The Economist UK - 12TH April-18TH April 2014


How NGOs could change China The charm of Democratic daughters Nigeria, Africa’s new champion Beware Greeks bearing bonds
APRIL 12TH– 18TH 2014

Economist.com

The thunder in thorium

Five Crises & how the Next One
could be Prevented:

A History of Finance in

A six-page essay

Contents
8 The world this week Leaders 11 The future of ?nance Leviathan of last resort 12 Israel and Palestine Take a break 12 China’s future Enter the Chinese NGO 14 The World Bank Right cause, wrong battle 16 Nigeria Africa’s new Number One On the cover State subsidies are corroding the ?nancial sector and encouraging risk-taking. As the crisis recedes, it is time to get rid of them: leader, page 11. Our essay looks at how ?ve historical crises shaped today’s ?nancial system, pages 51-56. The American government’s new plans for its mortgage market, page 81, and higher capital requirements for its banks, page 80. Our obituary of Charles Keating, a ?nancial snake-oil salesman, page 98 The Economist online
Daily analysis and opinion from our 19 blogs, plus audio and video content, debates and a daily chart
Economist.com/blogs

The Economist April 12th 2014 5

Letters 20 On Colombia, the IMF, robots, the media, jobs, streaming, Northern Ireland Britain The housing market Cool it Maria Miller The lady vanishes Libel and Russia A book too far The bedroom tax Settling in Urban beekeeping Honey monsters Carwyn Jones A mountain to climb Department stores Chinese takeaway Professional services To the rescue Bagehot Scotland’s No campaign

United States 36 Environmental politics A run for Tom Steyer’s money 37 Health reform Medicare, the opera 38 Police violence Breaking, and bad 38 The CIA and torture Into the light 39 Military uniforms Out of sight 39 America, Afghanistan and opium Ten billion wasted 40 The Civil Rights Act Fifty years on 41 Lexington The Democrats’ daughters The Americas 42 Argentina’s president The CFK psychodrama 43 Voisey’s Bay nickel mine Ice and lolly 43 Chinese lending to Latin America Flexible friends 44 Bello Peru’s Italian job Middle East and Africa 45 The peace process Going nowhere 48 Arabic and the internet Sur?ng the shabaka 48 South Africa’s corruption Nkandla in the wind 49 Angola Still much too oily Essay 51 Financial crises The slumps that shaped modern ?nance Asia 57 Myanmar and drugs Getting higher 58 Indonesia’s elections Rough for Jokowi 58 The Philippines A new condominium 59 Pakistan’s army General unease 60 Banyan Afghanistan’s gesture of de?ance

China’s NGOs The Communist Party is giving more freedom to a revolutionary idea: leader, page 12. In spite of a political clampdown, a ?ourishing civil society is taking hold, page 61. China’s lending to Latin America grows, page 43. But Bitcoin may be a step too far, page 80

25 26 26 27 27 28 28 29 30

E-mail: newsletters and mobile edition
Economist.com/email

Democratic daughters Well-connected women are a useful way for Barack Obama’s party to point up the di?erence from Republicans: Lexington, page 41. A verdant billionaire is betting that climate change matters too, page 36

Print edition: available online by 7pm London time each Thursday
Economist.com/print

Audio edition: available online to download each Friday
Economist.com/audioedition

Volume 411 Number 8882
Published since September 1843 to take part in "a severe contest between intelligence, which presses forward, and an unworthy, timid ignorance obstructing our progress." Editorial o?ces in London and also: Atlanta, Beijing, Berlin, Brussels, Cairo, Chicago, Hong Kong, Johannesburg, Lima, Los Angeles, Mexico City, Moscow, New Delhi, New York, Paris, San Francisco, S?o Paulo, Singapore, Tokyo, Washington DC

Europe 31 Ukraine and Russia Back to the battle?eld 32 France and Europe More special pleading 33 Italy’s government The last chance 33 Spain’s recovery Better but not best 34 Press in the Balkans Troublesome times 35 Charlemagne The laws of euro-nomics

Ukraine The disturbances in eastern Ukraine demonstrate that Russia wants to destabilise the country before next month’s election, page 31. British publishers are also scared of Vladimir Putin, page 26

1 Contents continues overleaf

6 Contents

The Economist April 12th 2014

China 61 Chinese civil society Beneath the glacier International 64 Firms and political crises Commissaries of revolution 65 Aid for health care New prescriptions 65 The odds of being murdered Dicing with death 66 Brain injuries in sport The hits keep coming Business 67 Dangote Group Building on concrete foundations 68 Holcim and Lafarge Into the mixer 69 Online business and security A digital heart attack 70 Employment law Faith in the workplace 70 French business Outside in 71 Indian drugmakers Sun takes a shine to Ranbaxy 72 Schumpeter Reviving old brands Finance and economics Greece’s return to the markets The prodigal son Buttonwood Self-employment surges Nigeria’s GDP Step change Insider trading Knowing too much Bitcoin in China A dream dispelled Lowering leverage at American banks Beyond Basel Fannie Mae and Freddie Mac The ugly twins of ?nance Free exchange The bene?ts of Brentry

Greek bonds Their reappearance is a milestone for the European Union’s most troubled economy, but there is still a long way to go, page 77. New research suggests that Greece should never have joined the EU, but everybody else should have, including Britain: Free exchange, page 82

Science and technology 83 Thorium reactors Asgard’s ?re 84 Ecology Darwin was right 84 Casting light on dark matter Fundamental physics 85 Rejuvenating bodily organs Engaging reverse gear 85 Symbiosis and parasitism The sorceress’s apprentice Books and arts 86 Matisse’s cut-outs Carving into colour 87 Sudan and South Sudan Breaking nations 88 Depression in the West Tidal wave 88 Duke University The lacrosse scandal Business books quarterly 89 Success Do you have what it takes? 90 American craft beer Hops and dreams 90 Beauty queen Andrea Jung at Avon 91 Apple’s haunted empire Life after Steve Jobs 91 Wally Ollins Brand old man 96 Economic and ?nancial indicators Statistics on 42 economies, plus a closer look at aid Obituary 98 Charles Keating Crusader and fraudster

Next week We publish a special report on China. By 2030 its cities will be home to about 1 billion people. Getting urban China to work properly is vital to the country’s economic and political future, says James Miles

Subscription service
For our full range of subscription offers, including digital only or print and digital combined visit Economist.com/offers You can also subscribe by mail or telephone at the details provided below: Telephone: +44 (0) 845 120 0983 Web: Post: Economist.com/offers The Economist Subscription Centre, P.O. Box 471, Haywards Heath, RH16 3GY UK

2013 estimates, $bn
0 100 200 300 400 500 Nigeria South Africa Angola Ethiopia
Sources: IMF; national statistics *After revision

