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Home Print edition June 19th 2010 This week's print edition Obama v BP Previous print editions Subscribe Daily news analysis America's justifiable fury with Jun 12th 2010 Subscribe to the print edition Opinion BP is degenerating into a Jun 5th 2010 All opinion Or buy a Web subscription for broader attack on business: May 29th 2010 full access online Leaders leader May 22nd 2010 Letters to the Editor May 15th 2010 RSS feeds Columns KAL's cartoons More print editions and Receive this page by RSS feed Correspondent's diary covers » Economist debates The world this week World All world Politics this week Politics this week Business this week International KAL's cartoon United States A special report on the human genome The Americas Asia Leaders Biology 2.0 Africa Middle East Britain's budget Marathon man Europe This won't hurt (much) Britain Where are they now? American politics and business Special reports Obama v BP It's personal Business and finance All business and finance Kyrgyzstan The dragon's DNA Business this week Stalin's latest victims Economics focus Inhuman genomes The human-genome project Business education Turning-point Which MBA? The soul of an old machine Management Iraq's flagging democracy No hiding place Economics A-Z Stop messing around

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Politics this week Jun 17th 2010 From The Economist print edition

In his first televised address from the Oval Office Barack Obama spoke about the oil spill off the coast of Louisiana, an environmental disaster that is also threatening to engulf his presidency. Mr Obama said he would “make BP pay” for the damage it has caused, criticised the federal agency that oversees drilling as “emblematic of a failed philosophy that views all regulation with hostility” and argued the case for green energy. But he gave no new details about how the crisis would be resolved. See article

The following day Mr Obama met BP bosses, including Tony Hayward, its beleaguered chief executive. The oil company agreed to demands that it should set aside $20 billion for an independent compensation fund and cancel its shareholder dividends for 2010. Meanwhile, the estimate of the amount of oil gushing out of BP’s damaged underwater well was raised again to between 35,000 and 60,000 barrels a day. See article

An annual study by Pew on attitudes towards America found the United States retaining a favourable rating among European countries, and more Russians holding a positive view (57%) than last year (44%). There was a small dip in European confidence that Mr Obama “will do the right thing in world affairs” (and a much larger drop among Americans). Pew also reported a sharp fall among Muslims expressing confidence in Mr Obama in Egypt, Lebanon and Turkey; in Pakistan only 8% of Muslims felt confident about America’s president.

Unbowed

Cuba freed Ariel Sigler, a paraplegic dissident, after he had spent seven years in jail on charges of treason. Leaders of the Catholic church in Cuba had pressed the government for his release.

An arrest warrant was issued in Venezuela for Guillermo Zuloaga, the owner of the Globovisión TV channel, charging him with business irregularities. Mr Zuloaga vowed not to turn himself in and said he was a political target because the channel’s programmes regularly criticise the president, Hugo Chávez.

Guatemala’s Constitutional Court dismissed the attorney- general, Conrado Reyes, after just three weeks in the job. Carlos Castresana, the head of a UN-appointed investigative commission, had resigned three days earlier largely because Mr Reyes, whom he accused of having ties to criminal groups, remained in office. See article

Mexico witnessed the most violent day yet in its drug “war”, with 85 people killed over a 24-hour period, including 12 policemen in an ambush. The president, Felipe Calderón, issued a 5,000-word manifesto defending his decision to confront the country’s organised-crime groups.

Trade concessions

The Israeli government eased the blockade of the Gaza Strip following intense international pressure after nine activists were killed in an Israeli raid on a Gaza-bound aid flotilla. The list of civilian goods allowed into Gaza will be expanded and building materials will also be permitted under UN supervision. Israel’s prime minister, Binyamin Netanyahu, vowed to “continue existing security procedures to prevent the inflow of weapons and war material”. See article

Police in Kenya arrested an assistant minister and two other MPs for “hate speech” in the volatile debate over the country’s new constitution, which is being put to a referendum on August 4th. Six people died in Nairobi, the capital, after grenades were thrown into a meeting organised by the No campaign. See article

Kyrgyz horror

Street-fighting in Osh, the largest city in southern Kyrgyzstan, between ethnic Kyrgyz and minority Uzbeks escalated rapidly into a pogrom. The country’s interim government ordered a curfew but lacked the manpower to impose it. Uzbek neighbourhoods were torched and nearly 200 people were reported to have been killed, though the actual total may turn out to be far higher. Hundreds of thousands were displaced, many fleeing across Uzbekistan’s border. The UN began an airlift of aid supplies to the region. See article

A report published by the London School of Economics alleged that the Taliban in Afghanistan are trained, armed and supported by Pakistan’s Inter-Services Intelligence (ISI) agency. It also said that Pakistan’s president, Asif Zardari (who has poor relations with the ISI) had visited imprisoned Taliban to assure them of his support. India’s government resolved to send paramilitary troops to break the blockade of Manipur, a state in the remote north-east. The rebellious Naga tribesmen, who had enforced the blockade, lifted it the next day. Sixty-five days without imported food or medicine had brought Manipur to the verge of collapse. The Nagas are agitating to change the state’s boundaries.

As the UN Security Council proceeded towards voting on a resolution concerning the sinking in March of a South Korean warship, North Korea’s ambassador to the UN warned that his country would retaliate with military force if it were condemned in any way.

A long time coming

After an investigation lasting 12 years, an independent inquiry into the killing in 1972 of 13 demonstrators by British forces at a Catholic civil-rights march in the Northern Irish town of Londonderry found that none of the victims posed a threat to troops and that the killings were unjustified. David Cameron, the British prime minister, apologised for“Bloody Sunday” on behalf of the government. It seemed unlikely that prosecutions would follow. See article

A general election in Belgium reaffirmed the country’s Flemish/Walloon division. The New Flemish Alliance, which aspires to eventual independence for Belgium’s Flemish half, won most seats. French- speakers in the south plumped for Socialists, who want to keep the country together.

Robert Fico’s reign as Slovakia’s prime minister looked set to end when his coalition partners performed badly in a parliamentary election. The new government will be a coalition of four centre-right parties, probably led by Iveta Radicova, a former sociology professor. See article

The French government unveiled a series of measures aimed at reducing the state pension-fund shortfall. Most prominent was a raising of the retirement age from 60 to 62. The opposition denounced the move; unions called for strikes. See article

Saturday June 19th 2010

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BANK REFORMS Editor's update Featured reader comments Stressful times Bank stress tests to be revealed 1 of 5 The EU’s leaders agreed to This reminds me of an old western where a publish the results of “stress tests” on member countries’ lynch mob forms to dole out quick "justice". largest banks. Germany’s Of course, in those movies the marshal, with chancellor, Angela Merkel, “shotgun pointed at the mob, would remind said the leaders had also them that this is America, where due agreed to impose new taxes process is guaranteed More» on banks. simon says on Obama v BP

President Obama wrote to ” other leaders of G20 countries ahead of their summit later this month, Advertisement urging them to speed up their banking reforms and do The EU's leaders agree to publish the results of stress tests on more to restore government Europe's banks, a welcome move finances. Products & events Democracy in America blog: Boring bankers who want to run hedge funds should quit their day jobs BP’s chief executive, Tony Stay informed today and every day The Bank of England gets new powers over banks (1) Hayward, was criticised by American congressmen for Subscribe to The Economist's free e-mail newsletters “stonewalling” when he and alerts. THE MUSIC BUSINESS appeared before a I kissed a copyright lawyer committee investigating the Get e-mail newsletters EMI's shake-up shows how managing the rights Gulf of Mexico oil leak. to songs, not making records, is where the money now is Follow this page on Twitter Subscribe to The Economist's latest article postings on As CD sales keep falling, digital music sales keep Twitter rising From our blogs Follow The Economist on Twitter Shining a light FAST FOOD The EU's leaders agree to Good and hungry publish the results of stress See a selection of The Economist's articles, events, Fast-food firms will have to do more than tests on Europe's banks, a topical videos and debates on Facebook. revamping their menus to keep growing (3) welcome move Charlemagne's notebook How fast-food joints did in the recession, and Follow The Economist on Facebook the threat from "health" taxes Pepsi tries to wean itself off sugar, salt and fat Bubble history (Mar 2010) (27) What happens when asset Advertisement prices become detached from the economy's BP'S BIG OIL LEAK AND ITS AFTERMATH underlying wealth Obama v BP Buttonwood's notebook America’s justifiable fury with BP is degenerating We are making continuous improvements to into a broader attack on business (179) Turning moral choices The Economist website and are interested in Live-blogging the BP hearings in Congress into market choices your thoughts. BP counts the political and financial cost Defending AT&T's Please leave your feedback. Crisis-management tips for bosses introduction of tiered pricing for mobile data The world's biggest oil spills Babbage

ANIMATION STUDIOS Planning for the sequel What we're reading

How Pixar’s leaders want to make their creative A growing gulf powerhouse outlast them (2) Gulf countries' reliance on Pixar's president on how the near-failure of "Toy ex-pat workers to staff Story 2" was turned into a triumph private companies looks increasingly untenable Book review: "The Hollywood Economist" (3) Economist Intelligence Unit

CAPITAL CONTROLS MAKE A COMEBACK When Washington took The won that got away on Wall Street South Korea joins the list of countries imposing Nearly 80 years ago, on mild capital controls, giving it more power to Capitol Hill, Ferdinand Pecora ward off inflation forced J.P. Morgan junior and other “banksters” to Central bankers get smarter at capital controls reveal the corruption that Governments rediscover currency controls had fuelled the Depression Economics A-Z: Capital controls Vanity Fair

BUSINESS IN AFRICA A failure of regulation Uncaging the lions What America's oilfield Business is transforming Africa (9) regulator and others can learn from more successful An African entrepreneur struggles for recognition watchdogs like the FDA in rich-country markets (18) New Yorker Who profits most from South Africa's World Cup finals? (20) Highlights

A special report on banking Also on this channel in emerging markets They might be giants Business this week (0)

Retail banking in America A new dominion Cracking the American market has proved beyond many foreign banks. Is Canada’s TD different? (0) Emerging-market banks have raced ahead as their Western colleagues have languished. More»

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KAL's cartoon Jun 17th 2010 From The Economist print edition

Britain's budget

This won't hurt (much) Jun 17th 2010 From The Economist print edition

Fortune favours the brave, so tear up those election pledges and start from scratch

POLITICIANS are by instinct incrementalists. They espouse the rhetoric of radicalism, but in reality they tend to shave a bit off their predecessors’ legacy here and add a bit there; to shuffle to the right or edge to the left. Both they and their voters avoid radical change whenever possible.

The British government, preparing for an emergency budget on June 22nd, can go the incrementalist route, minimising the extent of change and accepting the shape of taxation and spending that Labour has bequeathed it. Or it can take the radical road, bin previous plans and its own election pledges, and offer up a fiscal system designed for the future, not dictated by the past. This newspaper has no doubt which it would prefer.

Top of the flops

The fiscal deficit that George Osborne, the chancellor of the exchequer, must tackle is not just the biggest in Britain’s post-war history; on forecasts by the IMF in May, getting the public finances back on track is the toughest assignment facing any G20 country. We lay out the full details here.

Mr Osborne needs spending cuts and tax increases that add up to around 7% of GDP, while avoiding imperilling a still-fragile economy. Three principles should guide him. First, most of the retrenchment should come from cutting spending; second, any new taxes should focus on consumption; and third, both spending cuts and tax increases should be designed not just to cut the deficit but also to refashion government.

On the first point, although some tax increases will be needed to shore up fiscal capacity lost when revenue-raising financial services and property deals bit the dust, international experience argues that spending cuts, not tax rises, should bear the brunt. And given that spending has risen by ten percentage points to almost half of GDP in less than a decade, there is scope for cutting. The government’s plan to extract 80% of the adjustment from spending is a good starting point. Debates about how to cut spending tend to get stuck in a sterile argument about whether it is best to dictate a standard reduction across the board and tell departments to get on with it (as happened in Sweden), or to pick on particular areas (as in Canada). Mr Osborne needs to do both. Given the huge growth in government over the past decade, some form of universal cut, even if it is just a few percentage points, should apply to all departments. But future priorities will be different from past ones and some departments are more wasteful than others, so there should be selective culling on top of that.

That means breaking a (bad) promise. Before the election, the Tories promised not to cut health expenditure. But the health service, which absorbs about a fifth of total spending, has been the prime recipient of Labour’s largesse, and too much of the money has gone into pampering doctors. The government should walk away from that commitment, blaming the unknowable fiscal horrors Labour left behind it.

A second target is welfare, which accounts for more than a quarter of all spending. The biggest chunk of welfare is providing the state pension. Pension payments should not be cut, because British pensioners get one of the rawest deals in Europe; but the total bill could be reduced by raising the pensionable age. That would encourage people to stay in work, which is good for health, happiness and tax revenues.

Other welfare spending on the better-off should be cut back. Two examples are child benefit, which all parents of dependent children receive, and winter-fuel payments, to which all households with someone over 60 are entitled. Child benefit should be means-tested; and, as state pensions are being reinforced a bit anyway, fuel payments should cease. Too much money also goes on long-term benefits for fundamentally fit people of working age, which helps neither them nor the budget. Cutting this will be harder because it requires reforms to help people into work. Labour tackled the problem late in life; the new government must pick up the baton and run faster.

One choice across all public services is how much to carve out of capital spending, which voters tend to notice less because its impact is long-term. A smaller economy may justify some lessening of ambition where physical infrastructure is concerned. But for Britain to emerge from this crisis its economy must grow, and this takes decent roads and rail and research labs. Labour’s plan to cut net investment by 1.5% of GDP should be whittled back.

In cutting current spending, the public-sector payroll is an obvious target, not least because public employees are better paid and have much nicer pensions than most private employees. A public pay freeze for two years would bring wages back into line, and public employees should be required to contribute a lot more towards their generous pensions. The public-sector head count has grown by over a tenth in the past decade, and as many as 400,000 jobs may have to go.

Carbon tax, your time has come

Sensible selective slashing along these lines could cut spending by 5% of GDP or so. That leaves up to 2% to come from tax rises. Labour left an unhappy soak-the-rich potpourri of income, national-insurance and other tax increases worth 1.2% of GDP; the government wants to trim it to 0.8%, but it is proposing further dubious tinkering with income-tax allowances and capital-gains rates. It would be better to raise consumption taxes, which don’t discourage people from working or saving.

This could mean increasing VAT a notch or two, but it is also a chance to strike out from shore and introduce a new carbon tax. Properly designed, such a tax could not just raise revenue but also help to cut greenhouse-gas emissions and encourage investment in alternative energy sources (see article). Since both the carbon tax and VAT hit the poor harder than the rich, some offsetting rise should be inflicted on the well-off. The best option may be to stick with some of Labour’s tax hikes.

In all this, the government must keep a close eye on the health of the economy. While the recovery remains fragile, there is no advantage in sticking dogmatically to a timetable. On the timing of the retrenchment, Mr Osborne must show caution; on its substance, he must show courage.

American politics and business

Obama v BP Jun 17th 2010 From The Economist print edition

America’s justifiable fury with BP is degenerating into a broader attack on business

FOR over a month, Barack Obama watched the oil spill spread over the Gulf of Mexico with the same powerless horror as other Americans. Finally, lampooned by his countrymen for his impotence, he was spurred into action. He attacked the only available target—BP—and, to underline the seriousness with which he takes this problem, he gave his first Oval Office address on the subject.

The address got poor reviews; the attack on BP better ones. This week the firm bowed to pressure, and announced that it was, in effect, handing over $20 billion to the government to pay for compensation and clean-up, as well as cancelling the payment of any dividends this year and setting up a fund—of a mere $100m—to compensate unemployed oil workers.

This may do Mr Obama some good. Whether it will benefit America is more doubtful. Businessmen are already gloomy, depressed by the economy and nervous of their president’s attitude towards them. This episode will not encourage them.

Booted and spurred

There is good reason for Americans to be furious with BP. The authorities reckon that the oil may be flowing at a rate of 60,000 barrels a day—far more than the company estimated, and the equivalent of an Exxon Valdez every four days. Efforts to stem the toxic plume have met with only modest success (see briefing).

A permanent solution may be available in August, but only if the drilling of relief wells to intercept and plug the stricken one goes according to plan.

BP already had a miserable safety record in America. In 2005 an explosion at one of its refineries in Texas killed 15 people. In 2006 corrosion in its pipelines led to a sizeable spill on Alaska’s North Slope. Since then, regulators have often fined it for breaking safety standards. There are indications that BP’s approach to the drilling of the Macondo well was similarly slapdash. Engineering measures that might have prevented the calamity were not carried out, tests of safety equipment delayed. The firm’s emergency- response plan spoke of protecting the area’s walruses—an easy task, since there aren’t any—and consulting an ecologist who had died in 2005.

America has a well-developed system for getting companies to pay for the damage they do; and BP long ago accepted that it would pay in full. But that was never going to satisfy the country’s corporate bloodlust. An outfit called Seize BP has organised demonstrations in favour of the expropriation of BP’s assets in 50 cities. Over 600,000 people have supported a boycott of the firm on Facebook. Several of BP’s gas (petrol) stations have been vandalised.

The politicians, eager as ever to stay in tune with the nation, joined in. Ken Salazar, the secretary of the interior, vowed to keep the government’s boot on BP’s neck. At one of the many recent hearings at which BP executives have been hauled over the coals, a Republican congressman suggested that the chairman of BP’s American arm should commit ritual suicide. Mr Obama said he was looking for arses to kick.

After the macho rhetoric came the demands for cash. Mr Obama decided to “inform” BP that it must put adequate funds to meet all compensation claims into an escrow account beyond its control, although he has no authority to do so. Nancy Pelosi, the speaker of the House of Representatives, instructed it not to pay a dividend until all claims tied to the spill are settled. Her fellow Democrats in Congress are trying to raise BP’s liability retroactively—the sort of move America’s courts rightly frown on. Mr Salazar, on even thinner legal ice, suggested that the government would hold BP accountable not just for the harm directly done by the spill, but also for the jobs lost in the oil business thanks to the freeze on oil drilling in deep water that he himself has imposed.

Investors seem to be worried that the wrath of American officialdom will ruin BP. They have driven down its value by $89 billion since the well erupted, far in excess of all but the most dire forecasts of the ultimate costs of the spill. Corporate America, normally quick to resist government intrusion, has kept strangely silent, as though businessmen are afraid of the consequences of sticking their heads above the parapet.

The attack on BP seems to have paid off for the administration, in that the firm has caved in to most of its demands. Mr Obama’s swipes at the company have lent him an unfamiliar air of forcefulness. And, as everybody in Washington knows, so long as BP meets its commitments, government attempts to meddle in the firm’s management, much less seize its assets, will be rejected by the courts. So why not keep going?

Vladimir Obama

For several reasons. The vitriol has a xenophobic edge: witness the venomous references to “British Petroleum”, a name BP dropped in 1998 (just as well that it dispensed with the name Anglo-Iranian Oil Company even longer ago). Vilifying BP also gets in the way of identifying other culprits, one of which is the government. BP operates in one of the most regulated industries on earth with some of the most perverse rules, subsidies and incentives. Shoddy oversight clearly contributed to the spill, and an energy policy which reduced the demand for oil would do more to avert future environmental horrors than fierce retribution.

Mr Obama is not the socialist the right claims he is (see article). He went out of his way, meeting BP executives on June 16th, to insist that he has no interest in undermining the company’s financial stability. But his reaction is cementing business leaders’ impression that he is indifferent to their concerns. If he sees any impropriety in politicians ordering executives about, upstaging the courts and threatening confiscation, he has not said so. The collapse in BP’s share price suggests that he has convinced the markets that he is an American version of Vladimir Putin, willing to harry firms into doing his bidding.

Nobody should underestimate the scale of BP’s mistake, nor the damage that it has caused. But if the president does not stand up for due process, he will frighten investors across the board. The damage to America’s environment is bad enough. The president risks damaging its economy too.

Kyrgyzstan

Stalin's latest victims Jun 17th 2010 From The Economist print edition

The Kyrgyzstani government deserves help in dealing with history’s dangerous legacy

FACED with the difficulty of ruling a region as tumultuous as Central Asia, Stalin divided it into a patchwork of states whose borders were designed to fracture races and smash nationalism. He succeeded in preventing ethnic groups from uniting against him, and also in ensuring that each state is a hotbed of ethnic rivalry.

The latest victims of his legacy are the Uzbeks of Kyrgyzstan. Hundreds have been killed, and hundreds of thousands driven from their homes, in a pogrom against the ethnic minority in this poor country of 5.4m people. Inflamed by economic hardship and the rise of radical Islam, the conflict could spread. The fear is that this is not an isolated explosion of interethnic tension, but the future of Central Asia.

In April Dmitry Medvedev, Russia’s president, said Kyrgyzstan might be a “second Afghanistan”. At the time that seemed self-serving alarmism. Russia, after all, had just connived in the unconstitutional overthrow of Kurmanbek Bakiyev, a dictatorial president. But the Russian gloom now looks prophetic. And if the region does indeed descend into the flames, then stability in Afghanistan itself would look even more distant.

Not surprisingly, the outside world is unwilling to intervene in another distant, mountainous trouble-spot. Even Russia, normally all too willing to interfere in what it regards as its sphere of influence, refused the request from Kyrgyzstan’s interim leader, Roza Otunbayeva, for troops to restore order. Presumably the idea of being dragged into another Central Asian quagmire discouraged it. The neighbours are still less keen to help. Apparently fearing that Kyrgyz democratisation might spread, Kazakhstan and Uzbekistan in April both closed their borders. And America, nervous about its access to a “transit centre” important for operations in Afghanistan, has seemed wary of the interim government’s Russian links.

The time for such geopolitical caution is past. The interim government needs and deserves help. Although the bloodletting seemed to be subsiding as The Economist went to press, the misery of the refugees needs to be alleviated. Relief supplies are needed on both sides of the border. The UN’s proposal to set up an “aid corridor” is welcome and urgent. Persuading terrified refugees to go home may require a peacekeeping force, organised either in the region or by the UN. Failure to safeguard the refugees’ return would be to accede in an ethnic cleansing that would set a terrible precedent in Central Asia and beyond. Better to pursue multi-ethnic harmony within Stalin’s hateful legacy than to redraw the map.

La vie en Roza

The interim government is not blameless. It has sometimes seemed more interested in settling scores than in its professed goal of democratic reform. But it intends to hold a referendum, which would, if the government’s plan wins public approval, make Kyrgyzstan the only Central Asian parliamentary democracy, with severe constraints on the accumulation of presidential power. That should give ethnic minorities more security than they would have under either an autocratic strongman or a winner-takes-all democratic system. Common sense suggests that the referendum should be delayed until security has improved and the displaced can begin to go home; but it should, eventually, go ahead.

Kyrgyzstan’s neighbours will point to the recent bloody chaos as evidence of the importance of strong, authoritarian government. It is, rather, proof of the danger of bottling up tensions in the superficial calm that repression can temporarily impose. Democracy did not get Kyrgyzstan into this mess. It might just help the country escape it.

The human-genome project

Turning-point Jun 17th 2010 From The Economist print edition

Ten years after the reading of the human genome, humanity is about to confront its true nature

THE oracle at Delphi had two maxims posted above the entrance to her chamber, for the edification of those who sought her prophecy: “Know thyself” and “Nothing in excess”. Self-knowledge is often the hardest to learn and the least welcome, but the brutal truth is best. Humanity had better hope so, anyway, for the truth will soon out for the entire species.

June 26th marks the tenth anniversary of the reading of the human genome—the 3-billion-letter-long message that promises self-knowledge to humanity. Each letter is a pair of chemical bases that has accumulated over the 3.8 billion years that life has existed on Earth.

Viewed that way—the addition to the message of slightly less than a base-pair a year—the evolution of something as complex as a human being is not such an incredible journey. But it is still an amazing one. Some of it is lost, as the DNA palimpsest has been erased and re-written. Much is the scribbling of vandals who have broken in and scrawled, “We woz ’ere”, in the barbarian tongue of viruses, not yet erased by nature’s librarian, natural selection. And plenty of the rest, the bit that should make sense, can be read but is not yet understood.

But it will be. Humanity’s foibles will be laid bare. The species’s history, from its tentative beginning in north-east Africa to its current imperial dominion, has already been revealed, just through being able to read the genome. It is now possible, too, to compare Homo sapiens with his closest relative—not the living chimpanzee, with whom he parted company perhaps 5m years ago, but the extinct Neanderthal, a true human. That will do what philosophers have dreamed of, but none has yet accomplished: show just what it is that makes Homo sapiens unique. The genome will answer, too, the age-old question of original sin. By showing what is nature, it will reveal what is nurture—and thus just how flexible and perfectible the human animal really is.

Ecce Homo That is not, of course, why the genome project started. The pragmatists who began it were motivated by medical considerations. Diseases would be understood better and new targets for drugs discovered.

This is happening—more slowly than many hoped, but inexorably (see special report). So, too, is the industrialisation of genomic knowledge as better crops and clever ways of using micro-organisms to make chemicals are developed. Indeed, synthetic life itself is within humanity’s grasp, as Craig Venter’s announcement on May 20th of a bacterium with a synthetic genome has shown.

All these are great advances—but in the end, perhaps, not as great as the threat and promise of self- knowledge. Which recalls the oracle’s second admonition: nothing in excess.

Genomics may reveal that humans really are brothers and sisters under the skin. The species is young, so there has been little time for differences to evolve. Politically, that would be good news. It may turn out, however, that some differences both between and within groups are quite marked. If those differences are in sensitive traits like personality or intelligence, real trouble could ensue.

People must be prepared for this possibility, and ready to resist the excesses of racialism, nationalism and eugenics that some are bound to propose in response. That will not be easy. The liberal answer is to respect people as individuals, regardless of the genetic hand that they have been dealt. Genetic knowledge, however awkward, does not change that.

Iraq's flagging democracy

Stop messing around Jun 17th 2010 From The Economist print edition

Iraqis and their neighbours need to get a grip—or their country could slip back to its bad old ways

FEW countries more urgently need governing, yet Iraq is languishing without a real leader. No party or alliance clearly won the election held three months ago, so a period of horse-trading was inevitable. But now the country is dangerously adrift. The new parliament has only just assembled for the first time. No laws have been passed since March. Vital legislation to bring in foreign investment and share out the proceeds of oil production is stalled. Above all, Iraq needs a leader who can appeal to its Shia Arabs, Sunni Arabs and Kurds, divided by a chasm of ethno-sectarian hatred. If not, it risks falling back into the sort of authoritarianism that was supposed to have been banished by the overthrow of Saddam Hussein.

The chief rivals for the post of prime minister are Iyad Allawi, whose alliance won the most seats in parliament but still got barely more than a quarter of them, and Nuri al-Maliki, the caretaking incumbent. Both Mr Allawi, pictured left, and Mr Maliki, pictured right, are Shias, as are well over half of Iraq’s people. But they seem incapable of doing the job (see article). Mr Maliki at one time raised hopes that he could, especially after he boldly dispatched the national army to the southern city of Basra to chase out thuggish Shia militias. But since then he has fallen back on a core of assertive Shias and is widely reviled by Sunnis and Kurds. He is not the unifier Iraq needs. For his country’s sake, he should give way to another man.

Mr Allawi, a secular Shia who long ago left Saddam Hussein’s Baath party, was a plausible prime minister from 2004-05 under American tutelage, but he let corruption get wildly out of hand. More recently, he has appealed to the Sunni minority, which voted for him in large numbers. As the winner of most parliamentary seats, Mr Allawi looks better suited to lead the country. But the Shia majority revile him as a Baathist. If he cannot persuade enough MPs to endorse him, he too should give up his quest to be prime minister.

The best course for Iraq would then be for a compromise candidate to be chosen as soon as possible. The Shias would be foolish not to give Mr Allawi and his Sunni supporters a clutch of decent jobs. And that means a coalition government with a shared vision, not just the familiar carve-up into ministerial fiefs corruptly dished out on a tribal, sectarian or ethnic basis, with militias lurking murderously in the background. Outsiders can help, by creating a permanent “contact group” of neighbours, perhaps overseen by the UN, to set a monitoring and negotiating framework, much as Europe’s bigger powers, assisted by the United States, stabilised the Balkans in the 1990s. American influence in Iraq is dwindling but still matters. The UN has made progress towards calming nerves along the territorial “trigger line” dividing Arabs from Kurds. The Turks have been more sympathetic to Iraq’s Kurds. But the Syrians, if they want to play a bigger regional role, must do more to discourage the insurgency. The Iranians should stop egging on their fellow Shias to humiliate the Sunnis. And the Saudis should accept that Iraq, their beefiest neighbour, is bound to be dominated by Shias. A democratic election has been held in Iraq, the violence is down and the Americans look set to leave by the end of next year. But that must not be the end of the story. Too much blood has been spilt, Iraqi and American, for there to be a washing of hands.

Saddamned if they don’t

In the end, though, it is for the Iraqis to rebuild their country. Their elected politicians face a choice: to compromise over power in a democratic country or to block each other and let sectarian bigotry, corruption and intolerance prevail. Surely they can remember where that path leads.

Letters

On Israel and the Palestinians, unions, mortality data, Australia, Europe, BP Jun 17th 2010 From The Economist print edition

Hamas: an obstacle to peace

SIR – Although you are right that the Palestinians elected Hamas in 2006 “to represent all of them”, that very same party blocked all efforts by the Palestinian Authority to hold elections last January (“Israel’s siege mentality”, June 5th). Hamas also rejected an Egyptian reconciliation agreement, signed by Fatah, that would have permitted elections this July. This is not surprising given that opinion polls suggest Hamas would suffer a heavy defeat in any elections held now. According to the Palestinian Centre for Public Opinion, in May 53% of all Palestinians supported Fatah and only 15% favoured Hamas. In the Gaza Strip, 37% backed Fatah compared with 21% who preferred Hamas.

Furthermore, it is not strictly necessary for the West to “call for Hamas to be drawn into negotiations” in a peace process, as you suggest. Talks for the framework of a negotiated settlement could easily be completed without involving Hamas. Indeed, the “letters of mutual recognition” that form the basis of all negotiations establish that the Palestine Liberation Organisation is the sole legitimate representative of the Palestinian people.

The implementation of a future agreement is a different issue, but it is hard to imagine that the people of Gaza would tolerate being left behind because of Hamas’s refusal to accept a lasting two-state solution as their brethren in the West Bank move towards independence. In other words, progress in negotiations could well prove essential for a change of leadership in Gaza.

Aymenn Jawad Cardiff

SIR – You were right to criticise Israel’s poor execution of the raid on a Turkish aid ship that was bringing supplies to Gaza. But the blockade of Gaza is an essential guarantee of Israel’s security. It keeps Hamas from importing arms, exporting radicalism to the West Bank and firing rockets into Israel without fear of consequence.

Who will ensure that Hamas—which is even less interested in a two-state solution than Binyamin Netanyahu—will not engage in these activities? The UN, which has never supported Israel in any major conflict? The Arab League, in which most member countries don’t even recognise Israel as a state? With friends like those, Israel needs no enemies to feel on the defensive.

Avi Levin Seattle

* SIR – The pseudo-humanitarian flotilla that tried to reach Gaza was backed by the IHH, an Islamic Turkish NGO. According to Jean-Louis Bruguière, a French counter-terrorism magistrate, the IHH played an “important role” in the plot to bomb LAX in 2000. Israel should have received the support of the entire world for trying to prevent terrorist supporters from reaching Gaza.

Israel, to its credit, proposed to allow the aid to be delivered without using violence after checking the goods. It also sought to minimise the number of casualties on the Turkish boat by first using paintball guns. Only after they found themselves on the end of the rage and violence of the humanitarian activists did Israeli commandos shoot with real guns.

Surprisingly, by comparison with NATO, which wages its war against terror with quite a disproportionate use of force, Israel is judged with a radically different set of standards. Hamas is portrayed as the victim; the IHH has been rebranded as a humanitarian organisation and Turkey, a member of NATO, supports them. Jews are once again treated with a different set of laws.

Doron Kornblum Tel Aviv

* SIR – Why do you suppose Israel thinks it needs a blockade? What is the connection between the Turkish prime minister and the aid flotilla? Is Turkey trying to get closer to Iran and Syria? And why did the world react so fiercely to the Israeli assault on-board the ship, much more so than towards bigger atrocities in Afghanistan or Africa? As the old saying goes, the fact that you’re paranoid doesn’t mean you’re not being followed.

Itamar Katz Rockville, Maryland

* SIR – Happily, the participants in the Gaza flotilla must have read Henry David Thoreau’s “Civil Disobedience” and are following in the steps of Mahatma Gandhi, Martin Luther King and Nelson Mandella, albeit on the high seas. When I see the absence of outrage or even apparent embarrassment among so many Americans at the violence of militant Zionism I am reminded of the night Thoreau spent locked up because of his quiet protest against the Mexican War.

When Ralph Waldo Emerson came by and asked Henry why he was in jail, Thoreau replied, “Waldo, why are you out there?”

Byron Miller Raleigh, North Carolina

* SIR – One supposes that after 60 years of unremitting hostility aimed at Israel from its neighbours and the UN General Assembly, including three desperate fights for survival, Israelis would perforce develop a siege mentality.

And as Israel is under physical and collective mental siege, perhaps a siege mentality is not such a bad thing.

Ken Brier Villanova, Pennsylvania

Taking pride in your work

SIR – Schumpeter ruminated on the survival of trade unions in the age of austerity (June 5th). One way that unions could become more relevant would be if they, rather than their employers, took responsibility for the quality of workers’ output. Good employees resist unions because they do not want to work with loafers earning the same pay, or to have a shop steward telling them to “slow down”. If unions became highly selective, weeding out the incompetents and malcontents, they could offer employers the best trained, most-efficient workers available, for higher pay.

Employers would benefit by knowing that unions were protecting them from lazy, unqualified employees and that more jobs would be finished properly and on time.

David Hagan Grover Beach, California

Mortality data

SIR – We write in response to your article about estimates of child mortality (“The power of numbers”, May 29th). We are the members of the Technical Advisory Group that provides methodological advice to the Inter-Agency Group (of United Nations agencies) on Mortality Estimation (IGME). We function independently of the agencies themselves. Your article gave the impression that the estimates published by the Institute for Health Metrics and Evaluation (IHME), at the University of Washington, are a huge improvement on previous estimates. That this is something of an exaggeration is clear from the fact that the IHME’s estimate of deaths of children under the age of five in 1990 differs from the Unicef estimate published in 2009 (and which is based on IGME’s work) by less than 5%; the downward trend to 2008 estimated by the IHME is 2.2% per year, compared with 2.0% in the Unicef numbers. More importantly, however, it must be remembered that both sets of figures are estimates.

Ultimately such estimates depend on choices that are to some extent subjective, and in the absence of error-free data there will always be substantial uncertainty. New analytic methods are to be welcomed but can only ever play a limited role. In the long run, the big improvements in estimates will depend on the development of accurate civil-registration systems throughout the developing world.

Kenneth Hill Writing for the Technical Advisory Group to the Inter-Agency Group on Mortality Estimation Cambridge, Massachusetts

The pits

SIR – Your article on the row over the Australian government’s effort to extract more revenue from mining companies gave a balanced account of the furore caused by the so-called Resources Super-Profits Tax (“Digging in a minefield”, June 5th). To provide an update, some of the most recent polls show a swing against the government on the issue. One survey of voters in marginal districts in Queensland and Western Australia, both big mining states, found 48% opposed to the RSPT and 28% in favour; 78% said the tax should either be made more acceptable to miners or dropped entirely.

But perhaps the greatest failure of the Rudd government’s grab for cash is that it is undoubtedly unconstitutional. Constitutional powers over minerals and mining lie with the states, which have levied royalties on mining companies for many years. Some argue that the federal government’s power over corporations gives it the power to levy such a tax, but if the matter comes to the High Court it will almost certainly be ruled unconstitutional. The issue is the conflict between a broad commonwealth power and a narrowly defined state power, and a federal government trying to levy a tax on an industry that falls under the states’ purview.

John Penhallurick Fraser, Australia

Plus ça change…

SIR – One of your readers talked up the pluses to Britain from being part of the European Union, though the benefits of membership he listed were surprisingly weak (Letters, June 5th). Retirement to Spain? My grandparents managed this in the 1960s without the EU. Cheap French and Italian wines? They are no better than cheap Argentine or Chilean wine. Tapas bars? Britons have always indulged in “foreign” food; when I was a child I ate curry, Chinese and Italian food.

Maybe EU capital investment in poor areas is one good thing we should support. However as we are a net contributor to the European budget, Britain would have this money to invest in itself if it did not have to pay into the EU.

Zoë Hill Oxshott, Surrey

Bridging the gulf over BP

SIR – I guess Brit bashing is the new fad now (“No end in sight”, June 12th). May I request you send The Economist to my home in a plain brown wrapper, for now anyway? Cheers…I think.

James Thornberry Arcadia, Florida

* Letter appears online only

Kyrgyzstan

Stalin's harvest Jun 17th 2010 | OSH From The Economist print edition

The latest outbreak of violence in the ethnic boiling-pot of Central Asia will take generations to heal

A PLAINTIVE siren wails as a government unit, invisible in the darkness, patrols. “We will shoot anyone on the streets. Military curfew. Do not leave your homes,” comes the clipped command in Russian over the loudspeaker. A round of tank-artillery fire rings out. A machinegun crackles a response. This is “calm”, of a sort, after the bloody mayhem of inter-ethnic violence between the Kyrgyz majority and the Uzbek minority that broke out in southern Kyrgyzstan on June 10th. But in Osh, as elsewhere, the wounds that have been opened may take generations to heal.

By June 17th nearly 200 people, both Kyrgyz and Uzbeks, had been confirmed dead. Other estimates are far higher. Local Muslim custom requires that the dead are buried within 24 hours. Many people are burying family members at once without registering their deaths. Some 45,000 Uzbeks have registered as refugees in neighbouring Uzbek-majority Uzbekistan. According to the United Nations’ children’s agency, a total of 100,000 people, mostly women and children, have crossed the frontier. On June 15th Uzbekistan closed its borders, saying it could take no more. Perhaps a further 200,000 people have been displaced within Kyrgyzstan itself.

By day, at least, the streets of Osh are now quiet. Charred vehicles are winched onto dumper-trucks. But markets remain closed. Residents have opened their jars of pickled vegetables, usually reserved for the winter. The town is roughly divided into Uzbek mahallas (neighbourhoods) separated by corridors of mixed-ethnic communities. To the east and west of the city are large concentrations of mostly ethnic- Kyrgyz homes. Behind the barricades marking the entrances to the mahallas, life has been transformed. Women and children have gone. The men who have stayed behind to protect their homes are red-eyed with fatigue. In every mahalla men show pictures on their mobile phones of the dead they have buried. One man presses a DVD on a visiting journalist, saying “Show the world this.” It depicts a mass funeral in a field, with more than 20 graves.

Uzbek men are now replacing fallen trees with welded iron barriers, to keep out their attackers “until the peacekeepers arrive”. Travelling between the roadblocked mahallas and the government-controlled centre of town is a dangerous journey. At each end, men armed with sticks eye each other across the divide. Those who fled also face grim conditions. On June 12th at the border, Uzbekistani guards hesitated as hysterical women sobbed and stumbled towards them. They raised their rifles, but did not shoot. Then they began to allow them across. After the first stampede the bodies of four children lay, crushed to death, in the dust.

Nor are the 45,000 who have registered as refugees in Uzbekistan necessarily that lucky. Most are confined to newly erected camps, even if they have relations nearby. This is causing anguish among the refugees, but is in keeping with the control-freak tendencies of the regime of Islam Karimov, the president, for whom stability, or at least an outward semblance of it, is all.

Most of the refugees are not far from the town of Andijan, where several hundred protesters were shot dead in 2005. The Fergana Valley region of eastern Uzbekistan has also seen an intense crackdown on Islamist extremism, though the bar has been set very low. Some youths have been charged for holding prayer groups.

A well-off local Uzbek near the border on the Kyrgyzstani side is putting up some 200 people, mostly women and children, who are sleeping rough in his yard. At dawn a young man wakes up wailing. His neighbours at home have been shot dead, his house has been burned, and his wife and children are lost.

An Uzbek cameraman has footage of an armoured personnel-carrier going through a crowd of agitated Kyrgyz men as it approaches some Uzbeks. A soldier lowers his rifle. The crack of bullets whizzing past is unmistakable and the cameraman dives for cover. The government claims that some of its vehicles were seized on June 10th. The leader of Kyrgyzstan’s interim administration, Roza Otunbayeva, has admitted how weak her army is.

Simmering and boiling over

The origins of the unrest lie both in the recent turmoil in Kyrgyzstani politics, and in the country’s history as a former state of the Soviet Union. Alone in Central Asia, Kyrgyzstan has had two “revolutions” since independence in 1991. Its bigger neighbours, Uzbekistan and Kazakhstan, have had, in Mr Karimov and Nursultan Nazarbayev respectively, one authoritarian leader since 1991. But Kyrgyzstanis have twice overthrown presidents seen as corrupt, nepotistic and dictatorial.

The “Tulip Revolution” of 2005 brought down Askar Akayev, a Soviet-era strongman, who now teaches maths in Moscow. However, his replacement, Kurmanbek Bakiyev, soon started following the fashion among regional leaders. Like Mr Akayev, he beefed up the powers of the presidency. (The constitution has been changed to this effect seven times since 1991.) He also hounded his opponents while tolerating the fast-growing business interests of his family, notably his son, Maksim, who was this week detained as he landed on a private plane at a British airport, seeking political asylum.

Mr Bakiyev is also in exile. After the security forces opened fire on unarmed demonstrators in April, and more than 80 people were killed in clashes in Bishkek, the capital, he was forced to flee. Belarus’s Alyaksandr Lukashenka, naturally sympathetic to the plight of a fellow post-Soviet strongman, offered him sanctuary.

He was replaced by the interim government, led by Ms Otunbayeva, a former ambassador and foreign minister. It is largely made up of disaffected members of Mr Akayev’s or Mr Bakiyev’s regimes. The small political class is both close-knit and fractious. In an interview with The Economist in May, Ms Otunbayeva grumbled about the difficulty of getting her colleagues to agree on anything.

However, they were committed to a referendum on June 27th, in which voters would be asked to approve a switch to a parliamentary system. Ms Otunbayeva insists the vote will go ahead, though with so many people displaced, and security still doubtful, that may be unwise. The first elections under the new system, which would incorporate many safeguards against the rise of another dictator, would be held in October. If genuine, this would be a radical shift not just for Kyrgyzstan, but for Central Asia as a whole.

The interim government blames the violence on the Bakiyevs. They retain support among ethnic-Kyrgyz residents of the south, the family’s base and stronghold. Several times since April there have been clashes between government forces and Bakiyev loyalists. The government’s case is bolstered by a recording posted on YouTube in mid-May, purporting to be of a telephone conversation involving Maksim Bakiyev. In it he says he intends to bring down the government by causing unrest in the south. A foreign-ministry official says mercenaries from the badlands of Tajikistan and Afghanistan were hired. It is not just the interim government that detects an organising hand behind the violence. A UN spokesman, too, said there was evidence indicating that it began on June 10th with five simultaneous attacks in Osh involving men wearing masks and carrying guns. One target was a gym known to be frequented by criminals, an attack on which was bound to provoke a violent reaction. Aleksandr Knyazev, a political scientist from Kyrgyzstan, says the perpetrators were both Bakiyev-financed criminal gangs and ethnic-Uzbek groups financed by someone else.

The south is another country

Even if the spark came from outside—and first reports suggested that the initial cause was no more than a fist-fight in a gambling den—there was no shortage of dry tinder. In the chaotic weeks after Mr Bakiyev surrendered his seat in Bishkek, opportunistic mobs indulged in looting and score-settling across the country. In the north, around Bishkek, Kyrgyz gangs attacked enclaves of Russians and Meskhetian Turks.

It was in the south, however, that latent resentments manifested themselves most bitterly. Kyrgyzstan is divided both geographically—by high mountains—and ethnically (see map). In the north the legacy of Soviet rule is evident in a more Russified culture. Most of the country’s ethnic Russians live there, but so do Dungans (or Hui, a Muslim people of Chinese origin) and some ethnic Germans. The south is closer to Central Asian traditions and is more ethnically mixed. Most of Kyrgyzstan’s Uzbeks, who make up about 15% of its 5.4m people, live in the south, along with some Tajiks. Indeed, around Kyrgyzstan’s bit of the Fergana Valley—the eastern rim of the ethnically mixed heartland of modern Uzbekistan—Uzbeks form a narrow majority.

This is not the first time ethnic conflict in the area has claimed lives. In June 1990, during the last days of the Kyrgyz Soviet Socialist Republic, street brawling in Osh over land disagreements turned bloody. About 300 people died before Soviet troops restored order, and a curfew was imposed for the whole summer. Mr Akayev was appointed president, with instructions to keep the country’s ethnic frictions in check.

Kyrgyzstan is one of the poorest countries formed by the break-up of the Soviet Union. But the north, around Bishkek (formerly Frunze) is more developed, with some industry. The south is more agrarian and devoutly Islamic. Only two usable roads through the mountains link north and south. It takes a day to drive from Bishkek to Osh.

