The Economist - 19_25 April 2014

APRIL 19TH–25TH 2014Economist.comThe cost of stopping Vladimir PutinCoal, fuel of the futureWhy the rich are working harderEurope’s bond-market bubbleThe pope’s management secretsChina’s futureThe cities that will change the world:A 14-page special report

4 Contents The Economist April 19th 2014Britain45 The industrial northNever walk alone46 Recruiting priestsRevving up47 BagehotThe hated body politic61 Post-office bankingPut your money where yourmail is62 Ratings agenciesCredit where credit’s due63 Free exchangeThe decline of leisureCoal, fuel of the futureCheap, ubiquitous and flexible,with just one problem, page 51.Options for limiting climatechange are shrinking, page 65Government-bond yieldsTen-year, %Portugal Greece SpainItalyIreland504030201002009 10 11 12 13 14Source: Thomson ReutersEurope’s bond-market bubbleSouthern Europe’s economiesare in worse shape thantumbling bond yields suggest:leader, page 9. Sluggishstructured reform, page 60.Greece’s new politicallandscape, page 41. Farthernorth, Denmark’s propertymarket is also built on ricketyfoundations, page 59Work v leisure Why the richnow have less leisure than thepoor: Free exchange, page 63.American mothers are stayingat home, page 26. But at leastin New Hampshire they cannow have sex with otherpeople’s husbands, page 27International48 Chinese touristsComing to your beach49 The abuse of migrantsAnd still they comeBusiness51 CoalThe fuel of the future,unfortunately52 Business in RussiaFrom bad to worse53 Technology firmsStatus shift53 Corporate jetsChina takes off54 Peugeot’s revival planStriving for the podium55 Companies in the UAEImproving the desertclimate55 Made in SpainA pressing issue56 SchumpeterPeter Munk’s taleFinance and economics57 Private equityBarbarians at middle age58 Bond tradingFICC and thin59 Danish mortgagesSomething rotten59 State-owned banks inBangladeshFrom cancer to pimple60 Microfinance inBangladeshRehabilitation and attack60 Structural reform insouthern EuropePatchy progressScience and technology64 Reusable rocketsUp and down and up again65 Eggs-actlyAn evolutionary game65 Global warmingAnother week, anotherreport66 Fern evolutionTime and chance66 PsychologyHunger strikesBooks and arts67 John WayneA man in full68 Kim PhilbyRogue mate68 Rachel Seiffert’s fictionAfter dark69 America in AfghanistanTaking on the wrong enemy70 Joël Dicker’s SwissthrillerFinally in English70 London theatreModernising Arthur Miller76 Economic and financialindicatorsStatistics on 42economies, plus a closerlook at taxing wagesObituary78 Eleanor DrewRags, riches and “SaladDays”Recyclable rockets SpaceX’slatest launch could change theeconomics of going into orbit,page 64Subscription serviceFor our full range of subscription offers,including digital only or print and digitalcombined visitEconomist.com/offersYou can also subscribe by mail, telephone orfax at the details provided below:Telephone: +65 6534 5166Facsimile: +65 6534 5066Web: Economist.com/offersE-mail: Asia@subscriptions.economist.comPost: The EconomistSubscription Centre,Tanjong Pagar Post OfficePO Box 671Singapore 910817Subscription for 1 year (51 issues)Print onlyAustralia A$365China CNY 2,000Hong Kong & MacauHK$2,000India INR 5,000Japan Yen 34,500Korea KRW 299,000MalaysiaUS$210New ZealandNZ$400Singapore & Brunei S$365ThailandUS$250TaiwanUS$250Other countriesContact us as abovePrincipal commercial offices:25 St James’s Street, London sw1a 1hgTel: 020 7830 7000Rue de l’Athénée 321206 Geneva, SwitzerlandTel: 41 22 566 2470750 3rd Avenue, 5th Floor, New York, NY 10017Tel: 1 212 541 050060/F Central Plaza18 Harbour Road, Wanchai, Hong KongTel: 852 2585 3888Other commercial offices:Chicago, Dubai, Frankfurt, Los Angeles,Paris, San Francisco and SingaporePEFC/01-31-162PEFC certifiedThis copy of The Economistis printed on paper sourcedfrom sustainably managedforests, recycled and controlledsources certified by PEFCwww.pefc.org© 2014 The Economist Newspaper Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording orotherwise, without the prior permission of The Economist Newspaper Limited. Published every week, except for a year-end double issue, by The Economist Newspaper Limited. The Economist is a registered trademark of The Economist Newspaper Limited.Publisher: The Economist. Printed by Times Printers (in Singapore).M.C.I. (P) No.076/09/2013 PPS 677/11/2012(022861)

The world this weekThe Economist April 19th 2014 5PoliticsThe crisis in Ukraine deepenedwhen pro-Russian supporters,allegedly led andorganised by Russian forces,seized police and securitybuildings in about ten townsand cities across the east of thecountry. Oleksandr Turchinov,the acting president, orderedan “anti-terrorist operation” toretake the buildings. Thousandsof Russian troops aremustered along the Ukrainianborder, adding to fears that acrackdown on pro-Russianscould trigger a land invasion.BarackObama called VladimirPutin and urged him touse his influence to make theseparatists in Ukraine standdown. Mr Putin denied anyinvolvement and advisedUkrainian troops to refrainfrom violence. Speaking toAngela Merkel, Germany’schancellor, the Russian presidentwarned that Ukraine was“on the brinkofcivil war”.Silvio Berlusconi, a formerItalian prime minister, wassentenced by a court in Milanto community service, followinghis conviction last year fortax fraud. Mr Berlusconi, 77,will help out in a home for theelderly. He is subject to a curfewand is banned from meetingpeople with criminal convictions.He is still the leader ofForza Italia!, a conservativeopposition party.Britain’s chancellor oftheexchequer, George Osborne,requested new powers toclamp down on companiesand individuals who evade oravoid tax. He is consultingParliament about lowering thebar for prosecution, so that infuture the taxman would nothave to prove intent to evadetax by placing money offshore,merely that it was undeclaredincome.Turkey put more pressure onTwitter by demanding it paytaxes on any profit it makes inthe country. In March thegovernment banned themicroblogging site, a popularforum for protesters, thoughthis was overturned by thecourts. It wants Twitter to closeaccounts it deems a threat tosecurity and to set up an officein Turkey.Campaigning CamposEduardo Campos, until recentlythe governor ofPernambucostate in Brazil, confirmed thathe will run as the candidate ofthe Brazilian Socialist Party inthis year’s presidential election,with Marina Silva, aformer senator, as his runningmate.They hope to topplePresident Dilma Rousseff, whois running for a second term.A forest fire in Chile killed atleast15 people in the city ofValparaiso, destroying 2,900homes and leaving12,500homeless.Find someone elseLibya’s interim prime minister,Abdullah al-Thinni, whowas appointed only lastmonth, said his family hadbeen shot at in a “cowardlyattack” and he would stepdown as soon as a replacementcould be found. Thecountry’s continuing insecuritywas underlined by thekidnapping ofJordan’s ambassadorby an Islamist groupdemanding the release ofoneofits own in Jordan.Iraq announced the “completeclosure” ofAbu Ghraib. Theprison was used by the Americansduring the Iraq war as aninterrogation centre and hit theheadlines ten years ago whena series ofhuman-rightsabuses by American troopscame to light. Before that,hundreds ofSaddam Hussein’sopponents were killedbehind its walls. The authoritiesare moving its 2,400 inmatesto other prisons, becauseofsecurity worries.Explicit pictures depictingevidence oftorture, includinggouged eyes and strangulation,allegedly carried out by Syriangovernment forces, wereshown to the UN SecurityCouncil. Syria said the photographslacked “objectiveness”.France wants theInternational Criminal Courtin The Hague to investigate.At least 70 people were killedby a bomb in a bus station onthe outskirts ofNigeria’scapital, Abuja. An extremeIslamist group, Boko Haram,was suspected.It’s a tough jobBarackObama nominatedSylvia Mathews Burwell, hisbudget director, to be his newhealth secretary, after theresignation ofKathleen Sebelius.One ofthe few remainingmembers ofMr Obama’scabinet to be appointed at thestart ofhis administration, MrsSebelius was thought to be safein the job having survivedObamacare’s botched roll-outlast October; she told Congressat the time to “Hold me accountablefor the debacle.”A gunman attacked a Jewishcommunity centre and retirementhome in Overland Park,Kansas, killing three people,none ofwhom was Jewish.Police arrested a 73-year-oldwhite supremacist who shouted“Heil Hitler” as he wastaken away.A study by Democrats inCongress urged the Obamaadministration to speed upregulation ofthe growinge-cigarette industry. Theauthors ofthe report wante-cigarettes to be regulated inthe same way as tobacco.Though they are generallydeemed much safer, one congressmandescribed e-cigarettesas “a candy-flavouredaddiction”.Just do itThousands of workersdowned tools at a Chineseshoe factory, in what may beone ofthe biggest strikes inChina in recent decades. Thefactory, in the southern city ofDongguan, supplies Nike,Adidas and other Westernbrands. Workers are demandingbetter social insurance andother benefits.A ferry carrying mainly SouthKorean schoolchildren to anisland resort capsized andsank. Early reports indicatedthat hundreds were missing.Japan’s minister for internalaffairs visited the controversialYasukuni shrine in Tokyo,prompting complaints fromChina and South Korea. Theshrine, where war criminalsare honoured along withordinary soldiers, is a constantsource ofannoyance amongJapan’s neighbours, who see itas a symbol ofJapanesemilitarism.Early results from the presidentialvote in Afghanistansuggested that Abdullah Abdullah,a former foreign minister,was in the lead, ahead ofAshrafGhani, a former ministerof finance. If no candidategets a majority a run-offwilltake place in May.The Supreme Court in Indiarecognised transgender peopleas a third gender. The courtruled that choosing one’sgender was “the right ofeveryhuman being”, and orderedthe government to provideequal opportunities for thegroup, thought to number upto 2m in India.1

6 The world this week The Economist April 19th 2014BusinessCarlos Tavares, the new bossofPSA Peugeot Citroën, outlinedhis turnaround plan forthe French carmaker. It includescutting the number ofmodels the company producesfrom 45 to 26. Peugeot has lostmore than €7 billion ($9.7billion) since 2012 and hasoverhauled its ownershipstructure, selling stakes worth14% each to the French governmentand Dongfeng, a Chinesecarmaker. However, investorswere not impressed with theeight-year timeline for thelatest restructuring plan; Peugeot’sshare price fell by 7%.The recent broad sell-offintechnology stocks showed nosign ofdeterring companiesfrom making acquisitions.Zebra, a company used byAmazon to help control itsinventory flow, bought a unitofMotorola Solutions thatspecialises in high-tech logisticsin a deal valued at $3.5billion. And Twitter boughtGnip, a leading provider ofsocial data.Wi-Fi in the skyMeanwhile, Google agreed tobuy Titan Aerospace, a startupin New Mexico that makessolar-powered drones. LikeFacebook, which snapped up aBritish dronemaker earlier thisyear and was itselfconsideringa swoop for Titan, Google ishoping to use drones and otherairborne technology to bringinternet connections to remoteparts ofthe planet.net profit of$5.3 billion, itsworst start to a year by thatmeasure since 2010, as tradingrevenues fell sharply.TIAA-CREF, a financial-servicescompany that specialisesin pension plans for academicsand the non-profit sector,agreed to buy NuveenInvestments for almost $6.3billion. The new company willhave around $800 billion inassets under management,propelling it into the top ranksofAmerican money managers.China’s GDP% increase on previous year2010 11 12 13 14Source: Thomson Reuters12Official figures showed thatChina’s economy is growingat its slowest pace for almosttwo years. GDP rose by 7.4% inthe first quarter comparedwith the same period last year(or by1.4% compared with thelast three months of2013). Thegovernment’s target is for GDPto increase by 7.5% this year,which some economists thinkit will struggle to achieve.1086420The World Trade Organisationslightly raised its forecast forgrowth in the exports ofgoodsto 4.7% for this year and 5.3% fornext (5.3% has been the averagegrowth rate in trade over thepast 20 years). It said it wasencouraged by the signs ofrecovery in America andEurope.Britain’s unemployment ratefell to 6.9%. Last August, whenthe BankofEngland issued itsfirst forward guidance, unemploymentstood at 7.7%. Thecentral bank’s best estimatethen was that it wouldn’t dropbelow 7% until 2016, at whichpoint the bankwould considerincreasing interest rates. It hassince revised its guidance,which is now based on awider range ofindicators.The spending habit returnsRetail sales in America grewby 1.1% in March comparedwith February, the fastest pacein 18 months, albeit from a lowbase in February as severewinter weather chilled Americans’desire to spend. Car salesdrove the increase in March,rising by 3.1% in the month.Glencore Xstrata confirmedthat it was selling its LasBambas copper mine in Peruto a Chinese consortium,though the price, $5.9 billion,was at the high end ofexpectations.Last year China’s antitrustregulator instructedGlencore to sell the mine as acondition for approving itsmerger with Xstrata.A city court in Brussels orderedunlicensed taxi-drivers to stoppicking up passengers throughthe popular Uber app, whichhas been developed by a startupin San Francisco andbacked by Google. The casewas supported by city officials,but the decision was criticisedby a European Union commissionerfor “protecting a taxicartel”. Uber has come upagainst a number ofregulatoryroadblocks in various cities.Affordable housing (at last)A firm in China claimed tohave built the world’s firsthouse made from 3D-printedmaterials. The structural componentsoften 200-squaremetrehouses were printed in aShanghai district for around$4,800 each in less than a dayfrom recycled building materials.Some wonder ifthis couldone day alleviate the housingcrisis of sky-high prices andovercrowded properties thatbesets many cities around theworld, such as London.Other economic data and newscan be found on pages 76-77Carl Icahn, an activist investorwho made headlines last yearwith an ultimately unsuccessfulattempt to stop Dell’s buyout,dropped his campaign toget eBay to spin offPayPal. MrIcahn’s effort had been hostileat times, with personal criticismofeBay’s chiefexecutive,John Donahoe. But the twosides reached a friendly settlementin the end.America’s big banks beganposting their earnings for thefirst quarter, starting withJPMorgan Chase. It did lesswell than expected, reporting a

LeadersWhere China’s future will happenThe Economist April 19th 2014 7Forthe world’s sake, and its own, China needs to change the way it builds and runs its citiesGREAT city”, said BenjaminDisraeli, “…is the“Atype of some great idea. Romerepresents conquest; faith hoversoverthe towers ofJerusalem;and Athens embodies the preeminentquality of the antiqueworld, art.” In building its cities,China’s officials have had only one great idea in mind: growth.That has brought huge benefits, and problems too.In the three decades since economic liberalisation began,China’s urban population has risen by more than 500m, theequivalent of America plus three Britains. China’s cities, alreadyhome to more than half the country’s people, are growingby roughly the population of Pennsylvania every year. By2030 they will contain around a billion people—about 70% ofChina’s population, and perhaps an eighth of humanity. China’sfate, and that of the Communist Party, will be determinedby the stability ofits cities (see special report after page 40).Much of what has happened is breathtakingly exciting.Shanghai, a drab communist-era sprawl with a few 19th-centuryrelics until the 1990s, has been used as the cosmopolitanbackdrop for a James Bond film. Chengdu, whose populationhas grown by 50% since 2000, boasts the world’s largest building:the New Century Global Centre, which includes a shoppingmall and a 300-metre-long indoor artificial beach.Zhengzhou now claims the largest bullet-train station in theworld: the $2.4 billion edifice and surrounding area covers theequivalent of 340 football pitches. China’s urbanites whizzfrom city to city at 300kph (186mph) on a bullet-train networkthat did not exist six years ago yet now is longer than all of Europe’s.By 2020 it will expand by another two-thirds, or7,000km (4,300 miles), and every city with a population of500,000 or more will be connected to it.Cracks in the façadeYet the model of pell-mell urbanisation is breaking down.Even the government recognises this. In March the prime minister,Li Keqiang, described the noxious smog that shrouds China’scities as a “red-light warning against the model of inefficientand blind development”. The World Bank and a Chinesegovernment think-tank have just produced a 544-page reporton urban China. It praises China for avoiding ills common inthe developing world such as urban poverty, squalor and unemployment.But it says that “strains are starting to show” andthat the model is “running out ofsteam”.Two flaws in the Chinese model of urbanisation are causingthese strains. The first is economic. Farmers in China haveno property rights, so officials are able to grab agricultural landon the peripheries of urban areas and make money for themselvesand their cities by selling it to developers. This is notonly unjust; it has also led to a relentless pouring of concretethat has given rise to “ghost cities”—half-empty forests of highriseoffice and residential buildings that have sprung uparound many cities. The vast debts local governments have incurredas a result of this over-hasty development are the focusofforeign worries about the country’s economic stability.This urban sprawl is also exacerbating China’s environmentalproblems. People need cars to get around the country’sAmerican-style cities. Beijing now has more cars than Houston,as well as some of the dirtiest air on the planet. And it isnot just affecting the Chinese. The nation passed America in2006 as the biggest emitter ofcarbon dioxide from energy, andis now pumping out nearly twice America’s level.The second flaw in the urbanisation model is a social one.China’s cities are now largely made up of two classes, eachwith a population roughly the size of America’s: a propertyowningmiddle class which enjoys new social freedoms (seepage 25), takes holidays in Europe (see page 48) and spends likeits Western counterparts; and a migrant underclass which toilsin factories and menial jobs but is denied public services becauseits hukou (household registration) is still in the countryside.Both groups have fared well in the boom years; but discontentis growing (see page 24), and they distrust each other,as well as the party.On March 16th the government unveiled a long-awaitedplan for managing urbanisation. Under the new approach,some 100m migrants will be given urban hukou, and thus fullaccess to urban services by the end of the decade. But that willstill leave 200m unregistered, and the issue ofwho should paythe bill unresolved. Reformers want a new tax on property—the soaring value of which is enriching the middle classes—toprovide local governments with a steady revenue stream. Thecentral government fears that this could spur demands byhomeowners for more say in how cities are run.House of cardsThe challenge for Xi Jinping, China’s president, and his team isas immense as the cities themselves. But there are two obviousstepsforthem to take. The firstisto give farmersproperty rightsand thus the ability to sell their land. If the market were allowedto operate, prices would be high. Overall, China has lesshabitable space than America but four times as many people.Much ofthe country is mountain ordesert, unusable for development.High prices, reflecting this shortage, would force urbanplanners to regard land as a scarce resource and to use it efficiently.That would discourage them from allowingAmerican-style sprawl and encourage them to build dense,energy-efficient European-style cities in which people walk,cycle or take public transport to work.The second necessary step is to open up decision-making.One reason why so many Chinese cities are grim is that residentshave so little say in how they are planned, built and run.If people had the right to elect their mayors and legislators,they would—assuming they behaved like city-dwellers elsewherein the world—insist on planning controls to constraindevelopment and improve the environment.The document unveiled in March called the government’surbanisation plan “people-centred”. If the next stage of China’sphenomenal urban transformation is to bring prosperityand stability rather than conflict and chaos, the party needs tolive up to the phrase. 7

8 Leaders The Economist April 19th 2014Russia and UkraineInsatiableThe cost ofstopping the Russian bearnow is high—but it will only get higherifthe West does nothingFIRST Vladimir Putin mauledGeorgia, but the world forgavehim—because Russia wastoo important to be cut adrift.Then he gobbled up Crimea, butthe world accepted it—becauseCrimea should have been Russianall along. Now he has infiltratedeastern Ukraine, but the world is hesitating—because infiltrationis not quite invasion. But if the West does not face upto Mr Putin now, it may find him at its door.The storming of police stations in eastern Ukraine over theweekend by pro-Russian protesters (see page 15) is a clevermove, for it has put the interim government in Kiev in an impossibleposition. Mr Putin has warned that Ukraine is on thebrinkofcivil war. Ifthe country’s government fails to take control,it will open itselfto charges that it cannot keep order withinits own borders. But its soldiers are poorly trained, so in usingforce(operations were underway as The Economist went topress) it risks escalation and bloodshed. Either way, it loses.The West has seen Russia brush offits threats and warnings.It looks feeble and divided. Yet, afterthe destabilisation ofeasternUkraine, even doves should grasp that the best chance ofstability lies in standing up to Mr Putin, because firmness todayis the way to avoid confrontation later.Red lines and green menRussia insists that it has played no part in the seizure of townssuch as Sloviansk and Gorlivka. This is implausible. The attackswere co-ordinated, in strategically useful places that hadseen few protests. Just as in Crimea sixweeks ago, troops in unmarkeduniforms and with Russian weapons carried out theinitial assaults. Russian agents have turned up in custody andin reporters’ notebooks, organising the protests and, some say,paying for them. Russia has been meddling in eastern Ukrainefor weeks, occasionally with results from the pages of Gogol.On April 6th “local people” stormed what they thought wasthe regional administrative headquarters in Kharkiv only tofind that they had taken control ofthe opera house.Russian diplomats counter that they cannot be behindwhat is going on, because instability in eastern Ukraine is notin Russia’s interests. True, normal countries benefit from peaceand prosperity next door. However, mindful of its own claimto power and the outlook for Russia’s stagnant economy, theKremlin has much to fear from the pro-European demonstrationsthat toppled Ukraine’s president, Viktor Yanukovych. Itappears determined to see the new Ukraine fail.There are several reasons why Russia might want to destabiliseUkraine. One motive could be to stop the presidentialelections, due on May 25th. That would deprive Ukraine of theelected leadership it needs to restore order. A second could beto justify overt Russian intervention. Mr Putin is capable of exploitingeither anarchy or bloodshed as a pretext to move histroops, camped in large numbers across the border, into Ukraineas “peacekeepers”. But occupation would come at aheavy cost (see page 16), so the Kremlin might prefer a third result:civil conflict that destroys the authority of Kiev, followedby a parallel government for eastern Ukraine. There is nothingwrongwith federalism in principle, but this would be a formulafor Russian domination.Some would leap at such a deal as the least bad on offer. Ukrainianpoliticians and oligarchs might be happy, because theycould go on stealing. The West could take comfort that the Russianshad not actually invaded. But it would be a terrible outcomefor the Ukrainian people, especially those who riskedtheir lives in the Maidan for a chance of something better. Forthe West to accept such a result with relief would constitute agrave misreading ofRussia’s mischief-making.Mr Putin has used the Ukrainian crisis to establish somedangerous precedents. He has claimed a duty to intervene toprotect Russian-speakers wherever they are. He has staged areferendum and annexation, in defiance of Ukrainian law.And he has abrogated a commitment to respect Ukraine’s borders,which Russia signed in 1994 when Ukraine gave up nuclearweapons. Throughout, Mr Putin has shown that truth andthe law are whatever happens to suit him at the time.MrPutin has taken to arguingthat Russian values are fundamentallyat odds with Western liberal ones. He now has thetools to intervene on his borders and beyond so as to upendthe post-Soviet order. That might be in Transdniestria, a slice ofMoldova that has hosted Russian troops since the early 1990s.Or in Kazakhstan, which has a large Russian population in thenorth. Oreven in the Baltic states, two ofwhich have large Russian-speakingminorities and all of which depend on Russiangas. Because the Baltics are members of NATO and the EU, aRussian move against them would be a challenge to the entireWest. A miscalculation by either side could be disastrous.Hope for the best, prepare for the worstThat is why the West needs to show Mr Putin that further actionwill be costly. So far, its rhetoric has marched far ahead ofitswillingnessto act—onlyaddingto the aura ofweakness. Notenough is at stake in Ukraine to risk war with a nuclear-armedRussia. And European voters will not put up with gas shortages,so an embargo is not plausible. But the West has othercards to play. One is military. NATO should announce that itwill hold exercises in central and eastern Europe, strengthenair and cyber defences there and immediately send sometroops, missiles and aircraft to the Baltics and Poland. NATOmembers should pledge to increase military spending.Another card is sanctions, so far imposed on only a fewpeople close to Mr Putin. It is time for a broad visa ban on powerfulRussians and their families. France should cancel the saleof warships to Russia. A more devastating punishment wouldbe to cut Russia offfrom dollars, euros and sterling (see page 17).Such financial sanctions, like those that led Iran to negotiateover its nuclear programme, would deprive Russia ofrevenuesfrom oil and gas exports, priced in dollars, and force it to drawon reservesto payformostofitsimports. Theywould be costlyto the West, especiallythe CityofLondon, butworth it. Imposethem now, and give Mr Putin reason to pause. Do any less andthe price next time will be even higher. 7

The Economist April 19th 2014 Leaders 9Arab democracyThe lesson of AlgeriaEven ifthe Arab spring has sorely disappointed, dictators, even benevolent ones, are not the answerMANY people argue that itwould have been better ifthe Arab spring had never happened.Think of the mayhemthat would have been avoidedin Egypt and Syria, not to mentionLibya, Yemen and Bahrain,where the angry and the aggrievedhave created chaos in the name of democracy. Howfoolish of Western governments, especially in America andBritain, to betray allies like Hosni Mubarak and to pander tothe Muslim Brotherhood and assorted narrow-minded Islamists.Thank heavens that Egypt is back in safe hands under afield-marshal and that most of the Gulf is ruled by moderateWesternised princes. After all, people mutter privately, theArab culture simply is not suited to modern democracy.Some of this is justified. Nobody would claim that bloodstainedSyria is anything but a tragedy (see page 38). In Egyptliberals were naive to expect democracy to blossom overnight.But too much oftoday’s criticism ofthe Arab spring is itself naive,because it forgets that the dictatorial alternative is corrupt,repressive and ultimately doomed.That is the lesson from Algeria’s bogus election (see page37). Algeria’s regime is the sort that the realists like to excuse.The place used to be chaotic. Some 200,000 people werekilled in a civil war which the generals started when they refusedto accept an Islamist victory in the 1991 election. But forthe past 15 years President Abdelaziz Bouteflika has kept thepeace. The Arab spring has largely passed Algeria by.But at what cost? The election will be won by MrBouteflika,even though he is an ailing 77-year-old who is barely seen inpublic. Forthree months last yearhe was hidden away in a Parishospital. He has not bothered to campaign, leaving the job tohis staff. Oozing with gas, Algeria should be rich, but its economyis as moribund as its politics and rife with corruption. Algeriateems with disaffected young, many of whom dream ofcrossing the Mediterranean in search ofworkand freedom.At least Mr Bouteflika has had the nerve to print his nameon a ballot paper. In Saudi Arabia another gerontocrat, KingAbdullah, has just appointed his half-brother Muqrin, a 69-year-old, as second in line to the throne, behind the feeble 78-year-old crown prince, Salman. Too much of Arab politics isstill stuck. Ofthe Arab League’s 22 countries, only one, Tunisia,can nowadays be deemed fully democratic—a rare beneficiaryofthe Arab spring.What’s the Arabic for compromise?Hence the question for those who rubbish the idea ofArab democracy.Does anybody think that rule by dictators, howeverbenevolent, will last? Algeria’s seeming stability will prove anillusion in the long run. The generals and spooks who run theshow, in particular a shadowy 75-year-old security chief, GeneralMuhammad “Toufiq” Mediène, are jostling for the succession.Frustration at the prospect of five more stagnant years ofMr Bouteflika could yet ignite a smouldering popular protest.In Egypt the fall of Mr Mubarak showed that corrupt regimes,however militarily muscular, are not impregnable. Its lateststrongman, Abdel Fattah al-Sisi, the field-marshal who led lastyear’s coup against an elected Muslim Brother president, willwin the comingelection; butunlesshe can mend the economy,his popularity will wane, just as Mr Mubarak’s did.The argument that some civilisations are unsuited to democracyhas been used from Taiwan to South Africa: it seldomholds water for long. The Arab spring has so far been mainly amess. But to condemn Arabs to political servitude is no answer.It only delays the explosion. 7Europe’s bond bubbleDon’t go potty on the peripherySouthern Europe’s economies are in worse shape than tumbling bond yields suggestINVESTORS have developed aTen-year gov’t-bond yields, % remarkable enthusiasm forTen-year, Portugal % Greece SpainItaly Ireland the European debt they once50 shunned. On April 10th, only4030 two years after Greece imposed2010the biggest debt-restructuring in0 history on its private creditors, it2009 10 11 12 13 14raised €3 billion ($4.1 billion) infive-year bonds at a yield of less than 5%; the issue was seventimes oversubscribed. On April 15th yields on ten-year Italiangovernmentbonds fell to 3.11%, the lowest on record. From Portugalto Ireland, investors are piling into the bonds of the eurozone’s peripheral economies, pushing nominal yields downto levels not seen since the single currency began.It is tempting to say that this is proof that the euro crisis isover: that years of tough reform are paying off, and that lowerbond yields should soon lead to greater investment and fastergrowth. Tempting, but largely wrong. The outlook is far lessrosy than the plunge in bond yields suggests. First, there is thecruel arithmetic of deflation. With prices falling in several ofthe peripheral economies, the real burden of their debts is rising.Second, much of the fall in bond yields reflects investors’hopes that the European Central Bank (ECB) will start printingmoney, hopes that are likely to be dashed.A year ago Spain’s ten-year bonds yielded 4.7% and its inflationrate was 1.5%. Today ten-year bonds yield 3.1%, but inflationhas fallen below zero. On this crude measure, the realyield on these government bonds—that is, after adjusting for 1

10 Leaders The Economist April 19th 20142 inflation—has barely budged. On a fancier measure, using tenyearinflation expectations, real yields on the periphery’ssovereign bonds have fallen more, but are still much higherthan anywhere else in the rich world. That is why investors arepiling in. But it is also why the debt burden is a problem.Hoping against historyThe burden ofa country’sdebts depends on howmuch itowesand the gap between its growth rate and the real interest rate itmust pay. On each count, Europe’s peripheral governmentsfare poorly. Most have debts above 100% of GDP. Structural reforms,from freeinglabourmarkets to deregulatingcosseted industries,have not been radical enough to transform theirgrowth prospects (see page 60). So the odds are that outputwill stay weak, deflation will persist and debt will rise further.The way to avoid this is strong action from the ECB to banishdeflation. That is exactly what many investors today arebetting on. Thanks to a string of hints from ECB officials thatthey are considering “unconventional measures” to stop inflationfalling further, there is a growing expectation that the ECBis on the brinkofcranking up the printing presses.The reality will probably be much less dramatic. Europe’scentral bankers are willing to talk about bold measures, in thehope that talkalone persuades the markets. But there is no evidenceof a commitment to act decisively. Germany’s influentialBundesbankis not convinced that low inflation is yet a problem.Even those central bankers who worry about fallingprices see endless practical problems in designing measures tocombat them. If the ECB acts it will probably be in small, carefulsteps, starting perhaps with the introduction of a negativerate on bank deposits.Unfortunately, history suggests that incremental efforts tofight deflation do not work. Take Japan. For two decades theeconomy was stuck in a trap of economic stagnation, fallingprices and rising debt. In the early 2000s the Bank of Japan’stimid efforts at battling deflation with money-printing failed.Only since 2013 has the ambitious stimulus of Abenomics begunto succeed. The ECB is much more like the BankofJapan in2000 than that of 2014. Until that changes, investors in Europe’speriphery should expect more deflation and rising debt.Nominal yields may shrink further, but the problems are notgetting any smaller. 7The pope as a turnaround CEOThe Francis effectAbout to take overa crisis-ridden company with a demoralised workforce? Turn to a Roman case studyBUSINESS schools regularlyteach their students aboutgreat “turnaround CEOs” whobreathe new life into dying organisations:figures such as IBM’sLou Gerstner, Fiat’s Sergio Marchionneand Apple’s Steve Jobs.Now Harvard Business Schoolneeds to add another case study: Jorge Bergoglio, the man whohas rebranded RC Global in barely a year.When Pope Francis celebrated his first Easter as CEO, justafter being appointed, the world’s oldest multinational was incrisis. Pentecostal competitors were stealing market share inthe emergingworld, includingin Latin America, where Francisran the Argentine office. In its traditional markets, scandalswere scaring off customers and demoralising the salesforce.Recruitment was difficult, despite the offer of lifetime employmentin a tough economy. The firm’s finances were also amess. Leaked documents revealed the Vatican bankas a vortexof corruption and incompetence. The board was divided andweak. Francis’spredecessor, BenedictXVI, wasthe first pope toresign for 600 years, amid dark rumours that the founder andchairman, a rarely seen elderly bearded figure whose portraitadorns the Sistine boardroom, had intervened.Operating prophetIn just a year, the business has recovered a lot of its self-confidence.The CEO is popular: 85% of American Catholics—atough audience—approve of him. Footfall in RC Global’s retailoutlets is rising again. The salesforce now talks about a “Franciseffect”. How has a septuagenarian Argentine succeeded ingalvanising one of the world’s stodgiest outfits? Essentially bygrasping three management principles.The first is a classic lesson in core competences. Francis hasrefocused his organisation on one mission: helping the poor.One of his first decisions was to forsake the papal apartmentsin favour of a boarding house which he shares with 50 otherpriests and sundry visitors. He took the name ofa saint who isfamous forlookingafterthe poorand animals. He washed andkissed the feet of12 inmates of a juvenile-detention centre. Hegot rid of the fur-trimmed velvet capes that popes have wornsince the Renaissance, swapped Benedict’s red shoes for plainblack ones and ignored his fully loaded Mercedes in favour ofa battered Ford.This new focus has allowed the company to spend fewer resourceson ancillary businesses, such as engaging in doctrinaldisputes or staging elaborate ceremonies. The “poor-first strategy”is also aimed squarely at emerging markets, where thepotential for growth is greatest but competition fiercest.Along with the new strategic focus, the pope is employingtwo management tools to good effect. One is a brand repositioning.He clearly continues to support traditional teachingon abortion and gay marriage, but in a less censorious waythan his predecessors (“Who am I to judge?” he asked ofhomosexuals). The otheris a restructuring. He has appointed agroup of eight cardinals (“the C8”) to review the church’s organisationand brought in McKinsey and KPMG (“God’s consultants”)to look at the church’s administrative machinery andoverhaul the Vatican bank.Will it work? Established critics, notably the corporate raiderLou Siffer, maintain it is all incense-smoke and mirrors. Othersinsist that more sweeping change, including a bigger rolefor women, is needed. The chairman’s attitude is unknown.Some analysts interpret the absence of plagues of boils andfrogs as approbation; others point out that He moves in mysteriousways, his wonders to perform. 7

Letters12 The Economist April 19th 2014In support of ModiSIR – As a passionate reader ofThe Economist I have generallysubscribed to your views as anaccurate reflection ofthe facts.However, your leader onNarendra Modi, the favouriteto become India’s prime ministerafter the election, drewupon unseemly logic (“Cananyone stop Narendra Modi?”,April 5th). To give just oneexample, you argued that MrModi helped organise a marchon the holy site ofAyodhya in1990 and inferred that this led,two years later, to the deaths of2,000 people. Yet Mr Modi wasbarely a speckon the politicalhorizon in the early1990s andhis role was, ifanything, marginal.Moreover, the suggestionthat the march led to riotstwo years later is irrational.The facts are simple. MrModi’s administration in thestate ofGujarat will be rememberedmore for growth anddevelopment than for riots. Itaccounts for 5% ofIndia’spopulation, but for 26% ofitsexports and 18% ofits investment.And unlike other statessuch as Uttar Pradesh andAndhra Pradesh that are ruledby supposedly secular politicians,Gujarat under Mr Modihas witnessed no Hindu-Muslim discord other than theunfortunate riots of2002. Onthat count alone he becameIndia’s most scrutinised politicianand remains so, despitethe fact that an independentjudicial commission eventuallyexonerated him. His detractorsprivately admit that theysimply have nothing else topin on him.Your recommendation thatRahul Gandhi would be themore acceptable prime ministeris bizarre. What India sodesperately needs is robustleadership, investment andgrowth. The Congress party’spopulist agenda ofentitlementsand welfare has bankruptedthe treasury and destroyedinvestor confidence.Mr Modi is the best choice.Frankly, ifthe BJP does win thiselection it will be because theelectorate voted for him, ratherthan for the party.ADIT JAINDelhiOffshore finance and the BVISIR – The governor oftheBritish Virgin Islands shouldveto a piece oflegislation oncybercrimes recently approvedby the assembly (“Going overboard”,March 29th). The billwould impose stiffpenalties—upto 20 years in prisonand $1m in fines—on anyone,anywhere, who discloses orpublishes leaked informationabout a BVI offshore company.Although the rights ofindividuals to financial privacyshould be respected, it isalso necessary to safeguard therights ofthose damaged by thecriminal activities that suchprivacy can invite. The negativeeffects ofoffshore secrecyfall particularly heavily ondeveloping countries. Offshoresecrecy provides corrupt individualsand companies aneasy way to stash illicit assets.Journalists and whistle-blowersshould not be penalised forbringing such crimes andinjustices to light.The BVI legislation woulddo exactly that, by institutionalisinga system in whichprotecting secrecy at all coststakes precedence over protectingprinciples ofsocial justiceand freedom ofthe press.MICHAEL ELLIOTTChief executiveThe ONE CampaignWashington, DCSIR - For a newspaper thatextols the virtues ofthe democraticprocess, your suggestionthat the British-appointedgovernor should veto a billthat is still only one-third oftheway through the parliamentaryprocess betrays a troublinglackofconfidence in postcoloniallegislatures.COLIN RIEGELSPartnerHarneysHong KongOur changing climateSIR – “In the balance” (April5th) presented a false dichotomybetween being dispassionateand being alarmistabout the impacts of climatechange. There is nothingalarmist about the riskofextreme weather events leadingto breakdowns in criticalservices and food systems.Such breakdowns havealready accompanied, forexample, the 2011floods inThailand and the 2010 droughtin Russia. And there is nothingdispassionate about economicdamage estimates that, in thewords ofthe IntergovernmentalPanel on Climate Change,are “incomplete” and face“recognised limitations”.Rather than suggesting thatthe risks assessed by the IPCCare scare stories and that theoverall economic costs ofclimate change would bemanageable, The Economistcould explore the assumptionsused by economic models andtheir developers to arrive atsuch estimates.One assumption is that theoccurrence ofimpacts willautomatically lead to adaptationto those impacts. TheIPCC chapter, “Adaptationopportunities, constraints andlimits”, shows that such optimismis not justified. Not everyfarmer facing crop losses hasthe ability to choose a differentcrop variety, and not all urbandwellers can move to an areawhere they are not exposed tofloods or landslides.The world is facing impactsof climate change preciselybecause it is difficult to takeeffective action to reducegreenhouse-gas emissions. Toassume that adaptation tothese impacts will take placewith little extra effort, at low orno cost and with immediatepay-off, is quite silly, and not areflection ofreality.RICHARD KLEINIPCC authorStockholm EnvironmentInstituteThe officeSIR – In 1951I started my businesscareer at a prestigiouscompany in Japan with greathopes and aspirations. What Ifound were rigid but unwrittenrules ofwork(or pretending towork), such as not leaving theoffice before your boss does,joining the nominicationdrinking sessions, and so on.In this environment no innovativeideas were welcome.The all-important relationshipwas ofthe subordinate pledgingtotal obedience to the boss,who in turn protects him.In this working culturethere was little room for talentedwomen to survive, muchless succeed. Even for a manlike me, I saw no future. Yourarticle, “Holding backhalfthenation” (March 29th), showedthat working customs have notchanged in Japan.Fortunately, after enduringyears ofsuffocation, I wasrecruited to join the Japanesebranch ofan American firm,and eventually retired happilyin America.MUNEYUKI NAKANOSeattleSIR – I found it notable thatyou did not mention theyoung Japanese woman whomarried the emperor’s son,following her American educationand employment as alawyer on Wall Street. Therewas hope at the time that shewould influence the positionofwomen in Japan, even in avery modest way. Her apparentdisappearance from publiclife following her marriage is adisappointment to many.MARGOT CHAMPAGNEPhoenixSWAT teams at county fairsSIR – The article about themilitarisation ofAmerica’spolice (“Cops or soldiers”,March 22nd) reminded me ofan episode of“The Wire”,where Major Colvin says, “Youcall something a war, andpretty soon everybody gonnabe running around acting likewarriors.” I found your articleparticularly interesting as aresident ofsleepy Santa Barbara.Our local police have procureda BearCat armouredpersonnel carrier, just like thetown ofKeene in New Hampshire.Unfortunately, we haveno pumpkin festival to protect.JIM ANDREWSSanta Barbara, California 7Letters are welcome and should beaddressed to the Editor atThe Economist, 25 St James’s Street,London sw1A 1hgE-mail: letters@economist.comMore letters are available at:Economist.com/letters

Executive Focus13GLOBAL DEVELOPMENT INNOVATION VENTURESGlobal Development Innovation Ventures (GDIV) is a cutting edgenew initiative that will accelerate the development, rigorous testing,and scaling of innovations that improve lives for millions of people indeveloping countries. GDIV is currently being established througha new independent nonprofit organization, with a global mandateto scale development innovations through the public and privatesectors. Its design is being led by its founding financial partners, theUK’s Department for International Development and the United StatesAgency for International Development.MEMBERSHIP OF THE BOARDGDIV seeks senior leaders, committed to GDIV’s mission, from the publicand private sectors, civil society, and academia to be members of its firstboard of directors. Board members will serve without compensation,but expenses will be covered. Responsibilities include:• Oversee high-level policy making and provide strategic guidanceto management• Select the initial senior management team and approve seniorhires• In conjunction with management, develop and approve a set ofinvestment policies• Review and approve budgets annually and assume fiduciaryresponsibility for GDIV• Participate in four regularly scheduled meetings per yearTo apply, please send a CV and cover letter to board@gdiv.org.Closing date: 2 May, 2014The Economist April 19th 2014

14Executive FocusThe Economist April 19th 2014

Briefing The Ukraine crisisThe Economist April 19th 2014 15Boys from the blackstuffMOSCOW, RUSSIA, AND SLOVIANSK, UKRAINEThe government in Kiev has no obvious counters to Russian-inspired occupationsin the industrial eastAT A strangely stilted press conferencesix weeks ago, just after the annexationof Crimea, Vladimir Putin, Russia’spresident, was asked ifRussia would fight awar with Ukraine. “I want you to understandme clearly,” he answered. “If wemake that decision, it will only be to protectUkrainian citizens. And let us see if[Ukrainian] troops try to shoot their ownpeople, with us behind them—not in thefront, but behind.”Intended to reassure Russians, hiswords carried a sinister double meaning:Russia was prepared to use Ukrainian civiliansas human shields. Now it is doing so.In the past week it has engineered a situationin which the Ukrainian governmentmust either appear entirely ineffectual orrisk attacking some of its own citizens and,in so doing, provide a pretext for furtherRussian action—even, perhaps, invasion.On April 6th armed men seized the administrationbuildings in Donetsk andKharkiv, as well as the security-servicebuildings in Luhansk—the three capitals ofUkraine’s eastern provinces. Barricadeswent up and local enthusiasts gathered onthem, but without massive public support.On April 12th, in an apparently co-ordinatedway, the crisis moved to a newphase. Police and security-service buildingsfell to rebels in towns all across the region,many of them situated on road andrail links that would have strategic value inthe event of a Russian invasion. Thesesmaller, poorer towns where the family ofthe deposed president, Viktor Yanukovych,has strong influence were an easiertarget than the cities.Unidentified, well-equipped soldiersled many of the occupations. They werefollowed bylocal armed separatists and ordinarycivilians. Many police officersswitched sides. Russian television channels,disconnected a few weeks ago becauseof their ceaseless propaganda, havebeen turned back on. Passing through acheckpoint set up by pro-Russian rebels inSloviansk, 100km from Donetsk, a man onthe barricades says cheerfully that the situationunfolding is “just like Crimea”.Also in this section16 Russia’s military might17 The scope for new sanctionsAlien invasionRussia denies that the “little green men”who co-ordinated the occupation of Crimea,some of whom have now been seenin Donbas, are its soldiers. But last yearRussia’s defence ministry boasted aboutthe creation of a “special operations” unitcomprising personnel who could act as “illegals”in neighbouring countries, andmany think this has now been seen in action.Ukrainian security forces say theyhave intercepted a telephone conversationbetween pro-Russian forces and their Russianminders in military intelligence.The occupations have shown how littleauthority Ukraine’s government has in theeast. Yulia Tymoshenko, a former primeminister and presidential candidate, urgedthe government (which she effectivelycontrols) not to use force. One reason is herlack of confidence in Ukraine’s securityservices. A botched operation would enragethe public and give Russian forces apretext to move deeper into Ukraine. Anotherreason is the presidential electionsscheduled for May 25th, which Ms Tymoshenkostill hopes to win, despite trailingbehind Petro Poroshenko, a billionairewho supported the February revolution.The acting president, Oleksandr Turchinov,pledged large-scale anti-terrorist operations,issued ultimatums and set deadlines—butto little effect so far. On April 15thgovernment forces freed a small airport atKramatorsk which had apparently beentaken by militants, but which does notseem to have been defended. “It looks a bitfarcical,” says Fyodor Lukyanov, the editor 1

16 Briefing The Ukraine crisis The Economist April 19th 20142 of Russia in Global Affairs, a journal. “Themilitants are pretending that they are takingcontrol of things and Ukrainian forcesare pretending they are freeing them.”The farce could yet turn bloody. As TheEconomist went to press, armoured personnelcarriers containing Ukrainiantroops who had surrendered to pro-Russiancrowds were entering Sloviansk. In atelephone call to Angela Merkel, the Germanchancellor, on April 15th Mr Putin describedUkraine’soperation asa serious escalation.Ukraine, he said, wason the brinkof a civil war. This was what he said aboutCrimea to justify annexingit, citing NATO’saction in Kosovo—which at the time Russiadeplored—as a precedent. Mr Putin wouldnot need a genuine conflict, such as that inKosovo, to make a move; but there areenough pro-Russian and pro-Ukrainianfeelings on the ground to sparkone.Though Mr Putin may yet move militarilyagainst Ukraine (see next story), perhapsunder the guise of a peacekeepingmission, perhaps even to recognise independencefor the south and east, he seemsunlikely to want to annex any more of thecountry. The bribes that would be neededto ensure the acquiescence of a goodP O L A N DLITHUANIA50 kmLvivKharkivKHARKIVU K R A I N EZAPORIZHIABELARUSDniesterMOLDOVATRANSDNIESTRIAROMANIABULGARIABelgorodDPrutOSea of AzovSource: Texty.org.uaKievUKRAINENBDnieprADonetskDONETSKMariupolMoscowRUSSIAOdessaCRIMEABlack SeaR U S S I ASKharkivLuhanskDonetsk250 kmGEORGIARUSSIASochiLUHANSKSlovianskKramatorskLuhanskDNIPRO- GorlovkaPETROVSKRostovon-DonAttempt to seize gov’t buildingby pro-Russian groupchunkofthe population would cost a greatdeal. In Crimea Russia has pledged to bringsalaries and pensions up to Russian levels;to do the same for Donetsk would costtwice as much. Subsidising the region’scoal mines, as the government in Kiev hasdone for years, would be another burdenon the Russian economy. Much better simplyto gain influence on the government inKiev by turning the east into a constantsource of trouble which keeps Ukrainechaotic, dysfunctional and unpalatable tothe West. “Bringing the troops across theborder would be seen as a failure of theKremlin’s game,” says Mr Lukyanov.Alexander Dugin, one of Russia’s mostvocal imperial nationalists and anti-Americanideologues, agrees that an occupationof south-eastern Ukraine would not be inRussia’s interest. He argues that the Maidanrevolution in Kiev was an Americanplot to drag Ukraine into the European Unionand NATO. Having failed to make thishappen, Mr Dugin says, America is nowtrying to provoke violent clashes to justifyputting NATO military bases in Ukraine.As Russia’s plans depend on a new federalstructure for Ukraine which gives increasedpower to the areas over which itholds sway, it might seem odd that themost recent flare up of separatism in theeast began just afterArseniy Yatseniuk, Ukraine’sacting prime-minister, confirmedthat the government intended to decentralisepower and engage with local elitesthere. Rinat Akhmetov, who controls agreat deal of industry in the Donetsk regionand is Ukraine’s richest oligarch, volunteeredhimself as a mediator. Thosemight seem to be the sort of moves towardsfederalisation that Russia wouldseekto encourage.But they are also developments designedto build bridges between the governmentin Kiev and the businessmen andpoliticians in the south and east, and Russiawants none of that. Pro-Russian forcesare stirring up anti-oligarch sentiment becauseRussia knows that they might backthe central government rather than seeseparatism ascendant. What is more, forRussia to endorse the government’s effortwould be to recognise its legitimacy andthat of the revolution which swept it topower, both of which the Kremlin rejects(it refers to Ukraine’s government as a“junta”). Thus a proposal by Mr Turchinovto hold a national referendum on federalisationwas almost ignored by Russia.Rather than allowing the governmentin Kiev to delegate power to the regions,the Kremlin needs the eastern regions tograb power for themselves, creating parallelgovernment structures that underminethe central government’s legitimacy. Thatis why Mr Putin wants a representativefrom southern and eastern Ukraine at internationaltalks on the crisis—a proposalUkraine, Europe and America reject.Russia’s short-term objective is to sabotagethe elections. “National elections cannottakeplace withoutDonetsk,” saysMaksimShevchenko, a journalist close to theKremlin. Its long-term aim is to stop Ukraineever moving towards Europe. Giventhat the February revolution was poweredby aspirations to do just that, this wouldprovoke unrest in Kiev and in western Ukraine.That is not a problem for Mr Putin.Russia wants to turn Ukraine back into abuffer state, with a level of disorder it canturn up or down. In the end, Ukraine mayend up barely a state at all. 7The military balanceGathering stormRussia would find holding territory inUkraine harderthan taking itACCORDING to satellite pictures andmilitary intelligence, some 50,000Russian troops are massed along the borderwith Ukraine. The forces represent asubstantial fraction of Russia’s 270,000-strong army, and they cannot indefinitelymaintain the high state of readiness theyhave been in since early March, not leastbecause it is now the time of year whenconscripts at the end of their term have tobe sent home, and new ones trained.Ukraine’s armed forces are, by comparison,small, ill-equipped and out of position.Ukraine has just 77,000 troops. The interiorministry’s paramilitary forces are ofsimilar number, but in the south and eastof the country their loyalty may be questionable.A reserve of 1m men might theoreticallybe mobilised—all those who arewithin five years of completing their militaryservice—but it would probably bepoorlydisciplined, and ofverylimited use.Russia spends more on its armed forcesthan any other country save China andAmerica—$88 billion in 2013, half as muchagain as Britain. According to SIPRI, a researchinstitute, its spending is increasingfast as deficiencies exposed in the 2008war against Georgia are put right. On theother hand, Ukraine’s military spendingamounted to $2.4 billion last year. Its forcesare mainly equipped with Soviet-era tanksand field guns. Ukraine’s 36 Su-27 fighteraircraft are based in Crimea, and thusgrounded. It has 90 smaller MiG-29s andsome other aircraft capable of ground-attackmissions, according to the latest editionofthe “Military Balance” published bythe International Institute for StrategicStudies. But they would be overwhelmedby the far greater number ofsimilar aircraftcarrying more up-to-date missiles and radarsthat Russia has at its disposal. Uk-1