GDP

*

Champion Nigeria It has jumped ahead of South Africa to become Africa’s biggest economy. It also has supersized problems: leader, page 16. Some dramatically revised GDP ?gures, page 79. How Dangote Group became Nigeria’s biggest ?rm, page 67. But South Africa is mired in corruption scandals, page 48

Subscription for 1 year (51 issues) Print only UK – ?126

Principal commercial o?ces:
25 St James’s Street, London sw1a 1hg Tel: 020 7830 7000 Rue de l’Athénée 32 1206 Geneva, Switzerland Tel: 41 22 566 2470 750 3rd Avenue, 5th Floor, New York, NY 10017 Tel: 1 212 541 0500 60/F Central Plaza 18 Harbour Road, Wanchai, Hong Kong Tel: 852 2585 3888 Other commercial o?ces: Chicago, Dubai, Frankfurt, Los Angeles, Paris, San Francisco and Singapore

77

78 79 79 80 80

81 Thorium An element named after the Norse god of thunder may soon contribute to the world’s electricity supply, page 83

82

PEFC certi?ed This copy of The Economist is printed on paper sourced from sustainably managed forests certi?ed by PEFC www.pefc.org

PEFC/16-33-422

Registered as a newspaper. ? 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 or otherwise, without the prior permission of The Economist Newspaper Limited. Published every week, except for a year-end double issue, by The Economist Newspaper Limited. The Economist is a registered trademark of The Economist Newspaper Limited. Printed by Wyndeham Peterborough Limited.

Can your client advisor call on a specialist to customize your investments?
Whatever your investment strategy, we have access to a worldwide network of thousands of experts in all asset classes. And our in-depth knowledge of global, regional and local markets offers you a wide range of tailored solutions. Watch 100 seconds to ?nd out more on the UBS way of looking at wealth management with William Kennedy, Head of Investment Products and Services UBS. The value of investments can fall as well as rise. You may not get back the amount originally invested.

Go to www.ubs.com/solutions or scan the QR code with your smartphone

We will not rest

? UBS 2014. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

8

The world this week
Politics
er. But the pact reduces rather than eliminates many tari?s, and is less ambitious in scope than the Trans-Paci?c Partnership which they and other countries are negotiating. America is pushing hard for Japan to open its markets wider to farm produce. 0.19% of its national income. As a proportion of their national income aid from north European countries, such as Norway (1.07%) and Britain (0.72%), was far more generous.

The Economist April 12th 2014
Hungary’s ruling Fidesz party won another smashing general election victory, taking 133 of the 199 available seats in parliament. The European Union has repeatedly criticised the prime minister, Viktor Orban, for making changes to the constitution that seem to bene?t him and his party. But his majority will allow him to continue to govern largely unchallenged. The new prime ministers of France and Italy, Manuel Valls and Matteo Renzi, unveiled new ?scal plans, including cuts in public spending and taxes. Both may seek to loosen budget-de?cit limits agreed with the European Commission in Brussels. Jyrki Katainen said he would step down as Finland’s prime minister in order to seek a senior position in the EU. Replacements are being sought for the heads of the European Council, the European Commission and the Eurogroup of ?nance ministers, as well as the foreign-policy chief. Spain’s parliament overwhelmingly rejected a proposal by Catalonia to hold a referendum on independence. The Catalans said they would go ahead with the vote in November anyway.

Parliamentary and local elections took place in Indonesia. Exit polls showed that the main opposition party, the Indonesian Democratic Party of Struggle, had done worse than expected, given the popularity of Joko Widodo, its candidate for president in an election in July. The results will be known next month. Afghanistan held a presidential election to choose a successor to Hamid Karzai, who is limited to two terms. Reports suggest there was much less fraud at the ballot box this time than at the previous election in 2009. The result should be available by the end of April. The two leading candidates will go forward to a run-o? on May 28th. Voting got under way in India’s election, which is being held in nine stages until May 12th, with the count tallied on May 16th. Voters in the north-eastern states of Assam and Tripura were the ?rst to go to the polls. In Chhattisgarh state Maoist gunmen killed three policemen who were guarding election o?cials. The Supreme Court in the Philippines upheld a law that compels the government to make contraception freely available at clinics and allows schools to teach sex education. The Catholic church in the country had fought hard to scrap the law; some see the court’s decision as evidence of the church’s waning in?uence. After seven years of talks Japan signed a trade agreement with Australia, its ?rst with a big agricultural export-

Fun for federalists Voters in Quebec handed a crushing defeat to the Parti Québécois, a separatist party that had started the provincialelection campaign ahead in the polls. The Liberals, led by Philippe Couillard, will lead a new majority government.
Luis Guillermo Solís romped home in the second round of Costa Rica’s presidential election after his rival stopped campaigning several weeks ago. Mr Solís, whose party has never held power before, won on a platform that targeted inequality and corruption. The government and opposition in Venezuela agreed to hold talks to resolve weeks of violence that have claimed the lives of around 40 people. The talks were brokered by foreign ministers from the Union of South American Nations.

Jaded and faded Talks supposed to lead to peace between Israel and Palestine began to ?zzle out before an end-of-month deadline. The parties blamed each other. America’s State Department issued a neutral-sounding clari?cation after remarks by John Kerry, the secretary of state and chief mediator, were interpreted as holding Israel mainly responsible.

Brotherly love Jeb Bush waded into the Republicans’ tortuous debate over immigration policy, by making a distinction between illegal immigrants who overstay their visas and should leave America, and those who cross the border to be with their families, which he called “an act of love”. The former governor of Florida, and brother of George W., is considering a run for president in 2016.
The death toll from last month’s landslide in Washington state rose to 36, with another10 people unaccounted for. Development aid from rich countries reached an all-time high of $134.8 billion last year, according to the OECD. America remained the biggest donor, giving $31.6 billion, mostly for humanitarian aid and ?ghting AIDS. But this represented just

Some 3,000 ethnic Somalis were arrested in raids in Nairobi, Kenya’s capital, in a campaign to catch illegal immigrants and militant Islamists. Nearly 90% of them were released within days, according to the police; most were kept in a football stadium. On March 31st at least six people had been killed by a bomb in Eastleigh, a Somali-populated district of the city. At least 25 people were killed in clashes between an Arab clan and a Nubian one in the southern Egyptian province of Aswan.

Mischief-makers Riots broke out across eastern Ukraine, including in Donetsk, when pro-Russian militants occupied administration buildings and demanded a referendum on joining Russia. Ukraine accused the Russians, who recently annexed Crimea, of more interference in their country. Russia denied any involvement. America and Europe warned Russia of adverse consequences if its troops invaded Ukraine.