Mr Akayev, the strongman, was a northerner. Under him southerners felt neglected and unrepresented. When the southern Mr Bakiyev came to power he appointed a northern prime minister, Feliks Kulov, in an effort at inclusion. Ms Otunbayeva, the interim president, was born in Osh, the second-largest city in the country and the south’s biggest. But after many years in the north and abroad she is no longer seen as a real southerner. Uzbeks, who are under-represented in central government, regional administrations and the army, have long felt politically excluded. Whereas historically the Kyrgyz were nomadic herders, Uzbeks were settled farmers. Now the stereotype is that they make a living in the bazaars. The two groups often have very different outlooks, for example on the role of women. Kyrgyzstan is the first Central Asian country to have a woman as president.

The south is also a nest of spies from Uzbekistan—including taxi-drivers, businessmen and others, on the lookout for extremists or for other threats to the Karimov regime, such as members of a banned opposition party. The killing in 2007 of Alisher Saipov, a prominent ethnic-Uzbek journalist in Kyrgyzstan, shows Uzbekistan’s readiness to meddle elsewhere to further Mr Karimov’s perceived interests. Its secret service is said to have long crawled all over Osh and Jalal-Abad, the other big southern town, as if it was its own back yard. As the International Crisis Group, a think-tank, says in a 2008 report, northern Kyrgyzstani politicians complain that Uzbeks in the south make excessive demands for political rights, but have allowed Uzbekistan’s secret service free rein there since the Andijan massacre.

Blame Uncle Joe

Until the Soviet Union started to define its Central Asian territories in 1924, the region never had precise borders. Before Russian colonisation in the late 19th century, the boundaries of the different khanates shifted back and forth. The nomadic Kyrgyz and Kazakhs largely ignored the concepts of states and boundaries anyway.

After the October revolution of 1917, new autonomous republics were created. In 1924 Stalin divided the region into different Soviet republics. The borders were drawn up rather arbitrarily without following strict ethnic lines or even the guidelines of geography. The main aim was to counter the growing popularity of pan-Turkism in the region, and to avoid potential friction. Hence, the fertile Fergana Valley (formerly ruled by the Khanate of Kokand) was divided between Kyrgyzstan, Tajikistan and Uzbekistan.

Some of these borders were redrawn several times until 1936. After 1991, this led to lively demarcation disputes among the newly independent countries. In addition, some small pockets of territory are nominally part of one country but geographically isolated from it. Kyrgyzstan, for example, has seven enclaves, two belonging to Tajikistan and five to Uzbekistan.

Uzbeks in exile

This has been only one cause of prickly relations between the “stans”, which are linked by Soviet-era roads, gas pipelines, electricity grids and other infrastructure. Water, in particular, is very sensitive. Mountainous Kyrgyzstan and Tajikistan are the sources of much of the water that irrigates Uzbekistan and Kazakhstan. The upstream countries want to develop their enormous hydropower potential. This is opposed, especially by Uzbekistan.

The downfall of Mr Bakiyev seems to have opened a new rift between Kyrgyzstan and its neighbours. Neither Mr Karimov in Uzbekistan nor Mr Nazarbayev in Kazakhstan wants to see protest spread across his country’s borders. Both closed them after the April unrest, putting severe economic strain on the interim government. Kazakhstan also limited the time Kyrgyzstani migrant workers could stay. “Our neighbours are very hostile,” says Isa Omurkulov, the mayor of Bishkek, who then plays up to their fears by threatening to “export our revolution”. After the unrest in the south, Kazakhstan sent more troops to its border.

Friends like these All three big external powers in Central Asia—America, China and Russia—have a big interest in the region’s stability. China sees it as an important source of gas and other energy supplies. It is also, more alarmingly as seen from Beijing, a possible inspiration for Islamist nationalists in what was once “East Turkestan” and is now China’s region of Xinjiang.

Both America and Russia, for their parts, maintain military bases in Kyrgyzstan, both near Bishkek. The American Manas air base, or “transit centre”, as it is now called, is used for supporting American and NATO troops in Afghanistan. It is an important part of a northern supply route developed because of the vulnerability of convoys coming through the Khyber Pass from Pakistan. Russia’s base in Kant is part of an agreement by the Collective Security Treaty Organisation, which groups together seven members of the former Soviet Union, to set up a counter-terrorism base in the region. But the former imperial power still sees Central Asia as very much its own stamping-ground.

The Manas base has been a source of friction. Last year Mr Bakiyev promised Russia it would be closed and was promised aid. He reneged on the deal when America increased the rent it was paying. That is one reason why Russia was suspected of having a role in his downfall. And though domestic pressures were probably enough to unseat him, Russia was certainly quick to recognise and help Ms Otunbayeva’s government.

Russia did not, however, rush troops to its aid when Ms Otunbayeva asked for them, as the violence in the south span out of control. It limited itself at first to sending paratroopers to secure the base at Kant, and then sending relief supplies. In April Dmitry Medvedev, Russia’s president, described Kyrgyzstan as “on the verge of civil war”. Russia presumably has no desire to be sucked in, as it was in Afghanistan in 1979—and certainly not without international backing.

Ms Otunbayeva insists there are no plans to throw the Americans out of Manas. But many of her colleagues accuse America of having pandered to Mr Bakiyev’s corrupt and dictatorial whims in exchange for access to Manas. They allege that Maksim Bakiyev profited from the fuel-supply contracts for the base. This claim is being investigated by America’s Congress. The privately-held company which has the Pentagon contract denies any knowledge of Maksim Bakiyev’s involvement in the firms they deal with. NATO has suspended flights by air-to-air refuelling tankers from Manas.

Even if the world’s big powers share an abiding interest in the stability of Central Asia as a whole, and hence of Kyrgyzstan in particular, they seem to have little idea how to achieve it. So far they have tended to compete for influence. But with an eye on the ethnic and religious tensions in the region, and the vulnerability of brittle authoritarian systems, it may be time to start co-operating.

Britain's emergency budget

Pick your poison Jun 17th 2010 From The Economist print edition

All the scenarios are painful, but some make more sense than others

FROM the outset Britain’s new coalition government has said that its main task is to tackle the yawning fiscal deficit, which hit a peacetime record of 11.1% of GDP in 2009-10. It will set out its plans in an “emergency” budget to be presented on June 22nd. The decisions made by George Osborne, the Conservative chancellor of the exchequer, working with Danny Alexander, the Liberal Democrat at the Treasury in charge of controlling spending, will be momentous, determining, perhaps, the government’s own longevity as well as Britain’s economic prospects.

In practice the budget will have to take into account the compact between the Tories and Lib Dems, as well as each party’s election pledges. But in principle this is an opportunity to start afresh, sweeping aside their own commitments and plans inherited from Labour, and learning from the experience of other countries that have had to impose big clampdowns. The question is how to close the fiscal gap while protecting a still delicate economy, securing public support through a distribution of pain that is seen to be fair.

The first step is to establish just how deep a hole has to be filled. On June 14th the new Office for Budget Responsibility (OBR), now in charge of fiscal forecasting, put the deficit in the financial year to March 2011 at £155 billion ($229 billion), or 10.5% of GDP, before any changes by the current government.

What matters most is the shortfall likely to persist after the economy has fully recovered, unless spending is cut and taxes are raised. On the new forecasts, the permanent weakening in the public finances from the financial crisis and recession is 5% of GDP, according to the Institute for Fiscal Studies (IFS), a think- tank. But that is based on a central projection from the OBR and Mr Osborne may want to build in a safety margin of up to 1% of GDP. Moreover, interest payments will rise by close to 1% of GDP between this year and 2014-15 because of the deluge of borrowing. Taking this into account, the cyclically-adjusted primary budget balance (which excludes interest payments) would need to improve by around 7% of GDP.

Mr Osborne must also decide how swift the consolidation should be. He has already announced net spending cuts worth 0.4% of GDP for 2010-11. A further 6.6% off the deficit by trimming expenditure and raising taxes in the four years to 2014-15 would mean an annual improvement in the structural primary balance of over 1.6% of GDP. If he takes it more slowly over five years, he could reduce the deficit by just 1.3% of GDP a year.

As the chart shows, international experience suggests that either would be feasible. In the ten biggest consolidations since the late 1970s (and Britain’s would rank among them), the average pace of deficit- cutting was 1.9% of GDP a year, according to a study by the OECD. A quick workout now would calm bond vigilantes who fret about Britain’s borrowing, and could to some extent be offset by keeping interest rates lower for longer.

But Mr Osborne will need to take into account the fragility of Britain’s economy these days: the OBR is less optimistic than the previous government about its immediate prospects and also thinks that the long-term trend rate of growth is lower. And the troubles of the euro area, Britain’s biggest trading partner, also argue for a pace that is not too punishing. John Hawksworth, an economist at PricewaterhouseCoopers, an accountancy firm, thinks a fiscal consolidation of around 6.5% of GDP is needed and favours the more gradual approach. This would match the pace of Britain’s previous retrenchment, over six years, in the 1990s.

The balance to be struck

So what are the options for healing the public finances? If Mr Osborne wiped the slate clean, he could at one extreme rely entirely on spending cuts or at the other on tax rises. The OECD study found that cures based mainly on expenditure cuts tended to be more successful in stabilising the public finances. But Stéphanie Guichard, its main author, says that when fiscal consolidations are large they typically require tax rises as well as spending cuts. There are two particular reasons why higher taxes should take some of the strain in Britain.

The first is that in the middle of the previous decade the exchequer became unhealthily dependent on buoyant receipts from frothy finance and property markets. These will not return on the same scale. The second is that fiscal consolidation will succeed only if the public accepts the package as fair. Since spending cuts tend to hurt poorer people more, it is vital to show that richer folk, who usually pay more tax, are also feeling the pinch, according to Jens Henriksson, who worked on Sweden’s fiscal retrenchment in the 1990s.

Unwelcome though it is, a contribution from higher taxes is required. Just how big it should be is a matter of dispute. The Tories have said they want to rely on taxes for a fifth of the consolidation. That may be too ambitious. If something like 2% of GDP were found by higher taxes, leaving spending to be cut by 5% of GDP, it would still be a tougher mix than all but two of the ten biggest OECD deficit-cutters managed.

Mr Osborne has several choices in raising these revenues. First of all, there is the legacy of planned tax increases left by his Labour predecessor, Alistair Darling, which build to 1.2% of GDP by 2014-15. Of this, just under half comes from higher income tax, including a new 50% top rate on annual incomes above £150,000. Higher national-insurance contributions (NICs) will raise another 0.4% of GDP. The rest is to come from increases in alcohol, fuel and tobacco duties. Although the Tories pledged before the election to reverse most of the NIC increase, that still left them in effect planning for 0.8% of GDP from extra taxes as a result of Labour’s measures.

Mr Osborne could choose to annul all his predecessor’s tax changes, including those already implemented this year, and replace them. There are arguments for sweeping them aside. The new top rate of income tax may well alienate more rich people than raise revenues from them, and the associated pension provisions are nightmarishly complicated.

On strictly economic grounds, it would be better to raise money through higher VAT or, for example, a new carbon tax. Consumption taxes are generally thought to have smaller adverse effects on growth than most other types of tax and are certainly less distorting than corporate or personal income tax, as a 2009 OECD study confirmed. If, for example, the main rate of VAT were lifted from 17.5% to 21%, this would raise 1% of GDP—more, if some exceptions from it, such as that for books and newspapers, were removed. A carbon tax could raise a similar amount and, properly designed, could have the further merit of helping Britain to lower its emissions of greenhouse gases (see article).

The snag with both, however, is that they are regressive, meaning that poorer households would fork out proportionately more of their income paying them than richer ones. If the coalition government is to come up with a plan that will not lead to serious protests, it may have to stick to some of Labour’s income-tax imposts on the better-off while raising allowances to help low to middling earners. For the same reason, there may be a case for raising the rate of capital-gains tax on non-business assets, as the government proposes, provided that gains are indexed for inflation. Taken together, such measures will enhance the perceived fairness of the fiscal-consolidation package, and could then be supplemented by a carbon tax or higher VAT to raise an additional 1% of GDP. A further 0.2% could come from other measures, such as a mooted levy on banks.

That leaves spending, and the remaining 5% of GDP needed to balance the books. On May 24th the chancellor announced a first tranche of cuts worth 0.4% of GDP in the current financial year, so he has 4.6% still to find. According to the OBR, total expenditure in this financial year (before the cuts outlined last month) will be £701 billion, or 47.5% of GDP.

The single biggest component is welfare, which makes up 28% of the total. Around 55% is spent on the public services, such as health and education, and administration. A third category is a miscellaneous bunch of commitments, some of which, including debt-interest payments (2.9% of GDP this year), are unavoidable.

Indiscriminate cuts in welfare would run against the imperative of a socially fair package, since most of the spending goes in state pensions to workers in general, and to the poor and needy. But quite a chunk does not. At present, for example, all families with dependent children receive child benefit, and some quite well-off ones also get extra help through the child-tax credit, which is mainly for poorer families. If the two were combined and means-tested, there could be a saving of around £6.5 billion a year, according to the IFS.

Special benefits for pensioners, who will be gaining from separate plans to shore up the basic state pension, could also be reduced. One candidate is winter-fuel payments, which go to all households with someone over 60. This is a poorly directed benefit, as only 12% of recipients pay more than 10% of their income to heat their homes adequately (the “fuel poverty” which the transfer is meant to alleviate); scrapping it would save £2.7 billion. Ditching free bus travel for the over-60s and free television licences for the over-75s would save £1.6 billion.

And there is scope for other savings. For example, cutting the share of child-care costs that can be refunded through a tax credit from 80% to 50% could save £700m. Tightening the disability-living allowance and housing benefit in the private rented sector could raise £3 billion and £700m respectively, according to the Social Market Foundation (SMF), a think-tank. Altogether, these measures would clip 1% of GDP off the welfare bill.

Such a package would mean that the Tories, in particular, had to jettison pledges, notably over pensioner freebies. But unless substantial savings are made in welfare, public services will pay a disproportionate penalty. Even with a welfare clampdown of this magnitude, another 3.6% of GDP will be needed. Cuts will fall mainly on the departments responsible for the public services.

The next important decision Mr Osborne must make is what balance to strike between current and capital spending, on roads and rail and the like. Mr Darling had already pencilled in investment cuts worth 1.5% of GDP. This seems excessive, repeating the mistake often made in the past of slashing capital spending when times are hard; this has left the country with a poor transport system, for example. For Britain to emerge from its fiscal crisis not only must the deficit shrink but the economy must grow, and this means adequate infrastructure. The government might want to cut net investment by no more than 1% of GDP. That, in turn, would mean reducing current departmental spending by around 2.6% of GDP.

An obvious target is the government’s own pay bill, which makes up a quarter of total spending. Public- sector workers are paid much more than private-sector staff. In 2009 average hourly wages were 15% higher for men and 25% higher for women. But the public workforce is better educated and qualified. Once these differences are stripped out, men in the public sector earn 2% and women 7% more, for an average premium of 5%, according to research by Antoine Bozio and Paul Johnson of the IFS.

This suggests scope for a real cut in public pay of around 5%, which could be delivered through a two- year pay freeze. The gross saving would be £8.9 billion, though some of the effect would be lost in lower taxes. Even so it would deliver a net saving of £5.5 billion, or 0.4% of GDP.

The pensions gap between the public and private sector is greater still. More generous and much more widespread pension provision boosts public pay by a further 12% compared with the private sector, according to the IFS researchers. An increase in public-sector employee contributions of, say, two percentage points would raise £3 billion, or 0.2% of GDP, according to the SMF. Broader reform of the system could take place in slower time.

A squeeze in public-sector employment will also produce substantial savings. The government head count grew by 13% in the decade to 2009. Some of the extra staff were required but a 7.5% cull might be necessary now, bringing down the payroll by 400,000 or so. The potential saving would depend on how many of the job losses were among the lower paid and on whether it caused higher unemployment, pushing up benefit bills, but it might be around 0.8% of GDP. The job losses could be lower if more swingeing cuts in pay and perks were made.

The CBI, an employers’ group, thinks there is also scope for additional savings. Susan Anderson, who heads its public-services unit, argues that public managers will now be forced to make changes, such as sharing or outsourcing services like payroll and service-desk support. Procurement could also be tightened. Bigger economies will come in the medium-term by comprehensively reconfiguring the way that public services are provided. Such savings could build up to 1.2% of GDP.

Less cash, more reform

The need to cut public services should spur more fundamental reforms. The funding bonanza they have had over the past decade has been accompanied by falling productivity. It is time to concentrate on reforming the provision of health care and education, essentially resuming the supply-side liberalisation pioneered by Tony Blair, while also moving towards more co-payment and user fees.

Unfortunately, what would be manageable if cuts were made across all public services has been made much harder by the government’s promise to ring-fence some of them, notably the enormous health budget. The problem with safeguarding favoured services is that less favoured ones face steeper real cuts. And there are pressures to widen the inner circle.

This became clear with the Treasury’s first tranche of cuts in May, mainly in departmental budgets. Because health, overseas aid, big chunks of education and defence were shielded, the cuts elsewhere were much deeper than logic dictated. Several ministries, including transport and environment, lost 5% or more of their planned budgets for 2010-11 at a stroke.

Yet among the bad news lurks a little good. The crisis has forced people to focus on the state and what it should provide—free, for a fee or not at all—and in the nick of time. An ageing population will require more spent on pensions, health and social care in the 2020s. Mr Hawksworth, of PWC, thinks a further fiscal tightening equal to two or three percentage points of GDP will be needed to counter those costs. No bad thing to get the public finances in hand before then.

Taxing carbon

Worth a go Jun 17th 2010 From The Economist print edition

Designing the tax is not uncomplicated, but it is a promising way forward

THIS newspaper has long advocated a carbon tax as the best way to deal with a warming climate. This month we asked Cambridge Econometrics, an economic-modelling firm, to assess the impact of a carbon tax on the economy. To keep things simple and allow for gradual adjustment, we proposed that it should raise revenues equal to 1% of GDP by 2020, and that other policies with similar objectives (fuel duty, subsidies for renewable energy, Britain’s membership of the European emissions-trading scheme—the ETS—and so forth) would be abolished or cut back.

The results are surprising. A frequent worry about carbon taxes is that they will hurt business and the economy. But in our simulation Britain’s economic performance would improve. Despite raising an extra £11 billion in net revenue by 2015 and £18 billion by 2020, our carbon tax (£31 a tonne in 2015) would help economic performance, not hamper it. Output would be 1.2% higher by 2020 than under the current arrangements.

Philip Summerton, of Cambridge Econometrics, explains that, with a general carbon tax replacing specific, expensive subsidies for renewable energy, more gas-fired power stations would be built. Since gas power is cheaper than wind power, for example, that would lower the cost of electricity. That, in turn, would boost production: manufacturing would grow by an extra 2.5% by 2020.

Admittedly, not all the news is good. Britain already depends on gas for around 40% of its electricity, and it is running out of the stuff. The tax would do nothing for security and diversity of supply. Although electricity bills would fall, the price of gas (the most popular home-heating fuel) would rise. Average domestic fuel bills would climb by around 0.5% between 2010 and 2020. And Britain is in fact unlikely to withdraw from the ETS, so the relationship between the ETS price for carbon and the one set by the British taxman (in our test, higher) needs some thought.

Confining the revenues from our tax to 1% of GDP led to greenhouse-gas emissions of 568m tonnes in 2020, around 6% more than they would otherwise have been. This was a bit of a blow. But a higher tax rate could drive emissions down, says Mr Summerton, and, in return for slightly more emissions, Britain gains a significantly bigger economy and a useful revenue stream. This suggests that a carbon tax would be more efficient than the current hotchpotch of policies.

A carbon tax has many more general advantages as a fiscal tool, too. It would be simpler and more predictable than the current jumble of tax breaks, trading schemes and purchasing obligations. The principle—that polluters pay for the damage they cause—is easily grasped, and it is politically attractive to tax “bads” such as pollution instead of “goods” such as work and entrepreneurship. And, by establishing a reliable price for carbon, it could give businessmen the certainty they need to invest in greener technologies. But the effect of that is likely to show up only after 2020.

Note: for more thoughts on a carbon tax, see here

For more discussion of these results, and the advantages and disadvantages of a carbon tax, see www.economist.com/world/britain

Copyright © 2010 The Economist Newspaper and The Economist Group. All rights reserved. Public finances Can pay, won't pay America’s most profligate states do not owe as much, proportionately, as Greece. But their politics are just as problematic

Jun 17th 2010 | WASHINGTON, DC

THE state of Illinois has a rather crude way of coping with its ballooning budget deficit. It stops paying bills. Already, it has failed to pay more than $5 billion-worth. State legislators are paying their own office rent to avoid eviction. Schools and public universities are having their budgets cut.

Illinois owes Shore Community Services, a non-profit agency in suburban Chicago, some $1.6m for services to the mentally disabled. The agency has had to lay off a dozen staff. Jerry Gulley, the executive director, says his outfit’s line of credit could be exhausted soon. The bank will not accept the state’s IOUs as collateral. “That’s how sad it is,” shrugs Mr Gulley.

Comparisons between incontinent American states and Greece are all the rage. Though this is an exaggeration, credit-default-swap spreads, which measure investors’ expectations of default, are wider for some American states than they are for some of the euro zone’s other peripheral economies (see chart).

There are other similarities. Like members of the euro zone, American states may not declare bankruptcy, cannot be sued by creditors and, thanks to America’s federal structure, cannot be forced to behave by a higher level of government. They also do not issue their own currency, so inflating away their debt is not an option. And, like many European governments, state legislatures and governors are reluctant to impose the necessary pain. The Illinois legislature recently passed a budget for the next fiscal year, starting on July 1st, which leaves a $13 billion deficit to be closed.

The parallels with Europe are unfair, though only up to a point. American state and local debt last year was $2.4 trillion, about 16% of gdp. But most of that debt is issued by local governments or state agencies and has specific assets or fees, such as road tolls, earmarked for paying it back. Even in the weakest states, debt that needs to be paid out of general tax revenue was under 5% of GDP last year. Greece’s was 115%. The numbers for deficits show an even greater contrast. California’s deficit, assuming the state fails to close it, would equal only 1% of its GDP, compared with 14% for Greece and 9% for Portugal last year.

Greece and Portugal do not have separate federal and state governments, however. So a fairer comparison would take account of gross American federal debt, which currently stands at 85% of GDP. This underlines the fact that most of America’s debt problem is federal not local. The consequence is that, because states’ refinancing requirements are relatively low compared with their tax revenues, no state faces an imminent liquidity crisis. California’s treasurer, Bill Lockyer, is fond of saying that California will not default unless there is thermonuclear war.

It was not always that way. From 1841 to 1842, in the wake of a series of financial panics and recessions, eight states and Florida (then a territory) defaulted. John Wallis of the University of Maryland says that this first series of defaults led states to set up strong constitutional barriers to debt accumulation. States now commonly require either a referendum or a supermajority vote of the legislature to issue a general obligation bond (one not backed by earmarked revenues). All states, except tiny Vermont, now require their annual operating budgets to be balanced, which limits the racking up of debt over time. Many state constitutions also enforce repayment of debt. In California, for example, only schools can be paid ahead of bondholders. This is one reason that state defaults are so rare; the last was by Arkansas in 1933. In 1975, New York state passed a moratorium on servicing New York City debt unless its holders agreed to a restructuring. The next year the state’s court of appeals ruled it unconstitutional.

Still, the prospect of default is not quite as remote as these comforting comparisons suggest. That New York even tried to force a restructuring on creditors, albeit New York City’s, illustrates that the threat of default is primarily not economic, but political. With revenue plummeting, legislatures and governors are often unable to agree on spending cuts or higher taxes to narrow the gap. California’s dysfunctional politics are a big reason why Moody’s rates California only a few notches above junk. “This is the seventh-largest economy in the world—it’s not an ability-to- pay issue,” says Robert Kurtter of Moody’s.

States are also finding ways round the constitutional barriers to borrowing. New York needs voters to approve any general-obligation bond; so, since 2002, it has relied on bonds backed by personal income-tax revenues which don’t require that approval. In January Illinois issued $3.5 billion in bonds to fund its pension payments, and may issue a similar amount in the coming fiscal year, though pension obligations are clearly an operating expense.

Most troubling of all is the squeeze budgets are facing from their unfunded obligations for civil-service retirement pension and health benefits. The Pew Centre on the States, a research organisation, put these at $1 trillion in 2008. In a report, Joshua Rauh and Robert Novy-Marx, finance professors at Northwestern University and the University of Chicago respectively, note that these liabilities are coming due at an alarming rate. By 2018 Illinois will be paying $14 billion a year in benefits, equal to more than a third of the state’s revenue, compared with $6.5 billion now. Mr Rauh says bondholders should worry because several state constitutions, including those of Illinois and New York, make state pensions senior to bond debt.

Still, the assumption of many investors is that the federal government would never let a state default. It might allow an isolated case, but if a default looked like the start of a wave, the federal government would surely blink—just as Europe did when confronted by Greece.

United States

Jun 17th 2010 | NEW YORK

STALEMATE is nothing new in Albany, the capital of New York state. Last summer, for instance, the state Senate was paralysed for five weeks because a Democrat defected (temporarily, it turned out) to the Republican Party. This year is no better. The state budget is almost 80 days late. Since the fiscal year began on April 1st, lawmakers have been forced to pass weekly spending bills to keep the state government ticking along. But legislators’ patience is wearing thin; this week, the state came close to a full-scale shutdown, a first even for one of the most dysfunctional state legislatures in the country.

A shutdown would have closed state offices, sending 200,000 state workers home. Some $190m in unemployment benefits for 565,000 New Yorkers would have gone unpaid. Tolls on state roads might have gone uncollected. A terrorism hot-line might have been closed. State police and prison guards would have stayed on the job, but they might not have been paid. David Paterson, New York’s lame-duck governor, predicted “unimaginable chaos”.

E.J. McMahon, of the Empire Centre for New York State Policy, thinks the governor’s threat was hyperbole, nothing more than a “pointless diversion”. But it felt real enough to Hugh Farley, a Republican who represents the Albany area. Many of his constituents are state employees. Republicans had been uniformly voting against the recent spending bills. Last week two Democrats said they would not vote for the next one. Since the Democrats have only a majority of 32-30 in the Senate, Mr Farley feared that unless he crossed party lines to support the bill, a shutdown was likely. Although he, along with two other Republicans, supported the bill on June 14th, which averted a shutdown, he is loth to support the next spending bill. So the possibility of a shutdown remains.

Annoyed that the legislature will not help him close a $9.2 billion budget hole, Mr Paterson has recently started incorporating some of his budget into his temporary spending bills, much to lawmakers’ rage. The $327m cuts in mental health and social services were particularly hard to swallow. Using this creative, if rather sneaky, method, Mr Paterson is estimated to have smuggled as much as 60% of his unpassed January budget into his weekly spending bills.

But the governor has not yet made any truly hard calls. A federal judge has blocked his attempt to suspend thousands of state workers without pay, but he is considering imposing 10,000 lay-offs, which would save the state $250m. Tax increases remain possible: a tax on fizzy drinks has been considered, and a new millionaires’ tax may yet be introduced.

On June 16th, Mr Paterson gave the legislature until June 28th to finalise a deal. He is again giving lawmakers a final choice; vote for an expansive emergency spending bill—or see the government shut down.

United States

Jun 17th 2010 | AUSTIN

FOR a brief spell two summers ago, Chet Edwards, a Democratic congressman from Texas, was one of the most furiously scrutinised men in the nation. Barack Obama had yet to name his presidential running-mate, and at every squeak of a rumour the spotlight swung furiously to the subject. Nancy Pelosi, the speaker of the House of Representatives, offered a casual comment. Mr Edwards, she said, should surely be on the shortlist. He was one of the best people in Congress.

Now Ms Pelosi’s kind comment may be coming back to haunt Mr Edwards. The 17th congressional district of Texas, which he represents, sprawls across the centre of the state, centred on Waco. It encompasses George W. Bush’s ranch in the small town of Crawford, and his father’s presidential library at Texas A&M University. Its population is on average older than that of Texas as a whole, less Hispanic and more Republican. The Cook Political Report, which rates congressional races around the country, makes the district one of the most conservative in the country: it gives Republicans a 20-point built-in advantage there.

Mr Edwards has been the congressman from this bastion since 1991, although his district changed shape around him during Texas’s partisan redistricting of 2003. He knows how to work with Republicans, and has parted ways with the Democratic caucus on notable occasions, such as the health-care bill. Mr Edwards has survived tough election challenges before, but it is, after all, a Republican district, and this year will be hard for Democrats. In May a Republican poll showed him Is Chet Edwards conservative enough? trailing his Republican challenger, a little-known businessman named Bill Flores, by 12 points.

His ability to pull even may be a sign of whether this year’s mid-term elections are going to be dominated by national politics or by local concerns. The campaign says that they aim to focus on who will be better for the district—Mr Edwards, who spent much of this week lobbying for the preservation of the Big 12 football conference (a type of league), which includes both Baylor University and A&M, or Mr Flores, presented as an oilman from Houston. It is not a bad pitch. Despite all this the Cook Report rates this year’s contest a toss-up, and that is a testament to Mr Edwards’s efforts. “He has no business winning here, if not for the fact that he’s great at retail politics and delivering federal dollars for the district,” says David Wasserman, an analyst with the report.

At the moment, though, the pursuit of pork can be a liability. In the governor’s race in Texas earlier this year Rick Perry, the popular Republican incumbent, successfully attacked Kay Bailey Hutchison, his opponent in the primary, for chasing federal money. Mr Edwards has taken some grief for his own efforts. Earlier this year the council of the small city of Grandview angrily denounced a half-million-dollar earmark he had secured for a water tower. The candidates will battle it out on the stump. “The district knows him very well,” reckons Cal Jillson, a political scientist at Southern Methodist University, looking back at the past few cycles. “They know that he’s a Democrat, they know that they’re Republicans, but they’ve decided that he’s effective enough that they will keep him.”

United States

Jun 17th 2010 | ATLANTA

Let’s hope they’re not in a hurry

CONTRARY to popular belief, traffic in Atlanta is not always hellish. There are a good few days each year when it is merely purgatorial. In 2007 2.4m Atlantans took to the region’s roads each day. They spent a total of 135m hours in traffic delays, burning through almost 96m extra gallons of fuel—four times as much time and almost five times as much fuel as 20 years earlier. Between 1987 and 2007 the number of drivers during peak hours doubled, as the area’s population rose from 2.6m to 5m. Nor was growth limited to Atlanta: Georgia was the third fastest-growing state between 2000 and 2006.

The state’s infrastructure has not kept pace; Georgia ranks 49th among the 50 states in infrastructure-spending per capita. Its petrol tax—which funds highway, road and bridge maintenance—is the second-lowest in the country. Georgia’s legislature has long been sharply divided between Atlanta and the rest of the state: telling voters in the rural south, for instance, that they will have to pay higher taxes to fund road improvements in the urban north is politically unpalatable. So when Sonny Perdue, Georgia’s governor, signed an ambitious and comprehensive transport bill that was three years in the making into law on June 2nd, he did so not by bridging those divisions but by codifying them.

The bill divides Georgia into 12 regions, and gives each the power to decide on its own transport projects. Voters in each region will decide by referendum whether to approve a one-cent increase in the sales-tax to pay for those regional projects. Atlanta stands to see as much as $790m through the new tax.

The bill will also help MARTA, Atlanta’s woefully inadequate urban-rail system. It is the largest in the country to receive no state funding; it relies instead on passenger revenue and a 1% sales tax in the two counties it serves. It has long been required to spend half its sales-tax revenue on capital projects, which has starved its operating budget. The bill removes that requirement for the next three years. That will not make MARTA any more effective, but it may stave off some of the service cuts it faces.

Still, some worry that the regional focus will make statewide projects more difficult: building a rail link between Atlanta and Savannah, for instance, could require the co-operation of rural areas with little connection to either city. And for all its promise, the bill moves as slowly as an Atlanta rush hour. The first referendum will not occur until the 2012 presidential primary: Mr Perdue was leery of asking people to pay more tax while the economy remains weak. Should regional voters approve a project, funding would not arrive until the following year. Should they decline, that region will be unable to suggest another project for the next two years. And anyway the entire bill will have to be reapproved in ten years’ time.

United States

Jun 17th 2010 | NEW YORK

THE recession may have hurt, but re-regulation could hurt almost as much. So in the first quarter of this year the financial services, insurance and property industries spent nearly $125m on lobbying, up more than 11% from last year. The Centre for Public Integrity, a non-partisan research group, reckons the financial-services industries alone hired more than 3,000 lobbyists to influence the financial reform bill now before Congress. On June 14th came news that the Office of Congressional Ethics has launched a probe into the fund-raising activities of eight lawmakers who sit on the House Financial Services or Ways and Means Committees. They are thought to have held fund-raisers days before they voted on financial reform.

The bill has passed both House and Senate, but the two versions still have to be reconciled. Lobbyists hope to water down some of the more contentious provisions, such as a requirement for banks to spin off their derivatives units. They are making their appeals to familiar faces. The senators on the conference committee, which will meld the bills, are some of the biggest recipients of contributions from the financial services, insurance, and property industries, reckons the Centre for Responsive Politics. The 12 senators in question have received over $57m from these sectors during their careers.

If the final bill comes out tough, Wall Street may punish the Democrats. Already, many financial firms have started to spurn Democrats in favour of Republicans. In March 2009 they gave only 37% of their contributions to Republicans. But in March of this year the proportion jumped to 58%. Money-men want to reward Republicans, but they are also betting that Republicans will pick up seats in November’s election, says Jim Thurber, director of the Centre for Congressional and Presidential Studies at American University.

It is not just the reform bill that has prompted financial firms to storm Congress. A provision in the jobs bill, which the House has passed and the Senate is still considering, would hit private-equity shops, property firms and some hedge funds that pay capital-gains rates, rather than income tax, which is higher, on their profits. Congress wants to change this, and has proposed taxing 75% of their profits as income and 25% as capital gains.

On June 8th the Senate Finance Committee threw the industry a bone and proposed that government should tax only 65% of their profits as income. Some cynics note that the third-largest contributor to Max Baucus, the senator who heads the Finance Committee, were, collectively, employees at KKR, a big private-equity firm.

United States

Jun 17th 2010 | WAUNAKEE, WISCONSIN

SARAH ZANDER and Ashley Jacobsen are like many teenage girls. Sarah likes soccer. Ashley was captain of her school’s team of cheerleaders this year. They are also earning good money as nursing assistants at a retirement home. Sarah plans to become a registered nurse. Ashley may become a pharmacologist. Their futures look sunny. Yet both are products of what is arguably America’s most sneered-at high-school programme: vocational training.

Vocational education has been so disparaged that its few advocates have resorted to giving it a new name: “career and technical education” (CTE). Academic courses that prepare students for getting into universities, by contrast, are seen as the key to higher wages and global prowess. Last month the National Governors Association proposed standards to make students “college and career ready”. But a few states, districts and think-tanks favour a radical notion. In America’s quest to raise wages and compete internationally, CTE may be not a hindrance but a help.

America has a unique disdain for vocational education. It has supported such training since 1917; money now comes from the Perkins Act, which is reauthorised every six years. However, many Americans hate the idea of schoolchildren setting out on career paths—such predetermination, they think, threatens the ethos of opportunity. As wages have risen for those with college degrees, scepticism of CTE has grown too. By 2005 only one-fifth of high-school students specialised in an industry, compared with one-third in 1982. The share of 17-year-olds aspiring to four-year college, meanwhile, reached 69% in 2003, double the level of 1981. But the fact remains that not every student will graduate from university. This may make politicians uncomfortable, but it is not catastrophic. The Council of Economic Advisers projects faster-growing demand for those with a Learnt it at high school two-year technical-college degree, or specific training, than for those with a full university degree.

A growing chorus of state and local leaders argues that CTE can help. Rather than pit training against university preparation, they are trying to integrate the two. CTE students may go on to university, to training or directly into work. The Perkins Act nudges such efforts forward, but the big shove comes from beyond Washington. Wisconsin’s governor, Jim Doyle, has expanded his state’s youth apprentice programme, which provides high-school students such as Sarah and Ashley with jobs. Academic courses are complemented by those at technical colleges.

The most successful model, however, may be “career academies”. Started in Philadelphia in 1969, mimicked in California in the 1980s and supported elsewhere by Sandy Weil’s National Academy Foundation, these small schools combine academic and technical curriculums and give students work experience. When properly implemented, career academies can produce striking results. The non-partisan MDRC found that college attainment did not rise relative to a control group, but career academies did boost students’ earnings by 11%. Among boys, earnings were 17% higher. Young men were more likely to be married.

The challenge is to scale up such programmes. Within a sprawling high school in Chicago, Kevin Rutter runs a small finance academy, teaching students about markets, accounting and personal finance, welcoming executives and helping students find internships. Chicago’s schools system this year said it would revamp its CTE system to mimic academies such as Mr Rutter’s, merging academic work with training for growth industries. California has pursued similar reforms; CTE’s main champion is Arnold Schwarzenegger.

Mr Obama should presumably push along such efforts. Last year he asked every American to commit to at least one year of training, whether through a “community college or four-year school, vocational training or an apprenticeship”. However, the governors’ new standards still emphasise academic skills. The education secretary’s plan to reauthorise No Child Left Behind barely mentions CTE. Advocates hope this will change.

In the meantime, a bold new programme is inching forward. The National Centre on Education and the Economy (NCEE), a think-tank, is developing a test that students may take in their second year of high school. On passing, they could proceed to a community college or stay in high school to apply to a four-year university. Those who fail would take extra courses to help them pass. A pilot programme, supported by the Gates Foundation, will begin in eight states next year. Some parents are already outraged by the imagined spectre of tracking. Marc Tucker, who leads the NCEE, argues that a path to a community college might keep students engaged. Such a system would provide students with more opportunity, not less.

United States

Copyright © The Economist Newspaper Limited 2010. All rights reserved. Lexington The 70-30 nation America’s faith in free enterprise seems impervious to setbacks. That has not stopped the angst on the right

Jun 17th 2010

THE past couple of years have not been private enterprise’s finest hour. From the collapse of Lehman Brothers to the implosion of General Motors and Chrysler to BP’s oil spill in the Gulf of Mexico, one great firm after another that had boasted of making society richer has turned into an expensive liability for taxpayers at best or, at worst, a menace to the general prosperity or the environment. You might expect this sequence of calamities to have made people sourer towards capitalism and friendlier to the state. But in America, at least, you would be wrong. Americans remain deeply wedded to the free-enterprise system.

Even after the collapse of Wall Street and all that has followed, an overwhelming majority of Americans say in opinion polls that they prefer capitalism to socialism. Gallup found in January that 61% had a positive view of capitalism and about the same percentage had a negative view of socialism. In March last year the Pew Research Centre asked Americans whether they were better off in a free-market economy “even though there may be severe ups and downs from time to time”. Seventy percent answered in the affirmative. Most Americans also say their federal income taxes are too high. Even those who favour higher taxes on the rich think the top rate should be 20% or less.

If Americans will stand behind the free-enterprise system come what may, it makes sense for Barack Obama’s opponents to portray the president as a danger to it. “We are facing a ruthless secular-socialist machine that is alien to America’s history and traditions,” bellows Newt Gingrich, the hero of the Republican victory of 1994, as he flogs his latest book (“To Save America”). The Republicans are sure to do well in November’s mid- terms.

And yet Arthur Brooks, the president of the American Enterprise Institute, thinks defenders of capitalism need to do more. They need, even in America, to remake the moral case for it.

Mr Brooks considers entrepreneurship central to American culture, maybe literally a part of its DNA (thanks to all of those immigrants importing the gene that makes you get up and go). His guess is that the country is divided about 70% to 30% in favour of free enterprise. But he poses an intriguing question. If that is true, how did a politician with as “little regard for free enterprise” as Mr Obama become president in the first place? The answer in his own book (“The Battle”) is that although America is a 70-30 nation in favour of free enterprise, the 30% are firmly in charge.

How could that possibly be? Mr Brooks offers two explanations. The first is that the 30% coalition is led by people with undue influence: rich intellectuals, Hollywood types, media folk and university teachers. Also in the mix that elected Mr Obama are blacks and Hispanics, who trust government more than white Americans do. Second, for all America’s faith in capitalism, the economic calamity of 2008 helped the minority fool the majority into thinking that the crisis was caused by the private sector and that the state knew how to solve it. In Mr Brooks’s opinion it was the other way round: the state’s social engineering (in particular, government support for dodgy mortgages) caused the crisis, and its “remedies” will only make matters worse.

To save capitalism in the years to come Mr Brooks wants to persuade Americans all over again that a free-enterprise system is not only more efficient than socialism but morally superior as well. He has an elegant theory about this. Neither state-engineered equality of income, nor money itself, makes people as happy as their own “earned success in life”, which people are much freer to earn in a system of free enterprise. But both Mr Brooks’s subtle approach and Mr Gingrich’s unsubtle one suffer from a shared weakness. Where in fact is the evidence that Mr Obama is even remotely a “socialist”?

To stand up this straw man the president’s critics recycle the same small crop of incriminating quotations time and again. Mr Obama told Samuel “Joe the Plumber” Wurzelbacher on the campaign trail in 2008 that “when you spread the wealth around, it’s good for everybody.” Gotcha! In recent speeches to graduating students he has counselled against materialism and extolled the virtues of public service. More evidence! “That strikes me as exactly the wrong message to send to young people,” huffs Mitch Daniels, the governor of Indiana and a Republican presidential might-wannabe. Please. Platitudes like these have been the stuff of commencement speeches from time immemorial.

There is no master plan Government has expanded on Mr Obama’s watch. His administration is spending $1 trillion on economic stimulus, has propped up two of the big three car firms instead of letting them implode and introduced a far-reaching reform of health care. Whatever you think of the merits of the first two decisions it takes a peculiar mixture of amnesia and paranoia to see them as a master plan to turn America socialist, rather than as a series of ad hoc responses to the exigencies of the crisis Mr Obama inherited. As for the third, it is a funny socialism that gives private, for-profit insurance firms the main responsibility for delivering health care.

The American right misses Mr Obama’s real flaw. He is not a “socialist”; but he does not understand business. As even Democrat-leaning CEOs complain, he neither expresses enough appreciation of capitalism nor shares the wavelength of those who practise it. Bosses are ushered in for photo-calls and then ignored. It is one thing to seek redress from BP, another to vilify it as an alien invader. He is interested in economics and technology; but not in how you make money. That coolness is a weakness; but it takes a lot more than indifference to destroy America’s spirit of capitalism. Big government and free enterprise have co-existed productively in America since the second world war. Most Americans expect that to continue, and it almost certainly will.

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United States

Copyright © The Economist Newspaper Limited 2010. All rights reserved. Canada's politics 49th parallels Stephen Harper has imported American Republicanism just when Barack Obama has adopted some Canadian policies. Is there still a North American divide?

Jun 17th 2010 | OTTAWA

ANY country living beside an economic and cultural colossus tends to shore up its separate identity by emphasising its differences and ignoring its similarities. Few nations have mastered this better than Canada, which for decades has seen itself as a kinder, gentler counterpart to the United States. But under Stephen Harper, Canada’s Conservative prime minister since 2006, the two countries have been converging. While Barack Obama has embraced policies that Canadians hold dear, such as near-universal health care and stricter financial regulation, Mr Harper has been importing many hallmarks of American Republicanism. Mr Obama’s expansion of government has generated a fierce backlash from the tea-party movement. Will Mr Harper suffer a similar rebellion in reverse?

Compare the Canada preparing to host the G8 and G20 summits later this month with that of 2002, the last time it hosted the G8, and the difference is clear. Back then the debate was about legalising gay marriage, decriminalising marijuana and how to attract more immigrants. Now it is about lowering taxes, and cracking down on crime and bogus refugees. Even abortion, a question settled two decades ago in Canada, has returned to the news.

This grittier mood is partly a function of the world financial crisis. But Mr Harper can also claim to have moulded it. He argues that Canadians are not as left-wing as their governments have been, and that it was conservative divisions that long gave the Liberals free rein to impose a “benign dictatorship”. He took over one of two rival right-of-centre parties in 2002 by attracting voters he described as “similar to what George Bush tapped”, and then merged it with the other. Since then he has won two elections—but never with a parliamentary majority.

Like Mr Bush, Mr Harper is an evangelical Christian who once worked for an oil company. Many of his initiatives were first tried in America. Both men vowed to cut taxes and shrink government, and wound up completing only the first half of their agenda. Mr Harper has slashed corporate and personal income taxes as well as the national sales tax. His anti-tax rhetoric seems to have struck a chord: Liberals complain that they can no longer propose raising revenue because the Conservatives made “tax” a dirty word. The prime minister also increased spending, however, creating a deficit of 3% of GDP—large by Canadian standards.

Mr Harper’s foreign policy has also echoed Mr Bush’s. He has embraced Israel’s right-wing government, even as Mr Obama has distanced himself from it. He wants to stop funding foreign health programmes that allow abortion. As opposition leader, he condemned Canada’s decision not to join America’s invasion of Iraq. In office, he has increased military spending by 27%, and the number of Canadian troops in Afghanistan by two- fifths. He has pledged to pull out in 2011, but in that he is obeying a binding parliamentary vote.