The Economist April 19th 2014 Briefing The Ukraine crisis 172 raine’s air-defence system is a ropy Sovieteraremnant.And Ukraine’s forces are in the wrongplace, positioned in the West as if to counteran attack from NATO. Without significantbases or pre-positioned equipmenteast ofthe Dnieper river, which divides thecountry, Ukraine’s armed forces would beunable to offer much resistance to Russianmilitary incursions. NATO’s Supreme AlliedCommander in Europe, US Air ForceGeneral Philip Breedlove, says that theforce Russia has deployed along the border“is ready to go and we thinkit could accomplishits objectives in between three andfive days ifdirected to make the actions.”Much depends on what those objectiveswould actually be. One possibility isopening up a land corridor to Crimeathrough Donetskand Mariupol. Another isa corridor extending from Crimea toTransdniestria, a pro-Russian breakawayterritory in Moldova which is home to aRussian army, by way of Odessa. A third,extreme, option might be splitting thecountry along the Dnieper.However, Russian military planners arealmost certainly advising Vladimir Putinthat, although an incursion with a strictlylimited objective against weak defencesmighteasilybe achieved, occupyinga largetract of land against the wishes of most ofthe people who live there is far harder. Gettingbogged down and exposed to attacksby Ukrainian irregular forces would be alltoo likely. Stationing lots of troops in Ukraineindefinitely would have ramificationselsewhere, stretching forces in volatileregions such as the north Caucasus andCentral Asia. On top of this, Mr Putin cannotbe entirely confident about how hisforces would perform. Their post-Georgiamodernisation is a work in progress, withpoor command and control and logisticshampered by incompatible equipment.According to a recent biography of MrPutin, one of his first KGB instructors complainedthat he had “a lowered sense ofdanger”. Faced with a decision to send hisforces into Ukraine or stand them down, itis possible that not even he yet knowswhich he will choose. 7Ready to flyFinancial sanctionsTurning off thetapsThere is more that could be done topunish RussiaIT IS one thing to see Russia’s hand in thedisruption in eastern Ukraine, quite anotherto muster the strength to arm-wrestleit back. Europe says meekly that it will expandits list of Russian citizens subject totravel bans and asset freezes. America,which faces less economic blowback fromsanctions, is showing more resolve.Having targeted senior Kremlin figures,an oligarch and Vladimir Putin’s favouritebank in three earlier rounds of measures,America is preparing to add more of thepresident’s allies to the list. It has been reportedthat Igor Sechin, the president andchairman of Rosneft, a giant state-ownedoil company, could join Gennady Timchenko,who has called being sanctioned“quite an honour” while admitting it hascaused problems for Gunvor, the oil-tradingfirm he co-founded, because banks are“frightened”. The limited sanctions alreadyin place are having a chilling effecton business in Russia (see page 52). A Treasuryofficial points out that more capitalhas left Russia so far this year than in thewhole of 2013, and that stocks, bonds andthe rouble have all fallen. Now the WhiteHouse has mooted targeting whole sectors,such as financial services and energy.Finance is the obvious place to start becauseof the pre-eminence of the dollar,America’s central role in the clearing ofcross-border bank and credit-card transactions,and the American-led globalisationof money-laundering compliance. Thesemake America’s unilateral actions multilateral.“Russia is much more vulnerable infinance than we are. Putin knows this,which explains his attempts in recent yearsto reduce reliance on the dollar in internationaltrade and banking,” says Juan Zarate,a former deputy national security adviserand author of “Treasury’s War”, abookabout financial statecraft.BankRossiya, the only banksanctionedso far, has been cut off by Visa and Master-Card and forced to cease foreign-currencyoperations. (On the plus side, Mr Putin hasopened an account.) Sanctions lawyersthink Rossiya was selected to hint at thebroader damage that could be wrought onRussian banking. Bigger banks, which areeven more reliant on access to dollars andforeign “correspondent” relationships,could soon become stressed ifsanctioned.Such sanctions have been used increasinglysincethe 1990s, and theirfanspoint tovarious successes. The freezing of NorthKorean assets in a Macau bank in 2005helped nudge Pyongyang backto the negotiatingtable, they say. The targeting ofbanks and firms linked to Iran’s RevolutionaryGuard, combined with an oil embargo,helped soften Tehran’s stance overits nuclear programme.Mr Zarate suggests going after Russianbanks suspected of helping to sell arms toSyria or trading with North Korea. The PatriotAct allows America to designate entitiesor even whole classes of transactionsas “primary money-laundering concerns”.Another possibility is to step up investigationsofdirtyRussianmoneyheld offshore,tied to concerns about tax evasion andlinks to organised crime. “If America putthe same forensic effort into probing this asit has in following the money of terroristsand drug-traffickers, it could cause greatdiscomfort,” says a former official.This could be amplified by requiringenhanced monitoring of Russian-linkedaccounts and property investments. Internationalbanks are in no mood to quibble;some accused ofaidinglaunderers orsanctions-bustershave been fined heavily andcriticised in congressional hearings. JPMorganChase has plenty to lose by annoyingMoscow; it earned $51m in Russian investment-bankingfees last year, according toThomson Reuters. It has nevertheless beenblocking transfers first and asking questionslater if there is the slightest hint of alink to sanctioned parties. The Treasuryhas been deliberately vague about howstrong such links have to be, enhancing thesanctions’ impact. “If one bank or companystops doing business with an entity,so does everyone else. No one wants to bean outlier,” says Judith Lee of GibsonDunn, a law firm.Sanctions will have collateral damage;hit Rosneft and you hurt BP, which owns20% of it, and ExxonMobil, its partner invarious projects around the world. Theycould also invite countermeasures. Russiacould choose to investigate foreign investors(as it has done wayward oligarchs) fortax “irregularities”. It could enlist its hackersto destabilise American banks and exchanges.Lest anyone doubt Russia’s mischief-makingpotential, remember itsproposal to China in 2008 that the twocountries dump their holdings of debt issuedby Fannie Mae and Freddie Mac so asto exacerbate the financial crisis and forcea bail-out. The offer was declined.Another potential problem is that financialsanctions can be hard to remove.Take the interim deal with Iran, inked lastNovember. It calls for $4 billion in oil revenue,frozen in accounts overseas, to behanded back in stages. But its release hasbeen delayed because banks are still terrifiedof violating sanctions and being shutout of dollar transactions. For the time being,though, being unable to loosen penaltiesimposed on Russia ranks low on thesanction-setters’ list ofworries. 7

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AsiaThe Economist April 19th 2014 19Also in this section20 Pakistan’s Islamists20 Japan reboots21 Cambodian politics22 Taming the Brahmaputra22 A ferry disaster in South Korea23 Banyan: America’s balancing actFor daily analysis and debate on Asia, visitEconomist.com/asiaEconomist.com/blogs/banyanIndia’s political heartlandRiding the waveVARANASIHalfway through the campaign, the BJP and Narendra Modi lookstrongVARANASI, a city of1.5m by the Gangesriver some 800km (500 miles) southeastof Delhi, offers much for gawping visitors.A dusk boat ride is accompanied bynear naked sadhus splashing in the sacred,filthy water. Funeral pyres crackle on theriverbank. Under a fat moon, scholars ofSanskrit put on a show with bells and oillamps, a celebration of the river consideredmost holy by Hindus.The city is about to be crammed witheven more visitors, as it becomes the mainspectacle of India’s mammoth generalelection. Narendra Modi, the leader of theBharatiya Janata Party (BJP), is running tobe Varanasi’s MP. That has drawn prominentopponents, notably Arvind Kejriwal,the media-hungry leader of an upstartanti-corruption outfit known as the AamAadmi, or Common Man, Party. Even PriyankaGandhi, of the Nehru-Gandhi dynastythat dominates the ruling Congressparty, has had to deny that she too plannedto join the fray (the constituency ofAmethi, the Gandhi family’s seat ofpower,is not far away).Halfway through the extended ninestageelection, the BJP has most momentum.Its supporters expect the contest inVaranasi to be Mr Modi’s coronation. Ballotshave so far been cast in 25 states, includingDelhi, Kerala, parts of Uttar Pradesh(UP), where Varanasi is located, andmuch of the north-east. High turnout,about 70%, is probably a sign of voters eagerto boot out the incumbent, Congress.Opinion polls also cheer the opposition.One this week suggested the BJP and itsclosest allies—the National Democratic Alliance—couldget an outright majority, over272 of parliament’s 543 seats. That wouldbe historic, letting Mr Modi rule withoutneeding wider coalition partners.Take the strongest predictions with apinch of salt. Congress at times outperformssuch surveys because its core supporters—thepoor, the rural and Muslims—are likelier than richer ones to queue in theblazing sun and actually vote. Still, the rulingparty’s fortunes are certainly down. Itslatest embarrassment is a book on the “accidental”prime minister often years, ManmohanSingh, by his ex-spokesman. Itspells out how Sonia Gandhi, Congress’spresident, kept real political power, leavingMr Singh unable to appoint or sack ministersor implement policy. No wonder voterscrave stronger leadership.Varanasi will probably bring morecheer to Mr Modi (by the odd rules of Indiandemocracy he is also standing in hishome state ofGujarat). One prominent BJPfigure in the city crows that “we’ve alreadywon, we’re fighting for the margin of victory”.A local leader of the RashtriyaSwayamsevak Sangh (RSS) says his followers,enthused by Mr Modi, are campaigningtoo: the Hindu-nationalist outfit thatlong pretended it was just a social movementis now openly political.Anything less than a landslide in Varanasiwould thus be a poor result. The BJPwon in 2009, the last election, and triumphsin local polls. Rival candidates,who have strong pull with local castegroups, respond mostly with bravado. AjaiRai, Congress’s man, says he has a betterdevelopment record than Mr Modi, tellingthe “divisive” chiefminister ofGujarat thathe is unwelcome in a city known for goodHindu-Muslim relations. But unless he, MrKejriwal and several others somehow uniteagainst the BJP man, the only real questionis who claims second place.More uncertain is how the BJP fares beyondthe city limits. Eastern UP, heavilypopulated by poor, caste-obsessed farmers,is a region where local parties dominate.Mr Modi’s presence in Varanasi, andhis rallies of hundreds of thousands, couldperhaps help to win a few more seats nearby,necessary if the BJP is to fulfil the moreexcitable poll predictions. Mr Modi’s partyneeds around half the 80 seats in the state(plus 20 from nearby Bihar), a big leap fromits previous haul often.The problem for the BJP is convertingexcitement for Mr Modi as a prime ministerto votes for a local candidate. Insteadone of two big local parties is likely to dobetter in rural areas. The Bahujan SamajParty has a strong core of supportersamong the dalits (formerly known as “untouchables”)who lookloyal to theirleader,Mayawati. The other one, the SamajwadiParty, runs the state ofUP and draws on thesizeable Muslim vote and others. The twodominate the state, municipal and villageadministrations so have advantages of patronageand strong organisation.Mr Modi’s response is to rely on a troublingfigure, an acolyte and former ministerfrom Gujarat, Amit Shah. A friend fromearly days in the RSS, he faces murder chargesover a case in Gujarat. He has just beenbanned from public campaigning by theElection Commission for telling Hindus inMuzaffarnagar, in western UP, before poll-1

The Economist April 19th 2014 Asia 21Was that our alliance flashing past?2 embraced the idea of large-scale immigration,so Mr Abe’s move is particularly striking.On April 17th he was expected to addthat the Japanese must also show tolerancefor outsiders entering the country towork. Few developments would betterdemonstrate Mr Abe’s will to implementdifficult reforms. A further round ofgrowth measures is due in the summer.As for pressure to rein in the far-right,that comes not just from America and Japan’sneighbours, but also from within MrAbe’s Liberal Democratic Party (LDP). Theshift could therefore be lasting. The LDP’ssenior foreign-policy moderates are furiousthat Mr Abe has acted to please hisright-wing supporters at the expense of Japan’sdiplomatic standing. A substantialslice ofthe party is resistingone of his mostcherished aims on national security,which is to change the interpretation of Japan’spost-war constitution to allow thecountry’s armed forces to take part in “collectiveself-defence”, whereby they couldcome to the aid of an ally if attacked. It is achange that America solidly backs. Yet MrAbe has reportedly had to water down hisproposal fornow, so thatarmed forces mayoperate only in Japan’s immediate vicinity.Much will also depend on an expectedcabinet reshuffle later in the year, whichwould be Mr Abe’s first since returning topowerin December2012. The LDP rankandfile’s resentment of the concentration ofpower in the cabinet is growing deeper. Acoalition of right-wingers and anti-reformerswould like to see the departure of YoshihideSuga, the powerful and relativelymoderate chief cabinet secretary. That,however, is unlikely, and if Yasuhisa Shiozaki,a former chief cabinet secretary to MrAbe from his first term as prime minister in2006-07, joins the cabinet, it could becomemore reformist economically.Set against such hopes, however, is theYasukuni shrine’s annual spring festival,which, as bad luck would have it, runs inthe days just before Mr Obama’s visit. Thisweek it was the turn of Yoshitaka Shindo,the ministerofinternal affairs and communications,to turn up. Next week a flow ofparliamentarians is likely to follow him,though hopefully not the symbolically important,high-ranking cabinet members.For the time being, Mr Abe’s shift looks setto make a difference. 7Cambodian politicsTime to dealSINGAPOREGovernment and opposition inchtowards an agreementMORE than eight months have passedsince a general election paralysedCambodian politics. On paper, at least, theresult ofthe poll last July was a narrow winfor the long-serving prime minister andstrongman Hun Sen, leader of the CambodianPeople’s Party (CPP). The opposition,however, led by Sam Rainsy, cried foul, accusingthe government of systematic ballot-rigging.Mr Sam Rainsy’s CambodiaNational Rescue Party (CNRP) refused totake up its seats in parliament until theelection was either rerun, or an independentinquiry backed by the United Nationsinvestigated. Mr Hun Sen rejected both options,leaving a tense political stand-off.At last, the deadlock may be breaking.Hopes that the two sides might reachagreement on April 11th, before the countryshut down for its lunar new year celebrations,were dashed. But a deal may yet bereached by the end of the month, with theopposition takingup itsseatsin parliamentsoon afterwards.Both sides face pressure to come toterms. Mr Hun Sen has been widely criticisedfor his inflexibility. He cheerilyshrugs off such censure from his manyWestern detractors. Butthistime China, hismain source of international economicand political support, has joined in.Many in the CNRP are eager to strike adeal, too. Their chief negotiator with thegovernment, Son Chhay, a member of parliament,says the opposition is now strongenough “to change the system from within”by returning to parliament. The CNRPwon 55 outofthe 123 parliamentaryseats atthe election. He doesnotwantto repeat the“experience of Burma”. In Myanmar, theopposition party led by Aung San Suu Kyiwon a landslide victory in an election in1990, but the result was not honoured anda damaging two-decade-long stand-off ensued.Moreover, the CNRP’s donors amongthe Cambodian diaspora in America, Australiaand elsewhere, are tired of its intransigence(and increasing demands for moremoney). Opposition protests in PhnomPenh have been dwindling recently. Angerat the disruption they cause has beenmounting.So Mr Son Chhay says that the twosides have worked out a draft five-pointagreement. In return for ending its boycottof parliament the opposition has wonsome big concessions. Most important isthe reform of the National Election Committee,to give more hope of fairer elections.The committee’s members would bechosen by all parliamentary parties, ratherthan appointed by the government, asnow. Its independence would be enshrinedin the constitution. Joint committeeswould reform other national institutionsbeholden to the CPP, such as the statebroadcaster. And the opposition wouldchair five of the ten legislative committeesin the national assembly.A big stumbling block, however, is thedate ofthe next election, or “re-election” asthe opposition calls it. It is due in the summerof 2018, but the CNRP, sensing a bigwin ifthe reforms in the agreement are implemented,wants to bring it forward, toearly 2016. The government, obviously reluctant,has so far conceded only to a reschedulingto February 2018. This squabble,over election dates, was the mainreason no agreement was signed on April11th. But Mr Son Chhay is optimistic. Hehopes that talks will resume after the newyear festivities. 7

22 Asia The Economist April 19th 2014BangladeshThe game of the riverDHAKA AND ENAYETPURAt last, Bangladesh starts to tame the mighty BrahmaputraAMAN-MADE spur juts into the mightyJamuna river—known as the Brahmaputraupstream, over the border in India—near the town of Enayetpur. The solid wallwas built, expensively, to control the massiveflow of the river. But erosion now eatsdeep into itsfoundationsand the river isreclaimingthe land once again. Last yearpeople lived beside it in makeshift shacks;nowwhere theirhomesonce stood there isonly water.The great river draws from a huge,heavily populated basin, home to hundredsof millions of people. Over the centuriesthey have learned to live with theshifting course of the river, and with its immenseflow. At its peak, some 100,000 cubicmetres of water rush by every second,enough to fill 144,000 Olympic-sizedswimming pools per hour. But that flowcan be terribly destructive, alternately depositinghuge quantities of sediment—hundreds of millions of tonnes a year—then devouring the land elsewhere.This year the river will swallow another1,300 hectares (3,200 acres) of land, predictsMaminul Haque Sarker of the CentreNEPALGangesINDIAC H I N AMtEverest BHUTANASSAMPanduJamunaEnayetpurNakalia BazaarDhakaMeghnaPadmaBANGLADESHBay of BengalBrahmaputraMYANMAR250 kmfor Environmental and Geographic InformationServices (CEGIS) in Dhaka, Bangladesh’scapital. Scientists say that 64,000people in Bangladesh are displaced eachyear by the erosion of riverbanks. Manypushed from their homes by the river endup in slums in the capital. “The landlord inthe morning can become a beggar by evening,”goes a traditional song. “This is thegame ofthe river.”South Korean ferry sinksOn the morning of April 16th a South Korean passenger ferry, the Sewol, capsized andsank on its way from Incheon port to Jeju island, a popular resort. It was carrying 459people, more than half of whom were students from a high school near Seoul. As TheEconomist went to press, only three deaths were confirmed, but nearly 300 were stillmissing. The government immediately deployed 30 ships and a dozen helicopters in amass rescue operation, but the 6,825-tonne ferry sank surprisingly fast. Within a fewhours, only a portion of its bow was visible. Chonghaejin Marine, the company whichowns and operates the ferry, says it passed a routine survey two months ago. It can carry900 people and over 100 vehicles, suggesting overloading was not the problem, as it wasin South Korea’s last fatal ferry accident in 1993, when 292 people died.The cost of restraining its flow withstone spurs and other constructions usedto be prohibitive as well as ineffective: itcost about $20m to protect a kilometre ofembankment, usingstonestrucked in fromIndia and paid for in hard currency. Now arelatively simple solution is being tried toprotect millions who live near the river.Some 25km (16 miles) downstream fromthe spur is Nakalia Bazaar, which offers astrikingly different scene to Enayetpur. Abig riverside market contains permanentstructures. From huts atop a protected embankmentcomes the clicking sound of flyshuttlesworked through handlooms. Theeconomic activity is a sign that, locally, thegame ofthe river has changed and its powerhas been reduced.Here the riverbank is protected by lowtechmeans: heavy sandbags. Filling andinstalling them is labour intensive, butworkers are abundant and cheap. Sand isalso plentiful. Thus overall costs are low:some $2m per kilometre. Since around1,000km of banks along the river probablyneed protection, the difference in cost isimmense.Some environmentalists suggest it maybe better, at least beyond towns, to let theriver go where it wants than attempt towrestle with such a powerful monster. Butarmies of donors, consultants and developmentexperts have been determined tofight, for the sake of those who survive onthe river’s edge.Prospects for the sandbag campaign arelooking up. The government at least hasstarted to share information with localpeople, warning about imminent threatsoferosion. Along the river, a red flag placedin the ground means there is a high risk oferosion, a yellow flag warns people thatthey still have time but to be prepared.Now the Asian Development Bank (ADB)and the World Bankhave promised $1.5 billionto stabilise 150km of embankmentsalong the Jamuna and the Padma rivers.The simple bagging technique used inBangladesh could next be adopted acrossthe border in India, which has plenty offertile land to protect in its eastern provinces.In nearby Assam state, the chief minister,Tarun Gogoi, has suggested India isten years behind Bangladesh in “training”its part ofthe river and that his country hasmuch to learn.Rivers narrow and widen, dependingon the flow of sediment, and even as a resultof earthquakes that can dramaticallyshift their course. Experts say the effects ofone earthquake in Assam in 1950 were stillbeing felt four decades later. Today muchofthe riverin Bangladesh is12km wide, butMr Sarker, the scientist from CEGIS, sayswith sediment flow declining, the rivercould narrow again to just 6km. Nothingwill be permanent, but more stability mayyet beckon forthe people whose lives havefor years been defined by the river. 7

The Economist April 19th 2014 Asia 23BanyanA tricky rebalancing actBarackObama is bound to disappoint on his forthcoming trip to AsiaASTRATEGIC“pivot” or“rebalancing” towards Asia and the Pacificis central to American foreign policy under BarackObama. So it is more than embarrassing that the president hashad to cancel trips to the region at short notice—most recently lastOctober, when the partial shutdown ofhis administration forcedhim to pull out of two regional summits. This gives added significanceto his tour of Japan, South Korea, Malaysia and the Philippinesfrom April 22nd. It is the chance to reassert America’s militaryand economic commitment to three treaty allies, oneprospective “strategic partner” (Malaysia) and to the region as awhole, as it struggles with the implications ofChina’s rapid rise.That reassurance is needed all the more afterAmerica’s failureto intervene in Syria and, especially, its failure to contain Russianexpansionism in Ukraine. Both episodesfeed into a perception ofa declining American appetite for keeping the peace, and of a decliningability to do so. Countries such as Japan and the Philippines,facing an assertive Chinese approach to disputed territory,are naturally concerned. If America will do so little for Ukraine,will it risk lives and treasure for uninhabited rocks in the East orSouth China Sea? In theory, circumstances are so different thatAmerica’s Asian allies should have no cause for concern. Unlikethe Syrian opposition and Ukraine, the Japanese and Filipinoshave mutual security treaties with America.Indeed, if America did involve itself militarily in another conflictin the Middle East or in eastern Europe, its Asian allies wouldfret that the “rebalancing” was deemed, as they had feared, a lowerAmericanpriority than otherparts ofthe world. It is a battle forregional reassurance that America, it seems, simply cannot win.Other problems complicate things further. One is the poorstate of relations between America’s two most important allies,Japan and South Korea. Shinzo Abe, Japan’s prime minister,seems as unpopular in Seoul as he is in Beijing. His decision lastDecemberto visit the Yasukuni shrine in Tokyo, where war criminalsare honoured, confirmed South Koreans in their view ofhimas an unrepentant historical revisionist, in denial about the atrocitiesJapan inflicted on their country during its colonisation. So,rather than co-operating with Japan in dealing with an immediatethreat from North Korea and a potential longer-term one fromChina, South Korea prefers to make common cause with China tocondemn Japan for its failure to confront the past. It took a big effortto persuade Park Geun-hye, South Korea’s president, to join atrilateral meeting with Mr Obama and Mr Abe at a nuclear summitin the Netherlands last month. Coaxing them to work togetherwhen he is not in the room will be even harder.Another difficulty lies in distinguishing strategic support for acountry from political support for its current rulers. Americafinds much to admire in Mr Abe: his determination to drag theJapanese economy out of its deflationary morass; in particular,his promise to take on domestic lobbies by joining American-ledregional trade talks, the 12-country Trans-Pacific Partnership(TPP); his desire to see Japan play a bigger role in its own defence.Butitalso deploresthe often revisionistattitude to Japan’shistorythat, for Mr Abe and his supporters, animates these policies.Similarly it finds Malaysia a model of moderate Islamic democracyand its prime minister, Najib Razak, the friendliestleader it has had in decades. But Malaysian politics is poisonous.AnwarIbrahim, the leaderofthe opposition, which won the popularvote at last year’s election, is appealing against a sentencehanded down last month of five years in jail for sodomy. ManyMalaysians believe the prosecution is politically motivated.Mr Najib has taken Malaysia, too, into the TPP. Another problemfacing the “rebalance” is that this, its most important economicdimension, is in trouble. The impetus of Mr Obama’s touritselfmay generate a breakthrough in the shape ofagreement betweenthe TPP’s two biggest economies, America and Japan. Butratification of the TPP will face domestic political obstacles in anumber of countries, not least America itself. Many in Asia havenoticed that Mr Obama seems loth to spend much domestic politicalcapital on this orotheraspects ofAmerican commitment tothe region. MrObama may have trouble convincinghis friends inAsia that America’s rebalance is genuine.China, for its part, is keen to cast doubt on America’s regionalstaying power. Yet, oddly, its own government seems convincedby it. It sees the rebalance as an attempt to encircle China andcounter its rise. Some of this resentment emerged in testy exchangeswhen Chuck Hagel, America’s defence secretary, was inBeijing this month. China blames America for encouraging Japanand the Philippines to confront it over disputed rocks. Its leadersworry that America’s decision to deploy two more Aegis-classdestroyers to Japan to counter the threat from North Korea is infact directed against China. It has noticed that America supportsthe Philippines in its legal challenge to China’s claim to most ofthe South China Sea, and has just signed an agreement with it allowingmore of its troops into the country. And Congress is likelyto authorise the sale offour pensioned-offfrigates to Taiwan.Be careful what you wish forChina’s reaction is perhaps the most fundamental of all the factorsmaking the rebalance so tricky. America insists it is not tryingto contain China or thwart its rise. But if that is so, how to convinceAsian allies of an unshakable military commitment to thedefence of islands, reefs and rocks of no obvious relevance toAmerican security? And ifAmerica is in fact trying to stand in theway ofChina’s rise, then its Asian allies would also take fright at adangerous confrontation between the region’s two big maritimepowers. The rebalance, meant to reassure them withoutalarmingChina, risks the opposite: alienating China and scotching promisingareas of co-operation, yet leaving its neighbours, America’sfriends, more nervous than ever. 7

China24 The Economist April 19th 2014Also in this section25 Crowd-funding journalismFor daily analysis and debate on China, visitEconomist.com/chinaEconomist.com/blogs/analectsDisillusioned office workersChina’s losersSHANGHAIAmid spreading prosperity, a generation ofself-styled also-rans emergesZHU GUANG, a 25-year-old product tester,projects casual cool in his red Adidasjacket and canvas shoes. He sports theshadowy wisps of a moustache and goatee,as if he has the ambition to grow abeard but not the ability. On paper he isone of the millions of up-and-coming winnersof the Chinese economy: a universitygraduate, the only child of factory workersin Shanghai, working for Lenovo, one ofChina’s leading computer-makers.But Mr Zhu considers himself a loser,not a winner. He earns 4,000 yuan ($650) amonth aftertaxand sayshe feelslike a facelessdrone at work. He eats at the office canteenand goes home at night to a rented, 20-square-metre (215-square-foot) room in ashared flat, where he plays online games.He does not have a girlfriend or any prospectof finding one. “Lack of confidence”,he explains when asked why not. Like millionsof others, he mockingly calls himself,in evocative modern street slang, a diaosi,the term for a loser that literally translatesas “male pubic hair”. Figurativelyitisa declarationof powerlessness in an economywhere it is getting harder for the regularguy to succeed. Calling himself by this derisivenickname isa wayofcryingout, “likeGandhi”, says Mr Zhu, only partly in jest.“It is a quiet form ofprotest.”Calling yourself a diaosi has also becomea proud statement of solidarity withthe masses against the perceived corruptionofthe wealthy. The word itselfenteredthe language only recently, appealing to officegrunts across the country, especially inthe IT industry. A mostly male species,diaosi are often daydreamers with poor socialskills and an obsession with onlinegaming. They are slightly different from Japan’smarriage-shunning “herbivore”young men in that fewer ofthem have chosentheir station in life. Society has chosenit for them, especially with property pricesclimbing well beyond their reach. Severalrecent studies show that, while incomesacross Chinese society continue to rise, socialmobility has worsened. Yi Chen ofNanjing Audit University and Frank A.Cowell of the London School of Economicsfound that, since 2000, people at thebottom of society were more likely than inthe 1990s to stay where they were. “Chinahas become more rigid,” they conclude.An online video sketch show, “DiaosiMan”, shown on Sohu.com, an internetportal, mercilessly mocks the tribe. Sinceits debut in 2012, the show’s episodes havebeen streamed more than 1.5 billion times.In one recent episode a man tries to impresshis beautiful dinner date with howbusy he is at his job. He then receives aphone call from work, apologetically takeshis leave to go to the office and finally popsup again as a waiter when his date asks forthe bill. In the same episode a frustratednew driver curses repeatedly at a Lamborghiniin the next lane and screams, “Areyou bullying me because I don’t know anytraffic cops?” In the next scene he is in aneckbrace and his nose is broken.Mr Zhu says what makes him a diaosi isthat he is the son of factory workers. He isnot fu er dai—second-generation rich—orguan er dai—the son of powerful governmentofficials (it does not escape a diaosi’snotice that those two categories often overlap).He and his diaosi colleagues feel that,with connections or cash, they might haveattended a better university and found abetter job.With after-tax income of nearly $8,000a year, Mr Zhu would look to many peoplein China comfortably on his way to themiddle class. He is among the lower wageearnersat Zhangjiang Hi-Tech Park inShanghai, but even many higher earnerscall themselves diaosi, or refer to themselvesas“ITlabourers”. Though their salariesare above average even in Shanghai—which had China’s third-highest annualurban disposable income per person in2012 at 40,000 yuan—the cost ofappearingsuccessful is stratospheric. A fancy flat anda cool carare well beyond theirreach. Theyare wage slaves who cannot hope to be gaofu shuai—tall, rich and handsome—andmarry a woman who is bai fu mei—fairskinned,rich and beautiful.This might seem quite normal for a rapidlydeveloping economy. But Zhang Yi, asociologist at the Chinese Academy of SocialSciences, a government think-tank inBeijing, says this diaosi feeling of relativedeprivation is a troubling consequence ofChina’s growing wealth gap. In an interviewdevoted to the subject for the websiteof Phoenix Television, a Hong Kong satellitenetwork, Mr Zhang concluded thatpeople at the bottom feel utterly alienated.They feel less hopeful than they did beforeofever moving up in life, he said.In spite of this, however, they do stillrepresent a marketing opportunity. There 1

The Economist April 19th 2014 China 252 are, afterall, manymore ofthem than thereare millionaires, even though itcan be difficultto define the target market. At Dianping,a website offering restaurant reviewsand consumer deals, Schubert You targetsvery low-wage workers in smaller cities(earning about $150 to $450 a month) withcoupons and group discounts. Mr Youdoes not consider the IT workers of Shanghaiand Beijing to be true diaosi.But surveys show they believe they are.Last year Analysys International, a researchcompany in Beijing, asked a broadcross-section of office workers if they sawthemselves as diaosi. More than 90% ofprogrammers and journalists and about80% of food and service industry and marketingworkers said they did. Those surveyedwho least identified with being loserswere civil servants, working for thegovernment or the Communist Party. 7MediaScoopedBEIJINGCrowd-funding is improvingjournalismLIU JIANFENG began his career as an investigativereporter with noble idealsabout serving the public interest. After 20years in the job, even working for some ofChina’s more outspoken publications, hefelt increasingly manipulated. He also believedthe public was hungryforfact-basedreporting untainted by the state’s agenda.Casting around for a solution, last summerhe announced on his microblog that hewas becoming an independent journalist.Five years ago such a move would havebeen all but impossible. But now, tradingon his reputation as an honest reporter,through his microblog on Sina Weibo, China’sTwitter, and on Taobao, an e-commercesite, Mr Liu raised 200,000 yuan($30,000). That helped him produce hisfirst long investigative report about a landdispute between villagers and their localgovernment in Shandong, an eastern province.The report, which is available on MrLiu’s blog, has not (yet) caused him problems.“Writing at length and in detail is away to protect myself from accusations ofmalpractice,” he says.Since its foundation in 1921, the CommunistParty has insisted that the media isits “throat and tongue”. Though media arefreer than ever to report on non-political issuesand more reporters are trying to breaknew ground even within state-run outlets,China’s media must still bow to the party’spropaganda department.But new media are undercutting traditionalmodels. For profit-driven titles thismeans accepting a fall in advertising revenue.For the party the battle is all aboutcontrol. As microblogs and other media reportnews that challenges the party line, officialchannels appear untruthful, corruptor both.A bungled exposé ofthe sex trade in thesouthern city of Dongguan by China CentralTelevision (CCTV), the state broadcaster,has caused particularoffence. On February9th CCTV released its report, whichincluded undercover footage of allegedprostitutes in slinky dresses lined up in abrothel for selection. Such scoops are oftena mix of a new type of semi-investigativejournalism serving a broader party agenda.But the report failed to shock as thecity’s reputation was already notorious.Then, as the government unveiled a crackdownon the sex industry, the reportseemed a little too timely. Rather than theintended moral outcry, online commentatorsridiculed the network for colludingwith the state. “People who sell their soulshave always looked down on people whosell their bodies,” read one widely retweetedpost.Even though state-run media are not asbland as they once were, principled journalistsstill struggle to find a home for theirwork. Since the arrival of the internet thegovernment has engaged in a cat-andmousegame with emerging media, allowingsome new platforms to flourish yetstanding ready to pounce on those that becometoo popular.Since a crackdown on microblogs lastyear, many users have gravitated to We-Chat, a smartphone-messaging application.It has emerged as a relatively unconstrainedplatform for free-thinkingopinion. But in mid-March there was a suddenshutdown of dozens of prominent accounts.The “WeChat massacre”, as it becameknown, was a fresh warning tofree-thinkers, though it has not yet scaredusers away.Don’t read all about itLike other journalists, Song Zhibiaouses his WeChat feed to create what hecalls “self-made media”. He posts newsand commentary on controversial subjects,such as the mismanagement of officialcoverage of the missing Malaysia Airlinesflight MH370. Around 13,000 peoplesubscribe to his WeChat feed; some donateup to 500 yuan. Despite some financialsuccess, Mr Song sees two hurdles. Relyingon donations from a public used to consumingfree media is not sustainable, hethinks. And muckraking in China can berisky. If you are on your way “to seektruth”, he says, you may in the party’s eyesbe on the road to commit crimes.Since Xi Jinping became party chief in2012 the media have been even more tightlycontrolled. New legislation means thatweb users can be imprisoned for threeyears if a sensitive tweet proves too popular.Mr Xi himself heads a new internet securitygroup, expected to deal furtherblows to freedom of expression online.Ren Xianliang, vice-ministerofthe State InternetInformation Office, calls control ofthe media, like the party’s handle on themilitary, an unassailable principle for upholdingleadership. It is age-old party rhetoric,given a modern touch. Mr Ren suggestsfosteringa group of“thought leaders”to “occupy” new media.This suggestion exposes an inherentweakness in all such government strategy.Occupation of anything on the internet isdifficult, so technology provides a platformfor resistance, albeit a fragile one. Forjournalists aiming for integrity, the intersectionof technology and the market presentsnew ways to survive. When he resignedfrom his job at a newspaper, Mr Liuenvisaged creating a platform akin to Pro-Publica, an American non-profitoutlet thatproduces investigative journalism in thepublic interest. For China, it is a venturethat still seems far off. But Mr Liu knows ofothers who harbour similar ambitions. 7

United States26 The Economist April 19th 2014Also in this section27 Adultery in New Hampshire28 A tough job for LA’s mayor29 How to fix American roads30 Big data and parole30 After “Noah”, the deluge?31 Lexington: The Jack Kemp revivalFor daily analysis and debate on America, visitEconomist.com/unitedstatesEconomist.com/blogs/democracyinamericaWomen, work and childrenThe return of the stay-at-home motherWASHINGTON, DCAfterfalling foryears, the proportion ofmums who stay at home is risingEACH suburban housewife, wrote BettyFriedan in 1963, struggles with a singlequestion as she makes the beds, shops forgroceries, chauffeurs children about andlies beside her husband at night: “Is thisall?” A few years after her ground-breakingbook “The Feminine Mystique” was published,the Census Bureau began collectingdata on the proportion ofmotherswho optto stay at home. Over the subsequent decadesthe statistics answered Friedan’squestion with a heartfelt no.In 1967 the share of mothers who didnot work outside the home stood at 49%;by the turn of the millennium it haddropped to just 23% (see chart 1). ManyThe nameless terrorMothers with children under the age of 18 whodo not work outside the home, %:married withworking husbandJobs held by women, % of totalsingle/cohabiting/other1967 80 90 2000 12Sources: Pew Research Centre; Bureau of Labour Statistics504030201001thought this number would continue tofall as women sought to “have it all”. Instead,the proportion of stay-at-homemothers has been rising steadily for thepast 15 years, according to new datacrunched by the Pew Research Centre.This partly reflects demographicchange. Immigrants, a rising share of therelevant generation, are more likely to bestay-at-home mums than women born inAmerica. There is an economic componentto the change, too: at the end of the1990s, when mothersstayingathome wereat their rarest, the economy was creating somany jobs that most people who wantedwork could find it. Now more report thatthey are unable to do so, or are studying inthe hope of finding work later. But there isalso an element ofchoice: a quarterof stayat-homemothers have college degrees.Taken as a whole, the group includesmothers at both ends of the social scale(see chart 2). Some are highly educatedbankers’ wives who choose not to workbecause they don’t need the money andwould rather spend their time hot-housingtheir toddlers so that they may one day getinto Harvard. Others are poorer but calculatethat, after paying for child care, themoney they make sweeping floors or servingburgers does not justify the time awayfrom their little ones.The first group is fairly small. Pew estimatesthat there are 370,000 highlyeducatedand affluent stay-at-home mothers (de-fined as married mothers with childrenunder 18 who have at least a master’s degreeand family income in excess of$75,000). That is 5% of all stay-at-homemothers with working husbands. Onethirdof stay-at-home mothers are single orcohabiting, and on average they are poorerthan the rest.The increase in stay-at-home motheringsits oddly with a second big trend affectingwomen’s lives: their relative successin the labour market. Women nowhold half of the jobs in America, up from32% in 1964. Women lost just one job duringthe recession for every 2.6 jobs lost bymen, according to the Bureau of LabourStatistics (though men have since staged arecovery). At the highly skilled end of thejobs market, women are in a strong position:they earn 57% of all bachelor’s degreesawarded by universities. The same istrue in the low-skilled bit. The industrieswhere the government expects the mostemployment growth between now and2022, such as health care and hospitality,are mostly dominated by women. Unless 1But they all feel equally guiltyMothers with children under the age of 182012, % of totalStay-at-homeWorkingMarried with working husbandSingleOther0 20 40 60 80 100Less thanhigh schoolHigh schooldiplomaSome collegeBachelor’sdegree or moreSource: Pew Research Centre2

The Economist April 19th 2014 United States 272 men become more like women, the argumentgoes, changes in the structure of theeconomy will consign many of them to futuresas indolent sperm donors.How can women be taking over theworkplace while simultaneously optingout ofit? The answer is that men have beenquitting the labour force even faster. Overalllabour-force participation (for bothsexes) has been declining since 2000, butfor men it has fallen faster (from 75% to69%) than for women (60% to 57%). In 40%of households with children a woman isnow the primary breadwinner, though inmost ofthose cases (26% ofthe total) that isbecause she is the only one.Where women continue to lag is intheir earnings relative to men. “The averagefull-time working woman earns just 77cents for every dollar a man earns,” saidBarack Obama on April 8th, adding:“That’s an embarrassment. It is wrong.” Ashe signed a pair of executive orders thatwould compel federal contractors to providedata on the pay and sex of their workforce,he tut-tutted: “Equal pay for equalwork. It’s not that complicated.”Actually, it is a bit more complicatedthan Mr Obama pretends. If employerscould really get the same work done for 77cents on the dollar by hiring women, theywould do so, and their shareholderswould gleefully pocket the extra profits.The 77 cents statistic, which Mr Obamacites often, compares apples with oranges.The nonsense of “77 cents”Men in “full-time” work do indeed makemore than women, but this is partly becausethey work longer hours (full-timehere means 35 or more hours a week). Menalso cluster in some of the better-paid professions:theyare 87% ofengineersbutonly16% of teachers. They do more dangerousjobs: 92% of work-related deaths are ofmen. Most important, men are far less likelythan women to take hefty career breakswhen children arrive. Single, childlesswomen earn 95 cents for every dollar a single,childless man makes, which is hardlythe stuffofcampaign slogans.However, as the mid-terms loom,Democrats are anxious to turn out femalevoters, 55% of whom voted for Mr Obamain 2012. Waxing indignant about sexismmay help rally support forDemocratic candidates.But will it help women strugglingto juggle the demands ofworkand family?Policies that make it easier for womento stay in work after having children,should they choose to do so, would probablybe more constructive. America is unusualin not granting statutory paid maternity(or paternity) leave or providing muchaffordable child care. Both policies wererecommended by a commission headedby Eleanor Roosevelt shortly before “TheFeminine Mystique” was published, buthave been largely ignored. 7Adultery in New EnglandLove free or dieTime to checkinto the Motel New HampshireAFTER 223 years New Hampshire is a married man and woman having sex inabout to make adultery legal. A law a van. They weren’t married to eachin 1791called for convicted adulterers to other, and the woman, who challengedbe paraded on the gallows for an hour the charge, was fined $50.and then “publicly whipped not exceeding39 stripes” before being sent to prison police their bedrooms, but 93% thinkFew Americans want the state toand fined £100 (probably more than a adultery is morally wrong, a recent CNNyear’s wages in those days).poll found. That view has stiffened overThe penalty has grown milder since the past few decades, even as attitudes tothen. Adulterers now face a $1,200 fine, homosexuality have softened dramatically(see chart). This may be because,which is not enforced. New Hampshire’sstate House ofRepresentatives voted to since the liberalising1960s, Americansrepeal the law in February; the state now know more about the real-worldSenate is expected to follow soon. Not consequences ofboth. Many grow up ateveryone is happy. A letter to the Concord ease with gay friends but upset by theirMonitor huffed that adultery was “repugnant”and should remain a crime.How many Americans have strayed?parents’ divorces.More than 20 states still have laws In the General Social Survey, 15% ofwivesagainst adultery. Colorado (the state of and 21% ofhusbands admitted to it. But aGary Hart, whose adultery cost him dear separate survey found that 74% ofmenin the 1988 presidential race) did not and 68% ofwomen said they woulddecriminalise it until last year. Courts indulge in an affair ifthey knew theyrarely hand down convictions; the most wouldn’t get caught. The law may nonotable ofrecent times was in Massachusettsin 1983, when two policemen caught will ifthey findlonger punish cheaters, but their spousesout.It’s fine to be gay but not to stray% responding “always wrong”Gay sexSources: NORC; Pew Research CentreAdultery1973 80 85 90 95 2000 05 12908070605040% saying that “married people having an affair ismorally unacceptable”, spring 20130 20 40 60 80 100FranceGermanyItalySpainJapanRussiaChinaBritainGreeceAustraliaUnited StatesTunisiaEgyptTurkey

28 United States The Economist April 19th 2014Los AngelesClipped wingsLOS ANGELESA gloomy report card forthe City ofAngelsLIKE protagonists in a Hollywood movie,Los Angeles seems always to be hurtlingtowards triumph or disaster. In 1988the LA 2000 Committee declared that itsstrategic site and magnetic powers to attractcapital and labour would make LosAngeles “THE city of the 21st century”, justas New York, London and Paris had ownedpreviouseras. Writing25 years later, the LosAngeles 2020 Commission discloses adarker vision for America’s second city. Intwo reports with names that might havebeen borrowed from clapped-out actionthrillers(“ATime forTruth” and “ATime forAction”) the commission paints a pictureof a city in steep decline and a leadershipsluggish in thought and action.Four years after its report, the optimisticspirit of the LA 2000 Committee went upin smoke in the Los Angeles riots. The cityis much safer now, but the 2020 commissionhas grounds for pessimism. The problemsoutlined in its first report, publishedin December, are serious: dismal publicschools, crumbling infrastructure andsoaring employee costs. A city still celebratedas a place of dynamism and opportunityis unable to create jobs for its growingworkforce. Since 1990 totalemployment has actually fallen, thoughthat figure disguises some wild fluctuations(see chart). In 2012 the official povertyrate for Los Angeles County was 19.1%; in2011, on a broader measure that takes thecost ofliving and government benefits intoaccount, it stood at 26.9%. Even Hollywoodis tottering, as film and TV producers arelured away by tax bribes in other states.Climbing backLos AngelesHouse prices, metropolitan area(January 2000=100)3503002502001501005001990 95 2000 05 10 14Sources: S&P/Case-Shiller; UCLAAnderson School of ManagementEmployment*m4.24.14.03.93.83.73.6*CountyBack to basicsIt was against this backdrop that Eric Garcetti(pictured), the mayor of Los Angeles,delivered his first state-of-the-city addresson April 10th and, four days later, his firstbudget proposal, worth $8.1 billion. Bothfollowed the understated approach to governingthat Mr Garcetti has adopted sincetakingoffice last June. Unlike hisrecent predecessors,the mayor proposed no showstoppinginitiatives or benchmarks againstwhich he could be judged. His would be a“back-to-basics” regime, he declared. Thebig news from the state-of-the-city addresswas that a motorway lane would open afew months earlier than expected.Young, smooth and charming, themayor is easy to like. He talks a good gameon transparency and transport, and canspeak frankly about some of the city’s problems.City Hall, he said last week, had becomea place “where jobs go to die, strangledby bureaucracy and indifference”. In arecent public forum your correspondentreceived a mayoral correction when henoted that Mr Garcetti had described terminalsat Los Angeles’s airport as terrible;the word he had actually used, the mayorsaid, was “crappy”.Yet some observers are asking when allthis real talk will translate into action. Fewof the pledges Mr Garcetti made last weekwere costed or came with deadlines. Bybudget day his campaign vow to scrap thecity’s gross-receipts business tax had shrivelledto a plan to snip it from 0.51% to0.425% over the next four years (althoughhe continues to promise its elimination).Sceptics grouch that they have no ideawhat the mayor spends his time doing.Such complaints are merely the mutteringsof the commentariat, says Raphe Sonenshein,head of the Pat Brown Instituteat California State University, Los Angeles.Angelenos, never as concerned with thehigh politics of city government as theirpeers in New YorkorChicago, worry aboutsuch things as potholes and electricity bills(Los Angeles’s Department of Water andPower is the largest municipal utility in theUnited States). Mr Garcetti has devotedmuch time to tinkering with the city’s bureaucracy;such manoeuvrings may not attractheadlines, says Mr Sonenshein, butthey are more likely to yield results thanthe expansive visions ofsome ofhis predecessors,which often flopped. Mr Garcettiemphasises that he wants to turn Los Angelesinto America’s “best-run” city.Yet that leaves many questions unanswered.In 2003 retirement costs accountedfor 3% of the city’s general fund; nowthey gobble up 18%, a figure that will risefurther without action. Los Angeles’s publicschools,which mainlyserve Latino children,perform poorly, raising fears of stratificationalong ethnic as well as economiclines. Some American mayors have tackledthese issues head-on, reforming pensionplans or pushing charter schools. MrGarcetti has had little to say about them(schools, admittedly, lie largely outside hisjurisdiction, but that has not stopped othermayors from piping up).The same could be said for anotherthreat to Los Angeles’s economic future.Rising house prices drive so many Angelenosout that the population of the metropolitanarea grew by only 3.7% between2000 and 2010, slower than every otherbig metro area bar New York. As elsewherealong the Californian coast, high demandand supply constraints have conspired tolift prices; and often it is middle-incomeresidents who are forced to leave. Houseprices in Los Angeles rose by 17% last year,and last October Trulia, a real-estate website,found that Los Angeles was the second-leastaffordable city for middle-classhousing in America, behind San Francisco.In a city not known for restraint, MrGarcetti’s approach can be refreshing. Butit is too soon to determine whether it isworking. A sterner test than he has yetfaced may lie before him, in the form ofone of the disasters, natural or man-made,that befall the city from time to time, or afiscal crunch that could force a hard decisionon taxes (vast deficits are projected foryears). If not, his challenge will be to demonstratethat his modest proposals areenough to tackle Los Angeles’s deep-seatedproblems. 7Nothing flashy about Garcetti