The ?rst state visit to Britain by a president of Ireland was held, during which Michael Higgins (above) and other Irish politicians had dinner with the queen. Amid the glowing appraisals of improved relations, some Britons were shocked that Martin McGuinness, a former IRA commander who is now deputy ?rst minister in Northern Ireland, was 1 among the guests.

The Economist April 12th 2014
ernment, 11 states and the Navajo nation; the plainti?s had originally sought $25 billion. Anadarko’s ?ne is even bigger than the $4 billion slapped on BP for the Deepwater Horizon oil spill. A federal jury in Louisiana ordered Takeda, a Japanese drugs company, to pay $6 billion in punitive damages for covering up the risks of bladder cancer from a diabetes medicine. Eli Lilly, which marketed the treatment, was ordered to pay $3 billion. The combined $9 billion in damages shocked most observers, but it will probably be reduced substantially on appeal. Ranbaxy, a troubled Indian maker of generic drugs, was bought by Sun Pharmaceutical in a $3.2 billion deal that will create India’s biggest drugs company. Ranbaxy has come under investigation in America over its manufacturing processes, causing a headache for its biggest shareholder, Japan’s Daiichi Sankyo. It hopes to have found a remedy by selling to Sun Pharma. The world’s two biggest cement companies, Holcim of Switzerland and Lafarge of France, announced a merger. The pair hope to make the deal concrete in the ?rst half of 2015, but until then antitrust regulators will scrutinise the details; the European Union is currently investigating price?xing in the cement industry. Procter & Gamble sold three of its pet-food brands, including Iams, to Mars, a food group mostly known for its chocolate bars, for $2.9 billion. It was A.G. La?ey’s ?rst big strategic move since returning to P&G as chief executive a year ago.

The world this week 9
($18.5 billion) in cash. Backed by Patrick Drahi, a tech entrepreneur, Numericable was the preferred bidder, but that did not stop Bouygues, a blue-chip company which had the backing of the government and the unions, from sweetening its o?er three times during the takeover talks. A software ?aw that could leave two-thirds of the world’s websites vulnerable to attack by hackers was uncovered by researchers and Google. The “Heartbleed” bug was discovered in the OpenSSL encryption software used by many companies and governments to make their websites more secure.

Business
Gross government debt
As % of GDP, 2013 estimate 0 Greece Italy Portugal Ireland Euro area Spain France
Source: European Commission

50

100

150

200

Investor demand was very high for the ?rst long-term sovereign bond from Greece in four years. Borrowing costs for periphery economies in the euro zone have declined sharply. The yields on Italian and Spanish ten-year government bonds are now around 3.2%, about half what they were a couple of years ago. The yield on existing Greek tenyear bonds dropped to below 6% this week; two years ago it was nearly 40%. The IMF said that the recovery in the global economy “is becoming not only stronger but also broader”. Its latest report forecast that world GDP will grow by 3.6% this year, with Britain the best performer among the G7 at 2.9%.

Firefox in a hole Debate raged over whether Brendan Eich should have stepped down as Mozilla’s boss because of a political contribution he made in 2008 in support of a ban on gay marriage in California. His appointment as chief executive of the ?rm behind the Firefox web browser prompted a backlash from some gayrights activists and he resigned after just two weeks in the job. Mozilla’s chairwoman admitted that trying to stand for equality and free speech at the same time “can be hard”.
An intriguing takeover battle in France reached a conclusion when Vivendi chose to sell its SFR mobile-telecoms business to Numericable, a cable operator, for about 13.5 billion

XPired Microsoft issued its last security update for the Windows XP operating system, which it is not supporting any more as the software has nearly reached the grand old age of 13. Windows XP still powers 28% of the world’s PCs. The British and Dutch governments are paying Microsoft to extend support for XP in their IT departments, as are some ?rms and banks; 95% of the world’s ATMs run on the system.
Other economic data and news can be found on pages 96-97

Statistical signi?cance Nigeria overtook South Africa as Africa’s biggest economy overnight, after a long-overdue revision of the way its GDP is calculated. Now using 2010 as a base year, Nigeria’s GDP in 2013 was $510 billion, 89% bigger than previously stated. The old ?gure used 1990 as a base, which did not give enough weight to, among other things, Nigeria’s swelling telecoms industry. Nigerians will not feel any richer because of the change; most still live on less than $1.25 a day.
America’s Justice Department handed out its biggest penalty to date for contaminating the environment. Anadarko Petroleum is to pay $5.2 billion, the bulk of which will go to cleaning up sites contaminated by an energy company it bought in 2006. The company was sued by the federal gov-

The new C-Class. Beautifully calculated. Just 104g /km* CO2.
The numbers work.

A Daimler Brand

O?cial government fuel consumption ?gures in mpg (litres per 100km) for the new C-Class Saloon range: urban 41.5 (6.8)– 58.9 (4.8), extra urban 64.2 (4.4)–83.1 (3.4), combined 53.3 (5.3)–70.6 (4.0). CO2 emissions: 123-103 g/km. O?cial EU-regulated
test data are provided for comparison purposes and actual performance will depend on driving style, road conditions and other non-technical factors. The new C-Class range starts from ?26,855.00 on-the-road. *Model featured is a new C 220 BlueTEC Sport Saloon at ?32,005.00 on-the-road with metallic paint at ?645.00 (on-the-road price includes VAT, delivery, 12 months’ Road Fund Licence, number plates, ?rst registration fee and fuel). Some combinations of features/options may not be available. Please contact your local Retailer for availability. Prices correct at time of print 04/14.

