https://t.me/finera Labour’s uncivil war

Should Chinese investment be welcome?

Brazil’s dangerous election

How summer holidays hurt children AUGUST 11TH–17TH 2018 Stuckinthepast Time to bring tax into the 21st century Financial Era Advisory Group

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7 The world this week United States 30 Property in Seattle Leaders Build, baby, build 9 Taxation 31 Uber in New York Stuck in the past Jammed up 10 Democracy in America 31 Voter purges Sign me up On election day, stay away 10 Brazilian politics 32 Poverty Brasília has a problem Going, going, not gone 11 Foreign direct investment 33 The cost of haulage Labour turmoil The party Prudence not protectionism Keep on trucking is at war over anti-Semitism, 34 Lexington 12 Education failing to hold a weak Down with school holidays Never Trumpers’ forlorn hope government to account and On the cover ducking the biggest political Countries must overhaul Letters issue. Yet it is still in reach of their tax systems to make The Americas power, page 21 14 On Germany, Adam Smith, them fit for the 21st century: the Moon, Democrats, 35 Brazilian politics leader, page 9. Beloved of conscription, Norway, Convict, zealot, bore liberals and economists, George Costanza 36 Colombia land-value taxes have never Duque fakes charge caught on. The time may now be right, page 18. Our new Briefing 37 Bello The perils of Maduro house-price index suggests 18 Land-value tax that in many cities the On firmer ground market is slowing, page 61 Middle East and Africa Britain 38 America and Iran The pain of no deal The Economist online 21 The Labour Party 39 Jerusalem’s holy sites Daily analysis and opinion to Surreal strength Beware of falling rocks Iran American sanctions bring supplement the print edition, plus 22 Welfare policy 39 Canada and Saudi Arabia more agony to an economy audio and video, and a daily chart Poor economics A pointless fight that is already dysfunctional. Economist.com 23 Brexit in the Caribbean 40 Zimbabwe Whether they will accomplish E-mail: newsletters and Beaches and borders Open for chaos anything else is an open mobile edition 23 Brexit and public opinion question, page 38 Economist.com/email No confidence 40 Jihadists in Mozambique Burnings and beheadings Print edition: available online by 23 English schools 7pm London time each Thursday In, out, in, out 41 Congo’s coming election Economist.com/printedition Kabila stops running 24 London’s Koreatown Audio edition: available online Peninsula politics to download each Friday Asia Economist.com/audioedition 25 Bagehot Land of extremes 42 Bangladesh protests High-school vigilantes Europe 43 Tourism in Indonesia Building ten Balis 26 Turkey’s economy How low can it go? 44 An Antipodean tiff V olume 428 Number 9104 Kicking Kiwis out 27 Germany Brazil election Jair Bolsonaro, Far left and right overlap 44 Women in Japan Published since September1843 Toxic test-doctoring a presidential candidate who to take part in "a severe contest between 28 Polish nationalism is second in the polls, is a intelligence, which presses forward, and 45 Polishing Narendra Modi an unworthy, timid ignorance obstructing Buying back the family threat to democracy: leader, our progress." silver The image factory page 10. The outcome of the Editorial offices in London and also: 28 The French and trains forthcoming general election Beijing, Berlin, Brussels, Cairo, Chicago, Madrid, Mexico City, Moscow, Mumbai, Nairobi, New Delhi, A love affair is impossible to predict, page 35 New York, Paris, San Francisco, São Paulo, Seoul, Shanghai, Singapore, Tokyo, Washington DC 29 Charlemagne Street politics in Russia

1 Contents continues overleaf Financial Era Advisory Group 6 Contents The Economist August 11th 2018

China 61 Property prices Housing correction 46 Chinese politics On the Xi side 62 Buttonwood Triple-B movie 47 Ai Weiwei’s studio Bulldozed in Beijing 63 Free exchange Mangonomics

International Science and technology 48 Summer holidays Overlong and not over yet 64 Underwater senses Navy seals 49 Posh summer Xi Jinping How to read the School and summer Most Flute or Latin? 65 Aerospace summer grumbles about A breath of fresh air countries’ schools have China’s swaggering leader, 66 Astronomy excessively long summer page 46 Business Aim for the sun holidays, page 48. They are 50 China and Silicon Valley bad for children and for social 66 Wild medicine mobility: leader, page 12 Cheques and balances Scratching an itch 51 Bartleby Time to get in training Books and arts Subscription service 52 PepsiCo under Indra Nooyi 67 Egypt after the revolution For our full range of subscription offers, Coolfizzin including digital only or print and digital Brothers, generals, suckers combined visit 52 Elon Musk and Tesla Economist.com/offers Beckoning the barbarians 68 The history of opium You can also subscribe by mail or telephone at High and mighty the details provided below: 53 Alibaba Enigma variations 69 Icelandic fiction Telephone: +44 (0) 845 120 0983 An isle full of noises Web: Economist.com/offers 53 Oil firms 69 Imagining war with Post: The Economist Too much in the tank Subscription Centre, Foreign direct investment North Korea P.O. Box 471, China’s ability to invest in 54 Danone’s social goals Under a mushroom cloud Haywards Heath, Choosing Plan B RH16 3GY American startups is looking 70 Young people in India UK more uncertain, page 50. How 55 Schumpeter Dreams and nightmares to safeguard national security Sovereign-wealth funds Subscription for 1 year (51 issues) Print only UK – £145 without scaring off Chinese investment: leader, page 11. 72 Economic and financial Alibaba makes a welcome move Philosophy brief indicators Principal commercial offices: to rejig its legal structure. 56 Alexis de Tocqueville Statistics on 42 economies, The Adelphi Building, 1-11John Adam Street, Others may follow, page 53. The French exception plus our monthly poll of London WC2N 6HT Singapore is a model for how forecasters Tel: +44 (0) 20 7830 7000 to reform some of the world’s Finance and economics Rue de l’Athénée 32 most flawed investment 1206 Geneva, Switzerland Obituary Tel: +4122 566 2470 vehicles: Schumpeter, page 55 58 Trade war (1) Is China losing it? 74 Luc Nkulula 750 3rd Avenue, 5th Floor, New York, NY 10017 59 Trade war (2) Under the volcano Tel: +1212 5410500 Metal clashing 1301Cityplaza Four, 12 Taikoo Wan Road, Taikoo Shing, Hong Kong 60 Factor bond investing Tel: +852 2585 3888 Fama and fortune Other commercial offices: 60 Prediction markets Chicago, Dubai, Frankfurt, Los Angeles, Collective oracle Paris, San Francisco and Singapore

Trade wars Weak Chinese markets give America the edge, at least in confidence, page 58. Tariffs on steel and PEFC certified aluminium are generating This copy of The Economist is printed on paper sourced some winners, but they are not from sustainably managed quite the success Donald forests certified by PEFC PEFC/16-33-582 www.pefc.org Trump thinks, page 59

Registered as a newspaper. © 2018 The Economist Newspaper Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Newspaper Limited. Published every week, except for a year-end double issue, by The Economist Newspaper Limited. The Economist is a registered trademark of The Economist Newspaper Limited. Printed by Wyndeham Peterborough Limited. https://t.me/finera The world this week The Economist August 11th 2018 7

that did not previously trouble The left-wing Workers’ Party in girl were killed by a speeding Politics him. His term should have Brazil nominated Luiz Inácio bus. The protests unsettled the ended in 2016. An election is Lula da Silva, a formerpresi- government. Rubber bullets scheduled forDecember. dent, as its presidential candi- and tear gas were fired into the date. He leads in the polls, but crowds and clashes erupted Nigeria’s vice-president, Yemi is in jail forcorruption and will between the students and Osinbajo, who is acting as probably be disqualified. The activists from the ruling party’s president while Muhammadu second-most-popular candi- youth league. Buhari is on holiday, fired the date, Jair Bolsonaro, a right- country’s spy chiefafter wing formerarmy captain, The government ofAustralia masked security men barricad- named a formergeneral, Ham- promised more aid to farmers ed parliament. Dozens of ilton Mourão, as his running- stricken by drought. The entire lawmakers recently switched mate. Last year Mr Mourão state ofNew South Wales, their loyalty from the ruling suggested that the army could which produces a quarter of party to the opposition. intervene to solve Brazil’s Australia’s agricultural output, political problems. was declared to be in drought America reimposed sanctions I’d start worrying after recording its driest Janu- on Iran, three months after The Republicans appeared to Iván Duque was sworn in as ary to July period since 1965. pulling out ofan accord bro- have clung on in a special Colombia’s president, suc- kered in 2015 to roll backits election fora congressional ceeding Juan Manuel Santos, nuclear-weapons programme. seat in the suburbs ofColum- who negotiated a peace deal A European Union law aims to bus, Ohio. The Republican ending a long-running war shield EU-based firms that deal candidate’s margin ofvictory with the FARC guerrilla group. with Iran from the sanctions. stood at just one percentage Mr Duque is a critic ofthe But Donald Trump tweeted point in a district that the party peace agreement. As one ofhis that anyone doing business won by 37 points in 2016. In last acts Mr Santos gave with Iran will not be doing another election that was too 440,000 refugees from Vene- business with America. Scores close to call, Kris Kobach, who zuela the temporary right to ofinternational companies spearheaded (unfounded) stay in Colombia. have said they will comply allegations ofvoter fraud at the with the order. Tougher sanc- election in 2016, had a tiny lead Argentina’s senate rejected a An earthquake ofmagnitude tions come into force in in the Republican primary for bill to allow women to have 6.9 struckthe Indonesian November that curb Iranian governor ofKansas. abortions in the first14 weeks island ofLombok, killing energy exports. ofpregnancy. Abortion is hundreds ofpeople. With Chicago endured its bloodiest permitted only in cases ofrape thousands ofbuildings de- Saudi Arabia expelled Cana- weekend ofthe year. At least or to protect a woman’s health. stroyed, more than 156,000 da’s ambassador, froze trade 74 people were shot between islanders were displaced. with the country and will Friday afternoon and early Little currency reportedly dump its Canadian Monday, 12 ofthem fatally. The threat ofAmerican In China police quashed a investments. The kingdom’s sanctions in a row over the protest against collapsed peer- ire was raised by a series of Presidential target detention ofan American to-peer lending schemes be- tweets from Canada’s foreign pastor in Turkey sent the fore it could get going. The minister, in which she called Turkish lira reeling. It hit record protesters had planned to forthe release ofSaudi lows against the dollar, having converge on locations in Beij- human-rights activists. lost a third ofits value since the ing, but the authorities were start ofthis year. A Turkish ready, quickly dispatching The government in minister flew to Washington to would-be demonstrators in Zimbabwe continued arrest- try to resolve the dispute. buses to destinations un- ing and torturing members of Separately, America imposed known. Lending schemes the opposition, two weeks new sanctions on Russia for occasionally collapse in heaps after disputed elections that the nerve-agent attack on a offraud, leaving participants saw President Emmerson formerRussian spy in Britain. penniless and angry. Mnangagwa and his ruling Zanu-PF party hang onto pow- In an apparent attempt to Italy’s senate voted to over- China decided not to allow er. The situation is chaotic. assassinate Venezuela’s presi- turn legislation that requires cinemas to show Disney’s new According to reports, the chief dent, Nicolás Maduro, two all children to be vaccinated Winnie the Pooh film, “Chris- ofthe armed forces did not drones carrying explosives against measles. Some in the topher Robin”. No reason was order the crackdown. A former flew near him as he addressed ruling coalition believe anti- given. On Chinese social army chief, Constantino the paramilitary National vaccine conspiracy theories. media Xi Jinping has been Chiwenga, who is now the Guard. One blew up in mid-air. The measles virus is highly relentlessly (ifgently) mocked vice-president, is suspected of The other strucka building. contagious. forhis resemblance to the calling the shots. The guardsmen panicked and portly bear. Jokers swap pic- fled. A group calling itself On the road tures ofPooh and his pals for Joseph Kabila said he would Soldiers in T-shirts claimed Students in Dhaka, the capital images ofMr Xi with foreign not run fora third term as responsibility. At least seven ofBangladesh, ended their leaders. Censors insist that it is president ofthe Democratic people were arrested. Inflation protests demanding better not funny how a bear likes Republic of Congo. The con- in Venezuela is so high that road safety. The demonstra- honey, no matter how much stitution says he cannot, but prices double every 25 days. tions began after a boy and a buzz, buzz, buzz it generates. 1 Financial Era Advisory Group 8 The world this week The Economist August 11th 2018

profit surged, to 228bn roubles about hacking and identity Royal Bank of Scotland said it Business ($3.7bn). After years ofbig theft, the market fortech- would pay its first dividend acquisitions, the Russian oil nology that requires staffto since its bail-out during the Even by the standard ofhis producer, the world’s biggest enter additional security de- financial crisis. The govern- previous capricious outbursts, listed oil company by output, tails when accessing corporate ment still owns a 62.4% stake in Elon Musk’s tweet that he is said its buoyant earnings computer systems is expected RBS. Recommencing payouts thinking about taking Tesla reflected improved efficiency. to grow rapidly. may widen the pool ofpoten- private left investors scratching tial investors as the govern- their heads. Such a buyout Glencore’s headline profit for America’s Department of ment furtherreduces its stake. would be the biggest in history. the first halfofthe year rose to Justice filed an appeal against a In a memo on the carmaker’s $8.3bn, a record forthe mining judge’s decision to permit the Indra Nooyi decided to retire website, Mr Musksaid he was and commodities-trading firm. merger ofAT&T and Time as chiefexecutive ofPepsiCo considering the move to shield Its metals business benefited Warner. The department after12 years in the job. During Tesla, which has been plagued from rising commodity prices argues that the judge ignored her tenure Ms Nooyi steered by production problems, from in the first half, particularly in principles of“common sense” the company away from its the short-term demands of battery-related metals such as in his ruling. over-reliance on soft drinks public markets and to stop nickel and cobalt. However, and snacks towards healthier short sellers from attacking cobalt prices have plunged foods, juices and water. She Tesla’s shares. Some wondered recently, as China has upped its $ per £ saw offa subsequent cam-

whether such a significant exports ofthe metal. 1.45 paign led by Nelson Peltz, an disclosure about the business activist investor, to split the followed the proper regulatory Peak social media? 1.40 company in two. Her successor rules. Mr Musk’s announce- Snap followed Facebook, 1.35 is Ramon Laguarta, a PepsiCo ment came on the heels of Netflix and Twitter by report- 1.30 veteran. reports that a Saudi invest- ing disappointing user-growth 1.25 ment fund had taken a stake in figures. Daily users ofthe Flat-packing all over the world the company. Snapchat app actually fell by JFMAMJJA IKEA opened its first outlet in 2% from April to June com- 2018 India. The store, in Hyderabad, Source: Thomson Reuters I’ll see your bet and raise you pared with the previous three differs slightly from IKEA’s The trade war between Amer- months. Snap got a vote of The pound fell below $1.29 for shops in other countries by ica and China intensified. The confidence, however, from the first time in almost a year, offering a wider range ofcheap Trump administration pro- Prince Alwaleed bin Talal, a as worries mounted that Brit- goods, 1,000 ofwhich will sell ceeded with plans to impose prominent Saudi investor, ain could leave the European forless than 200 rupees tariffson a further$16bn-worth who has amassed a 2.3% stake. Union next March without a ($2.90), as well as a 1,000-seat ofgoods from China, which trade deal. Britain’s trade restaurant. Indians now, too, come into effect on August Cisco expanded its business in secretary did little to allay will get to know the pleasure 23rd. China said it would cyber-security by agreeing to those fears when he gave the ofassembling a PAX wardrobe respond in kind. It had earlier pay $2.4bn for Duo, which odds ofcrashing out ofthe EU over a weekend. threatened to levy new duties provides a two-factor authen- at 60-40. Sterling also hit its on $60bn-worth ofAmerican tication service. With compa- lowest level against the euro For other economic data and exports ifAmerica implement- nies increasingly concerned since last October, at €1.11. news see Indicators section ed tariffson another $200bn- worth ofChinese products.

Germany’s economy ministry in part blamed “uncertainties” in trade fora decline in manu- facturing orders. Orders from within the euro zone and domestically fell by almost 3% between May and June. Those from outside the currency bloc dipped by 6%.

New York’s city council voted to stop issuing new licences for ride-hailing cars fora year while it reassesses the in- dustry, and also to set a mini- mum wage fordrivers. Although existing licensed drivers will still be allowed to operate, the ruling is a setback for Uber in its biggest market.

Unfazed by American sanc- tions and boosted by higher oil prices, Rosneft’s quarterly net https://t.me/finera Leaders The Economist August 11th 2018 9 Stuck in the past

Countries must overhaul theirtaxsystems to make them fit forthe 21st century F YOU are a high earner in a will then allocate profits across countries using a complicated Irich country and you lack a formula. America’s supposedly simplifying recent tax reform good accountant, you probably included stunningly complex new rules formultinationals. In- spend about half the year work- ternational efforts to co-operate to prevent profit-shifting have ing for the state. If you are an av- made progress. But they are hamstrung by disagreements over erage earner, not even an ac- how to treat technology firms and competition forinvestment countant can spare you taxes on in a world where capital crosses borders. your payroll and spending. Fundamental tax reform can boost growth and make soci- Most of the fuss about taxation is over how much the gov- eties fairer—whatever the share of GDP a government takes in ernment takes and how often it is wasted. Too little is about tax. Fortunately, the principles according to which rich coun- how taxes are raised. Today’s tax systems are not only marred tries can design a good system are clear: taxes should target by the bewildering complexity and loopholes that have al- rents, preserve incentives and be hard to avoid. ways afflicted taxation; they are also outdated. That makes All countries should tax both property and inheritance them less efficient, more unfairand more likely to conflict with more. These taxes are unpopular but mostly efficient. In a a government’s priorities. The world needs to remake tax sys- world where property ownership brings windfallsthat persist tems so that they are fit forthe 21st century. across generations, such taxes are desirable. A conservative first step would be to roll back recent cuts to inheritance tax. A Let me tell you how it will be more radical approach would be to introduce a land-value tax, Jean-Baptiste Colbert, the finance minister of Louis XIV of the most efficient of all property taxes and one with a long lib- France, famously compared the art of raising tax to “plucking eral heritage (see Briefing). the goose so as to obtain the largest possible amount of feath- Economists are sceptical oftaxingotherformsofcapital, for ers with the smallest possible amount ofhissing”. Tax systems the good reason that it discourages investment. But capital’s vary from one economy to another—Europe imposes value- share of rich-world GDP has risen by four percentage points added taxes, America does not. Yet in most countries three since 1975, transferring nearly $2trn of annual global income flaws show how the art ofplucking has failed. outofpaychequesand into investors’ pockets. Given thatcom- One is missed opportunities. Expensive housing, often the petition is declining in many markets, this suggests that busi- result of a shortage of land, has yielded windfall gains to nesses are increasingly able to extract rents from the economy. homeowners in big, global cities. House prices there are 34% Taxes on capital can target those rents without disturbing in- higher, on average, than five years ago, freezing young people centives so long as they include carve-outs forinvestment. out of home ownership (see Finance section). Windfall gains To stop companies shifting profits, governments should should be an obvious source of revenue, yet property taxes switch their focus from firms to investors. Profits ultimately have stayed roughly constant at 6% ofgovernment revenues in flow to shareholders as dividends and buy-backs. But few peo- rich countries, the same as before the boom. ple are likely to emigrate to avoid taxes on their investment in- Another flaw is that tax sometimes works against other pri- come—Apple can move its intellectual property to Ireland, but orities. Policymakers in the rich world worry about growing it cannot put its shareholders there. Corporate tax should be a inequality, which is at its highest level in half a century. In the backstop, to ensure that investors who do not pay taxes them- OECD, a group of mostly developed countries, the richest 10% selves, such as foreigners and universities, still make some of the population earn, on average, nine times more than the contribution. Full investment expensing should be standard; poorest10%. Yet over this period, most economies (though not deductions for debt interest, which incentivise risky leverage America’s) have shifted the composition of labour taxation forno good reason, should be scrapped. slightly toward regressive payroll and social-security levies As the labour market continues to polarise between high and away from progressive income taxes. earners and everyone else, income taxes should be low orneg- Tax systems have also failed to adapt to technological ative for the lowest earners. That means getting rid of regres- change. The rising importance of intellectual property means sive payroll taxes which, in North America, could be replaced that it is almost impossible to pin down where a multinational with underused taxes on consumption. Though these are also really makes money. Tech giants like Apple and Amazon stash regressive, they are much more efficient. their intangible capital in havens such as Ireland, and pay too little tax elsewhere. This month it emerged that Amazon’s Brit- One foryou, nineteen forme ish subsidiary paid £1.7m ($2.2m) in tax last year, on profits of Adam Smith said that taxes should be efficient, certain, conve- £72m and revenues of £11.4bn. By one recent estimate, close to nient and fair. Against that standard, today’s tax policies are 40% of multinational profits are shifted to low-tax countries unforgivably cack-handed. Politicians rarely consider the pur- each year. pose and scope of taxation. When they do change tax codes, The “solutions” to such problems often only exacerbate the they clumsily bolt on new levies and snap off old ones, all in a daunting complexity of today’s tax code—and, if lobbies have rush for good headlines. Rewriting the codes means winning theirway, add extra loopholes too. The European Union wants over sceptical voters and defying rapacious special interests. It to determine when firms have a “virtual nexus” in a state, and is hard work. But the prize is well worth the fight. 7 Financial Era Advisory Group 10 Leaders The Economist August 11th 2018

Democracy in America Sign me up

Voting should be easy. Manystates are making it harder MERICA’S mid-term elec- in his state. “There is no iceberg,” the judge wrote, “only an ici- US mid-terms turnout Ations in November will be cle, largely created by confusion and administrative error.” % hugely consequential. If the Voter purges and identification laws are anti-democratic. 45 Democrats capture the House of Particularly in the South, where the laws are most unbending, 40 35 Representatives, as The Econo- they seem to push America back towards the early 20th cen- 30 mist’s model suggests they have tury, when blacks were systematically prevented from voting. a three-in-four chance of doing, Scare stories about fraudulent voting also distract from the 1998 200206 10 14 they will control congressional genuine problem of meddling in American elections by Rus- committees that now protect President Donald Trump from sia. In the long run, barriers to voting may even be bad for the harsh investigation. If Republicans hold on, they can pick up Republicans who usually erect them. Every moment they their attempt to repeal Obamacare. Yet few Americans are ex- spend thinking about how to make voting harder is a moment pected to vote in the mid-terms. Last time, in 2014, just 37% of they do not spend thinking about how to attract new non- eligible voters turned out. Worse, many legitimate voters this white voters—a puzzle they will have to crackeventually. autumn will be deterred or blocked from casting ballots. The Department ofJustice used to prevent states from erect- In some states voters have been “purged” from the rolls in ing barriers to voting. Under Jeff Sessions, it winks at such ef- overzealous clean-up efforts (see United States section). Other forts. Mr Sessions, who is supposed to enforce laws that pro- states demand ever more documentary proof that people are mote voting like the National Voter Registration Act and the eligible to vote. Well-off homeowners who drive cars and Help America Vote Act, should reconsider. Though an early have passports barely notice such hurdles. But young, poor Trump backer, he has shown some courage and indepen- and ethnic-minority voters are more likely to crash into them. dence, enduring much presidential barracking and knocking Often, this is not just an unfortunate side-effect of tighter vot- down Republican demands forhim to investigate the FBI. ing rules; it is their intent. In Tennessee and Texas student ID cards are not acceptable forms of identification—though gun Vote early, vote often permits are fine. It would be better still if states made it easier to vote, not hard- The ostensible purpose of such rules is to prevent electoral er. There is no reason not to enroll voters automatically when fraud. If that were common, they might be justified. But dili- they encounter state officials. A dozen states, not all of them gent research by the Heritage Foundation, a think-tank, has left-leaning, do so already. Three-quarters allow people to vote turned up fewer than 1,200 instances offraud since 1982, many early, by post; the most adventurous states, such as California ofthem by officials, not fake voters. Billions ofvotes have been and Colorado, are moving to postal voting by default. cast since then. A commission to investigate illegal voting set One reform above all would boost turnout. Americans up by Mr Trump was disbanded before it produced a report. In vote on Tuesdays not because the constitution says they must, June a judge ruled that Kris Kobach, Kansas’s secretary of state but because ofa law passed in 1845. So pass another one, creat- and vice-chairman ofthe commission, had failed to prove that ing a public holiday or moving national elections to the week- the statistics concealed an “iceberg” of unrecorded voter fraud end (as in many democracies). Voting is worth celebrating. 7

Brazilian politics Brasília, we have a problem

JairBolsonaro, a presidential candidate who is second in the polls, is a threat to democracy ITH just two months to go why this election is especially worrying (see Americas sec- Wbefore the first round of tion). His supporters are convinced that he has been unfairly Brazil’s elections, no one has a singled out, that the corruption charges against him are clue what will happen. The trumped up and that his 12-year sentence is excessive. His re- front-runner for the presidency, moval from the race will undermine their trust in it. But under Luiz Inácio Lula da Silva, a left- a lawthatLula himselfsigned when he waspresident, convicts wing former president, is in jail; may not run foroffice. The courts should enforce it. the courts will almost certainly His exit would heighten a second danger—that Jair Bolso- bar him from running. The rest of the presidential field is frag- naro (pictured), a flame-throwing right-winger who is second mented—no candidate polls over 20%. Unless someone wins a in the polls, will become the front-runner. The former army majority, the vote will go to a second round on October 28th. captain has barged into the front ranks ofcandidates through a At the moment, any offouror five people could win it. combination ofoutrageous provocation and mastery ofsocial Lula’s probable disqualification is just one ofmany reasons media. Even ifhe does not win, the fact that he has come so far 1 https://t.me/finera The Economist August 11th 2018 Leaders 11

2 showsthatthe centre ground ofpoliticsiscrumbling. Rejecting Last year, while still in uniform, Mr Mourão suggested that, if Mr Bolsonaro outright would be the best way ofshoring it up. other institutions failed to solve Brazil’s problems, the army Until recently, he was an obscure congressman whose could. The left is mainly to blame for the country’s ills, in Mr main talent was causing offence. In 2011 he said he would Bolsonaro’s cold-war-tinted view. prefer a dead son to a gay one. In 2014 he said of a congress- To Brazilians fed up with politicians, Mr Bolsonaro sounds woman that he wouldn’t rape her because she was “very like an anti-politician. Some businessmen are flirting with ugly”. Last year a court fined him forinsulting people who live him. They like his pistol-packing rhetoric on crime and are in- in quilombos, settlements founded by escaped slaves. trigued by his recent conversion to economic liberalism (he fa- Mr Bolsonaro would have remained a fringe figure but for vours privatising some state enterprises). the traumas Brazil has endured over the past four years. The economy suffered its worst-ever recession in 2014-16 and is re- Genuflecting to generals covering haltingly. In 2016 a record 62,517 Brazilians were mur- YetMr Bolsonaro would make a disastrous president. His rhet- dered. The Lava Jato (“Car Wash”) corruption cases have led to oric shows that he does not have sufficient respect for many investigations and indictments of leading figures in every big Brazilians, including gay and black people, to govern fairly. political party and discredited the entire political class. There is little evidence that he understands Brazil’s economic Mr Bolsonaro proposes brutal solutions to his country’s problems well enough to solve them. His genuflections to the problems. He thinks that “a policeman who doesn’t kill isn’t a dictatorship make him a threat to democracy in a country policeman” and wants to reduce the age of criminal responsi- where faith in it has been shaken by the exposure of graft and bility to 14. This iron fist belongs to an authoritarian world- the misery ofthe economic slump. view. In 2016 he dedicated his vote to impeach the then-presi- Over 60% of Brazilians say they will never vote for him, dent, Dilma Rousseff, to Carlos Alberto Brilhante Ustra, more than three times the share of those who say that he has commander of a police unit responsible for 500 cases of tor- their backing. He lacks support from any strong political party. ture and 40 murders during Brazil’s dictatorship. The charge If he makes it to the second round, odds are that voters will re- against Ms Rousseff, who belongs to Lula’s Workers’ Party, had luctantly choose the alternative, perhaps Geraldo Alckmin, a nothing directly to do with Lava Jato. But in paying tribute to centrist candidate. He does not deserve to make it even that far. Ustra, Mr Bolsonaro was asserting that the values of the dicta- There is no room for complacency. Other countries with torship, which governed in 1964-85, are the antidote to today’s Brazil’s mix of crime, elite failure and economic agony have corruption. MrBolsonaro hasreinforced thatmessage by nam- elected radical leaders whom the pundits dismissed as no- ing Hamilton Mourão, a retired general, as his running-mate. hopers. It could happen again. 7

Foreign direct investment Prudence not protectionism

How to safeguard national securitywithout scaring away Chinese investors T WAS like “selling Mount Ver- Japan both expanded their scrutiny last year. China itself says China’s outbound FDI Inon to the redcoats”. That was that it is tightening up on foreign investors. Flows, $bn the cry when Fujitsu, a Japanese Such safeguards are, in principle, entirely justifiable. Weap- 200 150 technology giant, proposed a onssystemsexploitevermore advanced technology, including 100 friendly takeover of Fairfield, a artificial intelligence (AI). The economies of the world’s great 50 once-pioneering Californian powers are intertwined, as they were not in the cold war. Data 0 semiconductor firm, in 1986. At know no borders, and the line between friend and foe is not al- 2005 07 09 11 13 15 16 stake, in the eyes of the deal’s ways clear. What is more, China has a history of stealing intel- critics, were America’s economic strength, military security lectual property even as it blocks foreign investment at will. and technological competitiveness. So emerged the first effort But the detail matters. Governments will inevitably be lob- to screen foreign direct investment (FDI) into the United States bied to use their expanded powers not just to preserve nation- on national-security grounds. Since then, things have become al security but also to promote economic one-upmanship. immeasurably more complicated. That is when prudence becomes protectionism. Now the main predator is China. The prey is all manner of technology and data, some with overlapping military and ci- I spy with my FDI vilian uses. The security and surveillance concerns have gone So far, many of the safeguards coming into law are prudent— global. President Donald Trump has a bill on his desk, ap- surprisingly, perhaps, given this year’s trade rows (see Finance proved in recent weeks with bipartisan support in Congress, section). In America the Foreign Investment Risk Review and that expands the scope of the Committee on Foreign Invest- Modernisation Act, the biggest revamp ofCFIUS in a decade, is mentin the United States(CFIUS), an inter-agency body able to level-headed. If enacted, it will expand the committee’s pow- blockdealsthatmaythreaten national security. This weekGer- ers to assess not just foreign acquisitions but minority hold- many’s government indicated that it would increase its power ings that give investors access to, or influence over, critical in- to block FDI, for the second time in just over a year. Britain is frastructure, technology or sensitive personal data. The doinglikewise, and the European Union isdevelopingan over- definition of the technologies it covers will become broader— arching screening framework for its members. Australia and but at least the focus remains on the advantages they provide 1 Financial Era Advisory Group 12 Leaders The Economist August 11th 2018

2 for defence, intelligence and other areas of national security. a long list of industries—including, as some Americans advo- The proposed EU rules emphasise the need to balance open- cate, cinemas—that might fall prey to foreign manipulation ness to FDI with protection of“security orpublic order”, some- goestoo far. Instead, investmentsshould be vetted case bycase thing only 12 member states screen for. Both America and the and the decision open to judicial review. The policyshould not EU also drawattention to who standsbehind the foreign inves- restrict itself to a particular country. What China does today, tors. When it comes to China, such influence is a particular Russia may do tomorrow. Look for technological fixes. Britain concern (see Business section). mitigated some of its concerns about Huawei, a Chinese tele- Yet in this murky world, lines are repeatedly crossed. Mr comsfirm, byusingan evaluation centre thatinspects the hard- Trump set a bad precedent when he used national security as ware and software thatthe companysuppliesto the telephone an excuse to impose tariffs on steel and aluminium imports. network; this yearthe centre asked forchanges. And the policy Germany wants to broaden its restrictions on “critical infra- should be used strictly for national security, not trade diplo- structure” to include sewerage, among other services, which macy. Raising the drawbridge will not convince China to open risks leading to more intervention. Its lawmakers demand pro- up. There are other ways, such as export controls and bilateral tection for the Mittelstand, the heartland of specialist firms. investment treaties, to deter broad intellectual-property theft Ministers in Europe, frustrated that foreign firms are some- and to encourage reciprocity. times shut out ofChina, thinkscreening can level the field. Safeguards alone cannot keep the West’s technological Knee-jerk responses to China risk curbing collaboration as edge. China already spends more on research than the EU; the well as competition. Blocking FDI on national-security National Science Foundation, a federal agency, reckons that it grounds should be a last resort, not a first line ofdefence. There could overtake America by the end ofthe year. The West could are ways to minimise abuse in the screening process. It makes lookto incentives for long-term research and more welcoming sense to pay attention to technologies, such as AI and robotics, visa policies. The idea ofan innovation strategy may be worth which can have civilian and militaryuses. Butto come up with borrowing, too. That is one thing to learn from China. 7

Education Down with summer holidays

Long breaks are bad forchildren and forsocial mobility OU return from work on a grown-ups will object to it, too. It would cost taxpayers more, Ymuggy August evening. Your since teachers would have to be paid for the extra days. unwashed teenage son is on the Schools in hotter areas would spend a fortune on air-condi- sofa playing Fortnite, as he has tioning. Sceptics also note that, although those barely rested been doing for the past eight South Korean pupils do superbly in exams, they are often mis- hours. Your daughter, scrolling erable. Is that really what you want for your darlings? through Instagram, acknowl- edges your presence with a We got no class, we got no principles surly grunt. Not for the first time, you ask yourself: why are It would be unwise to import South Korea’s pressure-cooker school summer holidays so insufferably long? approach, in which a single exam determines every child’s fu- This is a more serious question than it sounds (see Interna- ture. But plenty of Western children could usefully spend a bit tional section). Many children will return from the long break longer at their books. Yes, it would cost money, but there are having forgotten much of what they were taught the previous ways to pay for it. One is to have larger classes. Many parents year. One study from the American South found that this are obsessed with teacher-to-pupil ratios, butthere is scantevi- “summer learning loss” could be as high as a quarter of the dence that they make much difference. The average Japanese year’s education. Poor children tend to be the worst affected, lower-secondary class is more than 50% larger than the aver- since rich ones typically live in homes full of books and are age British one, but Japanese children get better results. packed offto summercamp to learn robotics, Latin or the flute. More time in school need not mean repeating the same old A study from Baltimore found that variations in summer loss lessons. Some extra drilling would be beneficial, particularly might possibly account for two-thirds of the achievement gap for those falling behind. But the summer could also be a time between rich and poor children by the age of 14-15. Long holi- for different kinds of learning: critical thinking, practical skills, days definitely strain the budgets of poor families, since free financial literacy, work placements with local firms—schools school meals stop and extra child care kicks in. should be free to experiment. Space should not be a problem. Summer holidays vary greatly from country to country. Many school buildings sit idle in the summer. South Korean children get only three weeks off. Children in Ita- Well-offchildren often already use the summer to broaden ly and Turkey get a whopping three months. So do those in their minds and burnish their college applications at pricey America, where their parents, unless they are teachers, have camps or doing summer jobs found through connections. an average of only three weeks off a year, among the shortest Schools should help the rest catch up. Other public services do holidays in the rich world. Companies should let them take a not simply vanish for a quarter of the year. It would be un- bit more, since burnt-out workers are less productive. But, for thinkable for hospitals or the police to do so. So why do their children, six weeks out ofclass is plenty. schools get away with it? Their responsibility to educate does Youngsters will hate the idea of a longer school year. Many not end when the mercury rises. 7 https://t.me/finera




 


 



  
 

  

 
 




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  Financial Era Advisory Group 14 Letters The Economist August 11th 2018

German military capability decreasing. Ifthe parties in Earth’s tides, and the tides not a proponent ofa draft, but charge after next month’s create intertidal zones, transi- ifthere were one, we would Long-term underfunding is election truly wish to boost tional areas on the margin have been out ofthe Middle indeed the main reason forthe defence, their actions need to between land and sea. It is East long ago. parlous state ofGermany’s extend beyond distributing hard to imagine life, especially BILL FALCONER armed forces, the Bundeswehr leaflets. Foreign invasions are animal life, making a direct Boulder, Colorado (“Outgunned”, July 28th). not stopped by printed matter. leap from a wet environment MARCUS DANSARIE Nevertheless, although Ger- to a dry one. But intertidal China has a hissy fit many spends just over1% ofits Stockholm zones offeran evolutionary GDP a year on defence, this still way-station, courtesy ofthe Japan and South Korea are not represents a significant budget, The fatherof economics Moon. the only countries to feel the especially fora non-nuclear SCOTT MCINTOSH brunt ofcarefully calibrated power. At over €40bn ($46bn), I would like to correct some Chevy Chase, Maryland Chinese consumer boycotts it is not farshort ofeither mystifying errors in your (“Waris peace”, July14th). Britain’s or France’s. Yet, it has review ofmy bookon the life Voterissues China imposed an extensive fewer capabilities than either. and impact ofAdam Smith diplomatic and commercial Moreover, in order to ad- (“Anenlightened life”, July Regarding the finding that boycott on Norway from 2010 dress shortfalls, the German 28th). You suggest that, amid 53 men’s politics are determined to 2016, as punishment for army is implementing a sys- pages of notes and bibliogra- by a supposed “status threat” awarding the Nobel peace tem ofdeep integration with phy,I failto referto an article from women (“Sometimes it’s prize to Liu Xiaobo, a dissident the Netherlands and now from1994 on “the invisible hard”, July 21st), I have been a who died last year. China will fields three German-Dutch hand” by Emma Rothschild, registered Democrat for nearly act without mercy when a divisions. On paper, the and to other works by Amar- 50 years. As a straight, white country is deemed inconse- German army is bigger and tya Sen. Alas, this is Oxbridge man who happens to eat meat quential to its own growth. more capable than it would be undergraduate nit-picking, and most days, owns a firearm and PEDER HANSSEN without the Dutch forces. The it is also untrue. Ms Roths- believes in the existence of Oslo determination ofGerman and child’s article was extended in God, I am assumed by the Dutch soldiers to make this a later book, which I cite; I more vocal members ofto- It’s not a lie if you believe it experiment workis admirable. touch directly on her (idiosyn- day’s Democratic Party to be a However, recent multinational cratic) interpretation on page racist, sexist, homophobic, experiences suggest that this 172; and there are six references superstitious gun-nut who level ofinteroperability simply to Mr Sen in the text, with doesn’t give a damn about his increases political, military numerous citations. Indeed, carbon footprint. I am, in fact, and professional friction, Mr Sen kindly wrote a glowing none ofthe above. ultimately vitiating the very endorsement ofthe book, I and many ofthe men I operational capability which it which would be unimaginable worked with had wives who was supposed to augment. The ifit failedto engage with his made more money than they German army may, unfortu- workor that ofMs Rothschild, did. They were, to a man, nately, be even weaker than it his wife. happy about the extra income. appears. Youalso chide me forfail- Ifmen are voting Republican, ANTHONY KING ing to deal adequately with it is not because they feel Chair of war studies criticisms ofSmith. The book threatened by women. The Reading Buttonwood’s article University of Warwick itselfstands as a rebuttal of Democratic Party,which used on the wisdom ofGeorge Coventry many critics. But chapter six to stand forworking men and Costanza (June 9th) reminded specifically addresses, in pretty women, now views halfthose me ofthe time I worked at a Although a general awareness unsparing terms, the key ques- workers with thinly veiled stockbroking firm in the City. It ofthe emerging threats to tions oforiginality,errors and contempt. That, and not the was shortly after the Big Bang security has, as you say, in- omissions in Smith’s writings. Russians, is what got that and the trading floor was a creased throughout Sweden, Unlike other works, the pernicious buffoon elected. hive ofactivity and noise. One this has not translated into entire second halfofmy book LARRY WHEELER phone on the trading deskwas stronger defence. A report by is devoted to Smith’s impact Lexington, Kentucky fora particularly prominent the Swedish Armed Forces today,in economics, free trade, client, who would call each found that recent appropria- social psychology,culture and In the army now morning to hear the firm’s buy tions did not cover the rise in crony capitalism. Adam Smith or sell recommendations. He salaries and equipment costs, deserves better, especially Youomitted the most impor- would then proceed to place much less any improvement to from The Economist. tant benefit forcompulsory orders with us, but to do the military capability. To stay JESSE NORMAN national service (“Fall in, or exact opposite ofthat advice. within budget, the armed Hereford halt”, July 7th). Citizen armies RONAN CUNNINGHAM forces have implemented make a population, in general, Boston 7 austerity measures, which will The pull ofthe Moon more informed and opinionat- decrease combat readiness in ed about their country’s con- all but a few elite units. The The Moon may not have flicts. Parents, siblings and Letters are welcome and should be report describes current de- brought about life on Earth friends ofwould-be conscripts addressed to the Editor at The Economist, The Adelphi Building, fence policy as counterproduc- (“Empty sky, empty Earth?”, have a vested interest in the 1-11John Adam Street, tive in trying to achieve the July 7th). But the Moon may knowledge that their son, London WC2N 6HT government’s goals by 2020. have contributed to the move- friend, sister or brother could E-mail: [email protected] In other words, Swedish ment oflife from sea to land. be put in harm’s way. It is what More letters are available at: defence capabilities are The Moon’s gravity produces ended the Vietnam war. I am Economist.com/letters https://t.me/finera Executive Focus 15

Executive Director The South East Asian Central Banks Location: Kuala Lumpur, Malaysia (SEACEN) Contract Type: Fixed Term (3 years) Research and Training Centre

The SEACEN Centre (SEACEN) seeks an outstanding and experienced leader as its Executive Director for a three-year i xed term (1 July 2019 to 30 June 2022). Based in Kuala Lumpur, SEACEN represents a learning and research collaboration among 19 member central banks and monetary authorities from the Asia-Pacii c region. Established in 1982, the Centre has provided learning and research opportunities to generations of central bankers. SEACEN has strengthened its internal faculty of experts in central banking in order to elevate its position to become the leading regional hub for learning and research in central banking, with a focus on macroeconomic and monetary policy management, i nancial stability and supervision, payment and settlement systems, as well as leadership and central bank governance.

Job Description The Executive Director of SEACEN heads experienced staff from diverse backgrounds and nationalities and collaborates with member central banks and international strategic partners to deliver high-impact and vibrant learning and research programmes to effectively build the capacity of member central banks and establish an effective platform for the building of regional views. The Executive Director will also drive organisational development strategies to ensure continuous operational efficiency and effectiveness in serving SEACEN’s current and future business needs. Reporting to Governors and Deputy Governors of its member central banks, the successful candidate is expected to contribute strategic direction and visionary leadership in raising the proi le of SEACEN as the leading regional hub for learning and research in central banking.