The Economist April 19th 2014 United States 29InfrastructureHighways to hellCHICAGOA harsh winter and tight budgets mean lots ofpotholesONLY the drunk, they say, drive in astraight line in Chicago. The sober zigzagto avoid falling into the city’s axlebreakingpotholes. This year the craters,caused by continual freezing and thawing,are worse than ever, and the spring thawhas brought three times the usual numberofcomplaints from citizens.As winter retreats, holes in roads andbudgets are being revealed—especially inmidwestern states, which were hit hard bythe polar vortex. Those states with moneyhave made emergency appropriations forrepairs; those without will have to cutsummer programmes. This means notmowing the grass in parks or picking up litter.It also means delaying resurfacing ofhighways or fixing guard rails, and puttingoffcapital spending.Looking after America’s roads is a persistentheadache. Although $91 billion isspent on them every year, that is nowherenear enough to keep the country’s 4.1mmiles (6.6m km) of public roadways ingood nick. The Federal Highway Administrationestimates that $170 billion in capitalinvestment is needed every year. Last yeara report from a civil-engineering groupsaid that 32% of America’s major roadswere in poor or mediocre condition. Mainroads through cities were in worst shape:almost half the miles travelled over urbaninterstates in 2013 were a bumpy ride. RayLaHood, a former transport secretary,thinks the roads are probably in the worstshape they have ever been.You shook me all night longHighway finance comes from two mainsources: cities and states, and the federalHighway Trust Fund (HTF). The HTFspends $46 billion a year and is funded bya tax of 18.4 cents on each gallon of petrol.But revenues are declining: the youngdrive a bit less and cars burn fuel more efficiently.Since American voters hate energytaxes, the petrol tax has not increased since1993 and its purchasing power has declined.Adjusted for inflation, it is nowworth only 11.5 cents. Had it been indexedto inflation 20 years ago (says the Centrefor American Progress, a leftish thinktank),it would now be 29 cents a gallon.The transport department reckons thehighway fund will dip below $4 billion inJuly. That is the minimum the administrationsays it needs to help states meet dayto-dayexpenses. The American Associationof State Highway and TransportationDirty deeds done dirt cheapOfficials says Congress must come up with$15 billion-17 billion to keep the fund solventnext year. It could either patch up thefund with another tranche of money—as ithas done in the past—or refinance it by raisingthe petrol tax and linking this to inflation.So far, it has done neither. Options arenarrow: a Gallup poll last year found thattwo-thirds of Americans opposed a rise inthe federal petrol tax for any reason.States also levy their own taxes, andsome, such as Michigan, have been able toincrease their road budgets. Massachusetts,together with Maryland and Wyoming,has managed to put up its petrol tax.Pennsylvania has imposed a tax on petrolwholesalers, which—officials seem tohope—may be less visible at the pump. InOhio toll-revenue bonds have been issued.In Missouri a 1% increase in the sales tax forten years has been proposed, though itmay not become law. (A state representativeremarked sardonically that 40% ofMissourians would oppose a new taxevenif it was being used “to construct the landingpad for the second coming ofChrist”.)Other states, however, cannot copewithout a large federal infusion. This maybe because they have lots of roads and notmany people to tax, or because their financesare shaky, like Rhode Island’s. Intestimony to Congress in March, Rhode Island’sdirector of transport said that if historicalfunding levels were not restored,and even with increased local investment,the state would be “managing the declineof its infrastructure”. Sue Minter, the deputysecretary of Vermont’s transport department,warned that “project delays will becomecancellations”.The HTF will probably be patched up;this is, after all, an election year. But statesare worried. In Arkansas ten projectsworth $60m—such as two bridge replacementsin Pulaski County, round Little Rock,and the widening of north-south Route63—have been taken off a list scheduled forfunding this April. In Colorado plans toadd a third lane to the I-25 between Denverand Fort Collins are in doubt, as the $1 billionproject needs federal support.Some states wonder whether tollingmight raise revenue for new roads. Illinoisrecently won planning approval for a $1.3billion toll road to Indiana. Forty-twostates and the District of Columbia nowhave some sort of tolling authority. Theseare increasingly popular ways of financingnew roads, although the slight decline indriving, and an unwillingness to pay highfees, have threatened this model in somecases. The Intercounty Connector, built toease congestion in the suburbsofWashington,DC, costs $8 for a round trip and hasfailed to meet traffic projections.Moreover, federal law does not allowtolling on existing interstates. The US TollingCoalition, a lobby group of buildingcompanies and contractors, would likeCongress to give more states the chance.But a new anti-toll lobby called the Alliancefor Toll-Free Interstates (mostly composedof shipping companies) wants toprevent it, and any change in federal lawwill be fiercely tussled over.Some argue that America needs to borrowmore to pay for better infrastructure.This is already happening. The new $3.9billion Tappan Zee bridge over the Hudsonriver in New York is financed with bondsthat will be paid for by tolls. A $2.5 billionproject, the North Tarrant Expressway inFort Worth, Texas, borrowed $531m from afederal fund known asTIFIA (the TransportationInfrastructure Finance and InnovationAct), set up in 1998 to provide loans orlines of credit for improvements to “eligibletransportation surfaces”.Down payment bluesLoans must still be repaid, whether fromtolls or taxes. Yet citizens seem to be morewilling to stump up for local roads throughlocal initiatives, whether higher taxes orvehicle-registration fees. Ken Orski, a transportanalyst, points out that on electionday in 2013 70% of ballot measures to increaseor extend funding for surface transportwere approved. Last year, voters inArkansas agreed to a half-cent increase inthe sales tax for highway improvements.The way ahead, perhaps? 7

30 United States The Economist April 19th 2014Parole and technologyPrisonbreakthroughBig data can help states decide whom torelease from prisonIN MONTY PYTHON’S “Life ofBrian”, theJerusalem crowd picks wrongdoers forPontius Pilate to release according towhether their names begin with “r”, sincethey find it amusing that the Roman governorcannot pronounce that letter. (“WeleaseWoger!”). Two thousand years later,America aims to select prisoners for paroleby more rational criteria, such as “Are theylikely to re-offend?”It turns out, however, that granting parolewisely is hard. Parole boards may bebiased, perhaps without realisingit. In general,they tend to overestimate the likelihoodthat a prisoner will re-offend, saysLance Lowry ofAFSCME Texas CorrectionalEmployees, a warders’ union. Many fearthat if they free a thug who then commitsan atrocity, their reputation will be ruined.This makes them err on the side of severity.In Ohio, forexample, a paroled murdererwas arrested last year for allegedlymurdering a 13 year old girl. (He later diedin custody.) The parole board took a beatingin the press. Being granted parole inOhio is now only slightly more likely thanwinning the lotto, says Barry Wilford, a locallawyer. Among applicants given hearings,in some months less than 1% are released.(In neighbouring West Virginia theaverage is 48%.)Help may be at hand, in the form of“risk-assessment” software, which crunchesdata to estimate the likelihood a prisonerwill re-offend. Such software tends to increasethe proportion of applicants whoare granted parole while also reducing theproportion who re-offend. Two such programmes,LSI-R and LS/CMI, appear to reduceparolee recidivism by about 15%. Developedby Multi-Health Systems, aCanadian firm, they were used to assess775,000 parole applications in America in2012. Four-fifths of parole boards now usesimilar technology, says Joan Petersilia ofStanford University.The data that matter include the prisoner’sage at first arrest, his education, the natureof his crime, his behaviour in prison,his friends’ criminal records, the results ofpsychometric tests and even the sobrietyof his mother while he was in the womb.The software estimates the probabilitythat an inmate will relapse by comparinghis profile with many others. The Americanversion of LS/CMI, for example, holdsdata on 135,000 (and counting) parolees.It is betterto be guided by software thanone’s gut, says Olivia Craven, head of theIdaho Commission of Pardons and Parole.Donna Sytekofthe New Hampshire ParoleBoard agrees. Unaided, parole board membersrely too much on their personal experiencesand make inconsistent decisions,she says.Software can be used to help make betterdecisions not only about whom to release,but also about how to manage paroleeson the outside. South Carolina uses aprogramme called COMPAS, developed byNorthpointe Inc, an American firm, to helpwith rehabilitation. It tells officials whichfactors are likely to be “feeding into” a person’scriminal behaviour, says ShaunitaGrase, the official in charge of making itwork. If COMPAS concludes that a paroleapplicant’s delinquency was fuelled moreby lack of education than, say, householdstrife, it might make sense to let him live athome aslongashe attendseveningclasses.If his education is irrelevant, limited resourcesmight be better spent on, say, anger-managementtraining.Christian filmsThey are risenNEW YORKProphets and profitsAFTER “Noah”, the deluge? On EasterSunday those who yearn for a biblicalfilm are spoiled for choice. “Heaven isfor Real” opens on April 16th. “Noah”,starring Russell Crowe, has alreadygrossed around $85m in America anddouble that abroad. Three religious filmsreleased in 2014—“Noah”, “Son ofGod”,and “God’s Not Dead”—have done wellat the box office, though not well enoughto make the all-time top ten (see chart).Some Christians complain whenfilms like “Noah” go off-scripture, butothers are happy to see holy tales giventhe Hollywood treatment. Churchgroups have been renting out cinemas towatch the films together.Popcorn and parablesUS box office receipts, $m, 2013 pricesRelease dateThe Ten Commandments, 1956Ben Hur, 1959Samson and Delilah, 1949The Robe, 1953The Passion of the Christ, 2004Quo Vadis, 1951The Lion, the Witch andthe Wardrobe, 2005The Bible: In the Beginning, 1966Solomon and Sheba, 1959The Prince of Egypt, 1998Sources: Office Box Mojo; Nash Information Services; The EconomistIn some cases, software may actuallyreduce crime. ORAS, a programme designedfor the Ohio Department of Rehabilitationand Correction, flags the low-riskcriminals whose likelihood of reoffendingactually increases the longer they arelocked up alongside violent criminals. Sosays Jennifer Lux, an ORAS designer at theUniversity ofCincinnati’s Centre for CriminalJustice Research.Some officials dislike all this new technology,notes Mr Lowry. Some resent havingtheir gut feelings overruled. Others aresorry that software makes it harder to disguisepolitical favours, such as respectingthe wish of a state senator to see the manwho burgled his house denied parole.However, it meets a need. America’sprisons are overcrowded—with less than a20th of the world’s population, it locks upnearly a quarter of prisoners—and ruinouslyexpensive. If software helps cut thecost of incarceration without endangeringthe public, states will surely use it. 7In the 1950s biblical epics such as “TheTen Commandments” and “Ben Hur”enjoyed Babylonian budgets. In laterdecades Christian films had to start withonly a few talents, and not many besidesMel Gibson’s “The Passion ofthe Christ”earned miraculous returns. Nowadays,however, name recognition is all the rage,and Bible figures are better known eventhan Harry Potter. Later this year Fox willrelease “Exodus: Gods and Kings”, starringChristian Bale as Moses. CharltonHeston is a tough act to follow: “The TenCommandments” is the most commerciallysuccessful religious film ever, whentakings are adjusted for inflation. Butsometimes you have to have faith.0 200 400 600 800 1,000 1,200

The Economist April 19th 2014 United States 31LexingtonThe Jack Kemp revivalLearning from a quarterbackturned “happy warrior” ofsupply-side economicsAMERICAN football “combines two of the worst things inAmerican life”, said George Will, a baseball fan. “It is violencepunctuated bycommittee meetings.” That soundslike goodtrainingforpolitics, so it is odd that so few football stars have wonhigh office. Jack Kemp, a quarterback for the Buffalo Bills, was anexception. He became a Republican congressman, an ideas manfor the Reagan revolution and, in 1996, vice-presidential runningmate to Senator Bob Dole. Now, long after his retirement fromelected politics and five years after his death Kemp is enjoying arevival, with tributes and name-checks from Republicans whobelieve that the party must broaden its appeal, notably amongthe young, women, Hispanics, blacks and other voter blocs whosuspect that the American Dream may be a mirage.In a way, this is a surprise. In his heyday Kemp was a radical,fighting a consensus in favour of big government and high taxes.Slash taxes and the Treasury will actually collect more money,Kemp and his allies predicted, as the economy creates newwealth and jobs—doing more to lift up the poor than any bossilybureaucratic welfare scheme. (“Voodoo economics”, sniffed theelder George Bush). Kemp could be a bit relentless: even friendsadmit they sometimes ducked down another congressional corridorwhen they heard him coming.But a quarterback’s charisma saved him, buttressed by his palpable,heart-on-sleeve compassion. Even opponents were disarmedby his willingness to preach the joys of free enterprise inunion halls, black community meetings or urban housing projects.Many saw a link to his sporting years. As congressional colleaguesjoked: “Jack Kemp has showered with more black menthan most Republicans meet in a lifetime.”Acentral Kemp idea waseliminatingtaxtrapsthatsqueeze thepoor if they move from welfare into work. Senator Marco RubioofFlorida, a putative contender for the 2016 presidential nomination,has some very Kempian ideas about simplifying welfareprogrammes and using wage subsidies to make work pay. Mr Rubiohas also backed immigration reforms that would bring millionsout of the shadows. Kemp, an immigration advocate whobattled nativists in his party, would surely have cheered (andsympathised when Mr Rubio endured a backlash from the right).Senator Rand Paul of Kentucky, another 2016 prospect, haspushed low-tax, deregulated “economic freedom zones” for suchblighted cities as Detroit, proudly calling them a version ofan oldKemp scheme, but “on steroids”. Representative Paul Ryan, the2012 vice-presidential candidate, has called Kemp a “mentor”since landinga job, aged 23, at a think-tankKemp founded. Of lateMr Ryan has been spending time deep in Kemp territory, visitingchurch-run anti-poverty schemes in minority neighbourhoods.Such moves to expand the party’s appeal mark a break withthe tin-eared 2012 Republican presidential campaign of MittRomney (whose team discouraged Mr Ryan from addressing Hispanicand black audiences, an insider sighs). That campaignreached an un-Kempian nadir when Mr Romney was caught ontape at a donors’ dinner, dismissing the 47% of Americans whopaid no federal income taxes as “dependent” on government andnever likely to vote Republican. Not only were Mr Romney’s remarkspolitically disastrous; he overlooked the fact that it was along-standing conservative goal, championed by Kemp and RonaldReagan, to remove low-earners from the tax rolls.Yet today’s Kemp revival is selective. In 1988 he failed to winthe Republican presidential nomination and he would flunk aparty primary today, suggests Mort Kondracke, co-author of aforthcoming Kemp biography. As a hawkish cold warrior, hewould loathe the pull-up-the-drawbridge foreign policies favouredby Mr Paul and the isolationist right. A self-styled “bleeding-heartconservative”, Kemp angered colleagues by arguingagainst cuts in social spending in hard economic times. Growthtakes care of deficits, he argued, warning his party against being“green-eyeshade” types obsessed with austerity.Explaining why he differs from his former mentor on this, MrRyan points out that Kemp worked in an age when far smallersums went on pensions, health care for the old and other socialtransfers, and deficits were less of a worry. Mr Ryan, a more austerefiscal conservative, calls himself a “second-generation supply-sider”,living in a “more difficult” age.What really draws today’s Republicans to Kemp is an attitudeof mind. Mr Ryan hails his old friend for representing an inclusive,“confident” strand of conservatism. Without namingnames, Mr Ryan draws a contrast with “insecure” conservatives,focused on “purifying the ranks and burning heretics, rather thanon winningconverts”. Will Kempian confidence win the day? Forthe Republicans’ sake, it had better.Don’t fear the votersKemp called the Republicans “America’s natural governingparty”—as long as they were willing to compete to defend theirideas. Americans, he warned conservatives, can lose trust in amajority party, if that majority party “loses faith in democracy”.Old friends hear a sportsman speaking. Kemp was smallish for amodern quarterback, notes SenatorDan Coats ofIndiana: he succeededthrough strength of will, first in football, then in politics.David Hoppe, a former Kemp aide, quotes a favourite dictum:“Jackused to say, ifwe have better ideas, we will win.”Today’s Republicans should pay heed. Too many boast thatAmerica is a majority centre-right country—only to turn roundand enthuse about low-turnout mid-term elections, in which theyoung, the poor and minorities are less likely to vote. Worse, toomany Republican state governments seem drawn to policies thatshrinkthe electorate, from purging felons from voter rolls to curbingearly voting. No sports team would long thrive if it ran fromfree and fair competition. Why should politics be different? 7

The Americas32 The Economist April 19th 2014Also in this section33 Bello: Searching for Mr Santos34 Intel and Costa Rica34 Canada’s war on doorknobsFor daily analysis and debate on the Americas, visitEconomist.com/americasBrazil’s economyThe 50-year snoozeSÃO PAULOBrazilian workers are gloriously unproductive. Forthe economy to grow, they mustsnap out oftheirstuporPECKISH revellers at Lollapalooza, a bigmusic festival in São Paulo earlier thismonth, were in for a treat. In contrast topast years’ menus ofreheated hamburgers,they could plump for pulled pork, barbecueribs or corn on the cob, courtesy ofBOSBBQ, a Texan eatery in the city. More surprisingthan the fare, however, was thepace at which BOS’s two tents dished it out.Over the course of two days the booths,each manned by six people, served 12,000portions, or more than one every 15 seconds,boasts Blake Watkins, who runs therestaurant. Such efficiency is as welcomeas it is uncommon. Neighbouring standsneeded two to three minutes to serve eachcustomer, leading to lengthy lines andrumbling stomachs.“The moment you land in Brazil youstart wasting time,” laments Mr Watkins,who moved to the country three years agoafter selling a fast-food business in NewYork. To be sure of having at least ten temporaryworkers at Lollapalooza, he hired20 (sure enough, only half of them turnedup). Lu Bonometti, who opened a cookieshop 18 months ago in a posh neighbourhoodofSão Paulo, has commissioned fourdifferent firms to fix her shop sign. Nonehas come. Few cultures offer a better recipeforenjoyinglife. But the notion ofopportunitycost seems lost on most Brazilians.Queues, traffic jams, missed deadlinesand other delays have been so ubiquitousfor so long that “Brazilians have becomeTime to wake upLabour productivity, GDP per employed person$’000 at PPP*, 2013 pricesSouth KoreaBrazilSource: The Conference BoardChileChinaMexicoIndia801960 70 80 90 2000 13*Purchasing-power parityity accounted for 40% of Brazil’s GDPgrowth between 1990 and 2012, comparedwith 91% in China and 67% in India, accordingto McKinsey, a consultancy. The remaindercame from an expansion of theworkforce as a result of favourable demography,formalisation and low unemployment.This will slow to 1% a year in the nextdecade, says Mr Bonelli. If the economy isto grow any faster than its current pace of2% or so a year, Brazilians will need to becomemore productive.Economists trot out familiar reasons forthe performance. Brazil invests just 2.2% ofits GDP in infrastructure, well below thedeveloping-world average of 5.1%. Of the278,000 patents granted last year by theUnited States patent office, just 254 went toinventors from Brazil, which accounts for3% of the world’s output and people. Brazil’sspending on education as a share ofGDP has risen to rich-world levels, butquality has not, with pupils among theworst-performingin standardised tests. MrWatkins complains that his18-year-old barbecuershave the skills of 14-year-oldAmericans.Less obviously, many Brazilian companiesare unproductive because they arebadly managed. John van Reenen of theLondon School of Economics found thatalthough its best firms are just as well runas top-notch American and Europeanones, Brazil (like China and India) has along, fat tail ofhighly inefficient ones.Preferential taxtreatment forfirms withturnovers of no more than 3.6m reais($1.6m) has reeled many irregular enter-anaesthetisedto them”, says Regis Bonelliof Fundação Getulio Vargas, a businessschool. When on April 12th the boss of thestate-owned operator suggested that largechunks of the airport in Belo Horizontethat will not be refurbished in time for thefootball World Cup in June should simplybe “veiled”, his remark elicited no morethan a shrug ofresignation.Apartfrom a briefspurtin the 1960sand1970s, output per worker has either slippedor stagnated over the past half century, incontrast to most other big emerging economies(see chart). Total-factor productivity,which gauges the efficiency with whichboth capital and labour are used, is lowernow than it was in 1960. Labour productiv-6040200Clarification: Our Bello column on Chile (April 5th 2014)said that the country’s proposed tax reforms wouldmean shareholders would be taxed on corporate profitsthey did not receive as dividends. Although firms wouldbe required to pay personal income tax on behalf ofshareholders on undistributed profits, shareholders willnot need to stump up their own cash.

The Economist April 19th 2014 The Americas 332 prises into the formal economy. But it discouragescompanies from growing. And asbig fish in areas like retail make efficiencygains they need fewer workers, who insteadswell the shoals of less productiveminnows. Many hire trusted kith or kinrather than a better-qualified stranger, tolimit the risk of being robbed or sued byemployees for flouting notoriously worker-friendlylabour laws. The upshot is evenmore inefficiency.Instead of collapsing, feeble firms plodon thanks to various forms of state protection,which shields them from competition.Protectionism weighs on productivityin other ways, too. Punitively high tariffson imported technology—such as thewhopping 80% cumulative tax slapped onforeign smartphones—make manyproductivity-enhancinggizmos prohibitively expensive,says José Scheinkman of ColumbiaUniversity. Rather than buy cheaperand better products from abroad, firmshave to pay overthe odds forlower-qualitylocal ones.Historical evidence points to a solution,thinks Marcos Lisboa of Insper university.The period of catch-up in productivitygrowth began in the 1960s, following about of liberal reforms engendered byyears of near-autarkic industrial policy. Asmaller uptick in the early 2000s also followedliberalising measures, enacted a decadebefore to stave off hyperinflation.Success notwithstanding, both the militarydictatorship of 1964-85 and the leftistWorkers’ Party, which has held the presidencysince 2003, soon reverted to interventionisttype. Recently this has meant local-contentrequirements, subsidised fueland electricity, and overweening regulation.Productivity has duly sputtered.Mr Lisboa highlights two salutary examplesfrom recent years. Agriculture wasderegulated in 1990, allowed to consoli-1BelloWill the real Mr Santos please speak upA tepid election fraught with risks for ColombiaUNTIL a few weeks ago, nobody seriouslythought that Juan Manuel San-to declare a ceasefire during the talks—thethe election. He took the wise decision nottos would fail to win a second term in an guerrillas used past truces to rest and recruit.But the result is continuing attackselection on May 25th. By any reasonablestandard, his has been a good government.Colombia’s economy is in decent two off-duty police officers. Most Colombi-and atrocities, such as the recent murder ofshape, and unemployment and poverty ans approve of the peace talks in principlehave fallen steadily. Yet suddenly the but remain sceptical that they will succeed.polls suggest that Mr Santos is vulnerable. Mr Santos’s biggest political problem isThey give him 25%-35% of the vote, with his predecessor, Álvaro Uribe. They werethe rest split among four rivals. So a runoffelection (on June 15th) is likely: if his defence minister; the supportand popular-once allies: Mr Santos served as Mr Uribe’sopponent is Enrique Peñalosa of the softleftGreen Alliance, Mr Santos would lose 2010. ButMrUribe, a pugnaciousconservaityof Mr Uribe guaranteed him victory innarrowly, according to one poll.tive, objects to the peace talks. He has unleasheda vitriolic personal campaignThat would have huge implicationsfor Colombia. For the election comes as against Mr Santos, branding the presidentthe government and the FARC guerrillas as a weak leader who is handing the countryover to communism.are locked in peace talks which offer thecountry its best-ever chance of ending an Faced with Mr Uribe’s “lies and insults”,Mr Santos says: “My policy is to ig-armed conflict that has dogged it since the1960s. Peace would not only improve Colombians’lives but add a point or more to to please everyone has led him to triangunorehim”. Yet the president’s instinct to tryeconomic growth, Mr Santos told Bello in late with the right. As his running mate, hean interview in his modest office in the picked Germán Vargas Lleras, a hardlinerNariño Palace in Bogotá. Lose the election,and that chance might be gone for talks. Mr Santos has tried to deflect conser-who until recently opposed the peaceyears. Yet paradoxically, this momentous vative ire by changing the subject, focusingelection has failed to engage the voters.The political climate is barely tepid, andturnout threatens to be low.There are several reasons for Mr Santos’ssudden difficulties. Colombiansdon’t much like the idea ofpresidential reelection,allowed only since 2006. Apatricianeconomist, the president is more athome in the classrooms of the LondonSchool of Economics or Harvard than thevillages of Colombia. He has overpromised,offering to reform every publicpolicy in sight. Colombians recall the failuresand take the successes for granted.Awkwardly, the president’s plan wasthatthe peace talks, begun formally in October2012, would be completed beforehis campaign on the economy and socialpolicy.But the biggest electoral threat to a secondterm lies not with Óscar Iván Zuluaga,the candidate of Mr Uribe, whoseparty won only 19% in a congressionalelection last month, but to the president’sleft. Mr Peñalosa, like Mr Santos, is an uncharismatictechnocrat. He wasa transformativemayor of Bogotá who can exploitColombians’ discontent with the statusquo and the lack of an economic feelgoodfactor.Mr Peñalosa says he would continuethe peace talks, keeping the same negotiatingteam. But a change in command atthis late stage of the talks would be hazardous.Although only two of the fivepoints on the agenda have been agreed,that is the tip of an iceberg of understanding,expressed in more than 50 pages ofdetailed blueprints for implementingpeace on the ground. Mr Santos says hehopes for a final accord by December.The president’s reluctance to campaignas a peacemaker is understandable—hewould risk rendering himselfhostage to a FARC attack—but looks mistaken.The FARC, whose ageing leadersknow they have suffered strategic militarydefeat, have as biga stake as the presidentin peace.An adviser to Mr Santos insists hiscampaign’s own polling suggests a clearvictory. Backed by the media and powerfulmachine politicians, it would be remarkableif he lost. But the presidentseems subdued and cautious; his campaign,with half a dozen different advisers,smacks of indecision. If he is to win aclear mandate, Mr Santos needs to facedown Mr Uribe, assert his own agendaand tell Colombians that the peace processoffers a historic opportunity to transformthe country for the better.

34 The Americas The Economist April 19th 20142 date and gain access to foreign machines,fertiliser and pesticides. A few years later,financial services enjoyed far-reaching institutionalreforms to boost the supply ofcredit and bolster capital markets. Bothwere left in peace—and became roughly 4%more efficient each year in the decade thatfollowed. Brazilian soyabean producersare now the envy of the world. Mr Watkins,the restaurateur, praises the bankingsystem as something that works morequickly in Brazil than it does in the UnitedStates.Regulation is always hard to unwind,Mr Lisboa concedes. But if Brazil is to growbeyond 2020, when the working-age populationwill begin to decline as a share ofthe total, it will have to tackle its productivityproblem. Until it does so, it risks fallinginto an ever deeper slumber. 7Business in Costa RicaIntel outsideSAN JOSÉThe chipmakershuts a factory, slicingaway one-fifth ofthe country’s exportsKARLA BLANCO started working for Intelin 1997, when the microchip giantopened its factory in the Costa Rican rainforest.She was hired as a customs andtrade expert and quickly climbed the professionalladder. After 17 years with thecompany, Ms Blanco is one of thousandsof Costa Ricans whose lives have beenchanged by the microchip industry. Shenow speaks fluent English and Portuguese,holds a master’s degree in internationalbusiness and serves as Intel’s corporate affairsdirector for Central America and theCaribbean.The future looked bright, both for MsBlanco and for Costa Rica. But on April 8thIntel announced plans to close its Costa Ricanfactory and move its operations to Malaysia,Vietnam and China. By the end ofthe year 1,500 jobs will have been lost. MsBlanco has been dealing with a torrent ofbewildered workers and media inquiries.“It’s been really painful,” she says.The pain will be felt across the economy.Intel’s operations in Costa Rica areworth around $2 billion a year, making upabout 20% of the country’s exports. Thefirm accounted for 11% of net foreign directinvestment in 2000-12. Intel says it will hireanother200 staffto workin its engineeringand global-services units in the country,which currently employ around 1,200 people.Nonetheless Henry Mora, a congressmanand economic adviser to the incominggovernment, estimates that the closureof the microchip factory will cause a dropin Costa Rica’s GDP of 0.3-0.4% over theCanada’s war on doorknobsKnobless obligeOTTAWANew building rules will help old folks—who now riskbeing eaten by bearsIT IS rare for changes to a municipalbuilding code to become headlinenews. But Vancouver’s ban on doorknobsin all new buildings, which went intoeffect last month, is an exception. It hasprovoked a strong reaction from thedoor-opening public and set offa chainreaction across the country as otherjurisdictions ponder whether to followVancouver’s lead. The country is ontenterhooks.The war on doorknobs is part ofabroader campaign to make buildingsmore accessible to the elderly and disabled,many ofwhom find levered doorhandleseasier to operate than fiddlyknobs. Vancouver’s code adds privatehomes to rules already in place in most ofCanada for large buildings, stipulatingwider entry doors, lower thresholds andlever-operated taps in bathrooms andkitchens.The rules have provoked grumblingabout the nanny state, much ofit fromdoorknob manufacturers. The CanadianHome Builders’ Association (CHBA)complains that Vancouver, the only cityin Canada with the power to determineits own building code (elsewhere it fallsto provincial governments), changed therules on its own, instead of asking for arevision ofthe national regulations,which would have triggered more detailedcost studies.These complaints pale in comparisonto a more sinister worry. True, elderly anddisabled people find it easier to operatedoors with handles. But so do bears. InBritish Columbia, bears have beenknown to scavenge for food inside cars—whose doors have handles, knob advocatespoint out. Pitkin County, Colorado,in the United States, has banned doornext year.Intel’s arrival helped Costa Rica to developa lively high-tech cluster which includescompanies such as Infosys andHewlett Packard (which last year announcedthat it was moving some of itsCosta Rican jobs to India). The worry isthat just as Intel’sarrival triggered an influxof smaller firms, its departure could causethem to leave. Nor is technology the onlyindustry feeling the squeeze. Hours afterIntel announced its departure, Bank ofAmerica said it would close its Costa Ricanoperations as part of a global restructuringprogramme, laying off1,400 workers.It is a grim start for the new governmentofLuis Guillermo Solís, who will be swornlevers on buildings for this very reason.One newspaper columnist in the proknobcamp has noted that the velociraptorsin “Jurassic Park” were able to opendoors by their handles.Canadians are undeterred. Membersofthe municipal council in Halifax areconsidering asking their provincial governmentto follow Vancouver’s example.So too are councillors in Pickering, east ofToronto. The provincial government inManitoba is examining how the newrules will workin Vancouver. PhilipRizcallah, who manages the federal bodyresponsible for the national code, says hewould be open to considering the measure.So far no one has asked.It seems only a matter oftime beforesomeone steps forward. Much publicityhas been given to the ban, which plays toVancouver’s offbeat reputation. “Whatare they smoking out there?” asks GarySharp ofthe CHBA. Iffurther bans do goahead, those living near the woodswould be wise to invest in some sturdylocks before installing doorhandles.in as president on May 8th. Mr Solís haspromised an international campaign topromote Costa Rica as an investment destination,highlighting its political stabilityand experience at combining foreign investmentwith local development that hasa low environmental impact. PR campaignsaside, he might address the expensiveelectricity and ropy infrastructure thatmany investors complain about.Asked if she will be able to continueworking for Intel, Ms Blanco says thatsome senior executives have told her shewill. “I hope so. But I still don’t know whatwill I do, or how,” she says. The thousandsleftjoblesswill expectthe newpresident tocome up with some answers, and fast. 7

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Middle East and AfricaThe Economist April 19th 2014 37Also in this section38 Syria’s ebb and flow of war38 Libya’s up-and-down eastern city39 A holy Palestinian city boxed in39 South Africa’s spectacle of a trial40 How to insure Kenyan cattleFor daily analysis and debate on the Middle Eastand Africa, visitEconomist.com/world/middle-east-africaAlgeria’s electionThe old man won’t go awayCAIROAn ageing president looks set to hang on grimly, however feeble his healthNOT surprisingly for a country that losta million people in its struggle for independencein 1954-1962 and perhaps another200,000 in its later civil war at theend of the century, humour in Algeriatends to be darkly cynical. And not surprisinglythe presidential election set for April17th has prompted plenty of bitter laughs.The almost certain winner, Abdelaziz Bouteflika,has been president for the past 15 ofhis 77 years. Yet apart from brief, inaudibletelevision clips of official gatherings, hehas scarcely been heard from in nearly twoyears. He did not even attend his campaign’sconcluding rally near Algiers, thecapital. Bused-in supporters were treatedinstead to a speech he recorded in 1999.“Technology in Algeria is so advancedthat even our president is virtual,” explaineda bemused commentator on Facebook.Such comments should not be dismissedas facile. Many Algerians regard MrBouteflika with a grudging fondness; afterall, he has been in politics since serving asforeign minister in the 1960s, and he didhelp bring the ghastly bloodshed of the1990s to an end. But they remain wary ofthe shadow-play that is Algerian politics.This election campaign, for instance,has carried a veneer of democratic practice,with six varied candidates bidding forthe top prize. But the oil-rich Algerian state,with its legacy of one-party rule and legionsofofficials all carefully vetted for loyaltyby an omnipresent secret police, tiltsthe outcome heavily towards the candidateanointed by “Le Pouvoir”, as Algerianscall the circle ofsenior generals and securitychiefs who actually run the country.Small wonder that Mr Bouteflika won hislast two elections, in 2004 and 2009, with85% and 90% of the vote, amid meagreturnouts and a strong whiffoffraud.The question in many minds is why Algeria’shidden puppet-masters shouldagain have backed Mr Bouteflika, despitethe fact that he had a bad stroke a year agoand may be unable to complete anotherfive-year term. The widely whispered answeris that divisions within Le Pouvoirmake it hard to agree on an alternative:someone who could present a façade ofdemocratic legitimacy and benign governance,while quietly letting the country’sensconced nomenclatura manage its fiefs.In recent months some of these divisionshave come into unusual public relief.A reshuffle of military posts last year, followedin January by a burst of criticismfrom Mr Bouteflika’s stalwarts directed atthe man long seen as the kingmaker, GeneralMuhammad “Toufiq” Mediène, headof the feared military intelligence service,exposed tensions. Open press criticism ofthe ailing president’s bid for a fourth term,as well as ofapparent top-level corruption,was rumoured to have been sanctioned byGeneral Mediène. But these cracks appearnow to have been largely papered over.Despite the advantages Mr Bouteflikaenjoys, Algeria still has a margin of freedomjust broad enough to allow for somepolitical jostling. His main challenger, AliBenflis, a former prime minister, has loudlywarned against electoral fraud. In onecampaign speech he predicted “a violentearthquake that will shake the foundationsof those who support a president forlife.” This prompted a heated riposte fromMr Bouteflika, who accused his opponentof“terrorism via television”.Most of Algeria’s myriad small oppositionparties, both Islamist and secular,urged supporters to boycott the vote. Inany case, they carry little weight. Perhapsmore challenging is the emergence of anew, non-affiliated pressure group that hasdenounced not just these elections, but the“entire masquerade” ofAlgeria’s politics.Launched only last month, Barakat,meaning “enough” in Algeria’s Arabic dialect,is modelled on peaceful civil movementsthat helped topple such rulers asEgypt’s Hosni Mubarak. Its internet presenceand public rallies have yet to attractmore than a few thousand, but its leaderssay they are planning for the longer run. LePouvoir is worried: a newspaper that hosteda Barakat press conference was quicklypunished by the withdrawal of all governmentadvertising, a vital source of revenuein a country whose oil wealth and socialistpolicies have stunted private business.Algeria is not a happy country. Periodicriots, ethnic clashes between Arabs andBerbersand the lingeringdangerofjihadistterrorism attest to festering social ills. Forthe time being, however, memories of stillworse times make Algerians too timid, byand large, to mount a greater challenge tothe powers-that-be. As Mr Bouteflika saidin his sole campaign effort, a letter to hispeople published by the state newsagency,“My current health challenges do not seemto disqualify me in your eyes.” 7

38 Middle East and Africa The Economist April 19th 2014Syria’s civil warThe ebb and flow of horrorCAIROWhile each side makes minorgains and losses, overall a bloody stalemate persistsACCORDING to President Bashar Assad,Syria’s three-year-old fratricide maysoon be over. Speaking at Damascus Universityon April 13th, he declared that hisarmy’s “war on terror” had reached a turningpoint. From now on, he implied, itwould essentially be a mopping-up operation.His allies echo this rosy view. “Thedanger of the Syrian regime falling hasended,” was the recent judgment of HassanNasrallah, the leader of Hizbullah, theLebanese Shia party-cum-militia that haspitched an estimated 5,000 fighters intothe battle on Mr Assad’s behalf.On the ground the picture ismuch moreblurred. Rather than showing an irreversibletilt in favour of the regime’s forces, thelatest fighting seems to have consolidatedterritories held by each side. True, Mr Assadfaces a less imminent threat to hisstrongholds, but he lacks the manpower toextend any of his gains very far. Syria remainsin effect partitioned into zones heldby the government and a patchwork of opponents.Short offarmore potent interventionby outside forces, it is hard to see anyearly military resolution to the conflict.Mr Assad’s men have lately reinforcedtheir control of the capital, Damascus, andmade more secure its vital link to regimeheldareas in the centre and west of thecountry. The capture on April 14th of Maaloula,a mainly Christian town north ofDamascus held by rebels since December,further shrunk a remaining rebel-controlledpocket along the border with Lebanon.Rebel resistance in Syria’s third-largestcity, Homs, is now in danger of beingterminally crushed, bringing to an end abitter and bloody two-year siege that hasdevastated the town centre.100 kmT U R K E YAleppoRaqqaKafr ZitaLatakiaSYRIAHomsAbu KamalLEBANONMaaloulaBeirut DamascusGOLANHEIGHTSISRAELJORDANAreas of controlHigh/low population densityAnti regime Syrian army ContestedSource: Noria Research; The EconomistIRAQEuphratesKurdishYet, despite infighting between rebelgroups, the regime’s opponents have notonly continued to harry the capital andother loyalist enclaves. They have alsomade their own territorial gains, in recentweeks seizing a coastal salient in the farnorth-west near Latakia, the Assad family’shomeland, plus chunks of territoryalong the Israeli-occupied Golan Heightsin the south-west.The rebels have also encroached on theremaining government-held parts of Syria’ssecond city, Aleppo. A rebel offensivethere in recent days has forthe first time cutthe government’s key supply line into thewestern part of the city. Thousands of governmenttroops as well as tens of thousandsof loyalist citizens could find themselvesencircled.Moreover, the mainstream rebel forcesappearto have contained, oratleast diminished,what had been a looming threatfrom the Islamic State of Iraq and GreaterSyria (ISIS). Last year this extreme jihadistgroup, which is commanded by Iraqis andlargely manned by foreign fighters, hadrapidly expanded its influence in rebelheldareas. Its cruelty and pan-Islamist ideologyprompted a Syrian nationalist backlash.Since open intra-rebel fighting eruptedin January, ISIS has been pushed backtoa rump territory in and around the centralcity of Raqqa. ISIS’s efforts to break out, eitherintoKurdish-held regions ofthe northeastor towards the town of Abu Kamal onthe border with Iraq, appear to have beenrepulsed. This is one reason why other rebelshave been freer to reassert their pressureon government forces in Aleppo.None of this is good news for ordinarySyrians longing for their nightmare to end.Scalded bythe costofachievingeven smalladvances, Mr Assad’s forces are making increasinglyindiscriminate use of heavyweaponry. Rockets, artillery and giant,nail-packed barrel bombs lobbed from helicoptershelp to suppress rebel fire. Theyalso make life in rebel-held areas a misery,generating floods ofterrified civilians.Some of Syria’s rebels have followedthe regime’s example by torturing, kidnappingand executing their opponents. Theyhave also launched indiscriminate attackson government-held areas. On April 14th,for example, more than 30 mortars firedfrom rebel areas landed on the loyalist Damascussuburb of Jaramana, killing fivepeople. And rebel car-bombings aimed atsoldiers inevitably hit civilians as well.One that went off in Homs on April 9thkilled at least 25 people, ofevery stripe.Despite the UN’s imposition last Septemberof a programme to strip Mr Assadof his chemical weapons, two-thirds ofwhich are now said to have been dismantled,there have been reports that governmentforces are usingthem again. The mostrecent documented event involved chlorinegas, which is technically not bannedunder international conventions. On April11th-12th it was apparently fired at Kafr Zita,a rebel-held village 200km (125 miles)north of Damascus. Dozens of people reportedlysuffered the symptoms ofpoisoning,causing widespread panic. The governmentaccusedthe rebelsofusingthe gasthemselves to attract sympathy. This failsto explain how the state media were ableto warn of imminent chlorine attacks onother nearby villages. 7Libya’s eastern cityIf only the bombswould go away…BENGHAZIThe country’s eastern capital is amishmash ofhope and fearELCOME to Benghazi, birthplace“Wofthe Libyan revolution,” declaresthe sign on the runway of its ramshackleairport. Visitors may be forgiven for nottaking the words at face value. Three yearsafter the uprising that began in Libya’s secondcity, the city is being pulled in severaldirections—not all ofthem backwards.Grim aspects are plain to see, especiallythe city’s lack of security. It often echoes tothe sound of gunfire and explosions. Earlierthis month a hairdresser’s shop and acafé were bombed. There has been a spateof assassinations. Recent victims have includednot just members of the securityforces, who are often targeted, but Egyptianlabourers, a French engineer and amuch-loved local poet famous for publiclyreciting his work during the revolution. ATurkish manager is pulling out his staff.“They are terrified,” he says. “It is notworth the risk.”The security vacuum has led to the riseof extreme Islamist groups flying the blackflag of jihad over mosques and streets insome of the city’s rougher districts andpainting it on walls. American drones areoften seen and heard over the city.Yet Benghazians have a good story totell, too. Their economy has bounced back.Neglected under Muammar Qaddafi’s 42-year rule, businesses and buildings arespringing up. A new shopping mall ispacked with families buying clothes andcosmetics from shops with European franchises.People sip cappuccinos in trendy 1

The Economist April 19th 2014 Middle East and Africa 392 cafés. A once-drab road known as VeniceStreet hosts scores of ebullient retailersselling international brands. Cranes dotthe city’s skyline.“Benghazi is booming,” says a nativebusinessman, smiling at his pun. Passengernumbers arriving at its rudimentaryairporthave doubled to 2m a year. Manyofthose flying in are from Libya’s diaspora,whose financial clout has helped resurrectprivate business. Others are potential foreigninvestors eyeing opportunities in Libya’soil-rich eastern region. Plans are underway for a free-trade zone on the city’s outskirts.Local optimists reckon grandioselythat Benghazi could be not just Libya’s economiccapitalbutalso a trade hub betweenEurope and the rest ofAfrica.But that all depends on security. If thecity stays dangerous, such fine hopes willsurely be dashed. 7PalestineNo room for a new innBETHLEHEMThe birthplace ofJesus is increasingly hemmed inSO GREAT has been the recent expansionofJewish settlements around thelittle Palestinian hamlet ofBeit Skaria, onthe south-western edge ofBethlehem,that it is now completely surrounded. Toreach its pretty hilltop you have to drivethrough the sprawling settlement ofGush Etzion, one ofthe largest ofJewishsettlement blocs on the West Bank, closeto the 1967 border. One crop ofsettlementsafter another has now been builton the land ofthe Beit Skaria villagers,who are banned by the army from puttingup any new buildings themselves.When they need to renovate their dilapidatedhomes, they smuggle in buildingmaterial in their car boots.For the people ofBethlehem up theroad, Beit Skaria is a bleakexample ofwhat might yet happen to them. On allsides, Bethlehem is also being surroundedby settler bypass roads and byconcrete walls higher than those thatdivided Berlin in the cold war. Earlier thismonth, Israel’s defence ministry confiscatedthe largest chunkofprivate Palestinianland in years on Bethlehem’ssouthern fringe to let smaller settlements,previously unauthorised by the Israeligovernment, expand. The population ofBeitar Illit, an ultra-Orthodox settlementto the west ofBethlehem, in the GushEtzion bloc, is set to grow from around45,000 to 100,000 in the next six years.With little land left for new inns,Bethlehem’s land prices have soared. Theboom in building hotels for Christianpilgrims has slowed, as hoteliers scourfor new land. Thanks to foreign pressure,South Africa’s trialJustice, after all, isbeing doneJOHANNESBURGA celebrity murdercase may teachSouth Africans a bit about themselvesHAT do other people in SA talk“Wabout? Those who don’t talkabout the #OscarTrial?” tweeted Zelda laGrange, a former aide to Nelson Mandela.For weeks the country has been transfixedby the trial of Oscar Pistorius, a sportinghero with two amputated legs who killedhis model girlfriend, Reeva Steenkamp—bymistake, he says.No newspaperis printed without Oscarnews. Court proceedings are broadcastRamallahISRAEL JerusalemBeitarIllitBethlehemPRE-1967BORDERBuilt-up jewishsettlementsSeparationbarrierArea control:C Israeli runSource: UNBeitSkariaHebronGush EtzionblocWEST BANK20 kmDead SeaSami Abu Daya, a Palestinian hotelier, gotIsraeli permission in principle to buildwhat he says will be the first Palestinianhotel in Area C, the rural 62% ofthe WestBankadministered solely by the Israelis.But his request to build a plush hotelcomplex on a hill just outside Bethlehem’smunicipal confines has yet toreceive the go-ahead from the plethora ofIsraeli committees.Farther south, a Turkish firm hasoffered to finance a hotel project aimed atMuslims returning from the pilgrimage toMecca. It would be the largest such complexin the Holy Land. But it is on hold,too, says its developer, because Israel isloth to issue permits. Bethlehem’s authoritieshave built a modern landfill tocater for an increase in rubbish. But thePalestinians say the Israelis will not letthe site operate unless it treats the newJewish settlements’ garbage as well.live, for the first time. A new satellite televisionchannel dedicated to the case carrieslegal commentary around the clock. EusebiusMcKaiser, a radio commentator, says:“The trial has become compulsory viewingor listening. Like sands through thehourglass, so are the days of our criminaltrial live.” Public attention peaked whenMr Pistorius was harshly cross-examined,cried, vomited and broke down.The questioning revolves around sex,jealousy, betrayal and the fast life of a boyborn without fibulas who became the firstdisabled athlete to compete in an Olympictrack event, two years ago, before he disappearedinto a netherworld of gunplay, bottle-blondesand celebrity lawyers. “It’s beyondwhat I could have made up,” saysMargie Orford, a Cape Town crime writer.The main facts ofthe case are not in dispute.Late on Valentine’s Day last year MrPistorius jumped out of bed with his gunand fired four bullets into Ms Steenkamp,who was behind a bathroom door. Did heact out of rage after a tiff, or in fear of an intruder,whom he said he heard in the dark?Interest in the case goes far beyond MrPistorius’s guilt or innocence. Campaignershighlight what they see as South Africa’sdangerous proliferation of firearms.The trial has brought to light several incidentswhen Mr Pistorius carelessly fired agun in public, once in a crowded restaurant,another time out of his car’s sunroofafter an argument with a policeman.Some thus see him as a product of thecountry’s malignly macho gun culture. Astring of South African men have recentlyshot family members after apparently mistakingthem for intruders. But others pointout that the number of guns in South Africahas fallen sharply since the end of apartheidin 1994 to 12.7 per100 people, not leastbecause stricter laws were enacted in2000. In comparison, Americans on averageown one gun per head of population.Britain has 6.7 per100.When Mr Pistorius declared in his testimony,“I shot out of fear,” he became thevoice of many white South Africans. Theytend to see themselves as living in theshadow ofviolent crime, retreating behindhigh walls, electric fences and steel doors.From there they can summon private securityguards, who are twice as numerous aspolicemen, by pressing a panic button.The trial has revived a long-running debateabout other aspects of crime. SouthAfrica’s murder rate is one ofthe highest inthe world: 30.9 for every 100,000 people,compared with 4.7 in the United States. Yetthe rate has fallen by half in the past 15years. Rich whites, the most fearful amongSouth Africans, are actually the least endangered.Most victims are poorand black.Though both the accused and the victimin the Pistorius case are white, race isnever far away. Ms Orford suggests that thecase in fact involves a third protagonist, 1