Another priority of Mr Harper’s has been to get tough on crime. He introduced bills to stop prisoners from collecting pensions or receiving double credit for time served before conviction. His government has strengthened mandatory-sentencing laws, reducing judges’ discretion to impose shorter jail terms. Even though the overall crime rate has been falling, Canadians’ attitudes are hardening.

Mr Bush’s one significant departure from conservative doctrine concerned immigration, where he unsuccessfully attempted a liberalising reform. Mr Harper is more orthodox. After a rise in the number of would-be refugees from Mexico last year, Canada required all visitors from Mexico—its partner in the North American Free Trade Agreement—to obtain visas. The government is now pushing a broader reform of immigration law which would make it harder for both bogus and legitimate refugees to reach Canadian soil. A poll this year found that 27% of Canadians see immigrants and refugees as a critical threat, up from 21% five years ago.

There are some reasons to believe that the country’s rightward drift might outlast Mr Harper. Ageing baby boomers care more about crime, for example, than they do about providing universal day care, an initiative of the previous Liberal government axed by the Conservatives. The anti- market sentiment that helped propel Mr Obama to office is absent in Canada, since its banks were already highly regulated. Voters approve of Mr Harper’s economic stewardship. And now it is the left-of-centre parties that are squabbling among themselves. In another sign of the new zeitgeist, on June 15th Pierre Karl Péladeau, a media mogul, announced the launch of Sun TV News, a new television channel led by Kory Teneycke, Mr Harper’s former communications director. Pundits have already dubbed it Fox News North. Many people on both sides of the border share the same values, says Matthew Mendelsohn, who heads a think-tank in Toronto. He argues the conservative American south pulls the United States to the right, while Quebec’s social-democratic traditions tug Canada to the left.

But the striking thing about Mr Harper’s conservative revolution is the narrowness of its political base. The opinion polls still give the Conservatives just 31%, meaning that a parliamentary majority remains beyond their grasp. The prime minister has been masterful at extracting advantage from favourable circumstances and from small shifts in public opinion. But above all he has thrived on a shambolic opposition. It is far too early to conclude that he has remade his country.

The Americas

Jun 17th 2010 | OTTAWA

FOR all his gifts as a political tactician, Stephen Harper, Canada’s Conservative prime minister, may have miscalculated how much Canadians want to pay to host the G8 and G20 summits from June 25th to 27th. As the government struggles to close a large budget deficit, it is spending C$1.2 billion ($1.2 billion) to host the world’s leaders—60% more than Japan, the previous record holder, coughed up for the G8 gathering in Okinawa in 2000.

Mr Harper points out that Canada is holding back-to-back summits—doubling the cost, he says. The government also notes that it can hardly be blamed for providing airtight security. It has built a steel fence around the woodland cottage resort at Muskoka that will receive the G8, and deployed special forces on overtime to lurk in the water and surrounding forest.

But critics counter that Mr Harper could have saved money by inviting the G20 to Muskoka as well, rather than receiving them separately in Toronto, 200 km (125 miles) to the south. Moreover, they note that much of the budget has gone on items of dubious utility and taste. The prime minister has become the butt of jokes for commissioning an artificial lake, complete with mock canoes and recordings of the call of the loon, for the G20 summit’s media centre—which sits just yards from the real Lake Ontario. In Muskoka taxpayers are on the hook for a refurbished steamboat that won’t even float until the summit is over, and new outdoor toilets 20km from the meeting site. So much for small government.

The Americas

Jun 17th 2010 | BRASÍLIA

ALTHOUGH Brazil has been a member of the UN Security Council on ten separate occasions since 1946, it had never before voted against a resolution backed by a majority of the council’s members. But on June 9th Brazil and Turkey both opposed further sanctions against Iran. In doing so it was out of step not just with its old allies, the United States and the European powers, but also with its new ones, Russia and China, all of which are worried by Iran’s nuclear programme. Why has the government of Luiz Inácio Lula da Silva stuck its neck out so far for Iran?

The short answer is that Lula, a former trade-union leader, fancies himself as the man who can talk Iran into obeying the world’s nuclear rules, and thinks sanctions will bring that effort to nought. Last month he flew to Tehran for talks with Iran’s president, Mahmoud Ahmadinejad, and Turkey’s prime minister, Recep Tayyip Erdogan. The three countries signed an agreement under which Iran would send to Turkey 1,200kg of its low-enriched (under 5%) uranium stocks; in return it would receive within a year more highly enriched (to 20%) fuel rods for its ageing medical-research reactor. Iran’s leaders also agreed to tell the International Atomic Energy Agency (IAEA) in writing of this plan. “We thought this was a gesture by them, a first demonstration of trust,” says Marco Aurélio Garcia, Lula’s foreign-policy adviser.

But to American and European officials, some of whom have negotiated with Iran for years, it looked as if Lula and his advisers had naively walked into Mr Ahmadinejad’s time-wasting trap. The terms of the deal were superficially similar to one reached under IAEA auspices last October (which Iran walked away from). But now Iran has nearly twice as much low-enriched uranium. And We won’t bow to pressure whereas the October deal would have robbed Iran of the excuse to enrich to 20% itself (a lot closer to the 90% needed for a bomb), it has since rushed to do just that. No sooner had Lula left Tehran than Iran’s nuclear chief said that enrichment to both the lower and the higher levels would continue. So America pushed forward with sanctions.

America and Brazil are now fuming at each other. Brazilian officials claim that the Tehran deal was in line with what Barack Obama had suggested to Lula in April, in a letter that they leaked to the local press. The Americans retort that this was just one of many communications with Brazil over the issue and has been plucked out of context. Worse than the Tehran deal itself was the leak and Brazil’s rejection of a Turkish proposal that both countries should have joined Lebanon in abstaining rather than voting against the resolution, according to a senior American official.

Under Lula, Brazil’s foreign policy has become more assertive. The government has recruited some 300 extra diplomats (and plans to add a similar number over the next four years). It has strengthened its ties with other emerging powers such as China, India, Russia and South Africa. Brazil now has more diplomatic missions in Africa than Britain has. Lula’s government has claimed leadership in Latin America more forcefully than its predecessors. And it has played a more active role on global issues such as trade, climate change and regulating the international financial system.

Much of this new assertiveness flows naturally from Brazil’s growing power, which stems from stability, a robust democracy, faster economic growth and successful social policies. It has generally been welcomed by the United States and Europe. But in the past couple of years Lula has taken up some more controversial stances. He has offered uncritical backing to Venezuela’s Hugo Chávez and Cuba’s Castro brothers. And he has struck up a friendship with Mr Ahmadinejad. All this goes down well at home with his Workers’ Party. His opponents detect a streak of anachronistic anti-Americanism.

The attempt to negotiate with Iran is part of “assuming our responsibility to promote peace and security” in the world, says Antonio Patriota, a senior diplomat. But it has given ammunition to the domestic critics of Lula’s foreign policy, who include some prominent retired diplomats (and, they say, many serving ones). “The Iranian adventure is incomprehensible, especially since there are various conflicts closer to us in which we haven’t tried, or haven’t managed, to mediate,” wrote Sérgio Amaral, a former ambassador, in O Estado, a São Paulo newspaper. He worries that Lula has gained nothing and succeeded only in drawing attention to Brazil’s refusal to accept enhanced outside inspection of its own peaceful nuclear programme (it says this would force it to divulge technological secrets, and that it allows Argentina to inspect its facilities freely under a bilateral agreement).

Lula’s adventure in Tehran smacks of the overconfidence of a politician who basks in an approval rating of over 70% and who sees the Iraq war and the financial crisis as having irreparably damaged American power and credibility. But the United States is still Brazil’s second-largest trading partner. Although some American and Brazilian officials are keen to prevent ill-will over Iran from spoiling co-operation in other areas, it nevertheless may do so. The United States Congress may be even less willing to support the elimination of a tariff on Brazil’s sugar-based ethanol, for example.

Lula wants the UN reformed to reflect today’s world, with Brazil gaining a permanent seat on the Security Council. But by choosing to apply his views on how the world should be run to an issue of pressing concern to America and Europe, and in which Brazil has no obvious national interest, Lula may only have lessened the chances that he will get his way.

The Americas

Jun 17th 2010 | GUATEMALA CITY

ASH still smears the pavements of Guatemala City, three weeks after nearby Mount Pacaya blew its top. On June 7th the city was shaken by a second explosion, this time of the political sort: the resignation of Carlos Castresana, a Spanish prosecutor who heads the International Commission Against Impunity in Guatemala (CICIG), a body set up in 2007 by the UN and Guatemala’s government to investigate organised crime and its links to the state. In a brief statement, Mr Castresana blamed the government for failing to support his effort to root out the mafias that have long penetrated its ranks.

His departure came as a shock. It followed a string of successes. In January CICIG secured the arrest of Alfonso Portillo, a former president charged with embezzling $15.7m, as he tried to flee the country. In the same month it cracked the stranger-than-fiction case of Rodrigo Rosenberg, a lawyer who, the commission found, had arranged his own murder in a bid to frame the president, Álvaro Colom. In all, CICIG has forced out some 2,000 police officers, ten prosecutors and, in its first year, an attorney-general.

The trigger for Mr Castresana’s resignation was the naming on May 25th of a new attorney-general, Conrado Reyes, whom CICIG had publicly accused of having ties to drug-traffickers and illegal- adoption rings. Once in office, Mr Reyes sacked more than 20 officials and demanded to oversee all wiretaps. Fearing a slow death of CICIG, Mr Castresana sacrificed himself instead. It worked: his resignation generated enough fuss to force the Constitutional Court to annul Mr Reyes’s Castresana ponders political suicide appointment.

Whoever replaces Mr Castresana can expect plenty of opposition. In a final press conference on June 14th, he presented evidence that various criminal factions had joined together since January to fight CICIG with a campaign of smears and intimidation. In one wiretapped phone call, two suspected criminals discussed cooking up a rumour that Mr Castresana was having an affair with a colleague. He also said that two suspects in the Rosenberg case bribed the officials that choose the attorney general with designer suits and ties, in order to secure Mr Reyes’s nomination.

Mr Castresana also accused the government of failing to boost the powers and resources of the justice system—a witness-protection programme now exists in name only, after the government stopped funding safe houses, for instance. And no one can explain why the president keeps appointing senior officials who later turn out to have criminal links.

The government counters that it has no money (central-government spending is the lowest as a share of GDP in Latin America) and that it is politically hamstrung, now that Mr Colom’s party holds barely a fifth of the seats in the legislature. Many appointments, including Mr Reyes’s, are partly in the hands of (allegedly crooked) independent commissions.

As Mexico and Colombia crack down on them, drug gangs are finding refuge in Guatemala. In the jungle state of Petén, the Zetas, a Mexican drug-trafficking group, have hung up signs recruiting soldiers. A report from America’s state department says that “entire regions of Guatemala are now essentially under [their] control.” The country’s lawlessness exposes it to the appeal of a strongman. Otto Pérez Molina, a former general who promises an “iron fist” against crime, leads the opinion polls for the next presidential election in September 2011. Much-needed change is unlikely to come from the left: the candidate most likely to run for Mr Colom’s party is Sandra Torres, his wife.

The Americas

Jun 17th 2010

IN A country where independent information-gathering is kept in check, what China’s leaders know and how they know it matters hugely. A recently leaked speech by Xia Lin, a senior editor at Xinhua, China’s government-run news agency, suggests that even though press controls have been somewhat loosened in recent years, leaders still rely heavily on secret reports filed by Xinhua journalists. Other evidence indicates this fault- prone system is actually gaining in importance.

In the speech last month Mr Xia revealed that the news agency’s public reports about an eruption of ethnic rioting in the far-western region of Xinjiang last July had played down revenge attacks by Han Chinese against members of the region’s biggest ethnic group, the Uighurs. Mr Xia said it was only after reading a classified “internal reference” report on the reprisals that China’s president, Hu Jintao, cut short an overseas tour. A summary of Mr Xia’s remarks was posted online by one of the audience. Censors removed it and tried to stop it circulating elsewhere.

The summary has not been verified. But filing secret bulletins to the leadership is one of Xinhua’s crucial roles. Many of China’s main newspapers also have classified versions covering news considered too sensitive for public consumption. They do not rely on secret intelligence, but merely report on issues that in most other countries would be the staple of journalism: public complaints; official wrongdoing; bad economic news; and foreign criticism.

In recent years China’s open media—which, thanks to the withdrawal of government subsidies, are now more commercially driven—have also been straying into these once-forbidden realms. But despite the growing assertiveness and reliability of at least a handful of open publications, the secret media have shown no sign of withering away. Some of them have gained a new lease of life—secret-sounding information sells well. China’s rapid adoption of the internet has even provided rich material for a whole new genre of classified reporting. And China’s leaders appear to be lapping it up.

The outbreak of SARS, a deadly lung disease, in 2003 exposed critical weaknesses in the “internal reference”, or neican, system. Xinhua’s first SARS report, for leaders’ eyes only, did not appear until February 9th, by when there had been some 300 cases and five deaths, dating back to November 2002. Only two days later did the leadership release the news and tell the World Health Organisation. China’s secretiveness and dilly- dallying were widely blamed for the spread of SARS.

It was not until April 20th that China’s leaders allowed the press to report the outbreak freely. But even as the number of open reports jumped, so too did Xinhua’s neican coverage. Between April 1st and July 10th, the news agency issued more than 2,700 public SARS-related reports in Chinese. It also filed more than 1,000 secret ones, and over six hours’ worth of classified audio-visual material.

In 2003 the number of comments written by leaders in the margins of Reference Proofs, a secret bulletin on international affairs for very senior officials rose by 88% compared with the year before. Six were by President Hu. Xinhua compiles such statistics assiduously to measure the impact of its work. An even more secret version of the bulletin, Reference Proofs (Supplementary Sheets), published more than three times as many reports as in 2002.

Internet usage in China soared after SARS, which boosted the appeal of virtual encounters and e-commerce. In parallel there was a surge in demand from China’s leaders for rapid updates on what the “netizens” were up to. Xinhua compiles these into another laboriously titled bulletin, Proofs of Domestic Trends (A Digest of Online Public Sentiment). In 2007 the agency’s yearbook reported a 15% growth in the number of such reports and a 50% increase in leaders’ comments on them. It seems unbothered by the paradox: public internet chat is rehashed in top-secret reports, divulging the contents of which could result in a lengthy prison term.

The plethora of information on the internet deemed too sensitive for China’s traditional media has spurred the growth of neican. Last July the Communist Party’s flagship newspaper, the People’s Daily, launched a new weekly journal for senior officials, called Online Public Sentiment: Three Rurals Internal Reference.

The similarity of its title to Xinhua’s far more restricted digest might well be calculated to give the impression that it is offering inside information on the dissatisfaction-plagued “three rurals”, which is the party’s way of referring to peasants, villages and agriculture. A sample edition available online is humdrum, but its aura of secrecy commands a subscription rate two or three times that of a standard (and far more informative) weekly magazine. A Chinese editor familiar with Reform Internal Reference, a secret weekly for low-level officials and academics, says much of its contents could be found online.

Chinese leaders themselves sometimes seem to take neican reports, produced as they are by the party’s own faithful, with a pinch of salt. In a commentary in the People’s Daily in April, China’s prime minister, Wen Jiabao, revealed that leaders sometimes had to sneak out incognito in search of unadulterated information.

The open press, subject as it is to a host of censorship directives, is usually even less reliable. At the party’s five-yearly congress in 2007, Xinhua issued more than twice as many neican reports as it had at the 2002 event. In 2009 a senior provincial official called for efforts to ensure that everyone eligible for Xinhua’s neican did subscribe. There must be no “blank spots”, he said. In the realm of the censored, half-censored content is king.

Asia

Jun 17th 2010 | JAKARTA

SHOULD Susilo Bambang Yudhoyono feel scorned? It would be easy to think so after Barack Obama this month postponed—once again—a state visit to Indonesia, in whose capital, Jakarta, he famously spent a part of his childhood. The ecological disaster in the Gulf of Mexico provided his latest reason for delay. In March he was detained by a vote to reform America’s health-care system.

Though Mr Yudhoyono has been perfectly obliging about these inconveniences, he must be conscious of their cost to his profile. There are few better ways to boost it than to hobnob with Mr Obama. Relations between America and Indonesia have never been better. When Mr Obama does arrive—possibly in November—the presidents will sign a statement of partnership covering security issues, climate change, trade and more. As an aperitif, on June 10th they announced a defence agreement covering training, procurement and maritime piracy.

But even this consolation comes with a caveat. The agreement keeps in place America’s 12-year-old ban on joint training with the Indonesian army’s infamous special forces, Kopassus. Their poor human-rights record includes torturing and killing separatists and civilians in East Timor (now Timor-Leste) and Aceh.

Still the ban chafes. Indonesia can claim to have transformed itself since the 32-year reign of Suharto ended; it belongs to the G20, stands as a regional model of democracy and has ushered its army out of politics. There is a personal sting for Mr Yudhoyono: he is a retired army general and his brother-in-law until recently commanded Kopassus. Some of its veterans, now senior officials in the defence ministry, were denied visas to travel to America with the president last year. The ban shows that the Suharto regime, which collapsed in 1998 amid popular protests, still casts a dark shadow abroad. Indeed, recent events suggest that it still darkens Jakarta.

In May Sri Mulyani Indrawati, a respected finance minister, resigned to take a job at the World Bank. Golkar, Suharto’s own party, had been haranguing Ms Mulyani for months, accusing her of malfeasance in bailing out a private bank in 2008. According to Ms Mulyani, Golkar’s true animus was her anti-corruption campaign; its leaders’ business interests were imperilled. If so, they can now breathe easier.

Two days before she left for Washington Ms Mulyani identified the billionaire Aburizal Bakrie, Golkar’s chairman, as one of the people seeking to subvert Indonesia’s hard-won reforms for personal gain. Her ministry had three of his family’s coalmining companies under investigation for the evasion of hundreds of millions of dollars in taxes.

Golkar however, is the second-largest party in parliament, and Mr Yudhoyono appears to be throwing in his lot with them. After Ms Mulyani resigned, Mr Bakrie took an ominous role in Mr Yudhoyono’s government. His partisans have introduced piles of pork that smack of the Suharto era. When they threatened to quit his coalition Mr Yudhoyono was forced to praise one of their ruinous proposals for rural development, worth $1.6m to each member of parliament.

Ms Mulyani’s disciples in the finance ministry are still charging ahead with their investigations. And Mr Yudhoyono may yet pacify his new allies in Golkar, perhaps by striking a deal to resolve Mr Bakrie’s tax cases. But so far the president’s Javanese tendency to try to please everyone has only encouraged his so-called partners to demand more. When Mr Obama does eventually come to visit the new Indonesia, some aspects will recall the old one he thought he had left behind.

Asia

Jun 17th 2010

REMARKABLY forgiving of Indonesia for its brutal 24-year occupation of their country, Timor-Leste’s leaders seem less tolerant of Australia. As the president, José Ramos-Horta, sets off for a state visit to Australia on 21st June, he will be packing a little list of grudges.

One is that Australia, one of the country’s biggest donors, squanders its aid on foreign consultants. Meanwhile, a popular American-Canadian NGO, the Peace Dividend Trust, that is creating much- needed local jobs, is seeing its funds from Australia’s AusAID dry up. Mr Ramos-Horta wrote to Australia’s ambassador that the group’s project had a “more tangible and important impact” than any other economic-assistance project.

Timor-Leste has also long been nurturing a grievance about the oil- and gas- rich fields in the Timor Sea straddling its maritime borders with Australia. Since independence in 2002, negotiations on sharing the resources have at times been acrimonious. Australia’s second-largest oil company, Woodside, recently proposed processing gas from Greater Sunrise, a field 150km (93 miles) off the Timorese coast, on a floating plant, rather than on Timorese soil. This incensed a government that is desperate for jobs for a young and fast-growing population of about 1m. More than 80% live from subsistence farming. In urban areas the youth-unemployment rate is 35%.

Woodside argues that an onshore plant would be both much more expensive and technically risky, entailing a pipeline through a “seismically active” 3km-deep ocean trough. Woodside is a private company, but the dispute heightens the Timorese perception that Australia is trying to grab more than its share of Timor Sea wealth.

Xanana Gusmão, the prime minister, has threatened to reject Woodside’s plans, even if it means forgoing the billions of dollars the project could bring. Many poor countries, he said, “fall victim to the corporate resource giants”, before boasting that “Timor-Leste will be the country that goes down in history as the nation to put a stop to it.”

This prickliness over perceived national sovereignty extends to issues of defence—although twice since 1999 Australia has sent its soldiers into harm’s way in Timor-Leste. For six years from 2002, it tried to persuade Timor-Leste to join its Pacific Patrol Boat Programme, in which Australian ships patrol the seas of South Pacific countries on their behalf. José Belo, a leading Timorese commentator, wrote that the strings attached to the programme made it seem as if Timor-Leste would have to “cede sovereignty”. China, which has already seen its commercial influence dwarf other countries’, eagerly stepped into the void, selling Timor-Leste two gunboats.

Many Timorese remember Australia’s appalling record on East Timor under Indonesian rule, and Mr Ramos-Horta will want to be seen to stand up to his hosts, though he himself is not an inveterate grumbler. As Mr Belo puts it: “We don’t like being pushed around. Even if we think we might lose the fight, we will still fight it…it’s a matter of national pride.” Just ask Indonesia.

Asia

Jun 17th 2010 | HERMANNSBURG, NORTHERN TERRITORY

Outlook sunny, with mixed opinions for Mildred and friends

A STERN message greets visitors to a small town in one of outback Australia’s most isolated regions: “Warning. Prescribed Area. No Liquor. No Pornography.” The whitewashed buildings of Hermannsburg, in the red desert west of Alice Springs, date from its founding as a Lutheran mission in 1877. The sign is a much more recent addition. Mildred Inkamala, an aboriginal elder, points out a spot along the Finke River where an 18- year-old indigenous youth, high from sniffing petrol, raped and drowned a young girl.

Three years ago a report on the sexual abuse of children among indigenous communities in the Northern Territory shocked Australia. Aborigines comprise about a quarter of the territory’s population, compared with 2% of Australia as a whole. The conservative government of the time, led by John Howard, announced the “Northern Territory Emergency Response”. Better known as “the intervention”, it imposed federal control over Hermannsburg and 72 other settlements.

The Australian government began controlling how residents of the “prescribed communities” spend their share of public monies: half their income from welfare payments is quarantined for necessities such as food and children’s clothes. As the intervention marks its third anniversary about 17,000 people are now on “income-management”, a twelvefold increase since 2007. The current Labor government, led by Kevin Rudd, is preparing to roll back the intervention’s most controversial element, which suspended laws against racial discrimination. But it also plans to broaden its provision of income-management. From July it will apply to all of the territory’s welfare recipients, regardless of race.

Human-rights activists are unimpressed. They view the intervention as a return to the official paternalism that prevailed before the aborigines won their long battle for land rights 35 years ago. Alastair Nicholson, a former judge, calls the Rudd government’s changes a “cynical attempt to perpetuate racial discrimination”. Among aborigines on the front lines however, opinion varies.

The contrast is most vivid in a fringe of 18 settlements around Alice Springs known as the town camps. Once places where desert aborigines came looking for work, they degenerated into pools of despair. Alcoholic binges, wife-beating, rape and murder were common. Late last year the federal government struck a deal with the Tangentyere Council, an indigenous body which controls the camps. The council granted 40-year leases to the federal government in exchange for A$100m ($92.6m) to clean up the town camps and build new houses.

William Tilmouth, the council’s director, still thinks the “government knows best” approach stinks of the notorious century of Australian policy that created the “stolen generations”. Mr Tilmouth himself was one of those mixed-race children who were forcibly separated from their parents, ostensibly for their own good. He thinks the intervention should be ended.

Its proponents, however, point to the shaming statistic that aborigines on average die almost 11 years younger than other Australians. Ms Inkamala, for one, is a supporter of the intervention. A reformed alcoholic herself, she has a job and manages her own income. She has watched as Hermannsburg’s primary-school attendance rate almost doubled, to 80%, since it started. The community’s income-managed women, she reckons, have more money to spend on their children’s welfare. Andrea Mason, the head of a local women’s group, says income-management has stopped abusive men “humbugging” household money to spend on booze, drugs and gambling. Far from calling for it to end, she wants it extended outside the territory.

Asia

Jun 17th 2010

THREE score years and a bit after its founding, Pakistan—which means land of the pure—still struggles to look like a nation. Economically backward, politically stunted and terrorised by religious extremists, it would be enough to make anyone nervous, even if it did not have nuclear weapons. For these shortcomings, most of the blame should be laid at the door of the army, which claims, more than any other institution, to embody nationhood. Grossly unfair? If the army stood before one of its own tribunals, the charge sheet would surely run as follows:

One, a taste for military adventurism on its “eastern front” against giant India, which has undermined security, not enhanced it. No adventure was more disastrous than the one in 1971, which hastened the loss of East Pakistan, present-day Bangladesh. More recently, in 1999, General Pervez Musharraf, then army chief, sent troops into Indian-controlled Kashmir without deigning to inform the prime minister, Nawaz Sharif. Mr Musharraf thus forced a confrontation between two nuclear states. It was an international public-relations debacle for Pakistan. Today the army remains wedded to the “India threat”. India, meanwhile, for all its gross abuses in Kashmir, is more concerned about economic development than invading Pakistan.

Two, endangering the state’s existence by making common cause with jihadism. This policy started with General Zia ul-Haq’s “Islamisation” policies in the late 1970s. After the Soviet Union invaded Afghanistan in 1979, Pakistan (along with the CIA) financed the Afghan mujahideen opposition. The policy turned into support for the Taliban when the movement swept into power in the mid-1990s. Taliban support continues today, even though Pakistan is America’s supposed ally in Afghanistan’s anti-Taliban counterinsurgency. A new report by the London School of Economics claims that not only does Pakistan’s Inter-Services Intelligence (ISI) spy agency finance the Afghan Taliban, but the ISI is even represented on the Taliban’s leadership council. The claims have been loudly rejected, but in private Pakistani military men admit that corners of the army do indeed help the Taliban.

For years both Islamist and liberal generals have also backed jihadists fighting for a Muslim Kashmir. Though vastly outnumbered, the militants have managed to tie down a dozen Indian army divisions. Mr Musharraf and an aide once joked about having such jihadists by their tooti—ie, literally, “taps”, by which he meant their private parts.

Yet ex-mujahideen and their affiliates—known loosely as the Pakistani Taliban—have turned on their hosts. The armed forces have struck against them near the border with Afghanistan. Other militant groups which the army thought it “owned” have either joined the Pakistani Taliban or, like them, have turned against their former protectors. The army itself, even the ISI, has been a target of attacks. While officers draw increasingly nice distinctions between different jihadists, the militant groups are bleeding into one another. Now attacks are spreading into tolerant, prosperous Punjab, far from the troubled marches. No doubt now about who holds whom by the tooti.

Three, the armed forces have undermined democratic institutions. Since 1947, the longest period of civilian rule the army has tolerated is just six years. And when Mr Musharraf instigated a coup after being sacked by Mr Sharif after the Kashmir debacle, there followed more than eight disastrous years of military rule, heavily backed, as with previous such rules, by the Americans. Like General Zia before him, Mr Musharraf often found Islamist political parties more congenial than secular ones.

Admittedly, Pakistan’s governing institutions were weak from the outset, but the army’s meddling has made them even weaker. Under Mr Musharraf it has left the civil service and judiciary corrupt and demoralised. (A tenth of civil-service appointments must still go to officers.) The armed forces have a $20 billion business empire and are probably the country’s biggest land developer, as officers’ loyalty is bought with grants of land.

The leaders of the main parties are mainly to blame for their corrupt, feudal styles and for not practising the democracy they espouse even in their own parties. Yet the army also shares some of the blame for political backwardness. It has permitted only a handful of elections. Democracy might have been much more mature by now had elections been allowed to run their course.

The costs go beyond any democratic deficit. Pakistan’s economic and social development have also been stunted, as the army has sucked up resources and thwarted growth. In economic terms, educated Pakistanis think their country should be a Turkey or a Malaysia by now. Instead, it lies below Yemen in the UNDP’s ranking of human-development indicators, at 151st in the world. School enrolment ranks below Sudan. The government spends twice as much on the armed forces as on education.

Dogs with the keys to their kennel

Some say Pakistan has turned a corner. The army went back to barracks in 2008, pushed partly by the return and assassination of the populist leader, Benazir Bhutto. This year political parties reached consensus on constitutional changes that shift power towards parliament and away from the president, currently Asif Zardari, Miss Bhutto’s widower and heir to her political dynasty.

Optimists say this sets Pakistan on a path to more effective and accountable government. Perhaps. But the pessimist in Banyan counters that the army retains its huge say on national security. What’s more, civilian politics remains frequently corrupt, and personality trumps policy. What looks like a system of checks and balances today could look like gridlock tomorrow. The sort of combination, in other words, that tempts the army to poke its head out of the barracks again.

Economist.com/blogs/banyan

Asia

Copyright © The Economist Newspaper Limited 2010. All rights reserved. Iraq's divisions Sectarian animosity still prevails With little sign of a genuine cross-sectarian consensus, Iraq’s fledgling democracy remains frighteningly fragile

Jun 17th 2010 | BAGHDAD AND FALLUJAH

MORE than three months after a general election, Iraq’s new parliament met for the first time on June 14th—but still with no new government in sight. The post of prime minister remains up for grabs, and no one knows who will get it. So the time-wasting hiatus that has kept the country adrift since the general election on March 7th could stretch for several more nerve-jangling months.

During this time, no new laws have been passed, no new national vision enunciated. Violence, though far less bloody than three years ago, has risen again. Worst of all, Iraq’s ethno-sectarian divisions seem as deep as ever. No Iraqi equipped to appeal across them looks likely to emerge as prime minister. Indeed, though a party strongly backed by the Sunni Arab minority narrowly won the most votes and seats in the March election, the two biggest mainly Shia alliances, which came second and third, have agreed to gang up in a wider front to form a ruling coalition in which the Sunnis may not play much of a part. Since the two mainly Shia alliances teamed up only recently, it is unclear whether the constitution should treat them as the election winners and give them first shot at forming a government.

It is clear, in any event, that Nuri al-Maliki, the incumbent caretaker prime minister, whose original alliance came second, is determined to keep his job, though he is reviled as sectarian by Iraq’s Sunni minority and by the leaders of influential neighbouring Sunni-led countries, especially Saudi Arabia. That would be outrageous, says Iyad Allawi, a secular Shia whose Sunni-backed Iraqiya alliance won 91 seats out of parliament’s 325 to Mr Maliki’s 89. He insists that he should have first try at forming a governing coalition.

Astonishingly, only on June 12th did the two rivals meet for the first time since the election (pictured above, Mr Maliki on the right). The day before, a Saudi newspaper published in London said a plot had recently been hatched by “local and regional parties” to assassinate Mr Allawi to prevent him from winning the top post.

The upshot is that neither rival may get it, and a compromise figure, almost certainly another Shia, may have to be tapped. Mr Maliki’s broader new Shia front now includes the party of Muqtada al-Sadr, a fiery populist, as well as the Islamic Supreme Council of Iraq, led by Ammar al- Hakim, which is deemed the cosiest of all Iraqi parties with Iran. The new super-alliance would still not quite have a majority in parliament but would do so if it cut a deal with the Kurdish alliance. Mr Allawi and his Sunni backers could thus be left out, filling a seething cauldron of resentment.

“Any government without Iyad Allawi would be a disaster for Iraq, especially for its security,” says Muwafaq al-Rubaie, a former national-security adviser under Mr Maliki. The Sunni insurgency that still persists would get a fillip. Virtually all prominent politicians across the spectrum say that all four of the main alliances—Mr Allawi’s Iraqiya, Mr Maliki’s State of Law group, the Iraqi National Alliance in which Mr Sadr’s people predominate, and the Kurds—should come together, each well represented in a grand coalition.

But the animosity between Sunni and Shia Arabs means it is still uncertain that Mr Allawi will get a senior job, let alone the prime minister’s. Iraqi Shias still feel, after a millennium of being treated as lowlier than the Sunnis despite being a majority, that they deserve the political cake unshared. “They far prefer dealing with a harassing [Sunni] insurgency than with what they see as a lethal fifth column embedded within the state apparatus”, writes Joost Hiltermann of International Crisis Group, a conflict-resolution outfit.

For their part, most Sunni Arabs, who ran the show under Saddam Hussein, doggedly refuse even to admit that they are a numerical minority. There has been no full census since 1987 and precise sectarian data have been unavailable for even longer. But most independent pundits reckon Shia Arabs make up more than half the population, Sunni Arabs less than a quarter, Kurds (most of whom are Sunni) around a fifth, while Turkomans, Christians and others make up the rest.

Most Sunni politicians, as well as Mr Allawi, blame Iran for meddling. Many rank-and-file Sunni Iraqis refer to the Shia-led government simply as “the Persians”. In conversation it is often mentioned that the two main Shia groups hastened to Tehran, Iran’s capital, for consultation immediately after the election, as did the Kurds.

A prominent Sunni preacher in west Baghdad, Zakariah al-Tamimi, who as a member of Mr Allawi’s party stood unsuccessfully in the election, says Iran “is waging a war to colonise Iraq…America destroyed Iraq and handed it to Iran.” Behind such dastardly plans there is, he says, an American- Iranian-Israeli plot. He smilingly quotes a Hadith (a saying attributed to the Prophet Muhammad) that warns against an “impostor from the west who will be followed by 70,000 Jews from [the Persian city of] Isfahan.” A recent spate of bombs in Baghdad and elsewhere in Iraq, presumed by independent observers to be the work of Sunni insurgents, some of them linked to al-Qaeda, had “obviously been planted by Iran.” Such theories may be dismissed as ludicrous, but they are widely believed.

Suspicions among Iraq’s diminished Sunnis of an Iranian plot to do them down are no less strongly held by influential Arabs in the Gulf. They often point out that Mr Sadr, the most powerful of Iraqi Shia populists, is still living in Iran’s holy city of Qom. The Iraqi Shias’ ageing but still pre- eminent grand ayatollah, Ali al-Sistani, is—it is widely noted by Sunnis—of Persian origin, and speaks Arabic with a Persian accent. As for Mr Maliki, he is “pure Persian, completely Persian,” insists the editor of a leading Gulf newspaper. At a recent conference organised by the Al Jazeera television channel in Qatar to discuss peacemaking in the region, many of the Sunni participants referred admiringly to Iraq’s insurgents as “the resistance”, even though its targets these days are almost entirely fellow Iraqis rather than American occupiers.

A visit to the city of Fallujah, an hour’s drive west of Baghdad, confirms the intensity of Sunni provincial hostility to Iraq’s new Shia-led establishment. A clutch of city councillors, albeit chosen in 2005 under American tutelage, insists that “life was much better” under Saddam Hussein, a refrain often heard among Sunnis across Iraq. The people of Fallujah, a fiercely Sunni town, will “never forgive the Americans”, say the councillors, for the ferocity of their two assaults on the city in 2004, after jihadists had taken it over. The city’s supply of electricity, they say, is still less than three hours a day. For such misfortunes they blame the Shias who now run Iraq from Baghdad, rubbishing them as Iranian stooges as well as crooks.

Iraqi Shias still tend to see Saddam’s old Baathists around every corner, deviously preparing for a comeback, especially as former senior soldiers, who are Sunni, have been returning to the upper ranks of the army to provide some professional experience. Hence Mr Maliki’s vote-catching pandering, just before the election, to Shia demands to bar several hundred candidates accused of having a Baathist past.

Many Shias are irked by Mr Allawi’s frequent visits, since the election, to the capitals of Arab countries, all of them governed by Sunnis, to rally support for his prime ministerial bid. Iraq’s Shias tend to harbour a special mistrust for the Saudis. “They are fanatics who don’t allow Shia mosques to be built on their own soil,” says a leading Iraqi banker. Saudi Arabia and the Gulf states are often accused of providing cash for the insurgents. Many Iraqi Shias, including Mr Maliki, also blame the secular Baathists who run next-door Syria for backing Iraq’s insurgents. Indeed, Mr Rubaie, the former national-security adviser, discerns a malign merger of jihadist and Baathist Sunnis: “Generals with beards”, he calls them. “Regional powers have plotted against us,” he adds.

Nothing like back to normal

As for the Kurds, whose autonomous region is the safest and most go-ahead bit of Iraq, they are cordially distrusted by most Arabs, Shias and Sunnis alike, who often claim they are trying to dismember the country at the behest of foreign powers. It is exceedingly rare to hear an Arab Iraqi express sympathy for Kurdish aspirations, or for the suffering they experienced under Saddam Hussein. And many Kurds, to be fair, do indeed give the impression of not wanting to be part of Iraq forever.

Amid such rumour-mongering and mistrust, Iraq is probably doomed to be politically stuck. It is a lot safer than it was two or three years ago, but it is still much too dangerous for most would-be investors to do business in a normal way. The oil companies and a handful of foreign banks think it worth setting up in Baghdad: they can afford to hire thousands of security men, most of them foreign—Peruvians, Ugandans, New Zealanders, South Africans, among others—to protect their staff. Businessmen with more modest resources cannot contemplate this.

Security requirements snag everything. Fallujah, with a claimed population of 600,000-plus, still prevents cars from other places from entering without special permission, allowing access only through eight designated entry points. Curfews in Baghdad and elsewhere persist. The capital is punctuated by some 1,500 checkpoints. Even short journeys can entail long delays. Concrete blast-walls are ubiquitous. In the first flush of freedom as the American troops withdrew from the cities a year ago, the government started to pull some of the walls down. But when sectarian violence and bombings instantly resumed, they went back up again. Side roads leading to arterial roads are still nearly all blocked off.

To visit parliament or various administrative buildings in Baghdad’s still heavily cocooned Green Zone, you need a special badge to come by car, and must then pass through a tedious labyrinth of rigorous checks: off with your shoes and belt, out with the battery of your mobile phone, put your hands up, have your body radar-scanned, put all your items from your briefcase in cages for dogs to sniff. In temperatures above 40°C this can take an hour, as you walk from one hut or receptacle to another, even if the queues are small. A member of parliament explains that he is entitled to 30 bodyguards on the state payroll, handpicked from the police or army, invariably by dint of tribal or sectarian affiliation.

Though political violence is down almost tenfold from three years ago, the number of civilians being killed in political violence is probably still higher than in Afghanistan. Last month, according to hospital, police and army sources, 337 people, including 275 civilians, are known to have been killed, against 328 the month before. That compares with more than 3,000 a month in the worst periods of 2006 and 2007. But Baghdad hardly feels relaxed.

The insurgents now seem to concentrate on spectacular bombings of landmark targets, such as ministries and hotels. Since last August there have been at least five big waves of co-ordinated attacks, hitting the finance and foreign ministries, among others, three of the city’s best-known hotels, plus softer targets such as mosques and market-places in Shia districts. Last month more than 100 people were killed in a single day in a score of bombings across the country. On June 13th jihadists in military uniforms stormed the central bank in Baghdad, killing 15 people. In the past year at least 3,000 civilians have perished in politically motivated attacks.

The insurgents also kill fellow Sunnis, especially those who have signed up to the “awakening councils” who have accommodated themselves, however reluctantly, with the new Shia-led order. On June 7th, for instance, a series of bombs went off in the Sunni province of Anbar, west of Baghdad. The targets were policemen and tribal leaders who have turned against al-Qaeda. Several Sunni imams who speak out against al-Qaeda have recently been shot dead. One was beheaded. Against this backdrop, it is vital that the new parliament and the government that it eventually endorses builds as wide a cross-sectarian consensus as possible. Mr Allawi sought to do just that. Mr Maliki also won cross-sectarian plaudits in provincial elections last year, after he had sent in the army to hammer fellow Shias in the Sadrist militias, who had tormented the southern city of Basra. But since then the country seems to have slipped back into more sectarian ways. “Everyone has retreated to his own corner—to his own dungeon, if you like,” says Mr Rubaie.

He and other leading politicians worry that the army may re-emerge as a political arbiter, as it has done repeatedly during Iraq’s past nine decades as a state. “There is still the risk of a coup,” says a minister close to Mr Maliki. Mr Rubaie says that the armed forces are “still infiltrated by extremists who are against the political process and have the mindset of the good old days of Saddam Hussein.”

Mr Maliki has sought to make Iraq “coup-proof”. But another prime minister might struggle to consolidate civilian control over the armed forces. Party militias, bound by sectarian loyalties, could yet re-emerge. Many Iraqis still fear that, once the ministries are allotted to the various parties in a new coalition government, they will again become party fiefs defended by militias that have, in the past, behaved murderously. Some fear that if that happens a military strongman could yet be tempted to intervene. Others think a civilian government could be tempted to carry out a “constitutional coup”, empowering itself with emergency laws that could erode Iraq’s fledgling democracy. In any event, it is still possible, especially if no overarching leader manages to close the fundamental Sunni-Shia rift, that the country could become a corrupt, authoritarian, oil-and-security state, a semi-democracy at best.

“Some people don’t believe in reconciliation—they’re just keen to settle scores and break the back of the other side,” says Mr Rubaie. “We’re learning. I honestly believe proportional-representation democracy is here to stay,” he says. “But ‘compromise’ is still a dirty word in Arabic.”

Middle East & Africa

Jun 17th 2010 | JERUSALEM

HANIN ZOABI, an Arab member of Israel’s parliament, the Knesset, will not have her parliamentary privileges withdrawn, despite a seven-to-one vote in a Knesset committee last week recommending that she be punished for sailing with Turkish and international campaigners to try to break Israel’s blockade of Gaza. The Knesset speaker, Reuven Rivlin, says he will ignore the recommendation and will not submit it to a plenary session for approval. He says he has won the tacit backing of Israel’s prime minister, Binyamin Netanyahu.

Mr Rivlin argued that sparing Ms Zoabi, aged 41, would save Israel from further international obloquy over its navy’s interception of the ship on May 31st, which left nine Turks dead. Bowing to world pressure, the Israeli security cabinet also decided this week to ease the Gaza blockade. The list of forbidden items will be pared down and building materials allowed in under UN supervision.

Furthermore, the prime minister has appointed a commission of inquiry led by a retired judge to examine the navy’s action. Two foreigners, David Trimble, a Nobel peace laureate and former first minister of Northern Ireland, and Ken Watkin, a former military judge advocate-general from Canada, will sit as observers.

But the ages of the commission’s three Israeli members have prompted caustic scepticism as to how vigorously Mr Netanyahu wants the episode investigated. The judge, aged 75, will be flanked by a former general of 86 and a former diplomat and lawyer of 93.

For Mr Rivlin, however, the near-unanimous assault on the privileges of Ms Zoabi, who was almost Zoabi (right) feels the heat in the Knesset physically attacked by another woman member when she appeared at the plenary session, illustrates a sad erosion of Israel’s democratic and parliamentary tradition. “Would they do that to a Jewish member?” he asks.

Mr Rivlin, known to everyone as “Rubi”, is a doubly rare bird. An old-style democrat, he is also a hardliner who argues for a Greater Israel that would embrace the whole of Palestine, with the Palestinians of the West Bank and Gaza given full citizenship of Israel. “The Israeli Arabs are our only bridge to peaceful coexistence,” he says. “And we’re failing to maintain it.” For many liberal Israelis, however, the 43-year-old occupation of the Palestinian territories explains why Israeli democracy is being steadily eroded.

“For two generations we’ve denied the people across the green line their democratic rights,” says Professor Mordechai Kremnitzer, an academic lawyer and vice-president of the Israel Democracy Institute, a think-tank. “That must impact on our society’s democratic ethos. Those who are ashamed find rationalisations: ‘We have no choice,’ they say. Or they cite ‘security considerations’ or explain the ‘uniqueness’ of our conflict with the Arabs. But many others are not even ashamed…”

For Professor Kremnitzer, there is a danger not just that the Arab minority in Israel proper may be delegitimised but that the same fate could await all critics of the government’s policy and especially of the Jewish settlements in the occupied areas.

He links this “ugly trend” to what he calls “a McCarthyite campaign against civil society”. Liberal and left-wing Israelis were shaken earlier this year by the stridency of a countrywide campaign against an old-established charity, the New Israel Fund, active in liberal causes among both Jews and Arabs. Vicious cartoons of its chairman, Naomi Chazan, a scholar and former Knesset member, appeared on billboards. The fund was accused of supporting NGOs that gave evidence to the UN inquiry, much reviled by most Israelis, that was headed by Richard Goldstone into Israel’s assault on Gaza in January last year. Mr Rivlin, alone on the right, praises Ms Chazan as “a lifelong Zionist who believes in her Zionism as deeply as I do in mine”. Her treatment, he says, pained him.

“All is not lost for Israeli democracy,” says Professor Kremnitzer. “We need to fight.” He points to Mr Rivlin as a bulwark. “Without him they’d throw the Arab parties out of the Knesset.” He is troubled, he says, by the apathy in which many educated Israeli liberals choose to wrap themselves. Such people sometimes speak of their “internal emigration” and just stop reading newspapers or following politics.