Desired Attributes The candidate must have at least master’s degree qualii cation in core central banking areas such as macroeconomics, monetary economics, accounting, i nance and banking. A Ph.D. and a good record of academic publications will be an added advantage. He or she must have at least 10 years of working experience in a senior management position in a central bank, the i nancial sector, a multilateral organisation or academia. Candidates with extensive experience in overseeing learning and research programmes will have a distinct advantage. He or she must have a positive and collaborative leadership style that motivates and inspires performance and excellence. Outstanding communication skills in English language and being highly result-oriented are also essential. The position provides a competitive tax-free remuneration package and other benei ts including a car with a driver, full home rental reimbursement, allowance for children’s education and other allowances. Applications, which include a curriculum vitae and a recent passport-size photograph should be submitted to [email protected]; [email protected]; [email protected] by 10 September 2018, addressed to: The Chairman SEACEN Board of Governors, The SEACEN Centre, Level 5, Sasana Kijang Bank Negara Malaysia, 2, Jalan Dato’ Onn, 50480 Kuala Lumpur http://www.seacen.org The Economist August 11th 2018 Financial Era Advisory Group 16 Executive Focus

Commonwealth of Learning (COL) helps governments and institutions to expand the scale, efi ciency and quality of learning by using new approaches, appropriate technologies and open and distance learning methodologies. Headquartered in British Columbia, Canada, COL promotes learning for sustainable development. It is i nanced by voluntary contributions from Commonwealth Member States.

COL is seeking applications from highly qualii ed candidates for the following senior leadership position. Vice President

The Vice President works closely with the President & CEO in the effective management of the organisation and is responsible for: • leading innovation and providing thought leadership in ‘learning for sustainable development’; • directing the COL programme for impact and effectiveness; and • generating i nancial support.

Applicants should have extensive and relevant senior leadership experience in governmental and international relations as well as signii cant management experience, preferably in an international setting. Excellent interpersonal and representational skills for a broad range of stakeholders are required. The candidate must have the proven ability to deliver results. For more details, please visit www.col.org/working-with-us. Enquiries and applications should be submitted by email to [email protected]. The closing date for applications is September 14, 2018.

The Economist August 11th 2018 https://t.me/finera Executive Focus 17

The Opportunity We are currently recruiting for a Regional Director for our Middle East and Eastern Europe region. Our current MEEE funding portfolio exceeds US$200 million, covering 14 countries and programs incorporating all of our priority thematic areas. As our RD for the MEEE region, you will be leading the organization’s efforts to ensure that by 2030 all children – in one of the most complex regions in the world – can survive, learn and be protected from violence. In the coming three-year strategy cycle, we are focusing on strengthening our impact for the most deprived and marginalised children through high quality programs and advocacy. An outstanding Regional Director is critical to ensuring the continued success of our mission in the region. To be successful in this role you will bring signifi cant senior level leadership and management experience, including senior level fi eld experience in both long-term development and humanitarian response. You will also have signifi cant expertise in representation, negotiation and advocacy with government, donors and international organizations. This role is based in our Regional offi ce in Amman, Jordan and offers a competitive package. Application Information: To fi nd out more, and apply online, please visit our website: www.savethechildren.net/jobs. The closing date for applications is the 19th August. We need to keep children safe so our selection process refl ects our commitment to the protection of children from abuse.

Recruitment of a Governor for the Central Bank of Somalia

Somalia is emerging from confl ict and rebuilding its economy, including its key economic institutions. The position of Governor of the Central Bank of Somalia (CBS) will fall vacant on November 1, 2018. The new Governor will lead the CBS through major ongoing reforms, including the issuance of a new national currency, rebuilding the CBS’s institutional capacity, developing monetary instruments, and implementing the CBS’s mandate, which includes the development of fi nancial intermediation and regulation of the fi nancial system. The Governor is the chief executive offi cer of the CBS and is responsible for its management under the general direction of the Board of Directors. The Governor also serves as the Chair of the Board, and is the principal representative of the CBS in its relations with the Federal Government of Somalia, other public entities and bodies and international fi nancial institutions. The successful candidate must hold a university degree in monetary, fi nancial, banking, accounting, legal or economic matters and have at least twelve years’ experience in the fi eld of economics, banking, fi nance or law, preferably internationally. Strong preference will be given to those with international banking experience. He/she will be a strong communicator, have good interpersonal skills, and be able to demonstrate strong leadership, management and policy skills. The successful candidate will have held a senior managerial position in a Central Bank, Government agency, private fi nancial institution or an international organization. He/she must be fully conversant with the functions and operations of a Central Bank. He/she must also be fully conversant with monetary policy and issues relating to fi nancial sector regulation and development. The successful candidate will be a person of undisputed integrity and standing. He/she shall be appointed by the President upon the proposal of the Council of Ministers and shall hold offi ce for a period of four years, with the possibility of a reappointment for one more term. Remuneration will be commensurate with the qualifi cation and experience of the candidate selected and will be competitive. Applications must be in English and should include a covering letter, CV and three written references. Applications should be sent electronically to: [email protected] The closing date for all applications is August 28th, 2018. Short-listed candidates will be contacted for interview. The Economist August 11th 2018 Financial Era Advisory Group 18 Briefing Land-value tax The Economist August 11th 2018

Taxes on land have longhad a magnetic On firmer ground attraction for liberals and economists. Their appeal has two roots. The first is fair- ness. Every person, it is argued, has an equal moral claim to the fruits of the earth itself. In the history of political thought, even the fiercest advocates for property Beloved ofliberals and economists, land-value taxes have nevercaught on. The rights have struggled to justify how legiti- time maynow be right mate ownership of land could first come N A trip to New York in the late 1860s buted between them. about, given thatitdeprivesothersof a nat- Othe journalist Henry George was puz- A land-value tax might seem like an en- ural resource. “God gave the land to the zled. He found the rapidly growing city to ticing prospect to those harmed by high people,” goes “The Land”, a Georgist an- be a place of unimaginable wealth. Yet it land values today. Unremitting demand in them adopted by Britain’s old Liberal Party also contained deeper poverty than the rich cities has sent land values in and that is still sung at the annual meeting ofits less-developed West Coast. How could around them soaring, after decades of fall- successor, the Liberal Democrats. this be? George had an epiphany. Too ing interest rates. Plenty ofpoverty persists The most famous attempt to justify much ofthe wealth ofNew Yorkwas being in these places. But the issue ofhigh rents— land ownership was made by John Locke extracted by landowners, who did nothing and wealthy landlords—has renewed po- in the 17th century. He argued that because to contribute to the development of the litical bite because it is now affecting the people own their own labour, toiling on city, but could extract its riches via rents. relatively well off, too. Rent is so expensive the land confers ownership rights over the The problem could be solved by a tax on in places such as San Francisco’s Bay Area resulting product (a farm, say). Yet even land values. that even technology workers earning Locke said this only works as long as there George’ssubsequentmasterpiece, “Pro- hundreds of thousands of dollars a year was “enough, and as good, left in common gress and Poverty”, sold more copies in complain that life there is unaffordable. for others”. This proviso may be met in a America in the 1890s than any other book wilderness but not in booming cities. In except the Bible. It spawned campaigns for ’twas God who made the land any case, such a combination seems a land-value taxation around the world. It Across the rich world a bitter generational shaky justification for acquisition. Robert also inspired a board game, “The Land- divide has opened between homeowning Nozick, a 20th-century libertarian philoso- lord’s Game”, a precursor to “Monopoly”. baby-boomers and “generation rent”. pher, doubted whether pouring his can of The game was designed to show how Many older people have become rich as tomato juice into the sea, combining the property markets naturally tend towards house prices have surged (see Finance sec- two, meant that he could then claim own- monopolies in which one player can ex- tion). But most young people cannot hope ership over the ocean. Without a good ba- tract all the rent. But an added feature, to buy houses in places such as London, sis for land ownership, how can it be fair missing from subsequent versions, was a unless they benefit from a big inheritance. forlandlords to get rich from rent? tax on the value ofland—ie, a levy that, un- Because they assume house prices will go The second appealing feature of land- like a property tax, does not vary with the on rising, they feel they are missing a gold- value taxes—and the one that entices econ- number of houses or hotels built on it. The en ticket to financial well-being, while omists—is their efficiency. Typically, taxing tax made it impossible for any one player landed oldies continue to enjoy the wind- a good lowers supply and raises prices. In- to win but instead made them rich in tan- fall of a property boom. The time seems come taxes cause people to workless or ex- dem, as the proceeds of the tax were distri- ripe fora revival in Georgist thinking. ert less effort. Taxes on alcohol deter drink-1 https://t.me/finera The Economist August 11th 2018 Briefing Land-value tax 19

2 ing. Taxing property values as a whole longer a household name. discourages development. But land is dif- One reason is that land-value taxes are Plot twists 2 ferent. Its supply is fixed and cannot go hard to implement. Land is difficult to val- United States, average home value away. As a result, as long as landlords are ue. Its price is not recognised directly when and house replacement costs, 2016, $m competing with each other for tenants— property is sold. It must be estimated by 1.2 whose numbers and willingness-to-pay subtracting the value of the buildings from are unaffected—the tax cannot, in theory, the sale price. Such a calculation is inevita- 1.0 be passed on through higher rents. Land- bly controversial, argues Paul Sanderson lords must simply pay up and carry on as of the International Property TaxInstitute, 0.8 before. In 1978 this efficiency led Milton an advisory body. People would complain 0.6 Friedman, a celebrated free-market econo- about a tax levied on a hypothetical num- Los Angeles, CA Pittsburgh, PA mist, to declare a tax on the unimproved ber. Where possible, they would mount le- 0.4 San Francisco, CA value ofland “the least bad tax”. gal challenges against it. Seattle, WA Replacement cost of house Replacement So taken was George by the arguments A score of cities in Pennsylvania, where 0.2 San Jose, CA New York, NY Houston, TX for land taxation that he thought the state George was born, levy so-called split-rate Washington, DC should confiscate all land rents. Nobody property taxes. These involve one rate on 0 would be allowed to profit from land own- building values and another, typically 0 0.2 0.4 0.6 0.8 1.0 1.2 ership. He thought this would raise higher, on land. Butvaluation isdone local- Home value enough revenue to all but abolish other ly by “somebody’s Uncle Charlie” and sys- Source: BuildZoom taxes. His campaign for “the single tax” tems are “primitive”, says Joshua Vincent suited George who, like Friedman, advo- of the Centre for the Study of Economics, a come tax. Another change is that land con- cated free trade and free markets through- Georgist think-tank in Philadelphia. Mr stitutes less ofthe total stockofcapital than out the rest ofthe economy. Vincent was once asked to design a land it did at the end of the 19th century. In 2015 tax based on valuations dating from 1957. William Larson, a statistician in the Com- No Georgist era Politicians do not like revaluations be- merce Department, estimated that all the Yet despite George’s fame and influence, cause they lead to higher tax bills and land in America was worth about $23trn in “Progress and Poverty” did not lead to grumpy constituents. But arbitrary, de- 2009 (160% of GDP). This compared with a widespread adoption of land taxes. In Brit- cades-old valuations also make split-rate total capital stock of about $45trn. Since ain a type of land tax was stripped from taxation a hard policy to sell. then land has probably appreciated signifi- the radical “people’s budget”, passed in The problem of valuation is not insur- cantly. Yet even if the government were 1910 under a Liberal chancellor of the ex- mountable. “I don’t thinkit’s a difficult task able to realise George’s dream and capture chequer, David Lloyd George, after land- at all,” says Arthur Grimes of Victoria Uni- all this economic value, it would not be owners in the House of Lords objected. In versity ofWellington. New Zealand allows able to fund the government for very long subsequent decades Georgist ideas were most local authorities to levy land-value after it had paid offthe national debt. left behind on both sides of the Atlantic. taxes. Valuations are carried out every The trade-union movement was more con- three years by the central government, Get off my property cerned with rights for workers than land which collects a vast array of data on the As foreffectiveness, there are several draw- rents. Policymakers focused on attacking characteristics of every property, from backs. Voters dislike any sort of property excess profits accruing to shareholders, no- when its roof was replaced to whether or tax. In California Proposition 13, a ballot tably those arising from the market power not it has a sea view. This allows statisti- measure passed in 1978, restricts taxes to 1% ofvast firms like Standard Oil. cians to predict land values to a high de- of a property’s value, and limits increases After the second world war, reformers gree ofaccuracy, says Mr Grimes. in the reassessmentofa property’svalue to focused on building social-welfare pro- Opponents also raise questions about 2% a year. Reassessments are also usually grammes such as health-care and public- land-value taxes’ fairness and viability. prohibited unless a property changes pension schemes. Land-value taxes rarely First fairness. A land-value tax would not hands, creating a pernicious incentive for surfaced. Today, although most econo- make much of a dent in wealth inequality. owners to stay put. In England and Scot- mists will acknowledge their efficiency, Matthew Rognlie, now of Northwestern land taxes on residential property are such taxes have been implemented only in University, showed in 2015 that the in- based on a valuation from 1991. Land-value a handful ofplaces. The norm is a property crease in capital’s share ofnational income taxes are common in Australia, but resi- tax, levied on the total value of the land in the latter half of the 20th century—la- dential property is mostly exempt. plus what is built on it. Henry George is no mented by Thomas Piketty in his book, Sceptics argue that places with land- “Capital in the Twenty-First Century”—has value taxes keep them low so that they do been driven by higher returns to housing. not attract political heat. New Zealand col- Home economics 1 Yet while home ownership constitutes a lects property taxes, including land taxes, United States, composition of household wealth big chunk of wealth for middle-class totalling around 2% of its GDP, similar to 2012, % households it is far less important for rich- the average in the OECD, a club mostly of Fixed income* Equities er ones, says Gabriel Zucman of the Uni- rich countries. But America collects more † Business assets Pensions Housing versity of California, Berkeley, who is one property taxes (2.7% of GDP) and Britain 0 20406080100 of Mr Piketty’s co-authors (see chart 1). In much more (4.2%). Even in New Zealand, Top 0.1% America the top 0.1% holds four-fifths of its the recent trend has been for local authori- wealth in equities and bonds. Higher ties to increase the rate levied on buildings, Top 1% wealth inequality has little to do with and lowerland taxes. In Denmark, another housing, says Mr Zucman. The pattern is country with local land-value taxes, rates Top 10% reflected elsewhere in the rich world. varyfrom 1.6% to 3.4%. Itisa farcryfrom the All households Land ownership is less concentrated single tax George wanted. among a small number of wealthy land- Opponents of high land-value taxes Source: “Wealth inequality in the United States since owners than it was in George’s day. That worry that homeowners who are rich on 1913” by Emmanuel Saez *Net of non-mortgage debt means a land-value tax would almost cer- paper may not have large bankbalances or † and Gabriel Zucman Net of mortgages tainly be less progressive than modern in- incomes with which to pay another levy. 1 Financial Era Advisory Group 20 Briefing Land-value tax The Economist August 11th 2018

2 Governments can get around this by let- cation ofproperty—and, like any such levy, ment emphasises the potential for land- ting landowners defer their tax bills until arouse fierce political resistance. owners to benefit at the taxpayer’s ex- their property is sold, perhaps on death. Yet, afterdecadesofgainsforthose who pense. There is lots of evidence that local Denmark is reforming its land tax to allow have bought property in areas where val- house prices rise when taxpayers provide, a deferral. That, though, will still frustrate ues have soared, might such a windfall tax say, better transport links. property owners who wish to pass on be desirable—and fair? In 2017 David Al- Landowners in today’s successful cities housing wealth to their heirs, a deep desire bouy and Minchul Shin of the University have surely profited from public invest- in the Anglo-Saxon world. In 2015 Britain’s of Illinois and Gabriel Ehrlich of the Uni- ment, but the bulk of their gain has come government even created an inheritance- versity of Michigan, estimated that as of from an explosion of private economic ac- tax exemption specifically forhouses. 2006, just five metropolises accounted for tivity. Around finance and technology A land-value tax would do little to nearlyhalfofall urban land value in Amer- hubs, returns to land ownership have been change the underlying shortages that have ica. Landowners’ gains have been society’s enormous. In the Bay Area city ofSan Jose, driven up property prices. Contrary to the losses, because the shortage ofland in such even as the median household income, claims of some Georgists, it would not places constrains economic growth. Amer- not adjusting for inflation, roughly dou- much change the incentive to develop or ica’s GDP would be fully 9% higher were bled between 1996 and 2016, the average sell valuable land, argues Stuart Adam of regulatory limitations on building relaxed house price rose by a factor of3.7. the Institute forFiscal Studies, a think-tank. in just three cities—San Francisco, San Jose Land prices account for the bulk of the Owners of vacant plots in pricey areas and New York—according to research by rise. Analysis by BuildZoom, a price-com- would indeed face the same costly levy as Chang-Tai Hsieh of the University of Chi- parison website for contractors, finds that owners of adjacent tower blocks. They cago and Mr Moretti. construction costs vary much less across would have to pay the tax somehow, and a One of George’s arguments for confis- cities than house prices (see chart 2 on pre- landlord short on cash may have to sell the cating land rents was that landlords do not vious page). Rising land values explain plot. But there would be no change in in- deserve the gains they accrue when others 80% of the rise in rich-world house prices centives for owners with deep pockets, invest in an area. This was echoed by Win- between the end of the second world war such as property-development firms. Low- ston Churchill, then a Liberal, in support of and 2012, according to research by econo- er land values would exactly offset the the “people’s budget”. “Roads are made, mists Katharina Knoll, Moritz Schularick fresh incentive to sell vacant land. Mean- streets are made, services are improved, and Thomas Steger. while the forgone rentfrom lettinga plotlie electric light turns night into day, water is For ascendant technology firms, intel- vacant would remain the same. However, brought from reservoirs a hundred miles lectual property and other intangible revenues from the tax could be used to cut offin the mountains—and all the while the forms of capital are more important than conventional property taxes, which do de- landlord sits still,” he thundered. The argu- land. Alphabet, the parent company of ter building. This would not help much in Google, owns real estate worth $23bn be- rich cities where the main constraint on fore accounting for depreciation. That new buildingis regulatory, says Enrico Mo- compares to a stockmarket value of over retti of the University of California, Berke- $850bn. Even Amazon, with its network of ley. But it might help rejuvenate areas that warehouses, owns land and property are otherwise in decline. worth only $24bn. Despite their lavish For instance, in the late 1970s Pittsburgh West Coast offices, a land-value tax would raised the tax on land values to more than not hit these tech titans hard. five times the rate on structures. A study from 1997 by Wallace Oates and Robert Clicks and mortar Schwab credits this with sparking a flurry Yet modern firms do have extraordinary of commercial-property development power to influence land values, thereby even as the city’s steel industry declined. giving immense windfall gains to land- The handful of Pennsylvanian towns owners. Later this year Amazon is due to which have since adopted pure land-value announce the site of its second headquar- taxation were generally in decline and did ters. Cities have been competing to attract so in order to encourage building, says Mr the firm. But local residents who do not Vincent. The Hawaiian building boom of own property could be forgiven forhoping the late 1960s that led Joni Mitchell to sing that Amazon goes elsewhere. Its headquar- that the state had “paved paradise to put ters will employ perhaps 50,000 rich up a parking lot” may have been partly workers, who will bid up rents and land prompted by the introduction of a split- values, all the while crowding local public rate system ofproperty tax in 1965. services and infrastructure. The chosen city will need to invest to accommodate Big yellow taxes the workers, but the costs of doing so will Perhaps the biggest obstacle to land-value be unfairly spread across existing resi- taxes comes from the dark side to its effi- dents, because in their bid to lure the firm, ciency. The moment the tax is announced cities are offering Amazon discounts on lo- land values should fall, because buyers cal business taxes. know that once they own the land, they Arguably the biggest winners from Am- must pay up. Land depreciates by precisely azon’s decision will be local property the present value of all the taxes it will in- owners. Were their windfall gains spread curin future. Thisisnotonlytheory. ADan- around, local renters would have nothing ish governmentstudyfrom 2016 found that to fear. A substantial land-value tax would changes in land-tax rates were fully and do the job. Whateverthe political obstacles quickly capitalised in house prices. As a re- to land-value taxes, the power of this argu- sult, the taxes harm only today’s landown- ment in their favour remains as decisive as ers. They are like a windfall tax or a confis- it was a century ago. 7 https://t.me/finera Britain The Economist August 11th 2018 21

Also in this section 22 Welfare policy 23 Brexit in the Caribbean 23 Brexit and public opinion 23 English schools 24 London’s Koreatown 25 Bagehot: Land of extremes

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

The Labour Party out for consultation with Jewish groups. Many shadow ministers are demanding The surreal strength of Jeremy thatthe IHRA definition be included in full, includingits examples. There is a chance of Corbyn’s party a U-turn, particularly as those around Mr Corbyn demand an end to the war. Chief among those calling for peace is John McDonnell, the shadow chancellor Apartyat waroveranti-Semitism, failing to hold a weakgovernment to account and a close ally of Mr Corbyn’s. Their ap- and ducking the biggest political issue is still in reach ofpower proaches reveal different perspectives. Be- F AN opposition MP were asked to come by the International Holocaust Remem- fore being catapulted into the leadership, Iup with an ideal backdrop for the parlia- brance Alliance (IHRA) to its code of con- Mr Corbyn spent three decades as a plac- mentaryrecess, he would surelysetout the duct, but omitted some of its suggested ex- ard-waving MP in Islington, lending his month just endured by Theresa May. Two amples. The party insists that this is to name to causes such as fighting against senior cabinet ministers resigned. Support allow legitimate criticism of Israel. Yet apartheid and forPalestinian solidarity. By for the prime minister’s Brexit plans many Labour MPs, as well as Jewish contrast, Mr McDonnell spent his early ca- dropped like a stone. Grassroots Tories groups across the country, virulently dis- reer running things. He was an important started baying forher head. A tired govern- agree, accusing Mr Corbyn of turning a figure in the left-run GreaterLondon Coun- ment looked close to exhaustion. blind eye to offensive statements made by cil in the 1980s, overseeing a budget that Yet even as the government creaked, it his own allies about Israel that crossed into ran into the billions in his early 30s. “John was Labour that seemed the more likely to anti-Semitism. Margaret Hodge, a long- is a machine politician,” says one MP. “Je- splinter. A row over anti-Semitism entered serving and respected backbencher with a remy is a protest politician.” For a man des- its most poisonous phase, with the shad- Jewish background, has labelled Mr Cor- perate to be painted asa chancellorin wait- ow cabinet in open revolt against Jeremy byn a “racist” and an “anti-Semite”. But ing, internal fights are a decidedly Corbyn, Labour’s far-left leader. A summer rather than put out the fire, Mr Corbyn’s al- unwelcome distraction. meant to be spent discussing big ideas for a lies poured petrol on it. Ms Hodge found future Labour government and hammer- herselfbeing investigated by the party. The sucking sound ing Mrs May’s record has instead been Thisisa strange hill forthe leadership to Bigpolicyinitiativeshave alreadybeen suf- overtaken by a bitter internal fight. plant its flag on. In other areas Mr Corbyn focated by the anti-Semitism row, much to Despite it all, Labour still has a decent has shown remarkable ideological flexibil- the chagrin of Mr McDonnell, who tightly chance of forming the next government. ity. The long-standing critic of NATO has controls Labour’s economic programme. A None of its self-inflicted wounds is fatal gone quiet. The former vice-chairman of promised experiment on universal basic and each has a potential fix. Its poll num- the Campaign for Nuclear Disarmament income was announced but generated lit- bers, which at around 40% are slightly campaigned on a manifesto pledge to tle coverage next to the torrent of news ahead of the Tories’, have held up. Labour maintain Britain’s nuclear deterrent. Yet overthe party’s position on Jews. Noris Mr resembles a drunkfallingdown a staircase, when it comes to anti-Semitism, the cam- McDonnell alone. Jon Lansman, who cracking his head on each step, only to paigner for Palestinian rights has reached founded Momentum, a 40,000-strong far- gather himselfup at the bottom and some- his limit. left grassroots organisation that supports how stagger on. It took a shadow cabinet rebellion and Mr Corbyn and is himselfJewish, tweeted: Anti-Semitism hasbroughtthe sharpest two weeks of public outcry before pro- “If only [Labour] could find a way of not blow during this drunken descent. Labour ceedings against Ms Hodge were dropped. having to spend so much time on certain has added the definition of anti-Semitism The code of conduct has at last been put other things, attacking the Tories might ac-1 Financial Era Advisory Group 22 Britain The Economist August 11th 2018

2 tually be quite productive.” Welfare policy tough love pays off. The unemployment Even without its self-inflicted blow rate is around 4%, a four-decade low. But over anti-Semitism, Labour has struggled Poor economics the circumstantial evidence cuts both to land punches on the government. A ways. Unemployment was half as high in weakshadowfrontbench hasletthe Tories the relatively lax 1950s. And stories escape censure fora recent jump in violent abound of claimants failed by the system. crime and a bungled introduction of uni- Advisers in jobcentres appear to enjoy versal credit, a reform of the welfare sys- wide discretion in the application of sanc- Benefit sanctions are not nearlyas tem. Not all of the backbenchers who are tions, so those who take a dislike to partic- helpful as theirsupporters claim long-standing critics of Mr Corbyn are po- ular claimants may punish them. In 2013 a litical giants. Some were insignificant ju- ORE than half Britain’s jobcentres hard-of-hearing man claiming JSA was nior ministers in the dog days of Gordon Mnow offer “universal credit”, which sanctioned for four weeks after being ten Brown’s Labour government. Yet few merges six working-age benefits into one. minutes late to a CV-writing course. The would argue that today’s front bench, Most discussion of universal credit, which man had wrongly heard that it started at where loyalty too often trumps talent, rep- will eventually offer payments to one in 11:50am, not11:15am. resents the best that the party has to offer. four households, has been about its Crunchy evidence on sanctions is hard On Brexit, Labour demonstrates a cal- botched rollout. Less attention has been to come by. Some research has ascribed the culated cowardice. Sir Keir Starmer, the paid to its tough sanctions regime. Those fall in long-term unemployment in the sec- shadowBrexitminister, hasgradually shuf- who fail to comply with requirements that ond half of the 1980s to the Thatcher re- fled the leadership into a softer position, include spending 35 hours a week job- forms. That argues in favour of imposing promising to stay in a customs union with hunting may see their benefits docked. In some requirements on the jobless. But the the European Union, for instance. But Mr America, where there is talk of tightening government has published little research Corbyn is a Eurosceptic who voted against conditions for receiving food stamps, re- on the impact of the tightening since 2010, every EU treaty as a backbencher and formers are looking at the British experi- despite sitting on a mound ofdata. whose pro-Remain campaigning in the ref- ment with interest. A new paper in the Cambridge Journal erendum was tepid at best. Even so he Sanctions of some sort have existed in of Economics offers a pessimistic assess- leads a party whose MPs, members and Britain’s welfare system for centuries. Un- ment. Focusing on the period from 2001 to voters are overwhelmingly pro-European. der the Poor Law of 1834 the only way to 2014, it finds that sanctions under JSA in- Support is starting to build behind a push obtain “relief” was in theory to enter a crease the flow of people into work—but for a “People’s Vote” on any Brexit deal, workhouse. Workhouses were abolished only in the short run. It may be that claim- which could offer a neat way of squaring in 1948, but other forms of sanctions have ants, fearful of having their money cut off, this circle without permanently alienating been toughened up. The sanction rate rose take the first job they find, which turns out Labour’s Leave-supporting minority. But in the mid-1980s, when Margaret Thatch- not to suit them. This also suggests that such a radical idea risks being buried by er’s government began supervising job- they may be taking jobs which do not pay the internal fight over anti-Semitism. seekers’ efforts more closely, and it contin- as well as they might. In a speech last year Threats by anti-Corbyn MPs to quit and ued to climb under New Labour. Michael Saunders of the Bank of England create a new party have, so far, proved From 2010 the coalition governmenten- drew a link between tough welfare rules empty. It requires heroic optimism to be- forced sanctions more vigorously still. Un- and recent low wage growth. lieve that a cabal of former shadow minis- der universal credit, claimants who have As the evidence builds, the government ters from the reign of Ed Miliband, the pre- received several sanctions are often made may at some point have to tweak its ap- vious leader, could succeed where Roy to serve them one after the other, rather proach. A recent study by Rachel Loopstra Jenkins, the most influential home secre- than concurrently, as underthe old system. of King’s College, London, and colleagues, tary of the 20th century, failed in the 1980s. Research by David Webster of Glasgow finds some correlation between tougher “Some ofthem are that stupid,” comments University suggests that the sanction rate benefit sanctions and a rise in the use of one old party hand. “Youcan never rely on for jobless universal-credit claimants is food banks. A government that tones people not being that stupid.” twice the rate for jobseeker’s allowance down sanctions would doubtless be ac- But most of those who hate Mr Corbyn (JSA), the old unemployment benefit. cused of going soft. But it would have the have no intention of leaving. Ms Hodge Supporters of benefit sanctions say evidence on its side. 7 spoke for many when she pledged to stay, even before the investigation against her wasdropped. “I am goingto fighttooth and nail to bring [Labour] back to the values that brought me into it,” she promised. Pol- itics is tribal. MPs are loth to quit just be- cause they do not like their chief—even if they thinkhe really is an anti-Semite. This means that Mr Corbyn should be strong enough to shift ground. A reversal on the IHRA wording would heal most re- maining wounds. Allowing former rebels into the shadow cabinet would help the opposition to harass the government. Soft- ening further on Brexit would do little to alienate Labour voters. Mr Corbyn has to- tal control of the party machinery. He has the lure of power in front of him as an in- centive to keep going. If he can only redis- cover his ability to compromise, he may yet end up in control ofa government. 7 The evolution of welfare https://t.me/finera The Economist August 11th 2018 Britain 23

Brexit in the Caribbean woes. Foreign Office diplomats, though, English schools dismiss many of the islanders’ concerns, Beaches and insisting that Anguilla is not as dependent In, out, in, out on EU funding as it claims. Although the is- borders landerssaythattrade with StMartin isvital to theireconomy, officialspointout thatsu- permarket shelves are in fact stacked with American imports. The tiny British island ofAnguilla Whygrowing numbers ofnew teachers Anguilla is not alone in its Brexit fears. worries about Brexit are jumping ship Bermuda, the British Virgin Islands and the EW Britons have heard of Anguilla. Yet Cayman Islands all provide financial ser- HEN Ewa began looking for jobs, she Fthe tiny Caribbean island, home to vices to the EU (though some claim it Wdid not plan to leave the country. She around 14,000 people, is proud to be a Brit- would be no bad thing ifthese notoriously now works as a modern-language teacher ish overseas territory. In the 1960s its is- shady tax havens were cut out). The top at a private school in Dubai, earning three landers successfully staged a bloodless re- destination for exports from the Falkland times what she did in London. Perks in- bellion to stop Britain granting them Islands is Spain, which has a taste for Ar- clude free flights home, accommodation, independence as part of St Kitts & Nevis, gentine squid. It is not clear whether the private health insurance and even a furni- around 60 miles to the south. Today they Falklands will retain tariff-free access to ture allowance. Five years after qualifying style themselves as the only place to have this market once Britain leaves the EU. And as a teacher she is head of her year. Would “foughtBritain to remain British” and loud- Gibraltar, the only one of Britain’s 14 over- she return? Her “heart beats for London” ly trumpet their links to London. But like seas territories that is technically part of but living there “on a teacher salary can be other far-flung relics of empire, Anguillans the EU, worries that its close links to Spain really difficult”, so not soon. often complain that they are overlooked. may suffer. Schools are struggling to recruit enough Since the Brexit vote their grumblings have Faced with such fears, the Foreign Of- teachers to deal with a demographic bulge. grown louder. fice insists that Britain’s overseas territories Yet they are also doing a bad job at keeping The islanders say they rely heavily on will not be any worse off after Brexit than those they manage to attract. Among the European Union and on nearby islands Britain will be. But for Anguillans, that is teachers who qualified in 2011, 83% were owned byFrance and the Netherlands. An- hardly reassuring. 7 still in the state sector two years later. 1 guilla’s airport does not have a runway long enough for big jets, which makes it de- pendent on the French and Dutch halves Brexit and public opinion of neighbouring St Martin. Although tou- rism makes up a big chunk of Anguilla’s No confidence economy, nearly all visitors must first fly to the Dutch halfofthe island and then travel Growing doubts about the government’s handling ofBrexit negotiations overland through the French half before catching a ferry for the last leg. Letters and HERESA MAYand several ofher At the same time Mrs May has a huge parcels take the same route. Meanwhile, Tcabinet ministers have been on a challenge selling Chequers at home, both Anguillan patients pop back and forth to charm offensive around Europe, trying to to MPs and to the public. The most recent receive specialisttreatmentnotavailable at sell her Chequers plan forBrexit to doubt- opinion survey from ORB, an interna- home. And in 2016 a third of the island’s ful European Union governments. Most tional pollster, finds that 76% ofrespon- capital budget came from the EU’s devel- recently the prime minister bearded dents disapprove ofthe government’s opment fund. Emmanuel Macron in the French presi- handling ofthe Brexit negotations, the Blondel Cluff, Anguilla’s representative dent’s Fort Brégançon holiday retreat in highest number so farand a big jump in London, worries that Brexit could dis- the south ofFrance. Like most EU leaders, since the Chequers plan was proposed. rupt all this. “We can’t survive without the Mr Macron is sceptical about the Che- Fully 60% ofrespondents expect the French and the Dutch,” she claims. But quers plan. He is also unwilling to side- prime minister not to get the right Brexit Westminster has given Anguilla’s post- step the EU’s chiefBrexit negotiator, deal, and 44% thinkBritain will be worse Brexit predicament little thought. Some of Michel Barnier, who has already rejected offeconomically. Little wonder that talk the civil servants her team encounters do several ofits central elements. ofleaving with no deal has grown. not seem entirely sure where Anguilla is. Worried by this, they have set out their own proposals for a customs union and Chorus of disapproval common travel area with St Martin. Britain, % responding, “Do you approve or disapprove of the way The island was amongthose hit hard by in which the government is handling the Brexit negotiations?” Chequers Hurricane Irma in September 2017. It is still Notification Article 50 General election. Phase one Agreement proposal of withdrawal triggered Theresa May deal struck to move on to 80 getting back to its feet. The storm badly bill loses majority in Brussels future trade talks damaged Anguilla’s sole hospital and its 70 only secondary school. Around 90% of 60 houses on the island were affected and all Disapprove transportlinkswere cut. Although Britain’s 50 Approve emergency response was swift, many 40 complain that reconstruction funds were slow to arrive. Before the summer holi- 30 days, many classes were still taught in liv- 20 ing rooms volunteered by locals. The Anguillan government worries NDJ FMAMJ JASONDJ FMAMJ JA that, without proper planning, a Brexit-in- 2016 2017 2018 duced rupture could add to the island’s Source: ORB International Financial Era Advisory Group 24 Britain The Economist August 11th 2018

School’s out London’s Koreatown England, teachers still in a state school after graduating, % Peninsula politics 90 85 2016 Nuclearproliferation is a surprisinglyhot topic in New Malden graduates 80 S DINERS devour their scorching at home. And then there are Chinese- 2015 75 Aportions ofbibimbap, with paintings Koreans, known as Joseonjok. One issue 2014 70 ofSouth Korea on the walls, visitors between North Koreans and Joseonjok is 2013 might thinkthey are in Seoul. But this is the asylum system. Many Joseonjok 2012 65 2011 New Malden in south-west London. falsely claim to be North Korean to im- 123456 More than 10,000 South Koreans have prove their chances ofwinning asylum. Years since graduation lived in “Koreatown” since a first wave North Koreans resent this as it risks genu- Source: Education Policy Institute came in the 1970s. Now they jostle with ine refugees being rejected. In 2013 some migrants from fartherafield. Over the 30 applications by people claiming to be din, sounds ofMandarin emerge from from North Korea were turned down. 2 Among those who qualified in 2015, just the kitchen. One waitress is a Chinese- Imported political disputes are anoth- 78% were (see chart). Failingto retain teach- Korean from Liaoning, a province next to er source offriction. Many South Koreans ersisa problem in itself, butitalso pointsto North Korea. The chefis from South approve ofPresident Moon Jae-in’s en- otherissues bedevillingEnglish education. Hamgyeong, in the north-east ofNorth gagement with the North, but some The most obvious is pay. In September Korea. She speaks Mandarin at work, as North Korean exiles see it as siding with classroom teachers will receive their first “it’s the only way to communicate with the enemy.“Moon Jae-in told the world above-inflation pay rise since 2010. Mean- the Chinese-Koreans.” he was a human-rights lawyer when he while private-sector wages have grown, so The big divide in Koreatown used to visited the White House,” says one North the pay cut taken, in effect, by some teach- be between traditional old-timers and Korean. “But now he has stopped the ers (such as those with degrees in physics the more liberal young. One South Kore- workofhuman-rights activists,” banning and economics) has grown too. an calls New Malden “more conservative the sending ofleaflets to the North tout- But money is hardly the only reason than Seoul”. “Womenstay at home, their ing the benefits offreedom. As for Do- why teachers are leaving. According to re- kids have to do what they are told to do, nald Trump’smeeting with Kim Jong Un, search bythe National Foundation for Edu- theyhavetogotouniversity,”hesays. “all hope was lost,” she adds. The future cational Research, teachers on average take Koreatown, which comprises three or ofnorth-east Asia is being watched close- a 10% pay cut when they quit and 51% stay fourstreets filled with restaurants, food ly in south-west London. in education in some form. That leads markets and travel agents, has stuck with many to think that a big part of the pro- old values that are eroding in Seoul. blem is the job itself. Now new divisions are opening A small number ofschools shoulder an among South, North and Chinese-Kore- outsized share ofthe blame. Sam Sims and ans. Some 600-800 North Koreans live in Rebecca Allen, economists at the UCL Insti- Britain, reportedly the biggest diaspora tute of Education, have identified 122 outside Asia. Many came via China. schools that burn through young teachers, Others arrived after living in South Korea. each losing more than three times the aver- Although Seoul seems glamorous at first, age number of newly qualified teachers in northerners can find it hard to fit in. 2010-14. In their book, “The Teacher Gap”, Because they are Korean, they are expect- they write that the schools “are essentially ed to act Korean. But the culture of com- sausage machines, efficiently grinding the munist North Korea is very different from fresh meat from teacher training pro- freewheeling South Korea. Toescape grammes into a grisly paste.” stigmatisation, some move on again. But in most schools the job of teaching Tensions can flare in Koreatown. takes up more time than it did. Ed Richard- “South and North Koreans try to get son of Keystone Tutors, a London-based along, but there are good and bad people firm, reports that the offer of a more man- everywhere,” says one North Korean. ageable workload is a key factor in per- Another says that, when having her first suadingteachers to become tutors. Accord- meal at a Korean restaurant in Britain, the ing to the OECD, a club of mostly rich South Korean waitress recognised her countries, only teachers in Singapore and accent and suggested she have leftovers, Japan worklongerhours than those in Brit- which she would be more used to eating Seoul survivor ain. British teachers also spend an unusu- ally large proportion of their time dealing with bureaucracy. ing. But fornew ones, who need time to get None of this would matter if it were Mr Sims suspects that changes to the in- to grips with the rest of their job, it is an only the weakest leaving the profession. spection system are the main explanation even bigger problem. Unlike other profes- But there is no evidence that this is true, for a rise in paperwork. A reduction in the sions, teachers are expected to meet the says James Zuccollo of the Education Poli- numberofinspectorsused forschool visits same standards no matter how long they cy Institute, a think-tank. The result is that means that the burden for collecting infor- have been working, notes Matthew Hood more inexperienced teachers enter the mation increasingly falls on schools. And of the Institute for Teaching, a graduate classroom and children have to form new since 2010 the penalties for a bad inspec- school. They are not helped by the fact that relationships. When teachers leave be- tion have become more severe. teacher training often focuses on theory, cause they are miserable, pupils suffer the All teachers suffer from more form-fill- rather than on the basics ofthe job. consequences. 7 https://t.me/finera The Economist August 11th 2018 Britain 25 Bagehot Land of extremes

It’s time to rethinkeverything we thought we knew about British national character worked in the coalmines. Clement Attlee’s 1945 Labour government preserved the manufacturing prowess but swept away the commitment to small government and free trade. The welfare state was part of a wider strategy of state planning. The coal, rail, steel, gas and elec- tricity industries were all nationalised. Hundreds of thousands of council houses were built. The gentleman in Whitehall as- sumed gigantic responsibilities for micro-managing the country. Some 80% of the population called themselves working-class, and the share of manufacturing workers in the labour force rose into the 1950s. Margaret Thatcher’s 1980s government uprooted things yet again, restoring the laissez-faire tradition (up to a point) but turn- ing its back on the country’s manufacturing might. Britain priva- tised large swathes ofits economy, declared “manufacturing” old hat and gambled its future on services, particularly financial ones. The Thatcherite policy was revolutionary not just in its ex- tentofchange butin the costsinvolved. Large partsof the country remain scarred by de-industrialisation and the marginalisation of a once proud working-class culture. Such radical shifts were made possible because the British are ORE than most people the British pride themselves on be- more ideological and less pragmatic than they like to think. Win- Ming sensible. Others might go in for such silly things as revo- ston Churchill insisted in going back on the gold standard in 1925 lutions and theories. Britons preferpragmatism to ideology, mod- despite its putting the real economy on the rack. Margaret Thatch- eration to extremism, continuity to change. Walter Bagehot er repeatedly referred to the writings of Friedrich Hayek and Mil- praised his fellow-countrymen for their “inconsistent modera- ton Friedman. Tony Blair refused to avail himself of available tion”. George Orwell thought that the essence of Englishness lay brakes to migration from eastern Europe in 2004 because he in continuity. “It stretches into the future and the past, there is treated immigration as an ideological matter (proof that he was something in it that persists, as in a living creature.” George VI committed to the double liberalism of free markets and progres- once pronounced that “abroad is bloody”. sive values) ratherthan asa practical issue with costs and benefits The notion that the British are above all sensible makes the that needed to be weighed against each other. current state of politics even more confusing. The country has The notion that Britain is an essentially moderate country is opted fora leap in the darkin the form ofBrexit. The Labour Party just as hard to defend. It is riven with internal divisions and inter- has elected a dyed-in-the-wool extremist as leader. This week a necine battles: more Hate Island than Love Island. It is home to former foreign secretary, Boris Johnson, compared women who one ofthe best systems forelite academic education in the world wear burkas to “letter boxes” and “bank robbers”. How could a and one ofthe worstforvocational education. Itboasts one ofthe sensible country get itselfinto such a frenzy? most capitalist markets in the City ofLondon and one of the most One answer is that the British have never been as sensible as socialist in the National Health Service. If London has a claim to they like to think. Their belief is similar to the American one of be a capital of globalisation, Blackpool has one to be a capital of being rugged individualists or the French doctrine that all are in- marginalisation, where 26% of women smoke during pregnancy, tellectuals: it conceals a more complicated and interesting reality. compared with less than 2% in Westminster, and male life expec- Probe the component parts of“sensibleness” (continuity, moder- tancy is nine years shorter than in Kensington. ation and pragmatism) and they quickly start to crumble. Britain does a better job than others of keeping up the idea of The new rules national continuity. The queen’s guards continue to parade in Whatare the implicationsofthistoday? Two stand out. The first is bearskins regardless of the sweltering heat or the state of Brexit to forget about many ofthe “rules” ofpolitics that have long been negotiations. But a look at the efficient rather than the dignified constructed on the assumption of British sensibleness. The com- arm ofgovernment reveals a more intriguing pattern. mentators who argue that Labour is on a hiding to nothing in ad- A new book by David Edgerton, “The Rise and Fall ofthe Brit- vocating making more things in Britain may be just as wrong as ish Nation”, argues that 20th-century British history is really when they argued that the party would never elect as its leader about rupture and revolution. Britain has seen three distinctive such a radical figure as Jeremy Corbyn. political regimes interrupted by periods of turmoil. In 1900 it dis- The second is that the British should not expect normal ser- played a combination of laissez-faire politics and manufacturing vice to return anytime soon. There are reasons for thinking that prowess. Central government spent about 10% of GDP and most Britain is embarking on a period of revolutionary change similar of the work of today’s Whitehall was done by local government to the 1940s and 1980s, a period that could shape the country’s or voluntary institutions. Britain was the world’s leading export- fate for decades. The parallels with previous eras in ideological er of manufactured goods and the leading producer of battle- flux and political turmoil are uncanny. The big difference is that ships and weapons (both Arsenal and West Ham started life as Britain no longer seems capable of producing political leaders the works football clubs of giant arms-makers). It was also easily worthy of revolutionary times. In place of Attlee and Thatcher the biggest exporter of energy. No fewer than a million people now stand Mr Corbyn and Theresa May. 7 Financial Era Advisory Group 26 Europe The Economist August 11th 2018