40 Middle East and Africa The Economist April 19th 20142 “the threatening body, nameless and faceless,of an armed and dangerous black intruder”.She detects and deplores the ghostof the “swart gevaar” (the black peril) thatsustained apartheid in the past century—and is still around.Some observers say that Mr Pistorius inhis defence reflects the laager mentality oflong-dead Afrikaners who felt they wereup againstthe world. In an article headline,“Crossing the street to avoid white men,”Sisonke Msimang, a writer, invokes thespectre of “white impunity” and “violentacts perpetrated by white men againstblack people who were simply mindingtheir own business”. She raises the possibilitythat “because we see whites as victimsand blacks as perpetrators, our collectivesympathies are always with whites.”A racial dimensionStill more controversially, Sandile Memela,an advocate forthe rulingAfrican NationalCongress (ANC), wrote on a website, “Oscarwould be a hero if Reeva were a blackman.” Trigger-happy whites, he added, feelentitled to kill anyone on their propertywho is black. “You cannot trust a blackman,” he wrote. “This is what white paranoiahas driven some white men to do:shoot first and askquestions later.” Followingan outcry, Mr Memela apologised.But others have sought to ease racialtensions. Every day members of the ANCWomen’s League come to court in supportof the family of Ms Steenkamp, whomthey see as a victim of domestic violence,another of South Africa’s biggest blights.Some see the trial as a referendum on thecountry’s willingness to confront it.A recent study in Gauteng province,which includes Johannesburg, found that50% ofwomen experience violent abuse athome and 75% of men admit to dishing itout. Four days before she was killed, MsSteenkamp, who was aware of the issue,tweeted, “I woke up in a happy safe homethis morning. Not everyone did.”Though less hotly debated, the most enduringlegacy of the Pistorius spectaclemay be its impact on the police and on thejustice system. Flaws in both have been exposed.It turned out that one of the investigatingdetectives on the case was himselffacing a murder charge. Evidence hassometimes been mishandled. Courtroomtranslation has been embarrassingly poor.Yet on the whole the justice system hasstood up to its televised scrutiny fairlywell. The presiding judge, an impressiveblack woman, is treated with nothing butrespect. Mr Pistorius calls her “M’lady”. Hisexpensive white lawyers cannot shieldhim from the robust questioning by GerrieNel, a so-called “pit bull” who is himselfsomething of a celebrity. South Africanswatching may be reassured by the sight ofa famous white man being attacked anddefended in equally vigorous measure. 7Kenyan farmersInsure my cowsWAJIRA new kind ofinsurance may protectherders against droughtASWELLasa cheque for$700, a knowinglook passed between Hassan Bashirand Bashir Mohamed, his 80-year-old father.A payment at a ceremony for herdersin Wajir, a town near Kenya’s border withSomalia, settled an argument dating backto 1997, when the son moved into the insurancebusiness. MrBashir, born into a cattleherdingSomali family in the rugged northeastof Kenya, was told that his careerchoice was not only odd but un-Islamic.Many imams say that sharia law does notsanction conventional insurance, deemingit to contain elements ofgambling.Despite being proud of his earningpower, Mr Bashir found his father wouldnot touch the money. He would not evenaccept the cash to go on the haj, the pilgrimageto Mecca. “He did not know anythingabout insurance,” said the son. “Hejust knew it was wrong.”His family’s disapproval persuaded MrBashir to set up Takaful, Kenya’s firstsharia-compliant insurance company. It offersmutual or “charity insurance”, wherebythe insurer acts as an agent, charging aset fee rather than un-Islamic interest. ButMr Bashir would not stop at insuring hiscommunity’s cars, homes and businesses;he wanted to solve their biggest problem,the loss oflivestockto drought.That proved harder. Insuring animalswho range with semi-nomadic herdersacross some of the harshest terrain onNot the end of the boy’s world if his cow can’t surviveearth had defeated all previous efforts.Eventually he came across the work of aKenyan economist, Andrew Mude of theInternational Livestock Research Institute(ILRI), based in Nairobi.Mr Mude has developed an insurancemodel that uses satellite images to assessthe impact of drought on the vegetationthat camels, cows and goats need to survive.The data allow for the severity of thedrought to be factored into the size of thepremium. If dry weather causes grazing todrop by at least 15%, judging by historicalrecords, the insurer will pay out. This model“insures the grass, not the animal”, saysMr Mude. Mr Bashir’s father was paid,along with dozens of others, after his areawas judged to have suffered a 23% drought.He got a cheque worth 8% of the total insuredvalue ofhis beloved herd of50 cows.Persuading seasoned Somali herderswho have been husbanding their animalsthe same way for centuries to pay insurancepremiums has not been easy. Mr Bashirhas bent the ear of local imams andsheikhs and brought in Islamic scholars.Meanwhile donors, including Britain andAustralia, whose aid agencies fund ILRI,have stumped up more money to get theword out around Wajir. The only problem,Mr Bashir concedes, is that, with all hisherderclients currently grazingin one area,everyone must be paid at the same timewhen the rains fail.To get enough clients Takaful must recruitherders from across northern Kenyaand into southern Ethiopia to spread theriskfar enough so that a single drought willnot clobber all its clients at once. It will be acostly undertaking; Mr Bashir expects it tomake a loss for at least five years. Talkinghis father around to the benefits of insurancetook 17 years. “This community haspeculiar needs,” he says ruefully. 7

S P E C I A L R E P O R TC H I N AApril 19th 2014Building the dream

SPECIAL REPORTCHINABuilding the dreamACKNOWLEDGMENTSApart from those individuals namedin the report, the author would liketo thank the following who alsoprovided generous help and sharedvaluable insights: Cai Fang, GregClark, Dai Bin, Du Yang, Feng Jin,Feng Yongfeng, Anna Greenspan,Guo Xiaoming, Guo Zhengmo, J.Vernon Henderson, Huang Rui, LianSi, Liu Li, Liu Zhi, Lu Ming, XinMeng, Gordon Orr, Paul Procee, KlausRohland, Victor Shih, Song Shinan,Tang Jun, Jeff Wasserstrom, YaoYang, Ye Xiaoyu, Yu Xiaogang, ZhaoJian, Zhu Liangmin and Zhu Ning.The views expressed in this report donot necessarily reflect theirs.By 2030 Chinese cities will be home to about 1billion people.Getting urban China to work properly is vital to the country’seconomic and political future, says James MilesSOME HISTORIANS BELIEVE that Marco Polo never went to China. Buteven ifthe 13th-century Venetian merchant did not lay eyes on the coastalcity ofHangzhou himself, he certainly reflected the awe it inspired in otherforeign traders when he described it as “beyond dispute the finest andthe noblest in the world”. And, “incredible as it may seem”, he wrote,Hangzhou (which he called Kinsay) was but one of more than 1,200“great and wealthy cities” in southernChina. “Everything appertaining tothis city is on so vast a scale…that it isnot easy even to put it in writing.”In Marco Polo’s day it was the ornatepalaces, paved roads and meticulouslyplanned layouts of Chinese citiesthat impressed visitors; in today’smegacities it is some of the world’s tallestskyscrapers and largest shoppingmalls, interlinked by the world’s longestbullet-train network. And if allgoes according to the CommunistParty’s plan, the coming two decadeswill evoke a few more gasps.By 2020 the high-speed rail networkwill expand by nearly twothirds,with the addition of another7,000km (4,300 miles). By then almostevery city with a population of half amillion ormore will be connected to it.Tens of millions more migrants willhave poured in from the countryside.Between now and 2030, says theWorld Bank, the average rise in thenumber of city-dwellers each year islikely to be around 13m, roughly thepopulation of Tokyo. In 2030 China’scities will be home to close to 1 billionpeople, or about 70% of the population,compared with 54% today. Bysome estimates the urban populationwill peak around 2040, still just shy ofthe 1 billion mark but close enough. As James McGregor, an Americanbusinessman, put it in his book, “One Billion Customers”, published in2005, the notion of a billion Chinese spenders has come to symbolise“the dream of staggering profits for those who get here first, the hype andhope that has mesmerised foreign merchants and traders for centuries”.After taking over as party chief in 2012, Xi Jinping (now also president)launched his expected decade in power with a catchphrase: “TheChinese dream”. It was a strikingbreakfrom the party’s tradition ofideology-ladenslogans. Now endlessly invoked in official speeches and thesubject of numerous books and songs, the phrase is clearly intended toappeal to upwardly mobile urban residents striving for the comforts oftheir rich-world counterparts.Only 15 years ago such a middle class barely existed in China. In2011, when the country reached 50% urbanisation, it had become obviousthat the party’s fate rested with the stability of cities and the content-1CONTENTS5 Spreading the wealthA billion shoppers7 The rural-urban divideEnding apartheid8 Local governmentEmerging from the shadows10 Urban sprawlPeople, not paving11 The city as pasticheDreaming spire12 GreeneryLet us breathe13 PoliticsThe urban voice15 A new societyPushing the boundariesA list of sources is atEconomist.com/specialreportsAn audio interview withthe author is atEconomist.com/audiovideo/specialreportsThe Economist April 19th 2014 3

SPECIAL REPORTCHINANumber of skyscapers*72Total, 2014Pre-2000Completed2000-14NATIONAL AVERAGE35.646.9HEBEIHEILONGJIANG17.5JILIN43X I N J I A N GINNERLIAONINGGANSUBeijingBEIJINGMONGOLIADalianSHANXITianjinnTIANJINQINGHAININGXIAIASHANDONGT I B E TZhengzhouChinaUnited StatesHENANJIANGSUSHAANXIANHUIShanghaihaiNominal GDP at current exchange rates, $trnSICHUANSHANGHAI50HUBEIChengduNingboFORECASTZHEJIANGCHONGQINGGJIANGXI40ChinaGDP per person, 2012, $’000HUNANFUJIAN301-44-77-10YUNNANGUIZHOU10-13 13-16KunmingGUANGXIXiamen20 NATIONAL AVERAGE = 6.1GUANGDONG †ZhongshanUnited StatesIndiaPopulation, 2012, %Hong10MacauRural,RegisteredMaomingKongliving whereurbanJapanregistered*250+ metres tall0Urban, with rural status ‡HAINAN† Guangdong data exclude1990 95 2000 05 10 15 20 25 30Hong Kong and MacauSources: Council on Tall Buildings and Urban Habitat; Economist Intelligence Unit; Haver Analytics; The Economist estimates‡ Registered as rural, living elsewhere2edness of their middle-class residents. The largely rural countrythat Deng Xiaoping (himself of peasant stock) set out to “reformand open up” in the late 1970s had become overwhelmingly urbanin its economic and political focus. Thanks mainly to a tideofmigration, China’s urban population had grown by more than500m since Deng launched his reforms: the equivalent of all thepeople in the United States plus three Britains.Li Keqiang, who took over as prime minister in 2013, seesfurther urbanisation as critical to China’s economic success. Hehas called it a “gigantic engine” for growth. Mr Li and other officialsare fond of quoting Joseph Stiglitz, a Nobel prize-winningAmerican economist, who said that technological innovation inAmerica and urbanisation in China would be “two keys” tomankind’s development in the 21st century.A new grand plan for China’s cities, overseen by the primeminister and published last month, admits to a number of problems,such as worsening pollution, urban sprawl and congestionas well as growingsocial tensions. It also points out that China’surbanisation lags behind that of other countries at similarlevels of development (typically around 60%), and that there remains“quite a lot ofroom” for further urban growth.Getting cities right will help China to keep growing fast foryears to come. Getting them wrong would be disastrous, bringingworsening inequality (which the World Bank says has approached“Latin American levels”, although Chinese officials insistit has recently been improving), the spread of slums, theacceleration ofglobal climate change (citiesconsume three-quartersof China’s energy, which comes mainly from coal) and increasingsocial unrest.After more than a decade of spectacular growth in China,much of it in double digits, doubts are setting in both at homeand abroad about the sustainability of the “Chinese model”.Growth is slowing. Lavish spending by local governments haspiled up huge debts. Increasing numbers of middle-class Chineseare looking for boltholes abroad for themselves, their familiesand their assets. Scandals involving senior officials have revealedcorruption on a gargantuan scale. Censors generallysucceed in preventing anti-party messages from spreading widely,but microbloggers with thousands of followers still boldly relaydamning critiques.MrXi describesthe country’sproblemsand hisapproach tosolvingthem in colourful terms. Reforms, he says, have entered a“deep-water area”. China must “venture along dangerous pathsto breakthrough barriers to reform”. In tackling corruption it willneed the resolve of a man who must “cut off his own snake-bittenhand to save his life”. At a plenum of the Central Committeein November the party declared that market forces must play a“decisive role”, the strongest support it has ever expressed for themarket. This seems all the more stirring after years of vacillationunder Mr Xi’s predecessor, Hu Jintao, who retreated from reformin the face ofpowerful resistance by vested interests, above all localgovernments, huge state-owned enterprises and, ironically,the new middle class, which would rather not share the fruits ofgrowth with rural migrants.Why cities matterAll the most important reforms that Mr Xi needs to tackleinvolve the movement to China’s cities. He must give farmers thesame property rights as urban residents so they can sell theirhomes (which is currently all but impossible) and leave the landwith cash in hand. He must sort out the mess of local-governmentfinances, which depend heavily on grabbing land fromfarmers and selling it to developers. He must loosen the grip ofstate-owned enterprises on the commanding heights of theeconomy and make them hand over more of their profits to thegovernment. He must move faster to clean up the urban environment,especially its noxious air, and prevent the growth of China’scities from exacerbating climate change. And he must start14 The Economist April 19th 2014

SPECIAL REPORTCHINA2giving urban residents a say in how their cities are run.This list is both daunting and urgent. The recent growth ofChina’s cities has created two new social forces whose concernsMr Xi cannot afford to ignore. One is a vast migrant population(including the urban-born children of recent migrants from thecountryside) that now makes up more than one-third of the urbantotal of 730m. It is far harder for a member of this group togain official recognition as a city-dweller in his own country,with all the welfare benefits and access to public services thatstatus confers, than to gain citizenship in America or Europe ifhewere to migrate there. The harsh treatment of China’s internalmigrants is creating huge social divisions that could erupt in seriousunrest.The other new force is the urban middle class, now thoughtto be roughly the same size as the migrant population, whichnumbers around 260m. It has been kept reasonably content bythe rapid growth ofthe past few years, but that may not last. China’smiddle classes, like those elsewhere, worry about property:how to protect it from the whims ofurban planners and party officials,what is happening to prices, and what to do if the bubblebursts. Increasingly unaffordable house prices, or conversely asteep drop, might prompt different ends ofthe middle-class spectrumto protest. So too might the party’s many sins and blunders:a food-safety scandal, perhaps, linked to official corruption.Like his predecessors, Mr Xi is nipping signs ofunrest in thebud. Dissidents who have done little more than briefly raise protestbanners in tiny groups are beingthrown into jail. But there arealso some positive signs. He has taken charge of a new party organ,a small group of officials with a wide range of portfolios,who are working to improve policy co-ordination and overcomebureaucratic resistance to change. It even has a taskforce dedicatedto building “democracy and the legal system”, although thatmay not get very far. Mr Xi has also launched a fierce campaignagainst high-level corruption which, though unlikely to offer alasting cure to the endemic problem of graft, could scare officialsinto compliance with his reform plans.A dwindling labour supplyAs economic growth slows and the pool of surplus labourin the countryside shrinks, the speed ofurbanisation will diminish.For the past few years about 9m people have been movinginto cities every year. The number will fall to 7m in the secondhalfofthis decade and 5m in the 2020s, according to Jin Sanlin ofthe Development Research Centre, a government think-tank. By2017, he writes, that supply of surplus labour in the countrysidewill have all but disappeared.Chinese officials note that the speed ofurbanisation in Chinahas been far faster than in Western countries during their industrialtransformations. It took China only 30 years to climbfrom 20% urbanisation to today’s 54%. In Britain the equivalentjourney took100 years and in America 60. However, in more recenttimes population growth in urban China has been slowerthan in countries such as South Korea and Indonesia during theirperiod of rapid economic development, mainly because of China’sdiscriminatory policies against migrants and its state monopolyon rural-land sales.By any measure, the country’s urbanisation has been impressive.Shanghai is about to finish a 121-storey Americandesignedskyscraper that will be the word’s second-tallest building(after Dubai’s Burj Khalifa). Whole new urban districts,underground railways, modern airports and intercity expresswayshave been built on a scale and at a pace most countrieswould be proud of. But China has failed to reap the full benefitsofcity growth. This is becoming a pressing problem in the face ofdiminishing returns from pouring ever more concrete. 7Spreading the wealthA billion shoppersChinese consumers are spending plenty, but theycould do even betterDENG HONG’S AMBITION, according to a Chinese newspaper,was to build a city inside a single building; a “temperature-controlledparadise”. Last September his dream edifice,the New Century Global Centre, formally opened in the southwesterncity of Chengdu (see picture, next page). China’s officialmedia call it the world’s largest building. Its centrepiece is a shoppingmall of such arresting dimensions that many visitors pauseon arrival to take souvenir photographs. It boasts a 300-metre indoorbeach, a skating rink and an IMAX cinema. The Chinese oftensay that theirs is a country of too many people and too littleland. The cavernous Global Centre building begs to differ.Mr Deng did not attend the launch ceremony. He was incustody, suspected ofbeinginvolved in a corruption scandal thathas also ensnared a former mayor of Chengdu, who in turn maybe linked to an even biggercase linked to a formermember ofthePolitburo Standing Committee, Zhou Yongkang. Mr Deng’s troublesare an uncomfortable reminder of the perils of hubris. Massivebuildings help to boost local officials’ egos and brand theircities. According to the Council on Tall Buildings and Urban Habitat,an American industry association, China has about 200 skyscrapersover 250 metres tall, four times as many as America.Close to Mr Deng’s building is an office complex reminiscent ofBeijing’s “bird’s nest” stadium that cost1.2 billion yuan ($175m) tobuild. It was supposed to become the city government’s headquarters,but after a public outcry over its extravagance its leadersdecided to move to more modest buildings nearby.The Global Centre, though, is also a monument to an increasinglyessential ingredient of China’s economic development:consumption on a scale that helps to lessen the country’sdependence on infrastructure investment as an engine ofgrowth. China’s leaders want citizens to save less and spendmore. Mr Deng’s brainchild is a proud declaration by a local governmentfar inland that it wants a consumer culture like that inmegacities such as Beijing, Shanghai, Guangzhou and Shenzhen.The capital’s most iconic new structures are stadiums, officebuildings and a colossal egg-shaped centre for the performingarts. Chengdu’s is a jaw-dropping shopping experience.Cultivating a consumer cultureChina’s GDP growth, contribution by source, percentage pointsConsumption Investment Net exports Total (% increaseon a year earlier)152000 01 02 03 04 05 06 07 08 09 10 11 12 13Source: CEIC105+0–511The Economist April 19th 2014 5

SPECIAL REPORTCHINAThe GlobalCentre is amonumentto consumption—an increasinglyessentialingredientof China’seconomicdevelopment2 Chengdu, the capital ofSichuan province, is a “second-tier”city, a loosely defined category that includes most provincialcapitals; yet it is rapidly gaining the “first-tier” status ofShanghai,1,600km (1,000 miles) to the east. That suits China’s leaders, whoare trying to boost consumption in regions that have fared lesswell in China’s almost uninterrupted boom of the past 35 years.Thanks to massive government investment since the turn of the21st century, the gap between the wealthy east and the far less developedwest of China has narrowed. According to the EconomistIntelligence Unit, a sister organisation ofthis newspaper, averageGDP per person in China’s western provinces in the late1990s had dropped to about one-third the figure in the nine easterncoastal provinces; but by 2012 it had recovered to more thanhalf, the highestlevel since China launched itseconomic reformsin the late 1970s.The Global Centre seems to be reckoning on a fair numberof wealthy spenders in Chengdu: it provides 15,000 parkingspaces. It is also readily accessible by the city’s first metro line,which opened in 2010 (there are now two lines, and plans for anunderground network of more than 350km by 2020, close to thelength of London’s). But Chengdu’s new middle classes muchprefer to drive. The city has more than 3m private cars, secondonly to the number in Beijing. And at weekends the centre alreadyseems to be packing visitors in.Consuming passions, continuedLike the rest of the country, though, Chengdu is beginningto slow down. The city estimates that its GDP last year grew byabout10%, two percentage points less than it was aiming for andthe lowest rate since 1999. Nationally the picture is much thesame. This year’s overall growth target is for 7.5%, the same as lastyear’s and a far cry from the double-digit advances ofmost ofthepast decade. But that does not mean household spending willfalter. Andy Rothman of Matthews Asia, an investment firm,calls China “hands down the best consumption story on theplanet”. Retail sales last year went up by 11.5% in real terms, after12.1% in 2012 and 11.6% in 2011. China’s household spending overthe past few years was holding up well, he argues. It was just thatinvestment grew even faster.A “rebalancing” may be under way. Except for a dip lastyear, the share of GDP growth contributed by households andthe government has been rising (see chart 1 on the previouspage). In 2011 and 2012 it exceeded that contributed by investmentfor the first time since the middle of the past decade. Lastyear China overtookJapan to become the world’s second-largestconsumer economy.However, there isa lotmore thatChina’sleaderscould do toachieve the goal set by the prime minister in March: that thecountry should “fully tap the enormous consumption potentialof more than a billion people”. The Global Centre was not builtfor the mass market, as attested by a display inviting shoppers toinvest in luxury resort property in Thailand. A large group ofpeople living in China’s cities is, in effect, “shut out of the urbanconsumer economy”, says Tom Miller, author of “China’s UrbanBillion”: the one-third of urban residents who have migratedfrom the countryside. They make up about 40% of urban labourand the majority ofChina’s workforce in manufacturingand services,but they spend very little.As Mr Miller notes, this is changing, thanks to a shift in China’sdemography. In 2012 China’s working-age population (thosebetween 15 and 59; most Chinese retire young) began to shrink.In response to shortages of young, unskilled labour, local governmentshave been raising minimum wages. This has beengood for inland cities like Chengdu, which have benefited fromproduction shifting westward in search of lower labour costs. Ithas also been great formigrants: theiraverage wages doubled between2005 and 2011, to about 2,050 yuan ($322) a month, andlast year rose by nearly 14%. But a lot remains to be done to turnthese migrants into big spenders.A good start would be to change their official householdregistration, or hukou, to the city, entitling them to the welfarebenefits and access to public services enjoyed by other citydwellersand thus releasing some of their spending power. Migrantshave an unusually high savings rate, farhigherthan that ofeither urbanites or rural dwellers, perhaps to compensate for theabsence of welfare benefits. According to Chi Fulin of the ChinaInstitute forReform and Development, rural migrants on averagespend 2.7 times as much when they move to urban areas as theydid athome. Buttheystill need to save to make up for theirlackofentitlement to housing and other benefits. If they also changetheir hukou, their expenditure more than triples.Yet for most migrants changing hukou is next to impossible.They continue to be called mingong (peasant workers) no matterhow long they have been living in the city, and so do their children,even ifurban-born and raised. Forreasons ofequity as wellas economic advantage, hukou reform has become urgent. 76 The Economist April 19th 2014

SPECIAL REPORTCHINAThe rural-urban divideEnding apartheidFor China’s reforms to work, its citizens have to bemade more equalMIGRANTS ENCOUNTER BARRIERS ofspeech, habits andmanners the world over, but in China these are heavily reinforcedby the system of hukou, or household registration,which permits routine discrimination against migrants by bureaucratsas well as by urbanites (a term applied in this special reportto city-dwellers who have no rural connections themselves,and nor do their parents). In a survey conducted by the ChineseAcademy of Social Sciences, nearly one-third of respondents inShanghai said they would not like to live next door to a migrant,against only one-tenth who said they would rather not live nextto a poor person. In Changchun, a less outward-looking city inthe north-east, nearly two-thirds said they did not want to livenext to a migrant. Chinese urbanites seem as anxious as Europeansabout migration from poor to rich places, even though inChina the migrants are fellow citizens.In one crucial respect, however, they fall short of that status.A migrant may have been living in a city for many years, buthis hukou will still identify him as rural. The document acts as aninternal passport. China’s first constitution in 1954 said that citizensenjoyed “freedom ofresidence and freedom to change theirresidence”. Four years later Mao Zedong introduced the hukousystem in order to prevent a flood of migrants pouring into thecities. It was eased only in the 1980s when China needed cheaplabour for its factories. But the pernicious legacy of hukou-inducedapartheid persists today.If China’s level of urbanisation were calculated on the basisof hukou, rather than residency, it would be a mere 36%, notfar ahead of India’s (31%). Very few of those who have migratedto the cities over the past three decades have obtained urban hukou.This matters a lot because a person’s hukou, rather than hisplace of residence, determines the level of welfare benefits he isentitled to. The city-born children of migrants suffer the samediscrimination, often being denied access to urban state-runschools and having to clear higher hurdles to get into university.The hukou divide is sharpest ofall in China’s “first-tier” megacities,which are among the biggest magnets for migrants. InStill plenty of upsideChina’s urban populationNumber, bnFORECAST1.00.80.60.40.201950 75 2000 25 50Sources: UN Population Division; Haver AnalyticsAs % of totalActual*Hukou60504030201001997 2000 05 10 13*Resident for six months or longer2No longer so cheapChina’s migrant workersNumbermSource: Haver Analyticssome, including Beijing, theyare not allowed to buy cars orhouses unless they meet whatfor most would be impossiblyexacting conditions. Thus, asChina’s middle class has expandedrapidly, a similarlylarge group of urban “secondclasscitizens” (as even the officialmedia have sometimescalled the migrants) has grownin parallel. Not that it matters ina one-party autocracy, but migrantsand their urban-raisedoffspring are not even allowedto vote in the cities.In the decade to 2010 themigrant population living in citiesgrew by more than 80%, a colossal influx that pushed up thetotal number of urban residents by some 200m. China has beenremarkably successful in controlling the spread of urban slums:over the same period the proportion of city-dwellers living inslums fell by one-quarter to below 30%, according to a UN study.And many of these slum-dwellings are relatively smart comparedwith their counterparts in other developing countries,thanks to tough controls on building shanty towns.Risking an explosionEven so, migrants often live in grim conditions. Out ofsightare pockets of wretchedness similar to slums in developingcountries such as India. One such is the village of Dongxiaokounorth of Beijing, just beyond the edge of the city’s urban core. Avillage only in name, it is essentially a centre for processingwaste. Thousands ofmigrants, most ofthem from impoverishedvillages in a single prefecture of the central province of Henan,prepare sackfuls of tin cans, piles of iron scrap and mountains ofplastic bottles for bulksale to recycling plants.It is a scene of Dickensian poverty, with migrants packedinto tiny brick shacks off muddy, rubbish-strewn streets. Theirchildren go to ramshackle private schools that charge around4,500 yuan ($725) a year, several weeks’ income for many migrants.Formost ofthem there are no places at state schools. Ifmigrantsfall seriously ill, they have little choice but to go back totheir villages; their government-subsidised rural medical insuranceis often not valid in a different province (or even, until lastyear, in a different part of Henan). The only migrants who haveurban health insurance are those with formal job contracts, butnot even one in five enjoys that privilege.The party appears to be waking up to the disruptive potentialof an urban underclass. Early in 2013 Li Keqiang, the primeminister, began calling for a “human-centred new style ofurbanisation”.In Novemberlast yearthe party decided to speed up thepace of hukou reform. Officials have been calling for “equalrights” for all urban residents. A new word has entered the partylexicon: shiminhua, which means turninga migrant into an urbanitewith all the perks ofa city hukou-holder. The declared aim ofurbanisation now is not just to move people into cities, but moreimportantly to make urbanites ofthem.That will be both costly and hugely contentious. Mr Li’splan for a new style of urbanisation was published in Marchafter many months of bickering among officials. It glossed overthe crucial question of how to pay for it all, which hints at strongresistance by local governments that do not want to foot the bill,and by urbanites who fear their privileged access to educationand health care will be stripped away. Li Tie, a government re-30025020015010050Average incomeyuan ’000 per month3.02.52.01.51.00.5002008 09 10 11 12 1331The Economist April 19th 2014 7

SPECIAL REPORTCHINA2Going to a better placesearcher, in a booklast year wrote that online support for hukourelatedreforms was “not running high”. Part of the problem, hesaid, was that policymakers, journalists and online commentatorswere themselves urban hukou-holders and as such formed a“rigid interest group”, posing a “severe” challenge to reforms.At the same time many holders of rural hukou, despite thediscrimination they suffer, are suspicious of moves to give themurban status. They fear that it might lose them the right (conferredby rural hukou) to a small patch offarmland and a residentialplot in their village of registration. Mr Li’s urbanisation planfailed to provide reassurance.In July last yearthe agriculture ministry conducted a surveyof nearly 7,000 rural hukou-holders, mostly male and living inthe countryside, which found that only about a quarter regardedgetting an urban hukou as important. Even among those whoseentire families were living in urban areas, the share was only justover half. The main reason for not wanting urban hukou, the surveyfound, was fear oflosing entitlements to land. Last October asenior official on the National Health and Family Planning Commissionsaid that as many as 70% of rural migrants wanted tostay in the cities but had no wish to give up their rural hukou.That chimes with the views of the waste-recycling migrants ofDongxiaokou village. One middle-aged man standing by theroadside says he would far rather have his tiny patch of land inbackward Henan province than a promise of a pension inwealthy Beijing.Losing the plotGiven the discrimination they face, it seems odd that migrantsthemselves resist reform, but they will continue to do sountil the government allows them to sell their land and severtheir ties with the countryside for good. Mr Li has promised this,but local governments, used to seizing land at will, are loth togive up that privilege.The new urbanisation plan calls for 100m migrants to begiven urban hukou by 2020, but there will still be conditions: at aminimum, applicants will need a stable job and a legal place ofresidence. That would rule out most migrants, who often live inunauthorised lodgings and workwithout contracts.Officials sometimes hold up the city of Zhongshan in thesouthern province of Guangdong as an example of how hukoureform could work. Since 2007 migrantsinto the city (who make up more than halfits population) have been able to apply forcity hukou on the basis ofpoints scored foreducational qualifications, ownership ofproperty, payments ofsocial-security contributionsand volunteer work (such asgiving blood). Yet since the scheme waslaunched, only around 30,000 out of a totalmigrant population of 1.6m havegained local hukou this way. Migrants canalso use their points to apply for just someof the benefits associated with urban hukou,which has enabled them to secureplaces at state-run schools for about25,000 oftheir children. But that is out ofatotal of 200,000 migrant children attendingschool in Zhongshan (and many morewho are studying in their parents’ villagesof origin). All the same, in January Zhongshanwon a prestigious award in Beijingfor its points system.In June 2012 three days oflarge-scalerioting erupted in Shaxi, a satellite townof Zhongshan, fed by rumours that security agents had maltreatedthe son of a migrant worker who was involved in a fight. PengRonghui of Zhongshan’s department in charge of migrant managementadmits that the city’s migrant population has created “aproblem of social control”. She says they “lack a sense of belongingand their morale and self-discipline is relatively poor”.Cities like Zhongshan worry that lifting hukou restrictionswould require massive extra spending on public services such aseducation, health care and housing. Yet most local governmentswould simply not be up to the task. 7Local governmentEmerging from theshadowsSeizing land and running up debts is no way to financelocal governmentRESIDENTS OF CHAOBEI NEW CITY know what it is liketo be “upstairsed”—the word for turfing farmers off theirland, pushing them out of their homes and making them moveinto newly built clusters ofblocks offlats without lifts. It is forcedurbanisation, to which local governments have taken with relishin theirrush to acquire precious land. Chaobei New City is the reincarnationof six flattened villages: a desolate, prison-like, rubbish-strewnghetto. On a concrete wall alongone side, billboardsspell out the risks of protesting. For example, depositing funeralwreaths, ashes from cremations or corpses at government petitioningoffices could be treated as crimes.Chaobei New City’s very name conveys the mindset ofthose who ordered it built: officials who hoped that by destroyingthe villages and building 56 blocks of flats in their place theycould create a semblance of urbanity. The residents would stillbe classified as peasants for welfare purposes, but the statisticswould count them as urban. To local officials, who take enormouspride in urbanisation rates, such numbers matter. Xianghecounty, to which the “new city” belongs, is in Hebei province,18 The Economist April 19th 2014

SPECIAL REPORTCHINA2about 45km (30 miles) east of Beijing. Like almost every other localgovernment in China, Xianghe’s has an urbanisation target:60% by 2017, up from around 50% today and ahead ofthe nationaltarget of 60% by 2020. Since the global financial crisis in 2008,governments have been hardening such objectives as a way ofstimulating growth, and have been borrowing heavily to meetthem. The result has been a rapidly growing pile of debt that hasspooked global investors.Seizing land is an easy way of acquiring cash or collateralfor borrowing, and since the 1990s this technique has become afavourite of local governments. Some have used the pretext ofbuilding what they call “new-style rural communities”, such asChaobei New City. Such schemes have uprooted millions offarmers around the country. In one prefecture alone, Chinesemedia quoted a local leader in 2010 as saying he planned to flattenvillages with a total population of 1m within three to fiveyears. The coastal province of Shandong has moved more than12.5m villagers into nearly 5,200 “new-style rural communities”since 2009, according to the local government. It calls this “urbanisationon the spot”.Mod cons from hellCentral-governmentofficialshave expressed alarm and (ineffectually)reminded local governments that resettlement mustbe voluntary. Beijing newspapers have run several exposés ofthe horrors of being “upstairsed”, comparing the phenomenonto Britain’s enclosure movement of the 18th and 19th centurieswhen landlords stripped farmers of their right to use commonland. Last September Xinmin Evening News, a Shanghai newspaper,described cracks in Chaobei New City’s buildings, floodedbasements, sagging ceilings and a leaky sewage system.Angry victims of forced appropriations are legion. Accordingto state-controlled media, seizures of rural land by local governmentsare the cause of60% ofmass petitionings in China andof nearly 4m disputes every year. Lynette Ong of the Universityof Toronto says almost all compulsory relocations involve gangsor secret societies, often hired by local governments to pushfarmers out. Occasionally evictions trigger large-scale protests,but strong-arm tactics usually deter farmers from putting upmuch resistance. The thuggery, often brought to light by socialmedia, is a political embarrassment to the central government.But what is behind these land grabs is of far greater concern: a financialsystem that has gone wrong and a system of local governancethat has become dangerously dysfunctional.Chaobei New City is symptomatic of both. The local governmentsold ten hectares (25 acres) of the land seized from thevillagers to a local developer, Xiu Lan RealEstate Group. The company is using it tobuild Rivedroite Town, a cluster of lavishFrench-style houses separated by a wideroad from the farmers’ new flats. It is unclearhow much Xiu Lan is investing orwhere the money is coming from, but thecompany’s website suggests it has a closerelationship with large state-owned trustcompanies. Such institutions are a widespreadand openly acknowledged sourceof financing for property projects. Theirlending is less strictly regulated than thatof formal banks. A cosy relationship betweenboth types of institution has enabledwhat Stephen Green of StandardChartered calls “shadowy activity” by formalbanks, which use theirinformal counterpartsto channel lending into propertyLocalgovernmentsreceive halfthe nation’sfiscalrevenue butareresponsiblefor 80% ofspendingand other risky projects.Some trust companies and banks raise funds by sellingfixed-term investments known as wealth-management products(WMPs). These promise better returns than bank deposits,interest rates on which are capped at extremely low or even negativereal levels—a legacy ofMaoist bankingthat has proved hardto shake off. But this short-term finance often supports long-termprojects, creating a dangerous maturity mismatch. And some institutionsmay be repaying maturing products with fresh fundsraised from new ones. In 2012 Xiao Gang, then chairman of thestate-owned Bank of China and now in charge of regulating thecountry’s stockmarkets, described this as “to some extent…aPonzi scheme”.In theory banks are not liable when WMPs go wrong. Inpractice, when defaults have occasionally loomed, ways are almostalwaysfoundofkeepinginvestorsfrom losingmuch, ifanything(including in the biggest potential default so far, ofa $490mtrust product issued through China’s biggest bank, ICBC, thatwas due to mature in January; a stalled mining venture related tothe project suddenly got official permission to go ahead).Local governments, which in China cannot borrow fromformal banks or sell municipal bonds without central-governmentbacking, are among the biggest borrowers through suchshadow channels. They mostly use the money to finance publicworks (including knocking down villages in the hope that resulting“urbanisation” might stimulate growth). In response to theglobal financial crisis of 2008 the central government loosenedcontrols on bank lending. The volume of new loans doubled in2009. Much ofthe money found its way indirectly into the handsof local governments which used it in a spending binge in an effortto maintain growth. As a result, debts soared. Along withWMPs, this has become the biggest worry to bearish observersofChina’s economy.There are good reasons for concern about local-governmentborrowing, and about the banks and trust firms, but financialmeltdown looks unlikely. An audit made public in Decembershowed that in mid-2013 local governments directly owed10.9 trillion yuan ($1.8 trillion), an increase of more than 60% on2010. This is by no means crippling. Taken together with otherdebts for which local governments are, or might be, liable, suchas those oflocal state-owned enterprises, it amounts to one-thirdof GDP. The central government would never allow a local governmentto default, so these debts are for the centre to worryabout. GK Dragonomics, a research firm, says total governmentdebt may be 70-80% of GDP, still well below the levels of manyrich countries with lower growth.1The Economist April 19th 2014 9

SPECIAL REPORTCHINAUnsustainableChina’s local-government debt:yuan trn18151296302007 10 13Sources: Haver Analytics;National Audit Officeas % of GDP36302418126042Risks are certainly growing.Standard & Poor’s, a creditratingagency, points out thatprojects which once looked viablemay cease being so asgrowth slows. It outlines a possiblescenario: a WMP fails, investorsstop buying new productsand non-bank credit driesup. Investment slows and propertyprices drop. Non-performingloans rise, putting pressureon banks. Credit slows further,and growth with it. In the eventof such a crisis, however, thecentral government could takebad loans off the banks’ booksand order them to resume lending.It could also ramp up its own spending. It would not solvethe problem, but could avert an immediate crisis.To reduce such risks, China must introduce a range of reforms.The most pressing of these is to lift controls on bank-depositinterest, which would reduce depositors’ incentives to shiftmoney into riskier WMPs. There are signs that it is graduallymoving that way, but for all the recent talk of the importance ofmarkets, progress remains slow. Zhou Xiaochuan, the governorof China’s central bank, in March held out the possibility of fullliberalisation of interest rates in a year or two. Banks themselvesare not keen because higher rates would cut their profit margins.Reform isalso slowin two areasthatare keyto local governments’woes: the way in which their spending obligations, suchas on public works, are funded; and the ownership of rural land.Changes in both are vital if China’s new “human-centred” urbanisationis to succeed and officials’ rapacious instinct to grabland is to be tamed.Local governments’ lack of money to cover their spendingneeds is a problem of the Communist Party’s own making. In1994, worried about the central government’s rapidly decliningshare ofthe country’stotal revenue, the partyreorganised the taxsystem to boostthe centre’stakings. Butitfailed to reduce the burdenon local governments, which have remained responsible forsuch coffer-draining activities as providing education and healthcare. The central government transfers funds to local ones (viaprovincial governments) to cover basic costs, but this is often farfrom enough. Local governments receive half of the nation’s fiscalrevenue but are responsible for 80% ofspending.To make up shortfalls, local officials turn to rural land.Whereas the property rights of urbanites were strengthenedfrom the late 1990s, thanks to the privatisation of urban housingand legislation to protect it from government interference, theproperty rights of villagers have remained vulnerable to abuse.Landesa Rural Development Institute, an American NGO, foundthat in 1,791villages it surveyed, the number of land seizures hadnearly tripled between 2007 and 2011. Land-related income,which in 2001 made up one-sixth of local-government revenue,had soared to three-quarters a decade later.Counting the costGiving urban benefits to migrants will cost a lot of money.Unless a new way of funding local governments can be found,they are likely to solve the problem in the time-honoured manner:by seizing yet more land. The central government mighthelp, but could it afford to? Estimates of the likely expense varywidely. A report this year by the Chinese Academy of Social Sciencesput the cost of providing a migrant worker with full urbanbenefits at 130,000 yuan. A government study in 2010 came upwith a figure of80,000 yuan. But Kam Wing Chan ofthe Universityof Washington writes that even at about 100,000 yuan permigrant, the total would still be manageable.Mr Chan calculates that it would add up to around 23 trillionyuan, or more than 44% of China’s GDP in 2012. That wouldbe more than any economy could cope with, but it would nothappen all at once. If it were done gradually, bringing in 20m migrantsannually, it would mean spending a far more manageable3.8% of2012 GDP a year. But in fact those 100,000 yuan ofhealthcareand other expenses would be stretched out over a lifetime,so the actual annual cost of converting 20m people to full urbanitestatus would be 0.1% of 2013 GDP, Mr Chan reckons: aboutone-fifth ofwhat China spent on the 2008 Olympic games.That would leave the task of giving full property rights tofarmers. Doing so would make it more difficult for local governmentsto seize land, which in turn would make it harder for themto find ready collateral for piling up huge debts. Most importantly,it would empowerfarmers, and perhaps even end the tyrannyof village officials who use their control over land to fill theirpockets. Last November the party pledged to allow rural land(though not arable land) to enterthe market on the same terms asany other property. This will take time: even deciding who ownswhat in the countryside will be tricky. And local governmentsare not keen to dispense with a ready source ofcash.But the party has to press ahead. If financial and social stabilityare not sufficiently powerful incentives, there is another toconsider: the rampant urban sprawl encouraged by local governments’ability to seize rural land at will. Such unrestrained expansionmay work in parts of America where there is plenty ofempty land (albeit at a cost to the environment and often to thequality of life). In China, where urbanisation has forced around40m farmers off their land over the past three decades, usuallywith little or no compensation, it will not. 7Urban sprawlPeople, not pavingChina’s largest cities can mostly cope with populationgrowth. The spread of concrete is a bigger problemTO GRASP THE size ofChina’s largest cities, and the pace ofexpansion of even the remotest of them, consider thesouth-western city of Kunming. Looking at a map, it would beeasy to dismiss it as a backwater, tucked in a mountainous subtropicalcorner of China that borders on some of South-EastAsia’s poorest countries: Vietnam, Laos and Myanmar. Yunnan,the province of which Kunming is the capital, is one of China’smost backward, with a nominal GDP per person roughly that ofAlbania. By the standards of China’s provincial capitals Kunming’surban population is merely middling, yet at 3.8m itroughlyequalsthatofAmerica’ssecond-largestcity, LosAngeles.By the end ofthis decade it is likely to have risen by 50%.There will, however, be no mushrooming of shanty townsalong the shore of Dian Lake, Yunnan’s largest and the one-timepride of Kunming (ill-regulated urban growth has since turned itso toxic that its water is deemed unfit even for industrial use). Officialshave what they think is a far better plan: building a newsuburb called Chenggong. This will account formost ofa project-110 The Economist April 19th 2014

SPECIAL REPORTCHINADreaming spireA Shanghai suburb that is forever EnglandOXFORD STREET IS a quiet cobbled lane, withTudor-style shop fronts and lights supposed tolook like gas lamps. At one end it opens outonto a small square. A bronze statue of WinstonChurchill stands in front of the open-aircolonnade of Thames Bar, looking towards anelderly man sitting on a bench on the otherside of the plaza. He is petting his two pugs,one dressed in a yellow jacket and the other inblue. It is so much cheaper here than in centralShanghai, he says—and, traffic permitting,it is only an hour away by car.President Xi Jinping may be having aChinese dream, but the country’s city plannersare often inspired by foreign examples.Thames Town has Victorian- and Georgianstylehousing for 10,000 people, red phonebooths and, perhaps oddest of all, a church(pictured) with a spire closely modelled on amid-19th century Anglican one in Bristol. Acolumnist in Global Times, an English-languagenewspaper in Beijing, accused Shanghaiofficials of being “unconcerned aboutcultural affinity or national ethos”, succumbingto “the appeal of the foreign”.Thames Town is often scoffed at as oneof China’s most peculiar “ghost towns”. Foryears most of its houses remained empty. Itstown centre attracted far more people insearch of a novel background for weddingphotographs than for suburban homes. (Cashingin on this, many of Thames Town’s shopsoffer photographic services and weddingregalia for hire.) But in the environs of a citylike Shanghai, one of China’s most prosperous,building the town was probably a goodlong-term bet. Soaring property prices in thecity centre are forcing buyers ever farther out.Shanghai has a record of proving doomsayerswrong. Thames Town and other European-themedsuburbs like it are but tinyspecks compared with the vast endeavour thatthe city undertook in the 1990s, clearing asemi-industrial, semi-rural area of tens ofthousands of people to make way for a newfinancial centre on the east side of theHuangpu river. In 2000 this newspaper calledthe new Pudong zone a “ghost town of abusiness district”. It is now a skyscraperedicon of Chinese economic power.New shops are opening in Thames Town,and residents say occupancy is picking up.Three years ago even the church acquired acongregration—though that was just transplantedfrom a Catholic church nearby, demolishedto make way for yet more urban growth.2 ed 40% expansion of the built-up area of the city of Kunming.Kunming’s urban-planning exhibition promises “a beautiful environment”for Chenggong.Workon the new addition is already well under way. Thicketsof residential tower blocks and office buildings are sprouting.Chenggong was connected to Kunming’s new metro networklast year. City-government offices and local universities have alreadymoved there. By 2016 it will have a $525m bullet-train stationwith one of its 30 tracks connecting to Shanghai, 2,000km(1,200 miles) to the east. By the end ofthis decade the populationof Chenggong is expected to reach nearly 1m, three times its currentlevel. Not so long ago Chenggong was derided as a ghost cityin the making. Few are now so scornful.Kunming’s orgy of urban expansion sits oddly with a longestablishedChinese policy of seeking to limit the populationgrowth of large cities. An urban-planning law adopted in 1989calls for strict control. Even after a decade of huge expansion inwhich the urban population of Beijing (including its satellitetowns) grew by about 7m to nearly 17m, the party still clings tothe hope that it can keep such expansion in check. When it unveiledplans for wide-ranging economic reforms last November,it called again for “strict control over the population size of extralargecities”. For all the party’s recent emphasis on the role ofmarket forces, they are still not allowed to determine people’smovements.Kunming could now argue that it is not “extra-large”. Thecentral government’s new urbanisation plan released in Marchsuggests that the term applies only to cities with urban populationsover 5m. On this definition only about15 cities qualify, andthey do not include Kunming. Previously, however, “extra-large”had meant any city with more than 1m people, of which Chinahas more than 130. (America, by contrast, has a mere nine in thiscategory.) A little redefinition goes a long way.The central government wants cities to grow, but prefers thesmaller ones to grow faster than the rest. Its new urbanisationplan calls for hukou barriers to be scrapped altogether in citieswith fewer than 500,000 urban residents. Those bigger than500,000 have been asked to remove or relax hukou rules, but inan “orderly” or “reasonable” manner, meaning not all at once. Inextra-large cities tough hukou restrictions are to remain in place.Yet in the past decade the populations of small cities have beenshrinking, largely because bigger ones have proved to be a muchmore powerful draw for migrants.Plenty of room for moreThe government’s worries about population size are overblown.Chinese cities are by no means unusually crowded.Three Chinese scholars, Ming Lu and Zhao Chen of Shanghai’sFudan University and Zheng Xu of the University of Connecticut,argue in a recent paperthat apart from cities with 10m peopleor more, the average big city in China has “a lot of room forgrowth”. Even greater Beijing, which city officials think is burstingat the seams, is far less densely populated than greater Tokyo.Rather than try to control population size, the central governmentwould do better to have a go at curbing the spatial expansionof cities. Local bureaucrats have a predilection for vast 1The Economist April 19th 2014 11