Alexander Yakobson, a political scientist at Jerusalem’s Hebrew University, sees a brighter side. “There is very little actual violence between Israeli Jews and Israeli Arabs,” he says. “Given the length and the intensity of the conflict, that is both surprising and encouraging.” He says that freedom of speech and sexual and religious tolerance are all stronger than before.

But an Arab-Israeli student at Tel Aviv University recently complained to the police that she was pushed over, kicked and beaten while walking past an anti-Turkish demonstration on the campus. “It took me two days to tell my parents,” said Fatma Issa. “I’d always been told the atmosphere was fine on the Tel Aviv campus.”

Middle East & Africa

Jun 17th 2010 | CONAKRY

GENERAL SÉKOUBA KONATÉ, Guinea’s interim president, is so keen to make sure his country’s election for a new head of state runs smoothly that he has appointed a 16,000-strong military and paramilitary task-force to keep order during the polls. In the past three years Guinea, a west African country rich in bauxite and iron ore, has seen general strikes, popular uprisings, military crackdowns and a coup. But on June 27th Guineans are due peacefully to elect a civilian president.

The road to democracy is likely to be bumpy, especially if armed soldiers supervise the votes. General Konaté, known as “El Tigre” for his combat prowess, was deputy leader of a junta that seized power in 2008 after the death of Lansana Conté, Guinea’s dictator for 24 years. The junta’s leader, Captain Moussa Dadis Camara, at first promised proper elections. But when, in September, he suggested he would run for office himself, Guinea’s opposition groups marched in protest through the capital, Conakry. The captain’s supporters killed at least 150 protesters. His soldiers gang-raped scores of women. The country faced a bleak future until last December, when Dadis, as he is generally known, was shot in the head by an aide and went abroad for treatment.

Opposition groups and El Tigre then teamed up to form an interim government and promised to hold elections in the captain’s absence. El Tigre has proved to be more serious than Dadis. He has restored a measure of discipline to the army. In May he enacted a new constitution by presidential decree while politicians argued over whether to subject it to referendum, which would have delayed the elections.

Most important of all, El Tigre is abiding by previous agreements that no member of the interim government may stand for office. But many people are still doubtful. The interim prime minister, Jean-Marie Doré, suggests that Dadis, who is convalescing in Burkina Faso, may be stirring up trouble in his native Forest region, where a spate of clashes has led to several deaths.

Indeed, El Tigre has already had to disband a training camp where 10,000 recruits, mostly from Dadis’s Guerzé ethnic group, were being schooled by foreigners to use machineguns and engage in hand-to-hand combat. He has also arrested a number of Dadis’s allies and demoted or sacked others in the high command.

Voter lists are in a mess thanks to chaotic registration. This could prompt losing presidential candidates to argue that they were cheated. Guinea’s parties draw their support largely from ethnic and regional bases, so a contentious result could open ethnic divisions across the country, perhaps even in the armed forces themselves.

Some say the army is too pragmatic to tolerate mayhem after the election. Both Dadis and El Tigre have overseen some big mining deals with a number of international companies; none of them wants to see such deals reversed by an unfriendly civilian president.

Some senior soldiers think Dadis and El Tigre may even close ranks to ensure that whoever wins will protect the other’s interests. “The military is divided by ethnic and generational lines but they have agreed on one thing, which is the holding of political power,” says Aliou Barry, a military expert and human-rights monitor.

Middle East & Africa

Jun 17th 2010 | NAIROBI

A RALLY in the capital, Nairobi, to campaign against a proposed new constitution ended in bloodshed on June 13th when two grenades were tossed into the crowd, killing six and injuring many more. The worry now is that violence will escalate before a referendum on the constitution, due on August 4th.

Prominent among those opposed to the constitutional changes are evangelical Christian leaders. They have railed against clauses that recognise the rights, albeit limited, of Islamic courts, and which permit abortion in certain circumstances. Similarly, the No campaign provides a platform for out-of-favour politicians. The best-known is the minister of higher education, William Ruto, a would-be presidential candidate who has fallen out with most of the government. Mr Ruto addressed the June 13th rally with characteristic gusto.

Most members of the government, however, want a Yes vote. Some in the No campaign blamed the deaths on the government, alleging that intelligence agents had thrown the grenades to suppress dissent. But why would ministers risk all when opinion polls show a large majority supporting the Yes campaign?

The minister of internal security, George Saitoti, says his men are working hard to catch the bombers. The government has also arrested three MPs from the No campaign on charges of “hate speech”. One of them is the deputy minister for roads. Mr Ruto himself had to explain his remarks to the rally before the National Cohesion and Integration Commission. This body was set up to try to stave off the sort of violence that erupted along ethnic lines after a disputed election in 2007 and left about 1,300 dead.

Since independence in 1963, Kenya has struggled to move beyond some of the arcane traditions inherited from British rule and come up with a modern constitution that its diverse people can agree on. Yet the ferocity of the debate over the Islamic courts may be a sign that the usual amity between Christians and Muslims might be breaking down. That is partly attributable to the growth of evangelical Christianity, but politicians also worry about the spillover effect of Islamic rule in neighbouring Somalia. In fact, given the choice between upsetting Kenya’s Muslims or its Christian evangelicals, President Mwai Kibaki and the prime minister, Raila Odinga, both prefer to keep the Muslims close.

Middle East & Africa

Copyright © The Economist Newspaper Limited 2010. All rights reserved. France's public finances How buoyant is France? The French government is slowly starting to tackle the country’s economic problems. But austerity remains a dirty word

Jun 17th 2010 | PARIS

ONE by one, euro-zone governments have been confecting austerity plans in a bid to reassure jumpy bond markets. After Greece, Spain, Portugal, Ireland and Italy, last week even creditworthy Germany unveiled a savings plan. Britain, although not in the euro zone, is braced for fiscal tightening in an emergency budget on June 22nd. The only big European economy yet to spell out an austerity plan is France—a country badly in need of one.

The government thinks it has a scheme to get the public finances under control. On June 16th it unveiled its long-awaited pension reform, which will raise the legal retirement age from 60 to 62 by 2018. Since this will meet less than half the €45 billion ($55 billion) state pension-fund shortfall by 2020, next year the top rate of income tax will be raised from 40% to 41%, and taxes on financial transactions will increase. By 2020 civil servants’ pension contributions will increase from 8.1% of pay to 10.5%.

The plan sends a reasonably serious message about France’s long-run resolve, although it will be resisted. Martine Aubry, the opposition Socialist leader, herself nearly 60, vowed to reverse the retirement-age rise if elected. The unions have called for protests on June 24th. In budgetary terms, however, the short-run impact of the measures will be limited. Even in the long run the reform will leave France with a younger retirement age than Greece.

The French have made other noises about spending cuts. Just days after Germany’s Angela Merkel announced her austerity plan, worth €80 billion by 2014, François Fillon, France’s prime minister, appeared to trump it by announcing €100 billion of savings by 2013. Yet there was nothing new here: he was merely quoting the saving needed to meet France’s promise, under euro-zone rules, to curb its deficit from 8% of GDP this year to 3% by 2013.

Moreover, Mr Fillon claimed cheerily that economic growth would do half the repair work. That leaves €50 billion to be found in cuts. He hopes to squeeze €5 billion by trimming tax exemptions, and says he will freeze the 2011 budget in real terms. Small savings will come from an old plan to replace only one in two retiring civil servants, and he says he will stop ministers claiming a salary and pension at the same time. But the rest is unspecified. “France for the moment stands out as the only country that has not spelled out how it will reduce its deficit,” notes Laurence Boone, an economist at Barclays Capital in Paris.

Why? A generous explanation is that France is doubtful about the wisdom of premature fiscal tightening. Before Mrs Merkel produced her cuts, Christine Lagarde, the finance minister, had accused Germany of not doing enough to stimulate demand. Another minister says an austerity plan would risk “killing off growth”. Mr Fillon himself has said that France is “far from an austerity plan”.

A more plausible reason is that the government is too nervous to tell voters about the need for deep spending cuts, let alone implement them two years before a presidential election. The French word for austerity, rigueur, remains taboo on both left and right. It is linked in the public mind to the painful austerity drive introduced by President François Mitterrand in 1983, after his “rupture with capitalism” had sunk the currency and built up a crushing deficit.

Politicians are haunted too by the fate of Alain Juppé, a prime minister on the right, who tried to reform France’s welfare and pensions in 1995. Strikes paralysed the country for weeks; Mr Juppé backed down and his government was booted out at the next election. With over 5m people, or nearly one in five of the labour force, working for the state, any squeeze on public-sector pay or benefits can draw crowds on to the streets. Although Nicolas Sarkozy was elected on a promise to shake things up, the recession has tempered his liberalising zeal. Pension reform aside, he appears more focused on keeping a lid on social discontent ahead of 2012.

The trouble is that economic reality demands tough measures. “We are closer to Greece than to Germany,” says Nicolas Baverez, a commentator who has long warned the government about its public finances. France’s budget deficit this year is forecast at 8% of GDP, next to 9% in Greece (see chart), and its deficit-cutting plans rely on optimistic growth forecasts. Its public debt, at 84%, is worryingly high. Moreover, Mr Sarkozy has a tendency to spend his way out of trouble. The French government spends 56% of GDP, more than any other euro-zone country. As the national auditor pointed out recently, a quarter of the increase in the deficit in 2009 was unrelated to the recession.

For the time being, the credit agencies continue to give French sovereign debt a top rating, enabling it to borrow cheaply. France has a big, diversified economy, and worries about debt in the euro-zone periphery have drawn investors to the perceived haven of French bonds. Yet the spread over German bonds has widened recently, and in February Moody’s, a rating agency, warned that in the absence of consolidation, rising debt could threaten France’s AAA rating. François Baroin, the budget minister, admitted that the objective of preserving France’s rating was tendu, which means “tight” or “stretched” (although he later insisted he intended it to mean “constant” or “unbending”).

The real difficulty is credibility. Mr Sarkozy says he wants to write a rule into the constitution to commit governments to reducing the deficit, something Germany has done. But this could take time, and it is unclear how binding it would be. The harsh truth is that no French government has balanced its budget since the early 1970s. As Jacques Delpla, an economist on the Council of Economic Analysis, points out, French governments have lived beyond their means even during the years of plenty—a failure he calls “scandalous”.

Europe

Jun 17th 2010 | PARIS

A SPECIALLY spray-painted Eurostar train, carrying ex-fighters of the French resistance from Paris to London on June 18th to commemorate the 70th anniversary of Charles de Gaulle’s BBC radio appeal to the French, is part of a wave of de Gaullemania in France. President Nicolas Sarkozy was due in London that day to mark the anniversary of the speech, which de Gaulle gave just four days after the Nazis rolled into Paris. There are films, exhibitions, books (see article), conferences and talks in the honour of the resistance leader and founder of the fifth republic. The French mint has issued a €2 coin with an image of de Gaulle at the BBC microphone. His portrait is all over the weeklies; Le Figaro magazine’s cover story runs to 33 pages.

De Gaulle already towers over France. Paris’s main airport, an aircraft-carrier and a Paris landmark are named after the former president. Not to mention 3,633 roads in France, according to the Fondation Charles-de-Gaulle: more than Louis Pasteur (3,001) and Victor Hugo (2,258). Television viewers voted him the greatest Frenchman of all time.

Why this revival of the memory of a proud, touchy man who became a national myth? One reason is that surviving resistance fighters are getting old, and there will be few around to celebrate the next big anniversary of the 1940 appeal.

Another factor is that political leaders still define themselves in relation to Gaullism. Dominique de Villepin, a former prime minister, is launching a new party to keep the Gaullist spirit alive. He hopes to rival Mr Sarkozy, who also claims to be de Gaulle’s heir. Even some left-leaning figures find ways to identify with the heroic figure who refused defeat, decline and national submission. De Gaulle himself was a master at mythmaking, so perhaps it is not surprising that today’s leaders pick what suits them from Gaullism. A model of modesty In troubled economic times, and with politicians enjoying handsome perks at taxpayers’ expense, reaching for de Gaulle may also be a way for the French to invoke a model of integrity and modesty. Even as president, de Gaulle paid his gas and electricity bills himself. In 1958, unveiling an austerity programme, he announced: “Without an effort to regain control, without the sacrifice it requires and the hope it entails, we will remain a country that lags behind, swinging continually between drama and mediocrity.” It is difficult to imagine such sentiments coming from Mr Sarkozy.

Europe

Jun 17th 2010 | BERLIN

THE headlines were alarming. “The Coalition Struggles to Survive”, reported the Financial Times Deutschland on June 14th. “End It!”, demanded DerSpiegel, which portrayed the chancellor, Angela Merkel, and the foreign minister, Guido Westerwelle, looking as if there was nothing they would like more. Things have got so bad in the “Christian-liberal” alliance—consisting of Mrs Merkel’s Christian Democratic Union (CDU), its Bavarian sibling, the Christian Social Union (CSU), and Mr Westerwelle’s Free Democratic Party (FDP)—that some adherents warn it could break up. Most voters do not expect it to survive its full term, which ends in 2013.

Little has gone right since Mrs Merkel was re-elected last September. Her coalition is meant to represent middle-class aspirations but has yet to agree on what they are. Tax relief, insisted the FDP, seconded by the CSU. The parties prevailed on Mrs Merkel to enact cuts—including a politically catastrophic sop for hoteliers—even though most economists and voters thought deficit reduction more important.

Though allies on tax, the two junior partners have warred over health-care reform. Karl-Theodor zu Guttenberg, the popular CSU defence minister, has clashed with conservative colleagues over his wish to save money by ending conscription; he was said to be on the point of resigning this month. Mrs Merkel contradicted the FDP economy minister, Rainer Brüderle, after he ruled out state aid to Opel, a car maker, then awkwardly retreated. (Opel later said it did not need the help anyway.) When an €80 billion ($96 billion) deficit-reduction plan finally came, on June 7th, it proposed soaking the poor (by cutting welfare benefits) while sparing the rich. Thousands marched against it.

A series of political reversals have added to the sense of disarray. In early May a Christian-liberal coalition lost an election in North Rhine-Westphalia, Germany’s most populous state. The federal president, Horst Köhler, quit unexpectedly at the end of the month. The crisis in the euro zone We can’t go on like this forced Mrs Merkel to push colossal bail-outs through a reluctant Bundestag. Her approval rating has fallen to 40%, its lowest level since she became chancellor in 2005.

Malcontents have an opportunity to bring her down on June 30th, when a Federal Assembly meets to choose a successor to Mr Köhler. Mrs Merkel is backing Christian Wulff, the lacklustre premier of Lower Saxony. The opposition candidate, Joachim Gauck, inspires more enthusiasm among some coalition members, especially eastern liberals. They could weaken the chancellor, perhaps fatally, by turning against Mr Wulff to elect Mr Gauck.

Yet that looks unlikely. No party has more to lose from elections than the FDP, which won a record 14.6% of the vote in September but has since slumped in the polls. Mrs Merkel has no serious rivals within the CDU except Mr Wulff, who will be a failed would-be president if he is not elected. She could jettison the FDP in favour of a “grand coalition” with the opposition Social Democrat Party (SPD), like the one she led until last year. But the SPD has little desire to repeat the experience. “The government can only fail if there is an alternative,” says Wolfgang Nowak, a former aide to the last SPD chancellor, Gerhard Schröder, “but there is no alternative.” Mrs Merkel and the Christian-liberal coalition are thus likely to survive. She needs to persuade Germans that this is a good idea.

Europe

Jun 17th 2010 | MADRID

IT WAS reform in slow motion. Spain’s labour laws were eventually tightened on June 16th, with the promise of more to come, as José Luis Rodríguez Zapatero’s Socialist government, faced with a national unemployment rate of almost 20% and rumours (which it denied) that it was poised to tap the euro-zone’s rescue package, continued its painful creep towards change.

Some of the reforms were bold. Severance payouts will, in some cases, be slashed from 45 days’ worth of salary per year worked to 25. Companies will find it easier to lay workers off temporarily during bad times. Some contracts will be simplified. It is the biggest shift in labour legislation for 16 years, says Salvador del Rey of the Cuatrecasas International Institute.

So far, so good. But although the decree came into effect immediately, it must pass through parliament on June 22nd. Lacking a majority, the prime minister could see it immediately repealed, although few expect that. The debate may involve the kind of political brinkmanship that last month saw Mr Zapatero’s austerity plan squeeze through parliament by a single vote. Further agony is added by his decision that the decree should be transformed into a full-blown parliamentary bill. This will require months of negotiations, as Mr Zapatero will allow other parties to add amendments in an attempt to spread responsibility for unpopular measures.

That process should permit further tightening, especially if Mr Zapatero turns to the business-friendly Catalan regional party Convergence and Union for help. But some economists worry that the first result of a law designed to boost employment will be the opposite, as companies freeze hiring during the months of uncertainty. The reforms will not help to create new jobs, says Gerardo Díaz Ferrán, head of the Spanish Confederation of Business Organisations, Spain’s biggest employers’ federation. (Yet Mr Zapatero was forced to act because Mr Díaz Ferrán and trade unions failed to agree on their own reforms.)

Some things will stay the same. The reformed laws will still be open to interpretation by judges, an experience many Spanish employers have come to dread. The decree clarifies some laws, but there is still likely to be plenty of work for Spain’s estimated 80,000 labour consultants and lawyers. Spain’s inefficient collective bargaining system has also been left largely intact.

The measures of the reform decree reflect Mr Zapatero’s attempt to triangulate between the demands of three groups. First, he needed to calm market fears about Spain’s ability to create wealth and pay debts. Second, he had to please other parties, which he relies on for support in parliament. Last, he wanted to avoid antagonising his old trade union allies.

That did not work. Spain’s two big unions have announced that they will hold a general strike to protest against the reforms. Yet the date they set, September 29th, is several months off, suggesting that they may doubt their ability to command widespread support.

The reaction of ordinary Spaniards was hard to measure. This was partly because on the day the reform was unveiled public attention was diverted by Spain’s first match in the World Cup (despite being favourites, they were humbled by Switzerland). The government insisted that the timing was coincidental, but to many Spaniards the televising of important sporting events at times of political tension is reminiscent of the Franco era.

The reform announcement also coincided with a rise of Spain’s borrowing costs to record levels. It is ultimately the market response that will count most, as Spaniards are being painfully reminded.

Europe

Jun 17th 2010 | BRATISLAVA AND PRAGUE

Easy, tigress

AFTER years of sleaze and stagnation central European politics is livening up. In April the centre-right gained a thumping majority in Hungary. At the end of May Czech voters, spurred by an anti-corruption campaign, shunned the two main parties for newcomers. And now Slovaks have evicted the country’s most effective politician, the populist and nationalist prime minister Robert Fico, in favour of a bunch of free-market parties preaching lean government and ethnic harmony.

Iveta Radicova (pictured), head of the centre-right Christian Democrats (SDKU-DS), is set to form a government backed by 79 of the 150 parliamentary deputies. The sociology professor, nicknamed the “Tatra Tigress”, will be Slovakia’s first woman prime minister (and one of a mere handful of prominent female politicians in the region). Her party won only 28 seats; it has a chance of power thanks to the collapse of Mr Fico’s coalition partners and a surge in support for two newcomers.

Slovakia’s political landscape has changed. The party of Vladimir Meciar, an authoritarian ex-prime minister who isolated Slovakia from Europe in the 1990s, failed to pass the 5% threshold needed to enter parliament. It is now likely to fold. The racist Slovak National Party squeaked in. Its loudmouth leader, Jan Slota, said he was “crying”. Both parties were Mr Fico’s allies. He pandered to their voters during the election campaign, to some effect: his nominally centre-left party’s share of the vote rose by 6%, gaining it 62 seats. It polled strongly among poorer and provincial voters. But flirting with the fringe made Mr Fico a pariah in the eyes of more mainstream potential partners.

These include the new Most-Hid (from the Slovak and Hungarian words for “bridge”), run by Bela Bugar, who used to run another well-rooted Hungarian ethnic party. The old outfit did not meet the 5% threshold, whereas the new lot, which aims to cross the ethnic divide, gained a surprising 8%. Most-Hid’s success seems to have stunned the new government in Budapest, which bet heavily on its defeated rival. The other newcomer, Freedom and Solidarity (known as SaS), did far better than expected, polling 12%. It is run by Richard Sulik, a zealous economic liberal who brought the flat tax to Slovakia in its free-market glory days. SaS fought the election using social-networking and messaging websites, chiefly Facebook and Twitter.

The new four-party Slovak coalition (it also includes a small Christian-Democrat party) will have two big tasks. One is to fix the public finances. Slovakia’s deficit has risen to 6.8% of GDP, following an economic contraction of 4.7% last year. The other is to mend relations with Hungary, plagued by rows over language and loyalty. Ms Radicova wants to scrap a new law that strips Slovaks of their passports if they take dual Hungarian citizenship. (She also opposes Slovakia’s contribution to the euro-zone bail-out fund.)

The Slovak result echoes that of the Czech election two weeks earlier, where anti-corruption campaigns swung votes behind new parties, which did well in Prague and among younger voters. Two of them—TOP 09, led by Karel Schwarzenberg, a Habsburg-tinged aristocrat and former foreign minister, and the more populist Public Matters—are in coalition talks with the centre-right Civic Democrats.

Public finances are a worry in the Czech Republic too (fears of the “road to Greece” played prominently in the election campaign). The coalition parties want to start working on a new budget as soon as the government has been agreed on, probably on July 7th. The country has promised the European Union to get the deficit below 3% of GDP by 2013, from 5.3% this year. The government should hold 118 of the 200 seats in the lower house, making it a bit more secure than its Slovak counterpart when it faces tough fiscal decisions.

It will have a harder job meeting voters’ expectations of cleaner politics. A campaign called “Replace the Politicians”, run by a group of apolitical but public-spirited marketing experts, helped focus voters’ wrath on some of the worst offenders, who found themselves voted off party lists. But the problems go deep. A cosy cartel between the old parties has brought worrying overlaps between business and politics, the stench of dirty money from the east and a stream of scandals involving the courts, police and spooks. Mr Schwarzenberg describes corruption as a “cancer” that threatens to turn the country into “Sicily, minus the sea and oranges”. But as Italians know, moaning about corruption is one thing. Eradicating it is quite another.

Europe

Jun 17th 2010 | COPENHAGEN

PIA KJAERSGAARD, the doyenne of Denmark’s hard right, has not put a foot wrong in the 15 years since she founded the Danish People’s Party. After an inauspicious start as a breakaway from another rightist group, the party has bounded forward, increasing its vote in every general election and, since 2001, enjoying influence over policy by propping up a minority centre-right coalition.

Ms Kjaersgaard’s recipe is simple: she panders to some Danes’ fear of foreigners by demanding a tightening of immigration policy and accommodates their financial anxieties by ensuring generous welfare handouts. Earlier this year Ms Kjaersgaard said that after a decade of supporting Denmark’s liberal-conservative governing alliance she now fancied the real deal—cabinet seats for the DPP after the next election, due to be held no later than November 2011.

But her ambitions appear to have been scuttled by a ham-fisted response to fiscal reform. With a 24 billion kroner ($3.9 billion) austerity package in the air, last month the DPP proposed slashing the period during which the jobless can draw welfare, from four years to two, and insisted on a reduction in child benefit. Both measures seemed aimed at immigrants, who have suffered higher rates of unemployment and have bigger families than ethnic Danes. But the DPP misjudged the demographics. Unskilled poor whites will be the main casualties of benefit cutbacks and immigrant fertility has fallen close to Danish levels.

A further setback came with immigration policy. Egged on by Ms Kjaersgaard, the government has tightened immigration rules every eight months, on average, since 2001. One disincentive involves reducing unemployment benefits to people who have not spent seven out of the previous eight years in Denmark. In 2008 almost 80% of people on this low rate were immigrants. But the residency requirement also turns out, much to the DPP’s embarrassment, to exclude veterans of Denmark’s military actions in Kosovo, Iraq and Afghanistan.

The upshot of all this is a dramatic decline in the polls for both the governing parties and the DPP. On current trends the opposition Social Democrats and their allies are on track for a sweeping victory next year. Ms Kjaersgaard may find her role switched from kingmaker to has-been.

Europe

Jun 17th 2010

SHUT up, please, you are not helping. That, with respect, would be Charlemagne’s advice to America’s foreign-policy establishment, as its big guns nag the European Union into admitting Turkey swiftly, so as to anchor Turks to “the West”.

It is no pleasure to offer such advice. Successive American governments have been right to say that EU membership for Turkey—a dynamic, officially secular, youthful Muslim nation, sitting astride vital trade and energy routes—is in the strategic interests of Europe. The very process of negotiating membership has promoted reform inside Turkey. Americans are right that such advances are imperilled when leaders like Nicolas Sarkozy of France say Turks have no place in the EU. Americans are also right to point out that EU leaders have already pledged to admit Turkey if it meets a long list of legal requirements.

For all that, American voices accusing Europe of losing Turkey are guilty of oversimplification, and of ignoring what a big deal Turkish membership of the EU would be. The chorus comes from all sides. Visiting London last week, Robert Gates, the American defence secretary, was asked if recent Turkish actions over Gaza and Iran’s nuclear programme signalled a country “moving eastward”. If Turkey is heading east, Mr Gates mused, perhaps it is being pushed by some in Europe “refusing to give Turkey the kind of organic link to the West that Turkey sought.”

In a new paper for the Turkish arm of the Open Society Foundation, a liberal pressure group, the Democratic politician Howard Dean is blunter. If some EU leaders are proposing a mere “privileged partnership” for Turkey rather than full EU membership, says Mr Dean, it is because they are trying to assuage “increasing xenophobia” at home, or even making “a bald and shameful political attempt” to recruit far-right voters. Comparing European integration to the birth of America, Mr Dean generously offers some advice: if EU citizens are in a funk, the emergence of pan-European political parties and direct elections for an EU president would be “very helpful”.

From Yale, Walter Russell Mead, a foreign policy grandee, this month suggested Turkey should offer to give up immediate membership of the EU in exchange for a firmer pledge of eventual success, and, in the short term, a voice in EU decision-making.

Some of these gripes have a point. EU leaders like Mr Sarkozy and Angela Merkel of Germany are playing to their electoral bases when they question Turkey’s fitness to join, and many of their core supporters think Turks too foreign (or too Muslim) for the club. But the Turkey question cannot be reduced to racism.

For one thing, in urging Europe to fight any eastward drift in Turkish diplomacy, Mr Gates risks conflating EU membership with support for American policy in the Middle East. After all, several European nations strongly dislike the current Israeli government and are unconvinced by sanctions on Iran: the West is a complex block. Talk of immediate membership is nonsense: even Turkey’s friends know it will take at least ten years. Some areas are stalemated: the EU has frozen several chapters of the talks, and Turkey refuses to recognise Cyprus, an EU member state.

It is not only xenophobes who see the prospect of EU membership for Turkey as daunting. Joining today’s union is not like entering the North American Free Trade Agreement (NAFTA). American pundits might like to try the following two thought experiments, based on real-life EU instruments, and imagine how, with Mexico playing the part of Turkey, they would sell either to American voters.

First, imagine a NAFTA single market, with legal powers to ban congressional aid intended to stop a Detroit car factory moving to Mexico. If Congress persisted, NAFTA competition authorities could send the American government to be fined by Mexican, American and Canadian judges at the NAFTA court. The EU already does this.

Second, consider a NAFTA arrest warrant, based on “mutual recognition”, ie, the principle that a Mexican court’s ruling is as valid as one from Ohio. A New Yorker accused of a serious crime (a drunken rape in Cancún, say) could not fight extradition on grounds of poor Mexican police work, but would have to be shipped promptly to Mexico for trial. Because the EU arrest warrant already exists, Europeans have a right to fret about Turkish courts.

It took us thousands of years to get here

Americans who compare their two centuries of union to the six decades of European integration may think they are paying Europe a compliment. But it often comes across as condescension. Yes, it took America a while to form a federal government and issue a common currency, and America did fight a civil war. But European differences, whether of language, religion or history, go back millennia. Europe’s conflicts were not civil wars.

On numerous measures, Europe is more diverse than America. Per-capita wealth in Mississippi, the poorest state, is almost two thirds the national average. But the poorest EU member, Bulgaria, stands at 38% of the union average. Mississippi is also the most religious state: folks there are three times more likely to go to church weekly than in Vermont (the most secular state). Well, three quarters of Maltese and two thirds of Poles go to church once a week: just 3% of Danes do the same. Mississippians are less likely than Californians to think global warming is a “very serious” problem, by 56% to 73%. Try Estonia, where just 42% think climate change is “very serious”, compared to 84% of Greeks. Some Americans are still unfazed. Come on Euro-Lilliputians, they cry, form a United States of Europe and elect yourself a president. They might like to ponder the kind of European issue big enough to win votes, continent-wide. Depressingly, opposing Turkey is one of the few that might do the trick.

Economist.com/blogs/charlemagne

Europe

Copyright © The Economist Newspaper Limited 2010. All rights reserved. The Bloody Sunday Inquiry Long time coming Lord Saville’s report into a massacre in Northern Ireland makes difficult but necessary reading

Jun 17th 2010 | BELFAST

AFTER 12 years, more than 900 witnesses and £195m ($288m), the findings of Lord Saville, a High Court judge charged by the British government with establishing the truth about what happened on January 30th 1972 in the Bogside area of Londonderry, have finally been made public. His main conclusion—that British paratroopers had no justification for killing any of the 13 men who died, some shot from behind, on what has come to be known as Bloody Sunday—will have a profound effect on relations between the British government and Irish nationalists. That effect will be entirely positive.

Relations have already improved immeasurably in recent years, but the inquiry’s conclusions, painful though they are for the authorities and the army, have removed an historic and deeply held nationalist grievance. They amounted to an exorcism of ghosts at large for almost four decades, removing at a stroke a significant Anglo-Irish irritant. Since 1972 the rapid-response report into the matter by Lord Widgery, then the Lord Chief Justice, which confined its criticism to saying that the behaviour of some members of the Parachute Regiment “bordered on the reckless”, had been widely dismissed as a whitewash, in Whitehall as well as in Northern Ireland.

Relatives of the dead campaigned fruitlessly for a full inquiry until, in 1998, a new British prime minister, Tony Blair, asked Lord Saville to conduct a fresh investigation into the killings. A number of family members described themselves as “consumed” by the issue, not just because they had lost husbands, sons and brothers, but also because Lord Widgery had branded some of the dead as gunmen and bombers. The Saville report is an implicit reprimand to Lord Widgery. It exonerates those killed on Bloody Sunday and, in effect, accuses soldiers of the Parachute Regiment of killing innocents and then lying when they appeared before both inquiries to explain what happened.

The report was received rapturously by the relatives of the victims, but their response was more an outpouring of relief and elation than crowing over an old enemy. Brian Cowen, the Irish prime minister, made clear that old grievances were not being reopened. Rather, he said, “it is about the healing of the gaping wounds of injustice left behind by the terrible events.”

The carefully orchestrated publication of the report was an emotional event in both the centre of Londonderry, where the relatives gathered, and in the House of Commons, where David Cameron, the prime minister, announced its findings. Some MPs professed themselves moved by pleas from both sides of the communitarian divide for wider justice. Nationalists and republicans, who had been nervous about Mr Cameron’s professed leanings towards the unionist cause, said they were impressed by his speed in endorsing Lord Saville’s stark conclusions.

Unionist opinion was divided. After the report was made public, leaders of the three main Protestant churches met relatives of the Bloody Sunday victims at a memorial in the Bogside. There, using rhetoric of a type rarely heard in Northern Ireland, they declared: “A cloud that has been hanging over this city for almost four decades has begun to lift…We dare to believe that this can be a decisive turning-point in reaching out to one another.”

Many Protestants, however, complained that the misdeeds of the British army had been broadcast to the world while the IRA had virtually escaped criticism. Most of the relatives of IRA victims, they said, are suffering in silence without public recognition or prime ministerial apologies. For those who lost friends and family to these killers, the extensive investigation of controversial incidents involving the army contrasts sourly with the lack of attention paid to their own tragedies.

Of the 3,700 who died in the Troubles, 1,800 were killed by the IRA, and around a thousand by extreme Protestant groups. The army killed 300. About 250,000 regular soldiers served in Northern Ireland over more than 30 years: the vast majority never fired a shot. Meanwhile terrorists, mostly IRA stalwarts, killed 1,000 members of the security forces, half of them regular troops and half locally recruited soldiers and police.

Those events belong to a time that has well and truly ended. Today, thanks to the peace process, both the army and the IRA have quit the streets of Derry and the rest of Northern Ireland. But the broader questions of how to deal with the past, and whether a truth commission or a peace and reconciliation process would help to lay it finally to rest, are yet to be answered.

Since the first IRA ceasefire in 1994 there have been any number of discussions, conferences and documents seeking to draw up a balance-sheet of the Troubles. None has come close to commanding widespread support, and some have produced much anger. One suggestion, to give £12,000 to the relatives of everyone—terrorist or not—who was killed, caused a furious uproar.

An enormous investigation along Bloody Sunday lines will not be mounted again because the time it took and the costs it ran up were prohibitive. Some lower-profile inquiries are under way now, but with rules that impose strict limits on the scope of the proceedings.

The Saville inquiry, meanwhile, has left significant loose ends. A notable one is whether prosecutions should be brought against those soldiers whom the judge came close to accusing of unlawful killing and perjury.

The idea of plunging into new legal thickets is daunting, especially since it might well prove hard to convert Lord Saville’s findings into convictions against individuals. And few want to pursue soldiers, even if they were guilty of serious wrongdoing, when virtually all IRA members convicted of terrorist offences were long ago set free as part of the peace process. Unionists are opposed to prosecutions. Most nationalists are too, considering that, with the pronouncements of the judge and the prime minister, truth has been told and honour satisfied.

Britain

Jun 17th 2010

IN 2006, at the height of his pomp as chancellor, Gordon Brown used his annual Mansion House speech to the City’s great and good to extol the virtues of London’s financial district. With its whizz kids and light-touch regulation it was proof, said Mr Brown, that “Britain can succeed in an open global economy”.

On June 16th George Osborne, the new Tory chancellor, reminded the same gathering that many Britons now see the City as a liability that deserves to be heavily taxed. Mr Osborne obliged with a new levy on banks’ borrowings, the gory details of which may be unveiled in his first budget on June 22nd.

Mr Osborne also wants to police banks better, hence his plans to rejig their regulators’ responsibilities. The Financial Services Authority (FSA), which supervises individual firms, will be recast as a subsidiary of the Bank of England. The pretext is to prevent wires getting crossed, as happened during the Northern Rock fiasco.

The real reason, though, is the FSA’s risible performance during the crisis. Its chief executive, Hector Sants, will run the new regulation arm of the central bank, but make no mistake who will be in charge. In his own speech, Mervyn King, the bank’s governor, said he will aim to avoid “an overly legalistic culture with its associated compliance-driven style of regulation”, which is central-banker-speak for beating the FSA into submission.

The central bank will also get powers to guard the stability of the financial system. A new Financial Policy Committee will be able to tweak banks’ requirements for liquidity and capital and may limit certain types of lending—by capping mortgages, for example. This could help to stop bubbles, which the central bank has a reasonable record of identifying. Its Financial Stability Review in July 2006 did not predict a meltdown, but did point a finger at structured credit products and British banks’ rising reliance on wholesale borrowing.

Mr King also suggested that the structure of banking may require reform. Reflecting this and the desires of his Liberal Democrat coalition partners, Mr Osborne has set up a new committee to look at breaking up banks. It has a heavyweight economist, Sir John Vickers, as chairman and similarly serious members, several of whom have expressed doubts about the big conglomerate model of banking.

If the committee does recommend breaking up banks it will put Mr Osborne in a tricky position. Two of Britain’s best-known banks, HSBC and Standard Chartered, would probably relocate to Asia to avoid being broken up. As previous chancellors have found, the only thing worse than relying heavily on the City is not having the City at all.

Britain

Jun 17th 2010

STARTING a long courtship, on June 15th News Corporation made a non-binding offer to acquire BSkyB, a satellite broadcaster. Sky’s share price shot up. News Corporation’s investors seemed pleased, too. After ruinous forays into the internet and newspapers in the shape of MySpace and the Wall Street Journal, they are probably relieved to see the firm invest in pay-TV, at which it is rather good.

News Corporation already holds a controlling 39% stake in Sky, which grew out of a business that Rupert Murdoch built in the 1980s. It has offered £7 ($10.36) a share for the rest, valuing the company at more than £12 billion. Sky’s directors sniffed at that, and said they would entertain offers over £8 per share. In the meantime, though, Sky will work with News Corporation to overcome regulatory hurdles in Britain and Europe. It was not exactly a firm brush-off.

It is easy to see why News Corporation wants Sky. The British firm has proved almost recession-proof, attracting hundreds of thousands of new subscribers during the slump and extracting more money from each. It is a pioneer in 3-D and mobile television and has begun to distribute programmes through games consoles. News Corporation, which suffered a nasty drop in its American broadcast TV business and newspapers last year, could do with such a solid player on its bench.

Sky is so successful, indeed, that the chief threat it faces now comes not from competitors but from regulators and the British government. Ofcom, the media watchdog, has ordered Sky to sell some of its channels to competitors such as Virgin and BT—and set the price (the firm is appealing). The previous Labour government mooted using taxes to upgrade the broadband network. That would have opened a new route for rivals to bring pay-TV into the living room.

But the Conservatives seem less keen on fiddling with the market. The party, which was backed by the Sun, a News Corporation paper, during the general-election campaign, has also hinted at more minimalist media regulation. Jeremy Hunt, the culture secretary, responded to news of News Corporation’s offer by pointing out that it already controls Sky. This one is likely to go through.

Britain

Jun 17th 2010

Space for Murray and two more

WHEN, late last year, Lord Mandelson proclaimed that he wanted Britain to become “a world leader in low-carbon transport”, most dismissed it as a typical example of New Labour hyperbole.

But the former business secretary was right in a way that even he may not have realised. The rarefied technological skills and talent for fleet- footed innovation that have made Britain home to much of the international motorsport industry are now being applied to develop some of the most interesting, possibly revolutionary, ultra-low-carbon vehicles envisaged anywhere.

The charge is being led by race-bred engineers, such as Gordon Murray, the designer of four Formula One world-championship-winning cars for McLaren and of the firm’s legendary 230mph F1 road car. Mr Murray left McLaren because he was determined to invent a car—and a manufacturing process to go with it—that had the lowest possible environmental footprint while still being safe, fun to drive and cheap to buy. He saw the project as creating a “new British Mini for the 21st century”— much more faithful to the original’s legacy than BMW’s bloated successor. To that end, three years ago he established a design firm near Guildford with backing from MDV, a Silicon Valley venture-capital outfit specialising in green technology.

Some of the principles behind Mr Murray’s car come straight from motorsport: very light weight, great strength, efficient packaging and compact dimensions. The difference is that, in Formula One, performance is pursued without heed to cost, whereas Mr Murray wanted a car that could be built and sold profitably at a price similar to today’s most basic city cars.

The result is a radically new way of making cars and the T.25, a vehicle every bit as impressive in its way as the 100 times more pricey McLaren F1. It is smaller than Daimler’s two-seater Smart, but can carry three in comfort, with the driver sitting in the middle, and has enough space in the boot for the weekly shop. Three T.25s can park abreast in one standard parking place. It meets the highest safety standards. Accident-repair costs are low, thanks to easily replaceable carbon body panels. With a 660cc engine, the car will accelerate at the pace of a 2-litre saloon and return 80mpg.

Mr Murray is also developing a battery-powered version—the T.27—with the help of Zytek, a British firm that pioneered engine-control systems for racing cars and is now a world leader in electric drivetrains (it is responsible for the electric version of the Smart). Because the car is so light a relatively small (and thus inexpensive) battery will give it a range of 100 miles.

Equally important is the “iStream” process used to make the T.25. “We’re selling a manufacturing system as much as a car,” says Mr Murray. By doing away with metal presses, and with assembly simplified by a tubular-frame chassis, Mr Murray reckons the capital cost of a factory making 100,000 T.25s a year would be about a fifth of the cost of a conventional plant. Nine carmakers, he says, are considering licensing the system, but interest extends beyond the automotive industry.

The approach taken to sustainable personal mobility by Riversimple, a company founded by another ex-racer, Hugo Spowers, is equally unorthodox. Its car, if anything, takes the gospel of lightness even further—Mr Spowers calls it “mass decompounding”—allowing it to use a tiny 6kW hydrogen fuel cell to power electric motors in each wheel. Fuel cells have long promised pollution-free driving, but have been held back by their enormous cost when applied to a normal car.

Riversimple, which is raising £20m in second-round financing and is backed by members of the Piëch family who founded Porsche, believes its “whole system design” philosophy and business model overcomes that obstacle. Mr Spowers intends to lease rather than sell the car, which has a range of 240 miles and will accelerate briskly to its top speed of 50mph. That way he can spread the cost of the critical weight-saving but expensive carbon composite structure over a vehicle’s lifespan of 15-20 years. Drivers will pay £200 a month and 15p a mile to cover all their costs, including fuel. In contrast to a conventional carmaker, says Mr Spowers, Riversimple will have an economic interest in lowering running costs and increasing longevity. Government-backed trials involving up to 30 cars will begin in Leicester and, probably, Oxford in 2012.

Mr Murray and Mr Spowers both believe that if cars (and indeed the planet) are to survive they must be designed, manufactured and used in ways very different to the century-old model that still holds the automotive industry in thrall. Their companies are small and specialised, but may hold the key to something much bigger.

Britain

Jun 17th 2010

MORE than a year has passed since the first revelations of fiddled expenses shamed Parliament. A general election has replaced many of the offenders with untainted newbies. Yet Westminster is still unable to move on from the scandal.

The problem, say irate MPs, is the new system set up to police their expense claims. The Independent Parliamentary Standards Authority (IPSA), created last year, is apparently nothing like as “fair, workable and transparent” as it claims to be. Its rules are impenetrably complicated, say MPs, and its staff a veritable parody of unhelpful, faceless bureaucracy.

In a debate in the House of Commons on June 16th, one MP said a colleague had spent four hours processing a claim for petrol. Stories abound of claims for stationery and the like getting lost in the system, forcing MPs to dip into their pockets for basics. Pension contributions for researchers and secretaries must now come from MPs’ staff budgets rather than, as before, a central fund. As a result, say MPs, they cannot afford enough staff. They also complain that IPSA’s helpline often goes unanswered, and that its online system for filing claims is insecure and often crashes.

Add in the accidental underpayment of most MPs’ salaries in May, and the usual transitional problems that follow a general election—many new MPs have yet to be given an office, and are sharing laptops and printers in the meantime—and Parliament has a beleaguered air. Veterans say they have never seen morale so low.

Sympathy will be scarce. The expenses scandal provoked popular fury. The new rules, announced by IPSA in March, could have been much harsher. MPs can still employ family members, for example. And some MPs, it appears, have damaged their cause by being rude to IPSA staff. On June 13th it emerged that the body’s interim chief executive, Nigel Gooding, would be leaving the post early for the sake of his “health and sanity”. IPSA’s chairman, Sir Ian Kennedy, has spoken of the “hostility” shown to his team by a minority of MPs.

But some gripes seem justified, and IPSA is taking note. It will introduce face-to-face “surgeries” for MPs, some of whom may be entitled to more help with staff costs than they realise. Mark Harper, a cabinet-office minister, hinted on June 16th that IPSA would contemplate a direct-payment system, giving MPs a kind of expenses credit card instead of reimbursing them retrospectively. IPSA is also seeking views on unresolved aspects of the new regime, such as whether to publish the addresses of taxpayer-funded homes.

Even after these teething problems are resolved, there may be a limit to the efficiency of such a rules-based system. Many MPs believe that the response to the scandal could have been simpler. A higher basic salary for MPs would have allowed most expenses and allowances to be abolished, they say. There would then have been less need for a publicly funded body complete with chairman, chief executive, five “senior leaders” and around 60 other staff. Few MPs, though, were brave enough to make that case publicly.

Britain

Jun 17th 2010

Doctors’ winning ways lure patients

EVER since the National Health Service was set up six decades ago in the teeth of opposition by many doctors, professionals have dominated decisions over who receives which treatment, and where. The government is now poised to hand more control to patients in a package of market reforms.

Discover the symptoms of what you suspect might be cancer, say, and you can make an appointment with your choice of family doctor. If he also suspects something serious, he will give you a choice of hospitals in which to be diagnosed and treated. On June 8th Andrew Lansley, the health secretary, announced that he wants to extend choice further, allowing patients to opt for one treatment over another in consultation with a medic (in England, that is; devolved regions are free to do things differently). Such choices must be informed. So he will also publish data on results, infections, waiting times and so on.

Payments will be channelled through general practitioners (GPs). Like primary-care physicians in Denmark and the Netherlands, they have long acted as gatekeepers, controlling access to expensive hospital care through referrals. Mr Lansley’s reforms, which he will present to the NHS Confederation, a group of health-service organisations, on June 24th, will strengthen the role of GPs in deciding where the money is spent.

Many hospital doctors are unhappy, citing the school league tables compiled by newspapers using government data, in which those that take pupils from poor families perform badly. They fear hospitals that treat very ill people might suffer a similar fate. But giving patients greater choice over where they are seen has already increased competition in some places. Recent research by the King’s Fund, a think-tank, found that hospitals solicited GP referrals at the edges of their geographical catchment areas. Choice was not a luxury afforded only to townies: the study found that patients outside city centres were more likely to attend a hospital other than their local one than were urban denizens.