Also in this section 27 The left wing meets the right wing 28 “Repolonisation” 28 The French and trains 29 Charlemagne: Street politics in Russia

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

Turkey “Both the executive and legislative branches have exhausted their strategic How low can it go? patience,” says Amanda Sloat, a former State Department official now at Brook- ings, a think-tank. It may be too early to tell whether the Treasury decision was a shot across the bows, meaning that there remains room ISTANBUL for a compromise, or whether new sanc- American sanctions might be the strawthat breaks the economy’s back tions are inevitable; talks were continuing HEN members of America’s Con- ish banker convicted of violating the em- as The Economist went to press. But many Wgress passed the Magnitsky Act in bargo against Iran, to serve the rest of his sanctions are in the pipeline already. One 2012 to pursue Kremlin officials responsi- sentence at home. The deal reportedly col- bill recently approved by the Senate threat- ble for the death of a Russian whistle- lapsed after Turkey’s foreign minister ens to block Mr Erdogan’s government blower, and even when they extended it to upped the stakes, asking American offi- from taking delivery of100 F-35 fighter jets include foreigners involved in corruption cials to kill any investigation into Halk- in retaliation for its purchase of a missile- and human-rights violations, few of them bank, the state bank for which Mr Atilla defence system from Russia. Another pro- imagined the law would ever be used had worked. Instead of being set free, Mr poses that America lean on international against the government ofa NATO ally. Brunson was transferred to house arrest. financial institutions like the World Bank Yet that is precisely what happened on Given the exasperation with Turkey’s and the European Bank for Reconstruction August 1st, when the US Treasury Depart- government in America, the sanctions de- and Development to suspend loans to Tur- ment imposed an asset freeze on two se- cision should not have come as a surprise. key until it releases Mr Brunson and three nior Turkish officials, the ministers of jus- Since his first meetingwith MrErdogan last local employees of American consulates tice and the interior, over their role in the year, when the American president detained over the past year. prolonged detention of an American pas- brought up Mr Brunson on three separate For a country hooked on capital in- tor. True to form, Turkey responded by an- occasions, the Trump administration has flows, saddled with $220bn in corporate nouncing sanctions against two members relentlessly called for the pastor’s release. debt and now faced with a spiralling cur- of President Donald Trump’scabinet. Both rency crisis, fresh sanctions could be dev- sides, including Turkey’s president, Recep astating. Even the largely symbolic mea- Tayyip Erdogan, suggested thattheywould Heading for a crash sures levelled against the two Turkish find a way out of the crisis, but the markets Turkey ministers, coupled with news that Ameri- seem to think otherwise. The Turkish cur- Lira per $ Consumer prices ca would review duty-free access for rency set record lows against the dollar for Inverted scale % increase on a year earlier $1.7bn-worth of imports from Turkey, were six consecutive days, while the yield on 0 30 enough to promptone ofthe worstruns on government bonds reached a new high, the lira in over a decade. On August 6th the 1 25 threatening to plunge the country’s econ- currency suffered its biggest daily net loss omy into crisis. 2 20 against the dollar since 2001. It has shed al- most a third of its value over the past year. Only two weeks ago, Turkey and Amer- 3 15 ica were on the brink of an agreement that Since Mr Erdogan took over as prime min- could have paved the way forprogress on a 4 10 ister in 2003, it has lost almost 70% of its range oftrickyissues. Turkeywasto release 5 5 value. the pastor, Andrew Brunson, who had lan- More generally, the economy has been guished in prison since his arrest on farci- 6 0 in trouble for some time. Amid a glut of 2003 10 15 18 2003 10 15 18 cal terrorism charges in late 2016, while cheap credit and fiscal spending, inflation America would allow Hakan Atilla, a Turk- Source: Thomson Reuters has climbed relentlessly, hitting nearly 16% 1 https://t.me/finera The Economist August 11th 2018 Europe 27

2 last month, the highest rate since 2003. The end of the state of emergency on July 18th can be made angers some in her party. In collapse of the lira has forced a number of has not improved sentiment nearly as 2016 pro-refugee activists threw a choco- leading Turkish companies to restructure much as expected. Many of the govern- late cake at her at one of its conferences to billionsofdollarsin debt. Some might now ment’s emergency powers, including the protest against her supposedly “brown” be on the brink of default. Under pressure right to sack judges and civil servants on (meaning far-right, a reference to the Nazis’ from Mr Erdogan, who thinks high interest vague national-security grounds, have brownshirts) politics. When, at this year’s rates produce inflation, an idea about as found their way into a new security law. conference on June 9th, Left party dele- popular with economists as the notion Others have been enshrined in a constitu- gates voted in favour of open borders, it that the Earth is flat, and who insists on tion that tightens Mr Erdogan’s grip on the was seen as a defeat forMs Wagenknecht. growth at all costs, the central bank has executive, allowing him to appoint and re- She presents her new movement as a consistently done too little too late to con- place senior officials at will, and weakens chance to bridge divisions within the left. tain the damage. To the surprise of most parliamentary oversight. Fresh from an Some suggest it may prepare the ground analysts, the bank did not raise rates at its election victory, the Turkish strongman for a future SPD-Left-Green government, most recent meeting on July 24th. With in- nowseemspoisedtotakeevengreatercon- and its early supporters include figures flation rising, the lira may have to weaken trol ofmonetary and fiscal policy.Mr Erdo- from all three parties and none. However, further to keep Turkish exports competi- gan has ditched his old economic team in it is betterunderstood as herbid to develop tive, says William Jackson, an analyst at favour of relatively untested loyalists, in- her own brand of economic statism and Capital Economics. The most the bank can cluding his son-in-law, Berat Albayrak, cultural conservatism. “The AfD does not probably hope to achieve, he says, is to whom he appointed as the finance and represent poor people. But if they turn to manage the currency meltdown. treasury minister. None of those moves the AfD nonetheless, I thinkwe should not Investor confidence is ebbing away.The will improve investors’ confidence. 7 insult them but ask what we have done wrong.” Such voters and others “have not found their way to the Left party”, she Germany adds, noting that polls show that she would win more votes as an independent The right hand talks to the left hand than as a candidate representing the party. Unsubmissive France, a brand-new party set up to support Jean-Luc Mélenchon’s hard-left bid for the French presidency last year, has impressed her. BERLIN If Rise Up evolves into a bridge be- New fusions ofeconomicstatism and cultural conservatism are emerging in tween the anti-establishment left and European politics right, it will not be an isolated case. The ITTINGdown with The Economist in her ditional working-class voters as a lefty al- two ends of Germany’s political spectrum Soffice in Berlin, Sahra Wagenknecht is ternative to the AfD? routinely rub shoulders at anti-NATO prot- restless: “Do we think that anyone can just For several years now Ms Wagenknecht ests. Compact, a prominent right-populist migrate to Germany and have a claim to has raised eyebrows by pursuing the latter magazine, has cheered on Ms Wagen- social welfare?” asks the doyenne of the strategy. She has argued for limits on refu- knecht’s new movement. It is edited by Jür- Left (Die Linke), a socialist party. “Or do we gee numbers and blamed the Berlin terror gen Elsässer, a former far-left activist who say that labour migration is more of a pro- attack in 2016 on Angela Merkel’s open- has switched to the pro-Putin right. The blem?” The party’s leader in the Bundestag border policies. She is Eurosceptic, critical AfD has started to involve itselfin workers’ worries about its direction. “Ifyou concen- ofNATO and broadly friendly to Russia. All protests—like those over the threatened trate more on hip, urban sortsofvoters—on of this aligns her with aspects of the AfD, closure of a Siemens factory in Görlitz, identity and lifestyle debates—you don’t whose leader, Alexander Gauland, has near the Polish border, this spring. Some speak to the poorest in society. They no praised herand said he wants closerco-op- form of AfD-Left co-operation in state poli- longer feel properly represented.” Her an- eration. Though Ms Wagenknecht rejects tics is probably only a matter of time (the swer, launched on August 4th, is a new, the idea (“out of the question,” she de- two parties may together win enough non-party movement called “Rise Up” de- clares firmly), the fact that the comparison seats fora majority in Saxony’s parliament signed to reach those who have switched in the election due there next year). off from politics. It may point to a signifi- As the left-right divide gives way to an cant realignment in both German and open-closed one, new alignments are tak- European politics. ing place in European politics. Elements of The Left was formed in 2005 when left- the left are resembling the hard right: wit- ists who had quit the Social Democrats ness the British Labour Party’s anti-Semi- (SPD) merged with the successor party to tism scandals and limp opposition to the former East German communists. It Brexit, orMrMélenchon’s diatribes against has always been an uneasy alliance of pro- foreign workers, or coalition arrangements vincial socialists and urban left-libertar- between the anti-immigrant populists and ians. At last year’s election it lost some the anti-capitalist left in Greece and the 420,000 voters, principally older ones in Czech Republic. Meanwhile, elements of the former communist east, to the right- the hard right are borrowing from the left: wing Alternative forGermany (AfD) party, once free-market but anti-migrant outfits but offset that loss by gaining 700,000 like Austria’s Freedom Party, France’s Na- from the SPD and 330,000 from the Greens, tional Rally and the AfD are learning to mainly in western cities and university love redistribution. A new space is open- towns. Itnowfacesa choice: consolidate its ing up: Russia-friendly, anti-Atlanticist, Eu- new strength as a lefty alternative to the rosceptic, economically interventionist, Greens (as Katja Kipping, the Left’s leader, sceptical of or hostile to immigration and wants to do) or prioritise winning back tra- Wagenknecht wants her voters back trade. Watch out, centrists. 7 Financial Era Advisory Group 28 Europe The Economist August 11th 2018

Poland The French and trains Buying back the Exodus

family silver GARE MONTPARNASSE Summerand the meaning oftrains WARSAW TEENAGER, headphones pinned to railway tracks. But train travel in France The government wants to push his ears, heaves a stuffed backpack grabs a greater share ofall journeys than foreigners out ofcrucial areas A across the station hall. A team ofadult in Germany,Britain, Spain or Italy. OLISH banks should be in Polish supervisors, eyes darting backand forth, Railways loom large in the French Phands, orso says the rulingLaw and Jus- guides boisterous children in fluorescent imagination. Claude Monet painted12 tice (PiS) party. Since PiS came to power in yellow jackets through the ticket barrier, oils ofthe Gare Saint-Lazare in1877, the 2015, Polish ownership of banks’ shares on their way to a colonie de vacances, billowing darksteam from the engines has risen, last year surpassing 50% for the French subsidised summer camp. A tall, rising towards the light clouds outside. first time since 1999. What the government lean father in well-pressed shorts “Fear the day that a train no longer stirs calls “repolonisation” is a form ofcreeping marches three small matching boys you,” wrote Guillaume Apollinaire, in his nationalisation, with foreign-owned towards the platform. Fit-looking grand- war poem “Victory”. While launching a banks being bought up (on a voluntary ba- parents climb into a train carriage, shep- startup incubator in a converted former sis) by state-controlled companies. But herding grandchildren to their seats. railway depot in Paris last year, President while PiS extols the virtues of economic August in France, when Paris empties Emmanuel Macron deservedly got into patriotism, economists are more wary. out, brings an annual ritual to the coun- trouble fordescribing a train station as a “Repolonisation” has become a buzz- try’s mainline railway stations. Out go “place where one passes those who word under PiS, applied to everything the besuited early-morning travellers, succeed, and those who are nothing”. from shipbuilding to medicines. The gov- settling into high-speed TGV trains for Inaugurated in1981, the TGV is regard- ernment has also toyed with “repolonis- business meetings in Bordeaux or Lyon. ed as an emblem ofnational technical ing” newspapers owned by foreign pub- In come extended families, fishing rods, prowess. It revived rail travel and shrank lishers, including Ringier Axel Springer, a skateboards, tennis racquets, pushchairs the country’s mental map. After the Swiss-German media company. “Capital and cats in carry-on baskets. Each year, opening last year ofnew fully high-speed has a nationality, especially in this incredi- thanks to a networkoffast links that can links to Rennes and Bordeaux, no further bly politically sensitive segment, the me- connect Paris to Marseille on the Mediter- lines are planned. But its cost has plunged dia,” says Jaroslaw Sellin, Poland’s deputy ranean coast 800km away in just over the SNCF into debt, which the govern- minister of culture. three hours, as well as discounted family ment is now taking onto its books as part PiS presents repolonisation as a return tickets, a massive110m passengers take ofits railway reform. Planned competi- to earlier times. After communism col- TGVs within France. Every day,820 of tion may change the nature and branding lapsed in 1989, most banks in Poland were these trains tear up and down the coun- ofthe trains on French tracks. But the state-owned. Over the next decade, many try.Overall, Germany may have more summer rituals will doubtless remain. were sold to foreign financial groups. Byre- polonisingbanks, the government is bring- ing the “family silver” home, says Mateusz Morawiecki, who was promoted to the job of prime minister in December. Observers have noted the irony. As recently as 2015, MrMorawiecki wasCEO ofBankZachodni WBK, which is controlled by Santander, a big Spanish banking group. After smaller takeovers, repolonisation culminated with the sale in June 2017 of a 32.8% stake in Pekao by UniCredit, Italy’s biggest lender, to PZU, Poland’s state-con- trolled insurer, and the Polish Develop- ment Fund (PFR) for10.6bn zlotys (€2.5bn). The transaction gave Polish capital control of53% ofthe banking sector. Repolonisation isa matterofmacroeco- That’s the way the Monet goes nomics, notideology, saysPawel Borys, the head ofthe PFR. But it chimes with the gov- ernment’s broader statist instincts, involv- by private banks. Meanwhile, further con- of increasing Poland’s role in the European ing economic interventionism and high solidation into fewer, state-controlled banking market. social spending, says Janusz Jankowiak, banks could reduce competition, pushing For now, the government has hailed re- the chief economist at the Polish Business up the cost of loans and therefore consum- polonisation a success, with Mr Mora- Council. “Pride in Polish companies” and er prices. Since Pekao was repolonised, wiecki calling it “a strong security buffer” “economic patriotism” are driving the there has been speculation that it could against turbulence on international finan- country’s economic development, said Mr merge with PKO BP, Poland’s biggest bank cial markets. Yet as other foreign banks Morawiecki in a speech in May. (which has denied this). The new, state- mull selling their subsidiaries in Poland, PiS’s brand of repolonisation carries controlled giant would have a market there may be further takeovers. The Polish risks, economists warn. It increases state share of one-third and some 15m custom- economyisin good shape, with lowunem- control over lending, which could then be ers. Mr Borys suggested last year that it ployment and solid growth. But for PiS, pa- used to fund risky projects rightly avoided would be a “good solution”, in the context triotic meddling remains in vogue. 7 https://t.me/finera The Economist August 11th 2018 Europe 29 Charlemagne Street politics

What a campaign to revive Russia’s urban spaces might mean forcivil society talisation plans, and writing new urban-design standards for the Construction Ministry. The efforts have provoked critics nonetheless. In Moscow they have decried the exorbitant costs and the often brutal meth- ods employed, such as the violent clearing of small kiosks. Accu- sations of corruption abound: RBC, a media organisation, has al- leged that several contractors were linked to family members of the deputy mayor responsible for blagoustroistvo. In smaller cit- ies such as Voronezh, residents complain about incompetence. “Would you let your kids play in this playground?” one mother yells, pointing to a metal slide that empties inexplicably onto a small rubber landing surrounded by scrubland. Yet the impact of blagoustroistvo may take longer to manifest itself. DenisLeontyev, KB Strelka’sco-founder, callsthe consultan- cy “an institute of values”, the key one being “human-centric” thinking. In a country long ruled by leaders who put the interests of the state and the collective ahead of the individual, that is an important shift. The question is whether blagoustroistvo can help create more than just a European-looking facade. The earlyresultsoffersome reason foroptimism. In areas with leaders willing to embrace more open communication—a group OVIETSQUARE in Voronezh no longerlooksespeciallySoviet. growing larger as a new generation of bureaucrats rises through SChildren dart through a dancing fountain. BMX bikers barrel the ranks—blagoustroistvo can become a space for fostering dia- across new tiles. Grassy groves play home to picnicking teens. logue between the state and society. Take Palekh, a town ofsome “It’s practically Spain,” gushes a pensioner. 5,000 nestled in forests north-east of Moscow. Once a centre of The newly reconstructed square is one piece of a sprawling Russian icon painting and later lacquer work, Palekh fell into dis- campaign of blagoustroistvo, or urban improvement, spreading repair after the Soviet collapse. Now with KB Strelka’s guidance, across Russia’s cities and towns. The trend began in Moscow, the central square has become a bustle of activity, as bulldozers where cityauthoritieshave rebuilthundredsofstreets and public crunch dirt and workers lay new cables. spaces since 2011, transforming the centre into an unrecognisable pedestrian paradise paved with plitka, the project’s distinctive Change has to start somewhere tiles. Other World Cup host cities received more modest facelifts Town meeting halls, where the authorities have taken the unusu- ahead ofthis summer’s tournament. The results have pleased the al step of listening to residents, also play a part in Palekh. Public Kremlin. Last month President Vladimir Putin made his first ap- hearings have debated the merits of fountain shapes, road pearance at the Moscow Urban Forum, extolling the importance widths and foliage. “The fate ofevery tree was discussed,” boasts of “a comfortable, friendly city atmosphere”. A broader national Stanislav Voskresensky, one of a host of younger technocratic go- effort, launched in 2016-17, is gaining steam. Earlier this year Mr vernors appointed in late 2017. The approach has shaken up the Putin directed the government to double spending on “comfort- region’s ossified ways. “More often than not, such hearings were able city environment” projects. This state-mandated urbanism formalities, a box that needed to be checked,” says Igor Starkin, a represents the “authoritarian modernisation” Mr Putin seeks. Yet veteran administratorwho tookoverasthe head ofPalekh earlier it may also carry the seed ofa more open future. this year. Now, he is a disciple ofengagement: “Feedbackcreates a For the government, the attraction is evident. Visible results union of souls,” he says. The authorities’ new-found openness help demonstrate effectiveness and foster loyalty. Many in Mos- has stunned residents, too. For many, the blagoustroistvo discus- cow see blagoustroistvo as a thinly-veiled ploy to placate the ur- sions were theirfirst experience ofcivic activism. “There’s always ban middle class who protested against fraudulent elections in been lots oftalk, but only among ourselves, never in public,” says 2011-12. Bureaucrats also see it as a means to stimulate a stagnant Olga Kolesova, the director of the local museum. “This is the first economy. Some 75% of Russians live in cities, many designed for time they’ve given people a chance to say something.” an industrial Soviet-era economy. Improving public spaces at- It would be foolish to see blagoustroistvo as a cure for Russia’s tracts tourists and creates room for small business. repressive politics. Mr Putin will not loosen his grip on power be- While the projects’ financing remains modest—some 1% of re- cause of a few new parks. “They don’t want democracy, they gional spending outside Moscow, reckons Natalia Zubarevich, an want results and budgets,” says Ekaterina Schulmann, a political expert on Russia’s regions, its scope is vast. Leading the charge is scientist. Any civic activity, she notes, quickly “hits a ceiling” KB Strelka, a consultancy backed by Alexander Mamut, an oli- when it moves away from safe topics such as urbanism to chal- garch, and founded asan outgrowth ofthe liberal-minded Strelka lenge those in powerdirectly. Yet it would be equally foolish to ig- Institute for Media, Architecture and Design. After developing nore the processes that blagoustroistvo both reflects and stimu- much ofthe Moscow blagoustroistvo, Strelka has turned to the re- lates. Russians’ creative energies may not have an outlet in gions, where it is aiding 40 cities, accounting forroughly a fifth of politics, but they have not been stamped out. As Michal Muraw- Russia’s population, as they carry out revivals of streets, parks, ski, an anthropologistfrom UniversityCollege London who stud- squares, embankments and other public spaces. It is also advis- ies Putin-era urbanism, quips, “There is politics in every plitka.” ing several hundred monogorods, or one-factory towns, on revi- Sometimes a square is more than just a square. 7 Financial Era Advisory Group 30 United States The Economist August 11th 2018

Also in this section 31 New York’s Uber moratorium 31 Purging voters from the rolls 32 Measuring immiseration 33 Truckers coin it 34 Lexington: Storming Trump Tower

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

Cities and development tion that would have greatly expanded market-rate development in San Francisco. Build, baby, build “In Seattle the NIMBYist-Trotskyite alliance is the default political alignment,” says Alan Durning, executive director of the Sightline Institute, a local think-tank. Seattle’s proposed solution to this deadlock, unveiled in 2015, is known as the SEATTLE “grand bargain”. It would reduce restric- A flourishing west-coast city wants to avoid becoming anotherSan Francisco tions and unleash building on big patches OR the third consecutive year, Seattle San Francisco’s count. Another 22,000 un- of city. In exchange, developers would Fhas the most cranes in operation of any its have been approved. have to reserve a few units for renting be- city in America—three times as many as Better than other highly successful cit- low the market rate or pay into an afford- New York. Long a placid, drizzly company ies, Seattle grasps the fact that property able-housing fund. Such schemes, known town, the place is booming. Since 2010 Se- prices are driven by supply and demand. as “inclusionary zoning”, are increasingly attle hasgrown more quicklythan any oth- Americans can move freely, and demand common in progressive American cities. er large American city, thanks in part to the forurban living is enormous. Yet supply re- They can lead to more mixed districts and success of Amazon and Microsoft, two lo- mains tightly constrained by local zoning placate left-wing critics. But they are not cal technology firms. Entrepreneurs are rules and limits on building heights and without problems. flocking there, repelled by the obscene density. The resulting artificial scarcity, en- By reducing future earnings, inclusion- costs ofSan Francisco. forced by the government, inflates prices, ary zoning acts as a tax on new develop- Butthe pathologiesofthe BayArea may benefiting homeowners. The overall costs ment. If the affordability requirements are not be far behind. Rents have shot up and to society are staggering. Research by two set too high, many new projects will not be homelessness is common. “We are not a economists, Chang-Tai Hsieh and Enrico built. Bill de Blasio, New York City’s pro- welcoming city in the way Seattle has his- Moretti, estimates that removing excessive gressive mayor, championed require- torically been,” says Mike McGinn, the for- regulations in just three cities—New York, ments that at least one-fifth of new units mer mayor. The boom shows little sign of San Francisco and San Jose—could boost should be offered below the prevailing abating, meaning that Seattle has only a America’s GDP by 9% because more peo- market rate. San Francisco sets the thresh- few years before it contracts a case of full- ple could move to them. old as high as 30% and imposes a clutch of blown San Francisco. Either the city will In Seattle, as in other cities facing simi- added “impactfees”. Developerscomplain cleverly manage its growing prosperity, or lar problems, three camps have emerged. that these feessuffocate all but the most lu- it will become inaccessible to ordinary The first contains urbanists and developers crative projects—which then invite criti- people. The Emerald City would be turned who want to build more homes. In the sec- cism as “luxury high-rises”. into a gilded fortress. ond camp are homeowners, who fear that Seattle has negotiated a more reason- A single-family residence now rents for new housing will depress property values. able route byrequiringbetween 5% and 11% $2,600 per month, on average—25% more Ifnewbuildingisto happen, these NIMBYs of new units to be rented at below-market in real terms than five years ago, according would prefer it to happen elsewhere. The rates. Progressives think that too little. “It’s to data from Zillow, a property website. third camp is occupied by the urban left. Its not in any way a substitute for a serious That is less than the peak price of $2,870 members are keen on public housing but programme of affordability. We need rent reached in September 2017. In fact, it is the suspicious of unfettered private building, control, social housing on a mass scale, largest drop in rents seen in any of Ameri- which they see as a handout to developers. and a full bill of renters’ rights,” says ca’s100 largestcities. Much ofthe decline is In California socialists and affordable- Kshama Sawant, a socialist member of the owing to the frantic pace of building visi- housing activists called PHIMBYs—which city council. “It’s all been led by what de- ble in parts of the city. Seattle added 8,750 stands for “public housing in my back- velopers want, and by what corporate Se- units of housing last year, nearly double yard”—joined NIMBYs to oppose legisla- attle wants,” adds Tammy Morales, a com-1 https://t.me/finera The Economist August 11th 2018 United States 31

2 munity organiser in southern Seattle, who mentation of the city plan, despite four Voter purges says the city is doing little about the dis- years of consultation, has been slow. Re- placement ofpoorer residents. strictions are loosened in urban centres, On election day, Any remaining goodwill towards Seat- leading to a building boom and a trickle of tle’s building plan has also diminished affordable housing. But only 6% of single- stay away after Amazon made a rare intervention in family neighbourhoods would be pro- local politics. On May 14th the city council foundly affected by the plan. And home- ATLANTA passed a “head tax” of $275 per employee owners are digging in even against that. Mr Republicans saythey’re fighting fraud. for firms with more than $20m in annual Durning likens it to trench warfare. Democrats call it voter-suppression revenue, in order to fund services for For more than 50 years NIMBYshave homeless people. Amazon, which em- swayed American city politics. They at- N 1965 President Lyndon Johnson signed ploys more than 40,000 people in Seattle, tend council meetings in droves and vote Ithe Voting Rights Act. Among other promptlyhalted construction on one office in low-turnout local elections. They ex- things, this required places with a history tower and suggested it would sub-let an- plain why strange pockets of low-rise sub- ofdiscriminating against non-white voters other. Amonth laterthe citycouncil tucked urbia, frozen in time, can be found in the to obtain federal approval before changing tail and repealed the tax. Progressives were heart of many cities facing sharply rising the way they conducted elections. In the furious. Ms Sawant, who (along with one rents, such as San Francisco’s Noe Valley, ensuing decades it narrowed, and in some other holdout) voted to keep the tax, called Seattle’s Queen Anne and Northwest cases reversed, racial gaps in voting. Con- it a “serious betrayal”. Washington. Upsetting the entrenched gressrepeatedlyreauthorised the Act, most The perception that Seattle is becoming powerstructure ofcitiesisan exasperating, recently in 2006 for25 years. Amazon-town will make neighbourhood thankless task. But if they are to remain But in 2013 the Supreme Court gutted change, never easy, a harder sell. Imple- truly open to all, it will be necessary. 7 the pre-clearance provision. Since then states that had been bound by it have purged voters from their rolls at a greater Traffic rate than other states. That is part of a dra- matic rise in voter purges in recent years. Jammed up Many on the right say such purges and oth- er policies are essential to ensuring elector- al integrity. Others see a darker purpose. New YorkCitytries to free its roads byrestricting Uberand Lyft According to a recent reportbythe Bren- IDE-HAILING companies like Uber holm and Singapore. Uber, whose ride- nan Centre for Justice, a think-tank and ad- Rand Lyft are loved by city dwellers but sharing cars would probably face lower vocacygroup atNewYorkUniversity, near- may be jamming roads. In midtown and charges than taxis under such a policy, is ly 16m voters were removed from the rolls lower Manhattan, cars have slowed from keen to go ahead. between 2014 and 2016. That is almost 4m an average speed of9.1mph (14.6kph) in Fix NYC, a task-force focused on fight- more than were purged between 2006 and 2010 to 7.1mph in 2017. Concerned about ing traffic jams and improving public 2008. The increased purging far exceeds both traffic jams and falling wages for transport, recommended in January that population growth orthe growingnumber ordinary taxi drivers, New York’s city New Yorkshould introduce a congestion of registered voters. council passed a bill on August 8th im- charge that would vary by time ofday. Not all voters were removed errone- posing a one-year moratorium on new That seems a distant prospect. A poll ously. Culling voter rolls of people who licences forhired vehicles. conducted by Quinnipiac University in have died, moved, or been convicted of a The measure may not reduce traffic March showed that 52% ofvoters living in serious crime keeps them accurate. But congestion much. Todd Schneider, a New YorkCity opposed congestion Myrna Pérez, one of the report’s authors, computer programmer, has published pricing, whereas just 42% were in favour. says that in jurisdictions previously cov- data collated by New York’s city govern- Technocrats may like such schemes, but ered by the Voting Rights Act’s pre-clear- ment on the number offor-hire car jour- the public seems unwilling to pay to ance provision, there isa statistically signif- neys by borough. His statistics show that avoid sitting in traffic. icant relationship between districts with although Uber and Lyft journeys are well high purge rates and high rates ofvoting by up, their impact on congestion in Man- provisional ballot. That could indicate bad hattan has been tempered by the fact that Where yellow cabs don’t go purges. Improperly purged people are of- they have put so many taxi drivers out of New York City, monthly* car-ride pickups, m ten given provisional ballots when they work(see chart). The new car services are try to vote, whereas those who are proper- Manhattan more popular in New York’s outer bor- 18 ly purged seldom try. Between the presi- oughs, where taxis are scarce and speeds 15 dential elections of 2012 and 2016, districts generally higher. Uber argues that the formerly covered by pre-clearance provi- Ride-hailing 12 council’s cap will reduce the number of 9 sions removed more than 9m voters from cars in the outer boroughs, but not in 6 their rolls. In Georgia, 156 of the state’s 159 Taxis Manhattan, where drivers can complete 3 counties saw increases in removal rates. more trips per hour. 0 The report also found that, in the past In March the city approved a flat 2014 15 16 17 five years, four states have conducted surcharge on both taxi and for-hire jour- Outer boroughs† purges in ways that violate federal stan- neys in Manhattan. Critics doubt that this 9 dards—for instance, by purging voters too will do much to alleviate New York’s 6 close to an election and failing to inform traffic problem, either. It would be much 3 voters adequately that they had been re- better to nudge travellers to stay away 0 moved from the rolls. Many states seem to during the busiest hours. Congestion 2014 15 16 17 have relied on flawed information. Arkan- Sources: Todd Schneider; *Trailing 28 days pricing, as the practice is known, has † sas, for instance, bars felons who are serv- been implemented in London, Stock- NYC Taxi and Limousine Commission Excluding airports ing their sentences from voting. But a list of voters to be purged in June 2016 included 1 Financial Era Advisory Group 32 United States The Economist August 11th 2018

Poverty Going, going... not gone

WASHINGTON, DC Has poverty almost disappeared? No. Is it as common as ever? Also no WO years ago Paul Ryan, the Speaker Tof the House of Representatives, ar- gued that Americans “are no better off to- day than they were before the war on pov- erty began in 1964”. The poverty rate, he explained, stood at 15%—the same as in the mid-1960s. Last month the White House’s Council of Economic Advisers (CEA) reached a completely different conclusion. The war on poverty, it proclaimed, was “largely over and a success”, with only 3% of Americans now poor. Clearly, both can- not be right. In fact, neither is. Trust but verify MrRyan’s preferred measure, the Feder- al Poverty Level (FPL), is perfectly ortho- 2 more than 4,000 people who had simply Kansas’s next governor—to investigate dox, yet perfectly absurd as a guide to how come into contact with the court system claims ofvoter fraud. poverty has changed over time. It was because of divorces, misdemeanours and The commission lasted less than eight based on food costs in the 1960s, using a the like. New York removed hundreds of months. Mr Trump disbanded it weeks rule of thumb that these were one-third of thousands of voters (more in mostly His- after a court ordered it to turn over infor- a family’s budget. Today’s FPL is, in es- panic districts than elsewhere) whom it mation to Matt Dunlap, Maine’s secretary sence, the cost of food for a family in the wrongly believed had moved. ofstate, who complained itwaskeeping in- 1960s multiplied by three and adjusted for Ms Pérez also noted a rise in lawsuits formation from him and other Democrats inflation. This rickety measure undergirds filed against states by conservative activ- on the commission. Mr Dunlap, who on America’s entire welfare system, deter- ists seeking more aggressive purging of the August 3rd released the documents he had mining the flow of hundreds of billions of rolls. This pattern, the report says, began in sought, believes “the whole purpose ofthe dollars a year. 2008—the year that a multiracial coalition commission, regardlessofevidence, was to The FPL is misleading partly because elected America’s first blackpresident. validate the president’s assertion that mil- food now accounts for under13% ofthe av- lions ofillegal votes were cast”. erage household budget—much less than The feds have flipped Logan Churchwell, a spokesman for the half a century ago. The measure also Under Barack Obama, the federal govern- Public Interest Legal Foundation, which makes no adjustment for variations in the ment sued states it deemed too restriction- has sued states over voter rolls it claims are cost of living within the 48 contiguous ist. UnderPresidentDonald Trump, the De- inaccurate and whose head served on the states. The poverty threshold in New York partment of Justice has reversed course. It commission, blamed Mr Dunlap for the City is the same as in eastern Kentucky. has backed a strict voter-identification law failure to find evidence of voter fraud: Worst of all, the measure relies on pre-tax in Texas which it previously opposed, and “That’s what happens when you sue income. It misses savings and government endorsed Ohio’s practice of purging infre- something into oblivion.” How a lawsuit benefits like subsidised health care, food, quent voters. Both Texas and Ohio have for information six months into the com- rent assistance and tax credits. In short, the Republican governors. Republicans have mission’s existence impeded its ability to standard measure of poverty ignores the also backed laws requiring voters to show find evidence of fraud over the previous effects of anti-poverty programmes. No government-issued photo IDs (which eth- six months remains unclear, however. wonder the rate has hardly budged. 1 nic minorities and young voters, who tend Republicans tend to cast their efforts to to vote Democratic, are less likely to have). root out fraud as essential to preserving They contend that this is essential to stop electoral integrity—a perfectly reasonable Pick one, any one voter fraud. goal. But Carol Anderson, a professor at United States, poverty rate, % Voter-impersonation fraud is vanish- Emory University in Atlanta and author of Official measure Supplemental ingly rare. One study found 31 possible a forthcoming book about vote-suppres- 35 Rural cases out of more than 1bn votes cast be- sion, says reasonable-sounding aims long 30 tween 2000 and 2014. Yet it has become a justified discriminatory policies; the poll 25 conservative shibboleth. Mr Trump insists, taxes that blocked black voters, for exam- Rural without evidence, that he lost the popular ple, were presented as a race-neutral safe- 20 vote in 2016 only because millions of peo- guard. Running elections costs money, Urban 15 ple voted illegally. He even set up a com- their backers explained, and a tax was nec- 10 Urban mission—run by Kris Kobach, a backer of essary to cover the costs. Ms Anderson 5 ID contends that Republicans now want to strict voter- laws who might become 0 create disillusionment with the voting pro- 1967 80 2000 14 1967 80 2000 14 cess, so that large swathes of the electorate Correction: Matthew Nisbet is a professor at Source: “Long-term trends in rural and urban poverty: come to believe it is hopeless. “That’s no new insights using a historical supplemental poverty Northeastern University, not Northwestern, as we wrote measure” by L.B. Nolan et al., June 2017 last week (“A slow thaw”). Sorry. way to run a democracy,” she says. 7 https://t.me/finera The Economist August 11th 2018 United States 33

2 Other, superior, measures are more en- couraging. The Census Bureau’s Supple- Haulage mental Poverty Measure accounts for anti- poverty programmes as well as variations Keep on trucking in living costs. It suggests that poverty has SANTA BARBARA ebbed (see chart on previous page). Social Ashortage oflorrydrivers is getting worse Securityhashelped cutpovertyamong old people, while food stamps and other pro- N1970s films like “Duel” and “Smokey moving goods along American roads has grammes have filled children’s bellies. In Iand the Bandit”, truckers are outlaws. If become much more expensive. In the 12 terms ofliving space, the number ofrooms that was ever close to the truth, it is now a months to June, the cost ofcontracts for in flats and access to amenities like air con- highway’s length from it. Consider a road freight rose by18%. For the roughly ditioning and dishwashers, the poorest requirement, enforced since April, that one-third offreight that is booked on the 20% of Americans live about as well as the lorries must be fitted with an electronic short-term “spot” market, costs went up middle class did a generation ago. logging device (ELD) to trackspeed, loca- by 28% over the same period, according The CEA uses yet another measure, tion and driving times. Drivers who are to DAT Solutions, an Oregon firm that known as the consumption-poverty rate. just a few dozen miles from home must matches loads to carriers. This reports what households spend rath- now often pull over and wait, sometimes The American Trucking Associations er than what they earn. Similar measures forten hours, before continuing. (ATA), the industry’s largest trade group, are often used in poor countries, where Or consider the video cameras that reckons America needs nearly 51,000 most work is informal and hard to track. some logging devices aim at drivers. more drivers ofbig rigs. The average But how much consumption is too little? These send alerts to headquarters if a American lorry driver is 55 years old. Researchers usually peg the measure to driver’s head or eye movements suggest Younger people are seldom keen on a job consumption levels in a particular year, that he is distracted or otherwise driving that tightly restricts smartphone use, not known as the “anchor year”, and then esti- unsafely. Not surprisingly, many truckers to mention time at home. The young may mate changes. Choosing different anchor associate ELDs with “a whole lot ofreal, also fear that autonomous vehicles (“ro- years gives wildly different results. The real frustrations”, says Todd Spencer of bot drivers”, as truckers contemptuously consumption-poverty measure that pro- the Owner-Operator Independent Driv- call them) will steal their jobs eventually. duced the heartening 3% figure, for exam- ers Association in Missouri. Rob Hatchett, vice-president ofrecruiting ple, was pegged to consumption levels in As truckers’ gripes grow, though, so do at Covenant Transport Services in Ten- 1980. Had 2015 been used as an anchor their wages. The past year has seen pay nessee, wishes that talkofself-driving year, the estimate would be a much less increases ofnearly10%, not counting the trucks would “go away” until the tech- impressive 12.7%. “I don’t think there’s a lot hiring bonuses of$5,000-10,000 that nology is ready. of meaning to that 3% number,” says Bruce have become common. Partly as a result, The ATA is lobbying Congress to pass Meyer, an economist at the University of a bill, introduced in March, that would Chicago who helped devise the consump- lower the minimum age forinterstate tion-poverty index. trucking to 18 from 21. And more shippers Measuring poverty always entails are setting up hubs where trailers are trickyvalue judgments, asAdam Smith ob- swapped, which keeps drivers closer to served in “The Wealth of Nations” while home and therefore happier. But until meditating on a linen shirt. Though an- any such efforts make a big dent in the cient Greeks and Romans lived comfort- driver shortage, wages and freight costs ably without linen, he wrote, “a creditable are likely to continue rising. day-labourer” of the 18th century “would Oddly, consumers may not have be ashamed to appear in public without a noticed the escalating cost oftrucking. linen shirt” for fear of betraying a “dis- They should thankAmazon, says Craig graceful degree of poverty”. Today much Decker ofWolfe Capital Markets & Advi- the same could be said of cars or smart- sory in New York. The online giant’s phones. Poverty can be defined in abso- shipping costs in America rose from lute terms—as having too little to pay for $11.5bn in 2015 to $21.7bn last year. But life’sessentials. Forexample, 4.9% ofAmer- rather than pass the expense along to ican households experienced “very low shoppers, Amazon has subsidised ship- food security” in 2016, meaning that a fam- ping with revenue from its cloud-com- ily member went hungry at least once. But puting operations. Amazon’s competitors that measure seems too austere in a coun- have responded by trimming their mar- try as rich as America. gins. As faras the average American is Despite their differences, the White Like a bandit concerned, the road is smooth. House reaches the same conclusion as Mr Ryan in 2016: more poor people should work in return for benefits. The White like to apply similar rules to rent subsidies vices. But because benefits tapered off as House is encouraging states to impose and tighten existing eligibility require- people earned more, poverty did not fall. work requirements on Medicaid, the ments forfood stamps. Of the 13 studies considering the effect of health-insurance scheme forthe poor. Ken- Such moves are unlikely to cut poverty work requirements on income, 11found no tucky’s proposal, which a federal judge re- much, ifat all. Welfare reforms in the 1990s significant impact. cently struck down, was expected to re- under President Bill Clinton, which tied It would be foolish to remake the wel- duce its rolls by15% in five years by making payments to work, succeeded in boosting fare system on such shaky statistical foun- compliance more complex. In the first working, says Lynn Karoly, a seniorecono- dations. America has made great strides month ofArkansas’s workrequirement for mist at the RAND Corporation, who exam- against poverty in the last half-century. Medicaid, 26% were at risk of losing their ined the effects of welfare reform for the That is an argument forcarrying on, not re- health insurance. The government would Department of Health and Human Ser- versing course. 7 Financial Era Advisory Group 34 United States The Economist August 11th 2018 Lexington Storming Trump Tower