Leaders

The Economist April 12th 2014 11

Leviathan of last resort
State subsidies and guarantees are once again corroding the ?nancial sector and creating new dangers VER since Lehman Brothers went bankrupt in 2008 a common assumption has been that the crisis happened because the state surrendered control of ?nance to the market. The answer, it follows, must be more rules. The latest target is American housing, the source of the dodgy loans that brought down Lehman. Plans are afoot to set up a permanent public backstop to mortgage markets (see page 81), with the government insuring 90% of losses in a crisis. Which might be comforting, except for two things. First, it is hard to see how entrenching state support will prevent excessive risk-taking. And, second, whatever was wrong with the American housing market, it was not lack of government: far from a free market, it was one of the most regulated industries in the world, funded by taxpayer subsidies and with lending decisions taken by the state. Back in 1856 one of this newspaper’s editors, Walter Bagehot, blamed crashes on what he called “blind capital”—periods when credulous cash, ignoring risk, ?ooded into unwise investments. Given not only the inevitability of such moments of panic but also ?nance’s systemic role in the economy, a government had to devise some special rules to make ?nance safer. Bagehot invented one: the need for central banks to rescue banks during crises. But Bagehot’s rule had a sting in the tail: the bail-out charges should be punitive. That toughness rested on the view that governments should as far as they could treat ?nanciers like any other industry, forcing bankers and investors to take as much of the risk as possible themselves. The more the state protected the system, the more likely it was that people in it would take risks with impunity. That danger was amply illustrated in 2007-08. Having pocketed the gains from state-underwritten risk-taking during the boom years, bankers presented the bill to taxpayers when the bubble went pop. Yet the lesson has not been learnt. Since 2008 there has been a mass of new rules, from America’s unwieldy Dodd-Frank law to transaction taxes in Europe. Some steps to boost banks’ capital and liquidity do make ?nance more self-reliant: America’s banks face a tough new leverage ratio (see page 80). But overall the urge to regulate and protect leaves an industry that depends too heavily on state support. Turning in his grave The numbers would amaze Bagehot. In America a citizen can now deposit up to $250,000 in any bank blindly, because that sum is insured by a government scheme: what incentive is there to check that the bank is any good? Most countries still encourage ?rms and individuals to borrow by allowing them to deduct interest payments against tax. The mortgage-interest subsidy in America is worth over $100 billion. Even Bagehot’s own ?nancial long-stop has been perverted into a subsidy. Since investors know governments will usually bail out big ?nancial ?rms, they let them borrow at lower rates than other businesses. America’s mortgage giants, Fannie Mae and Freddie Mac, used a $120 billion funding subsidy to line

E

shareholders’ pockets for decades. The overall subsidy for banks is worth up to $110 billion in Britain and Japan, and $300 billion in the euro area, according to the IMF. At a total of $630 billion in the rich world, the distortion is bigger than Sweden’s GDP—and more than the net pro?ts of the 1,000 biggest banks. In many cases the rationale for the rules and the rescues has been to protect ordinary investors from the evils of ?nance. Yet the overall e?ect is to add ever more layers ofstate padding and distort risk-taking. This ?ts an historical pattern. As our essay this week shows, regulation has responded to each crisis by protecting ever more of ?nance. Five disasters, from 1792 to 1929, explain the origins of the modern ?nancial system. This includes hugely successful innovations, from joint-stock banks to the Federal Reserve and the New York Stock Exchange. But it has also meant a corrosive trend: a gradual increase in state involvement. Deposit insurance is a good example. Introduced in America in 1934, it protected the ?rst $2,500 of deposits, a small multiple of average earnings then, reducing the risk of bank runs. Today America is an extreme case, but insurance of over $100,000 is common in the West. This protects wealth, and income, and means investors ignore creditworthiness, worrying only about the interest-rate o?er, sending deposits ?ocking to ?imsy Icelandic banks and others with pitiful equity bu?ers. The overall e?ect is not just to enrich one industry, but to mute the bene?cial e?ects of ?nance. Healthy ?nancial markets speed up an economy, channelling credit to ?rms that need it. They can also make an economy fairer and more competitive, providing the funds for those without them to challenge incumbents. Modern ?nance is a more slanted system in which savings are drawn towards subsidies and tax distortions. Debt-fuelled housing goes wild while investment in machines and patents runs dry. All this dulls growth. Blame the grandparents How can the zombie-like shu?e of the state into ?nance be stopped? Deposit insurance should be gradually trimmed until it protects no more than a year’s pay, around $50,000 in America. That is plenty to keep the payments system intact. Bank bosses might start advertising their capital ratios, as happened before deposit insurance was introduced. Giving ?rms tax relief on ?nancing costs is sensible, but loading it all onto debt rather than equity is not. And still more can be done to punish investors, not taxpayers, for failure. A start has been made with “living wills”, which describe how to wind down a megabank, and loss-absorbing bonds, which act as bu?ers in a crisis. But Europe is far behind America here, and the issue of how to resolve huge, cross-border banks remains. The chances of politicians withdrawing from ?nance are sadly low. But they could at least follow Bagehot’s advice and make the cost of their support explicit. The safety net for ?nance now stretches well beyond banks to undercapitalised clearing-houses and money-market funds. Governments should report these liabilities in national accounts, like other subsidies, and exact a proper price for them. Otherwise, they have merely set up the next crisis. 7

12 Leaders Israel and Palestine

The Economist April 12th 2014

Take a break
The two-state solution is still the only one that makes sense. But it won’t happen this time round T IS a cliché: every time a worthy mediator, in this case John Kerry, America’s secretary of state, sets about ending the con?ict between Israelis and Palestinians, people say the clockhand has reached “a minute to midnight”; disaster will follow if the parties fail to agree. By Mr Kerry’s timetable, the chimes will ring out dolefully at the end of this month (see page 45). He may ?nd a last-minute rewinding ploy to keep both sides burbling a bit longer. But there is scant chance, even with that extension, of a two-state deal being done. Mr Kerry has tried his heroic best, but this round of peacemaking is ?zzling out. Jewish and democratic? Disaster will not immediately follow. As things stand, Israel is not under threat, despite its understandable aversion to the prospect of other states in the Middle East, such as Iran, matching it with nuclear weapons. Israel is a prosperous democracy in a region of chaos and bloodshed. Binyamin Netanyahu, its prime minister (pictured left), is unchallenged. The Palestinians demanding a state are weak, divided and quiescent; morose as they are, few favour a return to suicide-bombing. Yet Israel cannot a?ord to be complacent in the longer run, for this stalemate poses a real threat if the country is to preserve its essence as both Jewish and democratic. It cannot stay both, if it inde?nitely controls the Palestinian territories and their people while denying them full rights under Israeli law, including the vote. And if the Palestinians were enfranchised, demography suggests that a Greater Israel between the Mediterranean and the Jordan river, including Gaza, would no longer be predominantly Jewish. Israel must give the Palestinians a proper state oftheir own ifit is to remain a Jewish democracy.

I

Mr Netanyahu knows this. But most of his own Likud party and much ofhis coalition still roundly reject the two-state idea, and he is loth to face them down. This time, he has added a clutch of extra demands which his predecessors, notably Ehud Barack at Camp David in 2000 and Ehud Olmert in Jerusalem in 2008, saw no need for—on such issues as boundaries, Jerusalem and the Jordan valley, which many in Likud now want to annex. He has let Jewish settlements on the West Bank expand as fast as ever. And he says the Palestinians must ?rst acknowledge Israel as a speci?cally Jewish state. The Palestinian leader, Mahmoud Abbas (pictured right), says he cannot submit to such demands as a precondition. He would be ditched by his own people if he were to cast Israel’s Arabs (who are a ?fth of Israeli citizens) into what they see as a second-class status and to disavow the Palestinians’ claimed “right of return” to Israel proper. The fact that the Palestinians will have to climb down in the ?nal stage of any deal only adds, like the Israeli demands, to a sense of bluster. In an ideal world, Mr Netanyahu, a clever populist, would emulate the late Ariel Sharon by abandoning his party’s right wing and the rejectionists within his coalition in order to forge a new ruling coalition genuinely committed to the two-state option; the Knesset arithmetic would let him do so. And Mr Abbas would step down in favour of a more dynamic leader, such as Marwan Barghouti, imprisoned in an Israeli jail for murder: he helped organise a bloody uprising. That, though, might give him the clout to drag the Palestinians into making painful but game-changing concessions. Instead, both sides are embarking on a blame game. Neither will win. The Palestinians are still stateless—and their prospective state is getting smaller. The Israelis face not just the growing opprobrium of the outside world, boycotts and all, but also the prospect of missing another opportunity to ensure the survival of a country that is both democratic and Jewish. 7