Some 70% of people still go local, but many who roamed further afield did so because of a poor experience closer to home. Patients did not pore over data before deciding, but relied on their own and their friends’ and families’ experiences, as well as their doctors’ advice. The researchers concluded that giving patients more choice helps to keep hospitals focused on what is important to their customers.

That will matter as funding is squeezed. Unlike most other public services, the NHS will be spared real cuts, but increasing demands mean it will have to do more for its money. Last month the Department of Health published a report by McKinsey, a consulting firm, showing that the NHS in England could save between 15% and 22% of current spending over the next three to five years—as much as £20 billion—by measures such as making hospitals operate more efficiently, making drugs cheaper and dropping unnecessary treatments such as tonsillectomy.

And giving patients a say in not only where but how they are treated could help the sick, as well as the bottom line. Glyn Elwyn, a professor of primary care at Cardiff University, observes that well-informed patients tend to be more conservative than doctors. Someone with advanced cancer, say, who is offered expensive, aggressive new chemotherapy that might extend life at the price of lowering its quality often opts instead for palliative care. Greater patient choice might not always increase competition between hospitals, but could yet increase happiness and save money.

Britain

Jun 17th 2010

SOMETIMES lowering the volume is as arresting as turning it up. Tact can be as expressive as bombast. That is true of the coalition government’s diplomacy. It has been eloquently muted, with both old problems and the oozing challenge in the Gulf of Mexico: a British administration that some expected to be spikily assertive seems determined to get along with everyone.

Right-wing British newspapers are often every bit as shrill as the American media. Leaping on the chance to display some easy, knee-jerk patriotism, several urged David Cameron to stand up for “British Petroleum” and rebuke Barack Obama for demonising the company. Instead, the line has been that the government neither owns nor will disown BP—and quietly to point out that the firm has lots of American shareholders and employees too. Ministers saw Mr Obama’s rhetoric for what it was: the flailing of a politician in a desperate fix. By saying very little in public, they defused what threatened to become a juvenile spat.

It would have been foolish to do otherwise. More striking has been the emollient attitude to Britain’s friends in Europe. As The Economist went to press, Mr Cameron was making his debut at the European Council in Brussels. His reception is likely to be warmer than once seemed plausible. The impressively polyglot deputy prime minister, Nick Clegg, has helped to soften up continental leaders who were troubled by the idea of a Conservative-led government. In David Lidington, Mr Cameron appointed a Europe minister who is much more palatable to the neighbours than Mark Francois, the Tory who held the brief in opposition. Even William Hague—unusually, in recent times, a foreign secretary who is both a big- hitter and an eager holder of that office—is sounding relatively Euro-friendly. It helps that, as part of their deal with the Liberal Democrats, the Tories ditched their quixotic bid to repatriate powers from the EU.

The prime minister has already visited Afghanistan, where he embraced Britain’s fighting men more convincingly than his predecessor, Gordon Brown, ever managed to. He calls their fight a “war”, rather than the pussyfooting “conflict”. Yet for all Mr Cameron’s vows to stay the course, his underlying message was humble. The definition of victory in Helmand has been revised downward (a process that began under Mr Brown); simultaneously, the official view of how close British forces are to achieving their diminished goals is being revised upwards. The length and scale of the deployment still largely depend on decisions made in Washington. But Mr Cameron’s government seems increasingly keen to pull back as soon as it possibly can.

What explains this modest and conciliatory mood—the urge to ingratiate rather than swagger? The nature of the coalition is part of it. Foreign affairs were widely billed as a potential source of fractures in the Lib-Con double act. So far, they haven’t been. The mixed Foreign Office ministerial team, and the cabinet’s European-affairs committee, are said to be dreams of harmony. The less proactive foreign policy is, of course, the longer that unity can be made to last: it is generally easier to agree on not doing things than on doing them. More than that, though, the two parties’ world views may prove more reconcilable than they once seemed. The Tories harbour a neocon tendency; the Lib Dems have a pacifist wing. But there is also a realist strand in Tory thinking and a sane but quietist strain among Lib Dems. A cautious, status-quo mentality is where they overlap.

Another part of the story is money, or rather the lack of it. It doesn’t take the strategic-defence review, to be completed this autumn, to understand that very soon Britain will have less to spend on military kit and adventures, perhaps a lot less. And the impact of the country’s fiscal plight on its ability and inclination to project power is much wider than that. Even more than is the case already, political energy and capital will soon be overwhelmingly consumed by domestic woes. Moreover, Britain’s standing and esteem abroad have been punctured by the crashing end of its economic boom. The much-touted miracle of Anglo-Saxon capitalism turned out to be a mirage. At least, that is the widespread perception, in Europe and beyond.

In these political and economic circumstances, modesty and niceness are a sensible strategy. The understated tone suggests a government suitably aware of its limitations. How nice the world will be in return, however, is doubtful.

Less blood, no treasure

Even before the oil spill, some Britons worried that Mr Obama was predisposed by his Kenyan ancestry to dislike them. But he is most usefully thought of, not as a post-colonial president, but as a post-war one—the wars being the second world war and the cold war. For American politicians of his generation, the 20th-century experiences that bound America to Europe, and to Britain in particular, are history; the continent and Mr Cameron’s country are no longer priorities. Mr Obama is probably too rational to bear the grudge against Britain that some detect in his railing against BP—but also too rational to be sentimental about the place.

Meanwhile, enchanted as the Europeans may be by the British new boys, and however mature Mr Cameron plans to be in his EU dealings, there will, in the end, be rows: over financial-services regulation, oversight of national budgets, the British rebate, reform of the common agricultural policy…There always are. Compared with other countries, it is notable how much cross-party consensus there tends to be on British foreign policy, not just within the coalition, but between it and the previous government too. As before, Europe is an opportunity but also an irritant; Britain is still locked into a gradual, half-willing decline, destined to be less loved by its closest ally than it would like. Those are the facts. No amount of ingratiation can change them.

Economist.com/blogs/bagehot

Britain

Copyright © The Economist Newspaper Limited 2010. All rights reserved. Legal confusion on internet privacy The clash of data civilisations Sharply differing attitudes towards privacy in Europe and America are a headache for the world’s internet giants

Jun 17th 2010 | SAN FRANCISCO

WATCHDOGS are growling at the web giants, and sometimes biting them. In May European data-protection agencies wrote to Google, Microsoft and Yahoo! demanding independent proof that they were making promised changes to protect the privacy of users’ search history. They also urged Google to store sensitive search data for only six months instead of nine.

In April ten privacy and data-protection commissioners from countries including Canada, Germany and Britain wrote a public letter to Eric Schmidt, Google’s boss, demanding changes in Google Buzz, the firm’s social-networking service, which had been criticised for dipping into users’ Gmail accounts to find “followers” for them without clearly explaining what it was doing. Google promptly complied.

Such run-ins with regulators are likely to multiply—and limit the freedom of global internet firms. It is not just that online privacy has become a controversial issue. More importantly, privacy rules are national, but data flows lightly and instantly across borders, often thanks to companies like Google and Facebook, which manage vast databases.

A recent scandal dubbed “Wi-Figate” exemplifies the problem. Google (accidentally, it insists) gathered data from unsecured Wi-Fi networks in people’s homes as part of a project to capture images of streets around the world. A number of regulators launched investigations. Yet their reaction varied widely, even within the European Union, where member states have supposedly aligned their stance on online privacy. Some European watchdogs ordered Google to preserve the data it had collected in their bailiwicks; others demanded that information related to their countries be destroyed (see table).

Despite such differences within Europe, the gap is much greater between Europe and America, home to many of the world’s largest online social networks and search engines. European regulations are inspired by the conviction that data privacy is a fundamental human right and that individuals should be in control of how their data are used. America, on the other hand, takes a more relaxed view, allowing people to use a patchwork-quilt of consumer-protection laws to seek redress if they feel their privacy has been violated. Companies that handle users’ data are largely expected to police themselves.

Some experts say this dichotomy explains why Silicon Valley firms that strike out abroad have sometimes been the targets of European Union data watchdogs. Jules Polonetsky of the Future of Privacy Forum, a think tank, says that many American firms have yet to learn that showing up in Europe and extolling the virtues of self-regulation is likely to be as ineffective as rightwing politicians denouncing anti-discrimination laws back home.

Guarding the guardians

Transatlantic friction between companies and regulators has grown as Europe’s data guardians have become more assertive. Francesca Bignami, a professor at George Washington University’s law school, says that the explosion of digital technologies has made it impossible for watchdogs to keep a close eye on every web company operating in their backyard. So instead they are relying more on scapegoating prominent wrongdoers in the hope that this will deter others.

But regulators such as Peter Schaar, who heads Germany’s federal data-protection agency, say the gulf is exaggerated. Some European countries, he points out, now have rules that make companies who suffer big losses of customer data to report these to the authorities. The inspiration for these measures comes from America.

Yet even Mr Schaar admits that the internet’s global scale means that there will need to be changes on both sides of the Atlantic. He hints that Europe might adopt a more flexible regulatory stance if America were to create what amounts to an independent data-protection body along European lines. In Europe, where the flagship Data Protection Directive came into effect in 1995, before firms such as Google and Facebook were even founded, the European Commission is conducting a review of its privacy policies. In America Congress has begun debating a new privacy bill and the Federal Trade Commission is considering an overhaul of its rules. David Vladeck, the head of the FTC’s Bureau of Consumer Protection, has acknowledged that “existing privacy frameworks have limitations”.

Even if America and Europe do narrow their differences, internet firms will still have to grapple with other data watchdogs. In Asia countries that belong to APEC are trying to develop a set of regional guidelines for privacy rules under an initiative known as the Data Privacy Pathfinder. Some countries such as Australia and New Zealand have longstanding privacy laws, but many emerging nations have yet to roll out fully fledged versions of their own. Mr Polonetsky sees Asia as “a new privacy battleground”, with America and Europe both keen to tempt countries towards their own regulatory model.

Privacy laws are somewhat more common in Latin America, where countries such as Argentina and Chile boast relatively strict European-style regimes. Mexico, which last year made data privacy a constitutional right, is also pushing through a new federal data-privacy law. The likely outcome is a mix of European and American privacy frameworks, predicts Katitza Rodriguez of the Electronic Frontier Foundation, a privacy group.

Canada already has something of a hybrid privacy regime, which may explain why its data-protection commissioner, Jennifer Stoddart, has been so influential on the international stage. She marshalled the signatories of the Google Buzz letter and took Facebook to task last year for breaching Canada’s data privacy laws, which led the company to change its policies.

Ms Stoddart argues that American companies often trip up on data-privacy issues because of “their brimming optimism that the whole world wants what they have rolled out in America.” Yet the same optimism has helped to create global companies that have brought huge benefits to consumers, while also presenting privacy regulators with tough choices. Shoehorning such firms into antiquated privacy frameworks will not benefit either them or their users.

International

Jun 17th 2010 | BONN

“WHY”, asked a Chinese negotiator, “is this working-group facing so much difficulty in showing a minimal semblance of being alive?” It was a fair question at the end of two weeks of climate discussions in Bonn. The talks led to some progress in some areas, but bogged down in almost all others. There is a moment in such negotiations when you come up against a nagging problem: many countries that are committed to act on climate change will seek to avoid really doing so for at least as long as other parties are under no such commitment—if not longer.

The meeting, which took place in Bonn from May 31st to June 11th, was the first big negotiating session held under the United Nations Framework Convention on Climate Change (UNFCCC) since the rushed, inconclusive and, to most, disappointing end of the Copenhagen conference last December. It produced some of the little that was expected. Many countries made a genuine attempt to set a new and equable tone for discussion and debate. The Copenhagen Accord, agreed to by a few dozen heads of government, for instance, has an uncertain status. The negotiators agreed to have aspects of the accord, such as a high-level advisory group on finance, dealt with under the UNFCCC.

But such progress was at best incremental. The chairman of the negotiations on long-term co-operative action (LCA, which means the things that go beyond the Kyoto protocol: see table) tried to nudge the discussions forward by proposing a draft document at the beginning of the meeting. It was meant to form the basis of a negotiating text from which detailed rules can eventually be drawn for how to decide on such things as providing finance to developing countries, transferring technology and saving forests.

Predictably, many countries found fault with the chairman’s draft. Discontent came both from countries, such as Bolivia, that are opposed to the accord and all its works as well as from some of those, such as America, that are broadly in favour. So, after a fortnight of sometimes constructive discussion, on the eve of the last day a new version was put to the conference. It, too, was all but universally criticised. The chairman will try again at the next session in Bonn, to be held in August. But chances are slim that negotiators will come up with a document that can serve as the basis for an agreement at the higher-level discussions taking place in Cancun, in Mexico, this December.

Other questions are even less tractable. Whose money, and how much, might flow through the new conduits for finance, which have yet to be established? What sort of commitments, if any, will the various less developed countries make in return for some of that money? The LCA’s sister negotiations, the Kyoto protocol (KP) track, show how much more vexed things get when commitments actually look as if they might cost money. Two technical problems bedevil the KP track. One is “land use, land-use change and forestry”, known to its friends as LULUCF. It could become a loophole for wriggling out of emission cuts—if, among other things, the baselines for forests are set too low, or if the rules allow the growth of a forest to be counted as a credit while its later felling does not constitute a debit.

The other problem is “hot air”, meaning the emission credits that have accrued to countries, such as Russia, that have seen their emissions fall below the Kyoto baseline year of 1990 simply because of economic contraction. Like a lax attitude to LULUCF, hot-air credits could allow developed countries that have pledged “emissions cuts” under the Copenhagen accord to meet those commitments without actually cutting emissions by much. According to analysis by the Dutch environmental-assessment agency, pledges which under one set of hot air and LULUCF rules would require a 12% cut on 1990 levels, would demand only a 4% reduction under a different set of rules. These are the sort of things that matter at negotiations—and on which they founder.

International

Biology 2.0 Jun 17th 2010 From The Economist print edition

A decade after the human-genome project, writes Geoffrey Carr (interviewed here), biological science is poised on the edge of something wonderful

TEN years ago, on June 26th 2000, a race ended. The result was declared a dead heat and both runners won the prize of shaking the hand of America’s then president, Bill Clinton, at the White House. The runners were J. Craig Venter for the private sector and Francis Collins for the public. The race was to sequence the human genome, all 3 billion genetic letters of it, and thus—as headline writers put it—read the book of life.

It quite caught the public imagination at the time. There was the drama of a maverick upstart, in the form of Dr Venter and his newly created firm, Celera, taking on the medical establishment, in the form of Dr Collins’s International Human Genome Sequencing Consortium. There was the promise of a cornucopia of new drugs as genetic targets previously unknown to biologists succumbed to pharmacological investigation. There was talk of an era of “personalised medicine” in which treatments would be tailored to an individual’s genetic make-up. There was the frisson of fear that a genetic helotry would be created, doomed by its DNA to second-class health care, education and employment. And there was, in some quarters, a hope that a biotech boom based on genomics might pick up the baton that the internet boom had just dropped, and that lots and lots of money would be made.

And then it all went terribly quiet. The drugs did not appear. Nor did personalised medicine. Neither did the genetic underclass. And the money certainly did not materialise. Biotech firms proved to be just as good at consuming cash as dotcom start-ups, and with as little return. The casual observer, then, might be forgiven for thinking the whole thing a damp squib, and the $3 billion spent on the project to be so much wasted money. But the casual observer would be wrong. As The Economist observed at the time, the race Dr Venter and Dr Collins had been engaged in was a race not to the finish but to the starting line. Moreover, compared with the sprint they had been running in the closing years of the 1990s, the new race marked by that starting line was a marathon.

The new race has been dogged by difficulties from the beginning. There was a false start (the announcement at the White House that the sequence was complete relied on a generous definition of that word: a truly complete sequence was not published until 2003). The competitors then ran into numerous obstacles that nature had strewn on the course. They found at first that there were far fewer genes than they had expected, only to discover later that there were far more. These discoveries changed the meaning of the word “gene”. They found the way genes are switched on and off is at least as important, both biologically and medically, as the composition of those genes. They found that their methods for linking genetic variation to disease were inadequate. And they found, above all, that they did not have enough genomes to work on. Each human genome is different, and that matters.

All is revealed

One by one, however, these obstacles are falling away. As they do so, the science of biology is being transformed. It seems quite likely that future historians of science will divide biology into the pre- and post-genomic eras.

In one way, post-genomic biology—biology 2.0, if you like—has finally killed the idea of vitalism, the persistent belief that to explain how living things work, something more is needed than just an understanding of their physics and chemistry. True, no biologist has really believed in vitalism for more than a century. Nevertheless, the promise of genomics, that the parts list of a cell and, by extension, of a living organism, is finite and cataloguable, leaves no room for ghosts in the machine.

Viewed another way, though, biology 2.0 is actually neo-vitalistic. No one thinks that a computer is anything more than the sum of its continually changing physical states, yet those states can be abstracted into concepts and processed by a branch of learning that has come to be known as information science, independently of the shifting pattern of electrical charges inside the computer’s processor.

So it is with the new biology. The chemicals in a cell are the hardware. The information encoded in the DNA is the preloaded software. The interactions between the cellular chemicals are like the constantly changing states of processing and memory chips. Though understanding the genome has proved more complicated than expected, no discovery made so far suggests anything other than that all the information needed to make a cell is squirreled away in the DNA. Yet the whole is somehow greater than the sum of its parts.

Whether the new biology is viewed as rigorously mechanistic or neo-vitalistic, what has become apparent over the past decade is that the process by which the genome regulates itself, both directly by one gene telling another what to do and indirectly by manipulating the other molecules in a cell, is vastly more complicated and sophisticated than anybody expected. Yet it now looks tractable in a way that 20 years ago it did not. Just as a team of engineers, given a rival’s computer, could strip it down and understand it perfectly, so biologists now believe that, in the fullness of time, they will be able to understand perfectly how a cell works.

And if cells can be understood completely in this way, then ultimately it should be possible to understand assemblages of cells such as animals and plants with equal completeness. That is a much more complicated problem, but it is different only in degree, not kind. Moreover, understanding—complete or partial—brings the possibility of manipulation. The past few weeks have seen an announcement that may, in retrospect, turn out to have been as portentous as the sequencing of the human genome: Dr Venter’s construction of an organism with a completely synthetic genome. The ability to write new genomes in this way brings true biological engineering—as opposed to the tinkering that passes for biotechnology at the moment—a step closer.

A second portentous announcement, of the genome of mankind’s closest—albeit extinct—relative, Neanderthal man, shows the power of biology 2.0 in a different way. Putting together some 1.3 billion fragments of 40,000-year-old DNA, contaminated as they were with the fungi and bacteria of millennia of decay and the personal genetic imprints of the dozens of archaeologists who had handled the bones, demonstrates how far the technology of genomics has advanced over the course of the past decade. It also shows that biology 2.0 can solve the other great question besides how life works: how it has evolved and diversified over the course of time.

As is often the way with scientific discovery, technological breakthroughs of the sort that have given science the Neanderthal genome have been as important to the development of genomics as intellectual insights have been. The telescope revolutionised astronomy; the microscope, biology; and the spectroscope, chemistry. The genomic revolution depends on two technological changes. One, in computing power, is generic—though computer-makers are slavering at the amount of data that biology 2.0 will need to process, and the amount of kit that will be needed to do the processing. This torrent of data, however, is the result of the second technological change that is driving genomics, in the power of DNA sequencing.

The new law

Computing has, famously, increased in potency according to Moore’s law. This says that computers double in power roughly every two years—an increase of more than 30 times over the course of a decade, with concomitant reductions in cost.

There is, as yet, no sobriquet for its genomic equivalent, but there should be. Eric Lander, the head of the Broad Institute, in Cambridge, Massachusetts, which is America’s largest DNA-sequencing centre, calculates that the cost of DNA sequencing at the institute has fallen to a hundred-thousandth of what it was a decade ago (see chart 1). The genome sequenced by the International Human Genome Sequencing Consortium (actually a composite from several individuals) took 13 years and cost $3 billion. Now, using the latest sequencers from Illumina, of San Diego, California, a human genome can be read in eight days at a cost of about $10,000. Nor is that the end of the story. Another Californian firm, Pacific Biosciences, of Menlo Park, has a technology that can read genomes from single DNA molecules. It thinks that in three years’ time this will be able to map a human genome in 15 minutes for less than $1,000. And a rival technology being developed in Britain by Oxford Nanopore Technologies aspires to similar speeds and cost.

This increase in speed and reduction in cost is turning the business of biology upside down. Up until now, firms that claim to read individual genomes (see article) have been using a shortcut. They have employed arrays of DNA probes, known as gene chips, to look for pre-identified variations in their clients’ DNA. Those variations have been discovered by scientific collaborations such as the International HapMap Project, which search for mutations of the genetic code called single-nucleotide polymorphisms, or SNPs, in blocks of DNA called haplotypes. A SNP (pronounced “snip”) is a place where a lone genetic letter varies from person to person. Some 10m SNPs are now known, but in the forest of 3 billion genetic letters there is reason to believe they are but a smattering of the total variation. Proper sequencing will reveal the lot.

Finding the sequence—even the full range of sequences—is, though, just the beginning. You then have to do something useful with the result. This is where the computing comes in. Computers allow individual genomes—all 3 billion base pairs of them—to be compared. And not only human genomes. Cross-species comparisons are enormously valuable. Laboratory experiments on creatures ranging from yeast to mice can reveal the functions of genes in these species. Computer comparison then shows which human genes correspond in DNA sequence and thus, presumably, in function, to the genes in these “model” organisms.

Cross-species comparison also shows how species differ, and thus how they have diverged. Comparing DNA from populations within a species can show how that species is evolving. Comparing DNA from individuals within a population can explain why those individuals differ from one another. And comparing the DNA from cells within an individual can show how tissues develop and become differentiated from one another, and what goes wrong in diseases like cancer.

Even before cheap sequencing became available, huge databases were being built up. In alliance with pathology samples, doctors’ notes and—most valuable of all—long-term studies of particular groups of individuals, genetic information can be linked to what biologists refer to as the phenotype. This is an organism’s outward expression: its anatomy, physiology and behaviour, whether healthy or pathological. The goal of the new biology is to tie these things together reliably and to understand how the phenotype emerges from the genotype.

That will lead to better medical diagnosis and treatment. It will result in the ability to manipulate animals, plants, fungi and bacteria to human ends. It will explain the history of life. And it will reveal, in pitiless detail, exactly what it is to be human.

Marathon man Jun 17th 2010 From The Economist print edition

Genomics has not yet delivered the drugs, but it will

“WHERE’S the beef?” is always a reasonable question to ask. For the human genome it can be rephrased slightly as “where are the drugs?” It is a question that does not exactly make genomicists squirm, but it puts them on the defensive.

By now, if you had believed the more bullish pronouncements made at the time the human-genome project was coming to fruition, the pipelines of pharmaceutical companies would have been bursting with aspiring treatments for everything from Alzheimer’s disease to Zollinger-Ellison syndrome, as the genes involved in these illnesses were identified and drug molecules that could correct malfunctions of those genes were discovered. In fact, the pipelines are empty; company analysts often seem to regard research as a drain on the balance-sheet, rather than an asset; and drug companies seem to be reinventing themselves as marketing firms for established products. The explanation is a toxic mix of science and economics, but the result is an industry ripe for disruption.

Don’t count your chickens

In 1990, when the human-genome project began, everybody thought they knew what a gene was. It was a stretch of DNA that could be transcribed by an enzyme called polymerase into a chemically similar molecule known as RNA. The RNA acted as a messenger that was itself translated into protein molecules in sub-cellular factories called ribosomes. The translation code was a series of three-letter “words”, called codons, each standing for one of the 20 amino-acid molecules that form the components of proteins. The codons were written in a four-letter alphabet, A, C, G, T, that abbreviated the names of the chemicals of which DNA is made.

It was all very neat. Nobel prizes were awarded in abundance and, except for a few specialised genes whose RNA was directly involved in the protein-manufacturing process, it was understood that the “central dogma” of biology (so described by Francis Crick, co-discoverer of the structure of DNA) was that one gene equals one RNA messenger molecule equals one protein. Proteins are the workhorses of cells, acting as enzymes, ion channels, signalling molecules and structural elements. And some proteins act as transcription factors, regulating the output of the genes themselves. The system made perfect sense. There were a few oddities. Most notably, the best estimate for the amount of DNA that encoded proteins was only 3% of all the DNA in the genome. In the rush of self-congratulation, however, no one paid too much attention to that fact. The non-gene DNA was dismissively labelled “junk”.

Someone should have taken note, though. A sizeable amount of the junk, it turns out, is transcribed into RNA even though it does not make proteins. Instead, the RNA itself is busy doing jobs that were once thought to be the prerogative of proteins: regulating the transcription of other genes, protecting cells from viral attack and even keeping control of bits of DNA that really are junk (or, more accurately, are parasitic on the whole genomic apparatus).

No one knows how many “RNA-only” genes there are, but there could well be more than 100,000 of them. Ten years ago, only a handful were known. By contrast, the current estimate of the number of protein- coding genes in the human genome is 23,000. The RNA-only genes are, moreover, medically significant. They keep popping up, for example, in cancers.

The second layer of complexity—not completely unexpected, but certainly underappreciated—is called epigenetics. This is the process by which DNA is chemically altered by the addition of a methyl group (a carbon atom and three hydrogens) to genetic letter C. Epigenesis is yet another way of regulating transcription (the methylation stops this happening). It is, however, more permanent than the on/off switching provided by transcription factors and RNA-only genes. Indeed, it is so permanent that it can sometimes be passed down the generations, leading to a lot of excitable talk about the inheritance of acquired characteristics—normally regarded as a Darwinian no-no.

Such talk is premature. More permanent is not the same as indelible, and epigenetic changes are not passed on indefinitely. Nevertheless, they may help explain patterns of disease such as late-onset diabetes. This, some researchers hypothesise, might be encouraged by children inheriting epigenetic patterns appropriate to the diets of their parents but inappropriate to the different, more calorific diets those children are enjoying thanks to the abundance of modern life.

The third layer of complexity is one that is only now starting to be explored. Biologists and laymen alike think of the genome as linear. DNA is, indeed, a long-chain molecule. It is so long, though, that if the 3 billion base pairs were linked together and pulled out straight, the result would be a metre in extent. In reality, DNA is twisted and folded up inside the cell nucleus, with the result that bits of the molecule that seem far apart on a map are actually next to each other in the nucleus.

How much this matters is almost completely obscure. What is known is that there are often active zones of DNA transcription within a nucleus that seem to be much bigger than the width of a strand of DNA and its associated proteins. This suggests that genes apparently a long way from one another are actually, in some sense, collaborating.

All this biological complexity would be bad enough by itself for drugmakers seeking a quiet life. The other problem, though, was a quite monumental naivety about the ease of linking newly discovered genes to diseases and disease processes. This has actually proved fiendishly difficult.

Lighten our darkness

The favoured approach has been the genome-wide association study, or GWAS. Hundreds of these have been carried out over the past five years or so. The idea sounds sensible: gather samples from people with and without particular diseases and look for associations between those diseases and particular genetic mutations, in the form of SNPs. The practice, however, has not really come up with the goods.

The thinking behind GWAS was that it would expose multigenic diseases. These are conditions that seem to run in families but do not obey the clear-cut laws of inheritance laid down in the 19th century by Gregor Mendel. Those diseases that do behave in a Mendelian way—haemophilia and sickle-cell anaemia, for example—are closely tied to the mutational failure of individual genes (a blood-clotting factor and one of the genes for haemoglobin, respectively, for these two diseases). The tendency of people in some families to suffer heart disease, strokes, late-onset diabetes, Alzheimer’s disease and so on is, by contrast, less clear-cut. Environmental factors are obviously involved. But mutations are, too—just not single, large- effect mutations like those that cause haemophilia and sickle-cell anaemia. Instead, the pattern of inheritance suggests that many mutations of small individual effect come together to produce a risk rather than a certainty.

GWAS has not been a total failure. It has revealed lots of mutations of small effect. On average, though, these add up to only 10% of the total heritability of any given disease. Mendelian effects add about another 1%. The rest, in a phrase that geneticists have borrowed from physicists, is referred to as “dark matter”. These mutations appear to be tremendously important, yet neither Mendelian nor GWAS techniques can detect them. Mendelian mutations are noticed because they are rare and powerful. GWAS mutations are seen because, though puny, they are common. The dark matter lies in the middle: too rare for GWAS but not powerful enough to leave a clear Mendelian signal. Bigger GWAS, with more statistical power, may help a bit, but clearly new methods are needed. One will be to deploy whole-genome sequencing more widely, now that it is becoming so much cheaper. And here the study of one particular sort of disease, cancer, is leading the way.

Compare and contrast

Cancer is at the vanguard of genomic medicine for two reasons. One is that oncologists and their patients (and also the regulators of medical practice) are often willing to take risks that would be unacceptable if the alternative were not a horrible death. The other is that cancer is now known unequivocally to be a genetic disease. Its environmental correlates (smoking, for example) act not by poisoning cells directly but by promoting mutations in those cells’ DNA. Such somatic mutations, as those in body cells are known, can cause chaos in an individual’s organs, but are not passed to his or her offspring.

In the case of cancer, an accumulation of somatic mutations causes a breakdown of the regulatory mechanisms that stop a cell from multiplying uncontrollably. With the brakes off, the cycle of division, growth and further division continues unabated until the body can no longer support both healthy tissue and tumour.

One lesson that genomics taught oncology early on is that cancers which look similar under the microscope can have completely different genetic causes and thus require different treatments. That general observation should soon be reinforced in detail by a project run by the International Cancer Genome Consortium (ICGC), a collaboration of researchers in 11 countries. The plan is to take advantage of the falling cost of sequencing to collect full DNA sequences from 500 people suffering from each of 50 types of cancer. Not only will the cancerous tissue be sampled, so will healthy tissue from each patient.

Comparing the healthy and the cancerous tissue in each individual will reveal the somatic mutations which that individual has undergone. Comparing cancerous tissue from different individuals will show which mutations are important. This is necessary because in cancer patients the genes which control the proofreading of new DNA strands often become damaged, so that mutations accumulate much faster. That means crucial mutations are more likely to happen, but also that in any given cancer there is a lot of mutational “noise”.

Until now, this has made it more difficult to discover which mutations are important and which merely incidental. The result of the ICGC study should be a near-complete understanding of cancer at the genetic level. That will help diagnosis and treatment (allowing doctors to choose appropriate drugs the first time round, rather than employing trial and error) and, with luck, should promote the development of new treatments.

But identifying the dodgy genes is only the first step to such treatments. Not all gene products are, in the argot, “drugable”. And this is where the economics comes in.

Todd Golub of the Broad Institute, in Cambridge, Massachusetts, reckons drug firms have got rather lazy about pursuing leads. For example, many oncogenes, as those whose breakage causes cancer are known, encode proteins called kinases. These are enzymes which are involved in intracellular signalling pathways. A lucky break some years ago revealed a systematic way of attacking kinases with small molecules that block their activation. Researchers with putative anti-kinase drugs are thus welcomed by venture-capital firms. The odds of success are understood and the time to market is tolerable. That is in marked contrast to, say, drugs that might control transcription factors. A failed transcription-factor gene is as common a cause of cancer as a failed kinase gene. Transcription factors, though, are not regarded as drugable. No systematic way of dealing with them has yet been discovered.

That is not the venture capitalists’ fault. Is it the drug companies’ fault? They might argue that they are not in the business of basic research. On the other hand, a breakthrough in this area would create a whole new line of business. However, if that breakthrough were a conceptual one that could not be protected by patent rather than, say, an individual molecule that could be patented, then other firms would be able to freeride on the discoverer’s expensive research.

Fair shares

Dr Golub has a suggestion to break the impasse. Independent laboratories like the Broad could act as honest brokers for general research paid for by a cabal of all the big drug companies. Having paid equally, all would benefit equally. This being basic research, openly published, such collaboration would probably be permitted by antitrust laws. Something similar was tried at the beginning of SNP studies (though admittedly those have not yet led to much in the way of medicine). At the moment the drug firms do not seem interested. Perhaps that will change as their pipelines empty.

Despite such obstacles, genomics has already led to some successes in cancer treatment. The astonishing possibilities can be seen in the two photographs on this page. They are of the same individual before and after treatment with a molecule code-named PLX4032. The shadows are tumours from secondary melanoma, one of the most aggressive cancers known. PLX4032 cleared them almost completely. It was designed specifically to interact with the protein produced by a particular mutated version of a gene called B-RAF. This mutation, called V600E, has been found to be involved in 60% of cases of malignant melanoma and, less commonly, in other cancers. PLX4032 inhibits the activity of the mutated protein and causes cells containing it to die.

In this case, the system has worked as it is supposed to. The protein encoded by B-RAF is a kinase (and therefore familiar to venture capitalists). The initial development was done by a small biotech firm called Plexxikon, co-founded by Joseph Schlessinger of Yale University, one of the early researchers on B-RAF. The molecule has now been picked up by a big drug company, Roche, which is paying for phase III trials, the last stage before a drug is offered to the authorities for approval. If all goes well PLX4032, no doubt sporting a more friendly name, will soon be available for those suffering from melanoma, and will also be undergoing trials in other sorts of tumour in which V600E is implicated

There is a sting in the tail. For the moment the protective effects of PLX4032 last only for six months or so. Presumably, further mutations bypass the V600E—precisely the sort of question that the ICGC project is designed to address. Once those mutations are identified, the hope is that drugs against them can be developed, too. If that proves possible, all of the pathways that lead to cancer could be blocked. That would, in effect, be a cure.

As a demonstration of what genomics can do, PLX4032 is impressive. The question is, can this sort of thing be done with other sorts of disease? One of Dr Schlessinger’s colleagues at Yale, Richard Lifton, thinks it can. He points to a number of recently discovered genes that are now the subject of investigation by drug companies. PCSK9, which encodes an enzyme involved in cholesterol metabolism, is a target for the prevention of heart disease. People with mutated versions of ROMK, the gene for a type of potassium- ion channel, have abnormally low blood pressure so the search is on for a drug that tweaks the unmutated version of the channel, to lower the pressure of people with hypertension. Those with mutated versions of SCN9A, which encodes a particular sodium-ion channel, are insensitive to pain. Tinkering with this might produce a superior analgesic. And BACE, the gene for an enzyme called beta secretase, is involved in Alzheimer’s disease. Inhibiting its action may delay the progress of that condition.

A little knowledge

This handful of promising candidates, though, shows up the drug companies’ real gripe about genomics. It is one thing to find a gene in the genome; it is quite another to find out what it does; and another still to understand whether that knowledge has any medical value. Until these points are dealt with, the drugmaking machine that genomics once promised to become cannot be built.

Thinking on a grander scale is needed. One bold thinker is George Church of the Harvard Medical School. Dr Church’s Personal Genome Project (PGP) proposes to collect samples and medical data from 100,000 people and use the newly emerging mass-sequencing techniques to record the entire genomes of each of them. In a way, the PGP will be competing with a number of commercial operations (see article). The two differences are that it will be free to enter and that all the information will be publicly available. That open access is a bold idea—and PGP is made bolder by the fact that Dr Church hopes to use new techniques to convert some sample cells into stem cells, from which all of the body’s tissue types can be grown. This will enable the project’s researchers to do genetic investigation on a tissue-by-tissue basis.

The United Kingdom’s Biobank is even more ambitious. It is a government-run project that aims to collect tissue samples and medical data from 500,000 people in Britain. That will allow an analysis of long-term correlations between genes (as well as lifestyles) and health, though in contrast to the PGP the participants’ anonymity will be preserved.

“Retrofitting” existing data-collection projects is also yielding results. As an example of what can be achieved, Dr Lifton points to the Framingham Heart Study. This began in 1948 and has followed several generations in the town (near Boston) to try to disentangle the causes of heart disease and strokes. It has revealed a number of genes that may prove classic examples of dark matter.

If present as a single copy inherited from either mother or father, certain mutations of these genes protect against heart disease and strokes. Those mutations are not, however, common enough to be caught by conventional GWAS. On the other hand, individuals who inherit two copies of them, one from each parent, will be stillborn and so they cannot be detected by classic Mendelian counts either.

This sort of result suggests the logical thing to do would be to throw everyone’s medical records into the genetic maw. The bigger the sample, the more robust the eventual result. The main objection to that is privacy, and the extent to which this really is an issue may be shown by the success or otherwise of Dr Church’s approach. The PGP began recruiting in earnest in March, so all should soon be clear. If the project is a success, the view that a person’s DNA is his own business may fade away.

Even when the data from the biobanks and the personal genome projects are in, though, they will still have to be turned into knowledge that can be converted into pharmaceuticals. Turning data into knowledge is the job of people like Aviv Regev of the Broad Institute. It will be a hard slog, involving yet more sequencing (of RNA, rather than DNA, to see which genes are actually active in particular sorts of cell) and lots of computing (to show up the correlations in activity which indicate that particular molecules are parts of the same biological pathway).

The way Dr Regev describes it is very much like electronics. First, the components (the biological equivalents of transistors, diodes and resistors) must be identified. That might now be thought of as “classical” genomics. Then those components need to be assembled into modules (the equivalent of a computer’s logic gates). That is where the RNA sequencing (along with a host of other tools) comes in. Lastly, the modules can be linked up as circuits and the whole apparatus of the cell should become clear.

The practical advantage of this knowledge will be that the cell’s circuitry can be altered to bypass broken bits rather than fixing the break itself. That opens up a whole new way of thinking about drug development. Add that to the plethora of new targets, in the form not only of the extra protein-coding genes discovered by the original genome project but also of the RNA-only genes and the epigenome, and the long-term opportunities for pharmaceutics ought to be bright. Who will take advantage of those opportunities, though, remains to be seen. For if it is true that the rich world’s established pharmaceutical companies have become stodgy, the genomic future may lie elsewhere.

Where are they now? Jun 17th 2010 From The Economist print edition

The big beasts of genomics

SCIENCE reporting usually concentrates on the science, not the scientists. Though the minds and hands behind the research are acknowledged, the real story is the discovery itself and its place in the jigsaw of human understanding. That, and the fact that modern scientific investigation tends to be a team effort, has diminished the cult of the celebrity scientist. The human-genome project was an exception to this rule. It created some scientific celebrities and also some celebrated rivalries. Ten years on the reader might wonder what has happened to them.

The loosest cannon of the lot was probably James Watson. Dr Watson, co-discoverer with Francis Crick of the double-helical structure of DNA, was responsible for suggesting the human-genome project in the first place. At the time he was head of America’s National Centre for Human Genome Research, part of the country’s National Institutes of Health (NIH). He fell out with the NIH, however, over the issue of patenting DNA sequences called expressed sequence tags. He opposed this, arguing that “you shouldn’t patent something a monkey could do.” That did not endear him to Craig Venter, who had created the DNA in question. Dr Watson was replaced by Francis Collins, a man regarded by some biologists as ideologically unsound because he is a born-again Christian. Dr Watson continued as head of the Cold Spring Harbour genetics laboratory until 2007, when he made some injudicious remarks about genetics and black people and found himself suddenly retired.

Dr Venter, too, left the NIH in the wake of the expressed-sequence-tag incident. At first he teamed up with Bill Haseltine, a virus geneticist with a record as an entrepreneur, to start an institute and a company, Human Genome Sciences, to exploit expressed sequence tags. The two failed to see eye to eye, though, and Dr Venter went on to help create a second firm, Celera, in the hope of beating the public project to the human genome. He used a new DNA-sequencing technique called whole-genome shotgunning that he and a colleague, Hamilton Smith, had invented, and patented a good tranche of human genes on the way. That was anathema to Dr Collins and his British counterpart, John Sulston (who was head of the Wellcome Trust’s Sanger Centre, now known as the Sanger Institute, which did about a third of the public project), who wanted genes to be public goods and started racing Celera to stop the firm finding genes first.

At this point, heads were knocked together in the public project, chiefly by Eric Lander, of the Whitehead Institute in Cambridge, Massachusetts, whose outfit achieved effective leadership of the American arm of the project. It was Dr Lander whose name led the list of researchers on the paper eventually published by Nature in 2001.

Celera’s version of the genome was published by Nature’s rival, Science. Unfortunately, this scientific triumph did not produce much in the way of revenue and Dr Venter was sacked from the firm in 2002. (Dr Haseltine left Human Genome Sciences in 2004.) Dr Venter then went on a round-the-world cruise on his yacht, collecting bacterial samples from the sea for a project he dubbed the Global Ocean Sampling Expedition. He also set up yet another research institute (which unveiled an organism with an artificial genome last month) and another commercial arm, called Synthetic Genomics, in collaboration with Dr Smith.

Dr Lander, too, has added to the number of America’s research laboratories. With money from two Californian benefactors of that name he has set up the Broad Institute, America’s largest genome- sequencing lab, next door to the Whitehead. Dr Sulston, meanwhile, has started a scientific-ethics institute at Manchester University and Dr Collins has bagged one of the top prizes in American science. He is now head of the NIH.

It's personal Jun 17th 2010 From The Economist print edition

Individualised genomics has yet to take off

ONE way of trying to make money out of the new genomic knowledge has been to offer what has come to be known as “personal genomics”. The results, to put it charitably, have been mixed, and for good reason. The price point is wrong, observes Douglas Fambrough of Oxford Bioscience Partners, a venture-capital firm based in Boston. What you learn from looking at your genome is not yet worth the price you have to pay. Either the price must come down or the value of the product must rise. Both may happen when the latest generation of DNA sequencers are more widely deployed, but at the moment most personal- sequencing companies use gene chips to give a SNP profile, rather than offering a complete sequence.

Two of the earliest entrants to the field were deCODE and 23andMe. DeCODE, an Icelandic firm whose aspirations to become a full-fledged pharmaceutical company were dealt a blow when it went through a bankruptcy restructuring earlier this year, charges $2,000 to search a sample for 1m SNPs predictive of 50 genetic traits, not all of them diseases. Theragen makes a similar offer from South Korea. 23andMe, based in Mountain View, California, charges $499 to search more than half a million SNPs for signs of 154 traits. Navigenics, down the road in Foster City, restricts its analysis ($999) to 28 health conditions and 12 drug responses “that you and your doctor can act on”. Complete Genomics, another Californian firm (Mountain View again), plans to leapfrog the chip-based crowd by offering customers full DNA sequences using a complicated proprietary technology that will not, initially, be for sale to other users. And Knome, a firm based in Cambridge, Massachusetts, offers a bespoke whole-genome service for the discerning client at $68,500 a pop.

Broadly, personal genomics offers two services. One is to trace your ancestry back through humanity’s family tree to its roots in north-east Africa (an offer like that of the Genographic Project, described later in this report). Indeed, a similar service is also available to pet owners, courtesy of Mars (who make a lot of pet food as well as confectionery). The other service is predictive medicine—a list of genetic variations that might put you at higher-than-average (or, indeed, lower-than-average) risk of developing particular diseases.

Predictive medicine is a controversial area. Being told that you have an increased chance of illness over the course of your life can be upsetting, particularly if no treatment or pre-emptive action is possible (hence Navigenics’s caveats). Worse, that worry may be misplaced; an increased chance is not a certainty. Conversely, it is now clear that the GWAS studies on which many of the correlations are based have uncovered only a small part of the risk, so not showing up as being in danger does not put someone in the clear. On the bright side, this sort of study can sometimes reveal the precise nature of a set of symptoms, which might affect which medicines are used to treat them.

Such precision is one aspect of a field called pharmacogenomics, which seeks to match drugs to a patient’s genome. A second aspect is that genetic knowledge can sometimes predict adverse reactions to drugs that have proved safe for some people to take but dangerous to others.

Pharmacogenomics, then, is a type of predictive medicine that could be a boon for patient and drug company alike. It allows prescriptions to be safer and more effective, and enables firms that want to take molecules through clinical trials to restrict the tests to people who are likely to respond well. That makes trials cheaper and more likely to succeed. It also ensures that the drug, once approved, is given only to those who will benefit from it.

The dragon's DNA Jun 17th 2010 From The Economist print edition

The next advances in genomics may happen in China

IN AN old printing works on an obscure industrial estate in Hong Kong’s New Territories a little bit of history is being made. Most of the five-storey building is dusty and derelict. One floor, however, is state- of-the-art. The paintwork shines. The metal gleams. And in the largest room the electrical sockets in the floor sit in serried ranks awaiting contact.

That contact will shortly be made with the delivery of 120 spanking new top-of-the-range Illumina sequencing machines. When they have all been installed the building will, so it is claimed, have more DNA-sequencing capacity than the whole of the United States. And that is just the start. According to Alex Wong, who runs the facility, the other four floors will also soon be refurbished and the whole building will become a powerhouse ready to generate information for biology 2.0.

The building belongs to the BGI, once known as the Beijing Genomics Institute. Mr Wong manages the institute’s Hong Kong operation, but the institute itself is based over the border in the People’s Republic proper, in Shenzhen. The BGI itself is one part—arguably the leading one—of China’s effort to show that it can be the scientific peer of the West.