SPECIAL REPORTCHINA2areas of concrete. Plazas, broad boulevards and colossal airportsand railway stations have become their badges of honour. In thecentral city of Zhengzhou, what local officials called the largestbullet-train station in Asia opened in 2012: a $2.4 billion edificewith a plaza in front which together cover around 240 hectares(about 340 football pitches). The station is half-deserted.Such extravagant use of land and money will only increaseif the government continues to encourage cities to expand theirpopulations. Built-up areas across the country have recentlybeen growing by an average of 8% a year whereas their populationshave been rising by only 5%. In western China the gap is farwider, with urban areas growing three times faster than theirpopulations, according to Fudan University’s Mr Lu. Kunmingprovides evidence of extravagant habits. Luo Chun, a professorat Yunnan University, reckons his institution’s new campus inChenggong district is five times the size ofits old one in the centreofKunming. The original campus remains in use.Central officials are concerned about this, but for the wrongreasons. They fear that urban sprawl could make it more difficultfor China to maintain near-self-sufficiency in staple foods. Thecountry is already hovering close to what officials describe as a“red line” of 120m hectares available for planting such crops.Even so, grain production has been rising. Thanks to fewer peoplein the countryside, farming is becoming more efficient.A better reason to worry about sprawl is that it is makingChina’s cities less “harmonious and liveable”, to use a phrase invogue among the country’s city planners. Old neighbourhoodsare being demolished, their inhabitants scattered into far-flunggated communities, commuting times are lengthening, car-dependenceis growing and the spatial divide between rich andpoor is widening. All this contributes to what officials call thecountry’s growing “urban disease”. 7GreeneryLet us breathePollution in cities is becoming a political issueTHE WORD “ECO-CITY” first took off with a book writtenin 1987 by Richard Register, a green thinker based in California.Now what may become the world’s first city with the wordin its name is beginning to take shape in the unlikely setting of asmog-shrouded expanse of salty mud on the northern Chinesecoast. Around a lake that not so long ago was a sewage farm, energy-efficientapartment blocks are going up. Electric buses plythe still largely empty streets. Public litterbins are equipped withsolar lighting so that residents can find them more easily at night.China’s urban growth is warming up the planet, and the elaboratelynamed Sino-Singapore Tianjin Eco-City is being touted asa cool solution.Few other countries could dream of building a large cityfrom scratch, let alone an eco one, but China has the advantageof an autocratic approach to urban planning (and to governancein general). It can decree that a piece of land will become a greencity, commandeerit and sell it cheaply to developers. That is howthe eco-project began in 2007 when Singapore proposed a co-operativegreen-city venture. China’s leaders agreed, having recentlyawoken to the environmental horrors wrought by breakneckurban expansion. Laterthatyearthe partyformallydeclared thatits goal was to build an “ecological civilisation”. The 30 square kilometresof inhospitable terrain near the northern port city ofTianjin became a test bed.China has tried a couple of eco-city projects before andfailed. About 60km (40 miles) farther along the coast to the eastofTianjin, in Caofeidian, workbegan in 2009 on an eco-city aimingfor 500,000 residents by 2020. Yet most of the site remains awilderness, too remote to attract developers. In Shanghai, plansa decade ago for a similar-sized eco-city on an alluvial island becameentangled in local corruption and never got offthe ground.But Tianjin’s, with strong backing from central and local governments,is making progress.To give it a flying start, officials designated it as China’s firstindustrial park devoted to the animation industry. The $690mstate-funded zone opened in 2011 and has attracted hundreds ofbusinesses. To lure in more residents, the government built a Victorian-styleschool in brown brick with lavish facilities, includingaroom full ofstuffed animals to help children learn about nature(“all real, except the tiger and the panda,” says a proudteacher). A 350-bed hospital, supposedly one of the best in China,is due to be completed next year, at a cost of$110m.At a control centre a dozen officials watch a giant screen dis-The price of progressCarbon-dioxide emissions, tonnes bnSource: EDGARUnited StatesChinaEU-271990 92 94 96 98 2000 02 04 06 08 10 1210864205112 The Economist April 19th 2014

SPECIAL REPORTCHINA2Publicresentmentof China’sdeterioratingenvironment,particularlythe noxioushaze overits cities, isgrowingplaying readings from heating and water systems, as well asfeeds from closed-circuit cameras at traffic intersections. “If anemergency happens, we can respond,” says an official surveyingthe images of lifeless streets. Officials are not deterred by the“ghost city” label. The city opened two years ago and now has10,000 residents. By 2030 it aims to have 350,000. Work is due tobegin this year on subway lines that will make it easier for localsto get to Tianjin, currently about an hour’s drive away, and nearbyindustrial zones.The government has a powerful incentive to support theproject. Within China, public resentment of its deteriorating environment,particularly the noxious haze over its cities, is growing,and abroad the country is being criticised for its contributionto global warming. In 2006 China became the world’s biggestemitter of carbon from energy, overtaking America; it is nowspewing out nearly double America’s level (see chart 5, previouspage). The spread of Chinese smog across the region is worryingneighbours such as South Korea and Japan.Ho Tong Yen, the Singaporean CEO of the eco-city’s developmentcompany (and a director of Mr Register’s Californianconsultancy, Ecocity Builders), says he believes many of the ecocity’smethods will eventually become “a key part of urbanisationin China”. A decade ago, he recalls, Chinese officials he metat conferences would boast about their cities’ GDP growth. Nowthey brag about how green their cities are.A work in progressThis sounds like a bit ofa stretch. China’s urban landscapesappear to be the antithesis of green: smog, foul-smelling streamsand canals, roads jammed with exhaust-belching cars, shoddybuildings erected with little heed to building codes. But growingpublic discontent with the urban environment is beginning tochange at least the rhetoric ofofficials, and in some cities theiractionsas well. In recent years about a third of China’s 600-plusmunicipalities have announced plans to turn themselves intoeco-cities. The central government has imposed stricter controlson emissions of carbon and smog-forming pollutants. In Marchthe prime minister, Li Keqiang, declared “war” on pollution.Smog, he said, was nature’s “red-light warning against the modelof inefficient and blind development”.It was a remarkableadmission of urbanisationgone wrong.Since there is no agreeddefinition of an eco-city, localgovernments interpret the termto suit themselves. They oftenuse it as an excuse for prettification,or worse, for seizing yetmore land from farmers and usingit to build luxury housing,with golf courses next to them(because grass is “green”). Eventhe eco-city in Tianjin, adrought-prone area, has a golfcourse, supposedly irrigatedwith recycled water. Mr Registerhimself is not altogetherbowled over by the project. InMany people, many carsPrivate passenger carsSelected cities, 2012, mBeijingHoustonChengduTianjinNew YorkGuangzhouShanghaiBerlinChongqingXiamenSource: China SignPost0 1 2 3 42012 he wrote that its layout, with the wide streets and longblocks typical of modern Chinese cities, looked “every bit as ifcreated to encourage driving”. Its plan for 20% of its energy tocome from renewable sources does not sound much bolder thanthe nationwide target of15% by 2020, against 9% now.And forall its claims to greenery, the eco-city lacks a vital ingredient:a thriving civil society that is free not only to protestabout the environment but to put pressure on the government tolive up to its promises. The party talks green and sometimes evenacts tough, but all the while it has been machinating to preventthe growth ofan environmental movement. It does not want residentsto set their own agenda for the way cities are run. 7PoliticsThe urban voiceChina’s new middle classes, quiescent so far, maysoon become more demandingCAO TIAN IS a property dealer who dreamed of changinghis city. As a poet and writer chosen by the government ofHenan in central China as one of the province’s ten cultural personalitiesofthe yearin 2006, he clearly did not lackimagination.When in May 2011 the mayor of Zhengzhou, Henan’s capital, announcedhe was stepping down, Mr Cao said that he wouldstand forelection to replace him. Not only would he take no salary,he would put up 100m yuan ($15.4m) as a guarantee of goodbehaviour while in office.It was a good try, but he knew it was doomed. Chinese lawsays that independent candidates can stand for the post ofmayor in cities. In theory all they need is the support of20 membersof a city’s legislature, which in Zhengzhou is less than 4% ofthe total. But legislators are hand-picked by the CommunistParty. Most ofthem are officials and party members. Mr Cao sayshe spoke to halfa dozen he knew and got nowhere; they were all“very obedient” to the party. “You can eat with them, you cangamble with them, but you cannot talk [about standing for election],”he says. The authorities made that clear enough. Theylaunched a tax investigation into his company, a common tactic 16The Economist April 19th 2014 13

SPECIAL REPORTCHINA2for intimidating dissenters. Mr Cao left town for a few months.To no one’s surprise, the acting mayor, Ma Yi, was elected byZhengzhou’s legislators to fill the post.MrCao’s challenge was an act ofrare bravado. In China, entrepreneurslike him are usually reluctant to cross the line intopolitical activism because business deals often depend on goodties with the party. At the time of Mr Cao’s mayoral bid China’sleaders were more than usually jittery following a series of prodemocracyuprisings in the Arab world. Internet activists wereanonymously calling for China to stage its own “jasmine revolution”,the name given to Tunisia’s revolt in late 2010. Online censorswere busy trying to expunge any reference to the word “jasmine”;police were rounding up dissidents and even tellingflorists not to sell the flower.It was a bad moment to provoke the authorities, especiallyfor someone like Mr Cao, who had form. After the pro-democracyunrest of1989 he had been sentenced to 12 years in prison for“counter-revolutionary” behaviour (he had organised a protestagainst the bloody crackdown in Beijing). Thanks, he believes, toforeign pressure on China he served less than three years, but recallsjail as “hell”. His punishment, he says, included having towatch condemned prisoners being shot.The rapid growth of a middle class in China increases therisk, as the party sees it, that more people like Mr Cao will beginto find their political voice. Unusually for a man who makes hisliving from property, Mr Cao says that as mayor he would haveThe biggest middle-class protests have been mostlyabout factories producing paraxylene (PX), which somefear might release poisonous fumestried to control soaring prices. He thinks a property tax wouldhelp, but would be opposed by the many corrupt officials whoown expensive properties.Many argue that China’s new middle class is largely in favourof the political status quo; many of its more affluent membersareofficials, formerofficialsorcloselyin league with officialdom.But the economic make-up ofmiddle-class China is rapidlychanging. McKinsey, a consultancy, reckons that in 2012 only14%ofurban households belonged to what it calls the “upper middleclass” (with an annual household income of 106,000-229,000yuan, or $16,000-34,000, in 2010 real terms) and 54% to the “massmiddle class” (with an income of 60,000-106,000 yuan). By2022, it estimates, the upper segment will have expanded tomore than half and the mass part will have shrunk to 22% (seechart 7). With this rise ofwhat McKinsey calls “sophisticated andseasoned shoppers” will come demands for a bigger say in howtheir cities are run. “Unmet, these demands could raise socialtensions,” as the World Bank and China’s Development ResearchCentre observed in a joint report in 2012. Asecond joint reportby the two organisations, “Urban China”, published inMarch, called for comprehensive reforms.A thicker upper crustChina’s urban households by income bracket, mPoor Mass middle class Upper middle class Affluent0 50 100 150 200 250 300 350 40020122022*Source: McKinsey*Forecast7Very few are challenging the party politically, but growingnumbers are getting involved in campaigns to protect theirneighbourhoods from government projects that might affecttheir health and comfort or the value oftheir property. Such protestsoccasionally take on a political hue, providing cover for awealth of grievances about the opacity of city management, thehigh-handedness ofofficials and pervasive corruption.The biggest middle-class protests have been mostly aboutfactories producing paraxylene, a chemical used in the productionof polyester. Since 2007 large-scale protests have erupted infive cities over plans to build such facilities, the main concern beingthat the factories might release poisonous fumes. The fearsare probably overblown, but reflect widespreadand profound distrust in officialdom.The demonstrators’ ability to gatherin public places in their tens of thousands,with the help ofmobile text messages andmicroblogs, has highlighted the weaknessof China’s censorship system. PX, as thechemical isoften called, hasbecome a coverfor poking at the party. Those of dissidentbent gleefully count off the cities thathave witnessed PX protests: Xiamen inJune 2007, Dalian in August 2011, Ningboin October 2012, Kunming in May 2013 andMaoming earlier this month.Zhou Min, a restaurant reviewer inKunming, is one of them. She says sheused not to care about politics. But in responseto the protests in her city last Maythe police detained dozens ofactivists. Officialseven briefly attempted to stop thesale of medical face-masks for fear theymight be donned by demonstrators. “Now I’ve changed mymind,” says Ms Zhou, who was herselfinterrogated by police, accused—falsely,she says—of being an organiser. “If only we hadthe vote, then we could veto projects like these,” she says, visiblyangry. During the recent anti-PX protests in the southern city ofMaomingpolice used teargas and batons against demonstrators.Most ofthe time urban China displays few obvious signs ofdiscontent. Since the late 1990s the party has managed a periodof rapid middle-class growth, along with huge urban expansionthanks to an upsurge of migration, with remarkably little unrestin the cities. Protests have been far more common in the countryside,mainly against the government’s seizure of land from farmers.The mostlypeaceful PX protestshave been a rare exception towidespread middle-class quiescence.Looking on the dark sideBut the mood in China’s cities could be changing. Middleclassurban residents look ahead with greater anxiety: about theslowingofChina’s growth; about the harmful effects ofair pollutionand contaminated food; about rising house prices that aremaking middle-class dreams of property ownership ever lessachievable; about the burden of looking after an ageing populationthat is growing ever faster; and (especially among recentgraduates) about the difficulty of finding a job. Richer Chineseworry about whether they can protect the wealth they have accumulatedin the past few years. Could a marginalised urban underclassturn against them? Could an anti-corruption campaignsuch as President Xi Jinping’s current drive land them in jail?Growing numbers are voting with their feet. When in 2012 and2013 researchers at Shanghai University surveyed nearly 2,000people in urban areas of Shanghai and five provincial capitalsacross China, nearly one in five said they would emigrate if they14 The Economist April 19th 20141

SPECIAL REPORTCHINA2had the chance. Those in the wealthiest cities were most eager toleave. In Shanghai one-third said they would go if they could,and in Guangzhou nearly 40%. Hurun Report, a company thatmonitors China’s rich people, said in January that 64% of nearly400 Chinese with personal wealth of at least 10m yuan ($1.6m)that it surveyed were emigrating or planning to do so, comparedwith 60% a year earlier.With his talkofa “Chinese dream”, Mr Xi has prompted debateamong his countrymen about how far they feel they arefrom a dream state. A survey last year by the Chinese Academyof Social Sciences (CASS) on attitudes to the “Chinese dream”found that only just over half of the 7,300 respondents believedthey lived in a “good society”. Equality, democracy and beingrich and powerful were rated most highly as the hallmarks ofsuch a society. The party itself bandies around such terms, but LiChunling of CASS says that what China’s middle class understandsby democracy is closer to Western ideas.China’s leaders clearly worry about this, as evidenced bythe cottage industry that has sprung up to produce translationsand analyses ofAlexis de Tocqueville’s workon the French revolution,“The Old Regime and the Revolution”, published in 1856.This was prompted by a recommendation of the book in 2012 byWang Qishan, who is now a member of the Politburo’s StandingCommittee. Exactly what drew Mr Wang to the book is notknown, butChinese media have focused on one ofitsmain arguments:that revolution is more likely to occur when an authoritariansociety begins to reform than during its period of maximumrepression. China Daily, a government-controlled newspaper,notes that copies of the book have been prominentlydisplayed in the Beijing bookshop of the Communist Party’smain training school for senior officials. New versions carryblurbs such as “Recommended by Wang Qishan”. One is subtitled:“Why Does Prosperity Hasten the Advent ofRevolution?”The possibility of revolution still appears remote, but therisk of larger-scale social unrest in urban areas is growing. To divertattention from trouble at home, China’s leaders may betempted to flex their muscles abroad. 7A new societyPushing theboundariesThe rapid move to the cities has handed Xi Jinping adaunting challengeFEWOUTSIDE CHINA have heard ofSansha, the country’sbiggest city. Its administrative area is 150 times larger thanBeijing’s, or roughly the size of Kazakhstan. Yet Sansha’s populationis no bigger than that of a village and consists mostly of fishermen.Its government is on an island too small even to fit in anairport; the military airstrip stretches out into the South ChinaSea, where most of the city’s watery territory lies. It is a city onlyin name, setup to assertChina’sclaimsin a vastswathe ofsea encompassingsomeofthe world’s busiest sea lanes. IfShanghai inspiresawe, Sansha causes alarm.The city was created (in bureaucrats’ minds, though probablynot the fishermen’s) seven years ago and upgraded in 2012 to“prefectural level”. Its tiny land area comprises about 200 isletsclustered in three groups that are bitterly contested. Two of thegroups, the Spratlys (Nansha in Chinese) and the Paracels(Xisha), are claimed by Vietnam. The third, known as Zhongshain Chinese, includes Scarborough Shoal, which is claimed by thePhilippines but has in effect been controlled by China since 2012.Some of the Paracels were controlled by South Vietnam until1974, when it was expelled after a battle with China. It was onone of these, Woody Island (pictured), that the party installedSansha’s legislature, which duly elected a man likely to be thecountry’s least busy mayor.An empty threatSansha is one of China’s most bizarre, and unsettling, attemptsat city-building; an undertaking motivated by a desire tostake outterritoryand scratch the itch ofnationalism. Some 2.6mof the South China Sea’s total area of 3.5m sqare kilometres aresaid to be under the city’s jurisdiction, giving access to a wealthof resources: an estimated 5m tonnes of harvestable fish andhuge reserves ofoil and natural gas. Parts ofthe vast area are alsoclaimed by five other countries. The creation of Sansha was intendedto rebuffthem.China’s spectacular urban-led growth in recent years hasbeen changing the way the country behaves abroad in importantways. First, it has been fuelling a voracious demand for importsofcommodities, from oil to iron ore. More than half ofChina’ssupplies of both are now bought from abroad. As a result,much more of China’s diplomatic attention is being focused oncultivatingrelationswith commodity-exportingcountries, mostlyin the Middle East, Africa and Latin America (several of themno friends ofthe West).Second, China is now much more worried about the securityofitssupplies.ItfeelsuneasyaboutleavingAmerica to patrolvital shipping lanes such as those through the South China Sea.And third, China’s growth has given it much greater confidence,increased by the West’s economic malaise in recent years. Thecountry is asserting itself more visibly, especially in nearby seasthat have long been under America’s sway.Mr Xi himself also happens to be a far more confidentleader than his predecessor. He has not been afraid to take stepsthat raise tensions with American allies, notably Japan and thePhilippines. This suggests to some in Asia that China has hadenough ofAmerica as the region’s dominant powerand is beginningto do something about it. Certainly the risk has increasedthat a small incident might escalate into a bigger conflict. For1The Economist April 19th 2014 15

SPECIAL REPORTCHINA2 now, however, Mr Xi does not appear to be spoiling for a fight.China cosies up to America’s rivals, most notably Russia, but italso sees its economic interests, and hence its strategic ones, asclosely linked with America’s.It is developments inside China, in real cities, that shouldworry the outside world more. Urbanisation, especially over thepast decade, has handed Mr Xi a daunting legacy. When his predecessor,Hu Jintao, came to power in 2002, urban China was farless of a challenge. The country was recovering well from theAsian financial crisis of1997-98. Its north-east had been wrackedby large-scale protests by workers laid off during the massivedownsizing of the state sector from the 1990s, but Mr Hu kept theregion largely quiet by directing dollops ofcash to it. The internetwas still the preserve ofa small urban minority.A harder place to runThe picture today is very different. Economic growth isslowing. As this special report has explained, rapid urbanisationhas spawned two huge new social forces: a middle class and anunderclass. Both are much bigger than they were a decade ago;both are suspicious of, and sometimes hostile towards, each other;and both often distrust the Communist Party.Just in the past five years social media such as Sina Weiboand WeChat have connected hundreds of millions of Chinese ina conversation held in near-real time, much of it less than flatteringabout the party. More than 60% of urban residents now usethe internet. The shoots of civil society are beginning to grow;small, scattered groups are working on everything from helpingHIV/AIDS sufferers to cleaning up the environment. The securityapparatus keeps close tabs on them but rightly worries that urbanChina may be changing too fast for it to keep up.Double-digit growth for much of this century has not onlymade many ordinary Chinese betteroffbut bestowed breathtakingriches on the families of some members of the political elite(including some ofMr Xi’s extended family). This has proved impossibleto cover up. Mr Xi’s anti-corruption efforts risk causingstrife among political clans eager to protect their privileges. Hemay be China’s strongest leader since Deng Xiaoping, but urbanisationhas fuelled the growth of other, often countervailing,powers too: large state-owned enterprises that have gorged onproperty and commodities, local governments bloated by recklessborrowing to build ever bigger cities, and an internal securi-Huang Bo’s modest needsty apparatus that now spendsmore than the army, most of iton policing cities.Mr Xi and his team havecorrectly identified the need fora better approach to urbanisation:one that will help ease socialtensions which have builtup over the past decade, bringlocal governments into line andmake big SOEs contribute muchmore to welfare and share moreof their markets with the privatesector. They have been makingencouraging noises about theneed to reform the iniquitoushukou system, strengthen farmers’property rights and makecities more “liveable”.But Mr Xi needs to gomuch further. The party stillcannot bring itself to talk of a“middle class” (too unsocialistsounding),much less acknowledgethat its aspirations aremore than just material ones. InJanuary a famous actor, HuangBo, introduced a new songabout the “Chinese dream” onstate television’s most popularshow of the year, the Spring Festivalgala. It was called “MyOffer to readersReprints of this special report are available.A minimum order of five copies is required.Please contact: Jill Kaletha at Foster PrintingTel +00(1) 219 879 9144e-mail: jillk@fosterprinting.comCorporate offerCorporate orders of 100 copies or more areavailable. We also offer a customisationservice. Please contact us to discuss yourrequirements.Tel +44 (0)20 7576 8148e-mail: rights@economist.comFor more information on how to order specialreports, reprints or any copyright queriesyou may have, please contact:The Rights and Syndication Department20 Cabot SquareLondon E14 4QWTel +44 (0)20 7576 8148Fax +44 (0)20 7576 8492e-mail: rights@economist.comwww.economist.com/rightsFuture special reportsInternational banking May 10thBusiness in Asia May 31stPoland June 21stCyber-security July 12thPrevious special reports and a list offorthcoming ones can be found online:economist.com/specialreportsNeeds Are Modest”. The middle-class fantasy it described (withoutnaming it as such) was an advance on the usual calls for selflessdevotionto the nation, butitwasstill politically sterile: “I canearn money, and still have time to go to Paris, New York and theAlps. I stroll through the shopping mall and go skiing in themountains. Days like these are so carefree.”Optimists still wonder whether Mr Xi might eventually allowa little more political experimentation. At the party’s 19thcongress in 2017, five of the Politburo Standing Committee’s sevenmembers are due to step down, leaving only Mr Xi and Mr Li,the prime minister. Of the replacementsexpected to join them, at least two arethought to have liberal(-ish) leanings. Butfew observers are holding their breath.In 1997 China’s leaders set a goal ofmaking China “moderately well off” by2020, just in time for the party’s 100thbirthdaycelebrations the following year.Judgment on whether this has beenachieved will be passed while Mr Xi isstill in office. As long as China’s GDPkeeps on growing at about 7% a year (as isplausible, possibly even making China’seconomy bigger than America’s by then),it will not be hard for him to tick off theeconomic targets. But the party has saidthat “moderately well off” also means amore democratic China, and one that respectshuman rights. Ignoring those aspectsrisks antagonising the constituencythat has become most vital to sustainingthe party’s power: the urban middle class.Mr Xi would do so at his peril. 716 The Economist April 19th 2014

EuropeThe Economist April 19th 2014 41Also in this section42 French politics42 Turkey’s prime minister43 Italian politics43 Culture wars in Ukraine44 Charlemagne: Putin’s populistfriendsFor daily analysis and debate on Europe, visitEconomist.com/europeGreek politicsRemaking the political landscapeATHENSA new burst ofoptimism about the economy is not yet luring many voters back tothe two mainstream partiesGREECE’S chances of recovery after sixyears of misery are improving. Its firstbond offering in four years, seen as a test ofconfidence, did much better than expected.Tourists are flocking in for Easter; hotelierspredict a record 19m visitors will comethis year. One long-blocked resort projecton Crete seems poised to go ahead, raisinghopes that foreign investment may flowinto otherindustries such as electricity andports. Angela Merkel, the German chancellorand often one of Greece’s harshest critics,spoke encouragingly to young Greekentrepreneurs during a quick visit to Athenson April 11th.Yet the new optimism does not seem tobe trickling down to most voters. Unemploymentfell slightly in January, but stillstood at 26.7%. The social safety-net isstretched so thin that only one in ten oftheunemployed gets any benefits. Private-sectorworkers complain of being paidmonths in arrears. An estimated 35% ofGreeks now live in poverty, according tosocial workers and charities.No wonder Greece’s clientelist politicalsystem is in tatters. It was once a politician’sresponsibility to find jobs in the publicsector for his (rarely her) constituents.Ambitious MPs extended their patronageto the private sector. “Myapplication foranassistant supermarket manager’s job waspicked on merit, but it wasn’t approved bythe local MP—he wanted someone else,”says Simos, a 28-year-old economics graduatenow working in Germany.Angry voters used to shout “Thieves,traitors” outside parliament as lawmakerswaved through a string of unpopular reformsdemanded by Greece’s creditors.The centre-right New Democracy (ND) andthe PanHellenic Socialist Movement (Pasok),partners in a fractious coalition withonly a two-seat majority in parliament, arenow widely blamed for the collapse of thepatronage system that they built during 30years ofalternating in power.Some voters have switched instead to“anti-systemic” fringe parties that advocateextreme solutions to Greece’s woes. Atnext month’s European elections, beingheld at the same time as local elections,two new moderate centre-left parties, Elia(Olive tree), led by a group of academicsand former ministers, and To Potami (theRiver), led by Stavros Theodorakis, a televisionjournalist, are trying to plug the gapopened up by Pasok’s slump.Many on the left now backSyriza, a radicalleft-wing party led by Alexis Tsipras, afiery 39-year-old who scares Greece’s businessmenwith talk of imposing a wealthtax and suspending debt repayments.Evangelos Venizelos, the Pasok leader (andforeign minister), is fighting attempts byGeorge Papandreou, a formerprime minis-ter, to reassert authority over the partyfounded by his father Andreas, Greece’sfirst Socialist prime minister. Mr Venizelosbacks Elia, but Mr Papandreou refuses tojoin him, prompting speculation that heseeks a political comeback to stop his dynasticparty disappearing.ND has proved Greece’s most durableparty, surviving several changes of leadership.Yetitsvotersprovide much ofthe supportfor the neo-Nazi Golden Dawn, a homophobic,anti-immigrant party whose 18deputies are accused ofrunning a criminalorganisation. Embarrassingly for AntonisSamaras, the prime minister and NDleader, a leaked video showed his chief ofstaff, Takis Baltakos, telling Ilias Kasidiaris,Golden Dawn’s spokesman, that the publicprosecutor had found barely a shred ofevidence against him. Mr Baltakos quit;and the affair has had little impact on ND’spoll rating. Mr Samaras is far ahead of MrTsipras as “most suitable prime minister”.Opinion polls nevertheless give a slightedge to Syriza over ND, with both partiesconsistently on 18-20%. Pasok has sunk toaround 3.5%, and could fail to win anyEuropean seats. More than three-quartersof Greek voters would like Mr Papandreouto retire from politics. Golden Dawn hasfallen from 11% to about 8%, but it couldbounce back on a sympathy vote if Mr Kasidiaris,who is running as Golden Dawn’scandidate for mayor of Athens, is placed incustody before polling day on May 25th.Elia is polling around 5% but is seen bymany as a dull and outdated revamp of Pasok.But To Potami has picked up voters atdizzying speed, moving into third place,with 11-15%, within three weeks of itslaunch. The 50-year-old Mr Theodorakis,wearing a T-shirt and trainers and carryinghis trademark backpack, tours the country 1

42 Europe The Economist April 19th 20142 making low-key speeches about crackingdown on tax evasion, promoting meritocracyand creating jobs for young Greeks.These are soothing sounds for voters fedup with traditional politicians.Some analysts claim that To Potami isbacked by powerful business interests determinedto stop Syriza and, perhaps, toforce Mr Samaras to call an early generalelection later this year. Mr Theodorakis insistshis party is financed by small donations.Questioned by a Pasokdeputy abouthis party’s finances, he snapped back, “Ittakes a lot of chutzpah to ask about ourcampaign when your party has dumped€140m on the Greek taxpayer.” He was referringto unpaid bank loans run up by Pasokwhen Mr Papandreou was in power.Greece’s political landscape is shifting—perhaps for the better. 7French politicsVallsmaniaPARISThe dangerofa prime minister who outshines the invisible presidentWHEN President François Hollandechose Manuel Valls as his newprime minister, he tooka big gamble. Hishope was that some ofthe popularity ofthe tough-talking, action-man Socialistwould rub offon him. Instead, the oppositeseems to be happening. Mr Valls’spopularity rating, at 58%, is the highest fora new mid-term prime minister in theFifth Republic, but Mr Hollande’s hasdropped to a new low ofjust18%.The only previous occasion when amid-term prime minister got close to suchhighs was1997, when Lionel Jospin wasmade head ofa Socialist governmentunder the Gaullist Jacques Chirac, andwon 47% approval. Yet this was duringpolitical cohabitation between the leftand right. Exclude such periods, and thepopularity gap between Mr Hollandeand Mr Valls, at 40 points, sets a modernrecord, according to Ifop, a pollster whoseratings go backto Charles de Gaulle.Mr Hollande has lost support acrossthe political spectrum, including on theleft. Among Socialist voters, his rating hascrumbled from 60% in March to 48%.Another poll this week suggests that, if apresidential election were held today, hewould be beaten into the run-offby theNational Front’s Marine Le Pen. With hisno-nonsense reputation and authoritativeedge, Mr Valls, by contrast, gets ahandsome 79% rating from Socialistvoters—and 58% from those who backthecentre-right UMP. “Le coprésident” read arecent cover of the weekly Le Point.Vallsmania may not last. The dailygrind ofthe job fells most modern primeministers, as it did Mr Jospin. Indeed, theTurkey’s prime ministerErdogan v judges,againISTANBULThe prime minister lashes out at hisopponentsTHE biggest foes of Recep Tayyip Erdoganwere the generals and the judges,who made common cause to try to oustTurkey’s pious prime minister (he wastrained as an imam) on thinly supportedcharges of steering the country towards Islamicrule. But they failed. The army wastamed through a series of court casesagainst alleged coup-plotters. The judiciarywas overhauled after constitutionalFrench refer to l’enfer (the hell) ofMatignon,the Paris mansion that is the primeminister’s office. For a president underthe Fifth Republic, this is part of the point.The head ofstate is meant to rise grandlyabove the rough-and-tumble, leaving hisprime minister to carry the can whenthings go wrong.Yet Mr Valls’s popularity is so broadlybased that he may be insulated for longerthan most. This sets up an awkward,unstable dynamic. Until now, althoughhe is a past rival ofMr Hollande, Mr Vallshas been studiously loyal. He ended uprunning Mr Hollande’s 2012 campaign,keeping a close eye on every detail, downto the knotting ofhis tie. But, as onefriend puts it, Mr Valls “thinks only aboutthe presidency”. The longer the popularitygap lasts, the more dangerous he maybecome. The politician whom Mr Hollandechose to rescue his presidencycould end up being his biggest threat.Valls ties the boss in knotsreforms were approved in a referendum in2010. Turkey’s democracy was at last ontrack, many hoped, until Mr Erdogan begantilting towards unabashed authoritarianismafter winning a third term in 2011.Flush with yet another victory in theMarch 30th local elections, in which hisconservative Justice and Development(AK) party swept up 45% of the vote, Mr Erdoganis now back at war with the judgesand, say many Turks, with democracy itself.On April 11th the constitutional courtoverturned parts of a bill rammed throughin February to give the government greatercontrol over the judiciary. The power grabwas part of a broader campaign to quashcorruption charges levelled against Mr Erdogan’schildren, business cronies andmembers of his cabinet. The campaign includeda ban on a social-media site, Twitter,on which a stream of incriminating recordingsofalleged conversations betweenMr Erdogan and his son Bilal were posted.The court threw out the Twitter ban earlierthis month, and access was restored.But Mr Erdogan fumed that he did not “respect”the ruling and said that the judgeswho issued it “ought to take off theirgowns”. He also called Twitter, Facebookand YouTube “tax dodgers” and said theymust pay Turkish taxes. YouTube remainsoff limits to Turkish users, even though alower court has overruled a separate banon the site. The company has now appealedto the constitutional court.Meanwhile, the main opposition RepublicanPeople’s Party (CHP) is sayingthat AK rigged the March 30th elections.Such claims may be overblown, but someWestern diplomats agree that the CHPprobably won in Ankara, where AKsqueaked in by a mere 30,000 votes. TheHigher Election Board has spurned theCHP’s repeated demands for a recount,while accepting all those lodged by AK.Mr Erdogan blames most of his recenttroubles on his former ally and fellowimam, Fethullah Gulen. He says Mr Gulen,who lives in Pennsylvania, has set up a“parallel state” by putting his followersinto powerful positions in the police,courts and security services (Mr Erdoganhas just passed a law tightening his grip onthe spooks). Their masters are Israel andothers who “cannot digest Turkey’s success”and want to overthrow AK, claimsthe prime minister. Millions of voters unwillingto risk a decade of economic prosperityunder AK apparently believe him.The flow of leaked recordings has stoppedsince the election. Mr Erdogan now vowsto crush Mr Gulen’s network of internationalschools and universities abroad:Gambia has caved in to AK pressure, butthe Iraqi Kurds have politely refused. Noneofthis helps Turkey’s image.The CHP leader, Kemal Kilicdaroglu, iscalling on the opposition to agree on acompromise candidate to challenge Mr Er-1

The Economist April 19th 2014 Europe 432 dogan if he runs in the presidential electiondue on August 10th. Hasim Kilic, theconstitutional court’s liberal president(and a devout Muslim) is a possible contender.Another is Meral Aksener, a femaledeputy for the far-right Nationalist ActionParty (MHP) with a reputation for toughnessand probity. Mr Kilicdaroglu is rumouredto favour a different lady: UmitBoyner, an outspoken former president ofTUSIAD, the main business lobby.The one person who might have defeatedMr Erdogan is the incumbent, AbdullahGul, because he can unite voters of allstripes, including Turkey’s14m Kurds. A cofounderof AK, Mr Gul has so far chosen toback Mr Erdogan, perhaps in hopes ofswapping jobs with him. But should Mr Erdogan’sdictatorial outbursts persist, hemight just have second thoughts. 7Italian politicsSilvio Berlusconi,social workerROMEEmbarrassments pile up but the formerprime minister still has political cloutNOT good: but far from the worst outcome.On April 15th a Milan courtruled that Silvio Berlusconi should servehis sentence for tax fraud by helping in anold people’s home in Milan. But the formerprime minister will be free to go to Romefrom Tuesday to Thursday. In practice, the77-year-old is unlikely to spend more thanhalf a day a week pretending to help grannies,and then only for nine months.As often happens in Italy, a dauntingpunishment has been whittled down to amild reproof. Mr Berlusconi’s four-yearsentence was cut to one year because of anamnesty law from a centre-left governmentin 2006. He could not be jailedthanks to another law passed by one of hisgovernments that bans the imprisonmentof most over-70s. Since the court had ruledout house arrest, there is nothing to stophim leading his Forza Italia! party into nextmonth’s European elections. The messagethat Mr Berlusconi was not just any criminal,but the leader ofItaly’s main conservativeparty, was neatly conveyed to thejudges when he spent some hours with theprime minister, Matteo Renzi, discussing aconstitutional reform that requires hisparty’s parliamentary support.Despite this clout, three recent eventshave left the media tycoon and his partybeleaguered. On April 10th a judge sequestered€49m ($68m) of assets said to belongto Roberto Formigoni, who was for18 yearsgovernor ofLombardy and for all but threea leading member ofMr Berlusconi’s party.Mr Formigoni, who has joined AngelinoCulture wars in UkraineHistory lessonsThe conflict in Ukraine spreads to its museumsE WHO controls the past controls the objects to them. But there is no guaranteethat Russia might not pinch the“Hthe future.” Orwell’s dictum nowfaces a new test. Shortly before Russia pieces the moment they arrive.annexed Crimea, the Bakhchisaray museum,north ofSevastopol, lent some Timmermans, does not wish to meddleThe Dutch foreign minister, Fransvaluable artefacts to an exhibition in the but he also wants to avoid being seen toNetherlands. The question as to which accept a new form ofart looting. Thiscountry these (and other objects from may be impossible; whether the goldCrimean museums) should return is returns to Crimea or to Kiev, each sidecreating a diplomatic conundrum. will accuse the Dutch ofpilfering.“Let yourselfbe overwhelmed by the A UNESCO resolution warns ofthegold ofCrimea,” boasts the Allard PiersonMuseum in Amsterdam. Never be-objects from Crimean museums to the“massive transfer ofpriceless culturalfore has Ukraine lent so many mostly Russian capital”. But a rogue Russia isCrimean treasures. The BlackSea peninsulais filled with gems left by invaders to stickto its obligations under interna-hardly going to be deterred by remindersover the centuries. The exhibition includesa Scythian gold helmet from 400tional law relating to cultural property.BC, pottery from Greekcolonisers and alacquered Chinese box that came alongthe SilkRoad. “We have given our verybest objects,” sighs Valentina Mordvintseva,a curator at the Crimean branch ofthe Institute ofArchaeology. She fearsshe may not see them again.Who is the rightful owner? On legalgrounds, Kiev has the upper hand becausethe Allard Pierson signed a loanagreement with the Ukrainian state. Andas the Netherlands does not recogniseRussia’s annexation, Ukraine still ownsthe property. Yet the Dutch also signedcontracts directly with the lending museums.And, says Inge van der Vlies, aprofessor at the University ofAmsterdam,there is an ethical case for returning Whose helmet is it, anyway?Alfano’s breakaway New Centre Right(NCD) party, is to go on trial next monthcharged with corruption and conspiracy.He denies wrongdoing.Then on April 12th police in Lebanon arrestedMarcello Dell’Utri, the man whocreated Forza Italia! from nothing in theearly 1990s, giving Mr Berlusconi the vehiclehe needed for his political career. MrDell’Utri, a Sicilian, remained close, despitecontroversy over his alleged links toCosa Nostra. He disappeared shortly beforethe supreme court could rule on hisseven-year jail sentence for aiding andabetting mobsters. Lower-court judgesruled that his collaboration with the Mafiaceased before he founded Forza Italia! Buthis legal problems and fugitive status areembarrassing for the party and its leader.Lastly, on April 13th, Mr Berlusconi’slong-standing spokesman, Paolo Bonaiuti,confirmed he was leaving Forza Italia!, butnot the centre-right—a hint that he will jointhe NCD. His decision to quit was evidenceof tensions that have multiplied withinForza Italia! as the party has drifted withouta clear direction in recent months.The possibility that Mr Berlusconimight have been under house arrest drewrenewed attention to his lack of a successor.Mr Alfano founded the NCD after MrBerlusconi had handed him the leadership,only to snatch it back again. Butwhether Mr Alfano can build a credible alternativeto Forza Italia! remainsto be seen;five months after its foundation, the NCDaverages less than 5% in the polls.Forza Italia!’s share has slumped from29% at last year’s election to 21%, belowBeppe Grillo’s maverick Five Star Movement(M5S). Unless Mr Berlusconi can finda way to revive his party’s fortunes, it ispossible that the next confrontation in Italianpolitics will not be between right andleft, but between Mr Renzi’s DemocraticParty and an M5S that aspires to replacenot just all the mainstream parties but parliamentarydemocracy itself. 7

44 Europe The Economist April 19th 2014CharlemagneRussia’s friends in blackWhy Europe’s populists and radicals admire VladimirPutinIF EUROPE’S far-right parties do as well as many expect in May’sEuropean election, no world leader will be happier than VladimirPutin. For a man who claims to be defending Russian-speakersin Ukraine against fascists and Nazis, the Russian presidenthas some curious bedfellows on the fringes of European politics,ranging from the creepy uniformed followers ofJobbikin Hungaryto the more scrubbed-up National Front in France.There was a time when Russia’s friends were principally onthe left. There are still some pro-Moscow communists, for instancein Greece. Butthese daysthe Kremlin’schumsare mostvisibleon the populist right. The crisis in Ukraine has brought outtheir pro-Russian sympathies, most overtly when a motley groupof radicals was invited to vouch for Crimea’s referendum on rejoiningRussia. The “observers” included members ofthe NationalFront, Jobbik, the Vlaams Belangin Belgium, Austria’s FreedomParty (FPÖ) and Italy’s Northern League, as well as leftists fromGreece and Germany and an assortment of eccentrics. They declaredthat the ballot, denounced by most Western governmentsas illegitimate, had been exemplary.So what does Europe’s farright see in MrPutin? As nationalistsof various stripes, their sympathies might have lain with theirUkrainian fellows fighting to escape Russian influence. In fact, arguesPeter Kreko of Political Capital, a Hungarian think-tank, beyondfavourable treatment in Russian-sponsored media, manyare attracted by Mr Putin’s muscular assertion of national interests,his emphasis on Christian tradition, his opposition to homosexualityand the way he has brought vital economic sectors understate control. For some, pan-Slavic ideas in eastern Europeplay a role. A common thread is that many on the far right shareMr Putin’s hatred for an order dominated by America and theEuropean Union. For Mr Putin, support from the far right offers asecond channel for influence in Europe.The flirtation with Russia first became apparent in eastern Europesome yearsago, despite memoriesofSovietoccupation. Jobbik,which took 20% of the vote in Hungary’s recent election, denouncedRussian riots in Estonia afterthe removal ofa Sovietwarmemorial in 2007. Buta yearlateritbacked Russia’smilitaryinterventionin Georgia. Far-right parties in Bulgaria and Slovakia alsosupported Russia. Since then, Russian influence has become apparentin western Europe, too. Marine Le Pen, leader of the NationalFront, has been given red-carpet treatment in Moscow andeven visited Crimea last year. At December’s congress of Italy’sNorthern League, pro-Putin officials were applauded when theyspoke of sharing “common Christian European values”. Amongthose attending were three nascent allies: Geert Wilders of theNetherlands’ Party for Freedom, Heinz-Christian Strache of theFPÖ, and Ludovic de Danne, Ms Le Pen’s European adviser.ForMrde Danne the parties share an aversion to the euro and,more widely, to the EU’s federalist dream. They oppose globalisationand favour protectionism. They seek a “Europe of homelands”,stretching from Lisbon to Vladivostok. As for Ukraine, hecalls the revolution in Kiev “illegitimate” and says the referendumin Crimea was justified by the pro-Russian sentiment of theCrimean population. By attaching themselves to the EU andAmerica, Ukraine’s new rulers expose their country to IMF oppressionand the pillage of its natural resources. Such dalliancewith MrPutin may create trouble forMrWilders, who sees the EUas a monster but is a strong supporter of gay rights. According toMr de Danne, the Eurosceptic alliance has agreed to co-ordinateonly on internal EU matters, not international affairs.A degree of admiration for Mr Putin also stretches to Britain’sUK Independence Party (UKIP). It sees Ms Le Pen and Mr Wildersas too tainted by racism and is parting ways with the NorthernLeague. But UKIP’s leader, Nigel Farage, while insisting he dislikesMr Putin’s methods, thinks the Russian leader has skilfullywrong-footed America and Europe. The EU, he declared in a televiseddebate, “hasblood on itshands” forraisingUkraine’shopesof EU membership and provoking Mr Putin. Mr Farage’s critiqueis perhaps a way of attacking the EU’s enlargement policy, whichis now linked by many to immigration. Yet it is also an implicit admissionthat the club remains attractive to those outside it.Hello, ComradeMr Putin is too clever to rely only on Europe’s insurgent parties,successful as some may be. So as well as cultivating anti-establishmentgroups, he has worked to entice national elites. WhileJobbikadvocates closer economic relations with the east, Hungary’sprime minister, Viktor Orban, is already doing it. A veteran ofthe struggle against communism, embodying the catchphrase“Goodbye, Comrade”, Mr Orban recently signed a deal with Russiato expand a nuclear-power plant, financed by a €10 billion($14 billion) Russian loan. He has sought to weaken Europeansanctions against Russia. In Italy the Northern League’s leader,Matteo Salvini, may shout “viva the referendum in Crimea”, butMatteo Renzi, the centre-left prime minister, has also been assiduousin resisting tough sanctions.Anti-EU parties will no doubt become stronger and noisier,but they lack the numbers and the cohesion fundamentally tochange EU business in the European Parliament. Their effect willbe more subtle. They may force mainstream parties in the parliamentinto more backroom deals, deepening the EU’s democraticdeficit. Their agitation is more likely to influence national politicsand to push governments into more Eurosceptic positions. Andthey will provide an echo chamber for Mr Putin, making it harderstill for the Europeans to come up with a firm and united responseto Mr Putin’s military challenge to the post-war order inEurope. There is more at stake in May than a protest vote. 7Economist.com/blogs/charlemagne

BritainThe Economist April 19th 2014 45Also in this section46 Recruiting priests47 Bagehot: Why politicians are hatedFor daily analysis and debate on Britain, visitEconomist.com/britainThe industrial northNever walk aloneMANCHESTERNorthern solidarity could give Britain a big economic boostTHE rivalry between Manchester Unitedand Liverpool Football Club isamong the oldest and fiercest in football.The teams first met in 1894, when competitionbetween the two cities—30 milesapart—reached fever pitch. That yearmarked the opening of the ManchesterShip Canal, an effort to bypass Liverpool’sbustlingportwith a directwaterroute fromthe Mersey to central Manchester. Over acentury later, old enmities continue to dividemany of England’s northern cities.Such localism is taken for granted in Britain.But it is sappingthe competitiveness ofthe country’s industrial heartland.Trace a rectangle 110 miles long and 90miles wide, with Blackpool at its northwestcorner and Birmingham to the south.The region contained in it has most of theingredients for a global metropolis. In areaand population it is comparable to GreaterChicago—home of corporate headquarters,world-class cultural amenities andsoaring towers. Both Chicago and Britain’smetropolitan north are former industrialcentres that grew rich in the 19th centurybut fell on hard times in the 20th. Yet theirpaths have diverged. Real incomes in Chicagoare roughly 80% higher than in Britain’sex-industrial core (see chart), accordingto figures gathered by the BrookingsInstitution, an American think-tank. Andthough the fortunes of Britain’s cities areimproving, the gap in productivity and dynamismbetween its biggest industrial corridorand those offoreign peers is striking.Cities thrive or wither on how wellthey foster connections between peopleand between firms. In the 19th century,when the cost of moving bulky goods washigh, cities were a means to shrink supplychains. Firms crowded around coalfieldsand each other to cuts costs and boost productivity.But transport costs fell steadilyinto the 20th century, reducing the need tocrowd factories cheek by jowl. Manufacturersinstead sought cheap labour, leavingsome industrial towns to rot. A new dynamobegan to drive urban growth: thespeedy flow ofknowledge within cities.The shift has wrong-footed many an industrialcity. Those which have managedthe transition best have been able to call ona critical mass of skilled workers. Chicago’sadvantage is obvious; the metropolitanarea circles a dense central city. Muchof the region is linked by a single transportsystem and city government. Britain’s oldmanufacturing belt is not so geographicallycoherent. Yet it lags more sprawlingpeers as well. The German industrial conurbationthat stretches from Dortmund toCologne is also more productive, despitelacking a defined heart.Several factors keep what might becalled Britain’s collective second city underperforming.Poor transport links amplifythe distance between the region’s hubs.Fewer than 40 miles divide Manchesterfrom Leeds—less than the length of the Piccadillyline on the London Underground.But the rail journey between the two citiestakes more than twice as long as that betweenReading and London, which coversa similar distance. (The rolling Penninesare not a great obstacle; a canal joined thecities nearly two centuries ago.) A 2009study by economists at the Spatial EconomicsResearch Centre (SERC) reckonedthere was 40% less commuting betweenManchester and Leeds than one would expect,given the cities’ characteristics.Divided government is another handicap.Local officials are scattered betweenmyriad town councils, and are more interestedin beating neighbouring districtsthan deepening links with them. The nationalgovernment periodically tries tosolve this—mostly unsuccessfully. The lastLabour government introduced agenciestasked with organising development on aregional level but they did little to encourageproper regional governance. The coalitionhas replaced them with local enterprisepartnerships but they are poorlyfunded and mostly impotent.Antipathy to regional partnerships, 1Come togetherMetropolitan areas*GDP per person, $’000 at PPP †Population*, m2012 estimates0 10 20 30 40 50 60Chicago9.5London14.0Ruhr valley ‡11.6Manchester2.6Birmingham3.7Leeds2.3Liverpool2.0Shenzhen §10.8Sheffield1.5PrestonLeedsBlackpoolLiverpool SheffieldManchester BirminghamENGLANDLondon200 km*Includes surroundingeconomically linked areasand commuting region† Purchasing-power parity‡ Germany § ChinaSource:BrookingsInstitution