NeverTrump Republicans are marginalised and humiliated. But they could have theirrevenge accept that his victory was a rebuke to the small-government creed they espouse. Then again, chargingenemy cannon requires a degree of self-delusion about your prospects. It also requires grit, which NeverTrumpers take from anothersource. Their main objection is not to the president’s protectionist, deficit-boosting policies, much as they hate them. It is to his divisive, destructive politics. Most would settle for dislodging Mr Trump even if they could not win backtheir party in the process. That is a realistic hope. Mr Trump won the nomination with support from a minority of Republicans. He squeaked to power thanks to a late rally by suburbanites who disliked him less than Hillary Clinton. Yet instead of trying to expand his support, he speaks mainly to his fervent base, representingaround half ofRe- publican voters. The fact that most other Republicans say they approve of him reflects the hyper-partisan environment he has engendered. Mr Kristol believes a cogent case against Mr Trump from within his party could give those voters pause. Many Republicans are already uneasy about the president’s record on certain issues, includingRussia and trade. And those on Mr Kristol’s wish-list are well able to offer correctives to his bad policies. MrKasich mighttalkmore abouthisrecord of expanding HE phrase “forlorn hope” entered English from Dutch and health care to poor Ohioans than he did during his presidential TGerman in the 17th century. It referred to a suicide mission or, run in 2016. Mr Sasse has thought deeply about the effects of eco- more often, the ambitious and condemned men chosen to exe- nomic disruption on workers. Yet even if a Republican challenge cute it. The most celebrated British forlorn hope was a band of to Mr Trump were articulated in policy terms, its focus would be aristocrats and ne’er-do-wells sent to scale the walls of the Span- on his behaviour. Do Republicans really want another four years ish city of Badajoz in 1812. They carried sacks of hay to cushion of that? A large minority say they dislike his tweeting. That may theirleap into itsdefensive ditch. Manywere blown up byFrench reflect how they view his general unruliness. mines the moment they landed. There is little chance Mr Trump would lose in a primary. His Never Trumpers, as President Donald Trump’s Republican hold on most Republican voters is too strong—though Mrs Haley, critics are known, are the forlorn hope of American politics. Led whom he might find hard to lambast, could make it interesting. by conservative pundits such as Max Boot, David Brooks, Bill But a serious challenge could damage his prospects in the general Kristol, David Frum and George Will, they are few in number, gal- election, especiallyifthe Democratsnominated a moderate alter- lantly in favour of things like free trade and fiscal discipline that native. It is striking how evasive conservative voters can sound Republicans used to care about, and probably doomed. Mr when asked about their views on the president. They are forhim, Trump’s hold over Republicans seems unbreakable. Almost 90% they say, because he is better than Mrs Clinton and appoints approve of his performance. “There is no Republican Party, judges they like. But they could say that of almost any Republi- there’s a Trump party,” says John Boehner, a former Republican can. A stiff primary challenge might force them to contemplate congressional leader. some ofthe other stuffMr Trump brings to the White House. That conclusion, sharpened by the failure of elected Republi- cans to resist the president’s pandering to Vladimir Putin, has Wanted: top-notch cannon fodder forced Never Trumpers to a moment of reckoning. Messrs Frum, An irony of the argument that Never Trumpers are out of touch Boot and Will urge conservatives to vote Democratic in the mid- with their party is how little influence it ascribes to Mr Trump. terms. Mr Brooks and two Republican movers-and-shakers, Reed The mismatch between the ruthless economics Republican lead- Galen and Juleanna Glover, are floating the idea ofa new centrist ers preached and the economic security their voters wanted pre- party. Agroup part-founded by Mr Kristol, founder of the Weekly dated him. Hisskill wasto notice it. Buthe doeshave a hand in the Standard, hopes to launch a primary challenge to Mr Trump. rising ethno-nationalist tensions America is witnessing. A chal- Among the more or less openly disaffected Republicans Mr Kris- lenge that could offer Republicans the security they crave, with- tol is courting to lead the assault are Governor John Kasich of out the race-baiting, would be invaluable. It could offer a tem- Ohio, SenatorBen Sasse ofNebraska, Mitt Romney and Nikki Ha- plate for post-Trump conservatism, whenever that might be ley, Mr Trump’s ambassador to the UN. If none will oblige, Mr possible. But will a high-class challenger step forward? Kristol suggests he might have a crackat it himself. A prospect of glorious annihilation is not something many Defenders of Mr Trump’s citadel have greeted these plans politicians find appealing. For that matter, “forlorn hope” sounds with derision. Asked what she thought of Mr Kristol’s ambitions, even worse in the original Dutch phrase, “verloren hoop”, which Kellyanne Conway, a Trump spokeswoman, asked which coun- contains no reference to hope. (“Hoop”, correctly translated into try he hoped to lead. Setting aside the fact that her lawyer hus- English as “heap”, refers to a band ofmen.) Still, MrKristol says he band, George Conway, is a closet Never Trumper, this was under- isconfidenta champion will emerge while the role remains entic- standable. Mr Kristol, a cerebral conservative, is not a serious ing. After18 months of Mr Trump, the Republican Party is a dent- candidate. Moreover, the notion of him challenging Mr Trump ed but still powerful election-winning machine. After eight years hints at the Never Trumpers’ main weakness: their reluctance to ofhis leadership, who knows what it might looklike? 7 https://t.me/finera The Americas The Economist August 11th 2018 35

Also in this section 36 Iván Duque takes charge 37 Bello: The perils of Nicolás Maduro

Brazilian politics mains the country’s most popular politi- cian. But he is also the most important The plot thickens scalp claimed by the Lava Jato investiga- tors: he is servinga 12-yearsentence forcor- ruption in a jail in Curitiba. That means he will almost certainly be disqualified be- fore the first round. Regardless, on August 4th his Workers’ Party (PT) nominated him SÃO PAULO to be its candidate, hoping to exploit the The outcome ofthe upcoming general election is harderto predict than usual sympathy of voters who regard him as a F BRAZILIAN politics were a telenovela, media? Complicating the picture further left-wingmartyr. Ifhe is forced out, his run- Ithe general election in October would are a new political-finance regime and ning mate, Fernando Haddad, a former make for a riveting finale. A motley cast of new rules for electing members of con- mayor of São Paulo, will probably become suitors is vying for the hand of a disap- gress. The fragmented presidential field the PT’s presidential candidate. pointed electorate. They include an old means that a candidate could enter a run- In polls that do not mention Lula, the flame, who is pressing his suit from a jail off, to be held on October 28th if needed, leader is Jair Bolsonaro, a far-right con- cell, a swain who has all the attributes with just15% ofthe vote. The safestbet may gressman who has made a career ofinsult- brides normally want but is a bit of a bore, be that the election will not produce the ing gays, women and black people, extol- and a rascal who promises excitement and conditions for political and economic re- ling the dictatorship that ruled Brazil from danger. Unlike the plots of past political newal that Brazil needs. 1964 to 1985 and advocating violent repres- dramas, this one is building up to an end- The sour mood comes from two trau- sion as the best way to fight crime. His run- ing that is impossible to guess. mas that Brazil has suffered over the past ning mate is a retired general who said last That is because this election, in which four years. One is the country’s worst-ever year that a military coup could solve the voters will choose Brazil’s president, all recession, which began in 2014 and from country’s political crisis. members of the lower house of congress which the economy is recovering slowly. Lagging behind is Geraldo Alckmin, a and two-thirds of the 81-seat senate, plus The other is the Lava Jato (“Car Wash”) cor- centrist formergovernor ofthe state ofSão governors and legislators in the 26 states ruption investigations. These began as a Paulo, who has run for president once be- and the capital, is different from any that probe into bribe-paying by construction fore, in 2006. Others in the second tier are has come before. The voters are more dis- companies to win contracts from Petro- Ciro Gomes, a formergovernor ofthe state gusted than atanytime since the end ofthe bras, the state-controlled oil company, and of Ceará who is battling with Lula’s PT for military dictatorship in 1985. More than a have implicated scores of politicians from the left-wing vote, and Marina Silva, an en- quarter are undecided, an unusually high all the main parties. The current president, vironmentalistwith a compellinglife story share just two months before the first Michel Temer, has avoided prosecution (she is the daughter of a rubber-tapper). round on October 7th; 31% say they might only because congress voted to protect She has run twice before. spoil their ballots or leave them blank. him from it. Last year just 13% of Brazilians Disillusionment makes voters unpre- said they were satisfied with their democ- Old whines dictable. Will they opt for one of the estab- racy, a lower share than in any other Latin Ifthe old rules applied, Mr Alckmin would lishment candidates, who retain the cus- American country, according to Latino- be the strong favourite. That is not because tomary advantages of backing by strong barómetro, a pollster. of his charisma. Trained as an anaesthe- parties and the lion’s share of advertising The line-up of presidential hopefuls is siologist, he is mocked by Brazilians as a pi- time (see chart on next page)? Or will they unlikely to rekindle enthusiasm. The front- colé de xuxu, an (imaginary) popsicle made choose one of the radicals, who must get runner is Luiz Inácio Lula da Silva, who from a flavourless vegetable. But Mr Alck- their message out mainly through social was president from 2003 to 2010 and re- min’s Party of Brazilian Social Democracy 1 Financial Era Advisory Group 36 The Americas The Economist August 11th 2018

Colombia Which medium is mightier? Brazil, presidential election 2018 A windy start Allocated time in Facebook Polling, % electoral TV broadcasts* followers, m Selected candidates Jul 30th-Aug 1st 2018 Aug 31st–Oct 4th 2018 Aug 9th 2018 Luiz Inácio Lula da Silva PT 31 2m 22s 3.6 BOGOTÁ Jair Bolsonaro PSL 19 9s 5.5 The new president, Iván Duque, will be Geraldo Alckmin PSDB 9 5m 32s 0.9 buffeted from all sides Marina Silva Rede 8 21s 2.2 Ciro Gomes PDT 7 40s 0.3 GUST of wind struck the Plaza Bolívar Álvaro Dias Podemos 4 40s 1.1 Ain Bogotá while Iván Duque was sworn in as Colombia’s president on Au- Henrique Meirelles MDB 2 1m 56s 0.2 gust 7th. During his inauguration speech, *Amount of time allocated in each 12-and-a-half-minute electoral delivered on a massive stage thronged Sources: Ipespe; Folha de S.Paulo; Facebook programme. Includes time allocated to coalition partners with Latin American presidents and other dignitaries, a man struggled to shield him 2 (DBPS ) is one ofthe most powerful (the last Bolsonaro hopes. Just half of Brazilians from a light rain with an umbrella. Seeking elected non-PT president, Fernando Hen- have frequent access to the internet, points to banish the bitterness ofa polarised elec- rique Cardoso, was among its founders). out Mauro Paulino, head of DataFolha, a tion campaign, Mr Duque promised to For the first time, it has formed a pre-elec- pollster. Mr Alckmin is trying to attract po- “govern Colombia with a spirit of con- tion coalition with the centrão (big centre), tential Bolsonaro voters by naming as his struction, never destruction”. an agglomeration ofsmaller parties. running-mate Ana Amélia from the con- That was not the tone used by Ernesto That entitles Mr Alckmin to 44% of free servative Progressive Party, to which Mr Macías, the president of congress, who in- television advertising time, far more than Bolsonaro belonged until 2015. troduced Mr Duque and administered the any other candidate. (Ms Silva jokes that Another big unknown is how much oath. Mr Macías, a member of Mr Duque’s she will barely have time to say “good supportMrHaddad will getifLula is forced Democratic Centre party, attacked the for- morning”.) Mr Alckmin will also get the out of the race. The PT has formed an alli- mer president, Juan Manuel Santos, and biggestshare of2.6bn reais($700m) in pub- ance with the Communist Party. Mr Had- vowed to modify the agreement that in lic campaign financing; for the first time in dad has begun to campaign with Manuela 2016 ended a 52-year war with the FARC a presidential election, corporate dona- D’Ávila, one of its leaders, in what looks guerrilla group. tions are banned (at least in theory). like an effort to familiarise voters with the The contrast illustrates the main politi- In the past, these advantages would duo in preparation for Lula’s withdrawal. cal difficulty that the new president will have been decisive. The biggest shifts in The press has dubbed her the “vice’s vice”. face: keeping the support of his party, poll standings normally occur after televi- Although no party is more enmeshed which is militantly opposed to the peace sion advertising begins, which this year in Lava Jato than the PT, voters remember accord, while courtingotherforces to enact will be on August 31st, though the main that the economy prospered and the poor his legislative priorities, including reform gainers are usually unknown candidates. benefited under Lula’s presidency. “The PT ofthe pension system, makingcourtsmore Mr Alckmin is, if anything, tiresomely fa- stole, but they helped us out,” says Luciano efficient and cutting taxes. miliar. So are his allies in the centrão, many Trajano, a janitor from São Paulo. Lula’s The key to controlling Democratic Cen- of whom have been implicated in Lava policies helped him buy his first plane tick- tre is co-operation with Álvaro Uribe, a for- Jato cases. “The PT and the PSDB think this et to visit his family in the north-eastern mer president who has been Mr Duque’s will end up being another left-versus-right state ofParaíba. Such memories could ush- political patron. The new president has ap- election,” says Pablo Ortellado, a professor er Mr Haddad into the second round. pointed favourites of Mr Uribe to lead the of public policy at the University of São The new rules may change the shape of ministries of defence, interior and finance. Paulo. “But it’s about traditional politics congress, though probably not as much as In July Mr Uribe resigned from his seat in versus a rejection ofthe system.” reformers hope. Public financing will ben- the senate after the supreme court called The leading rejectionist is Mr Bolso- efit bigpartiesat the expense ofsmall ones. him to testifyabout allegations that he had naro, who plans to win by being a fresh A “barrier clause” enacted last year elimi- bribed witnesses to retract their claim that face in national-level politics (though he nates money and media time for parties he is linked to the AUC, a paramilitary has been a congressman for 27 years), im- that get less than 1.5% of the vote in at least group that disarmed duringhis presidency. moderate in his pronouncements and, un- nine states, a threshold thatwill eventually Mr Uribe denies the allegations. He sus- like Mr Alckmin, compelling to watch. An rise to 3%. That will put pressure on politi- pended his resignation after his lawyers evangelical Christian, he hopes to appeal cians from small parties to join bigger asked that three supreme-court justices, to the third of the population that shares ones. With fewer, more disciplined parties, whom they consider biased, stand aside his faith and to other conservatives who congress may be less prone to the grubby from the case. But as long as the ex-presi- don’t feel represented by the main parties. deal-making that helped create the Lava dent’s future is cloudy, Mr Duque’s rela- “Bolsonaro is an expression of this enor- Jato scandals. tions with his party will be unsettled. mous contingent that’s for the first time However, 91% of the lower-house depu- On matters of war and peace, Mr represented in the political realm,” says ties under investigation plan to seek re- Duque has signalled that he is prepared to Fernando Schüler, a political scientist at In- election, according to O Estado de S. Paulo, soften the tough line thatMrUribe favours, sper, a university in São Paulo. a newspaper. Some are surely doing so to but only a bit. In his speech Mr Duque said To what extent that will translate into keep their immunity from prosecution. his government would consider continu- votes will depend in part on whether his “Congress won’t be substantially differ- ing peace talks with the ELN, a guerrilla social-media prowess can counter Mr ent,” said Pérsio Arida, Mr Alckmin’s eco- group that is still fighting, only if it declared Alckmin’s old-media advantage. Nearly all nomic adviser, at a recent conference. a unilateral ceasefire. The ELN is sure to re- “alt-right” websites support Mr Bolsonaro, “Change must come from the president.” jectthis, butMrDuque’sdemand lookslike says Mr Ortellado, who monitors political Brazilians can only wait and wonder what a retreat from his earlier position that the social media. That may matterless than Mr sort ofchange that will be. 7 group would have to gather in designated 1 https://t.me/finera The Economist August 11th 2018 The Americas 37

2 zones before talks could begin. attended the inauguration, said President members of his cabinet are technocrats Days afterhis election on June 17th, con- Donald Trump wants Colombia to reduce (and half are women). His choices show gressmen from Democratic Centre called the area on which coca is grown, which that he means to end the marmelada (liter- fora referendum on transitional justice, the reached a recent high of 209,000 hectares ally, jam; figuratively, buying the support controversial part of the peace deal under last year. “We have faith in the fact that [Mr ofpartieswith jobsforpoliticians). Butthat which formerguerrillasare to confess their Duque is] going to deliver,” she said. high-minded policy has risks. Congress- crimes in return for light sentences. The in- The government will step up forced men who do not get government jobs will coming vice-president, Marta Lucía Ramí- eradication of coca, including by sending have little incentive to support such un- rez, made clear that the government did drones to spray crops. That is bound to pro- popular but necessary measures as raising not support the plan. voke conflict with farmers; last year they the retirement age. The new ministers also On coca, an illegal crop exploited by the paralysed large partsofthe countryin prot- risklookingout oftouch with ordinary Co- ELN and other armed groups, Mr Duque ests against eradication. A clash over coca lombians. “Most ofthe cabinet lives in two must consider the views of the United would intensify the polarisation Mr high-class neighbourhoods of Bogotá,” States as well as of Mr Uribe. Nikki Haley, Duque is eager to lessen. notes Héctor Riveros, a political consult- the American ambassador to the UN, who In other areas he has a freer hand. Most ant. The gusts are just beginning. 7 Bello The perils of Nicolás Maduro

Adrone attackshows that the Venezuelan president is vulnerable T MAY be sinking ever deeper into But the regime probably did not attack trounced him in a legislative election in Islump, misery and corrupt dictatorship, itself. Dictators depend on projecting an 2015, prompting him to rule as a dictator. adorned only by threadbare revolution- image of omnipotence. In the television Three things have sustained him since ary rhetoric, but Venezuela has retained a footage, Mr Maduro looked befuddled; the then: oil revenue, the armed forces and surprising stability. Over the past 18 massed ranks of the National Guard broke Cuban security aid. He can no longer be months Nicolás Maduro, the president, discipline and ran offin panic. And Mr Ma- certain ofthe first two. has pulverised the democratic but divid- duro has rarely required an excuse to crack Mainly to keep the armed forces hap- ed opposition. Most of Latin America did down. His security forces killed many of py, in November he handed control of the not recognise the rigged election in May the 160 protesters who died last year. His oil industry to a National Guard general in which he arranged another six-year regime’s dungeons hold more than 250 po- with no relevant experience. According to term for himself, but the region has not litical prisoners, some of whom have suf- OPEC estimates, oil production has fallen taken any action to bringabout the demo- fered torture. Dozens have fled into exile to to 1.3m barrels per day, down from 2m in cratic transition it wants. avoid arrest. October. That is one of several ways in And yet Mr Maduro is far from invul- The main opposition parties con- which Venezuela is becoming a failed nerable. That was dramatically highlight- demned the attack. But a group calling it- state. It is suffering hyperinflation (prices ed on August 4th, when an apparent as- self Soldiers in T-shirts claimed it. The are doubling every 25 days). The regime sassination attempt against him played group is linked to Óscar Pérez, a police cap- uses subsidised food to secure loyalty. But out on live television. There is still much tain who led a brief guerrilla attack on the it now faces a vicious circle: formany em- that is murky about the incident, in which regime and was killed by government ployees, devalued wages no longer cover two drones carrying explosives flew to- forces while trying to surrender. A former the cost of getting to work on a collapsing wards Mr Maduro as he was speaking at a municipal police chief who says he is part public-transport system. Oil workers are ceremony of the paramilitary National of “the resistance” to Mr Maduro said he resigning in droves, some joining perhaps Guard in central Caracas. One ricocheted was involved in the drone attack. Such 2m Venezuelans who have emigrated against a block of flats, starting a fire. The groups are small, and the attack looked since 2015. Mr Maduro has partially lifted other was supposedly shot down. Offi- amateurish. But it is unlikely to be the last exchange controls in a seemingattempt to cials said that seven people were injured. attempt to unseat Mr Maduro. boost remittances from those migrants, Mr Maduro blamed the “farright”, Co- That he has lost the support of his peo- and has promised a new currency. That lombia’s outgoing president, Juan Ma- ple was clear when the opposition won’t be enough to tame inflation. nuel Santos, and shadowy forces in Mi- Despite the generals’ privileges, many ami. He has denounced a score of plots in the army suffer privations, too. Discon- since he took over from the late Hugo tent in the ranks has grown. Dozens of of- Chávez in 2013. This time, as before, he of- ficers have been arrested over the past fered no evidence that foreign powers year or so, including generals who were were involved. Colombia’s government close to Chávez. The only thing prevent- dismissed the claim as “absurd”. Some in ing a coup against Mr Maduro is his team the opposition believe that Mr Maduro’s of Cuban spies. The intelligence services regime staged the event to rally its own broke up a serious plot in May. flagging supporters and provide a pretext Mr Maduro leads the pro-Cuban fac- for a crackdown. At a congress of the rul- tion in the regime. Another has closer ties ing party last month there was open criti- to the armed forces. By blocking demo- cism of Mr Maduro’s management of the cratic change and by failing to halt Vene- economy. This week the government de- zuela’s decline, Mr Maduro has made tained an opposition legislator and or- himself vulnerable to removal by force. dered the arrestofJulio Borges, an opposi- That could happen tomorrow—or never. tion leader in exile in Colombia. Uneasy lies the head that fears a drone. Financial Era Advisory Group 38 Middle East and Africa The Economist August 11th 2018

Also in this section 39 Is the Western Wall falling down? 39 A silly Saudi spat with Canada 40 Chaos in Zimbabwe 40 Mozambique’s bubbling insurgency 41 Kabila stops running in Congo

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

America and Iran insurance firm. By its own estimate, it con- trols 41% of the land in Mashhad. The bon- The pain of no deal yads sit on vast wealth, all of it tax-exempt. A single Tehran-based trust is thought to control some $13bn in assets, twice as much as the Vatican’s bank. Every branch of the state has its own economic empire. Beneath Tehran, work- CAIRO ers are digging the seventh line ofthe city’s American sanctions bring more agonyto Iran’s suffering economy metro. The lead contractor, Sepasad, is un- T TOOK two years to negotiate a nuclear contract, are already out ofthe door. der American sanctions. The US Treasury Ideal with Iran—and a few strokes of a For months the looming sanctions and says it is run by Iran’s Revolutionary pen to undo it. On August 6th President expected capital flight have exacerbated a Guards Corps (IRGC). It awarded much of Donald Trump signed an executive order currency crisis in Iran. Last summer a dol- the tunnelling to the Hara Company, also restoring sanctions aimed at Iran’s car in- lar fetched about 38,000 rials on the black allegedly run by the Guards. If these firms dustry, its trade in gold and its access to dol- market (the official rate has long been out need construction materials, they can turn lars, among other things. It makes good on of touch with reality). Since then the rial to other IRGC-linked companies that make the president’s promise to withdraw from has lost more than 60% ofits value. On July cement and steel. The state and the bon- the deal, signed in 2015, which gave Iran 30th it bottomed out at 119,000 rials to the yads also control 40% of Iran’s private sanctions reliefin exchange forlimits on its dollar, a record low. Prices of some staple banks, many ofthem undercapitalised. nuclear programme. The sanctions will foods have increased by up to half. MrRouhani oversold the benefitsof the hurt. Whether they will accomplish any- Eager for a scapegoat, the president, nuclear deal, promising a flood of new in- thing else is up for debate. Hassan Rouhani, sacked the central-bank vestment. Even before Mr Trump took of- Contrary to his campaign promise, Mr governor and his deputy who oversaw for- fice, foreign firmswere skittish about doing Trump cannot unilaterally “tear up” the eign exchange. Ahmed Araghchi, the depu- business in Iran. It is hard to compete with deal. It has five other signatories: Britain, ty, who served for barely a year, is the dep- vertically integrated empires run by clerics France, Germany, Russia and China. All uty foreign minister’s nephew. His or the IRGC. Iranians were already frustrat- say it is working, an assessment backed by bumbling tenure was one example of the ed with the stagnant economy. Now it will the International Atomic Energy Agency, nepotism that plagues Iran, which ranks get worse—especially in November, when which certifies Iran’s compliance. near the bottom of Transparency Interna- America reimposes sanctions on Iran’s oil In an effort to preserve the agreement, tional’s corruption index. Mr Rouhani has industry. Mr Trump’s predecessor, Barack the European Union has instructed EU tried to make a show of arresting corrupt Obama, did the same, in partnership with firms not to comply with the sanctions and businessmen and politicians. Dozens of allies, and the volume of Iran’s oil exports allowed them to sue in court to recover bankers have been jailed fordodgy loans. fell by 58% between 2011and 2014. damages resulting from America’s action. Mr Trump says he wants a better deal, But few think the so-called “blocking” Persian empires one that limits Iran’s ballistic-missile pro- measure will work. Firms are taking seri- But Iran’s problems run much deeper than gramme and does not expire in a decade. It ously Mr Trump’sthreat that anyone doing a few dirty officials. Large chunks of the is hard to see how he will achieve that. Far business with Iran will not be allowed to economy are dominated by bloated quasi- from working with allies, he scorns them. do business with America. Total, a French state enterprises. Take Astan Quds Razavi, He has a fanciful goal of bringing Iran’s oil energy giant, is almost certainly quitting a a charitable trust, or bonyad, in the north- exports, currently 2.5m barrels per day, $2bn deal to develop Iran’s massive South eastern city of Mashhad. It was founded in down to zero. But India is looking for alter- Pars gasfield. Airbus may halt the planned the 16th century to maintain the shrine ofa native payment methods to keep at least delivery of 100 passenger jets. American revered imam. Today it has more earthly some of its 768,000 barrels per day from firms, such as Boeing, which lost a $20bn concerns: mines, an oil company, even an Iran flowing. Turkey says it will not comply1 https://t.me/finera The Economist August 11th 2018 Middle East and Africa 39

Jerusalem’s holy sites Beware of falling rocks

JERUSALEM Is the Western Wall falling down? VER since the Roman army tried to much fasterthan others. Vegetation Etopple it in the 1st century, knocking a growing in the wall’s cracks could be few slabs from the top, the Western Wall exacerbating the problem. In 2004 pieces in Jerusalem has remained largely intact. ofthe wall fell off, injuring a worshipper, A relic ofthe second Jewish temple, most in part because birds stuckmetal objects ofwhich the Romans did destroy, the into the cracks, causing erosion. wall attracts thousands ofJewish wor- It will take more intensive surveys, shippers each day. One called Daniella using laser measurements and under- Goldberg was standing in front ofit when ground sonar, to determine the exact a big slab ofthe wall came crashing cause ofthe falling stone and the risk that down next to her on July 23rd. more will follow. In the past, efforts have Ms Goldberg was unharmed, but been made to shore up the wall using engineers were left wondering ifworse is special adhesives and concrete. But more to come. Several explanations have been extensive work would have to be co- put forward as to why the slab broke off. ordinated with the Muslim religious Canada and Saudi Arabia Rainwater erosion and recent seismic authority, controlled by Jordan and activity may have loosened the wall’s known as the Waqf. It runs the Haram Meddlesome stones. A study done in 2014 found that al-Sharifcompound (known to Israelis as some parts ofthe wall were eroding the Temple Mount) on the other side of maple leaves the wall. Muslims consider the Western Wall part ofthe al-Aqsa mosque. CAIRO AND OTTAWA Tension between Israel and the Pales- Saudi Arabia picks a pointless fight with tinians is high, such that the director of Canada the al-Aqsa mosque, Omar al-Kiswani, felt it necessary to deny that anyone on UEBEC’S proudly Francophone sepa- his side pushed the rockthat nearly hit Qratists may want to learn some Ara- Ms Goldberg. YousefNatshe, the Waqf’s bic. On August 5th, as Canadians en- chiefarchaeologist, says publicly that he joyed a long weekend, Saudi Arabia will not co-operate with the Israelis on abruptly expelled their ambassador and fixing the wall. Privately, though, Mr froze bilateral trade and investment. Its Natshe and Israeli archaeologists ex- state-run funds have reportedly been or- change information so that each party dered to dump their Canadian assets, no can carry out workon its side. matter how much it costs to do so. The As engineers search forearthly sol- kingdom is angry about tweets from Cana- utions, rabbis in Jerusalem see a warning da’s foreign minister, Chrystia Freeland, from God. They thinkHe objects to plans criticising the arrests of Saudi human- to allow men and women to pray togeth- rights activists. For Saudi Arabia, this was er at the wall, near where the stone fell. unacceptable “foreign interference”. “For the stone shall cry out ofthe wall,” If anyone is qualified to opine on med- cautions one rabbi, quoting Habakkuk, a dling abroad, it is the Saudis. Since 2011 Between a rock and a holy place rather gloomy prophet. they have helped quash an uprising in Bahrain, backed a coup in Egypt and de- tained Lebanon’s prime minister. If Cana- 2 with the sanctions. And China, which than threats from abroad”. But, though da keeps up its criticism, “we are allowed buys a quarter of Iran’s crude, is happy to they are persistent, the protests are also to interfere in Canada’s internal affairs,” play spoiler. CNPC, a Chinese state-run en- small and leaderless. Iran has no coherent the Saudi foreign ministry warned. Cana- ergy behemoth, has reportedly offered to opposition to challenge the regime. dian diplomats joked about the kingdom pickup Total’s share in the South Pars field. At the beginning of the summer, resi- arming Québécois rebels. The president has offered to meet Iran’s dents of Khorramshahr province found A legion of Saudis took to Twitter to leaders, perhaps hoping for a reprise of his themselves without water. The govern- voice their (no doubt long-held) sympathy summit with North Korea’s dictator, Kim ment arrested protesters, and then dis- forindigenousCanadians. Othersattacked Jong Un. Iran is cool to the idea. So the ad- patched the Guards to install a 90km water Canada’s record on women’s rights. This ministration has fixed its hopes on the pipeline. It was a telling sign. Mr Rouhani was a co-ordinated effort, and a clumsy protests roiling the country. Small groups had hoped to weaken the IRGC’s grip on one. An account reportedly linked to the come out almost every day to complain both politics and business. He failed. His kingdom warned Canada not to “stick its about the economy. “We would like to see relatively moderate government will now nose where it doesn’t belong”. The mes- a change in the regime’s behaviour, and I have to work with the arch-conservatives. sage was superimposed on a photo of the thinkthe Iranian people are lookingfor the This will not make Iran more amenable to Toronto skyline, with a plane flying omi- same thing,” says an American official. Western interests, nor more responsive to nously towards the CN Tower. Someone On this, the White House and the IRGC its own people. Mr Trump may get a apparently realised this was a bad look for are in rare agreement. The commander of change in the regime’s behaviour—but not the country that produced most of the 9/11 the Guards calls the protests “more serious the one he says he wants. 7 hijackers. The account was quickly closed. 1 Financial Era Advisory Group 40 Middle East and Africa The Economist August 11th 2018

2 The damage to Canada will be slight. Its Neither is there unity between the exports to Saudi Arabia were worth $1.1bn armed forces and Zanu-PF, nor among the in 2017 (0.2% ofthe total value ofCanadian men in uniform themselves. The agitator- exports), mostly from a $12bn multi-year in-chief, according to several sources, is arms deal. It imported $2bn of Saudi Constantino Chiwenga, the vice-president goods, mostly petroleum. The first to suffer and minister of defence, who is rumoured will be nearly 10,000 Saudi students in to want one day to replace Mr Mnan- Canada. The kingdom told them to study gagwa. The formercommanderofthe Zim- elsewhere. It also plans to pull Saudi pa- babwe Defence Forces (ZDF) played a piv- tients from Canadian hospitals. otal role in the coup last year, but has Absurd as it is, the spat is a warning to struggled to adapt to political life. (He tried Saudi Arabia’s other allies: keep quiet to fire thousands of striking nurses before about our policies or lose access to our realising that was not possible.) It is he, market. Canada was an easy target. “We rather than the current head of the ZDF, are always going to speak up for human Philip Sibanda, who is believed to have in- rights,” says Ms Freeland. But allies are not stigated the crackdown on August 1st, out rushing to speak up for Canada, least of all of frustration that others have been too America. Donald Trumpisclose to the Sau- soft on the MDC. Mr Chiwenga speculates dis and mired in a trade war with Canada. that his critics are high on weed. The spat also serves a domestic pur- The president may be weaker than pose for the Saudi crown prince, Muham- Who ordered this? many assume, but he is not innocent. Mr mad bin Salman, who wants to refashion Mnangagwa reportedly co-ordinated the Saudi society.In mere months he has lifted Tendai Biti, one of the bloc’s senior figures, post-election violence in 2008-09. It is im- the ban on women driving, opened cine- whose claim for asylum in Zambia was re- plausible to claim, as his allies do, that he mas and allowed public concerts. This jected on August 8th. knows little ofwhat is happening now. risks a backlash from conservative clerics, For some the violence is not just grim, The MDC is challenging the legality of so he is keen to fashion a new Saudi na- but odd. Since taking power via a coup last Mr Mnangagwa’s first-round win in the tionalism. Aggressive foreign policies, November, President Emmerson Mnan- presidential race on July30th. Butgiven the from the blockade of Qatar to the war in gagwa has sought to convince the world partisanship of Zimbabwe’s judges, defeat Yemen, help do that. However, they also that Zimbabwe is “open for business” fol- looks certain. Therefore Mr Mnangagwa reinforce his image as a rash and reckless lowing nearly four decades of misrule by will be sworn in again as president before leader. The crown prince needs foreign in- Robert Mugabe. The culmination of this the end of the month. He will do so amid vestment to wean the Saudi economy off plan was meant to be a convincing victory growing mistrust among foreign govern- oil. A feud with the cuddly Canucks will in the election, which even if neither free ments and would-be investors. And with not help attract it. 7 nor fair, would be orderly enough to win more blood on his hands. 7 him the blessing of foreign governments. They would then encourage creditors to Zimbabwe after the election lend the country much-needed foreign Mozambique currency. Instead there is mayhem. When Open for chaos not shooting civilians in the back, Zimba- Burnings and bwe’s ruling elite seems to be shooting it- selfin the foot. beheadings Zanu-PF, the party of Mr Mnangagwa, has a history of thuggery. Mr Mugabe once HARARE AND JOHANNESBURG boasted: “We have degrees in violence.” Aviolent crackdown exposes the A bubbling Islamist insurgency could But the recent brutality is probably made instabilityofthe Mnangagwa regime grow deadlier worse by the fact that the ruling elite is far NTHE earlyhoursofAugust5th fourmen from united. Both Zanu-PF and the myriad ESIDENTS of Naunde village were wo- Ibroke into a house in eastern Zimbabwe security forces are fragmented. So while Rken by gunshots at around 2am on known to be home to activists for the MDC some factions may lose from chaos, others June 5th. Two of the attackers carried guns. Alliance, the country’s main opposition believe they will gain. So goes the macabre The other three, armed with machetes, set bloc. They dragged the husband and wife struggle forpower and spoils. houses on fire. Then they chased down a outside before beating them with sticks on In his election campaign Mr Mnan- local chief and hacked off his head in front their back and buttocks. Two of the assail- gagwa tried to portray himself as an all- of horrified neighbours. They also killed ants took turns raping the wife; the other powerful leader. But his control over his six others, including an Islamic leader two raped the husband. All the while the own party remains fragile. The so-called whom they beheaded in a mosque. children ofthe couple watched. G40 faction, associated with Grace Mu- The attack, documented by Human After holding peaceful elections on July gabe, Robert’s second wife, remains influ- Rights Watch, a pressure group, is one of 30th Zimbabwe has again descended into ential, well funded and keen for Mr Mnan- several dozen carried out by jihadists in violence. At least six people were killed on gagwa to fail. At the local level it has been Cabo Delgado—a mostly Muslim, coastal the streets of the capital two days after the hard for the president to exert authority. province in Mozambique’sfarnorth—since vote. Since then human-rights groups have There were two dozen riots during the October 2017. Recently many have fol- recorded more than 150 alleged cases of primary elections for Zanu-PF candidates. lowed a similar pattern: hit-and-run raids abuse against opposition supporters (in- Some newly elected members of parlia- during which attackers torch houses, steal cluding that of the husband and wife ment, such as Webster Shamu, have re- supplies and behead victims. In May terro- above), mostseeminglyatthe handsof sol- peatedly clashed with Mr Mnangagwa. rists decapitated ten people, including chil- diers. The true figure is almost certainly Overall only about a quarter of new mem- dren. Officials have tried to brush off the many times higher. Hundreds of MDC bers are incumbents. No one knows how violence as mere banditry. But the attacks members have fled their homes, including the newcomers will wield their power. appear to be increasing. 1 https://t.me/finera The Economist August 11th 2018 Middle East and Africa 41

2 Who the killers are and what they want Ahl al-Sunnah wal-Jamaah is not ex- As other candidates registered their is not entirely clear. Uncertainty surrounds pected to hamper the region’s gas projects. names ahead of the August 8th deadline, even their name. They are known as Ahl Butwhathappensnextmaydepend on the Mr Kabila waited until the last moment to al-Sunnah wal-Jamaah (Arabicfor“follow- state’sreaction. So farithasbeefed up secu- announce that he would not run again. In- ers of the prophetic tradition”), though lo- rity and arrested hundreds of suspected ji- stead the coalition that includes his party, cals also refer to them as al-Shabab (“the hadists. Eric Morier-Genoud of Queens the People’s Party for Reconstruction and youth”). They have no known ties to the ji- UniversityBelfastcomparesCabo Delgado Democracy (PPRD), will put forward Em- hadist group in Somalia, which is also to north-east Nigeria during the early days manuel Ramazani Shadary, who is the called al-Shabab, but some researchers of Boko Haram. There a heavy-handed PPRD’s permanent secretary. Many see the thinkthe jihadists in Mozambique have re- crackdown helped transform a radical reli- 57-year-old former interior minister as a ceived training abroad. gious sect into one ofAfrica’s deadliest ter- potential puppet ofMr Kabila. Beyond touting a strict form of Islam, ror groups. The hope is that northern Mo- Mr Shadary’s strongest rival is likely to the group’s political agenda is rudimen- zambique does not go the same way. 7 be Jean-Pierre Bemba, a former vice-presi- tary. According to Joseph Hanlon of the dent and, before that, a rebel leader. Mr London School of Economics, Ahl al-Sun- Bemba’s conviction for war crimes was nah wal-Jamaah emerged when groups of overturned on June 8th afterhe had served street traders, united by economic frustra- ten years in prison in The Hague. He had tion and radical Islam, came together in previously been held responsible for an 2015. They urged people not to pay taxes or epidemic of murder, rape and pillage com- send their children to state schools—and mitted by fighters under his command. they stormed into mosques, knives wav- Tens of thousands of people lined the ing, to lambast local Islamic practices. street from the airport to celebrate Mr Bem- For years locals complained about the ba’s return to Congo on August1st. growing number of angry young men in Mr Kabila was less enthused. Fearing their midst. But Mozambique’s corrupt unrest, the police blocked the road to Mr and listless authorities did little. The Bemba’s house in Kinshasa, which is close group’s first attack, last October, took offi- to the president’s residence. Then they dis- cials in the capital, Maputo, by surprise. persed Mr Bemba’s supporters using tear Cabo Delgado should be booming. gas and rubber bullets. One man was Companies such as Anadarko and Eni are killed when a police car ran over his head. investing some $50bn (around four times Mr Bemba narrowly lost to Mr Kabila in Mozambique’s annual GDP) in the region an election in 2006. His supporters cele- to exploit gas reserves found in 2010. Gem- brate the fact that his parents are Congo- fields, a British firm that makes gem-en- lese, while claiming that Mr Kabila’s moth- crusted eggs, arrived in 2011to mine whatis er was Rwandan, which he denies. said to be the world’s biggest ruby deposit. “Congolais, 100%”, they say. Even while in Butlocalssaytheyhave seen little bene- Congo prison he met with opposition leaders and fit. Cabo Delgado still lags behind Mozam- stayed abreast of Mr Kabila’s actions. “He bique’s more prosperous south. Many of Say it’s so, Joe neverlost his self-assurance,” says one visi- the jobs created by the gas finds go to high- tor. “He used to treat his jailers as if they ly skilled expatriates, not to locals, who are were his personal bodyguards.” Some lik- mostly illiterate. Young people in Palma, a en Mr Bemba, absurdly, to Nelson Man- town at the centre of the gas projects, prot- dela: released from prison to save his flail- ested in May, claiming that their job appli- ing country from misrule. His opponents The president says he will not run cations are ignored. want to bar him from running based on a again, but will he give up power? Adding to the misery are reports of second conviction, which was not over- ruby-related land grabs. In London law- HE Democratic Republic of Congo has turned, ofwitness tampering. yers are pursuing cases against Gemfields Tnever had a peaceful transition of pow- As Mr Bemba was registering with the on behalf of over 100 small-scale ruby er. Mobutu Sese Seko, the president from electoral commission (a privilege that costs miners, who claim they were shot at, beat- 1965 to 1997, fled his jungle palace shortly $100,000), another potential candidate en up and sexually abused by police offi- before it was ransacked by lootingsoldiers; was being barred from entering Congo. In cers and the company’s security guards. his successor, Laurent Kabila, was shot by 2016 Moïse Katumbi, a former governor of one of his bodyguards. So the country has mineral-rich Katanga province, was sen- People killed in jihadist been on edge as an election, scheduled for tenced in absentia to three years in prison attacks in Cabo Delgado December 23rd, draws closer. It is already forproperty fraud. He had gone to Belgium October 2017-July 2018 1 5 10 grappling with an outbreak of Ebola and shortly after falling out with Mr Kabila, Source: ACLED armed conflicts in ten ofits provinces. whom he accused of twisting the constitu-

Maputo The big question was whether Joseph tion to stay in power. The president’s pow- TANZANIA Kabila, the unpopular president (pictured), erful formerally, who would have been Mr Palma would run again. Mr Kabila inherited the Shadary’s biggest rival, was told he would job from his father, Laurent, in 2001. He is be arrested if he tried to come home. Still, ZAMBIA Naunde accused of corruption, incompetence and he tried twice, unsuccessfully. CABO DELGADO human-rights abuses. The constitution re- The electoral commission is now re- MALAWI quired him to step down when his second viewing the list of presidential candidates, term ended in 2016, but he stayed on, citing which will be announced on September

MOZAMBIQUE Channel a clause that allowed him to remain presi- 19th. Until then Congo holds its breath. If Mozambique dent until a new one was elected. He then Mr Bemba’s candidacy in annulled, mak- repeatedly delayed elections and cracked ing way for Mr Shadary, the country might 200 km down hard on those who protested. be in foreven more bloodshed. 7 Financial Era Advisory Group 42 Asia The Economist August 11th 2018

Also in this section 43 Building ten Balis 44 Oz kicks out Kiwis 44 Toxic test-doctoring in Japan 45 Polishing Narendra Modi Banyan is away