Its boss, Yang Huangming, is certainly the peer of people like Dr Venter, Dr Lander and Dr Collins. He is a man on a mission to make the BGI the first global genomics operation. Part of the reason for building his newest sequencing centre in Hong Kong is to reassure researchers from other countries that the facility will operate inside a reliable legal framework. If all goes well, laboratories in North America and Europe will follow.

The BGI began in 1999, when Dr Yang muscled his way into the human-genome project, cornering part of the tip of chromosome three (about 1% of the total human genome) as the Chinese contribution to that international project. From this humble beginning it now plans to sequence 200 full human genomes as part of an international collaboration called the 1,000-genome project. Half these genomes will be Chinese, but the institute’s researchers intend to sample the full geographical range of humanity. And not only human genomes. The BGI has already solved the genomes of rice, cucumbers, soyabeans and sorghum, honeybees, water fleas, pandas, lizards and silkworms, and some 40 other species of plant and animal, along with over 1,000 bacteria. And it, too, is interested in cancer. According to Dr Yang the institute will not merely compare healthy and tumorous tissue from the same individuals, as the International Cancer Genome Consortium (of which it is a part) plans to do, it will actually be able to follow the pattern of mutation, in the order that it happened, within an individual that has led to his cancer. That may allow pre-emptive treatment to be developed for people whose tumours are not yet malignant. Indeed, as the price of sequencing drops, this “internal phylogenetics”, as Dr Yang calls it, might be extended to trace the pattern of mutation that develops in even an apparently healthy body as cells proliferate within it. That may yield nothing interesting. On the other hand it might help explain patterns of disease associated with ageing as cells whose ancestors were genetically identical slowly diverge from one another.

A better balsa

The BGI also has non-medical ambitions. Its researchers are examining fast-growing plants with interesting structural properties, such as balsa, a lightweight South American wood familiar to generations of schoolboy model-makers, and bamboo, a traditional construction material in China. They are experimenting, too, with animal cloning. The BGI was the first outfit to clone pigs, and it has developed a new and more effective way of cloning mammals that might ultimately be applied to humans, if that were ever permitted.

But the organisation is involved in even more controversial projects. It is about to embark on a search for the genetic underpinning of intelligence. Two thousand Chinese schoolchildren will have 2,000 of their protein-coding genes sampled, and the results correlated with their test scores at school. Though it will cover less than a tenth of the total number of protein-coding genes, it will be the largest-scale examination to date of the idea that differences between individuals’ intelligence scores are partly due to differences in their DNA.

Dr Yang is also candid about the possibility of the 1,000-genome project revealing systematic geographical differences in human genetics—or, to put it politically incorrectly, racial differences. The differences that have come to light so far are not in sensitive areas such as intelligence. But if his study of schoolchildren does find genes that help control intelligence, a comparison with the results of the 1,000- genome project will be only a mouse-click away.

At the moment this frenetic activity is paid for mostly by regional development grants and loans from state-owned Chinese banks, but Dr Yang hopes to go properly commercial. The Hong Kong operation will work partly as a contractor, and Mr Wong hopes to persuade biologists around the world to send their samples in and have them sequenced there rather than relying on their own universities to do the sequencing. Whether the BGI’s researchers can turn their mass-produced DNA sequences into new scientific insights and bankable products remains to be seen, but the world is watching.

Inhuman genomes Jun 17th 2010 From The Economist print edition

Every genome on the planet is now up for grabs, including those that do not yet exist

IF THE history books do come to recognise the idea of biology 2.0, then the date it began may well be recorded as May 20th 2010. That was the day when Craig Venter announced JCVI-syn1.0, the world’s first living organism with a completely synthetic genome.

The Frankencell project, as it was known jokingly at the beginning, had been going for 15 years—ever since Dr Venter started to wonder what was the minimal genome necessary to support a living organism. To find out, he took a bacterium called Micoplasma genitalium, which has a particularly short genome anyway, and knocked its genes out one at a time to see which the bug could live without (at least in the cushy circumstances of a laboratory Petri dish). The answer was around 100 of its original complement of 485.

The genetic flexibility this hints at—of a core set of genes and a penumbra of others useful in particular circumstances—has, over the past decade, been confirmed for many other species of bacteria. Indeed, the way biologists think about the whole idea of “species” when they study these micro-organisms is beginning to shift rapidly. This is part of a general broadening of genomics. Though navel-gazing into Homo sapiens’s own genome remains of intense interest, the study and manipulation of non-human genomes may ultimately have greater impact.

Dr Venter certainly hopes so. His company, Synthetic Genomics, based in San Diego, plans to patent the new bug. It argues that although it is a living organism, which would normally be outside the scope of patent law, it is also a true artefact, not just the product of selective breeding. The firm will then be able to use it, and the method used to construct it, in its programmes to make fuels and vaccines.

Technology and magic

On the other side of America, in Boston, George Church is taking a different approach. Unlike Dr Venter, who focuses his energy on one firm, Dr Church is a promiscuous entrepreneur. He has been involved in the foundation of several companies, including LS9 and Joule Biotechnologies (which hope to manufacture biofuels) and Microbia (which plans to make speciality chemicals). Like Dr Venter, Dr Church has something up his sleeve. This is MAGE, a somewhat contrived acronym for multiplex automated genome engineering.

Instead of making new genomes from scratch, Dr Church plans to make lots of parallel changes in existing ones. The idea is to induce simultaneous random mutations in all of the genes in a particular cellular pathway by introducing pieces of DNA which match parts of those genes, but which are attached to short sequences that do not. As a cell replicates, the foreign DNA is absorbed and the genes in question are modified by the non-matching short sequences. Thousands upon thousands of different versions of the pathway are thus created, and all are subsequently isolated and tested to see which are most effective. The process is then repeated on the winners until the desired outcome is achieved. This can replicate at a cost of thousands of dollars the sort of genetic modifications that have previously cost millions.

Even without the new platforms, non-human genomics is beginning to pay dividends. Several firms, including Synthetic Genomics, LS9 and Joule, are engineering micro-organisms (sometimes bacteria, sometimes single-celled algae) to turn out biofuels resembling the petrol, diesel and kerosene that people put in cars and aircraft. Existing biofuels, based on ethanol, are less good. Ethanol is corrosive and has less energy per litre than petrol and diesel.

One firm, Amyris Biotechnologies, is already scaling up to industrial production of such biofuel, but in Brazil, where cheap cane sugar provides the raw material, rather than in the United States, where it is based. Joule plans to use an even cheaper raw material: the carbon-dioxide exhaust from power stations. It is one of the firms working on single-celled algae, tweaking their metabolic pathways to improve the rate at which CO2 is fixed by photosynthesis and then converted into hydrocarbons that can be used in cars.

Fuels are an attractive alternative to drugs for the new generation of synthetic biologists because they are not subject to regulatory whim to the extent that drugs are. If anything, regulation is likely to favour them because their raw material is, either directly or indirectly, carbon dioxide that has come from the atmosphere or would end up there. That makes them green in the eyes of governments, and therefore a good thing.

The smell of money

Fuel, however, is a low-value commodity. A more profitable way to avoid the regulators may be to make complicated high-price chemicals such as fragrances. This is what Allylix, of San Diego, California, is doing. The firm’s founders realised that biological synthesis of certain sorts of molecule is much more efficient than chemical synthesis. Many organic molecules contain what are known as chiral centres. These are places where the atoms can be arranged either left-handed or right-handed. In biochemistry, handedness can matter. Left- and right-handed versions may, for example, smell different. Traditional chemical synthesis cannot distinguish between left- and right-handed versions, so they have to be separated afterwards, which is tedious. Moreover, if there are lots of chiral centres in a molecule, and each matters, the yield of the version with the right combination can be minuscule.

Allylix gets around this by engineering the genes for new biological pathways into yeast cells. The molecular family it concentrates on is the terpenes, which are used as fragrances and flavours. Some are very costly. Sandalwood essence, for example, is a terpene, and the demand for its potent smell means the tree it comes from is becoming rare. Allylix has duplicated the smell of sandalwood industrially, by extracting the genes for the relevant enzymes from sandalwood trees. Indeed, its researchers have improved on nature. They have identified the parts of the enzyme molecules that carry out the reactions, and tinkered directly with the DNA that describes these parts, in order to improve their efficiency. Microbia plans something similar, using Dr Church’s MAGE technology, though its first products will be colourings rather than fragrances.

If genes are to be the raw material of a new technology, then it would be useful for researchers to know how many there are out there. The answer is, a staggering number. Most of them are bacterial. Though the average bacterium has fewer than 5,000 genes, compared with around 20,000 protein-coding genes in the average mammal (bacteria do not go in much for RNA-only genes), there are lots of species of bacteria. In his round-the-world cruise after he left Celera, Dr Venter reckoned he identified 5m new bacterial genes—and that was just a start.

Measuring bacterial diversity in genes rather than species makes sense because it is no longer obvious exactly what constitutes a bacterial species. In the view of Julian Parkhill, of the Sanger Institute, near Cambridge, England, bacteriologists need to shift the focus of their investigations from organisms to systems. The geneticists’ workhorse, E. coli, for example, has about 4,500 genes. Only 1,500-2,000 of these are always present, however. The remainder of any given E. coli bacterium’s genome is drawn from a pool of about 20,000 other genes that the organisms swap with gay abandon. In only a tenuous sense, then, is E. coli a species in the way that, say humans or mice are species.

The same thing is true of other well-studied bugs, such as those that cause typhus and plague, and is likely to be true of most bacteria. Thirty-four years ago Richard Dawkins, an evolutionary biologist at Oxford University, proposed the idea that “selfish genes”, not individual organisms or entire species, are the units on which evolution acts. In the case of bacteria, which seem to exchange genes promiscuously, that seems an excellent way of looking at things.

In a sense, such profligacy extends to humanity, too. Add in the genes of the bacteria that live in peaceable collaboration with the average human (in his gut, on his skin and so on), and the “human” genome expands from 23,000 protein-coding genes to something more like 3m, according to Francis Collins. Nor is it pure sophistry to think of these genes as part of an extended human genome. Many of the bacteria in question are genuinely mutualistic with their hosts, helping the process of digestion or warding off pathogenic bugs.

This is scarcely explored territory. Dr Collins estimates that 90% of these human symbionts cannot be cultured by normal laboratory methods. America’s National Institutes of Health, which he heads, is backing yet another of genomics’ big collaborative efforts, the Human Microbiome Project, to help put that right.

Nor is the human microbiome merely of academic interest. For example, some think that the mix of bacteria in a person’s gut can affect his chances of becoming obese. If those studying the genetics of obesity concentrate all their efforts on the genes in human cells, they might thus be looking in the wrong place.

The other area where genomics is likely to have a big practical impact is agriculture. At the moment, despite the brouhaha they have created in some countries, genetically modified plants are primitive things. Most of them have had but a single gene tweaked, either to make them poisonous to pestilential insects or resistant to a particular herbicide so that it can be used freely. Even so, GM crops are big business. A recent report by the International Service for the Acquisition of Agri-biotech Applications, a not-for-profit outfit that monitors the use of GM crops, suggested that more than three-quarters of the world’s soyabean plants are genetically modified, along with half the cotton and more than a quarter of the maize.

Fire burn and cauldron bubble

The next generation will be bigger business still. Ceres, a small biotech firm based in Thousand Oaks, California, is collaborating with Monsanto, a giant agribusiness company, to make crops better in all sorts of ways. Their genes are being tweaked to increase the plants’ drought-resistance and improve their absorption of nitrogen.

Ceres’s collaboration with Monsanto involves traditional crops such as maize, but Ceres is also interested in the energy business. Before fossil fuels became ubiquitous, plants—in the form of firewood—were one of humanity’s main sources of power. Ceres hopes those days will soon return. One way to release useful energy from plant matter is to ferment it into biofuels, as Synthetic Genomics, LS9 and Amyris are trying to do. Ceres is involved in this business, too, but Richard Hamilton, the firm’s boss, is hedging his bets.

Whether biofuels have a big future is a moot point. At the moment the car industry seems to view electricity as the motive power of the future. But that does not worry Dr Hamilton because even if the cars of the future are electric, the electricity will have to come from somewhere—and if that somewhere is not fossil fuels, then it might be from burning plant matter.

Viewed in this light, plant matter is just an alternative form of solar energy. In hot, dry parts of the world, turning sunlight into electricity directly with solar cells or indirectly with solar-powered steam turbines makes sense. In places where it is cooler and wetter, the equation changes. Growing plants and burning them may be a better way. Moreover, plant matter, once grown, is available 24 hours a day. It can thus provide an electrical baseload in a way that traditional solar power (which goes off at night) cannot. To this end, Ceres is tinkering with three species of grass: Miscanthus, switchgrass and sorghum. Its researchers have fiddled with the genes of these so-called energy crops to increase the amount of lignin in them, at the expense of carbohydrates like cellulose. That makes them more “woody”, increasing their energy content. Ceres is also applying to its energy crops the sorts of genetic modification that it has been developing in collaboration with Monsanto for use in food crops—in particular, improved drought tolerance and the more efficient use of nitrogen. Ceres energy crops are already on sale and several pilot projects that use them are under way.

Genomics, and the new biology it is bringing, thus promise a bright, practical future. But some scientists wish to understand things merely for the joy of it. David Haussler, of the University of California, Santa Cruz, is one of them. Dr Haussler wants to sequence 10,000 vertebrates, a sixth of the total number of species of fish, amphibians, reptiles, birds and mammals. Last month the BGI, in China, announced it would take on the first 100 of these, for delivery within two years.

Dr Haussler’s aim is to work out the core vertebrate genome and see how it has been modified to produce the incredible diversity of animals with backbones. The Genome 10K project will, he reckons, cost $50m. That is not small change, but it amounts to only $5,000 a species, showing, once again, how the price of sequencing has tumbled.

Dr Haussler has focused on vertebrates because he is one. Uncovering the genomic essentials of this ancient group would be a coup. But genomics can also help to answer more recent evolutionary questions, in particular about how humans emerged and why they are unique.

The soul of an old machine Jun 17th 2010 From The Economist print edition

Genomics is raising a mirror to humanity, producing some surprising reflections

THE decade since the genome announcement has seen many remarkable results. Vying with Dr Venter’s synthetic life for the title of the most extraordinary was the announcement on February 12th 2009 (by no mere coincidence Charles Darwin’s 200th birthday) that a second species of human had had its genome sequenced. Svante Paabo, the inspiration for Michael Crichton’s novel and film, “Jurassic Park”, told a meeting of the American Association for the Advancement of Science that his team at the Max Planck Institute in Leipzig had a version of Neanderthal man’s DNA to compare with that of modern humans.

The actual comparison was not published until six weeks ago, on May 6th. It was, however, worth waiting for. It showed similarities between the species (in, for example, the FOXP2 gene that helps govern the ability to speak) as well as differences (in several genes connected with cognitive ability). These differences are obvious places to start looking for the essence of modern humanity—the things that distinguish Homo sapiens from other animals, including other types of human, and thus accounts for the extraordinary flourishing of a species that is now estimated to make use of 40% of the net primary productivity (the energy captured by photosynthesis and converted into plant matter) of the planet’s land surface.

Genomics can, however, do more than this. Comparing the genomes of people alive today allows places where natural selection has been active in the more recent past to be identified. Until now this has been done using gene chips, but the new power of whole-genome sequencing will enrich and complete the picture. Allied with an analysis of how Homo sapiens has spread out of Africa and around the world, this will give a fine-grained picture of human evolution—and possibly a controversial one if differences between geographical groups emerge in sensitive areas such as intelligence and behaviour. Such phenotypic areas are also being investigated in studies looking at variation within populations, for GWAS is being extended beyond the realm of disease to examine intelligence, personality type, religiosity and even the ability to make money.

If humanity has a historian-in-chief, his name is Spencer Wells. Dr Wells is the head of the Genographic Project, run jointly by the National Geographical Society in Washington, DC, and IBM. In a sense, the project is a type of personal genomics. Volunteers from all over the world (more than 500,000 of them so far) give samples of cheek cells for genetic analysis. In exchange, they get a detailed breakdown of the wanderings of their ancestors over the past 150,000 years or so.

Family tree

For Africans, or those of recent African origin, the pattern is a tree leading out of north-east Africa, where Homo sapiens seem to have originated, that spreads its branches through the whole continent. For those without recent African ancestry, the journey then goes through a bottleneck 60,000 years ago (a fact that was first hypothesised in the late 1980s, though it has taken the Genographic Project’s plethora of data to tie the date down exactly) before fanning out into a tree that covers the rest of the world.

The bottleneck corresponds to the pioneers who crossed the straits of Bab el Mandeb and populated the rest of the planet (see map). And until recently there was little interbreeding between the branches, which has allowed local differences to emerge.

To start with, the spread of humanity was followed by studying differences in two unusual sorts of DNA: from cellular structures called mitochondria which have their own genes and are inherited only from the mother, and from the part of the Y chromosome that passes only from father to son. Now, though, it is possible to look at changes happening throughout the genome.

Some of these changes will be random. Some, though, will be the product of natural selection, and Pardis Sabeti of Harvard University thinks she can work out which is which. The blocks of DNA studied by the HapMap and similar projects are swapped between neighbouring chromosomes during the process of egg and sperm formation. Dr Sabeti realised that a gene which is being favoured by selection will drag its neighbours along for the ride, meaning that the block it is in will be longer than the statistics of random mixing would predict.

Using this and one or two similar statistical tools, Dr Sabeti has identified 200 places in the human genome that have been subject to recent selective “sweeps”—and she often has a good idea of the genes that have been doing the sweeping.

Some are not surprising. Genes that regulate skin pigment and hair morphology, both well-known markers of geographical origin, have undergone significant selection. So have genes regulating metabolism, probably in response to the shift from hunting and gathering to farming as mankind’s principal way of life.

Intriguingly, though, several genes connected with sensory perception—hearing and balance, in particular—have altered. In this case, the changes are most noticeable in some of the Asian branches of humanity. Genes involved in the development of the sound-detecting hair cells of the ears seem especially affected. Whether that means Asians hear things differently from other people has yet to be established, but it might.

The other sort of genes that have evolved rapidly are those involved in infectious disease. Dr Sabeti has found evidence that malaria, tuberculosis, measles and polio have all left their selective imprint as bits of DNA that help confer resistance are favoured. One of the biggest surprises was that Lassa fever, once regarded as a relatively rare disease, is also on this list. Now, prompted partly by Dr Sabeti’s work, it is becoming established that Lassa fever is actually very common in parts of West Africa. A fifth of Nigerians, for example, show signs of having been infected in the past. That these people have not been killed by an illness originally thought to be up to 80% lethal suggests the protective effect of the evolutionary change she has uncovered is strong.

Dr Sabeti has not, so far, found any selected genes that encode controversial traits such as behaviour and intelligence. That may be because they have not been subject to recent selection. It may, though, be because few links between these phenotypes and the genes themselves have yet been made. That could change soon. As mentioned earlier, for example, the BGI in China plans a study to look specifically for intelligence genes. And according to Nick Martin of the Queensland Institute of Medical Research, in Australia, dozens of GWAS investigations of behavioural and cognitive links are now under way. So as not to be caught with the dark-matter problem that has bedevilled the study of genetic disease, plans are afoot to consolidate these studies into “meta-analyses” big enough to detect otherwise- hidden effects. If all goes well, the old arguments about the role of nature and nurture in human development may soon be seen in a new light.

That will also be true if Fred Gage, of the Salk Institute, in San Diego, is proved right in thinking that variation in cognitive ability may be genetically determined in a way that is not inherited. Dr Gage studies LINE-1 elements, bits of DNA known colloquially as jumping genes. These make up about 20% of the human genome, and most biologists do regard them as junk—or rather as parasites. Their origin is unknown, though they may be the distant descendants of some type of retrovirus (the same class as the AIDS-causing virus, HIV) because they are able to copy themselves using a retroviral gene called reverse transcriptase. Generally, this is a bad thing for their hosts. If nothing else, it wastes resources. And if an element happens to copy itself into the wrong place it can cause an existing gene to malfunction.

Most biologists would have left things at that, accepting that parasitism happens at all other levels of biology, so why not at the level of the DNA? But Dr Gage wondered if there was more to it. Five years ago he showed that LINE-1 elements are much more active in the brains of mice than in their other tissues. And in 2009 he and a colleague, Nicole Coufal, showed the same is true in people. Using sensitive sequencing methods they discovered that human brain cells have around 100 more LINE-1 elements in them than tissues such as the heart or the liver. That means the elements are multiplying during the process of brain formation.

Survival of the fittest

Why that is remains an unanswered question. But one possible explanation is this. Each new brain develops by a process akin to natural selection. Nerve cells grow and develop lots of connections with each other, and then most of those connections and many of the cells themselves die. Only the fittest cells and connections survive, leaving a working network.

In this context a way of generating variations on which selection can operate may actually result in better networks and thus brains. The random changes brought about by LINE-1 elements jumping around the genomes of nerve cells can yield such variation. It is a daring hypothesis. But there is at least one other part of the body—the immune system—that relies on the internal mutability of the DNA to generate the variety needed for it to recognise all the pathogens that nature can throw at a body. Though the immune system has come up with a different solution in detail (particular cassettes of DNA have evolved to shuffle round at this one place in the genome), the general principle is the same. If Dr Gage’s hypothesis is correct, it leads to a nice irony. No one doubts that intelligence has a heritable element. Studies of identical and non-identical twins confirm that. No one doubts that upbringing and education matter, too. But part of the difference between people’s cognitive abilities—between being a Darwin and a dunce—might almost literally be a lottery, because it depends on the random movement of bits of DNA inside an individual’s developing brain.

No hiding place Jun 17th 2010 From The Economist print edition

Everyday genomics is coming, ready or not

IT IS 2020. You are watching the latest episode of CSI Miami. Horatio and the team have a murder to solve. The murderer has conveniently left a DNA sample behind. In fact, since a single strand of the molecule can now be detected and analysed, he could hardly avoid having done so. Not so conveniently, he is not on the database—wishy-washy civil libertarians having prohibited the collection of DNA records about the unconvicted.

Never mind. Horatio pops the sample in a state-of-the-art sequencing machine and out comes a picture of what the suspect looks like—or, rather, a series of pictures of his likely appearance at five-year intervals from age 15 to age 50. Cross-reference these with Florida’s driving-licence database, and the team has its man.

Not, perhaps, a nail-biting plot. But it is a perfectly plausible description of the future of crime-fighting. For in this and many other ways, the development of genomics means there will soon be no hiding place.

As Stewart Brand, an American futurologist, memorably put it, “information wants to be free,” and one of the lessons of the new biology is that it is all about information. DNA databases are a good illustration of that, and of the conflicts and paradoxes the new age of genomics is creating. Everybody likes the idea of the guilty being caught and punished. Universal DNA databases would assist that process. Yet many resist the logical conclusion this points to.

One reason they do so is an understandable fear not so much of what governments might do with the information now as what they might do with it in the future. DNA is more than just a reliable biometric (though not necessarily, if the price of making it continues to fall, an unfakeable one). It is an individual’s essence. If anyone doubted that, Craig Venter’s experiment of implanting an artificial genome in a cell he calls JCVI-syn1.0 and seeing that cell’s daughters march to the new genome’s tune should convince them.

Many people prefer to keep their essences to themselves. Few want their weaknesses exposed to public gaze. They may not even want to confront those weaknesses in private (though this motive is often less acknowledged). Yet that is what freedom of DNA information threatens. Disease susceptibility, life expectancy, personality traits, intelligence, criminal tendencies—all may be illuminated by the harsh light of free DNA information. Even if laws against genetic discrimination are passed (as in America with the Genetic Information Nondiscrimination Act of 2008), it is possible to imagine a future in which individuals are dogged by their DNA. Would you turn it over to a putative spouse, for example?

Yet the benefits for medical research—and thus for the health of future generations—of DNA information being free are enormous. And perhaps projects like George Church’s Personal Genome Project will show that those who are allowed to volunteer their genes, rather than having them wrenched from them by the authorities, will be inclined to be generous. Moreover, the unknown is often more terrifying than the known. Once the limits of DNA-based knowledge become apparent, some of the fears are likely to evaporate.

So much, then, for DNA freedom. Those who carelessly parrot Mr Brand, though, often forget that his quote actually starts with the words, “On the one hand information wants to be expensive because it is so valuable”. And the value of genomics can be enormous.

The gods themselves

On March 29th the Federal District Court of New York ruled on a longstanding American legal dispute. This was a claim by Myriad Genetics, of Salt Lake City, to patent protection on two human genes called BRCA1 and BRCA2. Some versions of these genes increase the risk of breast cancer, and Myriad sells a test that detects these versions. The patents in question, though, are not for the test but for the genes themselves. Myriad claims to own the intellectual-property rights to these sequences of DNA, even though they are natural and found in every human being. The court disagreed.

Dr Venter, meanwhile, is seeking a patent on his newly minted DNA sequence for JCVI-syn1.0. He is on somewhat stronger ground than Myriad, since the DNA in question is clearly an artefact, albeit one based on a natural sequence. Also, bacteria are not humans. Nevertheless, the principle that anyone can “own” an organism’s DNA in this way disturbs many people.

What can and cannot be patented needs to be sorted out, for property rights lie at the heart of business. Patent law is supposed to encourage innovators, rewarding them with temporary monopolies but requiring them to place the details of their inventions in the public domain and thus open them to competitors. In this context patenting an artificial genome for a bacterium seems reasonable. As long as the claims made are not too sweeping they need not stop anyone else patenting a different artificial genome. (Patents on how such genomes are made might do so, but that type of exclusivity is familiar territory for patent law.)

Similar rules should also apply to, say, a crop with an artificial genome. Such things both need and deserve to be expensive. They need to be because they cost money to develop. They deserve to be because inventors, no less than authors, singers, actors or any others whose work is easily and cheaply copied, are still worthy of their hire. It should not apply, though, to a natural genome.

Nor, many would argue, should it apply to synthetic DNA if that DNA is then inserted into a human being. Indeed, the question of whether such insertions should be allowed at all is fraught. Once the recipe for humanity is fully worked out, people will want to try changing it. They will, no doubt, plead medical need at the beginning but, as the rise of plastic surgery and the modern debate about performance-enhancing drugs have shown, the medical can easily spill over into other areas.

Since ethical norms vary from country to country, it is inconceivable that no one will try this. If it works, it will almost certainly spread. Thirty years ago the qualms felt by some about in-vitro fertilisation melted in the face of the first gurgling child born using the new technology. The same is likely to happen for the first “enhanced” human, assuming the gurgling is happy.

As long as such changes remain within the human gene pool (wanting children to be as tall, smart and beautiful as the best of their parents’ generation), a happy reaction is probably the right one. But what if people want their children to be three metres tall and have blue skin, pointed ears and maybe even a tail? In practice, such “post-human” features would probably arrive gradually, giving people time to adjust to the idea and decide which, if any, were acceptable. Some might be accepted. Most will probably be rejected as monstrous. For, in the end, people usually manage to bend technology to their will, rather than the other way round.

There will be mistakes on the way, and suffering, too. But technology, once invented, cannot be unlearned. Perhaps, then, the last word belongs to Mr Brand. When he set up the Whole Earth Catalog, the venture that first brought him to public attention, he said “We are as gods, and might as well get good at it.”

Sources and acknowledgments Jun 17th 2010 From The Economist print edition

In addition to those mentioned in the text, the author would like to give special thanks to: David Altshuler, Inês Barroso, Peter Donnelly, Michael Donoghue, Eric Green, Tim Hubbard, Lin Liu, Thomas Lynch, Geoffrey Miller, Thomas Pollard, James Rothman, Ed Scolnick, Frank Slack, Matt State, Michael Stratton, Elia Stupka and Chris Tyler-Smith.

This special report was the result of many interviews. The author is grateful to all those who shared their knowledge with him.

Offer to readers Jun 17th 2010 From The Economist print edition

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Copyright © 2010 The Economist Newspaper and The Economist Group. All rights reserved. The changes facing fast food Good and hungry More than menus need to be revamped if fast-food firms want to keep growing

Jun 17th 2010 | NEW YORK

FAST-FOOD firms have to be a thick-skinned bunch. Health experts regularly lambast them for peddling food that makes people fat. Critics even complain that McDonald’s, whose golden arches symbolise calorie excess, should not have been allowed to sponsor the World Cup. These are things fast-food firms have learnt to cope with and to deflect. But not perhaps for much longer. The burger business faces more pressure from regulators at a time when it is already adapting strategies in response to shifts in the global economy.

Fast food was once thought to be recession-proof. When consumers need to cut spending, the logic goes, cheap meals like Big Macs and Whoppers become even more attractive. Such “trading down” proved true for much of the latest recession, when fast-food companies picked up customers who could no longer afford to eat at casual restaurants. Traffic was boosted in America, the home of fast food, with discounts and promotions, such as $1 menus and cheap combination meals.

As a result, fast-food chains have weathered the recession better than their pricier competitors. In 2009 sales at full-service restaurants in America fell by more than 6%, but total sales remained about the same at fast-food chains. In some markets, such as Japan, France and Britain, total spending on fast food increased. Same-store sales in America at McDonald’s, the world’s largest fast-food company, did not decline throughout the downturn. Panera Bread, an American fast-food chain known for its fresh ingredients, performed well, too: its boss, Ron Shaich, claims this is because it offers higher-quality food at lower prices than restaurants.

But not all fast-food companies have been as fortunate. Many, such as Burger King, have seen sales fall. In a severe recession, while some people trade down to fast food, many others eat at home more frequently to save money. David Palmer, an analyst at UBS, a bank, says smaller fast- food chains in America, such as Jack in the Box and Carl’s Jr., have been hit particularly hard in this downturn because at the same time they are “slugging it out with a global powerhouse” in the form of McDonald’s, which ramped up spending on advertising by more than 7% last year as others cut back.

Some fast-food companies also cannibalised their own profits by trying to give customers better value. During the recession companies set prices low, hoping that once they had tempted customers through the door they would be persuaded to order more expensive items. But in many cases that strategy backfired. Last year Burger King franchisees sued the company over its double-cheeseburger promotion, claiming it was unfair for them to be required to sell these for $1 when they cost $1.10 to make. In May a judge ruled in favour of Burger King. Nevertheless, the company may still be cursing its decision to promote cheap choices over more expensive ones because items on its “value menu” now account for around 20% of all sales, up from 12% last October.

Analysts expect the fast-food industry to grow modestly this year. But the downturn is making them rethink their strategies. Many companies are now introducing higher-priced items to entice consumers away from $1 specials. KFC, a division of Yum! Brands, which also owns Taco Bell and Pizza Hut, has launched a chicken sandwich that costs around $5. And in May Burger King introduced barbecue pork ribs at a hefty $7 for eight.

More cheeseburgers

Companies are also trying to get customers to buy new and more items, including drinks. McDonald’s started selling better coffee as a challenge to Starbucks. Its “McCafé” line now accounts for an estimated 6% of sales in America. Others are testing a similar strategy. Starbucks has sold rights to its Seattle’s Best coffee brand to Burger King, which will start selling it later this year. McDonald’s is now rolling out frappé coffees and smoothies.

As fast-food companies shift from “super size” to “more buys” they need to keep customer traffic high throughout the day. Many see breakfast as a big opportunity, and not just for fatty food. McDonald’s will start selling porridge in America next year. Breakfast has the potential to be very lucrative, says Sara Senatore of Bernstein, a research firm, because the margins can be high. Fast- food companies are also adding midday and late-night snacks, such as blended drinks and wraps. The idea is that by having a greater range of things on the menu, “we can sell to consumers products they want all day,” says Rick Carucci, the chief financial officer of Yum! Brands.

Yet growth opportunities in America are limited because the market is considered to be “saturated”, not so much in fats but outlets. China is the place where most fast-food chains, like so many industries, see big expansion. Mr Carucci, for one, thinks China will be “the biggest growth opportunity for the industry this century”. If so, then Yum!, which has the greatest presence in China of any Western fast-food company, will be celebrating. Already around 30% of the company’s profits come from China, and in the next five years this is expected to grow to 40%. India also looks like a succulent opportunity. Others plan to serve up more business in Russia and elsewhere in Europe. Given that around 75% of fast-food companies’ revenue in Europe comes from people eating in the restaurants (compared with half in America), older European outlets are being done up to make them more attractive places.

Getting chunky

The recession also proved the importance of size in competing for customers, which means that more consolidation is likely. Wendy’s and Arby’s, two American fast-food chains, merged in 2008. On June 11th their shares surged following news that a buyer was interested in the company. Smaller chains may catch the eye of private-equity firms, just as CKE Restaurants did earlier this year when Apollo Management, a buy-out firm, purchased it.

But what about those growing waistlines? So far, fast-food firms have nimbly avoided government regulation. By providing healthy options, like salads and low-calorie sandwiches, they have at least given the impression of doing something about helping to fight obesity. These offerings are not necessarily loss-leaders, as they broaden the appeal of outlets to groups of diners that include some people who don’t want to eat a burger. But customers cannot be forced to order salads instead of fries.

In the future, simply offering a healthy option may not be good enough. “Every packaged-food and restaurant company I know is concerned about regulation right now,” says Mr Palmer of UBS. America’s health-reform bill, which Congress passed this year, requires restaurant chains with 20 or more outlets to put the calorie-content of items they serve on the menu. A study by the National Bureau of Economic Research, which tracked the effects on Starbucks of a similar calorie-posting law in New York City in 2007, found that the average calorie-count per transaction fell 6% and revenue increased 3% at Starbucks stores where a Dunkin Donuts outlet was nearby—a sign, it is said, that menu-labelling could favour chains that have more nutritious offerings.

In order to avoid other legislation in America and elsewhere, fast-food companies will have to continue innovating. Walt Riker of McDonald’s claims the makeover it has given to its menu means it offers more healthy items than it did a few years ago. “We probably sell more lettuce, more milk, more salads, more apples than any restaurant business in the world,” he says. But the recent proposal by a county in California to ban the golden arches from including toys in its high-calorie “Happy Meals”, because legislators believe it attracts children to unhealthy food, suggests there is a lot more left to do.

Business

Jun 17th 2010

FOR a long time it seemed as if Scotland’s whisky makers were stuck at the back of the bar. While whisky volumes were almost flat, vodka production rose by 3.5% a year for 20 years. The explanation is not difficult to find: Scotch whisky, even basic blends, has to mature in a cask for at least three years, while vodka can be distilled on Monday and bottled, shipped and drunk by the end of the week. As demand flagged, many smaller distilleries closed or were bought by international drinks groups. That led to a change of strategy: a move upmarket which is now paying off handsomely.

With the “premiumisation” of both blended and malt whiskies (some of which are aged for 12 years or more), Scotch exports have risen by over 40% in value since 2000. Despite a global slump, records were set last year: the volume of exports rose by 4% to 1.1 billion bottles worth £3.1 billion ($4.9 billion).

Investment is pouring into Scotch production—about £600m over the past three years. New distilleries are springing up and old ones are expanding. Last year Diageo, the world’s biggest drinks group, which dominates whisky sales with blended brands such as Johnnie Walker and J&B and Lagavulin, a malt, opened a £40m distillery near Elgin, the first new one in Scotland for 30 That’s the spirit years. Its whisky will come to market in two years. France’s Pernod Ricard, the world’s number two in drink with brands such as Chivas Regal, Ballantines and Glenlivet, recently unveiled a £10m modernisation plan to boost production of Glenlivet by 75%. It hopes to rival the world’s bestselling malt, Glenfiddich, made by William Grant, still an independent firm.

Although France, America and Spain are the largest Scotch whisky markets the biggest growth is coming from South American countries, such as Brazil and Venezuela, where premium blends are appealing to increasingly affluent consumers. Much of the investment in boosting volume is to build up reserves in the expectation that something similar will happen in India and China.

At present international spirits such as whisky and brandy account for less than 1% of the Chinese market. The Chinese are getting a taste for whisky, although the challenge for Scotland’s producers will be to ensure that they choose Scotch. Just as France’s champagne-makers found when expanding abroad, local imitators will emerge even though they cannot use a regional name. That is already starting with whisky. Kavalan is being made by a new Taiwanese whisky distillery with its sights set on the mainland Chinese market. Kavalan may be fruitier than a smoky single-malt Scotch, in order to appeal to Chinese palates, but the local tipple is eliciting praise from some connoisseurs.

Business

Jun 17th 2010

SOME fight wars with words, others with numbers. Hardly a day passes without new data on mobile apps, the small applications that can be downloaded to smart-phones to perform all kinds of feats, such as accessing social networks, playing games and identifying unknown music. Apple recently announced that its App Store now offers 225,000 apps, which collectively have been downloaded 5 billion times. Android Market, the storefront for the operating system that powers many other smart-phones, now boasts 60,000 apps and is catching up fast. And GetJar, an independent mobile store that offers programs for all kinds of handsets, claims 72,000 apps and 1 billion downloads.

As this is all part of the ongoing “platform war” between different mobile operating systems, the numbers should be taken with several grains of salt. The more the numbers are puffed up, not least with some double-counting, the more users and developers the respective app stores hope to attract. Ilja Laurs, GetJar’s chief executive, admits that his tally includes different versions of the same software—because this is industry practice. What is more, many apps are the mobile equivalent of marketing: they are given away to tout other wares. On June 15th Apple even released an app that lets users order the latest version of its own iPhone. Others apps are labours of love that have been put out free by passionate developers.

Nevertheless, research firms are trying to measure the market with tried and tested methods, sensing there are lucrative reports and consulting services to sell. In a recent study Juniper Research put last year’s revenues from mobile apps at nearly $10 billion and estimated that it will more than treble by 2015. Yet such figures are educated guesses at best, argues an analyst with a rival market-research firm which has refrained from making predictions of its own because of the paucity of data.

This makes it extremely difficult to gauge how good a business mobile apps really are. Developers of the programs get to keep a large part of what users pay to download one—70% in most cases. Apple says that it has already passed on more than $1 billion in revenues (meaning that its App Store, launched in July 2008, has so far generated $1.4 billion in revenues). Some developers are certainly making a killing. But success is often a matter of luck and much depends on how an app is promoted by the mobile store.

Despite the lack of hard data, at least the dynamics of the app economy are becoming clearer. And they seem to be more like the music business than the software one. On average, it takes about the same time to write an app as it does to compose a song, says GetJar’s Mr Laurs. Both cost about the same to download, $1.90 on average. In each case, some make it big but most never become hits. And apart from evergreens, such as games, utilities and programs to use Facebook and Twitter, even the most successful mobile apps often quickly fade into obscurity.

In much the same way as recorded music is increasingly considered a loss leader for other products, paid-for apps are likely to become an ever smaller piece of the pie. More apps are likely to be given away to get users to pay for premium services or “virtual goods”, like weapons or clothes in online games. And ads are about to become more important as a source of revenue. On July 1st Apple will launch its new advertisement platform, which allows the placement of ads directly within apps.

This does not mean apps are mere eye candy on small screens. In fact, they are bound to become more widespread. Newspapers and record labels have started to wrap their content in apps that come with additional features, hoping that it will allow them to charge for more things. And as other electronic devices—television sets, alarm clocks, e-readers and even electricity meters—become smarter and more connected, consumers will be able to download apps for these too. Perhaps, in the end, everything will have an app.

Business

Jun 17th 2010

MEG WHITMAN, who used to run eBay and now wants to run California, talks a lot about strengthening business. She is already propping up the media industry. Ms Whitman spent more than $80m, mostly on television advertising, to win the Republican nomination for governor on June 8th. Hardly had the confetti from the celebrations settled when she returned to the airwaves to promote her candidacy for November’s election.

The price of democracy in America has risen in recent years. Kantar Media, which tracks political advertising, reckons $2.6 billion was spent on the 2008 general election—up from $1.7 billion four years earlier. It thinks slightly more could be spent in this year’s mid-term contest. In January the Supreme Court removed almost all limits on corporate political giving. For television firms stumbling out of recession, it could not have come at a better time.

Michael O’Brien of E.W. Scripps, a television and newspaper firm, says Florida’s candidates began to advertise in the first quarter of this year—much earlier than usual. The governor’s office and a Senate seat are up for grabs, with no incumbents running. Such open races, of which America has an unusually large number this year, tend to be both competitive and expensive. And a turbulent, anti-politics mood, stirred by the tea-party movement, is making even incumbents nervous. Harry Reid, Nevada’s long-serving Democratic senator, is already running television ads.

Firms like Scripps and Sinclair Broadcast Group, which rely on local advertising, are the most Don’t vote for sheep obvious beneficiaries. But money will flow more broadly, including to media giants like Walt Disney and News Corporation, which own television stations in the biggest, most lucrative markets. There will be so much demand for local ad slots close to the mid-terms that commercial advertisers will be forced to spread their money around, to radio, cable television and national broadcast TV, says Evan Tracey of Kantar.

The only losers are the viewers, who must put up with the barrage. Most political advertising is crude, and only inadvertently entertaining. Carly Fiorina, a former boss of Hewlett-Packard who is running for the Senate in California, is at least providing some laughs. Her ads, which are available on YouTube, depict opponents as flying saucers and demonic sheep. Hostile advertising seems to work not so much by firing up a candidate’s own supporters but by suppressing the turnout for the other side. Just 1.3m Californians voted for Ms Whitman last week. And each of those votes cost her more than $60.

Business

Jun 17th 2010 | NEW YORK

ONE of the unlikeliest books of last year was “Only the Super-Rich Can Save Us!”, a fictional account by Ralph Nader, a veteran left-wing campaigner, of a movement of billionaires led by Warren Buffett and featuring, among others, Ted Turner, George Soros and Barry Diller, who use their fortunes to clean up America. This was not, as you might suppose, a satire but what Mr Nader called “an exercise in practical Utopianism”. He even met Mr Buffett to urge him to take up the challenge.

Perhaps the Sage of Omaha, as Mr Buffett is known, was listening. On June 16th, with Bill Gates and his wife, Melinda, he launched a campaign to persuade America’s billionaires to give away much of their fortunes. They are invited to take the “giving pledge” by writing a public letter promising to donate 50% or more of their wealth. Mr Buffett himself has written the first, which is published on a website, givingpledge.org. He says he will ultimately give away 99% of his wealth, most of which he has already pledged to the Bill & Melinda Gates Foundation. Although the letters will not be legally binding, they are intended to create a moral obligation which will be reinforced by peer pressure from others who take the pledge—a bit like members of Alcoholics Anonymous who promise to stay off the booze.

The idea took shape at a secret meeting in New York in May 2009, where Mr and Mrs Gates and Mr Buffett were joined by David Rockefeller, at 95 the elder statesman of philanthropy; Michael Bloomberg, the city’s billionaire mayor; Mr Turner; Mr Soros; and Oprah Winfrey, among others. It was refined over subsequent dinners in New York and San Francisco.

Since giving up his day job running Microsoft to work full-time at his foundation, Mr Gates has turned into an evangelist for giving, both by the wealthy and the broader public. Just as he sought out Mr Rockefeller for advice when he began giving on a large scale a decade ago, would-be philanthropists are now turning to Mr Gates. They include the new rich from the developing world. Mr Gates has hosted dinners in China and India, and predicts that India will become second only to America in its high-end philanthropy.

One carrot for those who take the pledge will be an invitation to what is expected to be an annual “Great Givers” summit. Although Mr and Mrs Gates and Mr Buffett say they have no agenda other than encouraging giving, it would be surprising if the summit did not look at how to be an effective giver. The Gates Foundation has an obsession with achieving demonstrable change with its money.

The new campaign comes at an interesting time for the rich in America. Thanks to Wall Street’s leading role in causing the economic downturn, bashing wealthy businesspeople is back in fashion. Even Mr Buffett has been given a tough time over his investment in Moody’s, a credit-rating firm that approved lots of dodgy mortgage securities. There is every chance of higher taxes, though due to the oddities of George Bush’s tax reforms, for 2010 only America has no inheritance tax (making this, in the words of Mr Gates’s father, an advocate of inheritance tax, “throw momma from the train year”).

The financial crisis also caused many wealthy people to slow down their giving, though their financial health has bounced back far more than that of the average American family. So far, four other tycoons (all well-known philanthropists) have publicly agreed to take the pledge: Eli Broad, a Los Angeles billionaire; John Doerr, a Silicon Valley venture capitalist; John Morgridge, a former boss of Cisco Systems; and Gerry Lenfest, a media entrepreneur. More are promised.

Mr Gates reckons that only about 15% of the wealthy currently give away large amounts of their fortunes. Half of the total net worth of the American billionaires on the 2009 Forbes 400 list is over $600 billion. So there is plenty to play for.

Business

Jun 17th 2010 | WARSAW

THE elegant silhouette of Aston Martin’s DB9 sports coupé draws admiring gazes anywhere. But it stands out even more than usual amid the drab communist-era apartment blocks of Warsaw’s Praga district, where the British carmaker’s first Polish dealership opened this spring. The city will soon also get Bentley and Ferrari showrooms, and the sellers of expensive cars will be joined by purveyors of pricey fashion brands: Louis Vuitton and Christian Dior boutiques are in the offing. The global market for luxury goods shrank by as much as 13% in 2009, say some estimates, but high- end goods are flourishing in Poland.