China’s future

Enter the Chinese NGO
The Communist Party is giving more freedom to a revolutionary idea HE rulers of China have always seen its history as biRegistered, ’000 nary. Long divided, the empire 500 will unite, goes a famous saying; 400 300 long united, it will divide. Today, 200 under the Communist Party, 100 0 fear of division is strong. Deter1990 95 2000 05 10 13 mined to avoid the fate ofthe Soviet Union, party leaders strive to hold China together. But the country is no longer a socialist paradise where the party dictates and the masses toil. A bourgeois class ofperhaps 300m people has emerged—and they have their own views on the sort of place China should become. At the same time, the
China’s NGOs

T

party has retreated from most people’s daily lives, no longer even pretending to provide cradle-to-grave bene?ts. Many weaker, poorer members of society are su?ering. Enter the Chinese NGO. A vast array of new non-governmental organisations are trying to meet both middle-class aspirations to participate and also society’s need for services (see page 61). Some 500,000 NGOs have registered over the past 25 years, a ?gure that some think will double over the next couple of years, as rules are relaxed. Many of these, admittedly, are quasi-state bodies, like an o?cial youth foundation, or businesses in disguise, like private schools, but a growing number are the real deal. And a further 1.5m-odd NGOs operate without being registered, including some that the party suspects of1

14 Leaders
2 being too independent or confrontational. They include every-

The Economist April 12th 2014

thing from self-help groups for the parents of autistic children to out?ts defending the rights of migrant workers to housechurch groups looking after the elderly. Many of these are illegal, but they have been tolerated and even encouraged at the local level. Strikingly, the national government now wants to recognise formally many more of them: national regulations are expected within months. But, as ever, it causes problems for the party. On the one hand, cadres have always railed against “peaceful evolution”—a phrase that strikes most mortals as a desirable aim but in party-speak means Trojan horses stu?ed full of Western liberal ideas ?rst subverting and then overthrowing the regime. On the other hand, more pragmatic sorts say the NGOs can help the party by mitigating social anger and o?ering health care, education and other services which the party ?nds it hard to provide. A call to alms The party’s plan seems to be to wriggle free from its dilemma by allowing NGOs to operate, but on a tight leash, keeping them small and local. So far, that has broadly worked. Most NGOs, even the religious ones, are not full of anti-party revolutionaries, and the Chinese government is quite adept at co-option: witness its success with the country’s entrepreneurs. And although some of the more independent out?ts (not to mention Western supporters) will hold their noses, China clearly bene?ts from the collaboration. Yet from the perspective of the most needy Chinese—the poor, the elderly, the excluded—the government needs to go further. The NGOs are institutions that people often trust more
The World Bank

than the party. To work properly, NGOs need their rights to be detailed, upheld and certainly enforced by law. Ad hoc measures—relying on the goodwill of people working in NGOs— will only last so long. There are still too many areas where the government is being too tentative and restrictive. First, it could expand the types of NGO allowed to register. At present this is limited largely to groups providing social services. Few advocacy groups are allowed. But in their work representing weaker parts of society most labour groups, unions and church organisations—hitherto illegal—often contribute to the stable, harmonious society that the party says it wants. Another issue is funding. The party does not allow independent fundraising, so it is still di?cult for NGOs, even if allowed to register, to raise money without o?cial help. They should be given full freedom to do so. Meanwhile, the party should also make its disbursal of funds to NGOs more transparent. Too much money is given to well-connected insiders and shell NGOs run by o?cials rather than to people in NGOs who actually know what they are doing. All these measures would help. But the most useful reforms for China’s nascent civil society are really the same things that all China needs: a stronger judiciary, more responsive people’s congresses, a more independent press. These will bring about more transparency and accountability. These words still scare conservatives in the regime. But the old system cannot cope. If the regime wants to keep China united, a lively civil society could be a bridge to the future, empowering individuals and institutions so that when the crunch comes, as it inevitably will, China’s binary history does not end up repeating itself all over again. 7

Right cause, wrong battle
Why the World Bank’s focus on gay rights is misguided IM KIM, the president of the World Bank, wants it to promote gay rights. He has declared the “?ght to eliminate all institutionalised discrimination” to be an “urgent task”. He recently put on hold a $90m loan to Uganda’s health sector after its government introduced one of Africa’s most draconian anti-gay laws. He has ordered an overhaul of the bank’s lending policies to make sure that no loan assists discrimination. At this week’s Spring Meetings in Washington, DC, he is convening discussions with gay activists on how best to do so. As an early proponent of gay marriage, this newspaper shares Mr Kim’s sentiments. Bigotry is abhorrent and laws that entrench it should be condemned. Uganda’s new law, which allows a maximum sentence of life imprisonment for anyone convicted of homosexuality and requires citizens to report anyone suspected of being gay, is particularly awful. Nonetheless, Mr Kim’s initiative is misguided. The World Bank is a technocratic development organisation, not a place for political advocacy. Setting up gay rights as a test of its lending decisions is likely to make the bank less e?ective at what Mr Kim himself has emphasised is its core job: tackling extreme poverty.

J

The bank’s technocratic approach is a big part of its DNA. Its founding documents prohibit “political activity”, however unpleasant a regime might be. Only “economic considerations” should be relevant to lending decisions. That does not, by itself, preclude it from opposing nasty laws. You can draw a link from ?ghting bigotry to alleviating poverty. Unfair treatment ofgroups ofpeople, whether on the basis ofgender, race or sexuality, leads to their social exclusion, which in turn is likely to harm economic growth and make it harder to alleviate poverty. By this logic the bank has, rightly, long been pushing for the education of girls. The ?ght against other forms of discrimination can be justi?ed on the same economic grounds. A rainbow of reasons But even if it can be justi?ed in principle, Mr Kim’s focus on gay rights is likely to be counterproductive in practice, for three reasons. First, it seems capricious. Uganda is hardly the only country with anti-gay laws on the books; nor is it the only one to have recently toughened its anti-gay stance. Almost 80 of the bank’s member countries, including most in Africa, have legislation that discriminates against gays. In many places the laws are ignored, but several places, notably Ethiopia and Nigeria, have recently introduced sti?er anti-gay statutes. Uganda’s be1 haviour is odious. But it is not alone.