46 Britain The Economist April 19th 20142 rooted in twists of economic history, is athird obstacle. When the Manchester ShipCanal opened, growth in the region—centredon booming Manchester—threatenedto merge swathes of the area into a singleeconomic unit. In 1915 Patrick Geddes, aScottish polymath, reckoned that Liverpooland Manchester were “fast becominglittle more than historic expressions”. Yetbythe early1920spopulation growth in theregion had nearly halted. Britain’s precociousindustrial cities were also the first tostagnate and deindustrialise, as technologicalleadership swung to America. Declineset in before urban growth submergedstrong city identities, and beforethe north could develop governing institutionswitha regional focus. Itscities insteadbecame trapped in an outmoded, Victorianeconomic geography.Patchy up northParts of the north-west are reviving. Populationsare growing again in places. Manchesterinparticularappears to be thriving.According to the Manchester IndependentEconomic Review, a mammoth reportabout the future of the city published in2009, productivitythere isamongthe highestin Britain outside London. Other researchsuggests that Manchester is the onlyarea outside the south-east to function as a“human-capital escalator”: sucking inyoung people and boosting their careers.The city’s governance is also improving. Anew Greater Manchester Combined Authoritywas formed in 2011, to ensureproper co-operation between ten differentlocal authorities.Yet to narrow the gap with London,Greater Manchester will have to growgreater still. Better integration with neighbouringhubs could stem the southwardleak of talent. Mancunian imperialism ishappening—slowly. The economic boundarybetween Manchester and Liverpoollooks increasingly porous. A big new portdevelopment along the Manchester ShipCanal will deepen links between them—provided local politicians stay the course.More ambition would help, as wouldsensible public investment. According tothe SERC report, a 20-minute reduction intravel time between Manchester andLeeds could add £6.7 billion to the economyof the north of England. Faster traveltimes to London could add half as muchagain to both cities’ economies, whileboosting the fortunes of cities along theroute. The best hope for Britain’s industrialheartland might be integration within asingle metropolitan corridor stretchingfrom the south-east to Preston.Offthe football pitch, that will mean cooperating.But if deepened ties raised productivityacross all northern cities to Mancunianlevels, British output could risenearly £50 billion a year. That is a derbyfrom which everyone would win. 7Recruiting priestsRevving upMore conga than wonga for the clergyMore young Britons are joining the priesthoodAT A recent school careers fair, one stallstood apart. Its attendant touted a jobthat involves 60-hour weeks, includingweekends, and pays £24,000 ($40,000) ayear. Despite her unpromising pitch, theyoung vicar drew a crowd.God’s work is growing more difficult.Attendance on Sundays is falling; churchcoffers are emptying. Yet more youngBritons are choosing to be priests. In 2013the Church of England started training 11320-somethings—the most for two decades(although still too few to replace retirees).The numberofnew trainees forthe RomanCatholic priesthood in England and Waleshas almost doubled since 2003, with 63starting in 2012, and their average age hasfallen.Church recruiters have fought hard forthis. Plummeting numbers of buddingCatholic priests in the 1990s underlinedthe need for a new approach, says ChristopherJamison, a senior monk. The Churchof England used to favour applicants witha few years’ experience in other professions.Now it sees that “youth and vitalityare huge assets”, says Liz Boughton, whoworks for the church.Cynics suggest the recession may haveaided these efforts, by making other graduatejobs more difficult to get. And the prospectof free accommodation is not to besniffed at. Yet youngsters say the work hasbecome more appealing. One reason isthat a steady exodus of middle-classchurchgoers has left smallerbut more committedand vibrant flocks. “Nowhere elsewill youfind local Nigerian matriarchs, gaystudents, bankers and mentally ill peopleforming friendships over fried chicken andrum punch,” says Mark Williams, a youngvicar in London.Urban ministry appeals particularly tothe idealistic young. It may involve runningprojects for homeless people and givingadvice to refugees. (“Rev”, a televisioncomedy about a fictional vicar in east London,has helped raise the profile of suchwork.) Whereas past generations saw thepriesthood as a shortcut into the establishment,many of today’s youngsters takepride in its shift to the margins of society.“The church is most attractive when it ceasestoobsessaboutitsstatusasa national institution,”says Sam Dennis, a 29-year-oldcurate in Catford. He sees the ministry as a“distinctive alternative” for people disillusionedwith how much of modern Britainis run.Not all today’s trainee priests will landin flourishing inner-city churches. Someare bound for country parishes, of which agreater proportion are moribund. And allbut the most charitable priests tire of keepingopenhouse for pushy parishioners andlocal vagrants (families can feel like publicproperty, says a curate). Lots of youngpriests also resent their seniors’ foot-draggingon gay rights. But a government surveypublished in March found clergy happierthan members of any otherprofession. Money can’t buy that. 7

The Economist April 19th 2014 Britain 47BagehotThe hated body politicThe problem with British MPs is not that they are too rowdy, but that they are too tameSPRING is here and the sap in British politicians appears to berising. Last week a prominent Conservative MP, the formerdeputy-speaker of the House of Commons, Nigel Evans, was acquittedof raping a junior parliamentary researcher; he admittedgettingdrunkand havingsexwith a man lessthan halfhis age. Allegationsof MPs boozing and cavorting on the public purse havesince proliferated. A television news programme suggests a thirdof parliamentary staff have experienced sexual harassment; atabloid newspaper claims gay orgies occurred at a recent ConservativeParty conference. Anyone would thinkMPs had all the fun.That is not Bagehot’s impression of “Sexminster”, as Parliamenthas been renamed by the media. Its once-sodden culture, aproduct of lots of cheap booze and idle men hanging around lateto vote, is much drier. More women MPs, fewer late nights andthe usual vicissitudes ofmodernity have put paid to the excesses;most MPs are hardworking, anxiously careerist and mildlyhealth conscious. Their once-storied licentiousness—highlightedby the Labour giant Roy Jenkins’ habit of sleeping with Tory andLiberal wives—has been similarly pegged back. Investigationslast year into an alleged Westminster sex pest, Lord Rennard, suggestthere is no plague of sexual predation in Parliament. Theyfound the portly Liberal Democrat peer had, at worst, “violatedthe personal space” ofhis accusers. In short, though Parliament isstill too male and boozy for some people’s tastes, it is probablycleaner-living and more upstanding than it has ever been.Exaggerated reports of political Bacchanalia are a proxy for abroader loathing of politicians. The long-running fury over MPs’excessive expenses claims, which cost the Tory culture secretary,Maria Miller, her job last week, is similarly more a symptom ofthis than a cause. Unhappily for the Tory prime minister, DavidCameron, who has promised new vigilance against his fellows’alleged improprieties, it is also harder to mitigate—not least becauseit is a global phenomenon. Surveys by Edelman, a publicrelationsfirm, suggest 20% of French and 18% of Spaniards trusttheir government; in Britain, 42% do. Yet that is a poor rating for acountry spared the euro crisis and with a history, unlike America,ofacquiescence to power. Itisno reason notto tryto improve Britishpoliticians’ standing—and polling by YouGov suggests how.Asked to choose from a list of possible disqualifications forpolitical office, few Britons picked closet homosexuality, extramaritalaffairs or, for that matter, posing naked for a magazine.That helps explain why two ofBritain’s more scandal-prone politicians,the Tory mayor of London, Boris Johnson, and leader ofthe UK Independence Party Nigel Farage (in terms of sex, not somuch naked photos) are also among the most popular. Far moreobjectionable to Britons is any symptom of belonging to a gildedelite—above all, never having worked outside politics. That is badnews for Mr Cameron, his right hand George Osborne and mostof their rivals, including the Labour Party’s leader Ed Milibandand Lib Dems’ NickClegg. None has done much except politick.The professionalisation of British politics is hardly unique.Most professions have undergone a similar formalisation in recentdecades, in response to meritocracy, and because peoplewho commit to a single trade tend to do it well. Jenkins, DenisHealey and Margaret Thatcher, to name three post-war politicalgiants, all did little work before politics. Yet these were substantialpeople, steeled by the experience of war—Mr Healey gave hisfirst big political speech in uniform—and defined by the greatideological battle, between left and right, of their time. Shorn ofthat epic context, never forced to fight and raked by a hostilepress, today’spoliticiansare inevitablydiminished. Itis the politicalcontext, more than politicians, that has changed. Yet they arealso agents oftheir diminution—as the current lot show.Having grown up in politics, Mr Cameron and Mr Osborneseem incapable of thinking beyond it. Thus the tricksiness oftheir policies—the token cap on welfare spending, designed toembarrass Labour; the chimeric tax cuts, which leave few peoplebetter off. If this approach achieves short-term political hits, itdoes not tell sceptical voters they are led by high-minded people.And this damaging fixation with tradecraft is self-perpetuating—becausethe Tory leaders, even more than their rivals, promotecolleagues with a similar approach. Mr Osborne has built anetwork of such protégées—he calls them “the club”—includingMatthew Hancock, Nicky Morgan and Sajid Javid, Ms Miller’ssuccessor. Derided by jealous colleagues as lackeys, these risingstars are equally defined by theirOsborne-ite view ofpolitics as agame clever people play. More obviously talented, yet less biddable,Tories—including Rory Stewart, Margot James and NadhimZahawi—languish outside the club. That is self-defeating. To enthusevoters, party leaders need to promote engaging representatives.The fact that Britain’s few charismatic politicians—Mr Johnson,Mr Farage and the Scottish nationalist leader AlexSalmond—are outside Parliament is symptomatic ofthis failure.Dare to embarrass yourselfPoliticians also need to be bolderin what they say. Their responseto 24-hour news, which is to minimise the risk of contraveningparty lines by say nothing interesting, has proved a reputationaldisaster. Witness the response to Mr Miliband giving an identicalanswer—“the governmenthasacted in a recklessand provocativemanner”—to a sequence of five different questions. He was castigatedas “Robo-Ed”. He looked idiotic. He did more damage to hisimage than he would have risked by straying off-grid.The risks of promoting awkward talent and sacking the spindoctor are obvious; Mr Johnson and Mr Farage illustrate themwith their mishaps and scandals, almost on a monthly basis. Butthe alternative to a looser, bolder and more outward-looking politics,as voter turnout falls and fringe groups rise, is worse. It is tobecome ever more ingenious, hated and irrelevant. 7

International48 The Economist April 19th 2014Also in this section49 The abuse of migrantsChinese touristsComing to a beach near youHow the growing Chinese middle class is changing the global tourism industryWEN ZHONG is doing what his parentscould only dream of: taking a ofthose who travel go to HongKongor Ma-population now own passports, and mosttwo-week tour of Europe. The 28-year-oldfrom Shanghai has already been to France(“very beautiful”) and the Netherlands(“very good English”). He is now flyingfrom Schiphol airport in Amsterdam to hisfinal stop, Finland, where he hopes to seethe Northern Lights (“very exclusive”). MrWen is typical of a new wave of Chinesetourists: young, affluent and travelling independently,rather than on a “20-cities-inten-days” bus tour like those that broughthis predecessors. Such tours still appeal tomost Chinese tourists on their first trip furtherafield than Hong Kong, Macau or Taiwan.But a third are now organising theircau. But increased affluence, a trend towardslonger holidays, fewer visa conditionsand growing numbers of repeattravellers mean that every year more willtake foreign trips, and more will venturefarther. By2020 the numberofforeign tripsmade from China will double, predictsAaron Fischer ofCLSA, an investment firm,and spending by Chinese tourists abroadwill triple. The world should brace itself,says Wolfgang Arlt ofthe China OutboundTourism Research Institute, to receive100m aspiring Chinese keen for “their turnto see the Mona Lisa” and shop in bigbrandstores, and 50m more experiencedown travel, spending more and stayinglonger in each oftheir destinations.Nearly one in ten international touristsworldwide is now Chinese, with 97.3mGoing placesSpending on outbound tourism, $bnoutward-bound journeys from the countryChina United Germany Russialast year, of which around half were forStatesBritain France Japanleisure. Chinese tourists spend most in total($129 billion in 2013, followed by Ameri-140120cansat$86 billion) and pertax-free transaction($1,130 compared with $494 byRussians). More than 80% say that shoppingis vital to their plans, compared with100806056% of Middle Eastern tourists and 48% of40Russians. They are expected to buy more20luxury goods next year while abroad thantourists from all other countries combined.01995 2000 05 10 13The dizzying pace ofgrowth is expectedSource: World Tourism Organisation (UNWTO)to continue. Only around 5% of China’stravellers keen to move beyond the tickboxattractions.Shops, hotels and other tourist businessesare scrambling to profit from thenew arrivals. Schiphol, which has directflights to seven Chinese cities, hands outpresents in the arrivals hall around ChineseNew Year and has a free translationapp to pointChinese travellersto its luxuryshops, all of which accept Chinese currencyand Union Pay (China’s main creditcard). Benno Leeser, the boss of Gassan Diamonds,a Dutch jewellery chain with 14outlets in the airport, travels to China everyyear to schmooze with the travelagents who bring him his best customers.New destinations are trying to workout how to get themselves on the itinerary.After direct airline connections, the nextstep is to make getting a visa easier or, betterstill, to bring in a visa-waiver scheme. In2013 Chinese citizens could visit just 44 othercountries without a pre-arranged visa;Taiwanese citizens could visit 130, andAmericans and Britons over 170. In 2010the European Tour Operators Associationfound that a quarter of Chinese who hadhoped to visit Europe for leisure had abandonedtheir plans because of visa delays.Britain, which is outside the EuropeanSchengen free-travel area, requires its ownvisa—the main reason it gets just a ninth ofthe Chinese tourists France does.America has started to interview Chinesevisa-applicants online and allowsthem to pick up their visas at any of 900bank branches, rather than the Americanembassy. It saw a 22% increase in Chinesevisitors last year. But places with visawaiverschemes, like the Maldives, arereally thriving: last yearthe number ofChinesevisitors to the islands increased by45% and reached nearly a third of the 1.1mtotal. A boom in Chinese honeymoonshelps. Beach resorts are also popular with 1

The Economist April 19th 2014 International 492 “6+1s”—young couples travelling with onechild and two sets of parents. Parents andchildren do adventure activities; grandparents,who are less likely to speak English,go to evening shows and cannot get lost.The next step is to tailor language, productsand services to the Chinese market.Printemps, a shop in Paris, has a dedicatedentrance for Chinese tour groups; Harrodsin London has 100 Union Pay terminalsscattered throughout the store. Both are recruitingMandarin-speaking staff and haveChinese-language websites and maps. Hotelsincrease their appeal by offering Chinesetelevision channels, menus with pictures,and congee (Chinese porridge) forbreakfast. Such details are seen as a sign ofrespect. The main consideration of Chinesetourists when choosing a place to visit,says Mr Arlt, is whether it tries to welcomethem. “They are very afraid of beingtreated as second-class.”Products or trips marketed as “authentic”,“limited edition” or “VIP” have alwaysappealed to the Chinese. That used tomean shopping for luxury brands and takingsnapshots at landmarks, says Roy Graffof China Edge, a consultancy. Now thatthese are more commonplace, it stretchesto polar expeditions, cruises and safaris.Switzerland has done well by appealing tothe Chinese longing for blue skies andclean air. Canadian ski resorts are trainingChinese instructors to help attract theirshare ofthe 5m-10m Chinese practising thesport—up from just10,000 in 1996.Appealing to the new Chinese hordemeans tapping into their love of a good romantictale, says John Kester of the UNWorld Tourism Organisation. Thailandsaw the number of Chinese visitors tripleafter a blockbuster film, “Lost in Thailand”,inspired a generation to come and sampleThai beer. Mauritius is hoping that “FiveMinutes to Tomorrow”, a romance due outlater this year featuring Liu Shishi, a popularactress, and partly filmed on the island,will bring it a similar bonanza.The toughest step is getting noticed byChinese would-be travellers, says FrankBudde of the Boston Consulting Groupand co-authorof“Winningthe NextBillionAsian Travellers”. Nearly half of China’spopulation is now online, and two-thirdsof those planning to travel use online materialwhen preparing their itinerary. Sincethey use different search engines and social-mediaplatforms from everywhereelse, success largely depends on beingblogged about on these platforms. Here,destinations can make theirown luck. TourismNew Zealand’s decision to host thefairy-tale wedding of Yao Chen, an actresswith 66m followers on Weibo, China’sequivalent of Twitter, in Queenstown in2012 was rewarded with 40m posts andcomments on discussion forums, 7,000news articles—and a surge in interest fromChinese lovebirds. 7The abuse of migrantsAnd still they comeAll work, no rightsMigrant population as % of totalSelected receiving countries (by region), 201344 15 12 1GulfStatesNorthAmericaEuropeIndex of migrant workers’ rights2009, 1=strongestAll1.0Family andmarriageResidence0.80.60.40.20Public servicesSources: Martin Ruhs; UN; The EconomistLatinAmericaCivil andpoliticalEmploymentBalancing the interests ofmigrant workers and the countries they live inWHAT government would tolerate itscitizens’ passports being confiscated,their earnings being withheld and theirdeaths being covered up? Nepal’s, it seems.In September reports ofthe abuse ofNepalesemigrants working on stadiums for the2022 football World Cup in Qatar, and thedeaths of at least 44 of them, appeared inthe Guardian, a British newspaper. TheNepalese government’s first response wasto recall its ambassador to Qatar: theGuardian had quoted her describing theGulf state as an “open jail”. Shortly afterwards,Nepalese and Qatari officials held ajoint press conference in Doha at whichthey insisted Nepalese workers were “safeand fully respected”. Reports to the contrarywere false and driven by “inappropriatetargets and agendas”.According to Martin Ruhs of OxfordUniversity, the Nepalese government’s apparentlack of concern can be explained bylooking at the interests of those involved.Forall the mistreatment, Nepalese workersearn far more in Qatar than they could athome. Remittances make up a quarter ofNepalese GDP. If the Nepalese governmentwere to insist that rules protectingmigrant workers in Qatar should be enforced,Qatari employers might look forworkers elsewhere.Mr Ruhs has drawn up an index of migrantrights (see chart): he finds that countrieswith more rights for migrant workerstend to be less keen on admitting newones. In the Gulf states and Singapore,where migrants have few rights on paper,the foreign workforce is huge: 94% ofworkersin Qatar were born abroad. Swedenand Norway, where migrants can use publicservices, claim welfare benefits andbring in dependents, admit relatively fewpurely economic migrants.This trade-off is visible even within theEuropean Union, where the recent accessionof12 relatively poor eastern Europeancountries has sparked a debate about migrants’rights to welfare. In January DavidCameron, Britain’s prime minister, clashedwith his Oxford contemporary, Radek Sikorski,Poland’s foreign minister. Mr Cameronwants to be able to exclude recentlyarrived European immigrants from welfareand public housing. “IfBritain gets ourtaxpayers, shouldn’t it also pay their benefits?”Mr Sikorski responded.In Europe the debate is multilateral; MrCameron intends to promote his point ofviewaspartofa package to reform the EU’ssingle labour market. Elsewhere the movementofpeople is increasingly regulated bybilateral agreements and diplomacy. Sincea diaspora can help poor countries develop,sending states must try to protect therights of migrant workers without makingthem such a burden as to be unwelcome,points out David McKenzie of the WorldBank. Receiving countries weigh their nationalinterests, real or perceived, againstinternational obligations.The calculations vary from country tocountry. Some sending countries, such asthe Philippines, come down on the side ofstronger rights: Filipinos must be offered ahigh wage to be allowed to leave for a job,and their government sends envoys andinspectors to the main receiving countries.Others, like Nepal, are lax. Amnesty International,an NGO, is almost as critical of itsgovernment’s tolerance of dodgy recruitmentagencies and exploitative brokers asit is ofQatari employers.A UN convention on migrant workers’rights which came into force in 2003 hasbeen ratified by only 47 countries, most ofwhich are net senders of migrants. It islargely unenforced. A weaker treaty coveringjust the basics might do more good, arguesMrRuhs, since the rich countries mostmigrants move to might sign it, and help tocrack down on the worst abuses in placessuch as Qatar. 7

BusinessThe Economist April 19th 2014 51Also in this section52 Russia’s gloomy business outlook53 Investors’ doubts about tech firms53 Business jets take off in China54 Peugeot’s revival plan55 The emirates’ business climate55 How “Made in Spain” is undervalued56 Schumpeter: Peter Munk’s taleFor daily analysis and debate on business andour weekly “Money talks” podcast, visitEconomist.com/business-financeCoalThe fuel of the future, unfortunatelyA cheap, ubiquitous and flexible fuel, with just one problemWHAT more could one want? It is oxide from soaring coal consumptioncheap and simple to extract, ship and threaten to fry the planet, as the IntergovernmentalPanel on Climate Change re-burn. It is abundant: proven reservesamount to 109 years of current consumption,reckons BP, a British energy giant. week (see page 65). The CO 2 makes theminded everyone in a new report thisThey are mostly in politically stable places. oceans acid; burning coal also producesThere is a wide choice of dependable sellers,such as BHP Billiton (Anglo-Austra-crumble and lungs sting, and other toxicsulphur dioxide, which makes buildingslian), Glencore (Anglo-Swiss), Peabody Energyand Arch Coal (both American). er stations emit more radioactivity thanchemicals. By some counts, coal-fired pow-Other fuels are beset by state interferenceand cartels, but in this industry conticulates.Per unit generated, coal-fired sta-nuclear ones. They release tiny, lethal parsumers—inheating, power generation and tions cause far more deaths than nuclearmetallurgy—are firmly in charge, keeping ones, and more even than oil-fired ones.prices low. Just as this wonder-fuel once But poverty kills people too, and slowpowered the industrial revolution, it now growth can cost politicians their jobs. Twooffers the best chance for poor countrieswanting to get rich.Such arguments are the basis of a new King Coal, long to rule over usPR campaign launched by Peabody, the Coal consumption by region, toe* bnworld’s largest private coal companyOECDChinaIndia(which unlike some rivals is profitable,Other Non-OECDthanks to its low-cost Australian mines).FORECAST5And coal would indeed be a boon, were itnot forone small problem: it is devastatinglydirty. Mining, transport, storage and4burning are fraught with mess, as well as3danger. Deep mines put workers in intolerablyfilthy and dangerous conditions. But2opencast mining, now the source of much1of the world’s coal, rips away topsoil andgobbles water. Transporting coal brings a01965 80 90 2000 10 20 30 35host ofenvironmental problems.Source: BP*Tonnes of oil equivalentThe increased emissions of carbon didecadesof environmental worries areproving only a marginal constraint on theglobal coal industry. Some are trying to getout: in America Consol Energy is sellingfive mines in West Virginia to concentrateon shale gas. Big coal-burners such asAmerican Electric Power and Duke Energyare shutting coal-fired plants. Yet despiteAmerica’s shale-gas boom, the federal EnergyInformation Administration reckonsthat by 2040 the country will still be generating22% of its electricity from coal (comparedwith 26% now). The InternationalEnergy Agency has even predicted that,barring policy changes, coal may rival oilin importance by 2017. As countries getricher they tend to look for alternatives—China is scrambling to curb its rising consumption.But others, such as India and Africa,are set to take up the slack(see chart).America’s gas boom has prompted itscoal miners to seek new export markets,sending prices plunging on world markets.So long as consumers do not pay for coal’shorrible side-effects, that makes it irresistiblycheap. In Germany power from coalnow costs halfthe price ofwattsfrom a gasfiredpower station. It is a paradox that coalis booming in a country that in other respectsis the greenest in Europe. Its productionofpowerfrom cheap, dirtybrown coal(lignite) isnowat162 billion kilowatthours,the highest since the days of the decrepitEast Germany.Japan, too, is turning to coal in the wakeof the Fukushima nuclear disaster. OnApril 11th the government approved a newenergy plan entrenching its role as a longtermelectricity source.International coal companies face twoworries. One is that governments mayeventually impose punitive levies, tariffsand restrictions on their mucky product.The other is the global glut. Prices for ther-1

52 Business The Economist April 19th 2014Business in RussiaFrom bad to worseBEFORE the current standoff betweenthe Kremlin and the West overUkraine,it was already clear that Russia’s economicmodel, of strong energy exports fuellingdomestic consumption, was running outof steam. In 2007, on the eve of the globalfinancial crisis, Russia’s economy grew by8.5%. Last year growth was a meagre 1.3%.Still, the country’s population of 144m,its entry into the World Trade Organisation,its consumers’ aspiration to a Westernlifestyle and its status as the “R” in theBRICs have persuaded multinationals tokeep investing in plants in Russia, and foreigninvestors to keep providing capital toRussian firms. The attitude until recently,says Alexis Rodzianko of the AmericanChamber of Commerce in Moscow, wasthat “Russia’s economy may be slowing,but my own prospects are pretty good.”Now the outlook for businesses there islooking gloomier. With pro-Russian separatistsseizing government buildings ineastern Ukraine, amid talkofa full-scale invasion,firms of all kinds fear a tighteningof American-led sanctions, a cut-off of foreignlending and investment, and a furtherfall in consumers’ confidence.The most immediate concern, especiallyfor Western firms doing business in andwith Russia, is the curbs the United Statesand the European Union have imposed ondealings with certain individuals. Even thesomewhat stronger American sanctionsimposed so far are, on paper, “pretty limited”,says Alexander Kliment of Eurasia2 mal coal (the kind used forpowerand heating)are at $80-85 a tonne, which barelycovers the cost of capital. Some Australianproducers are even mining at a loss, havingsigned freight contracts with railways andports that make them pay for capacitywhether they use it or not.One answer to that is cost-cutting andefficiency, much stressed by companiessuch as BHP Billiton. Unlike oil and gas,coal is geologically simple and does not requirea costly array of drills, platforms andpipes. Ifthe price is too low, companies candecide to stop production and await bettertimes. But thriftiness with capital has itslimits: the cost of mining is going up, as theeasiest coal seams are worked out.Some companies have tried to switchefforts to “met” (metallurgical) coal, whichfuels smelters. This was thought to bescarcer and more profitable. But that theoryhas suffered. Supplies of met coal haveproved more abundant than expected.Perhaps the biggest hope for all involvedin the coal industry is technology.Mining and transporting coal will alwaysbe messy, but this could be overlookedwere it burned cheaply and cleanly. Promisingtechnologies abound: pulverisingcoal, extracting gas from it, scrubbing emissionsand capturing the CO 2. But none ofthese seems scalable in the way needed todent the colossal damage done by coal.And all require large subsidies—from consumers,shareholders or taxpayers.A $5.2 billion taxpayer-supportedclean-coal plant in Mississippi incorporatesall the latest technology. But at $6,800per kilowatt, it will be the costliest powerplant yet built (a gas-fired power station inAmerica costs $1,000 per kW). At thoseprices, coal is going to stay dirty. 7MOSCOWDomestic and foreign firms wonderhow serious things might getMy other car is not a LadaGroup, a risk-analysis firm. But they havecreated a “scare factor” that is magnifyingtheir effect. For example, shares in Novatek,a gas producer, fell sharply when therestrictions were announced, on fears itmight struggle to do deals with foreignpartners or raise capital abroad becauseGennady Timchenko, a friend of VladimirPutin’s named on the American sanctionslist, owns 23% of the company and sits onitsboard. IfIgorSechin, the bossof Rosneft,another energy firm, is sanctioned, the effectmay be similar.Foreign firms fret that sanctions couldalso create openings for competitors.American firms worry that the EU’s softercurbs may give its companies more flexibility.The boss ofSiemens, a German engineeringgiant, met Mr Putin in Moscow lastmonth. Americans and Europeans alikeworry about losing out to Asian rivals.Moscow business circles are full of rumoursof Chinese executives trying to peeloff contracts by urging Russian companiesnot to depend on Western ones, given thepossibility offurther trading restrictions.Russian firms and politicians, in turn,are casting around Asia and elsewhere fornew customers to replace those they fearlosing from the West. Russia’s deputyprime minister, Arkady Dvorkovich, saidthis week that the government hoped to finalisesoon a long-promised deal for Gazpromto sell gasto China. Rosneftis seekingto treble its exports of oil to China. Sukhoi,a state-owned aircraft-maker, has juststruck a deal to sell a fleet of small passengerjets to a Chinese airline, hoping thiswill offset any loss of orders from Westerncarriers. But its plane, the Superjet, is chockfull of key parts from American and Europeansuppliers, and thus its production isvulnerable to any tightening ofsanctions.For domestic firms, a bigger worry thanthe sanctions imposed so far is the risk oflosing access to foreign loans, and whatthat will mean for investment, productivityand growth, says Elena Anankina ofStandard & Poor’s, a ratings agency. Westernlenders are likely to honour existingloan deals. But they may be reluctant toprovide fresh financing. Rusal, an indebtedaluminium producer, is amongthe Russianfirms most exposed to this. Some statebanks, such as Sberbank and VTB, have indicatedthey are ready to fill the gap left byWestern lenders. But Ms Anankina wondershow longthey will be able to do so. Indeed,some Russian banks themselves dependon Western loans. With capital flighthitting $60-70 billion in the first quarter ofthis year alone, investment in domesticproduction—what the spluttering economyneeds most ofall—will be even harderto come by.The fallout from Russia’s annexation ofCrimea and further stoking of unrest ineastern Ukraine has put downward pressureon an already weakening rouble. Onits face, a cheaper currency should be aboon to domestic producers. Visiting Moscowthis month, Carlos Ghosn, the boss ofRenault-Nissan, a global carmakerwhich isbuying control of AvtoVAZ, the maker ofLada cars, argued that the weak currencywill be “an advantage for local brands”.But thinking that a “weak rouble is theway forward” is the “wrong paradigm,” arguesYaroslav LissovolikofDeutsche Bank. 1

The Economist April 19th 2014 Business 532 Many Russian manufacturers, like Sukhoi,depend on imports for inputs and equipment.And in any case, many are runningnear full capacity and will be unable tograb market share from foreign rivals withoutmoney to invest in increasing output.This confluence of economic bad newswill hit a few industries first and hardest:consumer goods, construction, propertyand banking. Demand for the roughly halfTechnology firmsStatus shiftSAN FRANCISCOInvestors have unfriended some high-tech starsGOOGLE splashed out an undisclosedsum of money on April 14th to buy TitanAerospace, whose solar-powereddrones it plans to use to help deliver wirelessinternet access to remote parts of theworld. Like Google’s new drones, whichcan reach impressive heights, tech sharessoared in the early part ofthis year. Then inMarch a sell-off began that battered thestocks of many Silicon Valley stars. Thetech-heavy NASDAQ stockmarket indexsteadied somewhat early this week, andshares in older tech firms like HP and IBM,which are traded on the main market, havedone well. But investors and companiesare still jittery.Those worried that a new internet bubblepumped up by wild dreams and unabashedgreed is now deflating will bewatching closely to see whether tech firms’latest results give further cause for alarm.On April 15th Yahoo published its quarterlyearnings, which showed a tiny increasein revenue after excluding the cost of feespaid to its partner websites. Its shares roseon the news. Google was due to report itsresults the next day, after The Economistwent to press.It is not just web firms whose performanceis under the microscope. Shares inbiotech companies, which adapt and exploitprocesses found in living organismsto create drugs and other useful products,have also taken a beating. Having risen by60% last year, the NASDAQ biotech indexhas fallen by 18% since the middle ofMarch. On April 4th alone investors pulled$372m out of the multi-billion-dollariShares NASDAQ Biotechnology exchangetradedfund—the biggest one-day withdrawalsince the fund’s creation in 2001.Other firms developing novel technologieshave suffered sagging share prices,too. Tesla Motors, whose snazzy electricvehicles are a must-have in Silicon Valley,had a 350% run-up in its shares last year.This year they kept rising, reaching $240 inof Russian steel that goes to building projectsat home will drop. Car sales, dependenton the availability of bank loans, willprobably fall. Already a softening markethas led Ford to consider cutting productionat its joint venture with Sollers, a Russianfirm. Even a continuation of the currentstand-off between the Kremlin and theWest would be bad enough for business.But things may well get far worse. 7mid-March, by which time the market capitalisationof Tesla, which sold only 23,000cars last year, was more than half that ofGM, which sold almost 10m. They thenstarted to slip, and on April 15th they closedat $194, as investors continued to debatethe wisdom of the firm’s plans to invest $5billion in a huge battery-making factory.The shares of social-media companieshave been especially badly hit, faringworse than both the NASDAQ and thebroader S&P 500 index (see chart). Thispartly reflects concern over their ability tokeep growing. Twitter has seen its shareprice fall from a high of just over $73 in Decemberto around $46, as investors havefretted about falling advertising rates andlevels ofuser engagement at the firm.Say you want a revolutionQuestions have also been raised aboutFacebook’s ability to keep growing strongly.“Social networks promised marketers arevolution, but what they have delivered isjust boring traditional ads,” argues NateElliott of Forrester, a research outfit. Thatjudgment may be a little harsh, but Facebookis certainly casting around for newsources of revenue. Among other things, itistryingto become a “Facebank” thatoffersTechno-droopJanuary 1st 2014=100January February March April2014Source: BloombergS&P 500NASDAQGlobal X Social Media Index11010510095908580services such as electronic money and internationalpayments: it was reported thisweekthat the firm was seekinga licence forsuch activities in Ireland.Shares in some Asian web companies,such as Tencent of China, have fallen, too.But the news is not all bad. Yahoo, whichhas a stake in Alibaba, a giant e-commercecompany, reported that the Chinese firm’srevenue soared in the last quarter of 2013.Alibaba is planning to list its shares inAmerica this year.There are plenty of other tech firmsqueuing to stage an IPO. Those looking forevidence of a bubble should keep an eyeon upcoming listings for firms such as Box,a business founded in 2005 that has madea name for itself in online file-sharing andstorage. Like Twitter it has significant revenues,but is not yet in profit. They shouldalso keep a close eye on venture capitalists.American funds raised almost $9 billion inthe first quarter of the year, the most sincethe last quarter of 2007. But plenty of venturemoney is now pouring into me-toofirms and deals with crazy price tags. Recentevents may have taken some air out ofa tech bubble in the public markets, but financiersare still busy pumping one up behindthe scenes. 7Business aviationFasten seat beltsSHANGHAIA potentially huge market forcorporatejets is opening up in ChinaIT IS hard to think of a product for whichChina is as promising a market as it is forbusiness jets. The country is vast, and farfrom its main trading partners. Its hugeeconomy is churning out new billionaires.But the number ofcorporate jets in China—fewer than 400—is smaller than in lesseremerging markets like Brazil and Mexico. Itis even smaller, reckons Jeffrey Lowe ofAsian Sky Group, a consultant, than thenumber found just at Orange County airportin California.And yet the mood was upbeat thisweek at a big industry gathering at Hongqiaoairport in Shanghai. The government,long the biggest obstacle to growth, ischanging its attitude. Until now over-regulationhas made importing jets costly, traininglocal pilots complex and filing flightplans cumbersome. Officials have repeatedlytalked of slapping a luxury tax on thepurchase of new jets, on top of existingonerous duties and taxes. At Beijing’s mainairport, business jets get only two take-offslots an hour.An anti-corruption drive by the newishgovernment ofPresident Xi Jinping has led 1

54 Business The Economist April 19th 20142 state-owned enterprises (SOEs) to shunjets. An aviation-industry veteran says SOEexecutives once made up perhaps 15% ofthe local jet-leasing market before thecrackdown, but that figure today is 5%.Still, the government now seems readyto unleash business aviation’s potential. Itis promising to build 10-15 new airports ayear. China has fewer than 400 airports forcivil use today, whereas small jets can landat 18,000 fields across America. The latestofficial five-year plan explicitly promotesthe development of non-airline aviationand calls for reforms to improve the efficiencyand allocation of air space. Thismatters, because China’s air force blocksan inordinately large amount ofit.The armed forces have recently givenup some big blocks of air space they hadpreviously reserved fortraining, and handedover about a dozen military airfields forcivil aviation. In half a dozen local trials,regulators are allowing paperwork-freeflights at low altitudes. Faku, a county nearShenyang, the capital of Liaoning province,is one ofthese experimental zones aspiringto become a “light-air capital”, with1,000 small planes within five years.Edward Bolen of the National BusinessAviation Association, an American industrygroupthatorganised thisweek’sconference,observes that Faku’s experimentpoints to an important difference in theway the business is developing in China.The rise of business aviation in the Weststarted with a proliferation of smallplanes, typically propeller-driven, andonly later moved on to bigger, jet-poweredcraft. Since it first started in China in 2003,the industry has been dominated by bigjets costing tens of millions of dollars; theswarm of smaller turboprops buzzing overFaku is a new phenomenon.That suits Scott Neal of Gulfstream, anAmerican manufacturer of big businessjets. His firm has sold over 100 in China,many of them top-end models, and holdsthe biggest market share. The mainland’sprivate-jet fleet has more than doubled inthe past three years, and grew by roughly afifth last year. Bombardier, a Canadianbuilder of business jets, forecasts that from2013 to 2032 Chinese customers will takedelivery ofmore than 2,400 ofthem.A sign of the market’s maturation is theshift away from buying only new jets. Localsused to turn up their noses at usedplanes, but now sales of “gently preowned”jets make up nearly half of the total.A number of new charter operators aresetting up shop. NetJets, a firm partlyowned by America’s Berkshire Hathawaythat offers fractional ownership of jets, isabout to dip its toes into the market. OnApril 15th Gulfstream and MinshengFinancialLeasing, the aviation-finance arm of aChinese bank, trumpeted a deal to ship 60new corporate jets to China—one of thebiggest deals yet seen worldwide.Nope, not big enoughThere is another sign of rising sophistication.Jason Liao of China Business AviationGroup, another consultant, says thatwhen the market opened in 2003, buyerswere chiefly fat cats: they bought the biggestand blingiest jets, often plonkingdown cash, but flew them only rarely, toimpress friends. Now, the chief buyers areprivate companies, typically using financingor leasing schemes, and utilisationrates are soaring as the jets are put to businessuse. This is a market that looks, at longlast, set for take-off. 7Peugeot’s revival planStriving for thepodiumPARISA new boss seeks profits by making anarrowerrange ofpriciercarsTHE Peugeot group (PSA) won the MarrakechWorld Touring Car Championshipon April 13th, with Citroën C-Elyséescoming first, second and third. Thatcheered its new boss. Carlos Tavares, a racingfanatic, joined Peugeot’s archrival, Renault,as a test driver in 1981, rising to becomethat company’s number two beforetaking the wheel at PSA on March 31st. Henow wants to see his new company enjoyingthe same success financially as it hashad on the racetrack.The second-largest European carmaker,in volume terms, is struggling to escapefrom losses topping €7 billion ($9.7 billion)in the past two years. A €3 billion capitalincrease agreed on in principle in March,which hands both Dongfeng, a Chinesecarmaker, and the French state 14% stakesin exchange for €800m apiece, will helpPSA secure its future. On April 14th Mr Tavaresset out how he proposed doing it.Mr Tavares is seen by many as the firstgenuine “car guy” to run PSA for sometime. His real forte may be on the numbersside, however. “Back in the Race”, as his recoveryplan is called, has four broad goalsbut one overwhelming message: forgetabout volume and market share, focus onprofits and cashflow. The first aim is to distinguishmore clearly Peugeot’s high-endfamily cars from Citroën’s cheaper, trendyones, pulling out Citroën’s DS range as astand-alone premium brand. The idea is toreduce the percentage price gap betweenPSA cars and their best-in-class rivals,which runs to double digits in some cases.The second is to concentrate on globalwinners, dropping niche models. Thenumber ofmodels will fall from 45 to 26 by2022 and seven production platforms willbecome two. The third is making worldwideoperations profitable. PSA thinks carsales will grow by 38% globally betweennow and 2022 but by just 20% in Europe,where it now makes almost three-fifths ofits sales. Riding this wave means above allthat PSA must follow its rivals and expandin China, already its second market. TheBRICS have proved challenging: MrTavares aims to break even in Russia andLatin America in 2017 but it is a tall order.The fourth target is the whopper: improvingcompetitiveness. PSA has to sell2.6m cars outside China to break even andwants to lowerthis to 2m (in 2013 it actuallysold 2.3m). That means reducing costs—wages will fall from 15.1% of revenues toless than 12.5% in 2016, for example—andmanaging cash, suppliers and stockbetter.Mr Tavares expects to make profits in2018, with operating margins at the corecarmaking business of 2%, rising to 5% by2023. Analysts were dismayed by such timidtargets and PSA’s shares, having revivedrecently, slipped a bit.PSA is already on an upward swing financially.Sales are looking brighter as theEuropean market recovers. Peugeot’s 308hatchback won the European Car of theYear award; extra shifts are being laid on toproduce more of them, and of the new2008 mini-SUV. Much of the hard cost-cuttinghas already been agreed on: a plantnear Paris was closed last year and a jobsheddingcontract negotiated.The motor industry is studded with storiesof ailing firms whose fortunes were revived.One is particularly relevant. Nissanwas a sad case when Renault took a stakein 1999 and whipped it into shape, closingplants and cutting costs. Mr Tavares spentseven years at Nissan, in Japan and inAmerica. He knows how to end up on thewinners’ podium. 7

The Economist April 19th 2014 Business 55Business in the UAEImproving thedesert climateDUBAIA draft companies law in the emirates isa bit disappointingFOREIGN investment is flooding back,the malls are filling with shoppers anddeals are being struck: business in theUnited Arab Emirates is booming onceagain. The IMF this month upgraded itsforecast for the emirates’ economic growthin 2014 from 3.9% to 4.4%.As memories of the crisis recede, companiesare remembering the reasons thatmake the emirates attractive. The high incomeof the population, 84% of whom areexpatriates, is one. Geography is another.The country is conveniently located betweenEurope and Asia, with two worldclassairlines, Emirates and Etihad.The UAE has done a lot to make life easyfor firms, keeping paperwork to a minimumand moving much of it online. Itcomes 23rd out of 189 economies in theWorld Bank’s latest ranking for the ease ofdoing business, the highest in a region thathas seen a tumultuous few years. It takesonly eight days to set up a business, threefewerthan the average forthe OECD, a clubof mostly rich states. “Two years ago I’dhave said the UAE does well relative to theregion,” says Habib al-Mulla of the Dubaioffice of Baker & McKenzie, a law firm. “TodayI’d say it globally, too.”On April 13th the country’s president,Sheikh Khalifa bin Zayed al-Nahyan,signed into law a measure to promotesmaller firms by giving them greater accessto official contracts and loans. Yet businesspeopleare disappointed by a draft of abroader companies law, which is expectedto be sanctioned soon. The bill fails tosolve the two big problems hamperingbusiness in the emirates. First is the lack ofa proper insolvency regime that makesclear the duties ofa firm’s directors and therights of its creditors if it hits financial trouble.Despite its high overall rating, the UAEcomes 101st on this score in the WorldBank’s ratings. Such minor matters as beinglate paying a phone bill may be treatedas criminal offences rather than civil matters;businessmen tell tales of colleaguesgoing to the airport only to be told they arebanned from travelling.The second issue the proposed legislationleaves untouched is foreign ownership.International businesses that set uplocal limited-liability companies, as mostdo, can own only 49% of them, and thusmust find trustworthy local partners. Dubaihas created several “free” zones, wherefull foreign ownership is allowed, but theother emirates have been slow to follow.Made in SpainA pressing issueMADRIDThe government frets about foreign hands on the nation’s olive-pressesTHE French government once scuttleda possible foreign bid for Danone, abig dairy firm, on the ground that it was anational industrial “jewel”. Ifyogurt isstrategic for the French, olive oil has thesame exalted status in Spain. Four savingsbanks wanted to sell their combined31% stake in Deoleo, the country’s largestproducer, and under Spain’s stockmarketrules anyone buying such a large stakehas to bid for the whole company. Earlierthis month, when it emerged that all thebidders were foreign, ministers said theywould prefer that it remained in Spanishhands, and raised the possibility of thestate taking a stake in the firm.On April 10th a British private-equityfirm, CVC Capital, won the backing ofDeoleo’s board after making the highestoffer, valuing it at €439m ($607m). Butgiven the controversy over selling toforeigners, two ofthe four would-besellers now looklike keeping their stakes.CVC will end up owning 30% ofDeoleobut will later seek to buy the rest.Olive oil accounts for a mere 0.8% ofThese are Spanish, not ItalianAnalysts reckon that full liberalisation ofownership would attract more businesses.Investor protection is another worry.The UAE has made progress: its courts tendto recognise the decisions of foreign arbitraltribunals. But enforcing contracts canbe tricky, and the new law does not helpmuch. Its biggest potential benefit is itslowering ofthe percentage that companiesmust float in an IPO from 55% to 30%. Thisshould encourage more family-ownedfirms, hitherto worried about losing control,to raise capital to expand.Further legislation on insolvency andforeign ownership is promised. But whenSpain’s exports. Yet it is an extra-sensitivematter. The country is the world’s largestproducer ofthe oil, but one-third of itsexports are sent in bulkto Italy where it isbottled and sold, often for a significantmarkup, under Italian labels. Some of theoil sold with the Bertolli brand, one ofItaly’s and America’s favourites, is in factpressed by Deoleo from the fruits ofSpanish olive groves.It is a similar story for wine. Spain hasovertaken France and Italy to become theworld’s largest producer, but sells almosthalfofits exports in bulk to markets likeFrance, some ofwhich is retailed underFrench labels. French- and Italian-labelledwines typically fetch higher pricesthan Spanish-labelled ones, though thegap is narrowing. And despite the globalsuccess ofSpanish fashion retailers suchas Inditex and Mango, the fancy handbagsturned out by artisans in the smallAndalusian town of Ubrique are soldunder French and Italian labels. StuartWeitzman, an American shoe designerwho makes his products in Spain, saysthe country produces the world’s bestfootwear, but its domestic labels havebarely left a footprint on the world stage.Spain has come a long way, comparedwith the relatively closed economy it hadbefore joining the European Union in1986. More recently, rising exports havehelped pull the country out ofa deeprecession, with the economy returning togrowth in the third quarter of2013. Exportsare now 34% ofSpain’s GDP, upfrom 24% in 2009. Its olive oil is winningnew customers in places like China andMexico. Prominent chefs like FerranAdrià have raised the profile ofSpanishcuisine and attracted foodie tourists. Butthe country clearly has some way to go inraising the prestige ofthe “Made inSpain” label.things go well in the Gulf, as they now are,the authorities tend to lose interest in reform.Still, businessmen agree that theUAE’s advantages far outweigh its handicaps.Fadi Malas, the boss of Just Falafel, alocal fast-food operator, says it is ideal notjust as a place to do business but as aspringboard for expanding across the regionand beyond: plans are in hand for thechain, currently 55 outlets, to grow to morethan 900 worldwide. Like the Lebanese-British MrMalas, entrepreneurschoose theUAE over neighbouring countries not leastbecause it has both electricity and stability—twothings other places sorely lack. 7

56 Business The Economist April 19th 2014SchumpeterMunk’s taleHow a formerrefugee from the Nazis made and lost several fortunesYOU can’t be right all the time. In a 1995 profile of Peter Munk,the founder of Barrick Gold, a mining giant, The Economistconcluded that the biggest problem facing the company was whowould replace him as boss. Mr Munkwill at last step down as thecompany’s chairman at the annual meeting on April 30th, aged86. In the same profile we fretted that by spending $500m on aproperty company, Mr Munk risked ending up in the same boatas two fellow Canadian tycoons, Paul Reichmann and RobertCampeau, who had gone spectacularly bankrupt. In 2006 MrMunkhad the last laugh, selling the company for $9 billion.There were lots of reasons why our 1995 profile was so pessimistic.Mr Munk was already 67. The mining industry is an unforgivingone. Diversifying into property is a well-known road toruin. And Mr Munk had a catalogue of failures to his name. Butwe forgot one vital thing: his ability to turn failure into successand threat into opportunity.Failure is a hot topic in American business at the moment. SiliconValley entrepreneurs argue that the valley’s success is its tolerancefor failure. Historians apply the same argument to thegreat arc ofAmerican history: the United States has pulled aheadof its rivals in part because its entrepreneurs have always had atalent for picking themselves up, and its bankruptcy laws areamong the most lenient in the world.In Mr Munk’s early years, “threat” meant more than the possibilitythat his latest app might not get the nod from some venturecapitalist; and “opportunity” meant more than the chance ofbeing bought out by Facebook. In 1944 he fled his native Hungaryon the “Kastnertrain”, which carried almost1,700 Jews who wereable to pay for their passage to Switzerland and thus escape thegas chambers. Four years laterhe arrived in Canada with his familyfortune gone, and worked his way through university, cleaningcars and selling Christmas trees, ending up with a degree inelectronic engineering.His first business, the Clairtone Sound Corporation, wentfrom boom to bust in 11 years. One moment the former pennilessimmigrant was driving a Pierce-Arrow convertible down MadisonAvenue and payingFrankSinatra to endorse his hi-fi systems.The next moment he was unceremoniously dumped from thecompany, which then folded, the victim ofoverambitious expansionand Japanese competition. Nina Munk, one of his five children,says that his first experience offailure marked him for life. Itprobably lay behind his penchant for hedging output when hestarted in mining, an innovation at the time among gold miners.“Every human being makes mistakes,” he says. “You have tohedge so that if a decision goes wrong it does not eliminate yourabilityto stayatthe table and playon.” Butitdid notdull his appetitefor venturing into challenging businesses.After the collapse of Clairtone Mr Munk “played on” by investingin hotels in the South Pacific. The threat of failure continuedto stalk him. A resort he tried to build in Egypt with AdnanKhashoggi, an arms dealer, went nowhere. Abusiness park he developedsouth of Berlin after the Soviet empire imploded beganwell but was undercut by competing parks on the Berlin ringroad. Nevertheless, he succeeded in restoring his fortune.Mr Munk’s greatest gamble was his move into mining whenhe founded Barrick in 1983. He knew little about the business atthe time—just as he had known little about hotels before that. Buthis ignorance freed him from the assumptions that dominatedthe industry. It was mostly run by geologists and engineerswhose aim was to dig enormous holes with other people’s money,paying little regard to shareholder returns. Gold miners weresupposed to be “believers” in gold rather than efficient managersout to maximise profits. “Bullshit,” thought Mr Munk; he soonchanged all that. A string of ever-more audacious acquisitionsturned Barrick into what was for a while the world’s largest goldminer and is still among the biggest.MrMunkalso turned outto be a first-rate managerof hisgrowingbusiness empire. He may have been willing to overrule oldhands when it came to whether mining should be run by managersor miners—and do it with absolute self-confidence thatbrooked no question. But he was also willing to delegate operationaldecisions to experts. Indeed, he explicitly refused to micromanage,to give himselftime to thinkbig thoughts.Sailing into stormy weatherIn recent years Barrick’s competitive advantage has been erodedin partbecause everyotherminingcompanyhasnowrecognisedthe force of his insight. He is leaving the company he created at adifficult time: last year Barrick lost $10.4 billion as the gold pricetumbled; and a huge project in the Andes, that the firm has beenworking on for years, was halted. But none ofthese problems hasdulled his appetite for risk. He may yet have some big, farewelldeal for Barrick up his sleeve. Even if not, he can now give his fullattention to a side-project he has been working on for years, toturn an old naval dockyard in Montenegro into a marina wherethe super-rich can parktheir yachts alongside his.Whether fortune will smile on his latest venture is unclear:will Russian oligarchs, its most obvious customers, be impoverishedby Western sanctions over Russia’s meddling in Ukraine, orwill they flock to his marina to hunker down until the stormblows over? But Mr Munk is less troubled by the prospect of failurethis time around. He plans to give almost all of his fortune tocharity, and has already made a start by giving $160m to hospitalsand universities in Canada and Israel. He wishes to spare his childrenthe curse of too much inherited wealth. Take it from a manwho knows a thing or two about success or failure: there are fewthings more dangerous than making life too easy. 7Economist.com/blogs/schumpeter