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

Student protests in Bangladesh denounced the protesters, before going after them on August 4th. Meg, a 21-year- High-school vigilantes old student at Dhaka University, said he was part of “an absolutely non-violent protest” when he and his friends got tear- gassed. Rubber bullets were also fired into student gatherings. Stick- and machete- wielding thugs from the AL’s youth wing, DHAKA the Chhatra League, backed up police in at- A rallyagainst road deaths roils a weakand repressive state tempts to frighten protesters off the streets. OOK at the lanes!” exclaimed an as- registered, and many drivers to lack a li- Unidentified goons attacked the cavalcade “Ltonished bystander from a bridge cence. Among traffic police, bribe-de- of the American ambassador as she re- above one of Dhaka’s main roads. For a manding far exceeds enforcement. By turned from a dinner with liberal critics of week a miraculous transformation settled contrast, some students are calling for the the AL government. upon the motorised anarchy forwhich the death sentence fordrivers who kill. Priban, Bangladeshi capital is notorious. The a 17-year-old, says those killed at the bus Sheikh Hasina, street cleaner streets were still gridlocked with vehicles, stop “could have been any one ofus.” With the head-cracking, Sheikh Hasina has from battered buses and little tuk-tuks to The government of Sheikh Hasina got her way. By August 8th few students re- the four-wheel-drives of the elite. Yet be- Wajed, the prime minister, was quick to di- mained on the streets—Priban’s parents neath the bridge and elsewhere, the traffic vine the black hand of the opposition be- forbade her to protest once the state- crawled in neat, well-behaved lanes. Dart- hind the protests. Although everything backed violence mounted. Hundreds have ing between them, students in high-school suggests they arose spontaneously, a politi- been injured and arrests have been made, uniforms, acting as self-appointed traffic cal dimension is hardly surprising. A road- including of a prominent photographer police, checked drivers’ licences and even safety bill had gathered dust for years. And and activist, Shahidul Alam. He was distributed food to those stuck in jams. the arrogance of Sheikh Hasina’s govern- picked up from his home on August 5th, Dhaka had never seen anything like it. ment is overbearing. One of her ministers, beaten up in police custody and charged The school-age vigilantes, numbering Shahjahan Khan, when asked by reporters with “spreading propaganda and false in- in their thousands and soon joined by uni- about the two bus-stop deaths, grinned formation against the government” fol- versity undergraduates, imposed order on and answered: “A road crash has claimed lowing an interview with al-Jazeera, a Qa- Dhaka’s traffic into early August. This was 33 lives in India’s Maharashtra [state]. But tar-based television channel, in which he a powerful form of impromptu protest, do they talk about it the way we do?” It is, was supportive of the students and critical sparked when a speeding private bus, rac- Priban concludes, “like our lives don’t mat- of the government. A high-court judge ing against another to pick up passengers, ter.” To their list of demands, students add- who this week ordered him to be trans- ploughed into a crowd at a bus stop on July ed Mr Khan’s resignation. As minister, he ferred to hospital said grimly that Mr Alam 29th, killing a girl and a boy. Bangladesh has kept his post as the head of the Bangla- was fortunate not to have been “disap- has extremely high numbers of road desh Road Transport Workers’ Federa- peared”. Over the years, critics of Sheikh deaths. A vehicle in Bangladesh is 30 times tion—a clear conflict ofinterest. Hasina have simply vanished. more likely to be involved in a fatality than “Ministers and police should be sent to The crackdown on these unprecedent- one in Norway, while the number of cars school and we’ll run the country,” was one ed teen protests comes just five months be- on Dhaka’s roads has more than doubled of the students’ slogans. Strikingly, the rul- fore a general election that Sheikh Hasina since the 1990s. Adolescents are dispropor- ing Awami League (AL) responded to the seemed bound to win. She has, in effect, tionately at risk. There is no urban speed protests as if they were a mortal threat to done away with the opposition since re- limit, and no money in the national budget Sheikh Hasina’sincreasinglyauthoritarian turning to power in 2009. Her arch-rival, for the agency responsible for road safety. rule. First it closed schools and universities Khaleda Zia, leader of the main opposi- Half of all vehicles are reckoned to be un- (and, intermittently, the internet). Then it tion, the Bangladesh Nationalist Party 1 https://t.me/finera The Economist August 11th 2018 Asia 43

2 (PBN ), is in prison on corruption charges gladesh’s children to upset its plans for a In some quarters, including in the gov- that her backers say are politically motivat- long rule. Yet two-thirds of the country’s ernment, the plan has caused concern, in ed. The BNP boycotted the last general elec- population are under 35, and the feelings particular about the potential damage to tion, in 2014. For the next one, Mrs Zia ofstudents count. Not only do they fear for the environment. Bali itself has problems wantsthe armydeployed to protectvoting, their safety but they sense they will be fro- with ugly development, untreated sewage as well as Parliament dissolved and an im- zen out of job opportunities which fall spewing into the ocean and plastic waste partial interim government formed to or- only to the politically well-connected. littering the beaches. Some of Jokowi’s ganise the poll, as used to happen. The AL Abrar Chowdhury of Dhaka University designated spots are nature reserves with refuses. Yetto boycottthe election a second believes insensitive handling has turned fragile ecosystems. The national park near time would, according to electoral rules, an “innocuous low-key demand for re- the town of Labuan Bajo on Flores, for in- lead to the BNP’s dissolution. Perhaps, in form” of public transport into an anti-gov- stance, is home to Komodo dragons as well the students, the BNP sees dissatisfaction ernment movement. “Our generation has as a rich sea life; tourism could ruin special upon which it can capitalise. failed,” he says. The students, by contrast, habitats if not carefully regulated. On Au- The Awami League does not want Ban- are “reclaiming the state foreveryone”. 7 gust1st a fire burned ten hectares ofvegeta- tion in the park. Police suspect a visitor’s discarded cigarette. Tourism in Indonesia Another hurdle to the plan is Indone- sia’s woeful infrastructure. The govern- Build, and they shall come ment estimates it needs $20bn to spruce up all ten proposed spots, halffrom foreign in- vestors. The government has built seven new airports since 2014 and plans another eight in the next two years. More flights are arriving at the airport close to Lake Toba, JAKARTA one of the new Balis. That saves an hours- A series ofdisasters casts a shadow overa booming industry long drive from Medan, the nearest city. N AUGUST 6th the Indonesian island the number of annual visitors, from 7m in The runway has been extended at Labuan OofLombokwas shaken forthe second 2010 to 14m last year. The government Bajo too. But access to other designated time in ten days. A 6.9-magnitude earth- wants an annual 20m visitors by 2020, in- sites has not improved, says Matt Gebbie quake struck the tourist haven, razing creasing tourism’s contribution to GDP ofHorwath HTL, a tourism consultancy. buildings, shattering roads and cutting off from 5.8%, less than half the regional aver- A shortage of hotels looms in at least electricity. A government-issued tsunami age, to 7.5%. Much of the growth is coming four of the ten destinations, according to warning added to the panic, sending peo- from Chinese holidaymakers, who have the Indonesian Hotel and Restaurant Asso- ple running for higher ground, though the been lured away from Thai beaches. They ciation. Lake Toba needs another 2,000 ensuing wave proved small. Thousands of account for about 14% of visitors, double rooms (with the strain on resources that people have been evacuated. Crowds gath- the proportion in 2010. would come with them, it is hard to know ered on the beaches of the Gili Islands, off Though Indonesia has 13,000 or so is- how the lake can remain pristine). Even Lombok’s north-west coast, to be shipped lands, two-fifths of its tourism to date is where there are ample rooms, finding to safety. The quake killed 347 people and concentrated on just one: Bali. (Many Aus- qualified hotel staff to ensure guests’ pil- injured over1,000. Asmallertremorwhich tralians holidaying there, when asked lows are fluffed and cocktails are iced may hit days before claimed 17 lives. Another whether they have ever been to Indonesia, be tricky. The government is working with struckon August 9th. reply no.) In 2017, in an effort to spread the 100-odd colleges to train a new generation Several disasters have buffeted Indone- gains from tourism, President Joko Wi- of hoteliers, says Hiramsyah S. Thaib, the sia’s tourist spots in recent months. In late dodo, or Jokowi, announced a policy to head of the ten-Bali programme at the tou- June Mount Agung on the neighbouring is- roll out Bali’s success across the rest of In- rism ministry. Madam may have to wait a land of Bali began spewing ash and lava. donesia—his “ten Balis” plan. bit longer fora turndown service. 7 Flights were grounded, leaving thousands of visitors stranded. Indonesia runs along the Pacific Ocean’s “ring of fire”, with 130 active volcanoes. Tectonic events are com- mon. Of164 earthquakesaround the world since 2017 with a magnitude of6 ormore, 12 tookplace in Indonesia. Other concerns loom over the tourism industry, too. In June a ferry capsized on Lake Toba, a pristine destination on Suma- tra, drowning180 people. Officials later de- clared that the boat was grossly over- crowded. A rise in terrorism since 2014 is also a worry, even iftourists have not been directly targeted (as they were in the Bali bombing of 2002, when jihadists mur- dered over 200 people, most of them for- eign holidaymakers). The risks aside, Indonesia is blessed with white beaches, exotic wildlife and eight UNESCO world-heritage sites. Mar- keting campaigns, better access to airports and a loosening of visa rules have boosted Not the Gili beach party some imagined Financial Era Advisory Group 44 Asia The Economist August 11th 2018

Kiwi puts it. Citizenship is reserved mostly for the skilled and relatively wealthy: only about 8.4% of New Zealanders who ar- rived in Australia in the decade after 2001 got passports. The rate for Maoris was be- low 3%. Paul Hamer, a researcher at Victoria University of Wellington, in New Zea- land’s capital, suggests that Australia’s souring mood has been fed by “dissatisfac- tion” at New Zealand’s openness to Pacific migration. It threw open its doors to the re- gion at a time when Australia still banned all but white immigrants (today it sets an- nual quotas for newcomers from the Pacif- ic). People ofPacificIslanderdescent are 8% of New Zealand’s population. Politicians in Canberra, the Australian capital, have complained for decades that such mi- grants exploit a “backdoor” to Australia. Its conservative coalition government An Antipodean tiff under Malcolm Turnbull is so concerned about border control that last year it re- Kicking Kiwis out buffed New Zealand’s offer to resettle asy- lum-seekers from detention centres run for Australia’s benefit in Nauru, a tiny Pacific island state, and Manus island, part of Pa- pua New Guinea. Almost 1,600 “boat peo- ple” remain in the controversial camps, SYDNEY with no idea of when they might be re- New Zealand bemoans Australia’s deportation regime leased. Australia’s opposition leader, Bill EW ZEALAND’S deputy prime minis- the law now works retroactively, counting Shorten, says he would reconsider the Nter, Winston Peters, knows how to stir ancient infringements committed over- New Zealand proposal if his Labor party the pot. In the midst of a diplomatic tiff seas as well as recent ones in Australia. wins the general election that must be held with his country’s biggest and usually Some prior offenders are stopped at air- in the coming year. But not, he adds, before chummiest neighbour, he suggested that ports. Australian authorities catch others, dealing with the issue of their onward Australia was in need of a new flag. Its cur- like Tommy Murray, a former biker, inside movement. 7 rent one, he complained, too closely “cop- the country. He did four stints behind bars ied” New Zealand’s. Since the two ensigns for crimes including drugs and burglary are so similar, Australia’sshould be the one before moving to Australia. He says he Discrimination against women in Japan to change. (Australia’s flag was designed lived law-abidingly for 16 years and paid first, but was formally adopted a year later A$1.2m ($890,000) in tax before his past Toxic than New Zealand’s, in 1903.) Mr Peters, caught up with him. In detention, he ar- who recently served as interim prime min- gues he was refused much-needed medi- test-doctoring isterwhile Jacinda Ardern was on materni- cation, then booted out without being able ty leave, has a solution: an enormous kan- to see his family. “My country treated him TOKYO garoo, “like the maple leafin Canada”. barbarically,” sayshisAustralian wife Sara, Amedical-school scandal shows how The tiffis over Australia’s increasing de- who followed him. the show is rigged against women portations of New Zealanders. In 2014 a New Zealand politicians periodically conservative prime minister, Tony Abbott, grumble about Australian deportations, APAN has made a lot of noise in recent tightened deportation rules. Any foreigner but the political mood between the two Jyears about demolishing the traditional sentenced to a year in jail now fails a “char- countries soured markedly when a 17-year- view that women should stay at home acter test” and has to leave the country. Ki- old was recently thrown into an adult de- while men go out to work. So it was shock- wis may live and work freely in Australia. tention centre in Melbourne. The deporta- ing when, on August 7th, Tokyo Medical Since about 650,000 do so, the rule hits tions had “a venal political strain” to them, University, a prestigious medical school, them the hardest. Since the law was said New Zealand’s justice minister, An- confessed to marking down the test scores changed, at least 1,200 New Zealanders drew Little; Australia “doesn’t look like our of female applicants to keep the ratio of have been cast backacross the Tasman Sea. best friend, our nearest neighbour.” Aus- women in each class below 30%. This sys- OzKiwi, an advocacygroup, estimates that tralia, Mr Peters added, was in breach of tematic manipulation, university officials around 170 New Zealanders are currently the UN convention on children’s rights. admitted, had gone on since 2006. in detention centres awaiting deportation, The 17-year-old has since been released, Their defence was that women are more than any other nationality. but critics also raise questions about racial more likely to drop out to marry and have Australia makes no concessions for fairness. New Zealanders ofMaori orPacif- children. To judge female applicants to those who came as children but never ic Islander descent are disproportionately medical school purely on their merits changed their passports. Neitherdoes it for affected by the changes, because they are would leave Japan with a shortage of doc- juvenile offenders, or petty criminals with more likely than average to have convic- tors, they said. short sentences that cumulatively add up tions. About 60% of New Zealanders who The admission has caused outrage. But to 12 months, even if those were suspend- have been deported from Australia since it is probably just the tip ofthe iceberg, says ed. Historic crimes were once ignored, but 2014 are “brown”, as Joanne Cox of Oz Yumiko Murakami of the OECD. The gov-1 https://t.me/finera The Economist August 11th 2018 Asia 45

2 ernment says it will investigate every med- ical school in the country. Polishing Narendra Modi Doctoring has long been a male bas- tion. But it is not the only one. Japanese The image factory companies routinely favour male candi- DELHI dates when they recruit university stu- The Indian prime ministercares deeply about how he comes across dents, says Ms Murakami. Discrimination is rife in banks and trading houses, where EW national leaders are as careful of bring journalists along when he travels. stamina and loyalty, qualities somehow Ftheir image as Narendra Modi, India’s In a breakwith tradition, he has never associated with men, are prized, says Mari prime minister. He is said to change held a press conference. At a recent, rare Miura, a political scientist at Sophia Uni- clothes as often as fourtimes a day, keep- “interaction” with news editors from the versity. She recalls a job-recruiter breezily ing harmony with the occasion. His southern state ofTamil Nadu, the dozen admitting to dropping English as a require- favoured style is to wear a mandarin- visitors were told the meeting was whol- ment fornew entrants so as to weed out fe- collared jerkin over a short-sleeved kurta, ly offthe record. Oh, and they were to male candidates, who tended to have bet- or long shirt. The jerkin was long known avoid the topic ofpolitics. ter linguistic confidence and skills. as a Nehru jacket, after Jawaharlal Nehru, As it is, media analysts say, much of Employers discriminate against wom- India’s first prime minister, for whom it India’s press is too dependent on ad- en because they are likely to drop out; but was a sartorial staple. But so iconic has it vertising from the government, or from they drop out partly because they are so become on the current one that it is now friends ofthe ruling party, to be really poorly treated. Workplaces are seldom marketed as the Modi jacket. critical. This is especially true of televi- family-friendly. Hours are long and not The boosting ofMr Modi’s image is sion. The recent fate ofthree senior staff- nearly flexible enough forwomen who are not just down to dress sense. Since taking ers at ABP News, a Hindi channel, il- pregnant or raising children. A former office in 2014 his government has spent lustrates the perils. nurse at a Tokyo hospital says she quit after some $500m on advertising, much of Aware ofcriticism over economic being told she would get no concessions which bears the beaming prime min- distress suffered by India’s farmers, Mr for being pregnant. The head nurse said ister’s picture. The 21state governments Modi devoted the June edition of“From that given the uncertainty about the out- run by his party, the Bharatiya Janata the Heart” to a “dialogue” with farmers. It come of early pregnancy anyway, she Party, may have spent similar sums. Even featured a woman in the poor, remote should maintain her workload. A woman private companies use Mr Modi’s image state ofChhattisgarh who declared that at a private kindergarten was reprimanded to promote their wares. her income had doubled since he came to for getting pregnant out of turn—the direc- Pro-Modi fare swamps Indian social power. An ABP News investigative pro- tor had laid down “shifts” for when work- media. The prime minister has more than gramme subsequently tracked down the ers could have children. 40m followers on both Facebookand woman, who confessed on camera that All this embarrasses a government that Twitter. More than 5m have downloaded she had been coached to make the claim. has promised to make women “shine”, its a Modi smartphone app. Among other Soon after, the channel’s satellite feed condescendingcatchphrase forfemale em- things, internet followers have been sent began to experience strange interference powerment. The policy seems based on links to animated videos featuring Mr precisely during this programme’s air- the need for more workers rather than on Modi as a yoga instructor. He appears as time. A big advertiser, known forclose genuine concern for women. Shinzo Abe, an androgynous, air-brushed uncle with ties to the ruling party, pulled out. The the prime minister, says he wants to bring flawless technique. He also promotes the channel’s ratings fell. Told by the man- millions more women into the workforce videos on his monthly radio show, broad- agement to drop any reference to Mr to make up fora labour shortfall caused by cast in 18 languages by All-India Radio. Modi, two top staffers quit. A third was its ageing and declining population. Ja- One in five households is said to tune in sent on extended leave. As soon as they pan’s working-age population is projected to “From the Heart”. were gone, claims a letter from the pro- to shrinkfrom 77m in 2015 to 48m by 2060. All this image-making is carefully gramme’s now-unemployed anchor, the Yet in relative terms the country seems controlled. The prime minister makes technical problems vanished, and adver- to be going backwards. The World Eco- few unscripted appearances. He does not tisers returned. Easy as changing clothes. nomic Forum’s latest gender-gap index ranks Japan in 114th place out of 144 na- tions, a slide of23 places from a decade ago. The proportion of Japanese doctors who are women is less than halfthe OECD aver- age of46%. More female role models would help, says Ms Murakami. Yet in the field where Mr Abe has indisputable sway, thatof poli- tics, the record under his premiership is la- mentable. Just a tenth of MPs in the lower house are women, putting Japan in 158th place out of 193 countries. Just two mem- bers of Mr Abe’s 20-strong cabinet are women, includingSeiko Noda, in charge of women’s empowerment. Ms Noda, who makes little secret of her ambition to de- throne Mr Abe in a leadership contest next month, has just published a book called “Grab the Future”, her manifesto for pull- ingJapan into line with “global standards”. The man, the meme, the Indian dream She has almost no chance ofwinning. 7 Financial Era Advisory Group 46 China The Economist August 11th 2018 Also in this section 47 Demolishing Ai Weiwei’s studio

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

Chinese politics politics with outbursts of praise for Mr Xi—is a useful corrective. For in Beijing, a On the Xi side, beside the sea three-hour drive inland, this has been a fe- brile summer, filled with talk of brewing revolts against the president. Mr Xi is also Communist Party chairman and head of the Central Military Commission, and wields more power than any leader since BEIDAIHE Mao, filling party, military and security How to read summergrumbles about China’s swaggering leader posts with allies and using a vast (and pop- N THESE populist times, a head of state and plain-clothes police patrolling main ular) anti-corruption drive to purge rivals. Iwhose summer break shuts down much streets, all cars, drivers and passengers en- No evidence that Mr Xi’s position is in of a busy beach resort might expect a few tering town had to register at a checkpoint peril has come to light. Yet the capital’s po- grumbles. It says much about today’s Chi- bristling with number-plate readers and litical classes, including Chinese academ- na that—as Communist leaders arrived for surveillance cameras. Even families enter- ics who advise the government, business an annual summer gathering in Beidaihe, ing a public park offering (distant) views of leaders, foreign diplomats and journalists, north-east of Beijing—no peep of dissent leaders’ villas had to place identity cards have spent weeks swapping rumours of could be heard on the town’s packed pub- on digital scanners and squint into facial- bruising internal disputes about how to lic beach, in clear sight of the fenced-off recognition cameras. handle a trade war with America and gen- leaders’ districtwith itsturreted villas, pine Amidst this odd jumble of cavorting erally protect a slowing economy. Some woods and empty, sandy shoreline. Sever- children and scowling guards, the few Chi- predict that Mr Xi and his inner circle will al holiday-makers nervously insisted that nese bold enough to discuss the meeting face unprecedented criticism at gatherings they were “unsure” whether President Xi expressed approval. National leaders de- such as Beidaihe. Many rumours have a re- Jinping or any other bigwigs were in town. serve their rest, ventured a Beidaihe resi- curring theme: namely, that retired leaders dent sitting with his wife on a bench. such as Hu Jintao, his predecessor, Jiang Ze- Where the great helmsman swam “They need their health so they can solve min and the former premier Zhu Rongji, This was an implausible claim. Commu- problems,” said the 80-year-old retired are demandingan end to propaganda cam- nist leaders have been coming to Beidaihe businessman, who gave his surname as paigns exalting Mr Xi as the “eternal core” each summer to meet, swim and scheme Xu. Unprompted, Mr Xu’s wife offered of the party and “the country’s helms- since the 1950s, when Mao Zedong would praise for Xi Jinping, calling him a good man”. Such sycophancyrevoltsa lotof old- alarm aides by swimming far into the man who had brought China great stabil- er, educated Chinese, reminding them of soupy waters of the Bohai Sea. When a re- ity. Populous China cannot afford foreign the personality cult around Mao that so porter visited on August 5th the town was notions of freedom, volunteered Mr Xu, harmed China. Related rumourshave such full of tell-tale signs that the meeting was pointing to nearby hordes of swimmers. elder statesmen demanding a reversal of under way, starting with bare-tummied Without rules, who would save them if last year’s decision to allow Mr Xi, in effect, Chinese tourists in rubber rings dodging they got into trouble, he asked? As for to rule China forlife, by abolishing the ten- Red Flag limousines with number plates America’s combative president and his year term limit that applied to his post as from the People’s Liberation Army Central trade war: “I couldn’t care less,” Mr Xu de- president. Finally, Beijing seethes with talk Military Commission. Offshore, a coast- clared. “We’re such a big country.” that retired and serving members of the guard corvette sat at anchor. China’s high- Though hardly a scientific survey, such government accuse Team Xi of ill-judged tech security state has reached Beidaihe, a snapshot of provincial public opinion— boasting about the country’s rise, as when too. In addition to civilian, paramilitary combining a widespread reluctance to talk state media talked up a “Made In China 1 https://t.me/finera The Economist August 11th 2018 China 47

2 2025” plan to dominate such high-tech sec- prising the country’s best technocrats, and and purges. Mr Xu charges China’s ruler tors as robotics and artificial intelligence. the other China’s most ingenious Marxist with breaking the bargain underpinning Xi critics blame such bragging for provok- theoreticians. Deng asked the first team the post-Mao era, that the people will toler- ing a backlash across the West. what policies the economy needed, and ate one-party rule as long as they are left This summer’s wildest rumours, in- commanded the second team to define alone to seek prosperity and personal con- volving purported plots against and sack- those policies as socialist. Reform-minded tentment. But its bravery is tinged with ingsofseniorfigures, probablyreveal more elites fear Mr Xi has reversed that process. somethingclose to snobbery. Asmasterful- about the longings of Xi critics than any- Amid the rumours some facts lurk. ly translated by Geremie Barmé, an Austra- thing else. They also point to the down- Team Xi did misjudge Mr Trump, wrongly lian sinologist, MrXucallsurban China “all sides of opacity. Beidaihe’s very agenda is assuming that this businessman-presi- very comfy and petit-bourgeois”. It is a tell- a secret. Comings and goings of leaders dent, so charming in private with Mr Xi, ing line. Many Chinese reformists of the must be guessed at from sightings of mo- could be bought offwith the sort oftactical sort that foreigners meet loathe Mr Xi’s up- torcades and presidential trains, and terse concessions that China has long used to ending ofpost-Mao norms. But their grum- state media reports of side events at the re- placate angry foreigners. At a dinner for a bles are eerily similar to those that can be sort. In an age when America’s president foreign leader visiting Beijing this spring, heard at Washington dinner parties, when tweets his innermost thoughts, China- sources relate, Mr Xi and aides confidently academics or veterans of the Bush and watchers spent the summer counting predicted thattrade tensionswith America Obama White Houses deplore Mr Trump fawning references to Mr Xi on the front would not escalate because both countries and those voters taken in by him. Those page of People’s Daily, to see ifthey had be- had too much to lose, while Mr Trump’s Beltway critics don’t wield much clout. come less numerous (they had not). threats were called so much theatre. Other If one charge sticks this summer, it may It is true that by playingthe all-knowing insiders say Team Xi was getting advice involve out-of-control propaganda. State father of the nation, dispensing guidance from the wrong Americans, notably busi- media have stopped talking about Made in on everything from military strategy to the ness titans with long China careers, and China 2025, and have carried editorials building of public lavatories, Mr Xi is vul- puttingtoo much faith in such Trump aides about the dangers of hubris, especially nerable when things go wrong. It is genu- as Steven Mnuchin, the treasury secretary. when China remains dependent on for- inely damaging that China’s leaders look eign technologies. A propaganda chief has paralysed in the face ofMr Trump’sattacks Petitions to the throne reportedly lost his job. In Beidaihe a large over trade. But it is also the case that some- Yet Xi critics can be correct without posing portrait of Mr Xi can be seen inside a mili- body cannot be beaten by nobody, and Mr him any tangible threat. Chinese intellec- tary compound, but no others are easily Xi faces no obvious single challenger. tuals have been transfixed by a coruscat- visible. A slogan at the town entrance What he does face is widespread disgrun- ing, erudite essay by a Tsinghua University reads, “Hold High the Great Banner of Xi tlement among political and business law professor, Xu Zhangrun. The essay, Jinping New Era Socialism Thought with elites. Mr Xi has not just accrued power for which draws on centuries-old traditions of Chinese Characteristics”, butotherslogans himself, in part by locking up a lot of cor- scholars petitioning the mighty, condemns are more generic. One Western expert re- rupt officials. He has spent six years mak- the Communist leader for his draconian flectingon thisfebrile summerwrote an es- ing explicit the primacy of the Communist security policies, for eliminating term lim- say asking whether we have reached peak Party, a state-above-the-state that operates itson the presidency, and forreviving Mao- Xi Jinping. Nobody knows. But China may a parallel chain of command at every level ist-style propaganda, political campaigns have reached peakboasting. 7 ofgovernment, from the smallest village to the largest ministry or state-owned enter- prise. Communist Party secretaries and party committees are increasingly visible, as they sideline bureaucratic figureheads, from city mayors to provincial governors, right up to the premier, Li Keqiang, who runs the State Council, a body that over- sees many government ministries and agencies. A recurring theme of Beijing ru- mours has Mr Li and the State Council ap- paratus ready to stand up to Mr Xi and his inner circle, and rebuke them for such er- rors as bungling relations with Mr Trump. That seems a stretch. At any rate Mr Li has been damaged by a scandal involving de- fective vaccines given to hundreds of thou- sands ofchildren, dampening such talk. Outsiders can be forgiven forbeing puz- zled by government-party rivalry, not least because most government officials are party members. The contest can be partly understood as a clash between ideo- logues, who seek political control over the economy and all arms of state power, and Ai Weiwei’s studio is demolished technocrats who believe that the state In Beijing workers obliterated the studio of Ai Weiwei, a Chinese artist and dissident. Mr must loosen its grip for China to thrive. A Ai has been living in exile in Berlin since 2015, after years of skirmishes with authorities revealing joke in Beijing elite circles de- over his politically charged art and advocacy. The demolition came without warning, scribes how Deng Xiaoping, father of the putting some artwork at risk, but was not necessarily a political act. The lease had past 40 years of reform and economic expired, and the area is due for commercial development, including shopping malls. If opening, assembled two teams, one com- the destruction of the studio were an installation, it might have been called “Progress”. Financial Era Advisory Group 48 International The Economist August 11th 2018

Also in this section 49 High-end summer camps

Summer holidays harder. Demand for subsidised “enrich- ment” activities often outstrips supply. Mr School’s out Boulay recalls meeting a mother in Oregon who queued for four hours to enroll for free swimming lessons forher son. Holidays can be a financial strain, too. In countries where some children receive BARRY free school meals, summer means bigger Most countries’ schools have lengthysummerholidays. But experts saytheyhave grocery bills for hard-up families. House- problematic, and unequal, effects holds where both parents work have to HE summer holidays have just begun, an past, when families needed their chil- payforextra child care, too. The Family and Tbut it is a busy morning at Cadoxton dren’s help in the fields during the sum- Childcare Trust, a charity, says that in Brit- Primary School, in Barry, an industrial mer; but many historians think the ain, where out-of-pocket child-care costs town in Wales. It runs a summer pro- evidence forthis is thin. are the highest in the OECD, a club ofmost- gramme for hard-up children, providing Experts talk of “summer learning loss”, ly rich countries, parents will spend an av- meals and activities over the holidays. As in which children return to school having erage of £133 ($172) per child, per week on youngsters run laughing and screaming forgotten some of what was taught the child care this summer. into the school cafeteria for breakfast, their year before. “It is pretty clear that kids for- Natasha Cockram, who runs the sum- parents saunter out, some visibly relieved. get things over the summer,” says Harris mer programme at Cadoxton Primary Just three days into the six-week school Cooper of Duke University in North Caro- School, worries that many children in Bar- holidays one beleaguered mother says her lina. A study, using test-score data from stu- ry will spend most ofthe summer indoors, nine-year-old daughter has already asked dents aged seven to 15 in an unnamed state glued to their screens, because parents are five times to go bowling. Without the in America’s South in 2008-12, found that both unable to afford child care or activi- school’s help, she says, “it would be a long on average children lost more than a quar- ties and also loth to let them roam unsu- and expensive six weeks”. ter of their school-year learning over the pervised. “I get very bored at home,” com- In the popular imagination, school summer. Evidence from other countries is plains one six-year-old taking part in the summer holidays conjure up a picture of scarce. But studies have found that chil- summer programme. “There’s nothing to carefree youthful exploration. But many dren regress over the summer even in Bel- do except sit on the sofa and watch TV.” parents rely on the term-time services that gium, Britain, Canada, Germanyand Mala- Older children, too, may have less to keep schools give their offspring, such as super- wi, all of which have much shorter them busy. Data from the Pew Research vision and meals. Come the holidays, they summer breaks than America’s. Centre suggest that the number of16- to 19- can suddenly find their schedules and year-olds in America with paid summer budgets stretched. Researchers also say Losing it jobs has fallen from over a half in 2000 to that the long break often sets back chil- The impact appears to vary by socioeco- roughly a third last year—though this is dren’s learning, and that children from nomic class. Many poor children fall be- partly because more are taking on unpaid poorer backgrounds are disproportion- hind their wealthier peers over the holi- internships. ately affected. days. “Summeristhe mostunequal time of Astudyin 2007 in Baltimore, Maryland, The vast majority of the world’s school the year,” says Matthew Boulay of the Na- claimed that summer learning loss could calendars include summer holidays. Their tional Summer Learning Association, an account for up to two-thirds of the length ranges from three weeks in South American NGO. Well-off parents can fill “achievement gap” between rich and poor Korea to three months in America, Italy the gap left by school, keeping their chil- children by the age of 14-15. More recent and Latvia. The holidays’ 19th-century ori- dren stimulated with summer camps, trips American research, however, argues that gins are hazy. It is popularly believed that abroad or private tuition (see box on next early-childhood developmentmightplay a they are a hangover from the West’s agrari- page). Poorer families, obviously, find this bigger role. 1 https://t.me/finera The Economist August 11th 2018 International 49

2 Benjamin Piper, ofRTI International, an American research institute, suspects that Summer camps the scale of summer learning loss may be worse in the developing world, where it Mutually assured distraction has largely gone unnoticed and unstudied. In rural areas in particular, reading materi- The evermore competitive world ofthe summer“enrichment” programme al can be hard to come by and some chil- dren still spend their holidays helping N A classroom at Imperial College growing number focus on skills in de- theirfamiliesin the fields. Astudy MrPiper ILondon, students sit hunched over mand at modern workplaces. The pro- co-authored in 2017, on Malawian children laptops, typing lines ofcode. Just nine portion offering science, technology, taking part in an American-funded literacy years old, they are attending Firetech, a engineering or maths programmes, for programme, may be the only one on sum- British technology summer camp for instance, rose from less than a quarter in mer learning loss in sub-Saharan Africa. It children. Courses include “Junior Aug- 2014 to almost a third in 2017. found that the loss was almost as big as the mented Reality” and “Creating forYou- Students often have an eye on univer- gains the literacy programme generated Tube”. Such programmes are proliferat- sity. Alexandra Boyt and David Stephen- during the school year. Mr Piper says that ing in many countries. They pander to son, who run a residential Latin camp in international donors, who spent $1.4bn on two common demands from well-off western England, say a lot ofstudents basic education aid in Africa in 2015, risk parents: to entertain children over the come to prepare forinterviews at Oxford “losing what they invested”. long summer holidays and to give them a and Cambridge. Princeton asks appli- Experts suggest three types of solutions leg-up over their peers. cants how they spent their past two to the problems posed by the long summer At most American summer camps summers. Entry to the camps themselves holidays: extending school years; spread- children still commune with nature and can be competitive. Canada/USA Math- ing holidays to other times ofthe year; and sing around a campfire. But some camps camp accepts just15% ofapplicants. more state-provided summer-holiday ac- cater to more niche interests, such as In East Asia some parents use the tivities. South Korea is an extreme test-case neuroscience, outer space or even athe- summer to boost their children’s English forthe firstapproach. Ithasthe world’slon- ism. Tom Rosenberg, chiefexecutive of skills. In a packed classroom at SNT Acad- gest school year and shortest summer the American Camp Association, says a emy, a private language school in an break. For many students, even the short affluent part ofSeoul, the South Korean holidays offer little respite, since most are capital, a group ofeight- and nine-year- enrolled in private tuition, often in a hag- olds practise debating (topic: should won (crammer). Three in ten parents sur- cosmetic surgery be banned?). Many veyed last month said they planned to in- wealthy Chinese parents go further, crease the number of hagwon classes their sending their children on study tours children will have to attend this summer. abroad. Ctrip, a Chinese travel agency, Sure enough, South Korean students believes that1m Chinese students will go score brilliantly on comparative measures on such trips this year, spending $4.5bn. such as the OECD’s PISA test of maths, sci- The fanciest summer programmes can ence and reading skills. But there is a cost. be expensive. Firetech charges £1,300 They also have a miserable time cramming ($1,700) forweek-long residential for high-stakes exams, and higher inci- courses; a weekat Space Camp, in Hunts- dence of mental-health problems than ville, Alabama, can cost up to $1,200. Mr children in other rich countries. Rosenberg says there is a camp forevery Another objection to lengthening the budget. But as wealthier parents splash school year is that it would strain public- out on ever more specialised pro- education budgets. Teachers, who cherish grammes, it is getting harder forthe less their long breaks, would doubtless object well-to-do to keep up in the summer- unless they were paid more. Back to earth in September camp arms race. A second approach is to shorten the summer break but spread the holidays more evenly through the year. Janet Hay- be encouraged to develop skills not em- face outdoors (such as being kidnapped by ward, the head teacher at Cadoxton, wants phasised in the school curriculum. He also strangers, which is vanishingly unlikely) the six-week British summer holiday re- wants to see summercourses used as a lab- and so prevent them from exploring. duced to fourweeks, with half-term breaks oratory for innovative education tech- Some governments are keen to help lengthened. Professor Cooper says Ameri- niques. “We need more learning but not families that struggle with the summer. ca’s three-month break may be outdated, necessarily more schooling.” Britain’s Department for Education recent- and that a shorter one would be “more Summer learning need not be expen- ly announced £2m of funding for pro- compatible with modern American life.” sive. David Quinn of the University of grammes providingchildren with summer But Mr Boulay doubts that campaigns Southern California says that even simple activitiesand meals. Hungary, too, expand- to change the school calendar will have interventions like posting reading materi- ed its food aid to children over the holi- much effect. He says there is little public als to homes, or sending parents text mes- days, and American campaigners thwart- support anywhere for abolishing the sum- sages reminding them to make sure their ed a government attempt to cut all federal mer break entirely. The holiday is deeply children are reading, can reduce summer funding for summer activities from this ingrained in tradition across the world, learning loss. Lenore Skenazy, founder of year’s budget. But elsewhere, even data on and (albeit limited) evidence on year- the Free-Range Kids movement (which the effects of the summer holiday are round schooling remains inconclusive campaigns for children to have more time scanty. Chloë Hughes, a youth-worker in about its effects on academic performance. unsupervised), says that letting children Barry, contrasts fond memories ofher own Instead, Mr Boulay suggests that taxpayers play on their own in parks teaches them childhood summers with the predicament or philanthropists should subsidise sum- important skills. She laments that parents many families face at holiday-time today. mer activities. He thinks children should wildlyoverestimate the riskstheirchildren “I thinka lotofpeople dread it,” she says. 7 Financial Era Advisory Group 50 Business The Economist August 11th 2018

Also in this section 51 Bartleby: Time to get in training 52 PepsiCo under Indra Nooyi 52 Elon Musk and Tesla 53 Alibaba’s legal structure 53 Oil companies and climate change 54 Danone’s social goals 55 Schumpeter: Sovereign-wealth funds

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

Chinese investment in Silicon Valley stage venture deals. Many prominent start- ups, including the ride-hailing firms Uber Cheques and balances and Lyft, the messaging app Snap, virtual- reality firm Unity Technologies, cancer- testing firm Grail, financial-tech firm Sofi, augmented-reality firm Magic Leap and others, have taken Chinese money. From 2015-17, accordingto DIUx, China contribut- SAN FRANCISCO ed 13% of total funds into American ven- China’s ability to invest in American startups is looking more uncertain ture-capital-backed companiesand ranked UYER’S remorse is often experienced in cations have long been scrutinised. Ameri- onlysecond to Europe asthe largestforeign B Silicon Valley by investors who plough ca’s powerful Committee on Foreign In- source ofcapital forstartups. money into risky startups only to see them vestment in the United States (CFIUS) has Some investors are simply seeking fail. Some technology entrepreneurs are reviewed attempts by foreigners to take strong returns in a big market outside now suffering from seller’s remorse. They controlling stakes in domestic firms where mainland China. Yet American politicians are those whose young companies have their presence could weaken national se- fret that distinguishing private Chinese grown big in part thanks to Chinese finan- curity. But minority investments in start- capital from government funds is hard and cial backing, but now feel under scrutiny ups went unremarked, though the firms that more is in play than profit. because of an escalating fight between the may hold sensitive innovations in areas two tech superpowers. such as robotics, artificial intelligence (AI), One entrepreneur who took money biotechnology, 3D printing and more. Series C is forChina from Danhua Capital, a Chinese venture- China is not mentioned in FIRRMA but That is because China’s sovereign, provin- capital firm based near Stanford Universi- is the main target. In recent years China’s cial and local governments, state-owned ty, for example, only recently learned that governmentand several firmshave backed enterprises, firms and individual investors the firm was established with help and more than a dozen accelerators that culti- often form their own funds and pool their funding from China’s government. “You’re vate startups and have opened “corporate money in each other’s investment vehi- going in blind. If there are issues down the innovation” centres in Silicon Valley. cles. Many Chinese funds also have West- line you may not know who you’re deal- Baidu, the Chinese tech giantthatis consid- ern-sounding names, such as Westlake ing with,” he laments. ered closest to the government, runs a cen- Ventures, which is owned by the city gov- tre focused on AI, and ZGC Capital, a group ernment of Hangzhou. SAIC Capital, FIRRMA treatment directly funded by Beijing’s government, backed by a Chinese state-owned car com- In coming days President Donald Trump is has opened an innovation outpost. Next pany, has its office on Sand Hill Road, the expected to sign into effect the Foreign In- year a Chinese firm will open Oceanwide main thoroughfare for illustrious venture- vestment Risk Review Modernisation Act Centre, the second-tallest building in San capital firms. (FIRRMA), which establishes more vigilant Francisco, a symbol ofChina’s ambition to Chinese money has come with extra reviews offoreign investments into Ameri- playa role in America’stechnologycapital. perks forentrepreneurs. The investors usu- can companies, including startups, on na- But China’s main influence comes from ally agree to higher valuations to get access tional-security grounds. While Mr Trump investing directly in startups. Estimates are to deals. “We’re outsiders. We don’t have and China continue to spar over trade ta- hard to obtain, because venture-capital in- the yearsofconnectionswe can offer to en- riffs, FIRRMA reflects a fight over Chinese vestments are private and notoriously trepreneurs, so we have to offer them investment in American technology start- opaque. Butaccordingto an analysisby the something else,” explains one. The Chi- ups that is less visible but which nonethe- Defence Innovation Unit Experimental nese have also been more willing to invest less may have serious consequences for (DIUx), a group founded by America’s De- in more speculative technologies that are Silicon Valley. partment of Defence (DoD), in 2015 Chi- less likely to accrue big financial gains in Big deals with national-security impli- nese investors put $3bn-4bn into early- the near term but require lots ofcapital. 1 https://t.me/finera The Economist August 11th 2018 Business 51

2 Until recently startup bosses treated DIUx report. July American authorities charged a for- Chinese funds like any other. Aside from a Puttingmoney into startups in sensitive mer employee of Apple with trying to flee few cautionary tales, Chinese money was areas, some analysts believe, may also be a to China with information about its self- broadly welcomed. Now defence experts wayto keep them outofthe reach ofAmer- driving cars. worry that investors are not seeking finan- ica’s military. The DoD does not use tech- Passage ofFIRRMA will give CFIUS new cial returns so much as insight into the nologies supplied by young companies discretion to review property transactions, plans of startups. A recent report by DIUx, that have foreign investors, for fear they minority investments in companies that entitled “China’s Technology Transfer could share or steal information or secretly supply “critical technology” and firms that Strategy”, analysed this; its findings cata- offer a backdoor into computer systems. hold “sensitive personal” data on Ameri- lysed the FIRRMA legislation. Investing Thattheorymaybe unproven, butstartups can consumers. But no review will be trig- several billion dollars is ultimately “a are just one domain of an escalating fight gered by passive investments in compa- small price to pay to see a significant share over technology. MrTrump has made Chi- nies that do not come with board seats or of American startups’ innovation,” says nese theft ofAmerican intellectual proper- access to material, non-public informa- Michael Brown, ex-boss of Symantec, a ty a theme of his presidency. Industrial es- tion, so lots of investments in startups will cyber-security firm, and co-author of the pionage is also getting more attention: in not be scrutinised. There is also ambiguity 1 Bartleby Time to get in training