16 Leaders
2

The Economist April 12th 2014

Second, the stress on gay rights itself seems arbitrary. Of the many forms of bigotry the bank could battle, it is not clear that anti-gay laws are the most harmful to the poor. The bank lends to plenty of places that discriminate against women under Islamic law. It also lends to countries with laws that discriminate against minorities. The economic impact of these forms of bigotry is far bigger. But if Mr Kim tries to tackle all institutionalised discrimination by withholding lending, he will soon have no customers left. Third, his approach is likely to back?re. In the short term, it weakens the campaign to lessen poverty. Uganda’s loan, designed to support maternal-care clinics, was the equivalent of 20% of its health budget. And it still has a high child-mortality rate. Politically, the pressure from Mr Kim, though winning plaudits in Washington, is having perverse results, where it matters most. Uganda’s government declares itself to be stand-

ing up against the arrogant imposition of “Western values”. The more the World Bank adds such conditions to its lending, the more African countries will be inclined to seek money elsewhere, not least from the no-questions-asked Chinese. The uncomfortable truth is that an economic institution like the bankhas to pickits battles. There is a limit to how many conditions outsiders can attach to their aid. Its aim is to encourage economic development. Most of the evidence is that the bank is most e?ective when client countries see it as an economic partner, rather than a boss imposing a Western agenda. Ironically, at one level, Mr Kim seems to realise that. He is sponsoring a big management reform designed to make the bank better at ?nding the most promising solutions from around the world to help countries develop faster. Launching a battle for gay rights may salve consciences, but will make it harder to achieve that goal. 7

Nigeria

Africa’s new Number One
Nigeria’s suddenly supersized economy is indeed a wonder; but so are its still-huge problems EY PRESTO: as if by magic, Nigeria has declared itself 2013 estimates, $bn the biggest economy in Africa. 0 100 200 300 400 500 Overnight, with the wave of a Nigeria statistical wand, it has added * 89% to its GDP, now worth $510 South Africa billion, and soared past the pre*After revision vious leader, South Africa, worth $370 billion. Nothing has changed in Nigeria’s real economy, except the way it is measured. Yet the magic matters. The GDP revision is not mere trickery. It provides a truer picture of Nigeria’s size by giving due weight to the bits of the economy, such as telecoms, banking and the Nollywood ?lm industry, that have been growing fast in recent years (see page 79). Other countries perform similar statistical magic—Ghana, for example, added 60% to its economy in 2010—though few wait two decades, as Nigeria inexcusably did, to update the national accounts. In Nigeria’s case, the new numbers con?rm that it really is the colossus of the continent. Its economy has been growing at an average rate of around 7% a year over the past decade. It is rich in resources, especially oil. It has energetic entrepreneurs and aspirations to be the tech hub of Africa, boasting startups such as Konga and Jumia, budding Nigerian Alibabas. In other industries it has giants such as Dangote Cement (see page 67), which plans to list in London—as a big oil ?rm, Seplat, did this week—and is likely to become part of the portfolio of many pension funds. Growing numbers of foreigners wanting to invest in Africa’s rise will buy Nigerian stocks; after Johannesburg, Lagos has the biggest, most liquid market in the region. Above all, Nigeria has lots of people: more than 170m of them. One in ?ve people in sub-Saharan Africa is Nigerian. Come 2050, the UN expects there to be around 440m Nigerians, by then far outnumbering the 400m or so Americans. But the new GDP ?gures also provide a useful reminder of what must change. The clearest lesson is for sluggish, complacent South Africa, which has long taken its status as the continent’s giant for granted. With Nelson Mandela dead, it looks
GDP

H

ever less like a rainbow nation. The ruling African National Congress is tainted by corruption: President Jacob Zuma is trying to explain how the state spent $24m on his private home (see page 48). Without economic and political reform, it will slip further behind. But Nigeria, too, has plenty to do. Size isn’t everything The country may be a giant, but it is still poor: Nigeria ranks 153rd out of187 countries in the UN’s Human Development Index. Despite the rapid growth of recent years, unemployment remains high and the number of people in poverty has actually increased. Even with the revised ?gures, GDP per head is only $2,700; South Africans are more than twice as rich. Whereas large parts of South Africa have a rich country’s infrastructure, Nigeria su?ers from clogged tra?c and chronic power cuts. Lack of development is helping to breed an insurgency in the mainly Muslim north and stokes violence elsewhere that creates no-go areas for foreigners. And the numbers also show its growth rate is slipping—to perhaps 6.5% this year. To absorb the millions of young people pouring into the labour market, Nigeria requires the sustained double-digit growth that China has shown to be possible. To achieve that needs reforms of the sort that President Goodluck Jonathan has, with the big exception of electricity privatisation, largely failed to bring about. He should attack corruption: instead, he sacked the central-bank governor who raised the alarm over billions of dollars in oil revenues missing from the state co?ers. Tax-collection is woefully inadequate; the bigger GDP number shows tax revenues to be even smaller as a share of the economy than previously thought. And the barriers to doing business are formidable, from bureaucracy and graft to port delays and murky land rights. Foreign companies that tough it out in Nigeria—the likes of Shoprite stores, Nestlé for food and SABMiller in booze—have shown they can prosper. Even so, it is not a place for the faint-hearted. So let Nigeria celebrate its new-found status for a moment. And then let it get on with the task of living up to being Africa’s Number One. 7

The cloud that helps win the race.
The winning edge can boil down to nanoseconds, and data can be just as important as the driver. Powered by Microsoft Dynamics, Azure and Of?ce 365, Lotus F1 Team analyse and share information from over two hundred sensors. They can measure everything from engine fatigue to torque and vibration. By working in sync with the right data, teams from the factory, the garage and the track can make the calls that might be the difference between winning and losing.

This cloud gives teams an edge. This is the Microsoft Cloud.

learn more at microsoftcloud.com

The cloud that hosts 1.5 million guests.
It’s La Mercè, one of Europe’s largest festivals. Behind the revelry and the crowds, the City of Barcelona uses the power of Microsoft Dynamics CRM, Azure and SQL Server. Every single detail can be mapped out, from which puppets are performing to managing the crowds without overloading the city’s infrastructure.

This cloud turns chaos into clockwork. This is the Microsoft Cloud.