Finance and economicsThe Economist April 19th 2014 57Also in this section58 Bond-trading’s blight59 The Danish mortgage binge59 State-owned banks in Bangladesh60 Microfinance in Bangladesh60 Structural reform in southern Europe61 America weighs post-office banking62 Ratings agencies resurgent63 Free exchange: The curious case ofdeclining leisureFor daily analysis and debate on economics, visitEconomist.com/economicsPrivate equityBarbarians at middle ageThe firms that pioneered private equity are becoming dullerIN A study from 1989 entitled “The eclipseof the public corporation”, Michael Jensenargued that privately owned companiesshouldperform betterthan their listedrivals. His paper provided the intellectualunderpinningforprivate equity, which hassince turned the business of managing unlistedcompanies into a $3 trillion industry.Despite this success, Mr Jensen’s argumentsseem somewhat less apposite nowthat four of the leading private-equityhouses—KKR, the Carlyle Group, Blackstoneand Apollo Global Management—have themselves gone public.Investors have decided that they canlive with the irony: shares in the big listedprivate-equity firms are up by between48% and 131% since May 2012, when Carlylebecame the last ofthem to float. The valuationsare partly a reflection of America’sMore to losebubbly stockmarket, up by 33% in the sameperiod. In much the same way that an energycompany’s shares rise in tandem withBlackstoneoil prices, private-equity firms are boostedwhen stockmarkets are high, as the valueof the companies they own rises. (Althoughthey hold their stakes on behalf ofinvestors, they keep a share ofthe gains.)Having shareholders is not the onlything that has changed for the firms thatpioneered private equity. They have becomebigger, accumulating assets undermanagement at a furious clip (see chart).They are also becoming duller. WhereasKKR and itspeerswere once atthe forefrontoffinance’s most exciting deals, borrowingvast amounts to seize control of underperformingcompanies in hard-foughttakeoverbattles, theyoften nowmerely extendloans to such businesses. Investing ininfrastructure, once perceived as a backwater,is also popular. By contrast the leveragedbuy-out, the mainstay of private equity,is turning into a marginal activity. Ofthe $266 billion managed by Blackstone,only $66 billion is in private equity.The firms say they have diversified intodifferent product lines just as any otherbusiness would. Some doubt whether traditionalbuy-outs offer the best risk-adjustedreturns. The industry has matured: fatPrivate-equity firmsAssets under management, $bnApolloYear of public offeringSources: Bloomberg; company reportsCarlyle2005 06 07 08 09 10 11 12 13KKR300250200150100500profits in past decades have attracted over5,000 rivals competing for the same deals.Together they have raised more moneyfrom investors than they know what to dowith. Many buy-out firms have resorted tobuying and selling stuff to each other. Andprices for companies (as multiples of profits)are higher than even at the height ofthe credit boom. Eking out gains is hardwhen paying over ten times a firm’s earnings,as is now typical, compared with lessthan eight times in calmer periods.By contrast, lending to companies is amuch less crowded field now that banksare busy repairingtheirbalance-sheets. It isless sexy than buy-outs, but it holds anotherattraction: though fees tend to be lower,they are relatively skewed towards the annuallevy of 1-2%, known as managementfees, which private-equity firms charge regardlessof how their investments fare.These used to be a mere bonus: privateequityfirms once earned most of their incomefrom a 20% cut of investors’ profits,known as “carried interest”. Yet when analystsvalue “alternative investment”firms, they typically attach three timesmore value to the reliable income frommanagement fees than to erratic carried interest.Bosses fretting about their shareprices will therefore chase humdrum volumeover dramatic but risky deals.This shift is not so good for institutionalclients, such as pension funds, which arehappy enough to split profits but loathemanagement fees. Promised annual returnshave inched down from the 20-30%range to perhaps half that. That is still betterthan anything you can do legally withyour money, points out David Rubinstein,one of Carlyle’s bosses. But the ever-moreassetsroute stands in contrast to largehedge funds, which have capped theamount of money they manage to preservetheir investors’ returns.1

58 Finance and economics The Economist April 19th 20142 There are other reasons why privateequity’s titans have become more staid.The nine founders of the four big firms,who between them earned $2.5 billion lastyear, are nearing retirement age. Their successorsare administrators rather thandaredevils. “These guys aren’t playing towin, theyare playingnotto lose,” asone industryfigure puts it. Achieving outsized returnsis hard with a $18.4 billion fund—thesize of Apollo’s latest buy-out war chest—compared with the mere hundreds of millionsofyesteryear.The outlook for the listed firms ismixed. On the one hand, investors are desperatefor higher yields, and “alternatives”offer good returns. Investors are also flushwith money, given recent stockmarketgains. And they are not immune to thecharms of a one-stop shop: a big Americanuniversity endowment being wooed to investin European private equity, say, can besold an Asian property fund at the sametime. Better yet, regulatory changes make iteasier for Carlyle and others to pursue retailinvestors, potentially further swellingtheir assets under management.Bond tradingFICC and thinThe engine ofinvestment banking is splutteringIN AN open-plan office big enough tohouse a football field, scores of traderspeer into the unearthly glow of trading terminalsstacked two or three high and dozensin a row, buying and selling bonds andcurrencies. Flags poke out above the terminals,to denote which country’s financialinstruments are changing hands. It is anawkward reminder of the former docksoutside the windows, which bear namessuch as Canada Wharfor West India Quay,after the places from which they used towelcome ships.Just as London’s docks—once theworld’s busiest—emptied when the tidesof trade lapped new shores, the dealingrooms of the world’s biggest internationalfinancial market are being hollowed out.The buying and selling of bonds (“fixed income”in the argot), currencies and commoditieshave been the main source ofprofits for investment banks in recentyears. Now FICC, as these activities areknown collectively, is in retreat.In 2009 the world’s big investmentbanks earned nearly $142 billion fromFICC—63% of their total revenue, accordingto Coalition, a data firm. By last year thathad halved to nearly $74 billion, accountingfor slightly less than half of revenueOn the other hand, many of privateequity’s customers have been driven to itby low interest rates, which will not lastforever. Stockmarkets are also unlikely toremain so frothy. Leon Black, Apollo’sboss,has quipped for over a year that he is “sellingeverything that isn’t nailed down”. Thelast time the cycle turned, in 2008, Blackstone’sshares fell to just 13% of their 2007listing price. Fees are coming under pressure,partly because big investors such assovereign-wealth funds are trying to dotheirown buy-out deals. And long-discussedreforms to the tax code in Americacould hurt some bits oftheir business.Like a middle-aged man clinging toyouth, the buy-out firms want to preservethe vestiges of their past. All fret about losingthe culture that made them successfulas they go from dozens ofstaffto hundreds,if not thousands. Employees are their largestshareholders, but that will inevitablychange. For now, Byzantine corporate governancemeans managers are all-powerful.But a time will come, perhaps, for someswashbuckling corporate raiders to shakethem from their torpor. 7In a fixGlobal investment-banking revenuesBy business, $bnFICC* Equities Advisory2502008 09 10 11 12 13Financial yearsSource: Coalition200150100*Fixed income, currencies & commodities(see chart). In 2013 alone revenues fromFICC fell by almost 20%. And the precipitousdescent is continuing. On April 11thJPMorgan Chase, the world’s largest investmentbank by revenue, posted a 21% fall inincome from FICC in the first three monthsof 2014 compared with a year earlier. Dayslater Citigroup, another large Americanbank, announced an 18% decline.The latest drops are all the more surprisingsince the first quarter of the year tendsto be particularly profitable for banks.Moreover, the quarter ought to have been500especially lucrative this year given thebrisk pace of corporate-bond issuance ascreditworthy companies tried to lock inlow borrowing rates. The disappointingnumbers are rekindling an argument withinthe industry over whether FICC’s declineis merely cyclical orthe start ofa longtermslump in the profitability of banks’trading businesses.The trend towards falling trading revenuesis a global one, afflicting New Yorkand Hong Kong too. But it is being felt mostacutely in London, which is home to thebulk of European investment banking. Analystsexpect Europe’s big banks to reporteven sharper drops in trading income thantheir American rivals. Huw van Steenis, ananalyst at Morgan Stanley, reckons Europe’sleading investment banks gave upabout five percentage points of marketshare in FICC to the three leading Americanbanks last year. They may lose anotherthree points this year.At least some of the forces at work arecyclical. Central banks’ strenuous efforts tokeep long-term interest rates low are depressingbond trading. There is little reasonto buy or sell bonds ifthe interest rates thatdetermine their price are low and stable.Trading volumes may pick up again as centralbanks slow and eventually halt theirbond-buying, particularly if the retreatfrom “quantitative easing” leads to jumpsin interest rates. (Such a jump could at firstinflict losses on banks as the bonds theyown fall in price.)Yet deeper trends also appear to be atwork. The most important is the growingweight of regulation. Banks everywhereare now required to hold more capital tounderpin their trading. The Swiss rules areespecially demanding, to the detriment ofthe two biggest Swiss banks, Credit Suisseand UBS. Many countries are restrictingbanks’ trading on their own account, insteadof on behalf of clients; America hasbanned it outright. There is also a globalpush to shift derivative-trading to centralclearing houses.Estimates vary as to how much of thesting of these regulations is yet to be felt.Analysts at Citigroup, for instance, reckonthat about two-thirds of the impact has alreadybeen absorbed, leaving revenues todecline by another 6-7%. Others predictthat they still have twice as far to fall. It isprobably safe to side with the pessimists.This is partly because bankers and analyststend to underestimate the harm that regulationwill inflict on revenues. But it is alsobecause regulators are likely to push thetrading of more instruments onto exchanges,where margins are narrower, as aresult of market-rigging scandals affectingcurrency trading and interest rates.The tides of finance have almost certainlyturned. The real questions are howfarthey will retreat and how quickly the industrycan adapt. 7

The Economist April 19th 2014 Finance and economics 59Danish mortgagesSomething rottenBERLINDenmark’s property market is built onrickety foundationsDURING the euro crisis struggling Mediterraneaneconomies were discoveredto have been livingfarbeyond theirmeans.Northern Europeans sniffed at the southerners’spendthrift ways. But not all northernersare the epitome of parsimony: Danishhouseholds have the highest debt as ashare of disposable income among the 34members of the OECD, a club of mostlyrich countries. Their spending binge is beginningto look no more sustainable thanthat ofthe feckless southerners.The culprit, as in so many other places,is the housing market. In 2004 only 10% ofDanish mortgages had long interest-onlyperiods, during which borrowers repaidnone of the principal. By 2013 that numberhad climbed to 57%. Over the interveningdecade, property prices soared as Danesrushed into the market. Banks financedthemselves through mortgage-backed securities,promising investors fat yet seeminglyriskless returns: mortgage bondshave a 200-year history in Denmark, andnone has ever defaulted.Gregory Perdon of Arbuthnot Latham,a British private bank, believes that Danishhouseholds are living on borrowed time.Thanks to the prevalence of interest-onlyloans, Danes are paying down their mortgagesat a rate of only 2% a year on average.When the interest-only periods end (typicallyten years into the loan), their monthlypayments will rise sharply. Some will notbe able to afford them: the recovery hasbeen weak, and employment has fallen inrecent years. Refinancing is an option formany, but not for the most precarious borrowers,due to legal restrictions on loans ofmore than 80% ofa property’s value.Danes are not short of money, butmuch of it is tied up in illiquid houses anduntouchable pension pots. That leavesthem short of liquid assets, in the IMF’sview. If Danes are obliged to pay downtheir debts by dumping their houses astheir mortgage payments go up, the downwardpressure on prices could set off anugly chain reaction. As it is, prices are stagnating,having fallen briefly during the crisis,and loan-to-value ratios are high.Mortgages are long-term, whereas mostof Denmark’s mortgage bonds have maturitiesof less than five years. The mismatchmeans that some bonds must be rolledover each year. The Danish government,while insisting that the market is sound, isnot taking chances. On April 1st a new lawwent into effect that would automaticallyMediterraneans in disguiseextend by12 monthsthe maturitiesofexistingbonds in the “very unlikely” event thatnew auctions failed, or if interest rateswent up by more than five percentagepoints. This will keep the banks from failing.But Fitch, a ratings agency, is still worried:“Some of the consequences of theDanish funding structure are addressed inthe bill,” it says, “but the causes are not.”The European Banking Authority (EBA)has recommended that Danish mortgagebonds, which it currently categorises asvery liquid, be given a less favourable classification.Since new regulations requirebanks to hold a certain level of liquid assets,such a change would make the “veryunlikely” scenario ofa failed bond auctiona good bit likelier. So Denmark is furiouslylobbying against the proposed changewith its European partners and the EuropeanCommission, which will make a decisionin June.Denmark has low government debtand the central bank has ample reserves.But the Danish krone is pegged to the euro.Mr Perdon says that if a housing slumpcomes, the central bank will find it hard todefend the peg and succour the mortgagemarket at the same time.The central bank pooh-poohs a “horrorscenario” involving “the downfall of mortgagebanks, banks or homeowners”. AneArnth Jensen of the Association of DanishMortgage Banks says that Denmark enjoyssome of the cheapest mortgages in theworld, thanksto a transparentand competitivemarket. But if the EBA does lower thestatus of Danish mortgage bonds, bankswould presumably have to offer higher interestto attract enough buyers. The increasewould then be passed on to borrowers,further stretching their finances. 7State-owned banks in BangladeshFrom cancer topimpleDHAKAIfyou cannot reform them, starve themT TOOK us two years, but the greed“Ikept us going,” Yusuf Munshi told policeafter they arrested him and his accomplice.Mr Munshi had tunnelled under abranch of Sonali Bank, Bangladesh’s biggeststate-ownedbank, in the town of Kishoreganj,and made off with five sacks ofcash containing164m taka ($2m). On socialmedia, people advised the robbers thatthere is a less time-consuming way to getyour hands on a pile of cash: befriend thebank manager.Bangladesh’s government banks arenormally fleeced at street level duringopeninghours, in plain sight. In 2012, in thebiggest ofmanybankingscandalssince thebanks were nationalised 40 years before,Sonali Bank revealed that one of itsbranches in Dhaka had granted a particularfirm almost 27 billion taka in loans onfalse premises. All but 4 billion taka subsequentlydisappeared without trace.Poor oversight and imprudent lending,often to well-connected firms or individuals,are a hallmark of state-owned bankseverywhere. Bangladesh is no exception:in December the central bank estimatedthat 166 billion taka of loans at the four bigstate-owned banks were in default—roughly 20% of the total. The governmentinjected 41 billion taka into them thatmonth, 20 billion taka ofwhich wentto SonaliBank. That is only half of the additionalcapital the central bank thinks theyneed, and a quarter of what the WorldBank deems necessary. The governmenthas promised to raise underwriting standardsand institute more effective controls,but observers, both foreign and domestic,doubt its will and ability to do so.What is remarkable about this story isthat the rot at the state-owned banks has1State dethronedBank deposits in BangladeshBy type of bank, % of totalState-ownedPrivate01992 95 2000 05 10 13Source: Bangladesh Bank70605040302010

60 Finance and economics The Economist April 19th 20142 not brought the economy to a halt. Lendingcontinues to grow, albeit by less than thecentral bank’s target of 16% a year. In fact,the state-owned banks are of ever-shrinkingrelevance. For decades the World Bankand the IMF had been telling the governmentto clean them up and privatise them.Donors spent millions on clever consultants.But officials at the central bankdoubted that any government would willinglypart with such important sources ofinfluence and patronage. So they came upwith an alternative cure: issue lots of private-banklicences and cap the rate ofgrowth ofstate-owned banks.The strategy of transforming stateownedbanks “from a cancer to a pimple”,as one former official describes it, workedbeautifully. Today, their share ofdeposits is25%, down from 60% in 1992 (see chart onprevious page). In India, in contrast, it hasbeen frozen at 75% since the early1990s.Bangladesh’s private banks, in turn,have helped boost garment-making, itsmain industry. Clients are lining up to secureloans for garment factories, powerMicrofinance in BangladeshRehabilitation and attackMunshi did it the hard wayplants and steel mills, among other projects,says Sheikh Mohammad Maroof, thehead of wholesale banking at City Bank, aprivate bank.There is plenty more scope to grow.Commercial interest rates, at 15% or so, areThe biggest study so farfinds that microcredit helps the poorafterallFOR years the reputation ofmicrofinance—whichgives tiny loans to thepoorest—rose and fell in tandem withrelations between Grameen Bankandthe Bangladeshi government. In 2006 thebank and its head, Muhammad Yunus,won the Nobel peace prize for reducingpoverty and Mr Yunus toyed with settingup a political party, supposedly with thegovernment’s blessing. Since then severalstudies have found limited or no benefitsfrom microfinance, and in 2011(fordifferent reasons) a new governmentforced Mr Yunus to resign from the bankhe had founded.Now the pattern has been broken: onApril 6th the government tookone morestep in its assault on the bankby takingthe power to appoint its own boardmembers away from Grameen and givingit to the central bank. This has happenedjust as the biggest study ofmicrofinanceso far, by the World Bank*,rehabilitates the reputation ofthe practiceas a means ofhelping poor people,especially women.The new study is distinctive becauseof its size (it covers more than 3,000households in 87 villages) and longevity:interviews tookplace over 20 years...............................................................* “Dynamic effects of microcredit in Bangladesh”, byShahidur Khandker and Hussain Samad. PolicyResearch Working Paper 6821.Previous studies have mostly been smalleror just snapshots.Bangladesh has well over 500 microfinanceproviders and the survey foundthat almost a third ofrural householdsare members ofmore than one. Critics ofmicrofinance argue that borrowing frommultiple sources leads to over-indebtedness,trapping people in poverty.The study find no evidence ofthat.Rather, borrowing, whether from oneinstitution or several, increases personalexpenditure, household assets, the laboursupply and children’s education.Moreover, loans do benefit women morethan men—as they are designed to.A10% increase in men’s borrowingraises household spending by 0.04% andthe male labour supply by 0.18% (thoughthe figures are modest, they are significant).Borrowing by women pushes uphousehold spending by one and a halftimes as much and the female laboursupply by nearly three times as much(because even a tiny loan frees women toworkwho might otherwise be trapped inhousehold chores). It also raises schoolenrolment rates by eight percentagepoints. And multiple credit institutionsencourage households to diversify theirincome-earning activities. Bangladesh’sgovernment should lookat the study—and stop interfering with Grameen’sefforts to cut poverty.among the highest in Asia. The governmentissued nine new banking licences in2012, bringing the total number of banks to56. That should bring new capital to the industry,and spur lending.But there are fears that the distinctionbetween private banks and state-ownedones may not always remain so sharp. Thegovernment, with the help of the centralbank, recently took control of GrameenBank, an embattled microcredit institution(see box). Many of the new banking licenceswent to applicants with close ties tothe current government. It would be ashame if a reform designed to liberatelending from politicians’ whims itself fellprey to them. 7Structural reform in southern EuropePatchy progressSome signs ofimprovement. Must tryharderCYPRUS is suffering a vicious recessionas it struggles to adjust after a hugebanking crisis. Despite its ailing economy acab ride from the airport at Larnaca to Nicosia—ajourney that takes around 40 minutes—costs€50 ($69). Such high fares, reflectingthe power of the taxi trade, hinderthe country’s attempts to rekindle its touristindustry.Reformsto tackle these kindsofuncompetitivemarketsare vital ifthe beleagueredcountries ofsouthern Europe are to be ableto survive in the euro area. By makingwages and prices more flexible, they allowcountries like Spain and Portugal that havelost competitiveness to regain it eventhough they can no longer devalue againsttheir euro-zone trading partners. They alsohold out the promise of higher growth,which is vital if they are to shrug off heavy1

The Economist April 19th 2014 Finance and economics 612 debt burdens. Four years after the euro crisisbegan with the first Greek bail-out,what has been achieved?Assessing the scale and effectiveness ofreforms is hard, not least since they tackle amultitude ofsins. There are three main categories:enhancingcompetition, especiallyin services; promoting business activityrather than stifling it; and overhauling labourmarkets. In practice a determined effortto improve performance involves reformsacross government. In Portugal, forexample, 400 measures have been introducedin the past three years.One gauge of progress in southern Europeis the World Bank’s “Doing Business”survey. This annual study, covering over180 economies, monitors regulation fromthe perspective of small and mediumsizedcompanies. Its overall index has tencomponents, ranging from the ease offounding a company to how readily contractscan be enforced. Countries areranked according to how light the burdenof regulation is, as measured by the numberof procedures involved and their cost.Other factors include how easily firms canaccess credit and how well they protectoutside investors. A lack of regulation isnot deemed a strength; rather the focus ison efficient regulation.The findings suggest that progress hasbeen made in southern Europe but that ithas been patchy both between differentcountries and within them. Betweenmid-2009, before the euro crisis took hold,and mid-2013 Greece’s rankimproved from109 to 72 (see table). Portugal has alsogained ground, from 48 to 31. Advances byItaly and Spain have been less marked, andFrance has actually slipped down the rankings,from 31to 38.Even where progress has been madethere is cause for concern. Greece mayhave improved its ranking the most, butthat was from a desperately poor startingpoint.Its current performance remains extremelydisappointing within some crucialcategories. It ranked 161st in the worldas a place to register property easily, ahandicap for a country urgently needing toencourage inward investment. Anotherconcern is its 98th-place finish for the easeof enforcing contracts, a crucial conditionfor firms to flourish.A long climbEase of doing business, rank2013 (2009)1 (1) Singapore4 (4) United States10 (5) Britain15 (7) Ireland21 (25) Germany31 (48) PortugalSource: World Bank2013 (2009)33 (53) Slovenia38 (31) France39 (40) Cyprus52 (62) Spain65 (78) Italy72 (109) GreeceWITH a workforce ofjust over 491,000in 2013, the United States Postal Service(USPS) is second only to Walmartamong civilian employers in America. Butit still employed more than 200,000 fewerpeople last year than it did just nine yearsearlier—when it handled nearly 500mmore pieces of mail and had almost 2,000more retail offices. The rise of e-mail hasleft America’s massive postal service withfar less to do, and it has been scrambling tofind ways to raise revenue.Earlier this year its inspector-general releaseda white paper suggesting that postoffices should begin offering financial services,such as cheque-cashing, small loans,bill payments, international money transfersand prepaid cards to which salaries orbenefits could be transferred. The reasoningis simple: a lot ofAmericans have scantaccess to banks and a lot of post officesSuch patchiness is widespread. Themountain that Matteo Renzi, Italy’s newprime minister, must climb is clearfrom hiscountry’s performance. Its overall rank isdismal enough, at 65. But Italy is even fartherdown the league table for the tax burdenon businesses (138); ease ofgettingconstructionpermits (112); credit access (109);and enforcing contracts (103). Spain ranksparticularly poorly as a place to start a business,at 142. That is a worry because researchhas established a strong link, unsurprisingly,between the regulatory ease ofstartinga businessand howmanyare actuallyset up.The World Bank’s index does not includethe impact on firms of employmentregulations. But other evidence suggestssimilarly patchy progress on labour-marketreforms in southern Europe. Despiteoverhauls in Portugal and Spain, southernEurope still suffers from bifurcated markets,in which the gap between “insiders”on cosy, permanent contracts and “outsiders”employed on a temporary basis is particularlypronounced. With so much yet tobe done it is worrying that the pace of reformalready seems to be slackening. 7Post-office bankingPut your money where your mail isATLANTAAmerica’s postal service ponders a foray into financial serviceshave too little to do.More than one-quarter of Americanhouseholds are unbanked or underbanked,meaning they either lack a currentor savings account, or they have one butstill use alternatives to banks such ascheque-cashers and payday lenders. Thatis an expensive habit: the average underbankedhousehold has an annual incomeof only $25,500 or so, yet spends around9.5% of that on fees and interest charged bythese banking substitutes.High-street banks find it hard to makemoney serving poor customers, since theytend to have little money on deposit thatthe banks can lend out. Penalties such asoverdraft fees are not always enough tocompensate. Since 2008, 93% of bankbranchclosings have come in areas wheremedian household income is below thenational average.1

62 Finance and economics The Economist April 19th 20142 These are the distressed customers towhose rescue the USPS hopesto ride. Some59% of its post offices are in places with eithera single bank or none at all. In ruralhamlets they are often one of very fewcommercial establishments; even in thepostal service’s diminished state, there arestill more than seven post offices for everyWalmart in America. Post offices alreadysell money orders and provide electronicremittances to nine Latin American countries;from 1911 to 1967 the USPS also heldpersonal deposits. Providing small, briefloans at lower interest rates than paydaylenders (not a hard thing to do, since annualrates on payday loans can exceed 800%)could save low-income consumers hundredsofmillions oreven billions of dollarsin interest and fees. The post office wouldcompete not with banks, but with theirmore expensive stand-ins.Some, notably the head of the committeeof the House of Representatives thatoversees the USPS, are unconvinced. Theysee the postal services’ expansion into financialservices as government overreach,and a delay of the necessary “right-sizing”of a massive agency that does far less thanit used to. Jennifer Tescher, who heads acharityfocused on the underbanked calledthe Centre for Financial Services Innovation,notes that the USPS “has zero capacity,understanding or capability in this arena”.“The only asset they bring to the table”, shebelieves, “is distribution.” Even that is oflimited value outside rural areas: MsTescher notes that just because a spot lacksbank branches does not mean it has nocheque-cashers and corner shops sellingprepaid cards—many with longer andmore convenient opening hours than thepost office.Although turning the USPS into a parttimefinancial institution may seem outlandishin America, roughly 1 billion peoplein 50 countries rely on their postal systemsforfinancial services, according to theUniversal Postal Union, the United Nationsagency that helps the post arrive ontime. The business models vary widely. Insome countries post offices act as a paymentcentre, allowing people to receive remittances,pay bills and top up or tap moneystored on their mobile phones. Someoperate full-service banks: Japan Post, forinstance, is one of the world’s biggest. Inother countries, such as Brazil, commercialbanks form partnerships with post offices;in Malawi private banks can rent spacefrom post offices.A World Bankstudy found last year thatpostal banks are likelier than conventionalones to provide accounts to those outsidethe financial mainstream. The bigger thepostal network, the greater the ability toreach such people. That may not convincethose who would like to see the USPSshrink, but for those who want to preserveit, it could help to justify its scale. 7Ratings agenciesCredit wherecredit’s dueThe ratings industry has bounced backfrom the financial crisisAT FIRST glance, the past few years havenot been good to the ratings agencies.During the financial crisis, a collapse inbond markets cut the industry’s revenuesby a third. Worse, they were blamed forhelping to precipitate the crisis, by givingundulyhigh ratingsto mortgage-backed securities(MBS) that later turned sour. Worsestill, last February America’s Departmentof Justice sued Standard & Poor’s (S&P), abig ratings agency, for $5 billion, claimingthat it knowingly issued overgenerous ratings.S&P saysthe case isretaliation for loweringofAmerica’s credit rating.Yet in spite of these problems the “bigthree” agencies—Moody’s, S&P and Fitch—are now thriving again. Revenues from ratingsservices at all three outfits surpassedpre-crisis levels last year. Profits at Moody’sare at a record high; S&P’s are not far off.With margins at an enviable 52% and 44%of ratings revenues respectively, Moody’sand S&P now look more attractive as businessesthan most other financial firms do.The ratings agencies’ swelling profitsderive in part from increased activity in thebond markets, according to Flavio Camposat Credit Suisse, a bank. Last year companiesissued a record amount of bonds byvalue. There was even increased demandfor ratings of structured bonds—the sortsliced into different tranches with varyingexposure to default, which featured prominentlyin the crisis.The fact that issuers still pay for ratings,rather than investors, has also helpedmaintain demand. Companies issuingbonds benefit from getting them rated bythe agencies. The return in lower borrowingcosts can be up to ten times as much asthe feespaid forthe rating. Regulations thatstill make it virtually impossible to sell unratedbonds in America are also a boon.All this would have seemed improbableonly a couple of years ago, when talkabounded of reforming ratings agenciesand diminishing their role. Some criticscomplained that allowing issuers to payfor ratings gave agencies an incentive to inflatethem, to please their clients. Othersquestioned the huge role that the private,profit-making firms had in the regulationof public markets.The European Union set up a wholenewregulator, the European Securities andMarkets Authority, in part to keep a closereye on rating agencies’ conduct. (Amongthose it looks at is the Economist IntelligenceUnit, our sister company, which conductssovereign credit ratings.) In America,the Dodd-FrankAct of2010, which instituteda host of financial reforms, required theFederal Reserve and the Securities and ExchangeCommission (SEC), Wall Street’smain regulator, to tighten regulation of theagenciesand to reduce referencesto ratingsin their rules for banks.The SEC was meant to issue new regulationsabout ratings agencies by May 2011,but three years later they are still yet to befinalised. Critics, such as the ConsumerFederation of America, a lobby group,complain that they fail to reduce the ratingsagencies’ influence as much as Congresswanted. In part, that is because it hasproven much “easier said than done” to replaceratings with other indicators in riskmodels, according to Sam Theodore atScope Ratings, a boutique agency.AnewNBER paper* by Harold Cole atthe University of Pennsylvania and ThomasCooley of the Stern School of Businessalso challenges the notion that it would bebetter to get the investors who are buyingbonds to pay for ratings. They mightchoose not to release the ratings they payfor, it points out. Patchy information, inturn, could increase the likelihood that themarket would misprice securities.All told, the ratings agencies’ business“has not been threatened much by extraregulation or competition”, says DouglasArthur at Evercore Partners, an investmentbank. Although outfits like Scope havetried to challenge the big three’s dominance,the trio still control around 95% ofthe global ratings market: the same as beforethe crisis. With bond markets boomingagain, ratings agencies are back to theirprofitable and controversial old selves. 7...............................................................* “Rating Agencies”, by Harold Cole and Thomas Cooley,NBER Working Paper number 19972.

The Economist April 19th 2014 Finance and economics 63Free exchangeNice work if you can get outWhy the rich now have less leisure than the poorFOR most ofhuman history rich people had the most leisure. In“Downton Abbey”, a drama about the British upper classes ofthe early 20th century, one aloofaristocrat has never heard of theterm “weekend”: for her, every day is filled with leisure. On theflip side, the poor have typically slogged. Hans-Joachim Voth, aneconomic historian at the University of Zurich, shows that in1800 the average English worker laboured for 64 hours a week.“In the 19th century you could tell how poor somebody was byhow long they worked,” says Mr Voth.In today’s advanced economies things are different. Overallworkinghours have fallen overthe past century. But the rich havebegun to worklonger hours than the poor. In 1965 men with a collegedegree, who tend to be richer, had a bit more leisure timethan men who had only completed high school. But by 2005 thecollege-educated had eight hours less of it a week than the highschoolgrads. Figures from the American Time Use Survey, releasedlast year, show that Americans with a bachelor’s degree orabove worktwo hours more each day than those without a highschooldiploma. Other research shows that the share of collegeeducatedAmerican men regularly working more than 50 hours aweekrose from 24% in 1979 to 28% in 2006, but fell for high-schooldropouts. The rich, it seems, are no longer the class of leisure.There are a number of explanations. One has to do with whateconomists call the “substitution effect”. Higher wages make leisuremore expensive: if people take time off they give up moremoney. Since the 1980s the salaries of those at the top have risenstrongly, while those below the median have stagnated or fallen.Thus rising inequality encourages the rich to work more and thepoor to workless.The “winner-takes-all” nature ofmodern economies may amplifythe substitution effect. The scale ofthe global market meansbusinesses that innovate tend to reap huge gains (think of You-Tube, Apple and Goldman Sachs). The returns for beating yourcompetitors can be enormous. Research from Peter Kuhn of theUniversity of California, Santa Barbara, and Fernando Lozano ofPomona College shows that the same is true for highly skilledworkers. Although they do not immediately get overtime pay for“extra” hours, the most successful workers, often the ones puttingin the most hours, may reap gains from winner-takes-all markets.Whereas in the early 1980s a man working 55 hours a weekearned 11% more than a man putting in 40 hours in the same typeof occupation, that gap had increased to 25% by the turn of themillennium.Economists tend to assume that the substitution effect must atsome stage be countered by an “income effect”: as higher wagesallow people to satisfy more of their material needs, they forgoextra work and instead choose more leisure. A billionaire whocan afford his own island has little incentive to work that extrahour. But new social mores may have flipped the income effecton its head.The status of work and leisure in the rich world has changedsince the days of “Downton Abbey”. Back in 1899 Thorstein Veblen,an American economist who dabbled in sociology, offeredhis take on things. He argued that leisure was a “badge of honour”.Rich people could get others to do the dirty, repetitivework—what Veblen called “industry”. Yet Veblen’s leisure classwas not idle. Rather they engaged in “exploit”: challenging andcreative activities such as writing, philanthropy and debating.Veblen’s theory needs updating, according to a recent paperfrom researchers at Oxford University*. Workin advanced economieshas become more knowledge-intensive and intellectual.There are fewer really dull jobs, like lift-operating, and moreglamorous ones, like fashion design. That means more peoplethan ever can enjoy “exploit” at the office. Workhas come to offerthe sort ofpleasures that rich people used to seekin their time off.On the flip side, leisure is no longer a sign ofsocial power. Insteadit symbolises uselessness and unemployment.The evidence backs up the sociological theory. The occupationsin which people are least happy are manual and servicejobs requiring little skill. Job satisfaction tends to increase withthe prestige of the occupation. Research by Arlie Russell Hochschildof the University of California, Berkeley, suggests that asworkbecomes more intellectually stimulating, people start to enjoyit more than home life. “I come to work to relax,” oneinterviewee tells Ms Hochschild. And wealthy people often feelthat lingering at home is a waste oftime. Astudy in 2006 revealedthat Americans with a household income ofmore than $100,000indulged in 40% less “passive leisure” (such as watching TV) thanthose earning less than $20,000.Condemned to relaxWhat about less educated workers? Increasing leisure time probablyreflects a deterioration in their employment prospects aslow-skill and manual jobs have withered. Since the 1980s, highschooldropouts have fared badly in the labour market. In 1965the unemployment rate of American high-school graduates was2.9 percentage points higher than for those with a bachelor’s degreeor more. Today it is 8.4 points higher. “Less educated peopleare not necessarily buying their way into leisure,” explains ErikHurst of the University of Chicago. “Some of that time off workmay be involuntary.” There may also be change in the income effectfor those on low wages. Information technology, by openinga vast world of high-quality and cheap home entertainment,means that low-earners do not need to work as long to enjoy areasonably satisfying leisure. 7...................................................................................................* Studies cited in this article can be found at www.economist.com/leisure14Economist.com/blogs/freeexchange

Science and technology64 The Economist April 19th 2014Also in this section65 An evolutionary egg hunt65 Yet another IPCC report66 How ferns escaped extinction66 Blood sugar and marital harmonyFor daily analysis and debate on science andtechnology, visitEconomist.com/scienceReusable rocketsUp and down and up againSpaceX’s latest launch could change the economics ofgoing into orbitEVERYTHING about space flight is superlative.Even relatively modest rocketsare hundreds of feet high. The biggest (theSaturn V, which launched astronauts to theMoon) remains the most powerful vehicleever built. But space flight is superlativelyexpensive, too. One reason is that, for alltheir technological sophistication, rocketsare one-shot wonders. After they havefired their engines for a few minutes theyare left to fall back to Earth, usually splashingignominiously into the ocean.Rocket scientists have therefore longdreamed of making something able to flymore than once. Such a reusable machine,they hope, would slash the cost of gettinginto space. The only one built so far, America’sspace shuttle, proved a dangerous andcostly disappointment, killing two of itscrews and never coming close to the costsavings its designers had intended. Buthope springs eternal, and several ofAmerica’sprivately run “New Space” firms areplanning to try again.The furthest advanced is SpaceX,founded by Elon Musk, an internet mogul.On April 18th it is due to launch one of itsFalcon 9 rockets on a cargo-carrying trip tothe International Space Station (ISS), somethingit has done twice before. This time,though, the main story is not the ISS mission,but the modifications the firm hasmade to the rocket itself.The most notable are the four landinglegs folded up along the side of its firststage. If everything goes to plan, once thatstage has finished its job and detached itselffrom the rest of the rocket, it will fire itsengines again. Instead of crashing into thesea, it will make a controlled descent, deployits legs, slow almost to a stop off thecoast of Cape Canaveral, and then drop itselfdelicately into the drink. Mr Muskgives himself a slightly-less-than-evenchance ofpulling this off.Will you walk with me, Grasshopper?If it does work, though, it will be the mostdramatic demonstration yet of technologythat the firm has been working on for severalyears. In 2012 SpaceX began flying anunwieldy-looking legged test rocket calledGrasshopper. This was able to hover,manoeuvre around in mid-air, and land itselfbackonthe pad that launched it.Then, last September, it attempted to organisethe controlled descent of a leglessfirst stage. In what the firm’s engineers calla useful failure, the rocket’s engines restartedas planned, but as the stage descended itbegan spinning, flinging its remaining fuelagainst the walls of its tanks and starvingits motors, causing it to crash.This week’s test is intended to end upwith the rocket in the ocean, chiefly forsafety reasons in case something does gowrong. But SpaceX’s ultimate goal is tohave the first stage fly all the way back tothe pad it was launched from, and to landitself facing upwards. It will then be takenaway, serviced, refilled with rocket fueland readied to fly again. The firm wants,one day, to recover the Falcon’s secondstage, too—though the greater altitude andspeed the second stage reaches makes thisa far tougher proposition.Still, being the biggest, the first stage isthe most expensive part, so retrieving itshould make a huge difference to launchcosts. SpaceX already offers some of thelowest prices in the business. Its launchcosts of $56m are around half those of itscompetitors. Mr Musk has said in the pastthat a reusable rocket could cut those costsby at least halfagain.If SpaceX can make its technologywork, that will be the biggest advance inrocketry for decades. Whether it will translateinto higher demand for space flight isless clear. JeffFoust, who edits the Space Review,an industry newsletter, argues thateven dramatically lower launch costs willdo little to change the economics of the industry,at least for the governments andfirms that make up almost all of its currentcustomers. Launch costs, as Mr Foustpoints out, are but a small part of the totalcost of developing, building and running asatellite network.Mike Gold, an executive at BigelowAerospace, a firm that makes inflatablespace stations—and which has an agreementwith SpaceX to launch its products—thinks that most of the interest will comefrom people and organisations so far deniedaccess to space. “Putting a big rocketlike the Falcon in range of mid-size companies,research institutions and evenwealthy private individuals, that’s a game-1

The Economist April 19th 2014 Science and technology 652 changer,” he says. “When the laserwas firstinvented, no one had any idea what itmight be used for. Today they’re everywhere.We’re still at that early stage withcheap rockets.”Perhaps. But although SpaceX is a commercialfirm, simple profitability is not itsonly goal. Mr Musk has been perfectlyfrank about his long-term aim: “to die onMars, preferably not on impact.” After theFalcon 9, the firm plans a beefier versioncalled the Falcon Heavy. That, in turn,would be a dress rehearsal for somethingcalled the Mars Colonial Transporter.Mr Musk wants to build a machine thatwould let him offer prospective colonists a(one-way) trip to the Martian surface forabout $500,000—or, as he puts it, roughlythe cost of a nice house in California. Perfectingreusabilityis essential forachievingthat dream.If you build it, will they come?Hard-headed commentators may roll theireyes at such ambition. And history suggestsreusability is difficult to do properly.The shuttle itself, for instance, was intendedto fly every week. In the end, it madeonly 135 trips over the course of 30 years.There is a credible case that it proved moreexpensive, in the long run, than old-fashionedthrowaway rockets would havedone. Yet SpaceXhas already shaken up anindustry once mired in stifling conservatism.A successful fully reusable rocketwould just be the latest example in a longtradition ofit confounding its critics. 7Eggs-actlyGlobal warmingAnother week,another reportOptions forlimiting climate change arenarrowingTHE Intergovernmental Panel on ClimateChange (IPCC), a gathering of scientistswho advise governments, describesitself as “policy-relevant and yetpolicy-neutral”. Its latest report, the third insix months, ignores that fine distinction.Pressure from governments forced it tostrip out of its deliberations a table showingthelinkbetween greenhouse gases andnational income, presumably because thismade clear that middle-income countriessuch as China are the biggest contributorsto new emissions. It also got rid of referencesto historical contributions, whichshow that rich countries bear a disproportionateresponsibility. That seems morelike policy-based evidence than evidencebasedpolicy and bodes ill for talks on anew climate-change treaty, planned to takeplace in Paris next year.The new report is intended to measurehowfargovernmentshave mettheirpromises,formalised in 2010, to keep the globalrise in mean surface temperatures comparedwith pre-industrial times to less than2°C. It says they are miles from achievingthat goal and are falling further behind.This picture is part of a scientific Easter-egg hunt. “Egglab” tries to recapitulate theevolution of crypsis in nightjar eggs by asking the public to act as predators and play“spot the egg” in photos of places where these ground-nesting birds might lay theirclutches. A computer generates the initial eggs (oval shapes whose colours and patternsare chosen at random and superimposed on the image) and the player has to find them.Those it takes longest to find are then mutated slightly and crossbred to create a newgeneration. After ten generations the result can, as the picture shows, be quite cryptic(spot the one artificial egg). Martin Stevens of Exeter University, in Britain, who devisedthe game, hopes to use it to study selection pressures on real eggs. Readers who wish toplay should go to nightjar.exeter.ac.uk/egglab/Between 2000 and 2010, it says, greenhouse-gasemissions grew at 2.2% a year—almost twice as fast as in the previous 30years—as more and more fossil fuels wereburned (especially coal, see page 51). Indeed,for the first time since the early 1970s,the amount ofcarbon dioxide released perunit of energy consumed actually rose. Atthis rate, the report says, the world willpassa 2°Ctemperature rise by2030 and theincrease will reach 3.7-4.8°C by 2100, a levelat which damage, in the form ofinundatedcoastal cities, lost species and crop failures,becomes catastrophic.The report looks at what would beneeded to rein back the rise in temperatures,so that it would not exceed 2°C. This,it says, would mean cutting greenhousegasemissions in 2050 to between 30% and60% of their levels in 2010. Unfortunately,emissionsare still risingand are likely to increaseby around 10% by 2030, at whichpoint, the IPCC suggests, there will be onlya 33-66% chance ofhitting the 2°C target. By2100, moreover, the burning of fossil fuelwould have to cease altogether unless allthe carbon dioxide thus generated is capturedand stored.The panel puts enormous weight oncarbon capture and storage (CCS): in someversions of its calculations, doing withoutit raises the cost of reducing greenhousegasemissions by between 30% and 300%.But CCS remains unproven at a large scale.The IPCC still thinksitmightbe possibleto hit the emissions target by tripling, to80%, the share of low-carbon energysources, such as solar, wind and nuclearpower, used in electricity generation. Itreckons this would require investment insuch energy to go up by $147 billion a yearuntil 2030 (and for investment in conventionalcarbon-producing power generationto be cut by $30 billion a year). In total,the panel says, the world could keep carbonconcentrations to the requisite level byactions that would reduce annual economicgrowth by a mere 0.06 percentagepoints in 2100.These numbers lookpreposterous. Germanyand Spain have gone further thanmost in using public subsidies to boost theshare of renewable energy (though tonothing like 80%) and their bills have beenenormous: 0.6% ofGDP a year in Germanyand 0.8% in Spain. The costs of emissionreductionmeasures have routinely provedmuch higher than expected.Moreover, the assumptions used to calculatelong-term costs in the models are, asRobert Pindyck of the National Bureau ofEconomic Research, in Cambridge, Massachusetts,put it, “completely made up”. Insuch circumstances, estimates of the costsand benefits of climate change in 2100 arenext to useless. Of the IPCC’s three recentreports, the firsttwo (on the natural scienceand on adapting to global warming) werevaluable. This one isn’t. 7

66 Science and technology The Economist April 19th 2014Fern evolutionTime and chancePsychologyHunger strikesLow glucose levels can lead spouses to lash out at one anotherTEMPESTUOUS relationships prove evening for three weeks, while gettingthat the course oftrue love never has them to perform two revealing tasks.run smooth. Beatrice and Benedickbattledover friends, Elizabeth and Mr Darcy to do every evening, was to stickpins in aThe first, which each participant hadover etiquette, and Punch and Judy over doll he or she had been told representeda baby (and sausages). But a study led by his or her spouse. Up to 51pins wereBrad Bushman ofOhio State University, available. The second, performed once, atjust published in the Proceedings of the the end ofthe experiment, was a computergame which participants were toldNational Academy of Sciences, suggeststhat had these pugnacious partners eaten they were playing against their spouses.more, their aggressive tendencies might (In fact, they were playing against thehave been lower.machine.) They were also told that if theyDr Bushman looked at107 heterosexualcouples who had been married for 12 to be able to torment their partner withwon a round ofthis game, their prize wasyears on average, and searched for correlationsbetween the levels ofglucose in scratching a blackboard or the scream ofan unpleasant noise such as fingernailshis volunteers’ bloodstreams and their an ambulance siren at a volume andaffection (or lackofit) for their spouses. duration oftheir choosing—and theirTo do this, he and his team first asked that choices were recorded.participants rate their spousal relations, Both tasks showed that blood-sugarto provide a baseline, and then monitoredtheir blood sugar morning and annoyance. Most couples were not par-levels do indeed help regulate maritalticularly punitive towards each otherwhen it came to voodoo pin-sticking: theaverage number ofpins stuckper nightwas1.35, with the full 51going in on onlythree occasions. But for any given individualthe number ofpins he or she (andwomen used more pins than men) stuckin the doll ofan evening was correlatedwith his or her blood-sugar level that day.Similarly, those with low average bloodsugarlevels over the three weeks of theexperiment chose longer and louderpunishment sounds for their spousesthan those with high levels.Blood-sugar levels and tolerance forone’s better half’s irritating foibles do,then, seem to be correlated. That does notprove causation—particularly in the caseofthe noise test, where higher or lowerglucose levels over an extended periodmight be a reflection ofsomething elsesignificant and pertinent about the personin question. But it may be that one ofthe secrets ofa successful marriage is toeat before you fight. Ifonly the crocodilehad not come along to consume Punchand Judy’s sausages, things might haveThat’s the way to do itturned out rather different.The survival offerns to the present daydepended on an ancient accidentWHY do ferns still exist? That maysound an odd question, but it isn’t.Ferns dominated the botanical world forhundreds ofmillions ofyears, between theDevonian, about 360m years ago, and therise, about 120m years ago in the Cretaceous,of the flowering plants familiar today.When that happened, though, mostferns could not stand the competition andwere driven to extinction. One groupalone prospered and diversified. Almostall ferns now alive are its descendants.The secret these ferns share is an abilityto live in the shadows of their competitors.And that, suggests research just publishedby Fay-wei Li of Duke University in NorthCarolina in the Proceedings of the NationalAcademy of Sciences, is the result of an extraordinaryaccident long ago whichmeans the ferns in question are not actually100%fern.Modern ferns’ success in the shade dependson a protein called a neochrome.This molecule enables them to respond simultaneouslyto red and blue light in boththe way that they grow and the way thephotosynthetic elements in their cells, thechloroplasts, organise themselves. Mostplants respond best to blue light, whichhas most energy in it. But if overarchingflowering plants have already sucked outthe blue then an ability to respond to red aswell is an advantage.Neochrome’s response to both ends ofthe spectrum is a result of the gene encodingit being a merger of bits of two othergenes. One ancestor is the gene for a red receptorcalled a phytochrome. The other isfor a blue receptor called a phototropin. Inan attempt to understand how this mergerhappened, Mr Li and his colleaguessearched the 1000 Plants Initiative, a DNAdatabase at the University of Alberta, inCanada, to construct an evolutionary treefor the molecule and its two components.What they found shocked them. Beforethey conducted their search, the onlyknown non-fern neochrome was in asmall group ofalgae. That appeared to be acoincidence; a case of convergent evolution.But their investigations revealed thatin addition to these algae a group of primitiveplants called hornworts, which are relatedto mosses but not closely related toferns, have a neochrome too. This mighthave been convergent evolution, as well,of course. But closer analysis showed itwas not. Instead, the evolutionary tree offern neochrome fits neatly inside the evolutionarytree of hornwort neochrome.The original gene for fern neochrome—thegene that, in all probability, saved fernsfrom obscurity—formed in a Mesozoichornwort and then somehow passed to aMesozoic fern.In essence, this is the same process ofgene transfer from one species to anotherthat is used artificially to make geneticallymodified crops. Such a transfer might havehappened naturally by a virus picking upthe relevant gene and carrying it across thespecies boundary. Or it might have occurredin the rough-and-tumble of everydaylife as a tiny fern grew up abutting ahornwort. The details will probably neverbe known. But that chance event, whichhappened, Mr Li’s calculations suggest,about 180m years ago, probably explainswhy ferns are still around and thriving. 7