Last year Poland was the only member of the European Union to avoid a recession and the economy still looks perky. Investors also find it welcoming. A recent French study ranked Warsaw the third- friendliest city in Europe for entrepreneurs. As Poles get richer, they are developing a taste for luxury.

KPMG, a consultancy, calculates that some 2.5m Poles now earn at least 3,700 zlotys ($1,100) a month, and they are ready to devote 13% of their disposable income to luxury items. This tots up to 27 billion zlotys. And the ranks of those with financial assets of $1m or more are growing particularly fast: swelling by 11% in 2007-09, to over 86,000, according to MDRC, a research firm. The keenest shoppers are 30-somethings who came of age after the fall of communism and are happy to flaunt their wealth. High fashion looms large Retailers are gradually responding to the demand. KPMG estimates that over half of the world’s premium brands now have an official distributor in the country, with luxury cars especially well represented. A persistent carp is that cityscapes razed during the second world war, then blighted by communist urban planners, offer few locations swanky enough for upmarket outlets. Another challenge is finding skilled staff.

The more imaginative retailers are working around these problems. One perfumery, GaliLu, sends its staff to London for training. A shirtmaker, Da Vinci, shifts most of its stock through an online shop and sends tailors to customers’ homes and workplaces. The result, predicts Andrzej Marczak, of KPMG in Warsaw, will be that Poles raise their spending on luxury by a half within the next three years. What next, mega-yachts on the Vistula?

Business

Jun 17th 2010

“TO INFINITY and beyond!” Buzz Lightyear’s memorable if nonsensical phrase has been echoing around playgrounds ever since Pixar introduced the space ranger to the world in “Toy Story” in 1995. It will echo with renewed vigour this week when Pixar releases the third instalment. There is every reason to expect that three will be as successful as one and two—and Pixar will continue to mint money for its parent company, Walt Disney.

Pixar has succeeded as well as anyone in mastering the art of creativity. The company has produced one animated hit after another—including “Finding Nemo”, “Cars” and, a particular favourite of this columnist for its enthusiasm for unbridled individualism, “The Incredibles”. Rather than being crushed by Disney, as many feared, Pixar has reinvigorated its parent company.

But hit machines can run out of steam. Pixar’s founding fathers cannot go on for ever. Ed Catmull, the firm’s president, is 65, and John Lasseter, its chief creative officer, is 53, which makes him ancient by Hollywood standards. Creativity is hard enough to sustain for individuals, let alone organisations. Business history is littered with the corpses of corporate Icaruses that rose heavenwards on the wings of creativity only to plunge to the ground. That is a worry not just for Pixar but for the whole Disney empire: Mr Catmull doubles as head of Disney Animation Studios and Mr Lasseter is chief creative officer for both businesses.

How likely is it that Pixar will be able to escape that fate? The company has one important thing on its side: planning. Messrs Catmull and Lassetter spent many of their formative years watching Icaruses fall to earth from their base near Silicon Valley. Even Apple almost expired before begging Steve Jobs to return to the company. The pair consequently did everything that they could to build a machine that could outlast them— and continue churning out animated characters for decades to come.

Pixar’s approach to creativity is striking for two reasons. The first is that the company puts people before projects. Most Hollywood studios start by hunting down promising ideas and then hire creative teams to turn them into films. The projects dictate whom they hire. Pixar starts by bringing in creative people and then encourages them to generate ideas. One of its most successful recruits has been Brad Bird, who has presided over two Oscar-winning feature films, “The Incredibles” (in which he also provided a character’s voice) and “Ratatouille”.

The second is that the company devotes a lot of effort to getting people to work together. In most companies, people collaborate on specific projects, but pay little attention to what’s going on elsewhere in the business. Pixar, however, tries to foster a sense of collective responsibility among its 1,200 staff. Employees show unfinished work to one another in daily meetings, so get used to giving and receiving constructive criticism. And a small “brain trust” of top executives reviews films in the works.

Pixar got the inspiration for this system from a surprising place—Toyota and its method of “lean production”. For decades Toyota has solicited constant feedback from workers on its production lines to prevent flaws. Pixar wants to do the same with producing cartoon characters. This system of constant feedback is designed to bring problems to the surface before they mutate into crises, and to provide creative teams with a source of inspiration. Directors are not obliged to act on the feedback they receive from others, but when they do the results can be impressive. Peer review certainly lifted “Up”, a magical Pixar movie that became the studio’s highest-grossing picture at the box office after “Saving Nemo”. It helped produce the quirky storyline of an old man and a boy who fly to South America in a house supported by a bunch of balloons.

Pixar also obliges its teams to conduct formal post mortems once their films are complete. In lesser hands this might degenerate into a predictable Hollywood frenzy of backslapping and air-kissing. But Pixar demands that each review identify at least five things that did not go well in the film, as well as five that did.

And the winner is…

None of this can guarantee Pixar’s long-term success. Creative organisations depend to a striking extent on the X-factor provided by charismatic leaders such as Messrs Catmull and Lasseter. Creativity depends on serendipity as much as planning: Pixar itself started life making computer parts and only dabbled in animation as a sideline. Success is a great killer of innovation: there is an ever greater danger that, as Pixar’s list of blockbusters lengthens, its “creatives” will take ever fewer risks and its managers will become ever more complacent (as happened, by the way, at Toyota). Too much planning can alienate the prickly eccentrics who sometimes drive the creative process. It is worth remembering that Disney went into a long decline because its emphasis on doing things the Disney way alienated many creative people. But on the other hand not even the most robust production systems can eliminate risk: the second “Toy Story” film had to go through a set of wrenching revisions at high speed after it went too far off the rails, in spite of the studio’s early-warning systems.

Managing creativity involves a series of difficult balancing acts: giving people the freedom to come up with new ideas but making sure that they operate within an overall structure, creating a powerful corporate culture but making sure that it is not too stifling. Few organisations can get this balancing act right in the long term—particularly as the formula can change over time.

But Pixar’s attempt to solve this problem is nevertheless impressive. The company’s enthusiasm for thinking ahead is admirable. Even more admirable is its willingness to look to a car company for inspiration. For a culture as inward-looking as Hollywood’s, that is a remarkable piece of creative thinking.

Economist.com/blogs/schumpeter

Business

Jun 17th 2010

“WHO cares, it’s done, end of story, will probably be fine.” Thus, in an e-mail, a manager at BP wrote of the decision to use only a few “centralisers” when cementing into place the pipe that ran from an oil reservoir 13,000 feet (4,000 metres) below the sea floor to Deepwater Horizon, the drilling rig floating 5,000 feet above it. The cement failed—considerably more likely with fewer centralisers, experts say—four days after the e-mail was sent, on April 20th. Oil and gas rushed up the well, dooming the rig and 11 of her crew. Two months on, after perhaps 3m barrels of oil have leaked into the Gulf of Mexico, the story has still not ended and a lot of people, from those who dwell on the gulf coast to the chief executive of BP and the president of the United States, care very much indeed.

BP’s chief executive, Tony Hayward, has been the face (and voice) of a company America has come to hate. Shareholders have dropped its stock as if it were not merely oily but radioactive. America’s chief executive, lacking the ability to stop the leak, has found that he needs, as he put it, an ass to kick, and BP’s ass is the obvious choice. The spill was the subject of Barack Obama’s first address to the nation from the Oval Office, on June 15th, the day after he paid another visit to the stricken coast. He vowed to make BP pay for the damage it had caused, promised a sharpening of oil-industry regulation and told Americans that the country must seek to reduce its appetite for oil.

The speech did not meet with marked enthusiasm. Making BP pay, though, does, and at a meeting with Mr Obama on June 16th the company’s bosses agreed to put $20 billion into an escrow fund that would be used to pay for damages and lost earnings. BP will also pay no dividend, as some American politicians have been demanding, for at least the next three quarters. And it will set up a $100m fund to compensate unemployed oil-rig workers affected by the suspension of deep-water drilling. Will that be enough to bring at least some semblance of peace?

Next stop, Capitol Hill

For now, the company’s punishment continues. The suspect cementing is just one of the issues about which the House of Representatives committee on energy and commerce, chaired by Henry Waxman, intended to grill Mr Hayward on June 17th, after The Economist went to press. The committee has unearthed several instances in which BP managers seem to have chosen cheaper, rather than safer, options. With the centralisers, an earlier decision—to run only one pipe down the well, making it easier for gas and oil to get up—had been taken with the proviso that extra care would be needed in cementing. But extra care was apparently not exercised: six centralisers were used although 21 had been recommended by contractors. BP’s own inquiries into the cause of the disaster see the cement as one of the key points where failure needs to be investigated.

The House hearings are designed as theatre, not forensics: Mr Hayward has been preparing with the help of a “Murder Board” playing the role of his interrogators. A full account of what went wrong will probably not be forthcoming for months and will have to deal not just with problems in the well’s design and execution but also with why symptoms of an incipient blowout were not spotted during tests or normal operations during the rig’s last days, and why the equipment designed to contain such blowouts failed. A panel set up to investigate the accident and recommend changes in policy, chaired by William Reilly, who was head of the Environmental Protection Agency during the Exxon Valdez spill in 1989, and Bob Graham, a former Democratic senator for Florida, will not present its report until nearly the end of this year.

Mr Waxman’s hearing seems likely to reinforce the perception of BP as an evil rogue. In 2005 an explosion at its rundown Texas City refinery killed 15 workers. It received 97% of all operational safety and health citations for “wilful” and “egregiously wilful” breaches at American oil refineries between June 2007 and February 2010—a remarkable share even allowing for close scrutiny after Texas City.

Some in the American oil industry think this reflects a poor corporate culture at BP, in which personal advancement has depended more on cutting costs than on technical proficiency. BP has to some extent taken this on board. When Mr Hayward, with a background in exploration, replaced John Browne, much more associated with finance, in 2007, he emphasised a new coherence in management and a commitment to safety, with ambitious company-wide schemes meant to deliver these results. But chief executives cannot renew cultures without years of protracted and increasingly disseminated effort to that end. Plainly, Mr Hayward had not fully succeeded. This is not to say that BP is necessarily uniquely dangerous. Some other oil companies say that they would not have sanctioned all, or even any, of BP’s decisions about cementing, pipes and so on. But at Senate hearings on June 15th executives of some of those companies had to admit that their plans for responding to oil spills in the gulf were embarrassingly similar to a much-excoriated one submitted by BP. The plans recommended contacting dead experts and set out provisions for dealing with oil-soaked walruses (of which there are plenty in the Arctic but none in the gulf). All the companies operating in the gulf had, like BP, been risking a blowout that they had no technical means of dealing with, should it occur. As Amy Myers Jaffe, an oil expert at Rice University, puts it, the industry’s strategy on blowouts was not to have them, rather than to work out how to put one Who’s haunting whom? right quickly.

Instead, a response has been cobbled together after the fact. A “top hat” now perches over the towering blowout preventer, a set of valves that notably failed to live up to its name, which sits on the sea bed atop the well; the hat delivers a bit more than 15,000 barrels a day (b/d) to a drillship, Discoverer Enterprise. Further caps, hats, risers and the like will be added over the next month to bleed off ever more oil before it gets into the water. By mid-July, there could be four ships taking on oil, with a combined capacity of maybe 80,000 b/d. Two rigs are drilling relief wells that are meant to intersect the blown-out well and fill it with mud. They are on course to get down to the required depth in August.

Things will go wrong, naturally. The relief wells may falter at the first attempt; pipes may erode and fail; and this is the season when hurricanes happen. Four different ships all sucking up oil and flaring gas in close formation is not something a company would sanction in normal circumstances. Yet it is likely that from now on the flow of oil will abate as, with the addition of new pipes and ships, the capacity to get it to the surface grows.

Capping the well, but not the bill

Alas, estimates of the amount of oil already released keep growing, too. The latest, from a panel of government and independent scientists which benefited from new measurements of the pressure within the top hat, puts the flow at between 35,000 and 60,000 b/d. If the flow has been at the high end of that range ever since the accident, the quantity released so far is a staggering 3.25m barrels, or 13 times the amount that spewed out of the Exxon Valdez off the coast of Alaska. And even if the current containment plans work pretty well and the relief wells do their thing by the end of August, there could be another 1m barrels to come. If the rate is at the low end of the range and was lower still before a key pipe on top of the blowout preventer was cut to accommodate the top hat, about half as much oil has been spilled so far. But that is still an awful lot. Although the beaches of the gulf are more robust and easily cleaned than the shores of Alaska, they are also a lot more populated and commercially sensitive.

“They’re fishermen, they’re shrimpers, they’re labourers, they’re deckhands, they’re people who work in restaurants.” So says a BP video describing the people who might be entitled to financial help from the company. BP has said it is willing and able to pay them; but investors appear terrified that the list of claimants could extend far beyond that. Since the well erupted BP’s market capitalisation has fallen by $89 billion (see chart 1). After adjusting for declines in the wider stockmarket, about $90 billion has been wiped off the combined value of BP (which has a 65% stake in the stricken field), its two minority partners, Anadarko and Mitsui, and the rig’s owner, Transocean. About $65 billion of this relates to BP alone.

Financial analysts have been playing catch-up for weeks. Their first guesses of the all-in cost to BP were below $5 billion. These estimates have risen rapidly as the scale of the oil leaked has become apparent and the political furore has intensified.

The likely bill comes in three parts. The first element is the direct costs of plugging the well and cleaning up the pollution, which under the Oil Pollution Act (OPA), passed in 1990 after the Exxon Valdez spill, must be borne by the company. Using estimates of the likely size of the spill and the cost per barrel of cleaning up after Exxon Valdez, UBS reckons the bill could be $12 billion, of which BP’s share would be $8 billion (assuming the costs are not tax-deductible). An alternative approach is to assume BP carries on spending at its recent rate of about $40m a day for, say, a year. That works out at a total of $16.2 billion, or $10.5 billion for BP after its minority partners stump up their share. But those partners may try not to, instead suing BP for negligence. Suits involving BP, Transocean, Cameron (provider of the blowout preventer) and Halliburton (contractor for the cement) appear to be almost inevitable.

Then there are fines. Penalties under the Clean Water Act are based on the number of barrels deemed spilled, and range from $1,100 to $4,300 a barrel, depending on the extent to which the leak is the result of negligence. Suppose that capping plans paid off but that the total spill were assessed at the top end of current estimates, say 4m barrels, and BP were found wilfully negligent. The company could be facing a fine of $17 billion.

On top of that comes compensation for lost economic activity, lost federal, state and local taxes and damage to the environment. The OPA limits this to $75m, but BP said more than a month ago that it would waive the cap and honour all legitimate claims. It is possible to reach hair-raising figures: the annual revenue of the tourist and fishing industries in the four states most affected, Alabama, Louisiana, Mississippi and Florida, is between $15 billion and $30 billion. Against that, by June 15th only 63 miles (101km) of coastline was currently affected, according to the combined response team (see map). Perceptions may be a bigger threat to tourism than oil; on his latest visit Mr Obama purposefully chose to walk on a clean beach. Most guesses, based on the idea that BP will have coastline and sea largely clean within a year, put the company on the hook for a further $5 billion-10 billion.

That suggests a total for clean-up costs and damages of $20 billion and fines of up to $17 billion (again, assuming no tax relief). That the decline in BP’s market value is two to three times larger than that partly reflects the uncertainty of the operation taking place. But it also reflects a fear that the demand for compensation both from government and private concerns, which could have recourse to a whole panoply of legislation, is spiralling out of control. A BP insider says that what has spooked investors is the prospect of unlimited liability.

That is always a scary prospect. And though BP may be asset-rich, its liquidity position going into the spill was far from outstanding. Barring an oil price decline of $20 or more, it should generate $30 billion-odd of cashflow this year. $20 billion was due to be spent on capital expenditure and $10 billion or so on the dividend. The company has a further $15 billion of cash and available bank lines, but is also due to repay around $17 billion of maturing debt in 2010 and 2011, according to its annual report for 2009.

Clearly, it could try to roll over its borrowings in the market and issue new debt to pay for spill-related costs. But its credit costs have risen dramatically. After Fitch, a rating agency, downgraded the company to close to junk on June 15th, its credit spreads rose to six percentage points over government rates. Such dramatic deterioration in perceived creditworthiness can create a vicious and unpredictable spiral. Some worry that counterparties to BP’s giant and poorly disclosed derivatives book might demand extra collateral from it, leading to big cash calls.

Investors have therefore been grappling with two concerns; the prospect of colossal liabilities down the road, and the risk of a self-fulfilling liquidity squeeze, with the company frozen out of borrowing markets. The escrow agreement is an attempt to stop the financial panic while also proving to the American public that they will not, in Mr Obama’s phrase, be “nickel and dimed” by BP. The $20 billion escrow account should cover most clean-up costs as well as the potential economic damages BP might have to pay. As such it provides a rough figure for these costs which is within the realms of sanity. There are other advantages too: BP will contribute to it gradually over four years, easing the strain on its cashflow. And the president’s comments that “BP is a strong and viable company and it is in all our interests that it remains so” should also help to calm nerves. Kind of him not to call it “British Petroleum”, a superseded name that is back in somewhat chauvinistic usage (see chart 2).

Whether BP recovers quickly is another question. BP’s liability is not capped at the $20 billion paid into the fund, so it could be asked to stump up yet more money. And the company’s other actions suggest that it is battening down the hatches for a much rougher time than it expected at the start of June. The dividend could be quickly restored if the money is there to do it. But the company is also cutting its capital expenditure, which will hurt its long-term growth, and selling assets. This suggests that it expects a significant drain on its resources.

Not Bankrupt Petroleum, either

However, suggestions that BP could go bust are wide of the mark. That would require either a further catastrophe in the gulf or an unlimited and unprecedented broadening of government fines and private litigation. A BP bled to bankruptcy would not be good for the American government either, scaring off other firms in capital-intensive industries. It is likely, though, that BP will be financially weakened by the lasting blow to its reputation in America and elsewhere, paying a chunk of its cashflow in litigation costs and fines over years, with the ultimate bill taking a long time to become clear.

Looking at this prospect, some suggest that BP could become a takeover target. This too seems unlikely. For political reasons potential buyers would probably be limited to American firms or friendly big oil companies including Royal Dutch Shell and France’s Total, which would raise serious competition concerns in Europe as well as America. And even Britain’s long-standing ideological attachment to a free market for corporate control might be sorely tested by a takeover of its biggest and most global company.

There is still the worry, though, that the liabilities could conceivably grow yet further. Some politicians might welcome that, but the courts, too, would have a say, which might be to BP’s advantage. In 2008 John Roberts, chief justice of the Supreme Court, began his questions during the hearing on punitive damages in the Exxon Valdez case by asking, “Isn’t the question here how a company can protect itself from unlimited damages?” The Court is if anything reckoned to be more pro-business today than it was then.

For now, BP must hope that the deal it has struck inspires confidence in the markets while putting some brake on further political pressure. And as inquiries start to report, attention will refocus on what happens next. If deep-sea drilling is to continue, as many believe it must, then a way to make sure that it does so more safely will have to be found. As Ms Jaffe points out, there is every chance that technology that is up to the job will be developed fairly quickly: it is a very innovative industry. The tragedy is that, had the industry and its regulators faced up to their limitations, that much needed innovation might have happened sooner.

Briefings2

Jun 17th 2010 | HONG KONG AND WASHINGTON, DC

LIKE his leggier boss in the White House, Tim Geithner, America’s treasury secretary, is fond of basketball. In April he called a timeout in America’s long campaign for a stronger Chinese exchange rate, postponing a report that might have accused China of currency manipulation. His objective, he said, was to use his talks with China in May and the G20 gatherings in June to make “material progress” on rebalancing the world economy. The last of those meetings, the G20 summit in Toronto, will take place on June 26th and 27th.

In basketball timeouts provide an opportunity to regroup and substitute players. In politics they give new problems a chance to come into play. The Greek sovereign-debt crisis deflected the world’s attention from China’s currency and sank the euro, which meant the yuan has strengthened overall even as it has remained fixed to the dollar. It also unnerved China’s policymakers, who began to fret again about financial instability and a slowdown in the euro area, their second-biggest export market. This was not the time, they concluded, to fiddle with the yuan.

That sits awkwardly with Mr Geithner’s hopes for global rebalancing. In this vision of the future, American saving would rise as overstretched borrowers repaid their debts. American households have indeed pulled back dramatically if you count their reduced outlays on houses and home improvements, argues Jan Hatzius of Goldman Sachs. The combined spending of American households and businesses now falls short of their income by about 6.8% of GDP. In 2006 spending exceeded income by 3.7% of GDP.

This retrenchment was offset, and made possible, by a dramatic fiscal swing in the opposite direction. But America cannot long maintain a budget deficit of almost 9% of GDP. A sustainable recovery would require America to sell more to foreigners, aided by a cheaper dollar. And surplus countries, living well within their means, would have to buy more.

Things went according to script until the end of last year, but have since reversed. America’s trade deficit has widened notably this year, to a 16- month high of $40 billion in April. Europe’s travails suggest the outlook isn’t much better: it will probably be importing less and exporting more, because of fiscal retrenchment and a lower euro, taking market share from American exporters.

America can take some comfort from a narrowing of China’s current-account surplus, from 11% of GDP at its peak in 2007 to 6.1% last year. China’s imports have ballooned this year, thanks to its prodigious stimulus spending and a rise in commodity prices. It even recorded a trade deficit in March. But in the year to May exports increased by almost half, resulting in a trade surplus of about $20 billion for the month, the biggest since October. The fear is that China’s strong imports of machinery, oil and ores in the early months of this year may simply have gone into one end of a production pipeline, out of which are now emerging excessive volumes of steel and heavy-industrial products that it cannot sell at home. As Janet Zhang of GaveKal Dragonomics points out, China’s steel exports in May were 89% higher than their average over the previous four months.

Criticism of China’s currency has resurged almost as quickly as its exports. In international basketball, only the coach can call a timeout. But in America, any of the players can interrupt the game. American policymaking is equally chaotic. Unlike Mr Geithner, many congressmen believe China has already run out of time. Charles Schumer, a Democratic senator, has introduced a bill that would authorise America to slap duties on imports deemed to benefit from an artificially low currency. He plans to seek a vote within a few weeks.

With no parallel bill in the House of Representatives, Mr Schumer’s proposal is a long way from becoming law. But Senate passage could press the administration into taking a firmer line. The government could formally label China a currency manipulator in the delayed report, due in early July; or it could rule in favour of several companies—including three papermakers—that have requested duties on Chinese imports because of the cheap yuan.

Would a stronger yuan really save America’s papermakers and other struggling firms? Between mid-2005 and mid-2009, China’s real trade- weighted exchange rate appreciated by about 5.5% a year. If instead it had risen by 10% a year, as many in America would have liked, China’s exports would have been about 30% lower by mid-2009, according to a study by Shaghil Ahmed of the Federal Reserve.

But in China a drop in exports does not translate straightforwardly into a drop in the trade surplus. China re-exports a lot of what it imports, turning hard drives into iPods and iron ore into steel. So when its foreign sales fall, its overseas purchases drop as well. Alicia García-Herrero of BBVA, a Spanish bank, and Tuuli Koivu of the Bank of Finland find that a 10% appreciation of the trade-weighted yuan reduces imports of components by about 6%.

America hoped that other G20 members, particularly in the developing world, would rally to the cause of revaluing the yuan. In April the president of Brazil’s Central Bank described China’s currency as a “distortion”. His counterpart in India made some milder remarks, but India’s government has remained silent. It is the co-chair of the G20’s working group on rebalancing. As a rare example of a big Asian economy with a current- account deficit, it cherishes its role as honest broker.

America’s huge trade deficit with China (see chart) sets it apart from many other G20 members. Japan has a surplus of $45.5 billion with China and South Korea $59.1 billion. Even Brazil can boast more than $14 billion. In the past 12 months China has run a trade deficit with the G20 excluding America (even counting the entire European Union as a member).

Getting global imbalances onto the G20’s agenda took some work. China first resisted the idea, fearing the group would put it under too much pressure. But for champions of yuan reform the hope is less that the G20 sides with America against China, more that China feels comfortable enough to use the forum to unveil a policy shift that is in its own long-run interest. Finance and Economics

Jun 17th 2010

WHEN markets are jumpy and cash is needed, sovereign-wealth funds have some very fetching characteristics. As well as having lots of money, they tend to make decisions quickly. During the financial crisis they pumped money, often ill-advisedly, into imploding banks. Now they have a fresh set of suitors. The Greek government has been wooing sovereign-wealth funds in the Gulf and Libya; this week it played host to a Chinese delegation. Agricultural Bank of China is thought to have lined up state-owned funds from Kuwait, Qatar and Singapore as cornerstone investors in its imminent listing. Sovereign funds may invest directly in the Asian insurance arm of AIG following Prudential’s failed bid.

Where sovereign-wealth funds invest, however, political concerns often follow. Funds have made some changes to the way they operate since they ploughed money into the banks. In October 2008, 26 sovereign-wealth funds, with support from the IMF, agreed to a set of accounting standards and investment practices called the Santiago Principles. The most significant of the 24 guidelines is the principle that the funds should comply with all the disclosure rules of host countries. Over the past year many funds have started publishing annual reports and disclosing their asset allocation, a significant step for a secretive sector.

There is still a long way to go. The Santiago Principles are voluntary, with no penalties for non-compliance. Most disclosures are still short on information. For instance, the first report of Abu Dhabi Investment Authority, one of the largest sovereign-wealth funds, does not say how many assets it has under management. A recent study estimated that a group of funds with nearly $500 billion in assets, including funds from Russia and Qatar, provide only the most basic information. The Qatar Investment Authority does not even publish an annual report.

There are other ways to soften suspicions of political interference. Funds are now partnering with each other. Ashby Monk of the Oxford SWF Project, a research initiative, says that funds recognise that partners can provide political cover. China Investment Corporation (CIC), China’s state fund, recently invested in a natural-gas project in America alongside funds from South Korea and Singapore, whose presence may have made CIC’s involvement more palatable. A less healthy effect of political sensitivity is that funds may take a more passive investment approach. That makes them even more attractive to managers but much less alluring to other shareholders.

Finance and Economics

Jun 17th 2010 | SEOUL

WHENEVER South Korea’s currency, the won, has fluctuated against the dollar in recent months, the authorities in Seoul have had a deep sense of déjà vu. They remember the dark days of 2008 when finance officials jetted around the world trying to convince people that their export-dependent country was not the next Iceland. It was a tough sell.

Back then local and foreign banks in Seoul had amassed huge short-term dollar debts. That was partly a result of foreign-exchange hedging in South Korea’s large shipbuilding industry and partly thanks to a “carry trade” in which investors swapped cheaply borrowed dollars for won on the expectation that the local currency would rise. After the collapse of Lehman Brothers, there was rapid deleveraging. As South Korea’s capital account plunged into the red at the end of 2008, the won tumbled (see chart). In 2008 it was the second-worst-performing currency in the OECD—after the Icelandic krona.

Fast forward to 2010 and South Korea has experienced the same pattern in miniature. An economy that the OECD this week said may grow by 5.8% this year has once again attracted lots of speculative foreign capital, funded by negligible interest rates in America and elsewhere. But investors have again proved fickle. Some of the biggest foreign banks in South Korea are European ones. When Europe’s debt crisis started to unfold, they began feverishly deleveraging, pushing down the won.

The government of President Lee Myung-bak has not been idle since it stared over the abyss in 2008, however. Advised by Hyun Song Shin, an economist at Princeton, it has pondered ways to control destabilising capital flows. It hopes this will influence thinking in the G20, which it chairs this year.

On June 13th it set limits on the build-up of foreign-exchange derivatives that it believes makes the won one of the most volatile currencies in the rich world. Local banks will be allowed to have foreign-exchange derivatives no higher than half their capital base. Foreign branches, which have greater access to hard currency, have a higher ceiling of 2.5 times their capital. The limits are close to current levels; they will be introduced with a three-month grace period; and some existing positions can be held for up to two years. That helped minimise disruption in currency markets— the won actually rose against the dollar the day after the measures were unveiled.

Lots of countries are now experimenting with capital controls: on June 16th Indonesia became the latest, introducing mild curbs on flows of hot money. But Mr Shin insists the limits are a “surgical response” to unique circumstances in South Korea. These include a shipbuilding industry that is paid in dollars over three years and needs to hedge its won costs by selling forward dollar contracts to banks. The country also lacks a deep local-bond market attractive to long-term foreign investors. There is, says Mr Shin, a maturity mismatch in South Korea between long-term assets and short-term liabilities that makes it vulnerable to sudden bursts of deleveraging. “Whenever Europe trembles, we are the first place to jump from,” he says.

The carry-trade activity also hampers monetary policy. Benchmark rates remain at a meagre 2%, which raises inflation fears. With some foreign- exchange limits in place it may be easier for the Bank of Korea to raise interest rates without attracting a renewed surge of speculative capital.

Finance and Economics

Jun 17th 2010

“ALICE laughed: ‘There’s no use trying,’ she said; ‘one can’t believe impossible things.’ ‘I daresay you haven’t had much practice,’ said the Queen. ‘When I was your age, I always did it for half an hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast.’”

Occasionally investors can believe impossible things, as they did when dotcom stocks with no profits were valued at more than flourishing multinationals. But they can also believe in incompatible things, which is even more striking.

Take the recent surge in the gold price to a nominal record of $1,251.20 an ounce. Owning gold is traditionally seen as offering protection against inflation. And inflation is very bad news for owners of government bonds. But the ten-year Treasury bond yields just 3.3%, a level that is towards the low end of the historical range.

There is something remarkable about this combination. You would expect the performance of gold and Treasury bonds to be inversely correlated. When gold was at its real all-time high in 1980, the ten-year Treasury-bond yield was 10.8%. Fixed-income investors had suffered years of negative real returns in the 1970s.

Adding other assets to the mix does not solve the dilemma. David Ranson of Wainwright Economics, a consultancy, has examined how gold and corporate-bond spreads have worked as a guide to asset allocation since 1978. The gold price is an indicator of inflationary pressures. Bond spreads are an indicator of growth: investors are happy to take the risk of owning corporate bonds, and spreads come down, when the economy, and thus business revenues, are strengthening. Over the year to end-May gold was up by 25% while corporate-bond spreads narrowed sharply. History suggests that such a combination should be bad news for government bonds.

So what explains the current situation? Both gold and Treasury bonds could be classed as “safe haven” assets that investors buy when they are risk-averse. But if not inflation, safe havens against what? Investors did buy gold in 2007 and 2008 when they were worried about the health of the banking system. Some thought that physical gold would be a lot safer than a deposit in an insolvent bank.

In recent weeks there has been a rise in both LIBOR (a gauge of banks’ borrowing costs) and the credit-default-swap spreads on bank bonds (the cost of insuring against default risk). But in neither case are things as bad as they were in the autumn of 2008, when Lehman fell and no bank seemed safe. Gold was only around $900 an ounce during that burst of risk aversion.

Of course, safety is relative. The finances of Germany and America look better than those of Greece or Spain. Some say banks have been demanding German bonds as collateral for financing and refusing to accept the bonds of other euro-zone countries. This could be holding down the yields of the most liquid markets.

But that raises a related point that investors seem to be overlooking. Many people argue that Britain and America, for example, are in a better position than euro-zone members like Greece because they can depreciate their currencies. That may be good news for the governments concerned but it is bad news for investors. It does not take much depreciation to wipe out an annual yield of 3-4% a year. For hedge funds and other investors which will not be holding bonds to maturity, currency movements may determine their return. They ought to demand extra yield as compensation for the risk.

Then again, private investors may not be setting the price. Government-bond yields are being held artificially low by central-bank actions. In some cases (the European Central Bank or the Bank of England) this is because of direct purchases of bonds. In others it may be because central banks have rigged the yield curve, holding short-term rates artificially low and inducing banks to make money by buying longer-dated government bonds. A third factor is that Asian central banks are big buyers of Treasury bonds as part of their exchange-rate management policies, and are relatively indifferent to future returns.

Perhaps the explanation is simpler. Martin Barnes of Bank Credit Analyst, a research firm, points out that the direction of official policy (low rates, quantitative easing, big deficits) looks inflationary but the economic fundamentals (a big output gap, sluggish credit growth) look deflationary. Faced with this dichotomy, investors who buy both Treasury bonds and gold are not displaying cognitive dissonance. They are just hedging their bets.

Economist.com/blogs/buttonwood

Finance and Economics

Copyright © The Economist Newspaper Limited 2010. All rights reserved. Retail banking in America A new dominion Cracking the American market has proved beyond many foreign banks. Is Canada’s TD different?

Jun 17th 2010 | CHERRY HILL, NEW JERSEY

Hands up if you find this all a bit ridiculous

AT MOST banks, tellers who have been particularly helpful to a customer are content with a pat on the back from their manager. Star workers in the American branches of TD (for Toronto-Dominion) can expect a lot more. The bank’s WOW! Department (yes, really), a jazzed-up version of internal communications, sends costume-clad teams from Alpha WOW! Omega, its “fraternity”, to “surprise and delight” high performers in front of colleagues and (presumably bemused) customers, dishing out tokens that can be redeemed for TD-branded goodies.

Cringeworthy, perhaps. But TD, which touts itself as “America’s Most Convenient Bank”, takes service seriously. Its branches are open 50% longer than a typical rival’s, including Sundays. It provides water bowls for clients’ dogs, colouring books for their kids. Its ATMs offer stamps as well as cash. It eschews ropes for customer queues. “We don’t want them to feel like sheep,” says Mike Carbone, head of TD’s branches in Philadelphia, whose staff, like everyone at the bank, are trained at its “university” in New Jersey. TD calls 800 customers a night to gauge their experience. All of this seems to work. JD Power, a research firm, ranks it top for customer service among large banks in America’s mid-Atlantic region.

Toronto-based TD’s big leap into the United States came two years ago. Seeking growth outside its mature, oligopolistic home market, it bought Commerce Bank, which had shaken up high-street banking in New York. It has continued to expand, using its strength—Canadian banks weathered the credit crisis relatively well—to buy several troubled banks in the south-east this year. This has brought its total investment in America to $18 billion and its east-coast network to nearly 1,300 outlets, 200 more than it has across Canada. Its latest deal made it a top-ten bank in Florida.

TD’s speciality is sucking up deposits, a cheap and stable form of funding. Banks with more than 10% of the branches in a given local market typically garner a disproportionately large share of deposits. TD can do the same with only 5-6% of total branches because of its reputation for convenience, says Sherief Meleis of Novantas, a consultancy. It works hard to find the best locations, favouring former fast-food outlets, which tend to be in busy places and already have drive-throughs (for ATMs). In the densest parts of the network, TD has 50% more deposits than its share of branches would imply, claims Bharat Masrani, head of its American operations.

TD has various ruses for bringing in deposits. It has attracted thousands of new customers by placing penny arcades, which count change, in branches. Users get a slip which they must redeem for cash at the counter, giving tellers a chance to persuade them to open an account. TD has curried favour with savers by offering a scheme that pays $10 to children for every ten books they read and by supporting local sports teams. It recently launched a mascot, the imaginatively named “TD”: a bit naff, maybe, but $128 billion of deposits is nothing to smirk at for a firm that was barely on America’s retail-banking radar a few years ago.

Still, there are grounds for scepticism. Chief among them is the poor record of foreign banks, including some of TD’s Canadian peers, on America’s high street. TD’s overall return on invested capital in America was 4.5% last year, half its target. Brad Smith, an analyst at Stonecap Securities, wonders whether the bank will return its cost of capital. “They say it is a once-in-a-generation opportunity,” he says, “but we’ve seen this video many times.”

TD points out that its operating returns (excluding goodwill and the like) are close to 20%. Ed Clark, its boss, argues that profitability will grow as loan losses fall. He also thinks TD can sell more products to each customer: its franchise is “thin” compared with cross-selling leaders such as Wells Fargo, he says. The bank’s 45% stake in TD Ameritrade, a brokerage, could help.

TD’s profits should also get a lift as it shifts from holding low-yielding securities to making (admittedly riskier) loans as the economy recovers. Currently it has 65 cents of loans for every dollar of deposits, compared with 90 cents or more for many peers. It has begun to close the gap: it was one of very few large banks to expand lending last year.

Like other retail banks, TD faces regulatory headwinds. Restrictions on overdraft and other fees will take $15 billion-19 billion of non-interest income out of the industry, reckons Mr Meleis. But deposit spreads should widen as rates rise, because banks can delay passing on some of the extra interest to savers. To make up for the lost revenue, banks will need to improve their deposit margins by only 0.3 percentage points, Mr Meleis calculates. The improvement needs to be even smaller at deposit-rich institutions such as TD.

And if rates stay lower than expected? Mr Clark admits it is a worry. So, too, is lending indiscipline, though TD has a thick conservative streak. It faces intensifying competition as the economy picks up. Its high-touch service model, though impressive, is not impossible to replicate (British bank customers will get something similar with the opening next month of Metro Bank, one of whose founders was the force behind Commerce Bank).

But TD is not about to turn tail. America has become hugely important to the bank, which Mr Clark describes these days as “a North American institution that just happens to have its headquarters in Canada.” For better or worse, TD’s future increasingly lies not in Ontario or Quebec, but somewhere between Maine and Florida.

Finance and Economics

Jun 17th 2010

WITH governments seeking soft targets for tax revenues and regulators looking to curb their activities, investment banks have plenty to contend with. Now they face a new battle. The Office of Fair Trading (OFT), a British competition agency, said on June 10th that it would conduct an inquiry into equity underwriting, following complaints from issuing firms.

What might the OFT be looking for? One concern is that the industry may have too few firms to ensure vigorous price competition. One bank may have so big a share of the market that it can charge high fees without worrying how its rivals will respond. But it is rare for trustbusters to find a single firm that dominates in this way with a market share below 40%. No investment bank comes close to that threshold. Rights issues by already-listed firms accounted for the bulk of equity-raising in Britain last year; the leading bank’s share of revenues was 20% (see chart).

A related worry is that a small group of firms might act together to keep fees high. That could be achieved by a formal pact to fix prices (a cartel, in other words) or a tacit agreement not to compete too hard. Cartels are illegal and there is no suggestion that the OFT’s inquiry is of a criminal nature. But an implicit agreement can work in the right conditions—if demand is stable from year to year and if the bulk of the market is served by four or fewer firms, each with a similar share of business. In such circumstances, firms would have few incentives to undercut their peers. If one firm cut its prices, destroying the unspoken deal to carve up the market, it would succeed only in starting a price war.

For all its excesses, however, investment banking in Britain does not have the traits of a collusive industry. The market structure is too fragmented for banks to co-ordinate their activities easily. The top four captured less than half of the revenue from rights issues last year. If concentration is judged on deals in which firms were the lead bank (or “bookrunner”), the share of the top four banks was higher, at 58%. In both cases other banks would still have enough clout to undercut any collusion by the biggest competitors. And the market share of each firm varies from year to year, a sign of healthy competition.

Industry profits are also too “lumpy” for the market to be readily carved up. In 2009 rights issues in Britain produced $1.9 billion of revenues for banks, says Dealogic, a financial-information firm. That was a bumper year: the corresponding figure for 2007 was just $84m. An unspoken agreement to keep prices high could not be stable in a business that goes from famine to feast in this way. There would always be an incentive for one or more firms to break ranks and grab at any short-term profits on offer.

Investor groups nonetheless feel that the fees charged by banks do not reflect this competitive structure. One complaint is that fees have got fatter in a way that is not explained by any increase in banks’ risks or costs. Although there was variation, a typical fee for underwriting and distributing a rights issue when stockmarkets were more stable was 2% of the deal’s value. A chunk of that, perhaps 1.25%, might go to sub- underwriters (often insurers with shares in the firm raising equity) for taking on some of the underwriting risk. In last year’s jumpy markets, however, banks’ fees rose to 3% or more and have been slow to fall back. Sub-underwriters moan that their share of the spoils did not rise, too. They think banks were overpaid for the risks they took. Issues were priced as much as 40% below market prices so stocks would have had to plunge before banks would be out of pocket.

The fault may lie partly with buyers. Heads of big companies have a habit of spending shareholders’ money a bit too freely when they want to raise funds for an acquisition (think of the fees paid recently by Prudential, or earlier by BHP Billiton, on aborted takeovers). “Our clients want the best, not the cheapest,” says a corporate adviser. That means they often pay over the odds. Like other professionals, investment bankers tend not to compete on price lest customers interpret low fees as a sign of poor quality.

Corporate chiefs may feel they have little choice but to pay what they are charged. By their nature, rights issues are rare (serial dealmakers may be better placed to win concessions on fees because they can offer repeat business). A lot rides on their success: the proceeds might be needed to avert bankruptcy or to finance a takeover. The need for discretion makes it natural for a firm to look to its corporate broker, the investment bank which (in Britain) acts as the link between the company and investors. The broker does this without charge in the hope that another day it will be paid well for other services.

A switch in time saves nine

This kind of relationship is the norm. But the OFT’s trustbusters frown on markets where “switching costs” for consumers are high (retail bank accounts are a particular bugbear). They fear that firms locked in to a single supplier for a vital service could be overcharged for it—and for related services. A restaurateur may work hard to get customers in the door. But once inside, the diner who wants to buy a bottle of wine with his meal faces a monopoly supplier. Bankers retort that rivalry for corporate brokerships is intense and switching is common. “It’s not like changing your checking [current] account,” says a banker. “It’s more like changing your clothes.”

One innovation that might make the market work better is for the terms of a corporate brokership to be set out explicitly at the start. That way banks can say what they would charge for services should the need arise. As things stand, fees are almost an afterthought. Like diners at a fancy restaurant with no prices on the menu, customers may not even know what the charges are until the bill arrives. Whatever its problems, however, the market in Britain seems to work better than in America, where investment banks routinely charge a 7% fee on initial public offerings, roughly twice the European norm. That gap has never been satisfactorily explained. Once America’s new regulatory set-up is established, its trustbusters may well follow the lead of their British counterparts and take their own look at investment banking.

Finance and Economics

Copyright © The Economist Newspaper Limited 2010. All rights reserved. Alzheimer's disease No end to dementia Ten years ago people talked confidently of stopping Alzheimer’s disease in its tracks. Now, they realise they have no idea how to do that

Jun 17th 2010

DRUG companies are notoriously secretive. The clock starts running on a patent when it is filed, so the longer something can be kept under wraps before that happens, the better for the bottom line. You know something is up, then, when a group of these firms announce they are banding together to share the results of abandoned drug trials. And on June 11th several big companies did just that. They publicised the profiles of 4,000 patients from 11 trials so that they could learn from each other’s failures. An act of selflessness, perhaps, but also one of desperation.

Alzheimer’s disease is one of those things that policymakers would rather hide from. It is, perhaps, the classic illness of old age. Physical frailty is expected, and can be coped with. Mental frailty is much scarier for the sufferer and more demanding for those who have to look after him. It is expensive, too. Alzheimer’s is estimated to cost America alone some $170 billion a year. And it is getting commoner as average lifespans increase. The number of people suffering from the disease is expected to triple by 2050. Effective treatments would thus be embraced with enthusiasm by sufferers and society alike. The right Alzheimer’s drug could earn a drugmaker a lot of money. The incentives are there. But the science has still failed to deliver.

At the turn of the century, Alzheimer’s research seemed promising. A flurry of drugs which treated symptoms of the disorder had just hit the market and researchers were setting out confidently on a deeper investigation of its causes. Understanding those, they felt sure, would result in a cure. It still might, but the truth is that the hoped-for understanding has not come. As a consequence, a long list of would-be cures have failed in late-stage clinical trials, at enormous cost to the companies producing them. The latest of these, Dimebon, made by Pfizer, was abandoned as recently as March, after $725m had been spent on research and development.

Beta testing

The problem of what causes Alzheimer’s is profound. The physical manifestations of the disease that Alois Alzheimer noticed in 1906 are sticky plaques of one type of protein, now known as beta-amyloid, and nerve-cell-engulfing tangles of a second type, called tau protein. Since 1991 the smart money has been on the hypothesis that the disease is caused by the plaques, and that the tangles are mere consequence. For the past two decades, therefore, most attention has been given to developing drugs that will remove amyloid plaques from an affected brain. Five drugs that do this are on the market, but they only delay the onset of dementia. Once their effectiveness has run its course, memory loss and cognitive decline progress unimpeded, and sometimes even accelerate.

Partly as a consequence of this, the plaque theory is waning. Most researchers still believe beta-amyloid is the culprit, but the idea that free- floating protein molecules, rather than the proteins in the plaques, are to blame is gaining ground. This idea is supported by a study published in April in the Annals of Neurology, which showed that mice without plaques, but with floating beta-amyloid, were just as weakened by the disease as mice with both. If that is true in people, too, many more drugs now in clinical trials may prove to be ineffective.

Another fundamental problem is that, whatever is causing the damage, treatment is starting too late. By the time someone presents behavioural symptoms, such as forgetfulness, his brain is already in a significant state of disrepair. Even a “cure” is unlikely to restore lost function. A biochemical marker that indicates the progress of the disease would thus help identify those for whom early action would be advisable, and might help to distinguish people with Alzheimer’s from those with the less hostile forms of forgetfulness that tend to come with old age. Such a marker would also benefit the organisers of clinical trials. They would be able to see more easily whether a drug was working.