Social

Platform

Insights

Productivity

20

Letters
A president replies SIR – Bello’s column of March 29th presented a false dilemma of legalism versus democracy in Colombia. The country has a long history of strong institutions and solid democracy. Twelve years ago our institutions were at a weak point because of the submissive power of cocaine-fuelled terrorists. We overcame this near-failure by strengthening our institutions and our people’s trust in them. I would like to address speci?c points in the article. First, the proposal to reform our constitution to allow presidents to have a third term was a popular initiative and did not come from our government. I immediately bowed to the Constitutional Court’s ruling when it rejected this proposal. Second, the inspector-general of Colombia has a clear track record sanctioning elected o?cials and civil servants irrespective of their ideology. And third, I repealed the decision by the International Court of Justice that granted Colombian waters to Nicaragua motivated by the profound conviction of its illegality. Moreover, I strongly disagree with the call from Gustavo Petro and FARC for a constituent assembly. Our constitution should not be subjected to reform by terrorists, such as FARC; this would set a devastating precedent that weakens our legality. ?LVARO URIBE V?LEZ President of Colombia, 2002-10 Medellín, Colombia Congress and the IMF SIR – You depicted the refusal of the American Congress to endorse reforms to the way the IMF receives its income as “shameful” and “driven largely by ignorance” (“Dereliction of duty”, March 29th). You also asserted that we in Congress “misunderstand both the organisation and its reforms”. This could not be further from the truth. I and others have argued that the proposed reforms do not go far enough in reducing the outsized in?uence of Europe in the IMF, and therefore are not su?cient to justify a doubling of its permanent capital base. Even with the changes, Europe would continue to enjoy more than six times the representation of the United States, wielding that in?uence to force the IMF to shoulder more of the ?nancial burden in European bail-outs, and in the process sparing losses for European banks. The IMF gets support from American taxpayers and must operate in a more transparent manner. It plays a critical role in stabilising countries in crisis. But it should adhere to rules regarding “exceptional access” that limit the amount of lending it can do, as these rules work to guard against moral hazard. Central banks, aware of this same risk inherent in their own lending of last resort, are guided by “Bagehot’s Dictum”, penned by an early editor of The Economist. JOHN CAMPBELL Chairman of the subcommittee on monetary policy and trade House of Representatives Washington, DC The mechanics of society SIR – Your special report on robots (March 29th) virtually ignored what may, in the long run, be the most crucial factor in robotics: its cultural consequences. Robots will be the basis of a new slave-based economy. Even more profound than the impact on jobs will be the impacts on our relationship with technology, on how we identify ourselves, on how we measure the value of a human being and on what we mean by contributing to society. Will we see a new Athens, with a glorious burst of intellectual innovation and unleashed imagination as people are freed from toil? Or will we see another antebellum South, with a vain and shallow society, debased and brutalised? ARNOLD BROWN New York SIR – It was puzzling that there was no focus on the prospect of robots being used by criminals in your report. The potential of drones, for example, for burglary, smuggling, murder, spying and many forms of coercion is surely obvious to the criminal world. NEVILLE HOLMES Ballarat, Australia Controlling the media SIR – The soft censorship you described that pressures the media through government advertising and other means in Serbia is not unique to that country (“A zealot in power”, March 22nd). Soft censorship is a rising danger to press freedom and democratic processes around the world. It is an often little visible o?cial e?ort to in?uence the media through means other than direct censorship or force. These include the arbitrary placement of government advertising, as well as biased subsidies, licensing arrangements, and for broadcasters, frequency allocation, all of which can sustain or destroy the ?nancial viability of media ?rms. Although more subtle than closing a press o?ce or issuing o?cial propaganda, the e?ects of soft censorship can be just as insidious. VINCENT PEYR?GNE Chief executive o?cer World Association of Newspapers and News Publishers Paris MARK NELSON Senior director Centre for International Media Assistance Washington, DC Jobs in Europe SIR – With 26m unemployed and real wages lower than ?ve years ago in most member states, it is hardly surprising that voters in the European Union are disenchanted (“On the march”, March 29th). But you o?ered no clue about how mainstream political parties across Europe can reconnect with their electorates. The answer is for the EU to move beyond its obsessive pursuit of austerity and invest in order to spur growth and create quality jobs. An investment of 250 billion ($340 billion) over ten years—

The Economist April 12th 2014
far less than what was spent saving the banks, and much less than is lost through tax avoidance and evasion—could generate 11m jobs. BERNADETTE S?GOL General secretary European Trade Union Confederation Brussels Art pop SIR – Songwriters and music publishers have been hit hard by music piracy and online streaming services, yet you did not mention them at all in your article (“Beliebing in streaming”, March 22nd). The rates paid by Pandora, Spotify and YouTube are laughable. ROB CROSBY Nashville SIR – Lady Gaga knows that there are certain things that music streaming simply cannot o?er. Apart from wearing dresses made of raw beef, she recently let a performanceartist vomit on her while she sang at a gig. She called this “art in its purest form”. CHRISTOPHER SMITHKA Madison, Wisconsin Silly parades SIR – Bagehot sighed at Northern Ireland’s “ancient quarrels, such as one concerning unionists’ right to march by Catholic areas” and vice versa (March 29th). There is an easy ?x for these atavistic sectarian provocations. Tell both sides they are free to march under their ?ag of choice, wearing their ?ourgraders’ suits and bowler hats, orange sashes, Fenian insignia, shamrock nosegays, whatever, and to sing their in?ammatory songs. There should be only one condition: that for the duration of their march they must all wear green or orange frogman ?ippers. CHARLES DAWSON Jevington, East Sussex 7
Letters are welcome and should be addressed to the Editor at The Economist, 25 St James’s Street, London sw1A 1hg E-mail: letters@economist.com More letters are available at: Economist.com/letters

Executive Focus

21

The Economist April 12th 2014

22

Executive Focus

International Consultants
Crimson Capital Corp. (Crimson) is a leading international development ?rm active in Europe and Eurasia, Latin America, Africa, the Middle East and Asia. We are seeking seasoned professionals with proven success and expertise working in developing countries and emerging markets in the following ?elds: Energy ? Thermal (gas, coal, etc). ? Renewable Energy (hydro, solar, wind, biomass, geothermal, etc). ? Electricity & Gas Distribution ? Energy Ef?ciency/Conservation ? Energy Audits/ Assessment ? Energy Service Companies (ESCO) ? Energy Regulatory and Legal Reform Private Sector Development ? Foreign Direct Investment ? Public Private Partnerships (PPP) ? Trade/Export Promotion, Marketing ? Market Linkages ? Trade Associations & Consulting Firms ? Competitiveness/ Sectors ? Information Technology (IT) ? Workforce Development ? Entrepreneurship/ Innovation Finance ? SME and Micro Finance ? Value Chain Finance/Trade Finance ? Purchase Order Finance/ Factoring/Leasing ? Islamic Finance ? Project Finance ? Credit/Risk Assessment /Mitigation ? Central Banking/Financial Sector Regulation ? Credit/Pledge Registries ? Insurance and Pension Systems ? Equity Finance/Capital Markets Agriculture ? Farming ? Food Processing ? Feed the Future/Food Security ?Agribusiness Market Linkages ? Rural Development ? Alternative Development Governance ? Public Financial Management ? Budgeting ? Local Governance ? Own-Source Revenue ? Project Cost/Bene?t Analysis ? Local Economic Development ? Spatial Planning Infrastructure ? Transport (roads, railway, ports, airports) ? Water and Wastewater ? Recycling ? Construction Legal, Regulatory and Policy Reform ? Business Enabling Environment ? Doing Business Reform ? Corporate Governance ? Arbitration ? Mediation ? Anti-Corruption
Please reply in con?dence by sending us a complete resume or CV detailing your international experience in the above disciplines and regions and include degrees/certi?cations (including institutions and dates), professional references, language pro?ciency and contact details to: recruiting@crimsoncapital.org.