Books and artsThe Economist April 19th 2014 67Also in this section68 Kim Philby, spy68 Rachel Seiffert’s walk home69 America in Afghanistan70 A bestselling Swiss thriller70 Modernising Arthur MillerFor daily analysis and debate on books, arts andculture, visitEconomist.com/cultureAmerican cinemaA man in fullHow John Wayne stayed America’s favourite film starforso longSOON after his 57th birthday, JohnWayne learned that he had a big canceroustumour on his left lung. “I sat there,” helater wisecracked, “trying to be JohnWayne.” Who was that imaginary figure:Western hero? Shy giant? Rightist bigot?American myth? Scott Eyman knows thequestions but leaves it mostly to others tosay what Wayne’s outsize screen personagemeant. He concentrates instead onwhat Wayne, the actor, did.In comprehensive detail, this new biographychronicles a great starat work. Lighton Hollywood gush and sleaze, ittracks theups and downs of a long career. Its patientrecord of Wayne’s triple hold on audiences,critics and moneymen goes someway to explaining an astonishing factabout a man who was born in 1907, notlong after the birth of film itself: that eventoday, Wayne remains one of the top-tenfavourite stars in America, a fixed point inan otherwise changeable field of actorsand actressesyoungenough to be hisgreatgrandchildren.From the late 1920s, when Waynestarted in Hollywood shifting props andturning stunts, until just before his death in1979, he appeared in around 200 films. Hecame up slowly in silent quickies and thenin hack parts for minor studios. He madefriends with Yakima Canutt, dean of thestuntmen. The long apprenticeship taughtWayne to use gesture more than words.John Wayne: The Life and Legend. ByScott Eyman. Simon and Schuster; 512pages; $32.50 and £25The director John Ford spotted Wayne’ssimple, natural-seeming style and cast himin “Stagecoach” (1939), Wayne’s breakthroughWestern. “He’ll be the biggest starever,” Ford predicted. “He’s the perfectEveryman.”Wayne on camera was not dwarfed bythe desert. He seemed to get bigger as hewent up. Almost six foot four (1.93 metres)in boots, he had a broad chest, long body,shortish legs and small feet. He workedhard to become a graceful big man. Theswaying stride he developed—like a fairyto some, “I-own-the-world” to others—made him recognisable by gait alone.He was gorgeous when young, withlidded, almond-shaped eyes, high cheekbonesand a lopsided smile. His face wasstrong, not rugged, and with no trace ofcruelty or guile. Nightloads of tequila andcigarettes, dawn shoots, three marriagesand countless affairs, including one withMarlene Dietrich, aged the face withoutchanging the expression. The neck thickened,the stomach grew and drooping lidsnarrowed the eyes. Wayne’s steady,appraising gaze still said, “I won’t startanything, but ifyou do…”Wayne was lucky in his directors, asthey were in him. Several of Ford’s Westernswith Wayne became classics, notably“The Searchers” (1956, pictured) and “TheMan who Shot Liberty Valance” (1962), asdid an earlier film, “Red River” (1948),directed by Howard Hawks. In a populargenre, such films pointed to the moralharms of frontier conquest. They replayedwith 20th-century means the old tale ofwilderness versus civilisation. He did warpics, adventure films and comedies too,butthe American Westwashistruest stage.How hard it was, Ford and Hawks onceagreed, to shoota Western withoutWayne.He was born Marion Morrison into astruggling Scots-Irish family in Iowa, nicknamedDuke as a boy after his Airedale terrierand renamed John Wayne on screen.His father’s luck—a failed farm, a job in adrugstore—was no better on moving toCalifornia. When he was 14, Wayne’s parentssplit up. The navy turned him downand young Wayne was too poor to stay incollege. Hard graft, wariness of high-upsand sympathy for working stiffs becamehis compass points.After the studio system weakened inthe late 1940s, big stars and independentproducers came into their own. Waynewasamongthe firstactorsto win a percentageof a film’s earnings. By then his namealone could bankroll a film. He started hisown production company and tried directing,with mixed success. Though fewcriticsapplauded, audiences did. “The GreenBerets” (1968), Wayne’s hymn of praise tothe Vietnam war, made big money. Waynehimself grew rich, though not super-rich.Trusting and open by nature, he was routinelyoutfoxed by Hollywood’s secondmost-creativeindustry, accounting.Politically, Wayne emergeshere less asaconservative zealot than as an innocenteasilyused. In the second world war, when1

68 Books and arts The Economist April 19th 20142 other stars enlisted, Wayne’s studio askedfor repeated deferments and he demurred.He was no more heroic in the post-war redscares that led to Hollywood’s blacklistingofleft-wingwriters and directors, althoughon this possibly lenient account, Waynewas more figurehead of an ignoble causethan active witchhunter.Like a cinematographer, Mr Eymanoffers readers Wayne from many angles, inhis own words and the words of thosewho worked with him. He offers few stereotypes,makes no final judgments. AfterWayne, Westerns grew gruesome. Screenheroes became superheroes, and then cartoons.No longer number one, Wayne willslip further down the rankings. His outsizeimage will blur and fade. In the meantimeMr Eyman has left an engrossing record ofhow the Duke stayed top dog for so long. 7Kim PhilbyRogue mateA Spy Among Friends: Kim Philby and theGreat Betrayal. By Ben Macintyre.Bloomsbury; 352 pages; £20. To be publishedin America by Crown Publishing in July; $27Kim Philby: The Unknown Story of theKGB’s Master Spy. By Tim Milne. BitebackPublishing; 285 pages; $29.95 and £20WHEN an urbane young man namedHarold Philby, whom everyonecalled Kim, joined Britain’s Secret IntelligenceService (orMI6) in 1940, no one questionedhis credentials. “I was asked abouthim, and said I knew his people,” recalledone top spy. He belonged to the sameclubs, drank the same booze and wore thesame ties as the other men who secretlywaged war against Britain’s enemies. Hewas one of them. Except he wasn’t. KimPhilby was a dedicated communist, a doubleagent working for the Soviet Union.The nub of this story is well known.The numberofbooks written about Philbyis in proportion to his treachery—therehave been many, including volumes byhimself, his widow and a former wife. Buttwo new works shed fresh light on the spyby looking into his friendships with menof similar stock. He did not like deceivingthese people, he said. In fact, he felt verybad about it, for his friends would becomehis defenders, a band ofloyal dupes.None was more devoted than NicholasElliott, a well-bred spy who modelled himselfon Philby, down to the umbrella. Thepair “were as close as two heterosexual,upper-class, mid-century Englishmencould be”, writes Ben Macintyre in “A SpyAmong Friends”. The author is known forFictionAfter darkThe Walk Home. By Rachel Seiffert. Virago;294 pages; $25.95 and £14.99FOR Rachel Seiffert, history is a burdenthat can never be shed. “The DarkRoom”, her 2001debut, which was shortlistedfor the Man Booker prize, traced thelegacy ofNazi guilt in Germany throughthe lives ofthree ordinary people. Shesought neither to explain nor justify,instead exploring how people survivethe weight oftheir own past. Most of herwriting since, both long-form and short,echoes similar themes.“The WalkHome”, her third novel,retreads this turf. The bookis set in Glasgowand follows the fissures of an ageoldsectarian divide in two intertwinednarratives, set now and 20 years ago. Inthe early part ofthe story Lindsey is onthe run, first, as a young pregnant girl,from her father and Ireland (“Her borderhometown: not just boring, it was a warzone”) and later from Scotland, her marriageand her son Stevie, who himselfflees soon afterwards. Now Stevie is backclose to home, working and living with abunch ofPolish builders within miles ofhis family, yet still he cannot bear toretrace the final steps. The story of thePolish group is simpler, but they too areputting offtheir future, stuckin small,claustrophobic rooms, waiting to returnto their own lives. For each person, thewalkhome is a long one.This is a bookabout people who sayvery little: Stevie’s uncle Eric and hisfather came to blows, “neither ofthembudging, two decades lost to both ofthem”. Later Eric spends his days drawinghis old dad and scenes from the Bible,whose lessons they hurled at each otherwhen Eric strayed and married a Catholic. Lindsey chats to her mother-in-lawhis thrilling accounts of espionage, but thefocus here is on characters, not capers. Andthe doomed relationship between Philbyand Elliott (and, to a lesser extent, JamesAngleton, an American spy) makes this oldtale oftreason seem new enough.For a long time the lives of Philby andElliott ran in tandem—both went to Cambridge,married women of a certain class(for Philby, a second wife) and were risingstars in MI6. But everything changed in1951, when Guy Burgess and DonaldMaclean, British diplomats spying for theRussians, fled to Moscow. Investigatorsthought that a third man had tipped themoff about British suspicions; the evidencebut not her own husband. Young Stevierealises that he offends least when heasks nothing, bothers no one.Despite a plot driven by unhappysilences, “scratches shut in”, this is abrilliantly compelling and powerfulwork, told in beautiful, lean prose. “Lifecan send you reelin, hen,” says Eric at onepoint. “It can deal you blows you neverrecover from.” Evidence ofthis unfolds,drumbeat by steady drumbeat. A teenageboy stays firmly on the rails, no drugs, nowildness— “a son in a flute band seemedlike a blessing by comparison” —but hisenthusiasm for being in a Protestantmarching band inexorably pulls thefamily apart.Ms Seiffert’s novel builds not so muchto a grand finale as a bleakrealisation,that grand political themes, broughtdown to the level ofthe everyday, aggrandiseno one. The truth is sadder thanfiction: loving and leaving is “part oflife’spain”, and redemption is always justaround the next corner.pointed to Philby. It became clear, to someat least, why the operations he touchedalways turned to ash.ButElliott’strustwasnotshaken. He ralliedaround his friend, alongwith the othergentlemen of MI6, and beat back an investigationby MI5, the security service. It wasan injustice, thought Elliott, that Philbywasdismissed in 1951. When a politician reignitedthe “third man” controversy in 1955,Elliott organised Philby’s defence. Yearslater he even brought him back on the MI6payroll, this time as an agent in Lebanon,where he reported for The Economist.Elliott had a special rapport with Philby,but it was Tim Milne, another former spy, 1

The Economist April 19th 2014 Books and arts 692 who knew him the longest. His first-handaccount of Philby’s life from childhood,when the two first met, was blocked frompublication by MI6 some 35 years ago. Butthat restriction has since been lifted and,though Milne died in 2010, his family releasedhis story. It is disjointed, as Milnemoved in and out of Philby’s life. Andwhile his detailed observations are attimes intriguing, they are too often irrelevant—forexample, Philby had an aversionto apples. Even red ones, apparently.Elliott’s is the more captivating friendship,and it provides a fitting denouementto Philby’s treason. When MI6 finally settledon his guilt in 1962, Elliott insisted onconfronting the traitor. Even then, said anofficial, Philby “should be treated as a gentleman”.And so he was: sitting in a Beirutflat, Elliott and Philby “courteously” lied toone another, writes Mr Macintyre. In theend, Elliott left with a confession, andPhilby snuck off to Moscow. It is still notclear if Elliott hoped he would defect. “Icannot help thinking that perhaps youwanted me to do a fade,” wrote Philby toElliott a short time later, as if the two werestill friends. 7America in AfghanistanMisjudgmentsThe Wrong Enemy: America in Afghanistan,2001-2014. By Carlotta Gall. HoughtonMifflin Harcourt; 329 pages; $28FEW observers are better placed thanCarlotta Gall to judge what has gone sobadly wrong in Pakistan and Afghanistansince 2001. She spent more than a decadereporting for the New York Times in bothcountries, often from remote corners. Shehas a family connection, too: her father,Sandy Gall, is a British television journalistwho covered Afghanistan for many years,notably during the war ofthe 1980s.In “The Wrong Enemy” Ms Gall offers aprovocative and compelling thesis: thatAmerica and its allies are leaving Afghanistanas a weakened state, plagued byviolence and vulnerable to ambitions ofits neighbours. That is despite the deaths ofperhaps 70,000 Afghans, 3,400 foreignsoldiers and a trillion-dollar bill. Yet theoutcome was probably inevitable, sincethe West’s efforts were badly misdirected.In the words of America’s late specialenvoy to the region, Richard Holbrooke:“We may be fighting the wrong enemy inthe wrong country.”Ms Gall argues that since the Islamistmovement is “rotting at the core”, the Talibanalone could have been crushed or accommodatedlong ago. It survived becauseit serves as a front for the far stronger Pakistaniarmy, in particular the “S Directorate”of its spy network, the Inter-Services Intelligence(ISI). Pakistan uses the Taliban toproject military power across the border.The author shows how the ISI provideshavens for the Taliban and directs them toattack Western forces. In Pakistan they developsuicide-bombing techniques andraise soldiers from madrassas. Each schoolhas a talent-spotter paid to recruit studentsfor militant outfits, who are referred toderisively by Pakistan’s army as “potatosoldiers”. At crucial moments Pakistanisthemselves have directly overseen operations,like the bombing in 2008 of India’sembassy in Kabul, which was “sanctionedand monitored by the most senior officialsin Pakistani intelligence”.More controversially, Ms Gall gathersevidence that senior elements of the Pakistaniarmy collaborated with al-Qaeda,even as it drew billions of dollars fromAmerica to fight the militant Islamistgroup. Afghan intelligence sources “becomeconvinced” early on of the relationship,she says, describing how in February2006 the Afghan president, Hamid Karzai,and his spy chief personally handed a fileto Pakistan’s dictator, Pervez Musharraf,giving evidence of al-Qaeda operativeshidden in safe houses in Abbottabad, amilitary town north of Islamabad. MrMusharraflooked anxious, but did not act.Five years on American special forceskilled Osama bin Laden, also in Abbottabad.The natural question was whetherPakistan’s army had been sheltering himall along. Ms Gall says the Americansquickly concluded that it had, and that thehead of the ISI, Ahmad Shuja Pasha, andpossibly the army chief, Ashfaq ParvezKayani, as well were aware of bin Laden’spresence. Ms Gall implies that Mr Musharrafprobably also knew, though her evidencefor this is weak. She says that the ISIhad a desk dedicated to looking after al-Qaeda’s leader, while correspondenceTime to declarefound in his house showed that he andaides had discussed doinga deal with Pakistanto refrain from terrorism in the countryin return for protection.Other evidence also points to a relationship.Mobile phones are routinelymonitored in Pakistan, yet officials choseto ignore the fact that calls were beingmade to Saudi Arabia from mobiles insidebin Laden’s home. And even though thehouse was in a high-security area policedid not check on it, suggesting that someonein the ISI vouched for the occupants.That bin Laden’s house had little protectionalso pointed to his reliance on othersto guard him.The book asks many of the right questionsabout the affair, and history may wellprove Ms Gall’s answers to be right. Why,for example, would the American governmentnot make public its conclusion aboutPakistan’s complicity with al-Qaeda? MsGall suggests it cared more about trying topreserve its relations with a nuclear-armedally. She may also turn out to be correct insuggesting that Mr Musharraf and tensenior generals knew of militants’ plans tokill Benazir Bhutto in 2007, but chose not toprotect her. He is now on trial fortreason inIslamabad in a separate case.Ms Gall’s narrative would have beenstronger if she had balanced what shelearned from Afghan intelligence sources,who are famously hostile (if for good reason)towards Pakistan’s army, with otherviews. Abettersense ofcontextwould alsohave made her argument more powerful.Why did the West choose not to confrontthe ISI, Ms Gall’s “right” enemy, despiteabundant evidence of its wrongdoing?Was it fear of instability and the rise ofIslamistgroupsacrossSouth Asia, the needfor Pakistan’s help in promoting counterterrorismin the West or anxiety about China’sgrowing influence? “The Wrong Enemy”is a strong, well-crafted account by aninformed observer. It could have beeneven stronger. 7

70 Books and arts The Economist April 19th 2014FictionChronicle of adeath foretoldThe Truth about the Harry Quebert Affair.By Joël Dicker. Translated by Sam Taylor.MacLehose Press; 615 pages; £20. To bepublished in America by Penguin Press in MayHARRY QUEBERT is a struggling parttimewriter who, like others beforeand since, exchanges the distractions ofNew York for a quiet life in rural New England.He heads to Somerset, New Hampshire,and almost immediately falls in lovewith Nola, a beautiful local girl. He is 34,she is 15. One night she climbs out of herbedroom window and disappears.Thirty-three years later Nola’s body isdug up in the grounds ofQuebert’s seasidehome. Also in the grave is a leather bagwith a manuscript copy of the novel thathas made his name in the interveningperiod. Quebert, the sole suspect, is quicklyarrested. Marcus Goldman, his giftedyoung protégé, turns up, intent on clearinghis master’s name.Written in French by Joël Dicker, a Swissnovelist who is not yet 30, “The Truthabout the Harry Quebert Affair” was firstpublished in 2012. It has since sold 2mcopies in Europe and has been translatedinto 32 languages in 45 countries. Nextmonth it comes out in English, thanks tothe work of Sam Taylor (translator of anotherfashionable French novel, LaurentBinet’s “HHhH”), and plastered with morethan a dozen congratulatory blurbs fromcritics across the continent.Part master-and-disciple tale, part whodunnit,Mr Dicker’s thriller is also a postmodernconfabulation of timelines andstories, in the manner of Kate Atkinson’s“Life afterLife”. Atthe same time asplayingdetective, Goldman is being pursued byhis New York publisher for his second novel.Each chapter of “The Truth about theHarryQuebertAffair” beginswith a lessonfrom Quebert on how to write a bestsellerand how to be a man, with snippets of advicedrawn from boxing and romantic poppsychology. “The first chapter…is essential.”“Your second chapter has to be…aright-handed punch to the reader’s jaw.”“Do you know what is the only way toknow how much you love someone?…Bylosing them.” “Victory is within you. Allyou need is to want to let it out.” Withenough plot twists to fill a truck, it is a racyread. Clever, though at times far-fetched. 7Correction: We made a mistake when we said that theheart beats a billion times in the life of both ahummingbird and a human being (“Fairy creatures”,April 5th). The correct figure should have been 1.26billion heartbeats in the life of a hummingbird and 2.45billion for a human being.London theatreMan of the momentModernising an ArthurMillerclassicOF ALL modern dramatists, ArthurMiller can be the hardest to bring upto date. His plays are vivid portraits of theera in which they were written. As a result,few productions manage to go beyond presentingthem as period pieces. “A Viewfrom the Bridge”, which opened at theYoung Vic theatre in London on April 11th,is a rare exception. Directed by Ivo vanHove, a Belgian who is fast becomingknown further afield, it is a striking newtake on Miller’s work.“A View from the Bridge” tells the storyof Eddie Carbone, an Italian-Americanlongshoreman living in Red Hook, Brooklyn.After he takes in Marco and Rodolpho,two men who have illegally arrived fromSicily, events begin to unravel: his youngniece Catherine becomes infatuated withRodolpho, disturbing the jealous and protectiveEddie. As a play it can seem dated:Eddie’s belief that Rodolpho is homosexualseems forced (“I’m tellin’ you Iknow—he ain’t right”), while the structureof Miller’s play—loosely based on Greektragedy, with one character, a lawyer, narratingevents to the audience—can appearmannered.Mr van Hove is known for his innovativeapproach to classic plays. Since 2001he has been the director of ToneelgroepAmsterdam, Holland’s largest repertorytheatre. With his long-term collaboratorand partner Jan Versweyveld he createsstylised productions, often using videoscreens and experimental staging. Audiencesin his productions often find themselvessitting onstage or being movedaround an auditorium.In comparison with some of Mr vanHove’s earlier productions, “A View fromthe Bridge” is relatively simple. The playopens with Eddie (MarkStrong) showeringunder a sliver of water and wringing outhis shirt. Mr Versweyveld’s stage design isstark: a sunken monochrome set with fewprops, relying on subtle shifts of lighting toindicate scene changes. All the characters,with the exception of Catherine (PhoebeFox), wear muted colours. Padding aroundthe stage in bare feet, the actors seemvulnerable. A requiem mass quietly playsthroughout, building up to a crescendo atthe end ofthe play.Miller’s play is perhaps an odd choicefor a European director better known forhis more avant-garde work. But Mr vanHove was attracted to the ambiguity of theplay: how Eddie can seem sympatheticone minute and then monstrous the next.The play also echoes some of the anti-immigrationrhetoric being bandied about inEurope. “It raises the issue of whether youshould ask of people who come to yourcountry that they should integrate andadapt—and if that is possible anyway,”says Mr van Hove. His stylish staging stripsaway the affectations in Miller’s play. Indoing so, an American classic suddenlyappears dazzlingly modern. 7

Courses71The Economist April 19th 2014

72CoursesThe Economist April 19th 2014

Appointments73Director, Knowledge, Policy and Finance Centre D-1Location: Abu Dhabi (United Arab Emirates), IRENA HeadquartersDuration: Two years Fixed Term Appointment, with possible extensionClosing Date: 18 May 2014The International Renewable Energy Agency (IRENA) seeks to recruit aDirector for the Knowledge, Policy and Finance Centre (KPFC) in the IRENASecretariat.IRENA is an inter-governmental organisation, mandated by governmentsto promote the widespread adoption and sustainable use of all forms ofrenewable energy. It facilitates and catalyses sharing of best practices andlessons learned regarding policy frameworks, capacity-building, fi nancemechanisms and other relevant measures for accelerating and expanding thedemonstration and deployment of renewable energy technologies.KPFC is IRENA’s central knowledge repository and a centre of excellencefor renewables policy and fi nance issues. KPFC’s information collection andanalysis supports the work of other divisions, as well as providing criticalknowledge products to IRENA’s Members and the public. The division is alsoa platform for engagement with the private sector and civil society.Under the direct supervision of the Director-General and within delegatedauthority, the Director, KPFC, undertakes a range of analytical and advisoryactivities aimed at providing accurate information, sound advice and a broaderknowledge base to assist countries in making informed renewable energypolicy decisions.TendersEXPRESSION OF INTEREST NUMBEREOI-OMJ-001-14 FOR PROVISION OF CASH& VOUCHER FINANCIAL SERVICES TOUNWFP FOOD ASSISTANCE PROGRAMMESIN SOUTHERN AFRICAFurther details of the vacancy announcement and information on how toapply can be obtained at www.irena.org/Jobs.The United Nations World Food Programme (UNWFP) is the world’slargest humanitarian agency fighting hunger worldwide. Each year,on average, WFP feeds more than 90 million people in more than 70countries.The UNWFP Southern Africa Regional office in Johannesburg wishes toestablish a shortlist of potential financial/payment service providers withproven capacity to set up, maintain, and manage a secure, effective andefficient electronic (phone or card based) solution that can deliver cashor food vouchers in different programmes in diverse online and offlinecontexts across several countries in the region. In 2013, the regionplanned to support an estimated 20 million food insecure people, ofwhom 2.7 million were through cash and voucher based transfers.UNWFP envisages increasing the volume of assistance via cash andvouchers where contexts are appropriate.UNWFP hereby invites interested potential service provider, with theability to operate in at least 3 countries in Southern Africa DevelopmentCorporation (SADC) region, to express their interest by contactingUNWFP through the following dedicated email address, procurement.odj@wfp.org not later than 25th April 2014, 17:00 hours(Johannesburg time).Potential service providers, who have expressed interests, will receivea questionnaire to be completed and submitted. UNWFP will send thequestionnaires with submission instructions. The received completedquestionnaires will be used to pre-qualify potential service providerswho will later be invited to participate in a competitive bidding exercise.The Economist April 19th 2014

74TendersBusiness & PersonalSenior French Barristerwith circa 30 years call and in goodstanding with the French Bar willprovide a confidential second opinion,in English, on pending Frenchconstruction and property litigationincluding pre-appeal analysiscontact@frenchlawsecondopinion.frTo advertise within the classified section, contact:United KingdomMartin Cheng - Tel: (44-20) 7576 8408martincheng@economist.comUnited StatesSabrina Feldman - Tel: (212) 698-9754sabrinafeldman@economist.comReaders are recommendedto make appropriate enquiries and take appropriate advice before sendingmoney, incurring any expense or entering into a binding commitment inrelation to an advertisement.The Economist Newspaper Limited shall not be liable to any person for lossor damage incurred or suffered as a result of his/her accepting or offering toaccept an invitation contained in any advertisement published in The Economist.EuropeSandra Huot - Tel: (33) 153 9366 14sandrahuot@economist.comAsiaDavid E. Smith - Tel: (852) 2585 3232davidesmith@economist.comMiddle East & AfricaMirasol Galindo - Tel: (971) 4433 4202mirasolgalindo@economist.comThe Economist April 19th 2014

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76 The Economist April 19th 2014Economic and financial indicatorsEconomic data% change on year ago Budget InterestIndustrial Current-account balance balance rates, %Gross domestic product production Consumer prices Unemployment latest 12 % of GDP % of GDP 10-year gov't Currency units, per $latest qtr* 2014 † latest latest 2014 † rate, % months, $bn 2014 † 2014 † bonds, latest Apr 15th year agoUnited States +2.6 Q4 +2.6 +2.8 +3.0 Feb +1.5 Mar +1.7 6.7 Mar -379.3 Q4 -2.1 -2.9 2.62 - -China +7.4 Q1 +5.7 +7.3 +8.8 Mar +2.4 Mar +2.8 4.1 Q4 § +188.6 Q4 +1.7 -2.2 4.16 §§ 6.22 6.19Japan +2.6 Q4 +0.7 +1.2 +7.0 Feb +1.5 Feb +2.6 3.6 Feb +21.3 Feb +0.5 -8.1 0.61 102 98.0Britain +2.7 EconomicQ4 +2.7 data +2.9 +2.7 Feb +1.6 Mar +1.9 7.2 Dec †† -111.7 Q4 -3.3 -5.4 2.67 0.60 0.65Canada +2.7 Q4 +2.9 +2.3 +3.4 Jan +1.1 Feb +1.5 6.9 Mar -58.9 Q4 -2.8 -2.6 2.39 1.10 1.02Euro area +0.5 Q4 +0.9 +1.1 +1.7 Feb +0.5 Mar +0.9 11.9 Feb +298.0 Jan +2.3 -2.5 1.47 0.72 0.76Austria +1.1 Q4 +1.8 +1.3 +5.0 Jan +1.5 Feb +1.7 4.8 Feb +11.2 Q4 +3.1 -3.0 1.71 0.72 0.76Belgium +1.0 Statistics Q4 +2.0 on +1.2 42 economies, +3.7 Jan plus +0.9 Mar a closer +1.1 8.5 Feb -8.0 Dec -0.8 -2.5 2.09 0.72 0.76France +0.8 look Q4 at taxing +1.2 +0.8 wages -0.8 Feb +0.6 Mar +1.1 10.4 Feb -33.0 Feb -1.6 -4.2 1.95 0.72 0.76Germany +1.4 Q4 +1.5 +1.8 +4.8 Feb +1.0 Mar +1.3 6.7 Mar +278.5 Feb +6.8 +0.5 1.47 0.72 0.76Greece -2.3 Q4 na nil +1.6 Feb -1.3 Mar -1.0 27.5 Dec +1.6 Jan +1.4 -3.5 6.29 0.72 0.76Italy -0.9 Q4 +0.3 +0.5 +0.4 Feb +0.4 Mar +0.7 13.0 Feb +19.7 Jan +1.0 -3.3 3.11 0.72 0.76Netherlands +0.8 Q4 +3.7 +0.9 +5.2 Feb +0.8 Mar +1.0 8.8 Feb +83.1 Q4 +9.9 -3.0 1.87 0.72 0.76Spain -0.1 Q4 +0.7 +0.8 +3.2 Feb -0.1 Mar +0.4 25.6 Feb +10.0 Jan +1.4 -5.8 3.12 0.72 0.76Czech Republic +0.8 Q4 +7.5 +1.6 +6.8 Feb +0.2 Mar +1.0 8.3 Mar § -2.9 Q4 -1.2 -2.9 1.99 19.9 19.7Denmark +0.5 Q4 -2.3 +1.2 -0.2 Feb +0.4 Mar +1.3 5.3 Feb +24.8 Feb +6.2 -1.7 1.51 5.40 5.70Hungary +2.7 Q4 +2.2 +2.1 +8.0 Feb +0.1 Mar +1.4 8.6 Feb §†† +3.9 Q4 +1.9 -3.0 5.64 223 225Norway +1.1 Q4 -0.7 +2.1 +4.4 Feb +2.0 Mar +2.1 3.5 Jan ‡‡ +54.5 Q4 +12.1 +12.0 2.85 5.95 5.73Poland +2.7 Q4 na +3.2 +5.3 Feb +0.7 Mar +1.3 13.6 Mar § -5.8 Feb -1.4 -3.5 4.12 3.03 3.13Russia +2.0 Q4 na +1.2 +1.3 Mar +6.9 Mar +6.0 5.6 Feb § +36.1 Q1 +1.3 -0.2 9.23 36.1 31.4Sweden +3.1 Q4 +7.1 +2.5 +1.7 Feb -0.6 Mar +0.6 8.5 Feb § +34.6 Q4 +6.0 -2.0 2.03 6.57 6.38Switzerland +1.7 Q4 +0.6 +2.0 +0.4 Q4 nil Mar +0.3 3.2 Mar +84.4 Q4 +11.3 +0.5 0.88 0.88 0.93Turkey +4.4 Q4 na +2.2 +4.9 Feb +8.4 Mar +9.1 10.1 Jan § -62.2 Feb -6.0 -2.7 10.22 2.14 1.79Australia +2.8 Q4 +3.2 +2.7 +2.8 Q4 +2.7 Q4 +2.8 5.8 Mar -44.2 Q4 -2.9 -1.9 3.99 1.07 0.97Hong Kong +3.0 Q4 +4.4 +3.4 +0.5 Q4 +3.9 Feb +3.6 3.1 Feb ‡‡ +5.6 Q4 +2.9 +1.4 2.23 7.75 7.76India +4.7 Q4 +3.2 +6.0 -1.9 Feb +8.3 Mar +8.0 9.9 2012 -49.2 Q4 -2.6 -5.1 8.96 60.2 54.6Indonesia +5.7 Q4 na +5.4 +3.8 Feb +7.3 Mar +6.9 5.8 Q4 § -28.5 Q4 -3.5 -2.3 na 11,430 9,712Malaysia +5.1 Q4 na +5.1 +6.8 Feb +3.5 Feb +3.2 3.3 Jan § +11.7 Q4 +5.3 -4.1 4.09 3.24 3.04Pakistan +6.1 2013** na +3.9 +2.6 Jan +8.5 Mar +6.9 6.2 2013 -4.0 Q4 -2.1 -6.3 12.85 ††† 96.0 98.3Singapore +5.1 Q1 +0.1 +4.2 +12.8 Feb +0.4 Feb +2.7 1.8 Q4 +54.4 Q4 +19.6 +0.7 2.42 1.25 1.24South Korea +3.6 Q4 +3.6 +3.3 +4.3 Feb +1.3 Mar +1.6 3.9 Mar § +83.6 Feb +4.6 +0.5 3.54 1,041 1,121Taiwan +2.9 Q4 +7.3 +3.2 +7.0 Feb +1.6 Mar +1.1 4.1 Feb +57.4 Q4 +11.3 -2.1 1.58 30.2 29.9Thailand +0.4 Q4 +2.4 +2.5 -4.4 Feb +2.1 Mar +2.7 0.9 Feb § -2.8 Q4 +2.6 -2.3 3.65 32.3 29.0Argentina +5.5 Q3 -0.7 -0.7 -0.5 Feb — *** — 6.4 Q4 § -4.3 Q4 -0.1 -2.4 na 8.00 5.15Brazil +1.9 Q4 +2.8 +1.8 +5.0 Feb +6.2 Mar +6.2 5.1 Feb § -82.5 Feb -3.6 -4.0 12.69 2.23 1.98Chile +2.7 Q4 -0.3 +3.8 +2.6 Feb +3.5 Mar +3.3 6.1 Feb §‡‡ -9.5 Q4 -3.9 -1.2 4.91 554 472Colombia +4.9 Q4 +3.3 +4.7 +3.6 Feb +2.5 Mar +2.8 10.7 Feb § -12.7 Q4 -3.6 -0.9 6.29 1,931 1,835Mexico +0.7 Q4 +0.7 +3.0 +0.7 Feb +3.8 Mar +4.5 4.7 Feb -22.3 Q4 -1.6 -3.7 7.75 13.1 12.2Venezuela +1.1 Q3 -0.8 -1.9 +0.8 Sep +57.4 Feb +61.0 7.2 Feb § +6.9 Q3 +1.6 -12.0 12.77 6.29 6.29Egypt +1.4 Q4 na +2.0 -8.2 Feb +9.9 Mar +9.9 13.4 Q4 § -3.3 Q4 -2.4 -12.5 na 6.98 6.89Israel +3.7 Q4 +3.2 +3.4 +1.7 Jan +1.3 Mar +1.5 5.8 Feb +7.2 Q4 +2.9 -2.8 3.46 3.47 3.63Saudi Arabia +3.8 2013 na +4.0 na +2.6 Mar +3.2 5.6 2013 +134.3 Q4 +13.0 +1.9 na 3.75 3.75South Africa +2.0 Q4 +3.8 +2.5 +1.6 Feb +5.9 Feb +5.7 24.1 Q4 § -20.5 Q4 -6.2 -4.3 8.33 10.6 9.12Source: Haver Analytics. *% change on previous quarter, annual rate. † The Economist poll or Economist Intelligence Unit estimate/forecast. § Not seasonally adjusted. ‡ New series. **Year ending June. †† Latest 3months. ‡‡ 3-month moving average. §§ 5-year yield ***Official number not yet proven to be reliable; The State Street PriceStats Inflation Index, February 32.22%; year ago 25.71% ††† Dollar-denominated bonds.

The Economist April 19th 2014 Economic and financial indicators 77Markets% change onDec 31st 2013Index one in local in $Apr 15th week currency termsMarketsUnited States (DJIA) 16,262.6 nil -1.9 -1.9China (SSEA) 2,200.4 +0.2 -0.6 -3.3Japan (Nikkei 225) 13,996.8 -4.2 -14.1 -11.2Britain (FTSE 100) 6,541.6 -0.7 -3.1 -2.1Canada (S&P TSX) 14,303.9 -0.5 +5.0 +1.6Euro area (FTSE Euro 100) 1,011.5 -2.7 -0.8 -0.5Euro area (EURO STOXX 50) 3,091.5 -2.7 -0.6 -0.2Austria (ATX) 2,440.4 -2.4 -4.2 -3.9Belgium (Bel 20) 3,047.1 -1.6 +4.2 +4.6France (CAC 40) 4,345.4 -1.8 +1.1 +1.5Germany (DAX)* 9,173.7 -3.3 -4.0 -3.7Greece (Athex Comp) 1,187.0 -8.7 +2.1 +2.4Italy (FTSE/MIB) 20,817.5 -3.9 +9.8 +10.1Netherlands (AEX) 392.7 -2.5 -2.3 -2.0Spain (Madrid SE) 1,033.6 -3.6 +2.1 +2.5Czech Republic (PX) 996.0 +0.4 +0.7 +0.7Denmark (OMXCB) 611.8 -2.6 +8.1 +8.4Hungary (BUX) 17,345.6 -3.9 -6.6 -9.7Norway (OSEAX) 609.5 +0.1 +1.1 +3.1Poland (WIG) 51,263.9 -2.3 nil -0.6Russia (RTS, $ terms) 1,143.0 -4.4 -12.9 -20.8Sweden (OMXS30) 1,329.3 -2.4 -0.3 -2.5Switzerland (SMI) 8,280.5 -1.7 +0.9 +2.1Turkey (BIST) 72,438.0 -2.0 +6.8 +7.2Australia (All Ord.) 5,380.3 -0.5 +0.5 +5.5Hong Kong (Hang Seng) 22,671.3 +0.3 -2.7 -2.7India (BSE) 22,484.9 +0.6 +6.2 +9.1Indonesia (JSX) 4,870.2 -1.0 +13.9 +21.3Malaysia (KLSE) 1,853.9 +0.1 -0.7 +0.3Pakistan (KSE) 29,095.8 +1.5 +15.2 +26.2Singapore (STI) 3,246.3 +1.3 +2.5 +3.2South Korea (KOSPI) 1,992.3 nil -0.9 +0.4Taiwan (TWI) 8,916.7 +0.3 +3.5 +2.3Thailand (SET) 1,389.2 +0.7 +7.0 +8.9Argentina (MERV) 6,316.4 -2.6 +17.2 -4.6Brazil (BVSP) 50,454.4 -2.3 -2.0 +3.6Chile (IGPA) 19,010.3 +1.4 +4.3 -1.2Colombia (IGBC) 13,808.3 nil +5.6 +5.7Mexico (IPC) 40,481.8 -1.0 -5.3 -5.3Venezuela (IBC) 2,472.5 -2.0 -9.7 naEgypt (Case 30) 8,026.9 +4.2 +18.3 +17.8Israel (TA-100) 1,266.6 -1.1 +4.9 +5.0Saudi Arabia (Tadawul) 9,505.0 -0.6 +11.4 +11.4South Africa (JSE AS) 47,789.8 -0.6 +3.3 +2.5Taxing wagesThe “tax wedge”, the difference betweentotal labour costs to the employer andemployees’ take-home pay, rose by 0.2percentage points to 35.9% in 2013. Ofthe 34 mostly rich countries in the OECD,25 reported a rise in the tax burden in thepast three years. The largest increase inthe tax wedge was in Portugal. America’swedge also grew as reductions in employees’Social Security contributions expired.Overall, there has been littlechange in taxation for single workers,which in all OECD countries except Mexicoand Chile is higher than it is for thosewith families. Belgium’s tax wedge remainsthe biggest, at 55.8%; that is morethan double the figure in Mexico and NewZealand—and eight times that in Chile.Other marketsOthermarkets% change onDec 31st 2013Index one in local in $Apr 15th week currency termsUnited States (S&P 500) 1,843.0 -0.5 -0.3 -0.3United States (NAScomp) 4,034.2 -1.9 -3.4 -3.4China (SSEB, $ terms) 230.9 +1.1 -6.4 -9.0Japan (Topix) 1,136.1 -3.3 -12.8 -9.8Europe (FTSEurofirst 300) 1,306.9 -2.0 -0.7 -0.4World, dev'd (MSCI) 1,646.7 -1.0 -0.9 -0.9Emerging markets (MSCI) 999.9 -1.1 -0.3 -0.3World, all (MSCI) 405.3 -1.0 -0.8 -0.8World bonds (Citigroup) 940.4 +0.5 +3.7 +3.7EMBI+ (JPMorgan) 681.4 +0.1 +4.6 +4.6Hedge funds (HFRX) 1,224.4 § -0.6 -0.1 -0.1Volatility, US (VIX) 15.6 +14.9 +13.7 (levels)CDSs, Eur (iTRAXX) † 74.4 +4.4 +1.6 +1.9CDSs, N Am (CDX) † 69.0 +1.8 +8.4 +8.4Carbon trading (EU ETS) € 5.6 +13.8 +11.3 +11.7Sources: Markit; Thomson Reuters. *Total return index.† Credit-default-swap spreads, basis points. § Apr 14th.Indicators for more countries and additionalseries, go to: Economist.com/indicatorsGap between labour costs and take-home payAs % of total labour costs*, 2013%-point change since 20100 10 20 30 40 50 60BelgiumGermanyFranceItalyPortugalSpainPolandJapanBritainUnited StatesSouth KoreaMexicoNew ZealandChile-0.10.2-1.00.64.01.01.41.4-1.10.81.33.7-0.1nilSource: OECDOECD AVERAGE*Single person without childrenwith average earningsThe Economist commodity-price index2005=100% change onThe Economist commodity-price one indexoneApr 8th Apr 14th* month yearDollar IndexAll Items 174.1 174.7 +1.3 -0.4Food 204.2 204.2 +0.8 +2.0IndustrialsAll 142.8 144.0 +2.0 -3.7Nfa † 151.2 149.8 -4.0 -7.7Metals 139.2 141.6 +5.0 -1.8Sterling IndexAll items 189.0 189.8 +0.3 -9.0Euro IndexAll items 156.9 157.2 +2.0 -5.4Gold$ per oz 1,309.3 1,328.8 -2.2 -4.4West Texas Intermediate$ per barrel 102.6 103.7 +4.0 +17.0Sources: Bloomberg; CME Group; Cotlook; Darmenn & Curl; FT; ICCO;ICO; ISO; Live Rice Index; LME; NZ Wool Services; Thompson Lloyd &Ewart; Thomson Reuters; Urner Barry; WSJ. *Provisional† Non-food agriculturals.

Obituary78 The Economist April 19th 2014disgrace. But she was proud that her talentshad let her escape it. Her best memory ofthe show came from the first-night party,when she overheard a grandee saying“That girl’s absolutely perfect for the part—you can always tell class when you see it.”Eleanor DrewEleanorDrew (née Nellie Darlison), starof“Salad Days”, died on March 31st, aged 91VIVACITY and mischief were in short was a dull job, and the young Nellie keptsupply in post-war Britain. In a world her spirits up by singing along to the radiomarked by austerity and the survival of show “Music While You Work”.fussiness and pomposity, “Salad Days”, a A supervisor was perhaps her first realseemingly nonsensical love story, struck a fan. “You’re wasted here,” he told her.chord. Its five-year run in the West End was When she brushed his compliments aside,rivalled only by “My Fair Lady”, the musicalversion of George Bernard Shaw’s singing lessons and pestered her to give it ahe found a newspaper advertisement for“Pygmalion”.try. But the lessons were halfa crown each:But the enchanted world of parks and 12.5p in decimal money, or 21 cents, far tooOxford quads in which “Salad Days” was much for a factory worker. She turned toset was as foreign to its star, Eleanor Drew, go, but once the teacher heard her sing, heas London high society was to Eliza Doolittle.Though few knew it, London’s most ten lessons. And when he’d taught her, heoffered a big discount: 15 shillings (75p) forpopular musical actress had been born helped her get a job: only in the chorus ofNellie Darlison, within earshot of Bow “The Quaker Girl” to start with, but still aBells. Her formal education ended not foothold in a new world. Nellie Darlisonwith a summer ball or finishing school, but became Eleanor Drew: auburn hair shining,eyes flashing, and with a cut-glasswhen she left school at16. As a toddler, sheentertained neighboursand guestsbysingingcomicsongs:a favourite was“Felixkept to be deployed when needed.posh accent, acquired in elocution lessons,on Walking”, about the misadventures of It all helped to make her a perfect Jane.the cartoon character Felix the Cat. As the The main role in “Salad Days” is the poshestof daughters, harum-scarum and un-tips mounted up, her mother tookher fromtheir two-room tenement to tea-houses punctual, revelling in summer, sunshineand cafés in the gritty, greasy East End, and falling in love with her new boyfriend:where the little girl would stand on a table “as young and as green as the leaves on theand sing for her fatherless family’s supper. tree, for these are our salad days”. MissA scholarship to a grammar school, and Drew did not conceal her background—the civil service exam, took her out of that how could she, when her hit song ranlife—but not far enough. She ended up as a “Sometimes we may pretend to forget, butquality controller in a munitions factory. It of course we never will”. Her past was noThe queen’s favourite songThe musical—jotted down in three weeksby Julian Slade for a short end-of-seasonrun at the Bristol Old Vic—was an accidentalsuccess. Miss Drew and the rest of thecast came to London expecting a short run.Within months she and they were stars.No thanks to the critics. They praisedher poise and voice (the show makes demandson its female lead which today’sprofessionals, reared on simpler songs,find challenging). But by the grittier standardsoflater years, the feathery music andundergraduate banter seemed ridiculous.In 1959 Jerome Robbins, then the toast ofAmerica, visited Britain to try out his sizzlingnew production and get a feel for thecompetition. Told of the plot and lyrics ofLondon’s longest-running musical, his responsewas, “You’re kidding.” As a barbedentry in the “Cambridge Companion tothe Musical” notes: “How could you explainto one ofthe creators ofsuch a sociallyaware show as “West Side Story” that itsmain rival, seen by some five million people,concerned a magic piano?”Such snooty incomprehension missedthe edge and depth behind “Salad Days”,with its digs about censorship, secrecy,class divisions, and most of all the stiflingpressures of conformity and parental control.“We said we wouldn’t look back”, apoignant reflection on memory, nostalgiaand the passing of years, is said to be thequeen’s favourite song; Miss Drew sang itto her at the Royal Variety Performance in1955, and bands have played it at royalevents ever since.But the show’s record-breaking successwasthe end ofhercareer. The producers refusedto release her from her contract for arole she yearned for in a new musical,which had been specially written for her.Her next show turned out to be designedfor failure, for mysterious tax reasons.Then came one with an all-star cast whichproved fatally plagued by squabbles. Justas she had left the East End ten years earlier,it was time to move on. The fun, shesaid, had gone out of it. Better to enjoy herthree children (another came soon afterwards),and her third marriage, at last ahappy one, to another singer, Jon Barkwith,who survives her.She sang for the rest of her life, thoughnot professionally. She ran an antiquesshop and then a successful hotel in Wales,much favoured by London showbiz typeswanting a break from the pressured worldthat Miss Drew had already left behind her,lightly, gracefully and decisively. 7

Digital highlightsVisit economist.com for news, blogs, audio, video, interactive graphics and debatesLinks to all the stories below can be found at: economist.com/dh63China’s little EnglandOxford Street in Thames Town, a city of10,000 people on the outskirts of Shanghai,is a quiet cobble-stoned lane withmock-Tudor shop fronts replete withimitation gas lamps, and a statue ofWinston ChurchillYours to cut out and keepIf ever a technology were ripe for disruption,it is the microscope. Benchtop microscopeshave remained essentially unchanged sincethe 19th century—their shape a cartoonist’scliché of science along with alchemicalglassware and Bunsen burnersWhy elections are bad for youDemocracy is often accused of being unableto deliver long-term reforms in which theinterests of current voters conflict withthose of future ones. Research suggeststhat keeping current voters sweet isdistorting decision-making at every levelFrom our blogs Most read on Economist.com Featured commentMiddle East: Deep pocketsHumanitarian agencies do not haveenough money to deal with thetremendous suffering caused by the war inSyria. New donors are coming to their aidAmerica: Cross-Atlantic extremismTea Party voters and Euroscepticsare both traditionalist groups drivenby economic anxiety and mistrust ofcentralised government powerCulture: Dances with bearsKeenan Kampa, a well-knownballerina, explains why she is thefirst-ever American to dance with theMariinsky Ballet in St Petersburg2345Thorium reactorsAsgard’s fire1The odds of being murderedDicing with deathUkraine in crisisThe disappearing countryThe future of financeLeviathan of last resortFinancial crisesThe slumps that shapedmodern finance“Some of the supposed achievements youmention are arguable. Handouts that createda culture of crony support will take years tocorrect. Other than passing same-sexmarriage there is little else to celebrate of thisdecade of misguided policies, rampantcorruption and blind arrogance.”—on “TheCFK psychodrama”, April 12th 2014Links to all these storiescan be found at:economist.com/dh63or by scanning this codeTo subscribe go toecon.st/Sb6PrbFollow us@TheEconomist

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