To this end, the Alzheimer’s Disease Neuroimaging Initiative (ADNI), established by America’s National Institutes of Health (NIH) in 2004, is measuring the levels of certain proteins in the cerebrospinal fluid of people who may have Alzheimer’s or may go on to develop it. Though the project still has a long way to go, it has already helped develop a test to diagnose the early stages of the disease.

ADNI’s anagram DIAN, the Dominantly Inherited Alzheimer Network, based at Washington University in St Louis, is taking another approach to the biomarker question. Its researchers are studying families with a genetic mutation that triggers the early onset of Alzheimer’s. That terrible knowledge means it is possible to predict which members of a family are destined to get the disease, and compare their biochemistry with that of relatives who do not have the mutation.

It is hard pounding, however, and—as the drug companies’ confession suggests—it is the “R” rather than the “D” of research and development that needs to be emphasised at the moment. A bad time, then, to be cutting back on “R”. That tripling of future sufferers is going to be expensive. Yet Alzheimer’s research, on which the NIH spent $643m in 2006, is to receive only $480m in 2011. It has not been singled out for these cuts. They are part of a general belt-tightening at the agency. But in this as in everything, you get what you pay for. And that might, in the future, be an awful lot of witless, wandering elderly.

Science and Technology

Jun 17th 2010 | NEW YORK

TO MANY, the swine flu panic of 2009 was an overreaction. As the bug spread from Mexico, health officials began to fear the worst. The World Health Organisation declared it to be a pandemic. Airports and schools were shut down, and manufacturers were ordered to work double-time to produce a suitable vaccine.

Though the strains of A/H1N1 virus that caused the panic did not prove particularly deadly outside Mexico, officials gave warning that this might change. It is common for viruses that originate in animals and go on to afflict humans to evolve by recombining their genetic material with that of other strains. This can make them more virulent. In the case of A/H1N1, however, the bug remained mostly benign, so popular attention has faded. That is a mistake, argues a study published this week in Science.

As part of a long-running research project (beefed up since last year’s outbreak), a group at the University of Hong Kong has been monitoring the viruses of pigs slaughtered in the territory’s main abattoir. Malik Peiris and his colleagues have found strong evidence that the A/H1N1 virus afflicting humans is indeed recombining in pigs. They saw the mingling of A/H1N1 with two other types of swine influenza virus. These were the North American triple-reassortant viruses and the Eurasian avian-like swine viruses. They did not, however, observe reassortment with human seasonal influenza viruses, something they had worried might happen.

What all this means is unclear. It is possible that the new recombinations will make the virus even less dangerous. But the opposite is also possible. It would make sense, therefore, to keep a sharp eye on other pig populations around the world, just in case.

Science and Technology

Jun 17th 2010

THE week before last, a falcon was launched into space: Elon Musk’s privately financed Falcon 9 heavy-lifting rocket. This week a different falcon returned from the void. On June 13th Hayabusa, as the bird is known in Japanese, streaked through the night sky of southern Australia to deliver to Earth what researchers hope will be the first sample of rock collected from the surface of an asteroid.

As the picture suggests, most of the craft burned up on re-entry. But a small part, protected by a heat shield made of carbon-phenolic resin, survived and landed in the desert near Woomera. This capsule, it is hoped, will contain material from Itokawa, a half-kilometre-long asteroid whose orbit crosses the Earth’s.

One up, then, to JAXA, Japan’s space agency. Indeed, two up, because on June 10th it successfully deployed Ikaros, a solar sail attached to a small satellite in orbit round the Earth.

In the short term, the mission to Itokawa was the more spectacular of the two. It was dogged by bad luck, ranging from solar flares to boulder- strewn landing fields, and returned to Earth three years late. But return it did, having been nursed through its traumas by a patient ground team at JAXA’s mission-control centre in Tsukuba.

In the long term, though, Ikaros may be the more important mission. Solar sails are not the quickest way to travel through space, but they are cheap. They draw their energy from sunlight (the light exerts a small pressure on the sail, driving it forward) and therefore need no fuel. They are difficult to deploy, though, because they need to be thin, huge and tightly folded for launch. The unfurling of Ikaros, which has an area of 200 square metres, is therefore no mean feat. It will now be put through its paces to see just how much photonic puff it can provide.

Ikaros was launched on May 21st (it hitched a lift on a JAXA mission to Venus). Hayabusa was launched in 2003 and matched orbits with Itokawa in 2005. The intention was to get close, fire a projectile into the surface and grab some of the ensuing dust. That does not seem to have happened, but the probe did sit on the asteroid’s surface for about half an hour, so there is a chance some material, if only a few milligrams of dust, made its way into the grab and will thus be sitting in the return capsule, waiting to be examined.

If it is, it will be only the fourth sort of extraterrestrial material returned to Earth by a spacecraft—the others being the moon rocks brought back by the Apollo missions and three unmanned Russian Luna craft, the material from comet Wild 2 picked up by the Stardust mission in 2004, and the samples of solar wind collected between 2001 and 2004 by the Genesis mission. Of course, nature delivers extraterrestrial material to Earth every day, in the form of meteorites, most of which are, in effect, tiny asteroids, so whether anything truly new will be discovered by looking at Hayabusa’s trove is moot.

Woomera, the place JAXA chose to land Hayabusa’s capsule, is also the site from which the Black Knight, Black Arrow and Blue Streak rockets of Britain’s aborted space programme were launched in the 1950s to the 1970s. Japan’s space programme has, so far, been a lot more successful than Britain’s was. Thoughtful Japanese though, looking at their country’s debt and wondering what might be cut to reduce it, may regard the coincidence as a bad omen.

Science and Technology

Jun 17th 2010 | BARCELONA

PATIENTS in a vegetative state are, by definition, unable to respond to stimulation with any form of overt behaviour. Recently, however, a group of British and Belgian researchers have shown that some of them respond to simple commands by altering their brain activity while in an MRI scanner. At the annual meeting of the Organisation for Human Brain Mapping in Barcelona on June 7th, the British half of the group described how it has taken an important step towards helping such patients communicate.

Over the past four years, teams led by Adrian Owen at the Medical Research Council’s Cognition and Brain Sciences Unit in Cambridge, and Steven Laureys of the Coma Science Group at the University of Liège, have scanned 23 vegetative patients between them. Four were able to respond to yes-no questions correctly and consistently by following instructions to imagine playing tennis when they wanted to give one response, or walking round the house when they wanted to give the other.

Those studies have led Dr Owen to conclude that a significant minority of vegetative patients may be more aware than they seem. Since they are responsive, they are not even technically vegetative, though current diagnostic techniques—which require that they respond physically to instructions, for example by blinking—are not sensitive enough to detect that.

If they are responsive, they are capable of communicating. So the problem is how to facilitate this, given that it is not practical to put them in a scanner every time someone wants to ask them a question. Damian Cruse of the Cambridge group thinks he may have found a solution in electroencephalography (EEG), a cheaper and more portable way of measuring brain activity via electrodes pasted to the patient’s scalp.

Dr Cruse and his colleagues first asked six healthy volunteers to imagine either squeezing their right hand or wiggling the toes of both feet when they were presented with an audible tone. They found that their volunteers’ brains’ responses to the two commands were clearly different. The imagined hand-squeezing produced a response on the left-hand side of the brain, while the toe-wiggling produced one over the centre of the head.

They then applied the same procedure to a patient with “locked-in” syndrome—conscious but almost entirely paralysed—who retains some control of his eye movements. His brain responses were the same as those in the healthy controls. Finally, they gave the instructions to a patient who had been diagnosed as being vegetative two years earlier. They found that, from the EEG signals alone, they could deduce which movement this patient had been instructed to imagine with 100% accuracy.

This result, though preliminary, suggests it might be possible to establish some sort of dialogue with people who had previously been considered all but brain-dead. That would be extraordinary. Given that solitary confinement is one of the harshest punishments known, and that such people are condemned to the worst sort of solitary imaginable, it would also be wonderful.

Science and Technology

Jun 17th 2010 | GUILDFORD

IN “AVATAR”, a film that has enjoyed a certain modest success at the box office recently, 3D technology brought blue-skinned extraterrestrials to life. On June 10th, a similar innovation helped improve life on Earth when Iain Jourdan, a surgeon at the Royal Surrey County Hospital, in Guildford, England, donned polarising glasses to perform the first-ever laparoscopic surgery assisted by three-dimensional imaging.

The procedure he performed, a routine gall-bladder removal, is typically done by incising a slit in the patient’s navel, through which a tiny camera is inserted. Guided by the resulting video feed, the surgeon wields long-handled tools to excavate the gall bladder from its neighbouring organs before removing it though the slit. Until now, however, that video has been in two dimensions. Anyone who has tried threading a needle with one eye shut will understand that this is not ideal.

Past attempts to design a 3D display for use in the operating theatre have not worked. One prototype, a stereoscopic helmet worn by the surgeon, left users seasick after only a few minutes. The new system, manufactured by Solid-Look, a firm based in New York, abandons such missteps in favour of technology originally developed for the entertainment industry: 3D glasses and a specially modified television screen.

During the surgery, a camera sends back two live video feeds taken from slightly different angles, as it surveys the abdominal cavity from within. The signals are polarised in opposite directions, and the resulting images displayed as alternating rows of pixels on a high-definition television screen. The polarising lenses of the glasses filter these images, meaning each eye sees only one of them. The brain then adds them together as if they were natural, to create the impression of depth, as Do Na’vi actually have gall bladders? well as width and height.

The resulting vista of receding cavities and organic bulges allows for more accurate cutting and stitching. The first gall bladder removed by Mr Jourdan using the new system was extracted in 30 minutes, less than the normal average.

3D thus looks as though it could be poised for a dramatic future. And with the laparoscopic-device market valued at more than $5 billion a year, the new technology could soon be a medical, as well as cinematic, blockbuster.

Science and Technology

Jun 17th 2010

The Party: The Secret World of China’s Communist Rulers. By Richard McGregor. Harper; 302 pages; $27.99. Allen Lane; £25. Buy from Amazon.com, Amazon.co.uk

ANY study of the Chinese Communist Party today will soon confront two jarring questions. The first is how a party responsible for such horrors— the Cultural Revolution of the 1960s, the death of some 35m-40m people in the worst-ever man-made famine from 1958-1960—has stayed in power without facing any serious threat, the 1989 Tiananmen protests aside. The second is why it still calls itself “communist”, when China today seems closer to the cut-throat capitalism of Victorian England than to any egalitarian dream.

The second question is easier. In 1979 Deng Xiaoping, the pragmatic founder of the new China, answered it in “four basic principles”, the most important being “the leading role of the Communist Party”. Richard McGregor’s masterful depiction of the party today cites a less pompous tautology, from Chen Yuan, the son of a Long March veteran and hero of central planning, who is himself a leading state-banker: “We are the Communist Party and we will decide what communism means.”

This willingness to jettison ideological baggage while clinging to Leninist first principles also helps answer the first question, about the party’s surprising durability. Flexibility has been essential as the party has both led and adapted to wrenching change since 1978. It has had, as Mao Zedong, a less pragmatic communist, might have put it, to “manage contradictions”. In the process, Chinese people have learnt to enjoy freedoms and prosperity unimaginable under Mao. The system, Mr McGregor rightly points out, still relies, ultimately, on terror. But no longer are party rule and terror absolutely synonymous.

Through anecdote and example, Mr McGregor, a longtime correspondent in China for the Financial Times, illuminates the most important of the contradictions and paradoxes. There is the obvious one, for example, between the demands of the market and party control. Mr McGregor describes one almost comical battlefield—the overseas stockmarket listings of Chinese state-controlled companies.

Wall Street bankers scratched their heads over how to describe the role of a firm’s party committee. John Thornton, a former boss of Goldman Sachs, describes an “eye-opening” lecture he received as a member of a Chinese board: the committee was responsible for six functions “and they were the ones that mattered.” Prospectuses tend to solve the conundrum by avoiding mention of the party’s role.

A more stomach-churning example of this contradiction was the discovery in 2008 by Sanlu, a dairy firm, that some of its products had been contaminated and were harming and killing children. Commercial logic, not to mention basic humanity, demanded an instant recall. But the boss’s first loyalty was to the party, which had demanded that bad news be suppressed so as not to spoil the atmosphere at that year’s Beijing Olympics.

Then there is the tension arising from the party’s dependence—shown most graphically in Beijing in 1989—on the army to keep it in power. This has led to booming army budgets, as the generals acquire high-tech kit. But this in turn leads them to think of themselves as professional soldiers defending China when their job is to serve the Communist Party. Tensions surface in the mysterious occasional harangues in the press against those calling (though not in public) for the “depoliticisation” and “nationalisation” of the armed forces.

Third, there is the paradox that China’s leaders recognise that the main threat to their authority is corruption, yet their power rests on a system that makes it almost inevitable. Indeed, as Mr McGregor puts it, corruption has become a sort of “transaction tax that distributes ill-gotten gains among the ruling class…It becomes the glue that keeps the system together.” No outside body is allowed to have authority over the party. An independent anti-corruption campaign, as Mr McGregor notes, “could bring the whole edifice tumbling down”.

This is part of what the author calls the “fundamental paradox”: “That a strong, all-powerful party makes for a weak government and compromised institutions.” This leaves it ill-equipped to cope with the next change, as China “rebalances” its economy to stimulate domestic consumption, provide a decent social-security net and “take on the vested interests now profiting from the distortions”.

Mr McGregor seems to think that the party’s record suggests it will find a way to manage this next transition, too. But he also notes that the triumphalism of China’s leaders in recent months seems “brittle”. Party rule has always made it hard to picture the future as very different from the present. But in China it usually is.

Books and Arts

Jun 17th 2010

Empire of the Summer Moon: Quanah Parker and the Rise and Fall of the Comanches, the Most Powerful Indian Tribe in American History. By S.C. Gwynne. Scribner; 384 pages; $27.50. Buy from Amazon.com

ALL American schoolchildren learn of the 1876 Battle of Little Bighorn, in which General George Custer and the federal cavalry got trounced by Indians in present-day Montana. Far fewer know about the desperate, brutal struggle that played out just a few years earlier for control of the southern part of America’s Great Plains. In this riveting book, S.C. Gwynne turns the spotlight on his home state, Texas.

Mr Gwynne’s focus is the Comanches, a tribe that he describes as “the greatest light cavalry on earth” during their heyday. They could loose a flock of arrows while hanging off the side of a galloping horse, using the animal as protection against return fire. The sight amazed and terrified their white (and Indian) adversaries. The Comanches dominated the Plains; their very identity was rooted in war.

Comanche lore took a memorable turn in 1836. That year warriors attacked an ill-prepared Texas fort and kidnapped nine-year-old Cynthia Ann Parker, along with several others. In itself, this was not particularly notable: the Indians waged a campaign of terror against white settlers streaming into the brand-new Republic of Texas. Rapes and scalps were common. Mr Gwynne is frank about the butchery on both sides.

In 1860 the whites recaptured Cynthia Ann. By then she had become a full-fledged Comanche squaw. She had married a chief (who Mr Gwynne says died during the attack), forgotten English and had no desire to live among whites again. Yet the settlers, who thought they had saved her from heathen murderers, kept her against her will for the rest of her days.

But Cynthia Ann left another legacy. Her 12-year-old son, Quanah, had galloped away from the attackers, with a younger brother in tow. Soon Quanah, brave in battle, rose through the tribal ranks to become a leader of the most-feared subset of the Comanches, the Quahadi. Cynthia Ann’s unusual legacy

Quanah’s job was to hold off white settlement. The settlers, sick of the Indians’ raiding, were determined to exterminate them, with help from the nascent Texas Rangers. The Comanches rolled back the frontier during the civil war, when fighting-age Texans headed east. But several years after the war ended, William Tecumseh Sherman, President Ulysses Grant’s army chief, dispatched Ranald Mackenzie, one of their crack young officers, to track down the Comanches. Thus began an epic chase, including an episode in which Quanah led his entire village out of Mackenzie’s grasp, using criss-crossing tracks to fool federal troops. Mackenzie eventually spotted the mobile village, but Quanah got lucky: a monster storm descended and Mackenzie had to turn back.

But for the Quahadi, surrender was only a matter of time. Mr Gwynne recounts how technological innovation—first the Colt revolver, then high- powered rifles—kept the Texans a step ahead. Worse than the federal troops were the buffalo hunters, who slaughtered the great herds of the Texas Panhandle after the civil war, thus depriving the Comanches of a crucial source of food and warm clothes. Finally, in 1875, the Quahadis gave up and headed for the reservation. That was one year before Custer’s death at Little Bighorn; according to Mr Gwynne, Quanah had almost fought Custer in 1868.

The remarkable Quanah adapted to his new life well. He retained multiple wives, but donned white men’s clothes (sometimes) and entered the cattle business. He became fast friends with some of the men who had pursued him, and even welcomed President Teddy Roosevelt to his home in Oklahoma. Wisely, however, he refrained from telling spine-chilling stories about his earlier raids on white settlers. He died in 1911, and is known to history as the last chief of the Comanches.

Books and Arts

Jun 17th 2010

The General: Charles de Gaulle and the France He Saved. By Jonathan Fenby. Simon & Schuster; 707 pages; £30. Buy from Amazon.co.uk

“GREAT circumstances bring forth great men,” Charles de Gaulle remarked in 1956 to Cyrus Sulzberger of the New York Times. “Only during crises do nations throw up giants.” Naturally de Gaulle (almost literally a giant given his imposing height) was referring to himself. And why not? General de Gaulle was the towering, at times isolated, symbol of a French refusal to accept defeat by Hitler’s Germany; he was the architect of France’s departure from colonial Algeria; and he was the creator of today’s Fifth Republic, bringing institutional stability to France’s traditionally febrile politics.

He was also, as Jonathan Fenby illustrates in this magisterial biography, extraordinarily obstinate—ever convinced that he was right and never afraid to confront, and indeed insult, friends and allies. In the second world war, Winston Churchill, in particular, but Franklin Roosevelt and Dwight Eisenhower too, were driven to the brink of despair by this prickly general (later described by one American diplomat as “highly egocentric with touches indeed of megalomania”) who had precious few military assets but an unshakable conviction that he incarnated France—and that France must never be treated as less than a great power. Yet somehow de Gaulle almost invariably imposed his will, thanks to “his genius for ambiguity, duplicity and improvisation, his ability to impose abrupt changes of policy and his capacity for rallying popular support to succeed in finding his way to a solution.”

Mr Fenby, who was in Reuters’ Paris bureau during de Gaulle’s presidency (and later was Paris correspondent for The Economist), traces de Gaulle’s career from his days as a student at the Saint-Cyr military academy to his decade as president during the turbulent 1960s. His personal characteristics were always those of honour, bravery and rectitude (even as president, de Gaulle and his beloved wife, Yvonne, paid for their own telephone calls). And the political thread remained unbroken: France’s greatness must never be slighted. When he found himself seated in the eighth row at John Kennedy’s funeral, he made his way forward to the front, said “Right, we can start,” to a startled protocol official—and sat down.

The result was a France that secured a permanent seat at the UN Security Council, developed an independent nuclear deterrent, withdrew from NATO’s common military command and rebuffed Britain’s repeated attempts to join the European Common Market. If there were setbacks— overtures to Russia and China failed to thaw the cold war on terms that would reduce America’s influence and increase France’s—de Gaulle would simply dismiss them. If there were dissenting opinions from ministers and party politicians, de Gaulle would simply ignore them: after all, it was the French people, not the politicians, who had asked the general to lead them, and de Gaulle—a clever exponent of the referendum—would do so.

Perhaps that is why the student and worker riots of May 1968 seemed to discomfit the president so much: they showed a France that he, in his late 70s, could no longer fully understand. When a referendum on the reform of the Senate and local government failed in April 1969, de Gaulle immediately resigned “because of the absurdity”, as he put it to André Malraux.

This excellent book is far from being a hagiography but, as Mr Fenby points out, “the final judgment has to be that he was a man who made a huge difference, and put a lasting mark on his country.” Indeed so. Gaullism is a strong current in French politics—witness the ritual homage made to the general by Presidents Jacques Chirac and Nicolas Sarkozy. And, as America’s George Bush found out before the Iraq war and as Germany’s Angela Merkel is finding out in the European Union, it remains as exasperating as ever.

Books and Arts

Jun 17th 2010

Merchants of Doubt: How a Handful of Scientists Obscured the Truth on Issues from Tobacco Smoke to Global Warming. By Naomi Oreskes and Erik Conway. Bloomsbury; 368 pages; $27 and £25. Buy from Amazon.com, Amazon.co.uk

IN 1953 the leaders of America’s big tobacco companies met John Hill, founder of a public-relations company, Hill and Knowlton, to talk about worrying new scientific research linking their products to cancer: worrying, that is, in that it might hurt sales. Hill stressed that a key part of their response had to be making sure that the public was informed of scientific doubts about the validity of the research. The tobacco industry took his advice to heart, even when its own in-house scientists were confirming what the public-health researchers had found out.

In this powerful book, Naomi Oreskes and Eric Conway, two historians of science, show how big tobacco’s disreputable and self-serving tactics were adapted for later use in a number of debates about the environment. Their story takes in nuclear winter, missile defence, acid rain and the ozone layer. In all these debates a relatively small cadre of right-wing scientists, some of them eminent, worked through organisations sometimes created specially for the purpose to take on a scientific establishment that they perceived to be dangerously unsympathetic to the interests of capital and national security.

By the time the makers of cigarettes were fighting against legislation on secondary smoking and the makers of chlorofluorocarbons against regulations to protect the ozone layer, their efforts had What a way to go, indeed coalesced into a general attack on the environmental movement and the regulatory bodies it had brought into being. The techniques employed included disinformation of various sorts coupled with an enduring and disgraceful willingness to stick to discredited arguments that seemed to play well. It is a shameful story for many of those concerned, and the authors make effective use of the vast archive of tobacco company documents now in the public domain, and of the personal archives of some of the scientists involved.

The book is good on drawing out the politics involved, and pointing out the contradictions. People who insisted that it was vital to look at worst- case scenarios when dealing with the Soviet Union proved remarkably averse to taking the same approach to environmental issues. It is rather less strong on the politics on the other side. In most of these campaigns the dissenters have argued that the American scientific establishment is tainted with an anti-corporate liberalism and is trying to impose socialism by the back door. One does not have to agree with this view, or to think that both sides are equally culpable, to feel that the ways in which science is used to generate assent for environmental action may sometimes be as interesting as the ways in which it is mobilised for dissent. Though the authors note as a curiosity that campaigns against secondary smoke predated the evidence that it did any harm, they show no desire to explore this seemingly reversed causality.

The book seems to suggest that the path from scientific assessment to environmental regulation would be a straightforward business were it not for the kind of opposition that the authors chart. But it would have added something to have examined more systematically the differences between cases where the science is clear (ozone after 1987) and where there was a fair amount of hype (forest death through acid rain). It is striking that America got acid-rain regulation passed in an election year under a Republican president. Moreover, it was passed despite there being very little scientific support for the more hyperbolic claims by environmentalists.

The authors rightly decry the degree to which scientists have sometimes manufactured and exaggerated environmental uncertainties. But they fail fully to explain how, despite this and other countervailing factors, environmental action has still often proved possible.

Books and Arts

Jun 17th 2010

KONRAD BERNHEIMER, a fourth-generation art dealer, made his first sale when he was 12. At the 1956 Munich antiques fair he sold a small Louis XVI table for DM6,000 (then $1,429). “I still remember who bought it,” says the bearded and greying Mr Bernheimer, but he will not say who it was. Now the owner of London’s venerable Colnaghi gallery, currently celebrating its 250th anniversary, he has long known that client confidentiality and keeping contacts to oneself are cardinal rules of the trade.

While other tykes were playing football, Konrad’s grandfather was taking him to museums. He was the patriarch’s first grandson and chosen heir. The family firm founded in 1864, L. Bernheimer, occupied a palatial building in central Munich where it was filled with tapestries, furniture and objets d’art but no silver, jewellery or paintings. Paintings, however, were Konrad’s passion. When his grandfather announced yet another study trip to a decorative-arts treasury, the boy pleaded for a visit to an Old Master museum instead. After 1977, when he became owner of the Munich firm, the stock gradually changed and now is proudly Bernheimer Fine Old Masters.

During a brief stint at Christie’s in 1975, Mr Bernheimer got what he calls the “London bug”. In 1985, he opened a branch of his Munich dealership near Bond Street, a short walk from the illustrious Colnaghi gallery; 17 years later he owned the place.

“Colnaghi: the History”, published as part of this year’s anniversary celebrations, tells of the personalities and sales that contributed to its formidable reputation. It all began with fireworks. In 1760 Italian-born Giovanni Battista Torre (known as “Fireworks Macaroni”) started a Paris shop best known for its firework displays but also selling books and prints. Fifteen years later, his son Anthony, together with another Italian, Paul Peter Colnaghi, moved to London, establishing themselves as sellers and publishers of prints. Their set of prints titled “Cries of London” was a particular success.

The gallery’s glory days came in the late 19th century when Otto Gutekunst became its director and moved the firm into Old Master paintings. With the help of an art historian, Bernard Berenson, Colnaghi sold hugely important pictures, including Titian’s “Europa”, to Isabella Stewart Gardner, an American arts patron. In the book, Alan Chong, who today is the director of Boston’s Isabella Stewart Gardner Museum, gives an engaging account of Gutekunst and Berenson’s complex, sometimes devious, dealings with the very rich and art-hungry Mrs Gardner. Later there were sales to Henry Clay Frick and to Andrew Mellon and his son Paul.

In the 20th century Colnaghi, under a succession of expert directors, became renowned for its Old Master drawings. Jean-Luc Baroni continued this tradition when he joined the gallery in 1982. From that year on he was the majority partner in buying drawings; from 1996 he also owned all the paintings that were bought, paying Colnaghi a commission on those sold. The gallery had been purchased in 1985 by the Oetker Group, a Hamburg-based food company. But after a few years the Oetkers’ enthusiasm for the art trade dwindled and in 2001 they offered to sell it to Mr Baroni. He refused. The annual rental alone was £250,000 ($360,000). Instead he decamped to a less costly space. And having already bought out Colnaghi’s share of the drawings, he took nearly all the gallery’s stock with him.

At that point, recalls Mr Bernheimer, “old” Mr Oetker called him, saying simply “I think you should buy Colnaghi.” He was offered the Colnaghi name and a rental lease on the space (later on, Mr Bernheimer, together with Katrin Bellinger, a Munich dealer in drawings, bought Colnaghi’s archive and art library). Many people thought that whatever Mr Bernheimer had paid for Colnaghi, it was too much for a largely denuded dealership. Not so: dealing from its premises in Bond Street with its internationally recognised and respected name opened doors for Mr Bernheimer that might otherwise have required long, hard pushing—were they to open at all.

Champagne corks are popping as the gallery celebrates its anniversary. An exhibition of archival highlights is on view this summer. In early July a scholarly study-day at the gallery kicks off a master paintings and drawings week during which London’s dealers show off their treasures. In September, in a change of key, Colnaghi will show photographs by Julian Schnabel, an American filmmaker and artist. For Mr Bernheimer that also will be cause for celebration. Its curator is a fifth-generation art dealer, Blanca Bernheimer.

Books and Arts

Jun 17th 2010

AMID the fussy grandeur of the Metropolitan Museum of Art sits an unexpected show of photographs. “Hipsters, Hustlers, and Handball Players” is a collection of Leon Levinstein’s black-and-white pictures of New York City from 1950 to 1980. They are raw and energetic, with rubbish-strewn streets, stooped old men, fat painted ladies and posturing youths in tight jeans. One photograph features a woman in a white party dress curled up on the beach, asleep and mysterious. Another sees two handball players snapped from behind, aloft and balletic.

These 44 images chronicle life as it is lived in the city: kinetic and rough, with little beauty but plenty of pride. Levinstein, who died in 1988, often shot his subjects up close and at odd angles. The result is often unflattering but affectionate, full of the small pleasures of the day-to-day. The gallery seems fragrant with cigarette smoke, cheap perfume and fried chicken.

Levinstein is a photographer’s photographer. Beyond a core of devotees, his name rings few bells. He earned attention in the 1950s when Edward Steichen, as head of the photography department at the Museum of Modern Art, included him in a few shows alongside such peers as Diane Arbus and Robert Frank. But then he fell off the map.

This could be because he stuck to a career in advertising, taking photographs (thousands in all, over several decades) only in his spare time. Or maybe it was because he was an unpretentious loner. He gruffly complained that being a street photographer meant that “you’re always on the outside”. Yet he seemed unwilling to have it any other way.

The photographs are now part of the Met’s permanent collection, thanks to a big recent gift from a collector named Gary Davis. Jeff Rosenheim, the show’s curator, hopes this new trove, which is on show until October 17th, will revive Levinstein’s place among 20th-century photographers. The man himself may not have cared for such attention, but his work demands it.

Books and Arts

The unacknowledged giant Jun 17th 2010 From The Economist print edition

Few journalists have had as great an influence—or been proved right so often—as the man who, for 23 years, was the deputy editor of The Economist

WHEN Norman Macrae died on June 11th, aged 89, no major British newspaper published an obituary of him. You could blame The Economist’s tradition of anonymity; you could blame the extraordinary modesty of the man himself who, if you tried to take his photo, would duck down and giggle, convinced that no one could possibly be interested in him.

Yet Norman was one of the intellectual giants of post-war Britain: one of the very few journalists who could bear comparison with the best brains of his time. Like Milton Friedman, he applied free-market principles to public services such as education and council housing. Like Daniel Bell, he charted the shift from the industrial to the post-industrial society. And like Peter Drucker he illuminated the internal workings of companies, the organisations that drove the West’s prosperity and guaranteed its freedoms.

He kept the flame of free-market thinking burning during the long night of collectivism. He predicted the collapse of the Soviet Union, at a time when the CIA was obsessed by Russia’s growing strength, and foresaw the privatisation of industry, when other intellectuals were celebrating the triumph of the “mixed economy”.

Norman was the first journalist to “discover” Japan. In 1962 he wrote a survey predicting that a country most Westerners regarded as synonymous with knick-knacks and knock-offs would become an industrial power-house. He was also the first journalist to “discover” the internet. In 1984 he wrote another survey arguing that life was about to be transformed by “terminals” which would give users access to giant databases. He predicted that the 1973 energy shock would eventually lead to a surge in the supply of energy. He also dismissed the Club of Rome’s prediction that the world was about to run out of food as arrant nonsense.

The Economist was fortunate that Norman decided to park his formidable intellect at 25 St James’s Street. During his almost 40 years here—23 of them, from 1965 to 1988, as deputy editor—he did more than anyone else to provide the intellectual originality of what he liked to describe as “the world’s favourite viewspaper”. He constantly enlivened editorial meetings with proposals to allow Disneyworld to run the West’s cities or to move the British government from London to York. Roy Jenkins rightly described him as the “epitome of the internal spirit of The Economist”. He could be a brutal editor and a savage critic of flabby ideas. He altered colleagues’ copy with abandon. But he was greatly liked, generous with his time and amiable in conversation. He was also a loyal company man, never allowing his growing renown to go to his head. He frequently slept in his office, his large frame heaped on the floor, and sweated blood to correct errant facts as well as to expunge creeping heresy. More than anyone else, he made sure that The Economist was not blown off course by the winds of ideological fashion or becalmed in routine reporting.

But if The Economist was lucky to find Norman, he was lucky to find The Economist. His website poses a question at the end of each of his essays: “Brilliant? Batty?” and invites readers to join the fray. His undoubted eccentricity was partly a matter of personal style. The words tumbled out in an incoherent jumble interrupted by heaving shoulders and gales of cackling laughter. His handwriting was such a scrawl that only one person in the world, his loyal secretary, Elizabeth Methold, could decipher it—and she could perform this miracle only by holding the script at arm’s length, half-shutting her eyes and (in her words) going into a trance.

The eccentricity extended to his writing. Norman was a punctilious student of statistics. But he was quite happy to illustrate a 1969 article on American productivity with the assertion that a time-and-motion study of housewives at the kitchen sink would “almost certainly find” that the average American housewife was twice as efficient as the average British one. Why? Because the American housewife was capable of instinctively working out in her head, for each chore, “some rough approximation of what modern businessmen call a critical path analysis”.

The Economist provided him with the ideal mixture of freedom and discipline. He could travel to any corner of the world he fancied to produce lengthy reports on anything he wished, from the state of America to the future of mankind. Many of these special reports became books. But he was reined in when he got a bit too wild—as when he advocated writing a cover leader championing a nasal spray to “cure” homosexuals (who, he thought, were driven that way by their aversion to the smell of their mothers). He was passed over three times for the editorship. But, in truth, he was in exactly the right position.

The crystal ball

His greatest gift was his uncanny ability to predict the future. But the problem with the future is that it eventually arrives. Visions that are called from the vasty deep become reality. Ideas that were once pooh- poohed as outlandish become commonplace. “Nobody listened, then everybody did,” Norman wrote ruefully in a 1991 article called “A future history of privatisation, 1992-2022”. To grasp his prescience, it is necessary to return to an era when today’s commonplaces were heresies.

Not so murky to him

During much of the post-war period the market was “out” and the benevolent state was “in”. Public intellectuals such as Kenneth Galbraith argued that the age of the entrepreneur had given way to the age of the giant corporation. Practical politicians poured money into British Steel and the Concorde project. The market meant chaos and unemployment; industrial policy meant smooth growth and jobs for all.

Norman saw this as a recipe for flabby politics and failed economics. In 1954 he coined the term “Butskellism” to describe the portmanteau politics of the Conservative chancellor of the exchequer, R.A. Butler, and a Labour predecessor, Hugh Gaitskell. Throughout the Butskellite era he relentlessly documented the failures of industrial policy and government planning.

This makes it sound as if Norman was nothing more than a prophet of the new right. But the truth is more complicated—and, as befits the man, more idiosyncratic. Even while he embraced the market on micro- economic policy, he remained more or less a Keynesian on macroeconomic policy until the late 1970s. He was a firm believer in pumping up demand with deficit spending and holding down inflation with incomes policy. No deficit was too big and no incomes policy too hopeless. He greeted the first macroeconomic flushes of Reaganism and Thatcherism with sceptical editorials before finally admitting that he had been wrong. It was perhaps the only time he was not ahead of the debate.

Norman also had no time for social conservatism. He worried about broken families and out-of-wedlock births, but entirely from a utilitarian rather than a moral point of view. He dismissed the religious right as vigorously as he dismissed feminists and environmentalists (“both simple and psychotic Americans have too often been dominated by religious liars”). He argued that one of man’s greatest problems in the coming years would be growing life-expectancy—and advocated a “system of planned death” to deal with it. In a survey of America in 1975 he predicted that euthanasia would soon be as acceptable as abortion: “It will not be at all surprising if there is in some quite near decade-and-a-half a similarly swift and equally civilised dash to acceptance of killing off old codgers (by then, like me) as there has been, in so short a twinkling, towards the more emotive act of killing unborn babies.”

In Stalin’s Russia

Why did Norman think as he did? Why did he reject the post-war consensus about the virtues of government? And why did he keep his distance from a new right that embraced so many of his ideas? Part of the answer lies in his personality. Norman was an extraordinarily self-contained figure. He seldom used his telephone to call people, preferring to sit in his office poring over statistics. He had few doubts about the rightness of his opinions. Once he had an idea in his head he pushed it to its logical conclusion—and if he was proved wrong he simply shifted to another idea, which he pursued with equal certainty. Richard Holt Hutton once wrote about Walter Bagehot’s “dash and doubt”. Norman was just dash.

But his outlook was also shaped by his odd adolescence. His father was a British consul in Moscow in 1935-38, and Norman’s summer holidays from school were spent there at the height of Stalin’s purges. He saw members of the embassy staff—including maids his own age—disappearing, probably to be shot. Before and after his posting to Moscow his father also had jobs in Nazi-dominated Europe. Many of his family’s Jewish friends were terrorised and later slaughtered.

When he left school in 1941, Norman wrote later, my first job was a public-sector one, with public-sector productivity, as a teenager supposed to throw bombs about as an RAF navigator, creating a slum in the heart of the continent. By the time I got there, the Russians were coming in from the other side. All the politicians, including Churchill and Roosevelt, told us these were fine liberating democrats. And of course I knew from those school summer holidays so briefly before that those were astonishing lies. That has given me one advantage in my 40 years as a newspaperman. I have never since then believed a word either politicians or public relations officers have said.

Norman’s early experiences did not just sour him to politicians. They soured him to collectivism in all its many varieties. He had no time for the government-worshipping intellectuals he found when he studied economics at Cambridge in 1945-47. He loathed the feminists and black-power activists he came across in America in the late 1960s and 1970s, smelling in their affection for group rights and their willingness to use intimidation the same intolerance he had smelt in Europe in the 1930s and 1940s. He took his children on trips to eastern Europe in order to teach them the difference between freedom and tyranny. He seldom missed an opportunity to champion the “hard hats” over the “soft heads”. Norman’s case for market capitalism did not rest merely on its ability to create wealth, but on its capacity to advance individual freedom. He was almost as critical of big-company capitalism as he was of big- government socialism. In a 1976 survey on “The coming entrepreneurial revolution” he argued that big business was as doomed as big government. Hierarchical managers sitting in their skyscrapers could no longer arrange how brain workers should best use their imaginations. The future lay with small firms that could exploit individual creativity and with bigger firms that could split themselves into small centres and encourage competition between them.

Norman’s critique of the welfare state was inspired by a similar belief in individualism. He pointed out that the market had produced a remarkable equalisation in people’s lives. Rich and poor had access to the same consumer goods—the same television programmes, the same comfortable armchairs, the same plethora of goods in supermarkets, which were spreading from the suburbs to the slums. In 1945 the average Englishman had only one pair of trousers; in the swinging 1960s he had access not only to lots of pairs of (tight) trousers but also to holidays in the sun and cheap mortgages.

The great exception to this story of equalisation was the state. The state distributed its largesse disproportionately to the rich—exactly the opposite of what was supposed to happen—allowing them to end up with better schools and better health services. It also trapped the poorest in poverty, in sink estates with lousy schools and soaring crime and in public-sector jobs with little prospect of long-term prosperity. Norman argued that the only way to change this was to empower individuals—to allow them to own their own homes, through privatisation, and to choose their own schools, through vouchers. Give power to the state and you end up with self-serving interest groups. Give power to the individual and you apply the same creative ingenuity to public services as companies have long done to the invention of washing powder.

Norman’s belief in individualism also drove his enthusiasm for technology. This enthusiasm provoked widespread mirth at The Economist. The man who predicted the rise of the internet in 1984 and preached the virtues of telecommuting in articles on almost anything was by far the most incompetent member of the staff when it came to using new (or not so new) inventions. In battles with the office fax machine he usually came off worse. It was rumoured that paper clips baffled him. The staff were amazed when the Atex publishing system was introduced in 1982 and Norman revealed that he could actually type.

But as a techno-visionary he had few equals. He predicted a world in which “books, files, television programmes, computer information and telecommunications will merge”—in which people could explore the world’s knowledge repositories at a touch of a button, and in which readers would have access to custom-made newspapers paid for by targeted advertising (in typical fashion, he imagined this newspaper emerging from a fax machine at the back of the television). He saw that this revolution would have huge implications for the balance of power. Giant organisations such as governments and companies would lose their comparative advantage. Entrepreneurs would be empowered. Taxpayers would flee the coop and telecommute from rural villages—thus putting more pressure on governments to give up their powers and start serving people rather than bossing them about.

The last clue to Norman was that he was a consummate newspaperman. In print—or indeed on the lecture podium—the cackling incoherence of his speech simply vanished, and he was invariably lucid and frequently amusing, even coruscating. (A similar stylishness could be seen on the tennis court, where the immobility of middle age did nothing to inhibit a well-aimed slice that flummoxed younger and nimbler players.) He was one of the best word-coiners of his generation, producing “intrapreneurship” and “telecommuting” (the coinage of “privatisation” and “Eurocrat” is disputed). He littered his prose with memorable phrases. Milton Friedman was “the maddening gnome of Chicago”. American ghettoes exhibited “public squalor amid private non-affluence”. In diagnosing the failure of British firms to get the most out of computers, he likened them to “former slum dwellers who, when promoted into being council- house tenants, tended to keep coal in the bath”. In championing the virtues of entrepreneurship and people working in small teams, he pointed out that “Jesus Christ tried 12, and that proved one too many.”

Everything he wrote was compulsively readable—partly because he mixed battiness with brilliance and partly because he came at everything from such unexpected angles. His 1975 survey of “America’s third century” started by posing a surprising public-policy quandary:

Our children will probably “progressively” be able to order their babies with the shape and strength and level of intelligence that they choose, as well as alter existing human beings so as to insert artificial intelligence, retune brains, change personality, modify moods, control behaviour.

That raised troubling ethical issues which would be best decided by a world that was shaped by America rather than “the inexperienced Japanese”. Yet it was those Japanese who best demonstrated Norman’s skills as a journalist. In 1962 he visited Japan to get a measure of how the country had changed since the second world war. He learned little from talking to British ex-pats. But then, in a Mitsubishi factory, he came across a British machine-tool salesman who told him that Japanese workers were getting three times as much out of their machines as their better paid British counterparts.

The resulting article, “Consider Japan”, sealed his global reputation as a journalist and turned him into a hero in Japan (on his retirement in 1988 he was honoured by the emperor with the Order of the Rising Sun). He argued that the key to Japanese success lay in their plethora of tiny entrepreneurial component- makers and in their ability to break up huge plants into “small but brotherly” profit centres. He predicted that the Japanese productivity miracle would transform the world economy.

Arise Sir Norman, knight of the rising sun!

An eternal optimist

But for all his interest in the rest of the world, he was a very English figure. His ideas were rooted in the English liberalism of the 19th century—a liberalism that celebrated the individual over the collective, progress over reaction, free thought over superstition. This set him against both the “over-government” that had triumphed in his youth and the religious conservatism that prospered under Reaganism. But it also turned him into an irrepressible optimist. Few people since Bagehot and Macaulay have been so convinced that life is getting better, and that it will get better still if only a few doltish politicians can be elbowed out of the way.

This commitment to classical liberalism ensures that much of his work continues to sing. Norman devoted his energies to two of the most ephemeral bits of journalism—opinionated leaders and lengthy exercises in futurology. Yet a remarkable amount of what he wrote remains relevant today. His 1975 survey on America’s 200th birthday, in which he chastises the Democrats for flirting with the Fabian cult of government expertise, conservatives for flirting with religious extremism, and business for underinvesting in innovation, might easily be a portrait of Barack Obama’s America. Big government has been on the march for much of the past decade. The Beijing consensus celebrates the alliance of big government and big companies. Much of the public sector has resisted the power of vouchers and internal markets. The battle that Norman fought for so long has still not been won.

Overview Jun 17th 2010 From The Economist print edition

Industrial production in America grew by 1.2% in May from a month earlier. The growth rate in May was the fastest since August last year, and left output 7.6% higher than a year earlier.

In the euro area, industrial output rose by 9.5% in the year to the end of April, and grew by 0.8% during the month. The year-on-year growth rate was the highest since January 1991, the earliest month for which a comparable figure is available. This partly reflects a base effect: output in April 2009 was close to its recession-induced nadir, which it reached the following month.

Euro-area inflation inched up by a tenth of a percentage point to 1.6% in May.

The inflation rate in Britain fell by 0.3 percentage points to 3.4% in May.

In Britain, the number of those claiming unemployment benefits fell in May by 30,900 to 1.48 million, the lowest since April last year.

The unemployment rate in Greece fell in March, by half a percentage point to 11.6%.

Chinese inflation quickened to 3.1% in May from 2.8% in April.

Consumer prices in Pakistan rose by 13.1% in the year to the end of May. The inflation rate was 13.3% a month earlier.

South African industrial production grew by 8.7% in the year to the end of April.

Output, prices and jobs Jun 17th 2010 From The Economist print edition

The Economist commodity-price index Jun 17th 2010 From The Economist print edition

Refugees Jun 17th 2010 From The Economist print edition

Poor countries played host to a great many of the 43.3m people who were, at the end of last year, said to be “of concern” to the UNHCR, the UN body with the job of caring for those uprooted by war, repression or other nastiness. Many refugees, those who cross an international border in search of sanctuary, have escaped violence and persecution in Iraq and Afghanistan. Internally displaced people (IDPs), who flee home but stay within their country, are often just as vulnerable, for example in Sudan and Somalia. Another category of the needy are those who are not acknowledged by any government as belonging to a country. In Thailand alone, some 3.5m people live in the legal limbo of statelessness.

Trade, exchange rates, budget balances and interest rates Jun 17th 2010 From The Economist print edition

Markets Jun 17th 2010 From The Economist print edition

Daily newspaper revenue Jun 17th 2010 From The Economist print edition

As the world headed into recession in 2008, newspapers in different countries varied greatly in the extent to which they relied on advertising for their revenues. According to the OECD, a think-tank, Japanese newspapers got only 35% of their revenues from ads. The rest came from the amounts that readers coughed up. But 87% of what American newspapers earned came from advertisers. This made them much more vulnerable to the decline in ad spending that accompanied the global economic crisis. Among the 20 countries for which the think-tank provides figures, only in four—Japan, Denmark, the Netherlands and Italy—did newspapers get more than half their revenues from their readers.