Companies must overcome skill shortages MERICAN companies spent $91bn on gramme was an online platform with a Astaff training last year, almost a third tool allowing employees to analyse hir- as much again as they did in 2016. That ing trends within the company and find equated to more than $1,000 for every out which skills are needed to qualify for staff member being taught, according to a the jobs. Together with Georgia Tech, a survey by Training magazine. university, and Udacity, an online educa- This shift is highly encouraging. In tion group, AT&T offers a low-cost mas- broad terms, provision of on-the-job ter’s degree in computer science. training has been shrinking—in both As multinational tech companies, America and Britain it has fallen by AT&T and IBM have all the capacity they roughly half in the past two decades. need to offer substantial training pro- Companies are often loth to provide it. A grammes. Smaller firms may find the 2009 study from the OECD,aclubof prospect daunting, but the existence of mostly rich countries, worried that “in- online coursesmeansthatitisnot beyond dustry, left to its own devices, may not theirabilities. And they need to try.Amer- have incentives to provide sufficient ican businesses will have to fill an esti- training.” That is because workers may mated 1.4m new computing and engi- take advantage oftheireducation to trans- qualify fora digital “badge” which bolsters neering jobs by 2020. Many companies fertheir skills to a rival. their career profile on platforms such as worry about a shortage of talent in some Training is even more important in a LinkedIn. In 2016-18 more than 200,000 critical areas. A recent survey by Enter- world of rapid technological change, IBM staffers earned 650,000 badges and prise Strategy Group, a market-intelli- where low-skilled tasks are increasingly the average employee undertook 60 hours gence firm, found that 51% of companies being automated and artificial intelli- of training a year. IBM also has a pro- were short of cyber-security skills, up gence (AI) is transforming many services gramme that aims to retain workers who from23%in2014. jobs. Tohave a chance ofa long, high-pay- might be lured elsewhere. TheproblemmaybeevenworseinEu- ing career, workers need retraining. In the past five years, IBM reckons, the rope. A European Commission report last At IBM, a computer firm, Diane Gher- proportion of its employees who have ad- year found that 15% of workers lacked son, head of human resources, says that vanced digital skills has risen from 30% to even basicdigital skills, while 88% ofcom- employee skills stay relevant for only 80%. (Digital skills include knowledge of panies had taken no action to deal with three years. So training is “the lifeblood of AI, analytics, cloud computing, the Inter- the problem. A survey by the Association any tech company”. IBM created an “AI net ofThings and cyber-security.) ofInternational Certified Professional Ac- academy” in which employees take Patrick Hourigan has spent nearly 12 countants found that a quarter of British courses from a curriculum, provided by years at IBM, initiallyasa systemstelecoms workers had received no in-work training Coursera, an online-learning platform engineerand then as a software developer. in the previous12 months. founded by Andrew Ng, an AI pioneer, Three years ago he moved into the security Yet managers know that technological and Daphne Koller, a computer scientist, division and opted for a course in machine change will require their workers to ac- both of Stanford University. Roll up for learning and AI. It took him around 50-60 quire more skills. The supply from higher such clickbait as: “Artificial intelligence hours over six weeks. “Technology is con- education will be insufficient because of process re-engineering case study”, and tinuously moving,” he says. “Last year’s students’ subject choices, and immigra- “Improving deep neural networks: Hy- tech becomes a stepping stone to this tion may not be able to solve the problem perparameter tuning, Regularisation and year’s tech.” given the political mood. So firms will Optimisation”. IBM is far from alone in emphasising have to train workers themselves. The re- The courses are usually taught online the importance of training. In 2013 AT&T,a cent increase in spending is only a start. and the staff often study in their own telecoms giant, launched a training initia- time. Those who complete a course can tive called Workforce 2020. Part of the pro- Economist.com/blogs/bartleby Financial Era Advisory Group 52 Business The Economist August 11th 2018

2 about what will be considered a “critical Tesla and the markets technology”. According to Rhodium The big squeeze Tesla Group, 15-25% of Chinese venture deals Beckoning the Short interest will be reviewable under the new regime, Share price, $ as % of free float but if a broad definition is adopted, that barbarians 450 45 could rise to 75% of deals. It is likely that Elon Musk “considering” going private 400 40 America will continue to identify and add new sensitive technologies to its list over 350 35 time, says Christian Davis, a lawyer with Elon Muskwants to take Tesla private 300 30 Akin Gump. Chinese investors are thinking up cop- WISH we could be private with 250 25 Elon Musk’s ing mechanisms. According to one execu- “ITesla.” So said an exasperated and ex- 200 Production “bonehead” 20 comments tive who makes tech investments on be- hausted Elon Musk to Rolling Stone last No- shortfalls half of a large Chinese company, they vember. Tesla’s rise has been remarkable. Jan Feb Mar Apr May Jun Jul Aug could simply try to hire a team instead of In 15 years it has taken on established car- 2018 investing in their startup, or ask them to makers to become the world’s leading Sources: Thomson Reuters; IHS Markit move to Canada before an investment is manufacturer of electric cars. But the jour- made. Other investors are planning to take ney has been bumpy. Of late Mr Musk says soon. He even apologised to analysts. But their money elsewhere (though other his company has been in “production hell” private backers with deep pockets would countries are tightening up their screening trying to increase output of the Model 3, a let him expand at his own pace. mechanisms, too). “If the environment is whizzy mass-market saloon. While on its Can he achieve the unlikely yet again? not friendly for us to invest in America, quest to change the world, Tesla has fre- One potential snag might be his cavalier then it costs us nothing to pull out and do quently missed its production targets and use of tweets to drop his latest bombshell. more in Europe and Israel,” says the boss has never made an annual profit. Feeling American regulators have ruled that firms of a Chinese venture-capital firm men- the heat, Mr Musk earlier this year lashed are permitted to disclose financial infor- tioned in the DIUx report. “Tense” is how out at share analysts for “bonehead” ques- mation using social media, but they must one participant summed up the mood at a tions, and has derided the army of short not mislead investors. They will be watch- gathering in June near Silicon Valley, called sellers targeting it. ingto see ifhis claim ofhaving“fundingse- the US-China AI Tech Summit. Several Yet it still came as a shock when, on Au- cured” is borne out. high-profile Chinese tech bosses and gov- gust 7th, Mr Musk revealed his intention to Another concern is the sheer size of the ernment officials cancelled. take Tesla private in an extraordinary proposed deal. The largest buyout to date, Given the past interest of Chinese in- tweet. He claimed that he had lined up the takeover by Kohlberg Kravis Roberts of vestors in frontier technologies, startups enough money to buy out the firm at $420 RJR Nabisco in 1989, wasworth $64bn in to- working on hardware, biotechnology, per share, roughly a fifth above the share day’s money. Yet Mr Musk may not need quantum computing and other areas that price at the time. The chaos surrounding the $70bn-80bn (including nearly $10bn of require “patient” capital could suffer. That the tweet led to a brief suspension of trad- debt) at which Tesla would be valued at is probably what worries Valley-watchers ing of its shares on the NASDAQ stock ex- $420 per share. Some reckon he would re- the most about the recent shift. If America change. Then Tesla released a memo con- quire less than $40bn in financing if his makes life difficult for Chinese investors, firming Mr Musk’s plan. He added details own stake (about a fifth of the firm) and the government should provide some sort in subsequent tweets suggesting this was those of other big public investors were of improved tax treatment or otherwise more than a lark. By the end of the day the rolled into the new entity. encourage more American investors to firm’s shares were up sharply, dealing a Mr Musk has given no details of where step in, argues Matt Ocko, co-founder of costly blow to the shorts (see chart). the cash will come from, but the source DCVC, a venture-capital firm. “Startups al- Mr Musk’s wish to depart from the pub- might well be foreign. Tencent, a Chinese ready deal with so much uncertainty,” lic market is understandable, though of internet giant, already holds a big stake in adds Roy Bahat of Bloomberg Beta, an in- late he seems to have made some peace Tesla. Japan’s SoftBank, which has thrown vestor. “Anything that reduces their op- with its constraints. At a quarterly-earn- vast sums at technology firms through its tions or increases their risk makes them ings call on August1st he said output ofthe Vision Fund, might be keen. But the most more likely to die.” 7 Model 3 was rising and forecast profits likely investor is Saudi Arabia. Reports sur- faced this week that the oil kingdom’s sovereign-wealth fund had bought shares Coolfizzin’ in Tesla worth around $2bn. PepsiCo said this week that Indra Nooyi Even if Mr Musk can rally the money- will step down in October after 12 years as men, going private may not prove a chief executive. During her tenure smooth ride. There may be political oppo- revenues rose by 80% to over $63bn, sition to large foreign investments in an though rival Coca Cola delivered bigger American car firm. Many punters who gains in market capitalisation. Ms Nooyi have held onto Tesla shares through the presciently invested in healthier offerings, dark days made clear on Twitter that they offsetting weakness in sales of sugary did not want to sell. Mr Musk promised products. She fended off activist investors this weekto create a special investment ve- who demanded a break-up. She was one of hicle that would allow them and employ- the first Asian Americans to run an ees to “remain shareholders”, but experts American giant, helping to shatter a say such an unorthodox and complex ar- “bamboo ceiling”. When she took the top rangement may hit legal snags. Then even job, roughly 2% of Fortune 500 firms were Tesla’s accommodating board (which has run by women, a figure that has crept up to already discussed this proposal) might be less than 5% today. Ramon Laguarta, an forced to reject it. Public or private, Tesla inside man at PepsiCo, will succeed her. will keep Mr Muskrunning at full tilt. 7 https://t.me/finera The Economist August 11th 2018 Business 53

Chinese tech firms Energy Enigma variations Toomuchinthetank

Why investors in oil firms should worry about climate change HE oil industry has much to fear from tank, estimates one as low as $35 (see Alibaba makes a welcome move to rejig the Paris climate deal of2015, which chart). Oil firms could face a sticky mess its legal structure. Others mayfollow T aims to limit temperature rises to less offorced writedowns. FYOU want to study how the legal title to than 2°C above the pre-industrial era. To The picture is complicated by the fact Iassets worth many billions of dollars curb carbon emissions, demand for fossil that in Europe oil firms can choose their changes hands in China, then peer careful- fuels will have to drop in coming de- own long-term prices, whereas in Ameri- ly at page 116 of Alibaba’s new annual re- cades. That is likely to push down oil ca regulators compel firms based there to port. The text is dense and you may have to prices and the value ofinvestments that use the average price over the past year, put a cold towel on your head and read it firms have made based upon them. which is nearing $70. Executives in both several times. The gist is that the Chinese A report published on August 6th by places have their reasons forthinking internet giant is reforming its legal struc- Sarasin & Partners, an asset manager in that prices will be higher than the worst ture, which uses a fragile and ingenious de- London, suggests that oil firms are assum- forecasts, particularly as the world is set vice known as a variable interest entity ing that decarbonisation will be limited to miss the Paris goals. (VIE). Alibaba’s attempt to make its VIEs and are thus overstating their assets. Setting those aside, prices are likely to safer is to be welcomed and will be Sarasin notes that eight European oil be lower anyway in the next few de- watched closely by China’s richest entre- giants all used long-term oil price as- cades, says Adam Pilarski ofAvitas, a preneurs, many ofwhom use them, too. sumptions of$70-80 a barrel, rising by 2% consultancy.There will be ups and VIEs are ubiquitous, especially among a year with inflation to $127-145 by 2050, downs to do with geopolitics. Prices are the country’s internet firms, which have a to price their assets. But that does not up from $26 in 2016 to over $70 mainly total market capitalisation of over $1trn. appear to assume any drop in demand. because ofVenezuela’s meltdown and The structure datesbackto the early 2000s, The International Energy Agency pre- better co-operation between Saudi Ara- when Chinese technology companies dicts a price ofjust $60 by 2060; Oil bia and Russia. But the economics on the wanted to tap global capital markets in Change International, an activist think- supply side are clear: plentiful reserves New York and Hong Kong and to set up in- and the falling cost oftechnology for ternational holding companies domiciled extracting oil will soften long-term prices. outside of mainland China. Yet their sensi- Dipsticks? Natasha Landell-Mills ofSarasin says tive internet assets, such as licences, may Crude oil, $ per barrel* oil firms should be more transparent not be owned by foreign entities, accord- about the riskthis poses to assets and 140 ing to Chinese law. profits. Other fund managers, such as To get around this, tech firms opted to 120 Aviva Investors, echo that view.In Eu- avoid owning these mainland assets out- 100 rope oil bosses are preparing forlower right, and instead to bundle them into legal prices, though they are still unwilling to 80 entities called VIEs, in turn owned by indi- Oil majors’ long-term forecast say as much. Shell and its British rival BP viduals in China (usually the bosses of the 60 are aiming to make new projects break firms and their associates). The VIEsand 40 even at just $40. Investors are more wor- these individuals sign contracts with the Paris ried about the American firms. Rising goals 20 international holding company, handing prices have lured them to start splurging over to it control of the VIE as well as its 0 on pricier projects. America may be profits. This approach remains popular. 1861 80 1900 20 40 60 80 2000 18 leaving the Paris deal, but escaping its For example, it is being used by Xiaomi, a Sources: EIA; Federal Reserve *2018 prices impact on global oil prices is harder. tech firm which did a blockbuster initial public offering in Hong Kong this year. There are three problems with VIEs. terparties. Instead the VIEs will be owned they could buy stock in two ways. They First, key-man risk. Ifthe people with nom- by two layers of holding companies, could purchase depositary receipts (which inal title die, divorce or disappear, it is not which will sign contracts with Alibaba. give the rights to the underlying share) that certain that their heirs and successors can These holding companies will ulti- would be listed in Shanghai, or they could be bound to follow the same contracts. mately be nominally owned by a broader buy shares in Hong Kong through “stock Second, it is not clearifthe structure is even group of Alibaba’s senior Chinese staff. connect”, a programme allowing a limited legal. China’s courts have set few reliable The idea is that ifanyone gets run over by a volume of trading between the mainland precedents on VIEs and the official posi- bus, then the scheme will notbe disrupted, and Hong Kong. tion isone oftoleration ratherthan approv- because nominal control is spread among Unfortunately the listing of depositary al. Third, VIEs allow China’s leading tech a wider group of people. The new ap- receipts fell through, for reasons that re- firms to be listed abroad, preventing main- proach is far from perfect but it is an im- main unclear. Then mainland regulators landers from easily owning their shares provement. If all goes to plan it will be decided that firms with dual share classes, and participating in their success. completed by 2019. Other tech firms may includingXiaomi, would notbe eligible for Alibaba’s proposed change is aimed at feel pressure to follow. stock connect (the Chinese authorities and tackling the first problem, key-man risk. At The other two problems with VIEsre- Hong Kong’s exchange are holding negoti- the moment four of its five VIEs are nomi- main, however. All firms still carry warn- ations to try to resolve this). China talks a nally owned by Jack Ma, the firm’s leader, ings in theirannual reports that the legality good game about financial reform but its and Simon Xie, a co-founder and former ofVIEs is uncertain. And mainlanders can- fiddly rules and opaque decision-making employee. After the restructuring, the two not own shares easily. When Xiaomi float- are a source of risk and ambiguity—even men will no longer be the dominant coun- ed in Hong Kong in June its plan was that forits most successful companies. 7 Financial Era Advisory Group 54 Business The Economist August 11th 2018

Danone and the rise of B Corporations Relatively few people, at least outside America, have heard of B Corps, although Choosing plan B Walmart, Danone’s biggest single custom- er, is an enthusiastic promoter and pushes B-Corp goods in its stores. In America B Corps are associated with (but different from) Benefit Corporations, a legal status for firms that lets them seek goals other PARIS than maximising shareholder welfare. The boss ofDanone, a food-and-drinkgiant, rethinks the purpose ofthe company B Corps are certified by an independent HE food industry is going nowhere. mouth is. It has sold subsidiaries that pro- movement called B Lab, founded by Jay TPrettypictureson food packetsmislead. duced biscuits, chocolate and beer, for ex- Coen Gilbert. Like Mr Faber, he talks of a Big companies have disconnected people ample. Evian, its high-end mineral water pressing need to rethink the philosophy of from their sustenance. Consumers, espe- brand, which accounts for roughly 3% of the company, saying “we need to correct ciallymillennials, are sceptics about indus- revenues, is trying to become carbon neu- an error in the source code of capitalism: trial-scale food production. Even sellers of tral. Danone is working on a way to make shareholder primacy”. B Corps, he says, healthy products, such as mineral water, recycled plastic, which is often grey, ap- promote better governance and better spread harm—just look at billions of their pealing to drink from. Danone also runs serve the interests of workers, suppliers plastic bottles that choke the oceans. large-scale, non-profit “social businesses”, and wider society, in addition to investors. Such views are commonly heard such as one in co-operation with Muham- He notes that Larry Fink, chairman of among food activists, radical bloggers or mad Yunus, a Nobel laureate, which pro- BlackRock, the world’s biggest asset man- anti-capitalists. Yet these come from Em- vides high-quality and nutritious yogurt ager, said much the same in a letter to com- manuel Faber, who runs Danone, a large cheaply to Bangladeshi children. Mr Faber panies in January. French food company. Mr Faber (pictured) previously led this part ofthe company. frequently sounds like a doomsayer about The latest effort is to win certification as Prophet with profits his own industry—and about capitalism a“B Corporation”, a label meant to reflect a Does Danone’s radical approach hold wa- more broadly. “A revolution” and the end firm’s ethical, social, environmental prac- ter? Other consumer giants, such as Un- ofglobalisation are nigh, he says. tices. Smaller outfits, such as Patagonia, a ilever, emphasise that giant firms should Danone is well-placed to spot such clothing firm, or Ben and Jerry’s ice-cream lead on environmental, social and gover- changes. With its headquarters in Paris, the (now part of Unilever) were early B Corps. nance topics. But Danone’s virtue-signal- company sells to over 130 countries and Some 2,500 have been certified in the past ling goes further, analysts agree. All the made nearly €25bn ($28bn) in revenues decade or so. Athleta, an “athleisure” firm same, Martin Deboo, of Jefferies Interna- last year. Mostly it sells dairy goods such as owned by the Gap clothing chain, became tional, a bank, notes that Danone has a Activia yogurt, mineral water (in plastic a B Corp in March. Firms scrutinise each mixed reputation among European inves- bottles) such as Evian or Volvic, and baby other, along with independent monitors. tors. The firm had been trying to up its re- food. Mr Faber sees change driven mostly So far around 30% of Danone’s various turns, but its high-priced purchase of Whi- by the new habits of consumers in rich subsidiariesare thuscertified. The goal isto teWave, which has low returns, was countries. “People are walking out of do them all within a few years, at least by disappointing, he says. Danone’s returns brands that they’ve been consuming for 2030. In April Danone North America, en- of around 8% on invested capital are rela- decades,” he says. Millennials in particular compassing WhiteWave, an organic-food tively low compared to its peers. After ru- do not think their food system works and firm that Danone bought in 2017 for mours in the summer of 2017 that an activ- are shopping locally, favouring smaller $12.5bn, became the world’sbiggestB Corp. ist investor was circling, the firm’s share producers and buyingorganic, plant-based The idea is that the label will help to win price leapt, suggesting buyers hoped new or GM-free products. backtrust from consumers. management could lift its performance. Danone’s answer is to rethink the moti- Over time, Danone’s approach may be- vating idea ofthe company. That means re- come more appealing to mainstream in- jecting the Anglo-Saxon idea that a firm ex- vestors. Long-term asset managers, banks, ists primarily to maximise the welfare of and other financial partners say they feel its owners, the shareholders. Danone is social and environmental obligations get- pursuing what Mr Faber sees as a more ting stronger. Yngve Slyngstad, the head of meaningful goal. The “purpose of this firm Norway’s pension fund, says he is obliged is not to create shareholder value”, he says. to consider how investment decisions to- Instead it is to get healthy food to as many daymightaffectfuture generationsand ask mouths as possible, benefiting everyone how firms might influence society, say, from suppliers to consumers to owners. overclimate change. The fund owns nearly In part, this serves as savvy marketing; $1bn ofDanone stock(1.7% ofthe total). Mr Faber, a wiry rock-climber, is living the Danone points to other financial bene- brand. The approach is also consistent fits of its approach. It trumpets, for exam- with Danone’s history going back well ple, a deal announced in February with 12 over a century. In a speech in Marseille in creditors. Cecile Cabanis, its chieffinancial 1972 a former boss, Antoine Riboud, officer, describes a syndicated credit facili- launched the idea of the company having ty of €2bn that is tied to Danone’s B-Corp a “dual project”, meaning it should pursue status plus other environmental, social both economic and social benefits. That and governance goals. As more of Danone speech, influenced byhisSocialistleanings is certified, she says, the margin payable on and anti-capitalist protests and social up- the credit will gradually fall. MrFaber does heaval from 1968 onwards, is still dutifully concede that ultimately, he himself will be cited by senior management. judged by Danone’s share price. The proof The firm does put its money where its Between a rock and a better place ofthe pudding will be in the eating. 7 https://t.me/finera The Economist August 11th 2018 Business 55 Schumpeter How to save it

Singapore is a model forhow to reform some ofthe world’s most flawed investment vehicles form.Abody called SASAC owns stakes in firms at home, but fails to insulate them from political influence. Another fund, CIC, styles itself as an independent global asset manager, but holds stakes in local banks, talks up foreign policy aims such as the Belt and Road Initiative, and wants approval to play in the sagging do- mestic stockmarket. Even Norway’s $1trn fund has seen political rows over its approach to private investment and energy firms. Relative to the pack, Singapore is doing well. Its funds have as- sets of about $770bn—the exact figure is secret. They have made an annual return (in dollar terms) of about 6% over the past two decades, slightly more than an indexed portfolio with two-thirds of its assets in shares and one-third in bonds. Their income pays for a fifth of government spending. The funds are free of scandal and enjoy a solid reputation both in China and the West. There is a clear division of labour. The central bank runs $290bn of liquid reserves. A national piggy-bank manager called GIC runs an estimated $250bn, long-term, diversified foreign portfolio. Then a holding company, Temasek, has the rest, keep- ing a quarter of its portfolio in stakes in Singaporean firms. It also makes punchy bets abroad. On the funds’ boards sit a combination of officials, politicians N MOST countries the priority with the public finances is how and captains of industry; Singapore’s elite can sometimes seem Ito stop debt spiralling. But some places have the opposite diffi- too tightly knit. Yet overall governance is good. The city-state’s culty: how to manage piles of savings. China and Saudi Arabia leaders view reserves-management as a national mission. Advi- are examples. Globally, governments have over$20trn stashed in soryboardsand staffinclude lotsofoutsiders: 37% ofthe total em- state-run investment vehicles. That sum is three times the size of ployees ofTemasekand GIC are foreign, versus under10% at CIC. BlackRock, the world’s biggest asset manager. Managing it is There is little evidence of Temasek meddling in the local champi- fraught and becoming more so owing to protectionism. Govern- ons in which it invests, such as DBS, a bank. In 2014 it did raise its ments with spare funds should study Singapore, which, as in stake in Olam, a struggling local commodities firm, but made a many aspects ofadministration, has its head screwed on. modest profit on the deal. In 2015 it unsentimentally sold control State investmentfundscome in several flavours. There are cur- ofNeptune Orient, a shipping line, to a French firm. rency reserve funds, which are often managed solely by central The fiscal framework is admirably clear. The reserves have banks. Then there is an array of entities that are lumped together special protection under the constitution. Under rules put in under the “sovereign-wealth fund” label, which typically man- place in 2008, the government can spend up to half of the long- age pension assets, oil revenues, some currency reserves, or own term expected annual real return of its net reserves each year. In stakes in companies that governments view as strategic. practice this equates to about1.6% of the funds’ capital value. The Central bank reserve kitties have existed for centuries, and aim isto ensure thatthe pool ofreservesand theirincome remain sovereign-wealth funds date back to the 1950s, but both became constant as a share of GDP over time, which Singapore has prominent in 2004-08. High oil prices, trade surpluses and capital achieved; its capital is about 220% ofGDP, the same as in 1997, The inflows meant that Asian and Arab countries were knee-deep in Economist estimates. While the official calculations are confiden- foreign earnings, which they reinvested in safe treasury bonds tial, a rough estimate is that annual nominal returns would need and also in riskier assets such as stakes in foreign firms. The to drop below 5.5% before the state eats into its inheritance. spending spree peaked in 2008. By that point Western govern- ments had become uneasy about the funds’ power. Keeping on the Strait and narrow There are still problems. Often the funds’ objectives are mud- Few countries have Singapore’s graft-free civil service and polity, dled. Some have their capital depleted by profligate politicians; which make technocratic excellence easier. And there are blem- others cannot decide whether to invest at home as well as ishes. The funds are now so big that there is more risk ofpointless abroad. It is a constant struggle to avoid cronyism and to per- duplication. In June, for example, both GIC and Temasek invest- suade other countries that they are not a tool offoreign policy. ed in Ant Financial, a Chinese fintech firm. Mistakes happen: in Judged by theirsize, state funds have trodden water. Since 2015 2007-08 both funds made some badly timed bets on Western emerging countries have burned up reserves as capital flows re- banks. As Singapore’s population ages, state health-care costs versed and commodity prices fell. Adding up all global currency will rise by almost one percentage point of GDP over the next de- reserves and sovereign-wealth funds, their weight in the finan- cade. There will be pressure to raid the piggy bank, or for the cial system has stayed flat over the past six years, at 12% of the funds to juice up their returns by taking bigger risks. market value of all shares and bonds. Governance is patchy. A Nonetheless, for many countries, including China and Saudi Malaysian state fund, 1MBD, has been at the centre of a corrup- Arabia, Singapore’s model forstate investment funds is the one to tion scandal. The $250bn Saudi Public Investment Fund is mak- emulate. Markets are frothy, so rash investment decisions can be ing huge, wild, bets on Silicon Valley and pursuing the pet pro- very expensive. And protectionism means that countries lacking jects ofMuhammad bin Salman, the crown prince. a credible, apolitical investment process may suffer a worse fate: China has pots of money but has made little progress on re- having their state funds locked out offoreign markets. 7 Financial Era Advisory Group 56 Philosophy brief Liberal thinkers The Economist August 11th 2018

than just parliamentary democracy with its principle ofelections and wide suffrage. He meant a society based on equality. The old regime was predicated on the belief that society was divided into fixed classes. Some people are born to rule and others to serve. Rulers like Tocqueville’s family in Normandy inherited responsibil- itiesaswell asprivileges. Theywere moral- ly bound to look after “their people” and serve “their country”. Democratic society was based on the idea that all people were born equal. They came into the world as individuals rather than as aristocrats or peasants. Their greatest responsibility was to make the most oftheir abilities.

Terror and the state Many members of Tocqueville’s class thought that democratisation was both an accident and a mistake—an accident be- cause cleverer management of the old re- gime could have prevented the revolution in 1789, and a mistake because democracy destroyed everything they held most dear. Tocqueville thought that was nonsense— and pitied his fellow blue-bloods who wasted their lives in a doomed attempt to restore aristocratic privilege. Alexis de Tocqueville The great question at the heart of Tocqueville’s thought is the relationship The French exception between liberty and democracy. Tocque- ville was certain that it was impossible to have liberty without democracy, but he worried that it was possible to have de- mocracy without liberty. For example, de- mocracymighttransferpowerfrom the old The gloomiest ofthe great liberals worried that democracymight not be aristocracy to an all-powerful central state, compatible with liberty thereby reducing individuals to helpless, E IS the most unusual member of the isolated atoms. Or it might make a mock- Hliberal pantheon. Liberalism has usu- In this series ery of free discussion by manipulating ally been at its most vigorous among the everybody into bowing down before con- Anglo-American middle classes. By con- 1 John Stuart Mill ventional wisdom. trast, Alexis de Tocqueville was a proud SirLarry Siedentop, an Oxford academ- 2 Alexis de Tocqueville member of the French aristocracy. Liberal- ic, points out that Tocqueville’s contribu- ism tends to be marinated in optimism to 3 John Maynard Keynes tion was to identify a structural flaw in such an extent that it sometimes shades democratic societies. Liberals are so preoc- 4 Schumpeter, Popper and Hayek into naivety. Tocqueville believed that lib- cupied by the “contract” between the indi- eral optimism needs to be served with a 5 Berlin, Rawls and Nozick vidual on the one hand and the state on side-order of pessimism. Far from being the other that they don’t make enough 6 Rousseau, Marx and Nietzsche automatic, progress depends on wise gov- room for intermediate associations which ernment and sensible policy. acted as schools of local politics and buff- He also ranks among the greats. He growing dangers of bureaucratic centrali- ers between the individual and the state. wrote classic studies of two engines of the sation. Better than any other liberal, And, he was the first serious thinker to emerging liberal order: “Democracy in Tocqueville understood the importance of warn that liberalism could destroy itself. America” (1835-40) and “The Old Regime ensuring that the collective business of Tocqueville worried that states might use and the French Revolution” (1856). He also society is done as much as possible by the the principle of equality to accumulate helped shape French liberalism, both as a people themselves, through voluntary ef- powerand ride roughshod overlocal tradi- political activist and as a thinker. He was a fort, rather than by the government. tions and local communities. Such central- leading participant in the “Great Debate” Tocqueville’s liberalism was driven by isation might have all sorts of malign con- of the 1820s between liberals and ultra- two forces. The first was his fierce commit- sequences. It might reduce the variety of Royalists about the future direction of ment to the sanctity of the individual. The institutions by obliging them to follow a France. In 1849 he served briefly as foreign purpose of politics was to protect people’s central script. It might reduce individuals minister (he died a decade later). He broad- rights (particularly the right to free discus- to a position of defencelessness before the ened the liberal tradition by subjecting the sion) and to give them scope to develop mighty state, either by forcing them to bland pieties of the Anglo-American mid- their abilities to the full. The second was obey the state’s edicts or making them de- dle class to a certain aristocratic disdain; his unshakable belief that the future lay pendent on the state’s largesse. And it and he deepened it by pointing to the with “democracy”. By that he meant more mightkill offtraditionsofself-government.1 https://t.me/finera The Economist August 11th 2018 Philosophy brief 57

2 Thus one liberal principle—equal treat- matter of free conscience created a vital al- society might weaken liberty by narrow- ment—might end up destroying three rival liance between the “spirit of religion” and ing society’s choices. principles: self-government, pluralism and the “spirit of liberty”. America was a soci- More recently intellectuals have wor- freedom from coercion. ety that “goes along by itself”, as Tocque- ried about the rapid growth of the federal Tocqueville feared his own country ville put it, not just because it dispersed government, inaugurated by Lyndon John- might fall into the grip of just such an illib- power but because it produced self-confi- son’s Great Society programme. Transfer- eral democracy, as it had in the Terror, un- dent, energetic citizens, capable of organis- ring power from local to the federal gov- der Maximilien Robespierre in 1793. The ing themselves rather than looking to the ernment; empowering unaccountable French revolutionaries had been so blind- government to solve their problems. bureaucrats to pursue abstract goods such ed bytheircommitmentto liberty, equality as “equality of representation” (even if it and fraternity that they crushed dissenters Sleeping on a volcano means riding roughshod over local institu- and slaughtered aristocrats, including He was not blind to the faults of American tions); and undermining the vitality of civ- many members of Tocqueville’s family. democracy. He puzzled over the fact that il society tends, they fear, to destroy the His parents were spared, but his father’s the world’s most liberal society practised building blocks of Tocqueville’s America. hairturned white at 24 and his motherwas slavery, though, like most liberals, he com- A recent conference, organised by the reduced to a nervous wreck. forted himself with the thought that it was Tocqueville Society and held in the fam- He was worried about more than just sure to wither. He worried aboutthe cult of ily’sNormandymanorhouse, dwelton the the bloodshed, which proved to be a pass- the common man. Americans were so ap- variouswaysin which democracyisunder ing frenzy. The power of the state also palled by the idea that one person’s opin- assault from within, by speech codes, and posed a more subtle threat. The monarchy ion might be better than another’s that from without, by the rise of authoritarian had nurtured an over-mighty state, as they embraced dolts and persecuted gifted populism, under the general heading of French kings sucked power from aristo- heretics. He worried that individualism “demo-pessimism”. crats towards the central government. The It is worth adding that the threat to lib- revolution completed the job, abolishing erty today does not stem just from big gov- local autonomy along with aristocratic ernment. It also comes from big compa- power and reducing individual citizens to nies, particularly tech firms that trade in equal servitude beneath the “immense tu- information, and from the nexus between telary power” ofthe state. the two. Gargantuan tech companies en- By contrast, the United States represent- joy market shares unknown since the Gild- ed democracy at its finest. Tocqueville’s os- ed Age. They are intertwined with the gov- tensible reason for crossing the Atlantic, in ernment through lobbying and the 1831, was to study the American penal sys- revolving door that has government offi- tem, then seen as one of the most enlight- cials working forthem when they leave of- ened in the world. His real wish was to un- fice. By providing so much information derstand how America had combined “free” they are throttling media outfits that democracy with liberty so successfully. He invest in gathering the news that informs was impressed by the New England town- citizens. By using algorithms based on pre- ships, with their robust local governments, vious preferences they provide people but he was equally taken by the raw egali- with information that suits their preju- tarianism ofthe frontier. dices—right-wing rage for the right and left- Why did the children of the American wing rage forthe left. revolution achieve what the children of Today’s great rising power is the very the French revolution could not? The most opposite of the United States, the great ris- obvious factor was the dispersal of power. ing power of Tocqueville’s time. China is The government in Washington was disci- might shade into egotism. Shorn of bonds an example not of democracy allied to lib- plined by checks and balances. Power was with wider society, Americans risked be- erty but of centralisation allied to authori- exercised at the lowest possible level—not ing confined within the solitude of their tarianism. Its state and its pliant tech firms just the states but also cities, townships own hearts. The combination of egalitari- can control the flow of information to an and voluntary organisations that flour- anism and individualism might do for extent never dreamed of. Increasingly, Chi- ished in America even as they declined in Americans what centralisation had done na embodies everything that Tocqueville France. The second factor was what he for France—dissolve their defences against warned against: power centralised in the called “manners”. Like most French liber- governmental power and reduce them to hands of the state; citizens reduced to at- als, Tocqueville was an Anglophile. He sheep, contentto be fed and watered by be- oms; a collective willingness to sacrifice thought that America had inherited many nevolent bureaucrats. liberty fora comfortable life. of Britain’s best traditions, such as com- Tocqueville exercised a powerful influ- Before the revolution in France in 1848, mon law and a ruling class that was com- ence on those who shared his fears. In his Tocqueville warned that the continent was mitted to running local institutions. “Autobiography” John Stuart Mill thanked “sleeping on a volcano…A wind ofrevolu- Tocqueville for sharpening his insight that tion blows, the storm is on the horizon.” Ofliberty and religion government by the majority might hinder Today democracy in America has taken a America also had the invaluable advan- idiosyncratic intellectuals from influenc- dangerous turn. Populists are advancing in tage offreedom ofreligion. Tocqueville be- ing the debate. In 1867 Robert Lowe, a lead- Europe, Asia and Latin America. Authori- lieved that a liberal society depended ulti- ing Liberal politician, argued for mass edu- tarians are consolidating power. The most mately on Christian morality. Alone cation on the Tocquevillian grounds that pessimistic of great liberal thinkers may among the world’s religions, Christianity “we must educate our masters”. Other Lib- not have been pessimistic enough. 7 preached the equality of man and the infi- eral politicians argued against extending nite worth ofthe individual. But the ancien the franchise on the grounds that liberty régime had robbed Christianity of its true could notsurvive a surfeitofdemocracy. In spirit by turning it into an adjunct of the the 1950s and 1960s American intellectuals Read more on classical liberal values and state. America’s decision to make religion a seized on Tocqueville’s insight that mass thinkers at Economist.com/openfuture Financial Era Advisory Group 58 Finance and economics The Economist August 11th 2018

Also in this section 59 Steel and aluminium tariffs 60 Factor-based bond investing 60 Online prediction markets 61 Have house prices peaked? 62 Buttonwood: Triple-B movie 63 Free exchange: Mangonomics

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

Trade war (1) cal terms, is close to becoming a hard reali- ty. MrTrump has instructed his trade team Is China losing it? to consider 25% tariffs on $200bn of Chi- nese imports as early as September, taking the total affected by its tariffs to about $250bn, with room for twice that amount. China’s threatened retaliation, announced on August 3rd, will be tariffs on $60bn of SHANGHAI American imports. This would take the to- WeakChinese markets give America the edge, at least in confidence tal under its tariffs to $110bn, with little HEN Donald Trump tweeted on Au- wanting. An agreement for China to buy room formore. Wgust5th thattariffswere working “big more American natural gas and soyabeans China has other weapons at its dispo- time”, American media sprang into action collapsed in June. Chinese officials are sal. It can disrupt the lucrative Chinese op- to test the claim (see next article). In China, keenly aware ofvulnerabilities; had Amer- erations of American businesses, from Ap- editors were more circumspect. No major ica maintained its sanctions on sales of ple to Starbucks. But that would have Chinese-language newspaper reported his semiconductors to ZTE, the Chinese tele- downsides. Declaring bogus justifications tweets. One of his claims—that China’s coms giant might well have gone out of (health violations, say) would reinforce stockmarket has fallen 27% in the past four business. Those with a conspiratorial foreign criticism of government meddling months—was an exaggeration. But why mindset see things in a darker light. “The in China’s economy. And the nature of would any self-respecting propagandist in Americans don’t want a deal. They want to such interference, unlike tariffs, is that it Beijing dwell on that? Chinese stocks have screw us,” says a fund manager. will not be announced in advance, mean- indeed fallen sharply (see chart), which of- The asymmetry in the trade war is an- ing it can take longer to register the impact. ficials do not wish to emphasise. other uncomfortable fact. Since America The timing of the trade war is most in- And this is just one of a series of awk- buys far more from China than vice versa, convenient for China. Over the past two ward facts for China as its trade war with America has more scope to impose tariffs. years the government has waged a cam- America deepens. The yuan is down 8% This imbalance, long discussed in theoreti- paign to rein in debt levels. Finally this has against the dollar since April, and near its started to bite, with credit growth slowing weakest in more than a year. A shrinking sharply. Officials could opt to abandon trade surplus produced a current-account Cracked China their tightening stance in order to counter- deficit in the first half of 2018, China’s first Stockmarket indices, $ terms act the trade turmoil. But that might erase such gap in at least two decades. More January 2nd 2018=100 the gains from the deleveraging. This ex- broadly, China’s growth is slowing at a First major tariffs plains their restraint so far. At a meeting of announced against China 110 time when America’s economy is expand- 105 the Politburo on July 31st, China’s leaders ing at its fastest pace since 2014. No wonder noted that it was a priority to support 100 Mr Trump feels that he is on the right path, S&P 500 growth amid the “clear change” in the ex- and that Chinese investors are jittery. 95 ternal environment, but also pledged to 90 Making matters worse for China is a CSI 300 press on with their efforts to control debt. whiplash effect. Until recently officials and 85 Investors who had hoped for more easing executivesbelieved theirown declarations 80 were disappointed. of technological prowess. Privately, advis- 75 So there is cause for concern about Chi- ers were confident that Mr Trump could be Jan Feb Mar Apr May Jun Jul Aug na’s growth outlook. But markets may be placated with promises to ramp up im- 2018 unduly pessimistic. One conclusion from ports from America. Now both views look Source: Wind Info the past few weeks is that policymakers 1 https://t.me/finera The Economist August 11th 2018 Finance and economics 59

2 now accept that the trade war is real, and the tariffsoverall, criticised Canada’s inclu- are starting to cushion the economy. The sion. (It represents workers on both sides boost to exports from the falling yuan, ofthe border.) down about 6% on a trade-weighted basis In the first quarter of2018, 52% ofAmer- since mid-June, should be “roughly pro- ican steel exports went to Canada. Those portionate” to the blow from the first are now being hit with retaliatory tariffs. $50bn of American tariffs and some of the On August 6th Alcoa, a large aluminium next $200bn, says Andrew Tilton, the chief producer, requested a tariff exemption of Asia economist at Goldman Sachs. At the its own so that it could import aluminium margins, he adds, China is shifting to a from itsCanadian subsidiaryto America. It more active fiscal policy. Officials have had previously reported that tariffs had made iteasierforcitiesto getfunding forin- raised its costs by around $15m in the sec- frastructure projects. One government ad- ond quarterof2018 (less than the extra pro- viser says there is discussion of a bigger fits from higher aluminium prices). stimulus, likely to be focused on promot- Some producers within both industries ing consumption rather than investment. do not smelt metal from scratch but recycle The economic backdrop to the trade or process it instead. It is in their interests war could also change over the next year. for their inputs to be cheap. So far alumi- As China tiptoes towards easing, its credit nium processors (which account for97% of growth should pick up. Meanwhile, Amer- employment in the industry) seem to have ica may be near the top of its growth cycle, passed the extra costs on to their buyers. with gains from last year’s tax cut set to dis- Flame wars But in the long run higher prices could en- sipate. Louis Kuijs of Oxford Economics, a courage a switch to different materials. research firm, says the divergence in their that they have brought American furnaces Aluminium competes with steel for use in stockmarkets might reflect overconfidence and smelters roaring back to life. The vol- cars, and with glass in drinks containers. in America and an evaporation of confi- ume ofsteel imports from the countries hit The big question is whether any revival dence in China. “Both reactionsseem exag- by tariffsand quotas was 36% lowerin June can be sustained. In the short term, tariffs gerated,” he says. With no resolution to the than a year previously. The corresponding are more likely to bring older, relatively in- trade war in sight, there will be time fall for aluminium imports was 27% (see efficient steel plants back online than to enough to test this proposition. 7 chart). As prices have risen, so has produc- stimulate new long-term investments, for tion. Steelmakers are using 78% of their ca- the simple reason that the president could pacity, notfar off the administration’s goal withdraw the tariffs at any moment. The Trade war (2) of 80%. And some idled aluminium capac- newest aluminium smelter in America is ity is being brought backonline. around 40 years old. If primary alumi- Metal clashing But production data are volatile, and re- nium production revives sustainably, it cent changes are relatively small when tak- will be because American producers can en in historical context. And some of the access cheap, reliable energy. recent activity would have happened And tariffs do nothing to address the without new trade barriers. Metal prices underlying complaint of American steel WASHINGTON, DC have been pulled higher by a strong econ- and aluminium producers: that state sup- Tariffs are not quite the success the omy. Higher aluminium prices are in part port gives Chinese producers an unfair ad- American president thinks the result of more expensive alumina, one vantage that has them pumping out pro- ONALD TRUMP credits the tariffs he ofthe main inputs. American sanctions on duction as job losses mount elsewhere. Dhas imposed on steel and aluminium Rusal, a massive Russian supplierofalumi- Populist policies can often deliver short- imports, and on a range of Chinese pro- na, and cuts to alumina production in Bra- term results. The question for Mr Trump is ducts, with almost magical potency. Either zil because of environmental problems, whether his are worth the cost, and how they will force other countries to drop have left aluminium makers feeling inse- long the benefits can last. 7 trade barriers and crown him as deal- cure about supply. maker-in-chief, or they will pay down gov- Those higher prices are a burden for ernment debt while saving favoured in- businesses that use metals, which account Smelter skelter dustries. “Plants are opening all over the for a far higher share of American jobs. United States, January 2017=100 US, Steelworkers are working again, and They are doubly disadvantaged as inputs big dollars are flowing into our Treasury,” become pricier and overseas competitors Price 160 he tweeted on August 4th. How do those can undercut them. Some have requested Steel 140 claims stackup? exemptions from the tariffs, only to be Aluminium 120 Tariffs are taxes on imports and so will blocked by official objections from some 100 bring some cash to treasury coffers. But of the biggest American steelmakers, 80 comparatively little. In 2017 America’s gov- which claim that they can supply the sup- 60 ernment borrowed around 3.5% of GDP. posedly scarce products. But tariffs were 2017 2018 Had the new tariffs been in place, and un- not intended to help metal consumers, der the (extreme) assumption that the after all. Imports 160 same goods had been imported despite More strikingly, even some of those Steel costing more, they would have raised only whom protectionism was supposed to 140 0.08% of GDP. Even including all Chinese help are grumbling. The loudest com- 120 imports, the number would have risen to plaints are about the inclusion of Canada 100 80 just 0.7% of GDP. And that is before consid- in the list of countries thwacked by trade Aluminium ering tariffs’ depressive effects on demand barriers, which has damaged a highly inte- 60 2017 2018 forimports and on economic growth. grated economic area. Even the United There is more substance to the claim Steel Workers Union, a strong supporter of Sources: S&P Global Platts; Census Bureau; USITC Financial Era Advisory Group 60 Finance and economics The Economist August 11th 2018

Fund management mid-2016. It outperformed the benchmark index by 2.1 percentage points in its first Fama and fortune year, and 2.6 points in its second. Tony Gould of AQR credits not only the factor modelling for its success. He says that the higher cost of trading bonds compared with equities needs to be built into the GREENWICH, CONNECTICUT bond-picking process. The firm has since Factor-based investing spreads from started two more bond funds. Other such stocks to bonds firms that used to focus on equities are OMPARED with equity investing, looking into bonds, too. Man Numeric, for C bond investing can seem stuck in the instance, a quant fund in Boston, wants to dark ages. As hedge funds and asset man- apply its expertise in company-level analy- agers use whizzy algorithms to trade sis to high-yield bonds. shares automatically, bond-fund manag- Among the mass-market offerings are ers still often call traders by phone. So BlackRock’s first smart-beta bond fund, when new investing strategies do arise, launched in 2015. It switched from active they make an even bigger splash. “Factor” management to index-trackingin 2018, and investing is the latest example. the firm now has several index-tracking This is the idea, credited to economists bond ETFs that use factors (mostly quality Eugene Fama and Kenneth French, that and value). Fidelity Investments launched predictable, persistent factors explain long- two bond factor ETFs in March, and In- instance to predict demand for a product. term asset returns. Their1992 model foreq- vesco launched eight on July 25th. All have the same goal: to gain insights into uities used the size of firms and what be- Factor investing forbonds is still so new the future by giving those who hold useful came known as “value” (the tendency for that many investors have not even heard information an incentive to reveal it. cheap assets to outperform pricey ones). ofit. But opportunities to use it are growing But legal barriers have long hampered Later models added factors such as “mo- because of recent European regulations such attempts at crowdsourcing. In Ameri- mentum” (the tendency of prices to keep mandating price and volume disclosure ca many prediction markets are consid- moving in the same direction). Factor- forbonds. Justfive yearsago a fund manag- ered a form of illegal gambling, or akin to based analysishassqueezed active manag- er would have struggled to find enough trading in commodities futures that re- ers (since it explains much of their returns) data for non-American bonds, says Collin quires a licence. Regulators have allowed and helped drive the rise of passive invest- Crownover ofState Street Global Advisors. such services to operate if they are struc- ing. Investors can access factors in equities, Now the firm is applying quality- and val- tured as non-profit “research” initiatives often called “smart beta”, through cheap ue-factoranalysisto corporate bonds in eu- and limit bet sizes and numbers of traders, index-tracking funds or exchange-traded ros and sterling. The way index-trackers as IEM and PredictIt do. But because of the funds (ETFs) from the likes of BlackRock and smart-beta approaches laid waste to legal risk, private investors are reluctant to and State Street Global Advisors. stock-pickers suggests that managers of ac- finance prediction markets. Intrade, an Messrs Fama and French considered tive bond funds should be quaking. 7 Irish site, shut in 2013, partly because the factors in bond returns as early as 1993, Commodity Futures Trading Commission though not the same ones as for equities forced it to stop serving Americans. (they reckoned, forinstance, that for bonds Prediction markets Augur’s decentralised design should al- value had “no obvious meaning”). Federal low it to sidestep regulatory difficulties. In requirements since 2002 to disclose tran- Collective oracle 2015 the Forecast Foundation, a non-profit saction prices and volumes have enabled group of developers, raised $5.5m by issu- closer analyses. A recent paper by re- ing a crypto-currency, REP, in a form of searchers at AQR Capital Management, a crowdfunding now known as an initial $226bn hedge fund founded by a student coin offering. Rather than living on a few ofMrFama that specialises in factor invest- servers, as Intrade did, Augur is a “proto- Crowdsourcing and crypto-currencies ing forequities, looks at fourfactors forglo- col”, or set of technical rules, based on the could breathe new life into an old idea bal sovereign bonds and American cor- Ethereum blockchain, that allows punters porate ones: carry (high-yielding bonds ILL a Democrat win America’s next to set up their own prediction market. This beat low-yielding ones), quality (safer as- Wpresidential election? Will Tesla file will make betting cheaper, says Joseph sets have better risk-adjusted returns), val- forbankruptcy by the end of 2019? Punters Krug, one of Augur’s developers, and shift ue and momentum. now have a new option for such bets: Au- legal responsibility to bettors. These were not only strongly correlated gur, an online prediction market. Whether Yet decentralisation creates a new pro- with bond returns over the past two de- it takes off will be a gauge of the viability blem: who will decide the outcome of a cades, but also largely uncorrelated with not only of such markets but of decentral- bet? For Intrade, the firm itselfdeclared the factors in equity markets, credit risk for ised applications built on blockchains, the winner. For Augur, any holder of REP can bonds and macroeconomic variables such databases underlying crypto-currencies. become a “reporter”, in charge of checking as inflation. Since active bond-fund man- Augur is not the first online service that facts on the ground for a fee. So that they agers tend to make excess returns mainly allows people to buy and sell predictions are kept honest, reporters must stake some by buying riskier bonds, and a traditional like shares. Since 1988 it has been possible REP, which is forfeit ifother reporters over- bond index-tracking fund means exposure to beton American electionsvia Iowa Elec- turn a decision. Reporters can close a mar- to the firms and countries that issue the tronic Markets (IEM), run by the University ket they deem illegal or unethical. If they most debt, factors provide a third, distinc- of Iowa. PredictIt, a site based in New Zea- err, whether towards caution or tolerance, tive investment option. land but with a largely American audi- they can lose their REP deposit. AQR’s first dedicated fixed-income of- ence, and Betfair Exchange, a British ser- Markets have been created on the fering, a fund of American high-yield (that vice, also let users bet on political events. deaths of famous people. That has raised is, junk-rated) bonds, was launched in Some firmsrun such marketsinternally, for fears about the rise of “assassination mar-1 https://t.me/finera The Economist August 11th 2018 Finance and economics 61

2 kets” that incite people to commit murder is clunky and slow for users: downloading 50%, and for London 59%, with rent con- for financial gain (none has been shut its software and the Ethereum blockchain suming half of gross pay. In just four ofour down yet since there have been no trades). can take hours. Now that they know the cities are prices at or under fair value: To- A more immediate problem for Augur is system works, he and his developers plan kyo, Milan, New Yorkand Singapore. getting people to use it. Predictions.Global, to make it more user-friendly.But success is But our index suggests that property a website that tracks activity on Augur, lists not in their hands alone: Ethereum has run prices may be near a turning point. The av- nearly 1,000 markets with almost $1.5m at out ofcapacity and needs major upgrades. erage rate of house-price inflation across stake. Yet most are bets on the value of Even ifAuguris not a wild success, it is a our 22 cities has slowed, from 6.2% annual- crypto-currencies. Worse, according to “worthwhile exploration” of the viability ly 12 months ago to 4.7% now. In six cities DappRadar, another website, the number of decentralised services, says Kevin Wer- prices have fallen from recent peaks. of daily users has fallen from a peak of 265 bach, the author of “The Blockchain and The three reasons why cities have expe- in early July, straight after Augur’s launch, the New Architecture of Trust”, a forth- rienced a property boom—and why it may to 37 on August 8th. comingbook. Learningneeds a lot ofdoing now be ending—are demand, supply and Mr Krug says he is unconcerned. Augur in the complex world ofblockchains. 7 the cost of money. In recent years people and jobs have flocked to the biggest cities from other parts of their own countries Property prices and elsewhere. More than a third of Lon- don’s population was born abroad. For To- Housing correction ronto, the share is more than half. The pop- ulation of our 22 cities rose, on average, by 12% overthe past decade. Afurtherboost to demand has come from foreign investors. Auckland, London, Sydney and Vancouver have attracted large inflows, particularly from China. Ournew cities house-price indexsuggests that the market is slowing But according to the Economist Intelli- ROM Auckland to Amsterdam, Sydney with rents for the past three years. They gence Unit (EIU), our sister company, the Fto San Francisco, house prices in the have now hit 40% above fairvalue forboth growth in globalised cities’ population best locations have gone through the roof. metrics. Data for rents at the level of cities will soon start to slow. Afew might shrink. The Economist’s new house-price index are lacking. But compared with long-run London lost 100,000 people to the rest of covers 22 of the world’s most vibrant cities median incomes, prices appear even bub- Britain in the 12 months to June 2017, and (see table). They are home to 163m people, blier at city level than nationally. the EIU expects its population to fall over with an economic output equal to Ger- Prices in Vancouver are 65% overvalued the coming decade. many and Japan combined. The average by the same metric. The figures for Amster- One reason people may stop flocking to price of a home in these cities rose by 34% dam, Copenhagen and Sydney are around cities is that they have been priced out. 1 in real terms overthe past five years. In sev- en cities it rose by more than half. Some of this is a rebound from the glo- Prime numbers bal financial crisis, which started with a Cities house-price index, latest Under/ Under/ overvalued overvalued housing bust. Prices in our cities fell by an Real terms, Q1 2011=100 % change on against % change on against average of 22% in real terms, peak to 1 year 5 years income* 1 year 5 years income* trough—in Dublin by 62%, and in San Fran- Berlin 2011 13.2 63.1 na Lisbon 2011 4.7 17.9 na cisco by 42%. But they have since risen by 1995 2018 2018 an average of 56%, in real terms, from their Copenhagen 12.9 45.1 +48% New York 4.5 16.2 +4% lowest points. In 14 cities prices are above their pre-crisis peak—by an average of 45%. Hong Kong +94% Zurich +22% Before the crisis, city and national 12.6 39.3 1.0 14.5 prices broadly rose in tandem. They fell to- gether, too, after the bust. But when they Vancouver 12.3 60.4 +65% Auckland -0.2 56.4 +75% started to rise again, they did so on average twice as fast in our cities as nationally. Dublin 11.7 78.5 +25% Tokyo -0.3 4.1 -8% Moreover, according to the IMF house- price inflation in capital cities is increasing- Amsterdam 10.6 54.4 +49% Milan -0.6 -9.0 +1% ly synchronised. 1995 1995 2018 To gauge whether house prices reflect 2018 fundamentals or froth, The Economist has Brussels 10.1 18.9 +67% London -1.2 39.6 +59% compared them with rents and median household incomes. If prices rise faster in Singapore 8.9 -3.1 -3% Shanghai -1.2 52.5 na the long run than the revenue a property could generate or the earnings that service San Francisco +27% Stockholm +38% mortgages, they may be unsustainable. Or, 8.2 49.1 -1.8 41.0 at least, incomes or rents will eventually have to rise. Madrid 7.0 18.4 +15% Sydney -2.7 54.8 +50% Takingthe average ratio overthe past 20 years (or more if data exist) as “fair value”, Paris 5.8 6.3 +70% Oslo -12.2 31.6 +53% 1995 1995 national house prices in Australia, Canada 2018 2018 and New Zealand have been more than 20% above fair value compared with in- Sources: Bank for International Settlements; Economist Intelligence Unit; Nomisma; *Relative to long-run median Thomson Reuters; vdpResearch; Zillow; national statistics; The Economist disposable household income come and 30% above fair value compared Financial Era Advisory Group 62 Finance and economics The Economist August 11th 2018

2 And cities are becoming less welcoming to builds with population growth (an imper- prices, says Liam Bailey of Knight Frank foreign capital, too. Vancouver has made it fect measure, since household composi- Global Research, a property consultancy. harder for foreigners to buy property. Aus- tion may change, but the best available) Cheap money has also lowered bond tralia has increased property-transaction suggests a shortfall across ten of our cities yields, pushing investors into other assets, taxes for non-residents. New Zealand is of28,000 homes a year in the past decade. including property. As central banks tight- considering a ban on foreigners buying But the calculus here, too, may be en, servicing a property loan will become property. Tighter capital controls in China changing. Prices seem to have climbed more expensive and fewer investors will add to the squeeze. high enough to encourage new supply. seekalternatives to fixed-income assets. Second, planning restrictions, local London added 40,000 homes last year— London, vulnerable because of Brexit, campaigns against new developments and the most for decades. New-builds have may be a bellwether. Agents say develop- developers sitting on land they think will added almost a fifth to Sydney’s stock of ers have started to offer discounts of as rise in value have conspired to make new apartments in the past three years. much as 10% to close sales. As demand housing scarce. In the five years to 2016 Finally, loose monetary policy since the weakens, supply strengthens and mort- London’s population grew almost twice as financial crisis has made mortgages ex- gage rates rise, the bull run in global cities’ fast as its housing stock. Comparing new- tremely cheap. This has “super-charged” housing may be drawing to an end. 7 Buttonwood Triple-B movie

Why the largest category ofAmerican corporate bonds is a notch above junk Y HIS own account Christopher Hitch- returns. Investors dislike volatility. So a leveraged buy-outs of listed companies. B ens, an author who died in 2011, was a firm’s share price should in principle de- Since the financial crisiscorporate-debt is- poor student. He left Oxford with a third- cline as it takes on more debt, leaving its suance has accelerated, says Adam Rich- class degree. This was not for want ofabil- overall financial value (the sum of its debt mond, an analyst at Morgan Stanley. Low ity. Hitchens would become a prolific es- and equity) unchanged. yields on government bonds as a result of sayist and fearsome debater. Rather, it quantitative easing have drawn investors was a choice. His tutors warned him Grade deflation into riskier sorts of paper. Companies about neglecting his studies. But he pre- The theory simplifies reality to illustrate a have seized on this demand as a further ferred to divide his time between his so- truth—a firm’s worth is ultimately its cash- subsidy to debt. The number offirms issu- cial life, political protests, books (other flows. In the real world, there are benefits ing bonds has increased by two-thirds in than the prescribed ones) and lively de- to using debt. A big one is that interest costs the past decade, according to PIMCO, a bates with other thinkers. are tax-deductible. This tax shield is in ef- fund manager. As Hitchens’s counterexample dem- fect a subsidy to debt finance. Debt also has No doubt some firms will discover onstrates, it is possible to regret the oppor- costs. A high interest burden can lead to they have issued too much. It is of some tunities missed while striving for top missed opportunities or a damaging bank- comfort that the ratio of corporate debt to grades. It is a lesson that many of Ameri- ruptcy. Each firm has to make a trade-off GDP is barely higher than its previous cy- ca’s biggest companies have grasped. At between the costs and benefits. Capital- clical peaks, in 2000 and 2008. Bond fi- one time, the sort of company that could goods firms may plump for low debts and nance has in part displaced bank finance. tap the bond market for capital would be a solid credit rating to show they will be But if banks are less exposed, investors given an A-grade as a matter of course. around to honour their warranties. Tele- are more so. For now, strong GDP growth These days the typical corporate-bond is- com companies, which have more stable is a balm. A recent report by S&P Global, a suer has a credit-rating of BBB, only a earnings, are more likely to gear up. credit-rating agency, plays down the risk notch above a junkrating (see chart). As the corporate-bond market has ex- of a rash of downgrades to junk. Firms That might seem to imply that busi- panded, new categories offirms have been might simply choose to buy fewer of their ness has become less efficient orlucrative. able to take advantage of cheap debt fi- shares backto preserve their BBB rating. Yet profits have never been higher as a nance. The taboo on issuing lower-grade Even so, a recession will come sooner share of GDP. In fact, for much of cor- debtbecame weakerin the 1980safter“cor- or later. The profits of leveraged firms will porate America a BBB rating is the conse- porate raiders” used junk bonds to finance be damaged, which will in turn hurt con- quence of a financial strategy. Many es- fidence. Downgrades and defaults will tablished firms have chosen to load up on follow, astheyalwaysdo. The process will debt to buy backtheirown shares in order BBB King be more drawn-out than usual if, as to boost shareholder returns or, more re- Face value of US corporate-bond debt seems likely, there proves to be a shortage cently, to pay formergers. By rating category, June 30th 2018, $trn ofbuyers fora fresh supply ofjunk. To understand why, it helps to start 3.0 For now the market is stable. But cor- with a bit of textbook finance that says porate credit is an asset class to be wary of 2.5 share buy-backs are pointless. According BBB+ in a maturing economic cycle. In good to a theory proposed in 1958 by Franco 2.0 times there seems little prospect that buy- Modigliani and Merton Miller, a firm’s ers might dry up. But they will. The best capital structure—its mix of equity and 1.5 time to buy corporate bonds is early in an BBB debt finance—has no effect on its value. 1.0 economic recovery, when downgrades Debt has first call on profits; shareholders 0.5 and defaults are still under way. There are get what is left over. Debt is thus less risky BBB- likely to be more bargains than usual next for investors and a cheaper form of fi- 0 time. If companies no longer need to AAA AA A BBB BB B CCC-C nance for companies. The more debt a strive for an A-grade, all the more reason firm has, the more volatile are its equity Source: Standard & Poor’s forinvestors to do their homework. https://t.me/finera The Economist August 11th 2018 Finance and economics 63 Free exchange Mangonomics

Whyis macroeconomics so hard to teach? of consumption (or, more precisely, not buying new consumer goods with income earned from production). In macro, someone who spends a fortune on a house is savingeven ifthey have emp- tied theirbankaccountto do so. The term can be so confusing that Mr Rowe thinks it should be banished from the discipline. More difficulties, Mr Rowe suggests, follow from the fact that macroeconomics is a bit “weird”. For him, the discipline’s funda- mental question is the one broached by Jean-Baptiste Say 200 years ago: does supply create its own demand? The answer, which is often no, is odd. Why do people go to the trouble of pro- ducingand marketingstuff(therebyaddingto supply) if notto ob- tain equally valuable goods with the proceeds (thereby adding to demand)? Because students take recessions forgranted, they may not realise how peculiar they are. Professors may recognise the strangeness. But they sometimes struggle or neglect to explain it. Mr Rowe did not encounter Say’s law explicitly until well into graduate school. As a monetarist, he thinks the explanation for recessions lies in an excess demand for money, the medium of exchange. To il- lustrate the point he has built a “minimalist” macroeconomic model, the smallest he can get away with. Its aim is to show what AST month NickRowe had a bad dream. It was five minutes be- is required for a recession and, by what it leaves out, what is not Lfore the first class ofthe autumn term at Carleton University in necessarily required. Inevitably, it involves fruit. Ottawa, where he has long taught macroeconomics. But he could In this model half the people have apples, the other half ba- not find the classroom. Then he woke up and remembered with nanas. The two groups also have mangoes, but not as many. The reliefthat he had just retired. apple-sellers would like more bananas; the banana-sellers more Learning macro is a source of anxiety for many students. apples. But what they all want most is more mangoes. Teaching it can give their professors the jitters, too. The subject is People in this world can clearly gain from trading apples for notoriously difficult to explain well. During his 37 years at Carle- bananas. And in a barter economy that is exactly what happens. ton Mr Rowe remained, by his own admission, “fairly low down But what if one of the fruits—mangoes—serves as the medium of the totem pole” as a researcher. But he became a thunderbird at exchange? What if apples and bananas can be traded for man- conveying macroeconomic intuition. In the past decade this goesbutnotdirectlywith each other? Thisparallelsthe real world served him well in his second intellectual career, contributing to where goods are typically traded formoney but not each other. Worthwhile Canadian Initiative, an economicsblog. Many a con- In this scenario less fruit will change hands and potential troversy has benefited from one ofhis ingenious analogies or nu- gains from trade will be lost. People are unwilling to buy much merical parables, usually involving some kind offruit. with their mangoes, which they hoard. As a result they are them- Professors may find themselves ill-prepared for the macro selves unable to sell much of their fruit for the mangoes that classroom. To become academics they had to answer erudite everyone else issimilarlyhoarding. This, accordingto MrRowe, is questions posed by more senior members of the discipline. To what a recession looks like. An excess demand forthe medium of become good teachers of introductory macro, they have to give exchange depresses trade. Workers are unable to sell their labour clearanswers to muddled students. That requires an intuitive feel formoney, partly because they (and everyone else) are unwilling for the subject. It is not enough to crankthrough the equations. to part with their money forthe fruits ofanyone else’s labour. Indeed, Mr Rowe attributes part of his success as a teacher to Monetarists think the medium of exchange is distinctive for a his shortcomings as a mathematician. He quotes Joan Robinson, variety of reasons. With any other good or asset, when people another clear expositor of macroeconomics: “I never learned want more they must buy it. If they want more money, however, maths, so I had to think.” Because the answers did not leap out at theycan simplyrefrain from buyingotherthings, a drop in spend- him from the equations, he had to dwell on the economic behav- ing characteristic of a recession. Similarly, if any other asset or iour underneath the algebra. good is in hot demand, its price will rise until the demand is Macroeconomics is difficult to teach partly because its theo- quenched. But because everything is priced in money, it has no rists (classical, Keynesian, monetarist, New Classical and New price of its own. It can rise in value only if the price of everything Keynesian, among others) disagree about so much. It is difficult else falls, a deflationary pressure also characteristic ofrecessions. also because the textbooks disagree about so little. To reach the widestpossible audience, most cover similarmaterial: a miscella- The hidden fundamentals of macro ny of models that are not always consistent with each other or You cannot teach macro well without a strong intuitive feel for even with themselves. The result is that many professors must the subject. But the best way to gain a feel for the subject is to teach things they do not believe. teach it. “I learn something every time,” Mr Rowe says. On Rate Professors can also sometimes forget that macroeconomics is my Professors, a website, one student paid him the ultimate tri- full of faux amis: words that mean something different in every- bute: he made an 8.30am class worth attending. And how, at the day speech. “Saving” is an example. In ordinary life, it means the end ofhis longteachingcareer, did his students show their appre- opposite of spending. In macroeconomics it means the opposite ciation? Naturally, bygiving him an apple and a banana. 7 Financial Era Advisory Group 64 Science and technology The Economist August 11th 2018

Also in this section 65 A record flight for a drone 66 Probing the sun 66 Millipedes as medicine

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Underwater senses through water, to find out how a vortex street laid down in front ofit affected its be- Navy seals haviour. They aligned theirmodel whisker so that it was edge-on to the direction of travel, just as a real one would be. This caused it to cut through the water like a knife blade. Currents at right angles to its direction oftravel, such as those created by vortices, exerted forces on its flat surfaces. Pinniped whiskers provide a model fora new generation ofsubmarine detectors These caused it to skirt around those vorti- ISION is useless in murky water. To way at Jeju National University in South ces like a skier negotiating moguls, thus vi- Vdeal with that deficiency dolphins Korea and at Cleveland State University. brating in a way that it would not when have evolved sonar. They emit clicks and Seals can pickup the trail offish such as presented with a laminar current. interpret the echoes to find their prey. But herring when blindfolded and wearing Bigger moving objects generate bigger not all marine mammals are so equipped. earmuffs. Cover their whiskers, though, vortices, so the amplitude of this vibration Seals, for instance, have no sonar, yet that and supper eludes them. The bases of seal changed with the size of the object being doesnotstop them findingdistantmeals as whiskers are rich in nerve cells, making followed. The frequency of the vibration effectively as dolphins can. This puzzled re- them as sensitive as human fingertips. But changed with the object’s speed. Assum- searchers for years, until they discovered that is not all there is to it. Under a micro- ing that this also happens with real whis- that the secret lies in the animals’ whis- scope, seal whiskers are not circular when kers, it would permit a seal to assess its tar- kers—which they are now trying to copy, to sliced through, as might naively be expect- get’s bearing, size and velocity. develop novel underwater sensors. ed. Instead, they have an oval cross-sec- In 2016, with help from researchers at An object moving through water leaves tion. Moreover, those whiskers’ surfaces Singapore University of Technology and a series of miniature whirlpools in its have an elaborate undulating geometry. Design, Dr Triantafyllou built on these dis- wake. This trail is called a Karman vortex coveries by attaching an artificial whisker street. And that is what seals, using their Oh my ears and whiskers! to a membrane that, when distorted, gen- whiskers, follow. As Michael Triantafyllou This complex shape looked familiar to Dr erated a pulse of electricity. This arrange- of the Massachusetts Institute of Technol- Triantafyllou and his team. They had ar- ment proved sensitive to the slightest of ogy (MIT) observes, “Youcan set a harbour rived at something similar when working water movements. The next stage is to un- seal loose to follow a towed fish, and even on mooringlinesforoffshore gasrigs. Their derstand what the pulses mean. 30 seconds later they will be able to follow purpose was to stop those lines vibrating That is a challenge Dr Calhoun, at Vir- the exact track, whether it’s straight or zig- as water flowed past, a phenomenon simi- ginia, has already taken up. Recruiting a zag or circular.” lar to telephone wires or power cables trained seal for the task, he and his col- Dr Triantafyllou and his colleagues at humming in the wind. Dr Triantafyllou leagues attached a recording device to one MIT’s Centre for Ocean Engineering are confirmed his suspicions about the simi- of the animal’s whiskers. They found that one of several groups studying how seals larity when he tested a scaled-up 3D- even following the simplest object gener- do this. Arival team, led byBen Calhoun of printed model of an artificial seal whisker. ates several types ofvibration in this whis- the University of Virginia, and involving This, too, failed to vibrate in what are ker. And a seal has dozens of whiskers. the University of California, Santa Cruz; known as laminar-flow currents (that is, Seals’ brains can make sense of all this the Naval Undersea Warfare Centre Divi- those without eddies in them). input. Dr Triantafyllou hopes to do like- sion atNewport, Rhode Island; and Woods Paradoxically, this insensitivity to lami- wise using artificial intelligence (AI). He Hole Oceanographic Institution, has re- narflowincreasessensitivityto vortices, as and his colleagues will employ a form of cently completed a three-year investiga- Dr Triantafyllou proved. He and his team AI called deep learning. The workinvolves tion ofthe matter. Other projects are under towed an enlarged artificial whisker training appropriate software on thou-1 https://t.me/finera The Economist August 11th 2018 Science and technology 65

2 sands of different inputs from an array of find shoals ofherring. lers driven by electric motors. Airbus says artificial whiskers. Once trained, such soft- A vortex detector would have civilian the craft are fitted with batteries which use ware should be able to pick out patterns in applications too. A static detector would an “advanced chemistry” and are re- the data and so learn to recognise the trails be able to measure turbulent currents charged by “novel” solar cells that cover left by objects of different types and sizes, flowing past it. Such a system, Dr Trianta- their wings. But it will provide no other de- travelling at different speeds. fyllou observes, might have been useful tails for fear of tipping off rivals, of whom Dr Triantafyllou’s team’s purpose is to during the Deepwater Horizon oil spill in there are several. (Though one potential create a whisker-based sensor for under- the Gulf of Mexico, in 2010. Then, vortex competitor, Facebook, closed its own high- water robots. This will detect the wakes of sensors could have helped map the altitude-solar-powered-drone operation natural objects, such as fish and marine plumes of oil released, helping predict the earlier this year with a view to using mammals, and artificial ones, such as oth- spread of the spill. Nor are applications re- drones built by others to provide internet er robots, surface ships and submarines. stricted to marine settings. Appropriate access in remote regions.) At the opening Not surprisingly America’s armed sensors might measure liquid flowing tur- of the Farnborough factory, in July, the forces are taking a keen interest in all this. bulently through pipes and air flowing wings ofthe three Zephyrs then on the pro- As well as the Naval Undersea Warfare similarly over aircraft wings. duction line were carefully covered, in or- Centre’s involvement, some of the re- Extending vortex sensors into the air der to avoid prying eyes. search has been supported by the Office of brings to mind another possible zoological Rather than selling the craft outright, Naval Research. The navy hopes that vor- analogy. Nightjars (which are, as their Airbus plans to use them to conduct partic- tex sensors may meet the challenge of name suggests, nocturnal), prey on flying ular jobs for particular customers, says Ni- spotting submarines, which are getting insects, especially moths. The assumption gel Chandler, head of sales for the opera- ever quieter and harder to find with sonar. has always been that these birds have par- tion. Acraftthusleased outmightengage in A submarine leaves a farbigger trail than a ticularly good night vision. What they defi- Earth-observation tasks such as maritime fish, and that trail can persist for hours, nitely have, though, are arrays of whiskers surveillance or detecting forest fires—or it even days. Fleets of small, bewhiskered ro- around their beaks. Time, perhaps, to get might, by travelling in small circles, act as bots might thus be able to track otherwise the microscopes out again, to see exactly an internet node or as a platform for mo- undetectable submarines as easily as seals what shape these whiskers are. 7 bile telephony. Moreover it could, if re- quired, be moved around in mid mission, for example to act as an observation plat- Aerospace form for a disaster area. That would both be much simpler than repositioning a sat- A breath of fresh air ellite and cheaper to operate. Airbus will run its Zephyr service from a base at Wyndham, Western Australia, that will open later this year. This is sur- rounded by a large area of unrestricted air- space and has reliable weather for land- FARNBOROUGH ings and take-offs (like landings, these also Meet Zephyr, a high-flying drone that can do the workofa satellite involve people giving the craft a helping N AUGUST 6th a flimsy-looking pilot- Zephyrs fly in the stratosphere. During hand). Depending on conditions, a Zephyr Oless aircraft, the Zephyr S, came slow- daylight hours they cruise at an altitude of on the move can travel between 1,000km ly in to land at an undisclosed location in about 21km. At night, when solar energy is and 2,000km a day, so in principle only Arizona, and wascaughtbya group of peo- unavailable and they must rely solely on this one base is needed to serve the world. ple jogging along beside it. The reception their batteries, they make a slow but pow- Airbus will, though, offer a portable committee was needed because the craft, ered and controlled descent to 16.7km. ground-station and launching services in which weighs less than 75kg, lacks an un- That, though, is still well above trouble- other parts of the world, for those custom- dercarriage—or, indeed, anything else that some weather, and also clear of commer- ers who do not wish to wait fora craft to ar- would add unnecessary weight. The cial aircraft. rive under its own (or, rather, the sun’s) touchdown meant the Zephyr S had set a They are powered by a pair of propel- power from Australia. 7 new flight-endurance record fora drone, of 25 days, 23 hours and 57 minutes. The point of doing so was to show that solar-pow- ered aircraft of this sort can compete with satellites in the markets for Earth observa- tion and telecommunications. This has led some people to dub them “pseudo-satel- lites”. The idea is that eventually they will stay aloft formonths. The previous endurance record for drones, of just over14 days, was set in 2010 by the Zephyr 7, an earlier version of this aircraft. The Zephyr 7 was developed by QinetiQ, a British defence company. In 2013 QinetiQ sold the Zephyr programme to Airbus, a European aerospace firm. Airbus has now built, at Farnborough, in Britain, a factory to make them. The model S, with a wingspan of25 metres, will soon be joined by a bigger, more advanced version, the model T. Dawn’s early light Financial Era Advisory Group 66 Science and technology The Economist August 11th 2018

Astronomy Wild medicine Set the controls for Scratching an itch a part of the sun Mangled millipedes can treat threadworm infestations ANY animals are herbalists. Preg- skin. Pieces ofthe puzzle started to come Anew probe will studywhythe sun’s nant elephants eat particular leaves together, though, when she and her atmosphere is hotterthan its surface M to induce the births oftheir calves. Birds colleagues noticed, by analysing the NTIL February, when the first of keep bloodsucking bugs at bay by weav- lemurs’ faeces, that times ofpeakmilli- USpaceX’s Falcon Heavy lifters was ing insect-repelling plants into their nests. pede use coincided with threadworm launched, the world’s most powerful rock- Fruit flies lay their eggs on fermenting infestations in the lemurs’ guts. et was the Delta IV Heavy. On August 11th, matter that is rich in ethanol, which Threadworms have the repulsive if all goes according to plan, one of these drives away parasitic wasps. There is, in habit ofslithering out oftheir host’s anus will take offfrom Cape Canaveral carrying other words, a whole pharmacopoeia of at night and laying their eggs in the soft a craft called the Parker Solar Probe. botanical products out there. Examples flesh nearby.The site where the eggs are This probe, as its name suggests, is de- ofanimals employing the products of laid itches. The infested individual either signed to get close to the sun. The rules of other animals formedical purposes are, scratches or licks the site, gets the eggs on orbital mechanics mean that requires a lot by contrast, rare. But one case has just its fingers or tongue, and ultimately ofenergy. Hence the need fora launcher as come to light. Louise Peckre ofthe Ger- either swallows them or passes them on powerful as the Delta IV Heavy. A combi- man Primate Centre, in Göttingen, has to others during grooming sessions. nation ofrocketthrustand a seriesof gravi- found that red-fronted lemurs treat Human beings, who are frequent tational “assists” from Venus will put the threadworm infestations in the gut and hosts ofthreadworms, can deal with probe in a long, looping solar orbit. At its around the anus with millipede juice. them using drugs such as benzimidazole, closest, it will fly within 6m kilometres of Unlike their fellow myriapods the which are similar in structure to ben- the nearest thing the sun has to a surface— centipedes, which are venomous, milli- zoquinone. Ms Peckre therefore suspects the top of the layer known as the pho- pedes have no chemical weapons. But that her lemurs are employing millipedes tosphere, which the naked eye perceives as they have chemical defences, particularly in lieu ofa trip to the pharmacy. the solar disc. That will bring it 85% closer benzoquinones. These can blind, burn to the photosphere than Mercury, the plan- and poison would-be predators, and also et closest to the sun, ever gets. act as insect repellents. It was in this This path will take it through the co- context, as she describes in a paper in rona, a shell of superhot plasma that sur- Primates, that Ms Peckre watched with rounds the photosphere and which is visi- fascination the habit ofsome red-fronted ble to the naked eye only during a total lemurs she had under observation in the solar eclipse. Flying through the corona is Kirindy Forest, in Madagascar, ofgnaw- no easy task. Even in Earth’s comparatively ing on benzoquinone-rich millipedes distant orbit, sunlight is powerful enough and rubbing the remains around their to mean spacecraft must have beefy cool- anuses, then swallowing them. She saw ing systems. Parker will endure sunlight six lemurs doing this and was left won- more than 450 times as intense. The craft dering, why? will therefore be shielded bya special insu- Some monkeys rub millipede juice lator—a slab of carbon-composite more onto their skin to ward offbiting insects, than 11cm thick. One advantage of its close so what she had seen was not completely encounters with the sun is that there will unexpected. But Ms Peckre’s lemurs were be no shortage of solar power to run its in- not behaving in a way that suggested struments. But its solar panels will have to repelling insects was their purpose. be cooled continuously by circulating wa- Lemurs’ anal regions are furry and are ter, the waste heat then radiated into space. rarely attacked by bloodsucking arthro- The Parker Space Probe is named after pods. Nor would swallowing dismem- Eugene Parker, an American astrophysicist, bered pieces ofmillipede seem likely to who studied the nature of the corona, and deter something that was attacking the Good news for lemurs. Bad for millipedes also ofthe solar wind (the steady stream of charged particles released by the corona). Both are in his robotic namesake’s sights. a hot one, so whatever is doing the heating temperatures. The balance, says Dr Coates, Though much investigated, neither co- must rely on something more complicated is thought to come from sound waves that rona nor wind is well understood. The sun than simple radiation or convection. Re- start in the solardepths and deposit energy is powered by nuclear fusion, a result of searchers have fingered two separate pro- in the sun’s outer layers. the crushing pressures deep in its core. cesses, says Andrew Coates, a heliophysi- The main mystery of the solar wind Here, temperatures exceed 15m degrees. cist at University College London. that the Parker probe will study is why it Farther out, they are lower. The photosph- One involves solar flares. These are blows so fast. By the time it leaves the sun, ere is a comparatively balmy 5,400°C. The magnetically driven eruptions of material it is travelling in excess of 400km per sec- corona, though, bucks this trend. The from the sun’s surface. The magnetic fields ond. This is faster than the speed of sound wispy plasma of which it is composed va- involved snap and twist into new configu- in the thin soup of particles known as the ries in temperature from 1m to 3m degrees. rations in a process called magnetic recon- heliosphere that suffuses the solar system. Exactly why remains a matter of de- nection. That releases energy, which ends Exactly how the solar wind attains such bate. The laws of thermodynamics dictate up in the corona. But not enough to ac- speeds is not understood, but once again that heat cannot flow from a cold region to count, by itself, for the corona’s scorching the process seems to occur in the corona. 7 https://t.me/finera Books and arts The Economist August 11th 2018 67

Also in this section 68 The history of opium 69 Icelandic fiction 69 Imagining war with North Korea 70 Ambition and anger in India

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Egypt after the revolution nos and button-down shirts. But, before the revolution, their intentions were diffi- Brothers, generals and suckers cult to discern. When Hassan al-Banna founded the group in 1928 he was fuzzy on whether it should be militant or peaceful, political or spiritual, democratic or au- thoritarian. Egypt’s dictators by turns per- secuted, embraced and tolerated the Broth- A foreign correspondent attempts to understand Egypt—a taskthat has confounded erhood. America, which lavishes military successive American governments aid on Egypt, followed their lead. N2005 a middle-aged Egyptian armyoffi- Opponents ofthe Brotherhood warned Icer arrived in Carlisle, Pennsylvania. Into the Hands of the Soldiers: Freedom foreign journalists that the group wanted While taking classes at the US Army War and Chaos in Egypt and the Middle East. to “Islamise” Egypt. But to Mr Kirkpatrick— By David Kirkpatrick. Viking; 384 pages; College, the officer, a devout Muslim, and your reviewer, a former Cairo corre- $28. Bloomsbury Publishing; £21 sometimes led Friday prayers at the local spondent—the Brothers said all the right mosque. During campus debates he took things. They advocated the separation of exception to those who claimed that politi- when he took over the paper’s Cairo bu- mosque and state, free expression and cal Islam was incompatible with democra- reau at the start of 2011. Weeks later Mr equality for women and non-Muslims. cy. In his final paper he argued that Arab Mubarak was toppled and the political or- These views were more liberal than those democracies must include Islamists, even der was thrown into disarray. In the years of mainstream Egyptians. Moreover, to “radical ones”. that followed, soldiers, Islamists, liberals avoid a backlash, the group said during the So when the Muslim Brotherhood, and the old elite jostled for power. None uprising that it would not seekmore than a Egypt’s main Islamist movement, won the could be trusted. third of parliamentary seats; later it said it country’s first free and fair elections in In his new book, “Into the Hands of the would not field a presidential candidate in 2011-12, the officer, Abdel-Fattah al-Sisi, Soldiers”, Mr Kirkpatrick describes these the polls following the revolution. seemed keen to work with the group. He tumultuous times in compelling detail. But when those elections came around, was appointed defence minister and The author is honest about how hard it the Brotherhood contested most of the quickly gained the trust of the new presi- was to interpret events, grasp the motives seats, winning nearly half and also the dent, Muhammad Morsi, a Brotherhood ofpeople such as MrSisi and MrMorsi and presidency. After his victory, Mr Morsi in- leader. Mr Sisi would show up at meetings predict the direction in which Egypt was stalled Brothers in powerful positions. with his sleeves rolled up and hands wet, heading. “I brought with me the standard Months later he issued a decree holding as though he had been washing himself Western assumptions,” he admits. “Almost himself above judicial review and pushed for prayer. Yet, less than two years later, he all of it was wrong.” But Mr Kirkpatrick, through a constitution opposed byliberals. ousted Mr Morsi, slaughtered hundreds of who dodged bullets and official harass- “We thought we were losing our country,” his followers and imprisoned what was ment, deciphered the mystery. The same one young Egyptian told The Economist. left ofthe Brotherhood’s leadership. cannot be said ofthe foreign powers, espe- Millions took to the streets in 2013 calling Egypt, where a quarter of Arabs live, cially America, that watched as Egypt’s de- for Mr Morsi to go. Egypt’s so-called liber- has always been something of an enigma. mocracy crumbled. als saw those protests as a rerun of the 2011 Despite the public’s disenchantment with revolution—another organic uprising; an- Hosni Mubarak, the long-term dictator, The Islamist riddle other chance for democracy, as they de- few predicted the revolution of 2011 that The Brotherhood was Egypt’s biggest puz- fined it. laid the groundwork for Mr Morsi’s elec- zle. “For a supposedly secret society, they They were nothing of the sort. Egypt’s tion and Mr Sisi’s subsequent coup. “Noth- were easy to spot,” writes Mr Kirkpatrick. liberals were not taking back the country— ing is going to happen in Egypt,” editors at Often middle-aged and middle-class, they the army was. A slow-motion coup had the New York Times told David Kirkpatrick kept their beards trimmed and wore chi- been in the works since Mr Morsi was1 Financial Era Advisory Group 68 Books and arts The Economist August 11th 2018

2 elected. Egypt’s generals did not even want democracy”, Mr Kerry tells the author. tween the substance’s medicinal virtue to recognise his victory. Mubarak-era “Over whatever number of years we have and its dangers is ancient. From their earli- judges duly dissolved the parliament. The put about $80bn into Egypt. Most of the est uses, opium and its cousins have both president’s own foreign minister, a non-Is- time, this is the kind of government they soothed and troubled people. Roman lamist, admitted to poisoning other gov- had—almost all ofthe time. And the reality herbalists used the drug to combat dysen- ernments against him, while the intelli- is, no matter how much I wish it was differ- tery, even as they warned against the gence services worked covertly to bring ent, it ain’t going to be different tomorrow.” “chilled extremities” and “laboured the Brotherhood down. The United Arab Today’s American administration does breath” ofoverdosing. Two thousand years Emirates, whose authoritarian rulers fear not even wish it were different. To them, later, a doctor anguished by the addictive democracy, especially if it has an Islamic Mr Sisi has said all the right things. He power of morphine reflected that no drug tint, funnelled millions of dollars to the wants to moderate Islam and reform the “has been so great a blessing and so great a supposedly grassroots opposition to Mr economy. He calls Mr Trump “a unique curse to mankind”. Morsi. Much of it went through Mr Sisi’s personality that is capable ofdoing the im- Ms Inglis untangles these contradic- defence ministry. possible”. Mr Trump, in turn, celebrates Mr tions with gusto, guiding readers from The coup befuddled America. As Mr Sisi’stough leadership and callshim “a fan- primitive Neolithic experiments with pop- Morsi teetered, “Washington did not speak tasticguy”. Like so manyothers, the Ameri- pies to the modern “war on drugs”. Her with a single, credible voice,” writes Mr can president seems unconcerned that au- narrative is propelled by savagery and Kirkpatrick. Barack Obama, then Ameri- tocracy is again breeding misery and greed. In 1621the Dutch helped secure trade ca’s president, opposed the takeover and extremism in Egypt. 7 in the East Indies (which included opium) leant on Mr Morsi to make concessions to by murdering and enslaving13,000 people save his skin. (Mr Morsi did invite the op- on the islands east of Java. Two centuries position for talks—they declined.) But The story of opium later Victorian merchants got rich by forc- many American officials seemed resigned ing the “vile dirt” into China, spawning an to, or even encouraged, a military power- High and mighty estimated 12m addicts. grab. Chuck Hagel, then secretary of de- Yetifthe opium trade led to violence, vi- fence, told MrSisi: “I don’tlive in Cairo, you olence has also led to the development of do. You do have to protect your security, innovative applications for opium. The sy- protect your country.” John Kerry, then sec- rette, a sealed single-use dose of painkill- retary of state, said later that the generals ing morphine, emerged from the mud and Milk of Paradise: A History of Opium. By “were restoring democracy”. guts of the first world war. Severely Lucy Inglis. Pegasus Books; 448 pages; American officials couldn’t get their wounded troopsin Afghanistan have been $28.95. Macmillan; £25.00 facts right. James Mattis, then the com- treated using lollipops laced with fentanyl, mander of American forces in the region, UNTINGDON, West Virginia, is dying. a powerful synthetic opioid. blamed the Brotherhood alone for Egypt’s HAs a share of the town’s population, Ms Inglis does not just trace the arc of troubles. He laterclaimed that the constitu- overdoses kill more than ten times the history. She wallows in the exotic details of tion backed by Mr Morsi had been “reject- American average. Startling numbers of her story—from the sharpened bamboo ed immediately by over 60% of the peo- babies are reportedly addicted to opioids the Chinese used to fight British interlop- ple”. In fact, about two-thirds of voters at birth. The country at large is suffering, ers, to the heroin pills“flavoured with rose- approved the charter, which is similar to too: 42,000 Americans died from opioid water and coated with chocolate” that the one Egypt has now. Mr Mattis and Mi- overdoses in 2016, compared with 58,000 were once sold over the counter. Remark- chael Flynn, then head of the Defence In- fatalities in the Vietnam war. This is not able personalities scamper past. Ralph telligence Agency, lumped the Brother- how things were meant to be. Scientists de- Fitch, an Elizabethan adventurer and opi- hood in with the jihadists of al-Qaeda and veloped opioids to dull pain, not cause it. um trader, returned with tales of the king Islamic State, even though the Brothers re- As Lucy Inglis recounts in her sweeping of Thailand and his pet white elephants, peatedlycondemned those groupsand op- new history of opium, the tension be- all “dressed in cloth ofgold”. Antoine Gué- posed violence. Both men were given top rini fought for the French resistance before jobs by Donald Trump. making it big in the heroin business. There It is true that the roots of al-Qaeda and are energetic descriptions of drug culture, other jihadist groups can be traced back to from the Romantic poets to David Bowie. Egyptian jails, which began filling with re- Sometimes “MilkofParadise” reads like sentful Islamists in the 1960s. Now the jails fiction. Occasionally the author over- are bursting again, so much so that new crowds this narrative with incidental char- ones have had to be built. The Islamists acters; in whatisa panoramicsurvey, she is have been joined by liberals, who quickly prone to the odd tendentious claim. None- soured on Mr Sisi’s inept and draconian theless, thisisa deeplyresearched and cap- rule. Egypt now holds about 30,000 politi- tivating book. The final chapters, in which cal prisoners, including many journalists. Ms Inglis escapes the archives, are espe- Your reviewer was berated by the foreign cially compelling. ministry for, among other things, referring Her interviews provide rich insights to Mr Sisi’s takeover as a coup (a label into the modern heroin trade. Asked if his America refused to apply). Mr Kirkpatrick family grows poppies, one Afghan farmer had it worse. Talk-show hosts denounced is blunt. “Sure. Who doesn’t?” A study of him on air as an enemy ofthe state. the online drug world is similarly reveal- The coup also fuelled a jihadist insur- ing. One forum helped addicts avoid dan- gency in Sinai that continues to torment gerous, fentanyl-spiked heroin. The Silk Egypt. Yet American officials, citing re- Road website facilitated over a million newed “stability”, argued that the Brother- drug transactions in just two years. Like hood’s overthrow was the least bad op- opium itself, Ms Inglis discovers, the inter- tion. The alternative “wasn’t Jeffersonian Consider the poppies of the field net has been both a blessing and a curse. 7 https://t.me/finera The Economist August 11th 2018 Books and arts 69

Imagining nuclear war Under a mushroom cloud

The 2020 Commission Report on the dents Donald Trumpand Moon Jae-in, North Korean Nuclear Attacks Against the plus Kim Jong Un and Jim Mattis, Ameri- United States: A Speculative Novel. By ca’s defence secretary.Again, they mostly Jeffrey Lewis. Mariner Books; 304 pages; say and do things very like those they $15.99. WH Allen; £9.99 have said and done before. The harrow- ing tales ofvictims are similarly authen- PEN-SOURCE intelligence is the art tic; Mr Lewis has adapted many ofthem Ooflearning things by procuring and from accounts ofsurvivors ofHiroshima analysing unclassified (ifnot always very and Nagasaki. The book’s American accessible) evidence. Jeffrey Lewis, an publication came one day after the anni- expert on arms control and disarmament versary ofthe Hiroshima bombing. at the Middlebury Institute in Monterey, Fans of“Arms Control Wonk”, Mr California, is a keen exponent ofthis Lewis’s podcast, will expect notes of Icelandic fiction craft. In “The 2020 Commission Report” absurdist and scornful humour; they will he applies it to the near future. not be disappointed. More surprising is An isle full of The fiction is framed as an American that, in a sense, the bookis optimistic government report, published in 2023, about American democracy.The devas- noises into the loss of3m lives—1.4m ofthem tating blow that it envisages might undo Americans—to North Korean nuclear even the sturdiest polity.Given the exist- weapons in March 2020. Like the reports ing rifts in American society at a time of ofthe Roberts Commission on Pearl relative peace, it is easy to see the recrim- CoDex 1962. By Sjon. Translated by Victoria Harbour and the 9/11Commission, it inations and repercussions after a nuc- Cribb. Sceptre; 527 pages; £18.99. To be finds that the disaster could have been lear catastrophe capsizing its politics published in America by MCD in September; $30 avoided, but that the evidence ofthe altogether. Yet Mr Lewis’s premise de- INCE the age of the medieval sagas, the escalating threat was missed—because pends on America’s institutions continu- Sstories told by Icelanders have helped the people in charge were misreading the ing to function in recognisable form. That enthrone their lonely mid-Atlantic island world they lived in. Mr Lewis’s message implies a bedrockfaith in the resilience of as a narrative superpower. From this is that anyone who believes that either the republic—more, perhaps, than sober- “northern periphery”, arguesthisbewitch- supine summitry or threats ofa “bloody ly assessed open-source intelligence ing trilogy of short novels, a yarn-spinner nose” are good responses to North Ko- might warrant. must deploy “every trick in the book” to rea’s nuclear programme is guilty ofjust “think your way into human history”. such a misreading today. Poet, novelist and lyric-writer for his com- The imaginary sequence oferrors—in patriot Bjork, Sjon commands more tricks software, communication, tactics, in- than most. Born, as Sigurjon Sigurosson, in telligence and politics—that leads to the Reykjavik in 1962, the prolific author has spasm ofmass murder is chillingly plau- beguiled audiences abroad with shape- sible. This is largely because, as the shifting fictions such as “The Blue Fox”, book’s notes make clear, most ofthem “From the Mouth of the Whale” and have already happened in real life. Jets “Moonstone”. His stories compound the have indeed strayed offcourse because dreamscapes of Surrealism, the marvels of ofsoftware glitches; airliners have been Icelandic folklore and a pop-culture sensi- taken formilitary probes ofair defences bility into free-form fables. Call it magic re- and shot down. Decision-makers have alism under Nordic lights. assumed that actions by one ally were “CoDex 1962” gathers three linked sanctioned by another; America has tried works—published in Icelandic in 1994, 2001 to kill its adversary’s leaders on the eve of and 2016—into one volume. In his own war. The commander-in-chiefhas voice, interspersed with episodes from tweeted threateningly in ALL CAPS. other lives, Sjon’s protagonist Jósef Loewe Though some ofthe characters in the first recounts the “love story” of his father bookare invented, its cast includes Presi- Leo’s meeting with Marie-Sophie, a cham- bermaid, and Leo’s escape, as a persecuted Jew, from Nazi Germany. Leo is a mystical last enters the world—on the same day as ments of fantasy, this third “science-fiction alchemist; Jósef voyages to Iceland in 1944 the author. However, the genetic muta- story” draws on the actual scheme of a ge- as a clay doll that lacks the breath of life. Or tions spread by fallout from those thermo- nomics corporation that sought to map the so he claims. The middle section, a “crime nuclear “war drums” render him an inval- entire nation’s biological data in a “Bookof story”, sees Leo settled in late-1950s Reykja- id with a rare bone disease. Either an Icelanders”. In Sjon’s telling, a similar firm vik as a ceramics decorator, embroiled in a emissary from an occult domain, or mere- hopes to yoke together “genetic purity and murder plot with a “philatelic werewolf”. ly “a disabled man who had trouble telling massive profits”. Jósefstill waits to be born. the difference between fiction and reality”, Jósef, and Sjon, detestall pretence to pu- In August1962, while “the vault ofheav- Jósef commits his life and dreams to tape rity. The villains of“CoDex1962” believe in en rumbled” with nuclear tests, Jósef at as part of a research project. For all its ele- the power of isolation, and segregation. Its 1 Financial Era Advisory Group 70 Books and arts The Economist August 11th 2018

2 heroes cross boundaries: between myth er satirical fantasias—whether Laurence transporting cattle on northern highways. and history; reason and magic; male and Sterne’s “Tristram Shandy” or Günter Pawan Poojary, 19, merrily duped Ameri- female (Jósef dictates his testimony to Grass’s “The Tin Drum”—sometimes feel cans through phone-scams, partly for the Aleta, a trans Ukrainian woman). Sjon’s laboured. In contrast, Sjon’s finale anchors sheerjoyofdeceivingpeople who “consid- tall tales celebrate such cultural contami- his ingenuity to a moving plea for solidar- ered themselves superior to the rest of the nation. Their style skips gleefully among a ity. Hrolfur, the entrepreneurial geneticist, world”. (Eventually his conscience drove dozen genres, “visionary poems” to “futur- yearns to “soar heavenwards into a world him to tip offthe American authorities.) istic films”, “folktales” to “gossip columns” where imagination is the only law of na- That these young Indians are “dream- (all namechecked by Jósef). Victoria Cribb, ture that matters”. “CoDex 1962” applauds ers” is incontrovertible; the idea that they the sure-footed translator, keeps pace with the aim, but distrusts his means and mo- are “changing the world”—as Ms Poonam’s every swerve. tive. That wild flight remains a mission not subtitle asserts—is more questionable. But In the opening segment, echoes of oth- for scientists but for story-tellers. 7 her book offers valuable insights into the politics of identity and resentment that have gripped much ofthe world. It demon- Young people in India strates, for instance, that the perfect past of nostalgia need not lie within living memo- Dreams and nightmares ry. Nor is that fantasy restricted to the mid- dle-aged. Many devotees of Mr Modi want to bring back the glories of pre-colonial, pre-Islamic Hindu kingdoms from centu- ries before they were born. Greatness is a point forever receding in the distance, and yet somehow within reach. A study ofIndia’s new generation finds its members as angry as they are ambitious Howdid thispoliticsofangergo global? INAY SINGHAL and his brother, Par- A clue can be found in the structure of this veen, co-founded WittyFeed, a content- Dreamers: How Young Indians are book. “Dreamers” begins and ends with V By Snigdha factory that churns out clickbait, as a Face- Changing the World. stories of young Indians deploying assets Poonam. Harvard University Press; 288 book page in 2011. By 2016 it had its own they acquired from the West against credu- pages; $17.95. Hurst; £14.99 website, 150 writers around the world, a lous Americans: content-free listicles and valuation of $30m and a big HQ in Indore, call-centre databases. Silicon Valley’s so- a third-tier city about halfway between up the young, isprime minister. He will put cial-media platforms feature throughout Mumbai and Delhi. Mr Singhal has bigger those miscreants in their place. as the foundation of young Indians’ social aspirations yet; for a while he thought he Ms Poonam travels to small towns, lives. They spend their leisure time staring might aim to become prime minister. And largely in Hindi-speaking parts of north into their phones. The part this technology why stop there? “I want to lead human- and central India, and repeatedly finds the has played in the rise of populism in the ity…I want to lead Mars,” he tells Snigdha same mix ofaspiration and anger. At a mo- West has been much discussed. That its Poonam, an Indian journalist. tivational class in New Delhi, 32-year-old spread in other parts ofthe world has been “Dreamers: How Young Indians are Shahnawaz Chaudhary, who wants to be- coterminous with that of smartphones Changing the World”, Ms Poonam’s first come president, explains to a paying audi- and internet connections is noted less fre- book, contains an abundance of bombas- ence that the British destroyed India. Vikas quently. Ms Poonam offers empirical, if an- tic characters. “Eyes red from sleepless Thakur, a 29-year-old social-media warrior ecdotal, evidence ofthat overlap. nights of plotting his and his country’s rise forthe rulingBharatiya Janata Party and an She does not dwell on statistics. But to glory, Singhal can seem like the face of aspiring MP, boasts about “flattening his what “Dreamers” lacks in citations of offi- the new India,” Ms Poonam writes. “This enemies” when he was at college. Arjun cial data it makes up for through its Hindi- new India”, she adds wryly, “is not always Kumar, 19, carriesaround an iron rod on Va- speaking author’s ability to draw out her easy to like.” Quite. The country she de- lentine’s Day in the hope offinding Hindu- subjects’ inner thoughts. The picture she scribes is deeply worrying. Muslim couples to intimidate. Sachin paintsisimpressionistic. Itisalso alarming. Two-thirds of India’s 1.3bn citizens are Ahuja, 26, leads a gang of cow protectors If young Indians really are changing the under 35. Roughly 1m people enter the on midnight raids, looking for Muslims world, it may not be forthe better. 7 workforce every month. Few find jobs; most graduates are too poorly educated to be employable. Meanwhile a numerical gender imbalance means many men re- main single. Yet India’s young men—Ms Poonam’s interlocutors are mostly men, because they dominate public spaces—be- lieve they can have it all. And they believe they are owed it all. Unlike previous generations, they see the pleasures of the wider world in their Face- book feeds, Instagram timelines and WhatsApp chats, and wonder why every- body else goes on foreign holidays, drives imported cars, and parties with vodka and girls. They blame the Muslims, the West, the Congress government and its decades of socialism and appeasement of minor- ities. Now Narendra Modi, whose muscu- lar brand of Hindu nationalism has fired Waiting for the good times to roll https://t.me/finera Tenders 71

KOSOVO PENSION SAVINGS TRUST

Kosovo Pension Savings Trust (KPST), is calling for bids to Your chance to represent Hong Kong, Asia’s business capital engage one or more fi nancial institutions willing to provide Invitation to Companies to bid for the provision of broker services for trading all types of publicly traded Investment Promotion Support Services for Invest Hong Kong (InvestHK) securities (predominantly ETFs) on behalf of KPST. As Asia’s business capital, Hong Kong offers sophisticated world-class infrastructure, logistics and i nancial services coupled with a transparent legal system, supportive government, low tax To obtain the Call for bids dossier, which includes the detailed and an enviable position as the gateway to China. list of requirements and information on how to apply, the InvestHK is the department of the Hong Kong Special Administrative Region Government to interested parties should write to [email protected], Subject: attract foreign direct investment and support overseas and Mainland businesses to set up and “Dossier Request | IC-2018-02 |” followed by the name of the expand in Hong Kong. fi nancial institution. InvestHK invites companies with experience in investment promotion, economic development, or international business development to submit an expression of interest for provision of the Bid submission deadline: August 28th 2018 at 13:00 GMT+1. following services in one or more markets of India, Israel, Mexico & Central America, Nordics and West Japan. • To act as a representative ofi ce of InvestHK and actively promote Hong Kong as a premier Courses business location in Asia • To identify target companies in priority sectors and markets through desk research, networking, attendance of conferences and exhibitions • To respond to enquiries from potential investors by providing timely advice and practical assistance • To develop and implement annual business plans for promoting inward investment to Hong Kong and to achieve key performance indicators • To organise and support investment promotion visits by InvestHK head ofi ce teams • To develop links and networks with business multiplier organisations and the media Interested Companies based in the markets above are invited to email a short proi le of their company highlighting their business capabilities, including consultancy experience in investment promotion, economic development, or international business development and business network in the specii ed market, in performing the aforementioned services to IPConsultant@investhk.gov.hk in English by 12:00 noon, 22 August 2018 Hong Kong time; any late response will not be considered. Selected companies will be provided with a service brief with more detailed scope of services and other information and invited to submit a formal proposal. Only shortlisted companies will be notii ed. Companies which do not hear from InvestHK by 4 September 2018 should consider their bids unsuccessful. For further information on InvestHK, please visit our website at www.InvestHK.gov.hk

MINISTRY OF INFRASTRUCTURE AND ENERGY NOTIFICATION OF THE CONTRACT

1. Name and Address of Contracting Authority: Ministry of Infrastructure and Energy, Republic of Albania. Address: Str. Abdi Toptani, No. 1, Tirane, Albania.

2. Name and address of Person Responsible: Enea Karakaci, Ministry of Infrastructure and Energy, (E-mail: [email protected], cc: [email protected]).

3. The Form, Object and Type of Contract: Selection of Project for the construction of a photovoltaic plant for electricity generation in the Akërni Zone (Vlora) with installed capacity of 50 MW, as part of the Support Measures, and additional capacity of 20MW to 50 MW, which will not be part of the Support Measures.

4. Type of Competitive Procedure: Open Procedure.

5. Project Land: The location of the Project is Akërni area in Vlora Municipality at Cadastral Zone Nr 1007, Vlora, Albania.

6. Duration of Project Agreement: 30 years, with the right to renew the contract.

7. Power Purchase Agreement: As part of the Support Measures, a Power Purchase Agreement will be signed for a purchase capacity of 50 MW for a duration of 15 years.

8. Time Limit for Execution of Project: 18 months from Effective Date, which is the date of signing of all Project agreements.

9. Bid Submission Deadline: 12.00 Central European Time on 17th September 2018. 10. Bid Opening: 12:00 Central European Time on 17th September 2018. To advertise within the classified section, contact: 11. Bid Validity Period: Bids must be valid for 150 days from final deadline for submission. UK/Europe United States Agne Zurauskaite Richard Dexter 12. Bid Security: Euro 200,000 (Euro Two Hundred Thousand), payable in the form given in the Bidding Procedure Documents. Tel: +44 20 7576 8152 Tel: +1 212 554 0662 [email protected] [email protected] 13. Payment of the Participation Fee in the Bidding Procedure: The fee for participation in the Bidding Procedure is Euro 2,000 (Euro Two Thousand).

14. Bidding Eligibility and Evaluation: As set forth in the Bidding Procedure Asia Middle East & Africa Documents. Shan Shan Teo Philip Wrigley Additional information about the Bidding Procedure documents can be obtained from the Tel: +65 6428 2673 Tel: +44 20 7576 8091 Contracting Authority’s website: http://infrastruktura.gov.al/ [email protected] [email protected] The Economist August 11th 2018 Financial Era Advisory Group 72 Economic and financial indicators The Economist August 11th 2018

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* 2018† latest latest 2018† rate, % months, $bn 2018† 2018† bonds, latest Aug 8th year ago United States +2.8 Q2 +4.1 +2.9 +3.8 Jun +2.9 Jun +2.4 3.9 Jul -465.5 Q1 -2.7 -4.6 2.94 - - China +6.7 Q2 +7.4 +6.6 +6.0 Jun +2.1 Jul +2.1 3.8 Q2§ +68.3 Q2 +0.6 -3.7 3.19§§ 6.83 6.70 Japan +1.1 Q1 -0.6 +1.2 -1.2 Jun +0.7 Jun +1.0 2.4 Jun +201.8 Jun +3.7 -3.8 0.09 111 111 Britain +1.2 Q1 +0.9 +1.3 +0.8 May +2.4 Jun +2.4 4.2 Apr†† -106.3 Q1 -3.5 -1.8 1.40 0.78 0.77 Canada +2.3 Q1 +1.3 +2.3 +3.8 May +2.5 Jun +2.2 6.0 Jun -53.8 Q1 -2.6 -2.3 2.36 1.31 1.27 Euro area +2.1 Q2 +1.4 +2.1 +2.4 May +2.1 Jul +1.7 8.3 Jun +474.0 May +3.4 -0.7 0.40 0.86 0.85 Austria +3.4 Q1 +9.7 +2.9 +6.2 May +2.0 Jun +2.2 4.7 Jun +9.5 Q1 +2.3 -0.6 0.48 0.86 0.85 Belgium +1.3 Q2 +1.2 +1.6 +2.9 May +2.2 Jul +2.0 6.0 Jun +0.2 Mar nil -1.1 0.75 0.86 0.85 France +1.7 Q2 +0.6 +1.8 -0.9 May +2.3 Jul +1.9 9.2 Jun -10.2 Jun -0.6 -2.4 0.71 0.86 0.85 Germany +2.3 Q1 +1.2 +2.1 +2.5 Jun +2.0 Jul +1.8 3.4 Jun‡ +323.6 Jun +7.8 +1.1 0.40 0.86 0.85 Greece +2.3 Q1 +3.1 +1.8 +0.9 May +1.0 Jun +0.7 20.2 Apr -2.0 May -1.2 -0.3 4.00 0.86 0.85 Italy +1.1 Q2 +0.7 +1.2 +1.7 Jun +1.5 Jul +1.3 10.9 Jun +56.1 May +2.6 -2.0 2.92 0.86 0.85 Netherlands +2.8 Q1 +2.3 +2.7 +3.2 May +2.1 Jul +1.6 4.8 Jun +91.3 Q1 +9.6 +0.8 0.52 0.86 0.85 Spain +2.7 Q2 +2.3 +2.7 -2.0 Jun +2.3 Jul +1.7 15.2 Jun +20.7 May +1.4 -2.7 1.28 0.86 0.85 Czech Republic +3.4 Q1 +2.2 +3.5 +3.4 Jun +2.6 Jun +2.2 2.4 Jun‡ +0.9 Q1 +0.5 +0.9 2.22 22.1 22.3 Denmark -1.4 Q1 +1.8 +1.6 -1.8 Jun +1.1 Jun +1.0 3.9 Jun +20.2 May +7.4 -0.7 0.36 6.42 6.34 Norway +0.3 Q1 +2.5 +1.9 +0.6 Jun +2.6 Jun +2.3 3.8 May‡‡ +22.8 Q1 +7.4 +5.4 1.82 8.22 7.95 Poland +5.2 Q1 +6.6 +4.4 +6.8 Jun +2.0 Jul +1.7 5.9 Jul§ -1.0 May -0.6 -2.2 3.12 3.67 3.63 Russia +1.3 Q1 na +1.7 +2.1 Jun +2.5 Jul +3.0 4.7 Jun§ +64.6 Q2 +4.0 +0.3 8.13 64.7 59.9 Sweden +3.3 Q2 +4.2 +2.8 +5.4 Jun +2.1 Jun +1.9 7.2 Jun§ +16.8 Q1 +3.3 +1.1 0.56 8.95 8.19 Switzerland +2.2 Q1 +2.3 +2.2 +9.0 Q1 +1.2 Jul +0.8 2.6 Jun +72.9 Q1 +8.9 +0.8 0.03 0.99 0.98 Turkey +7.4 Q1 na +4.3 +7.0 May +15.8 Jul +12.8 9.6 Apr§ -57.6 May -5.9 -2.8 19.08 5.29 3.53 Australia +3.1 Q1 +4.2 +2.9 +4.3 Q1 +2.1 Q2 +2.2 5.4 Jun -36.8 Q1 -2.5 -1.0 2.66 1.35 1.27 Hong Kong +4.7 Q1 +9.2 +3.4 +1.0 Q1 +2.4 Jun +2.1 2.8 Jun‡‡ +14.2 Q1 +3.9 +1.9 2.23 7.85 7.82 India +7.7 Q1 +10.1 +7.2 +3.2 May +5.0 Jun +4.6 5.6 Jul -48.7 Q1 -2.4 -3.6 7.78 68.7 63.6 Indonesia +5.3 Q2 na +5.3 +11.6 May +3.2 Jul +3.5 5.1 Q1§ -20.9 Q1 -2.4 -2.5 7.68 14,435 13,314 Malaysia +5.4 Q1 na +5.7 +3.0 May +0.8 Jun +0.8 3.3 May§ +12.2 Q1 +2.9 -3.3 4.05 4.08 4.29 Pakistan +5.4 2018** na +5.4 +2.7 May +5.8 Jul +5.2 5.9 2015 -18.0 Q2 -5.8 -5.4 10.00††† 124 105 Philippines +6.0 Q2 +6.1 +6.6 +17.9 Jun +5.7 Jul +5.1 5.5 Q2§ -1.9 Mar -1.6 -2.7 6.43 53.1 50.4 Singapore +3.8 Q2 +1.0 +3.2 +7.4 Jun +0.6 Jun +0.8 2.1 Q2 +61.7 Q1 +18.6 -0.7 2.46 1.36 1.36 South Korea +2.9 Q2 +2.8 +2.8 -0.4 Jun +1.5 Jul +1.7 3.7 Jun§ +72.5 Jun +4.8 +0.9 2.56 1,120 1,125 Taiwan +3.3 Q2 +3.1 +2.6 +0.4 Jun +1.7 Jul +1.6 3.7 Jun +84.8 Q1 +13.4 -0.9 0.84 30.6 30.2 Thailand +4.8 Q1 +8.1 +4.0 +4.7 Jun +1.5 Jul +1.2 1.1 Jun§ +50.3 Q1 +9.4 -2.9 2.64 33.2 33.3 Argentina +3.6 Q1 +4.7 +1.3 -2.9 Jun +29.5 Jun +24.2 9.1 Q1§ -33.8 Q1 -4.7 -5.3 9.42 27.5 17.7 Brazil +1.2 Q1 +1.8 +1.6 +3.5 Jun +4.5 Jul +3.9 12.4 Jun§ -13.9 Jun -1.0 -7.0 9.00 3.75 3.14 Chile +4.2 Q1 +4.9 +3.7 +5.0 Jun +2.7 Jul +2.4 7.2 Jun§‡‡ -3.1 Q1 -1.6 -2.0 4.52 643 651 Colombia +2.8 Q1 +2.8 +2.5 +2.9 May +3.1 Jul +3.3 9.1 Jun§ -9.8 Q1 -3.1 -2.0 6.83 2,905 2,997 Mexico +2.7 Q2 -0.4 +2.2 +0.3 May +4.6 Jun +4.6 3.4 Jun -15.9 Q1 -1.7 -2.3 7.69 18.4 17.9 Peru +3.2 Q1 +5.6 +3.7 +10.5 May +1.6 Jul +1.4 6.6 May§ -2.9 Q1 -1.6 -3.5 na 3.27 3.24 Egypt +5.4 Q1 na +5.4 +3.8 May +14.4 Jun +16.1 10.6 Q1§ -7.7 Q1 -2.4 -9.6 na 17.9 17.8 Israel +4.1 Q1 +4.7 +3.9 +4.2 May +1.3 Jun +1.3 3.9 Jun +9.7 Q1 +2.2 -2.4 1.92 3.68 3.61 Saudi Arabia -0.9 2017 na +1.0 na +2.1 Jun +4.4 6.1 Q1 +21.6 Q1 +7.5 -3.9 na 3.75 3.75 South Africa +0.8 Q1 -2.2 +1.5 +1.3 Jun +4.6 Jun +4.8 27.2 Q2§ -12.2 Q1 -3.2 -3.6 8.69 13.4 13.2 Source: Haver Analytics. *% change on previous quarter, annual rate. †The Economist poll or Economist Intelligence Unit estimate/forecast. §Not seasonally adjusted. ‡New series. **Year ending June. ††Latest 3 months. ‡‡3-month moving average. §§5-year yield. †††Dollar-denominated bonds. https://t.me/finera The Economist August 11th 2018 Economic and financial indicators 73

Markets % change on The Economist poll of forecasters, August averages (previous month’s, if changed) Dec 29th 2017 Real GDP, % change Consumer prices Current account Index one in local in $ Low/high range average % change % of GDP Aug 8th week currency terms 2018 2019 2018 2019 2018 2019 2018 2019 United States (DJIA) 25,583.8 +1.0 +3.5 +3.5 Australia 2.7 / 3.2 2.3 / 3.1 2.9 2.8 (2.7) 2.2 2.3 -2.5 (-2.6) -2.6 (-2.7) China (Shanghai Comp) 2,744.1 -2.8 -17.0 -20.9 Brazil 1.2 / 2.0 1.9 / 3.0 1.6 (1.7) 2.4 (2.6) 3.9 (3.5) 4.2 (4.3) -1.0 -1.4 (-1.3) Japan (Nikkei 225) 22,644.3 -0.5 -0.5 +1.0 Britain 1.1 / 1.5 0.7 / 1.8 1.3 1.4 2.4 2.0 -3.5 (-3.6) -3.2 (-3.3) Britain (FTSE 100) 7,776.7 +1.6 +1.2 -3.7 Canada 1.9 / 3.2 1.6 / 3.7 2.3 2.2 (1.9) 2.2 2.0 -2.6 (-2.7) -2.4 (-2.5) Canada (S&P TSX) 16,315.1 -0.4 +0.7 -3.4 China 6.5 / 6.7 6.1 / 6.8 6.6 6.3 2.1 (2.2) 2.3 (2.4) 0.6 (0.7) 0.5 Euro area (FTSE Euro 100) 1,214.3 -0.3 +0.4 -3.0 France 1.6 / 2.0 1.6 / 2.2 1.8 (1.9) 1.8 1.9 1.4 -0.6 (-0.8) -0.6 (-0.8) Euro area (EURO STOXX 50) 3,493.6 -0.4 -0.3 -3.7 Germany 1.8 / 2.4 1.6 / 2.5 2.1 2.0 (1.9) 1.8 1.7 7.8 (7.7) 7.4 (7.3) Austria (ATX) 3,413.6 -0.4 -0.2 -3.6 India 6.7 / 7.7 6.9 / 8.2 7.2 (7.3) 7.4 (7.5) 4.6 (4.7) 4.7 (4.9) -2.4 (-2.5) -2.4 Belgium (Bel 20) 3,863.7 -0.8 -2.9 -6.1 Italy 1.1 / 1.4 0.9 / 1.8 1.2 (1.3) 1.2 1.3 (1.2) 1.3 (1.2) 2.6 (2.5) 2.4 France (CAC 40) 5,501.9 +0.1 +3.6 +0.1 Japan 0.7 / 1.5 0.6 / 1.6 1.2 (1.1) 1.2 (1.1) 1.0 1.3 (1.2) 3.7 (3.8) 3.8 Germany (DAX)* 12,633.5 -0.8 -2.2 -5.5 1.5 / 2.0 1.4 / 2.1 1.7 1.7 3.0 (2.9) 4.2 4.0 (3.5) 3.4 (3.1) Greece (Athex Comp) 758.0 -0.5 -5.5 -8.7 Russia Italy (FTSE/MIB) 21,790.3 nil -0.3 -3.6 Spain 2.5 / 3.0 1.0 / 3.2 2.7 2.2 (2.3) 1.7 1.5 1.4 (1.5) 1.4 (1.5) Netherlands (AEX) 573.7 +0.1 +5.3 +1.8 United States 2.7 / 3.1 1.6 / 3.3 2.9 (2.8) 2.5 (2.4) 2.4 (2.5) 2.2 -2.7 -2.9 (-3.0) Spain (IBEX 35) 9,747.1 -0.5 -3.0 -6.2 Euro area 2.0 / 2.4 1.7 / 2.6 2.1 (2.2) 1.9 1.7 (1.6) 1.5 3.4 (3.3) 3.1 Czech Republic (PX) 1,084.8 -0.4 +0.6 -3.0 Sources: Bank of America, Barclays, BNP Paribas, Citigroup, Commerzbank, Credit Suisse, Decision Economics, Deutsche Bank, Denmark (OMXCB) 910.1 -2.8 -1.8 -5.3 EIU, Goldman Sachs, HSBC Securities, ING, Itaú BBA, JPMorgan, Morgan Stanley, RBS, Royal Bank of Canada, Schroders, Scotiabank, Société Générale, Standard Chartered, UBS. For more countries, go to: Economist.com/markets Hungary (BUX) 36,954.2 +2.1 -6.2 -11.9 Norway (OSEAX) 1,027.3 +1.2 +13.3 +12.7 Poland (WIG) 60,097.9 -0.2 -5.7 -10.7 Other markets The Economist commodity-price index Russia (RTS, $ terms) 1,113.8 -4.0 -3.5 -3.5 2005=100 % change on % change on Sweden (OMXS30) 1,622.6 +0.6 +2.9 -5.9 Dec 29th 2017 one one Switzerland (SMI) 9,176.2 nil -2.2 -4.2 Index one in local in $ Jul 31st Aug 7th* month year Turkey (BIST) 96,973.8 -0.2 -15.9 -39.7 Aug 8th week currency terms Dollar Index Australia (All Ord.) 6,354.9 -0.1 +3.0 -1.8 United States (S&P 500) 2,857.7 +1.6 +6.9 +6.9 All Items 144.3 143.1 -1.2 -1.5 Hong Kong (Hang Seng) 28,359.1 +0.1 -5.2 -5.6 United States (NAScomp) 7,888.3 +2.3 +14.3 +14.3 Food 148.4 148.1 +1.6 -3.3 India (BSE) 37,887.6 +1.0 +11.2 +3.4 China (Shenzhen Comp) 1,466.7 -5.3 -22.8 -26.4 Indonesia (IDX) 6,094.8 +1.0 -4.1 -9.9 Japan (Topix) 1,744.7 -1.4 -4.0 -2.5 Industrials Malaysia (KLSE) 1,804.7 +0.9 +0.4 -0.3 Europe (FTSEurofirst 300) 1,526.9 nil -0.2 -3.5 All 140.0 137.9 -4.2 +0.6 Pakistan (KSE) 42,731.9 -0.2 +5.6 -6.2 World, dev'd (MSCI) 2,166.1 +0.8 +3.0 +3.0 Nfa† 137.3 136.3 -3.6 +4.9 Singapore (STI) 3,326.7 -0.1 -2.2 -4.2 Emerging markets (MSCI) 1,079.7 -0.7 -6.8 -6.8 Metals 141.2 138.7 -4.4 -1.1 South Korea (KOSPI) 2,301.5 -0.2 -6.7 -10.8 World, all (MSCI) 522.2 +0.6 +1.8 +1.8 Sterling Index Taiwan (TWI) 11,075.3 -0.2 +4.1 +1.1 World bonds (Citigroup) 933.4 nil -1.8 -1.8 All items 200.1 201.0 +1.2 -1.4 Thailand (SET) 1,721.6 nil -1.8 -3.7 EMBI+ (JPMorgan) 792.4 -0.6 -5.2 -5.2 Argentina (MERV) 26,674.9 -9.1 -11.3 -39.3 Hedge funds (HFRX) 1,265.0§ +0.1 -0.8 -0.8 Euro Index Brazil (BVSP) 79,151.7 -0.2 +3.6 -8.3 Volatility, US (VIX) 10.9 +13.2 +11.0 (levels) All items 153.3 153.5 -0.1 -0.2 Chile (IGPA) 26,897.5 -1.1 -3.9 -8.1 CDSs, Eur (iTRAXX)† 63.6 +3.2 +41.0 +36.2 Gold Colombia (IGBC) 12,188.4 -0.3 +6.2 +9.1 CDSs, N Am (CDX)† 58.0 -1.1 +18.1 +18.1 $ per oz 1,222.0 1,211.9 -3.4 -3.4 Mexico (IPC) 49,894.6 +0.9 +1.1 +7.3 Carbon trading (EU ETS) € 17.4 -1.5 +113.9 +106.7 West Texas Intermediate Peru (S&P/BVL)* 20,213.5 -1.0 +1.2 +0.3 Sources: IHS Markit; Thomson Reuters. *Total return index. $ per barrel 68.8 69.2 -6.7 +40.7 Egypt (EGX 30) 15,862.9 +1.2 +5.6 +5.2 †Credit-default-swap spreads, basis points. §Aug 7th. Israel (TA-125) 1,427.0 +1.0 +4.6 -1.2 Sources: Bloomberg; CME Group; Cotlook; Darmenn & Curl; FT; ICCO; Indor icat s for more countries and additional ICO; ISO; Live Rice Index; LME; NZ Wool Services; Thompson Lloyd & Saudi Arabia (Tadawul) 8,210.3 -0.9 +13.6 +13.6 Ewart; Thomson Reuters; Urner Barry; WSJ. *Provisional South Africa (JSE AS) 57,786.3 +0.7 -2.9 -10.2 series, go to: Economist.com/indicators †Non-food agriculturals. Financial Era Advisory Group 74 Obituary Luc Nkulula The Economist August 11th 2018

insist on social change, even down to litter- free streets. In his neatly buttoned white shirt he would stand before blackboards chalked with the words “Innovation”, “En- trepreneurship”, “Collaboration” and “Creative Empowerment”. On the day he died he had been impressing those things on around 100 teenagers from 14 quartiers of Goma. He had to harness their energy and spirit forCongo’s sake. In the ramshackle back-streets, still strewn with cooled lava rocksfrom the vol- cano Nyiragongo which rose behind the city, he would talk idealistic politics ten to the dozen. As a boy he had yelled about any injustice, and he still could, but anger did not drive him. He rebuffed it with an impish smile, ora positive spin. Even when dressing down Mr Kabila he managed to be more or less polite, because that petty oppressorwas not the problem. The whole system was rotten and unfree, and each man and woman had to strive to make it better. For his part, he had learned respon- sibility fast; his mother’s death in 2010 had suddenly made him the protector and pro- vider for his sister, then 12, who still lived with him. Amen remembered how he had Under the volcano smiled at her even as he burned, and as he yelled at her to run away. Dignity was what every Congolese most deserved: the right to respect, free ex- pression, free association, a free vote. Why should anyone hesitate to ask for these? Only because fear had invaded every- Luc Nkulula, campaignerfordemocracyin Congo, died on June 10th, aged 32 body—fear that someone you knew might HE fire tookhold at around midnight. It hold elections orface consequences. In De- be killed, or agents would take your laptop Twas so fierce and sudden in the wood- cember that year he stormed social media and phone, or that the “forces of order” en house in Himbi, outside Goma, in east- by standing on a police lorry, surrounded would stop you for walking in the street ern Congo, that Luc Nkulula could not get by armed police, raising a defiant fist. He after 6pm and “resolve the situation” for through the lounge to the main door. Nor was arrested and beaten several times for money. Even demanding clean water had could he climb out of his bedroom win- protests in the street. Each one was a badge got him arrested. Asking for elections had dow, which was barred against thieves. He of honour, a proof that he and Lucha (Luc been met with tear gas and live rounds. In- managed to stuff his laptop and some pa- and Lucha, theirnames so enjoyably close) telligence goons trailed him; neighbours pers through, the most important things. were getting on the government’s nerves. distrusted him and each other. Lucha Then the blazing curtain fell on his back, And yet Lucha—and he—were also so lacked the numbers and organisation to and he could not fight it off. well-behaved, as militants went. They make the difference he wanted. But should His sister Amen, coming in from the were upper-middle-class and French- he therefore shut himself up in some little outside privy, heard a noise like an explo- speaking. Many were professionals. He box, terrified ofchanging the future? sion and saw him burning. After an hour, was a law graduate and a legal consultant firemen came; by then, the house was for non-profits; his largely absent father Across the lake ashes. Investigations by a state procurator had been a doctor. Although the Congo he The man he longed to emulate was Patrice blamed an overheated battery, but Mr grew up in was a desperate place, racked Lumumba, the first prime minister ofinde- Nkulula’s friends were sure he had been by a civil war in which millions had died pendent Congo, whose hope had been to killed by the government in Kinshasa. and despots had dug themselves in, he unify the vast country before he was de- It seemed obvious why. As a founder- kept Lucha both idealistic and legalistic. Its posed in 1960, and later murdered, with member of Lutte pour le Changement banners tended to read “Respect the Con- the connivance of Western powers. He (Struggle for Change), Lucha for short, he stitution, Article 64”, and its firm creed was took Lumumba’s finest words as his own had campaigned since 2012 for democracy non-violence: preferably organising villes motto, instinctively clenching his fist as he in Congo, for proper elections and alterna- mortes, in which people protested by stay- declared them: “Le Congo est grand, et il tion in government, instead of the relent- ing at home for a day or two. His first mod- demande de nous la grandeur.” He saw the lessly continuing rule of President Joseph est campaign was to get more jobs and ideal Congolese citizen, l’homme congolais, Kabila, who had clung on for17 years. At a clean drinking water for Goma. From this, powerfully free and assured of his rights in meeting with Mr Kabila in August 2016 he and the vitality he poured into the move- a country cleansed of corruption and un- was chief spokesman, hammering the ment, he earned the nickname “H2O”. ited in peace. Looking out from Goma on president for his apparent indifference to His chief task in the movement was to the beauty of Lake Kivu and Nyiragongo, the rapes and killings that still went on in educate young men and women to be the land he loved, he dreamed fiercely, and the east of the country, and urging him to good citizens, to engage in politics and to was buried among those dreams. 7 https://t.me/finera

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