GLOBAL DEVELOPMENT INNOVATION VENTURES
Global Development Innovation Ventures (GDIV) is a cutting edge new initiative that will accelerate the development, rigorous testing, and scaling of innovations that improve lives for millions of people in developing countries. GDIV is currently being established through a new independent nonpro?t organization, with a global mandate to scale development innovations through the public and private sectors. Its design is being led by its founding ?nancial partners, the UK’s Department for International Development and the United States Agency for International Development.

MEMBERSHIP OF THE BOARD
GDIV seeks senior leaders, committed to GDIV’s mission, from the public and private sectors, civil society, and academia to be members of its ?rst board of directors. Board members will serve without compensation, but expenses will be covered. Responsibilities include: ? ? ? ? ? Oversee high-level policy making and provide strategic guidance to management Select the initial senior management team and approve senior hires In conjunction with management, develop and approve a set of investment policies Review and approve budgets annually and assume ?duciary responsibility for GDIV Participate in four regularly scheduled meetings per year To apply, please send a CV and cover letter to board@gdiv.org. Closing date: 2 May, 2014

The Economist April 12th 2014

Executive Focus

23

Rome - Italy LUISS Senior Scholars Programme
As part of a major international expansion initiative, LUISS Guido Carli University (www.luiss.edu) invites outstanding academics to apply for the LUISS Senior Scholars Programme. The LUISS Senior Scholars Programme aims to enable the newly constituted School of Business and Management and School of Law to become international actors in their ?elds. It offers the opportunity to launch new research streams while teaching a course on a preferred subject. The ideal candidate will have a demonstrated track record of publications in prominent academic journals as well as relevant teaching experience. Successful candidates will be appointed as Full Professors from a minimum of three years to permanent until the candidates’ retirement. Contract extensions are also negotiable. Recruiting will be on a rolling basis: from Fall 2014 to Fall 2015. Located in a green area in the heart of Rome, LUISS is specialized in Social Sciences i.e. economics, management, law, and political science. It offers dual degrees with international universities and educates over 7,000 students from a variety of countries. LUISS School of Business and Management has recently started a recruiting campaign to develop its reputation for excellence in research and high quality teaching. Within the Senior Scholars Programme, scholars are expected to conduct research in the ?elds of Management and Organization, Marketing, Accounting and Corporate Finance, and Innovation. LUISS School of Law’s teaching and research domains include all ?elds of public and private law in national, and international jurisdiction. Scholars are expected to conduct research in the ?elds of European Union Law, Public and Private Comparative Law, Corporate Law, Constitutional and Administrative Law. Interested applicants should send the following information to seniorscholarsprogramme@luiss.it by July 15th, 2014 ? ? ? ? Curriculum Vitae A synthesis of the research program the candidate intends to pursue One-page research and teaching statement A copy of the applicant’s three best publications

The Economist April 12th 2014

Digital highlights
Visit economist.com for news, blogs, audio, video, interactive graphics and debates Links to all the stories below can be found at: economist.com/dh62

The slumps that shaped modern ?nance An interactive version of this week’s essay features a timeline, video, extra charts and animated graphics. Five historical crises show how aspects of today’s ?nancial system originated—and o?er lessons for today’s regulators

Separated from power Concern that the largely French-speaking province of Quebec might soon separate from Canada vanished when the separatist Parti Québécois government, led by Pauline Marois, was soundly defeated in a provincial election by the federalist Parti Libéral

House-to-house investigations Real property prices in London are at an all-time high and they are gathering pace in other parts of Britain too. Explore the ups and downs of 13 regional housing markets with our interactive tool, which presents price data from 1968

From our blogs
Language: Time to grow up

Most read on Economist.com

Featured comment “India needs somebody who will bring change. The agent of that change is unlikely to arrive in an unblemished package. The Economist has opted for the status quo in a country where the status quo leads only to more misery. The choice isn’t between two men, it is between two parties.”—On “Can anyone stop Narendra Modi?”, April 5th 2014
Follow us@TheEconomist

The New York Times should ditch its outdated and silly ban on profanity in the news pages, according to Johnson, our columnist on language
Religion: A truth worth witnessing

1 Planetary science
At sea in space
election 2 India’s Can anyone stop Narendra Modi? education in America 3 Higher Is college worth it? Economist explains 4 The Why homeopathy is nonsense and barbecues 5 Beer A marriage made in heaven

Father van der Lugt, a Jesuit priest?who was shot dead in Homs, Syria, highlights how many varieties of martyrdom there are
Eastern Europe: Eye of the storm

Finnbay, a Finnish news website whose ownership and sources of funding are unclear, faces allegations of being a channel for Russian propaganda

Links to all these stories can be found at: economist.com/dh62 or by scanning this code To subscribe go to econ.st/Sb6Prb

Britain

The Economist April 12th 2014 25 Also in this section 26 Maria Miller bows out 26 Libel and Russia 27 The bedroom tax 27 The buzz of urban beekeeping 28 Carwyn Jones’s big plan 28 Department stores 29 Professional services 30 Bagehot: The perils of pessimism

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

The housing market

Cool it

Property prices are rising swiftly. The Bank of England may intervene

B

RITAIN’S housing market is like food in a microwave, says Spencer Dale, the chief economist at the Bank of England. It can “turn from lukewarm to scalding hot in a matter of a few economic seconds”. Since the crisis the bank has gained new tools to control the market’s temperature. Now that the heat is rising, it may soon start testing them out. Until last year house prices were rising predominantly in prosperous central London boroughs. That was largely because of an in?ux of cash-rich buyers, says Neal Hudson of Savills, an estate agency. People saw posh property in the capital as a shelter from economic turmoil abroad. Elsewhere in Britain, the housing market was torpid. Potential buyers struggled to ?nd mortgages. Falling real wages, economic uncertainty and the memory of plummeting house prices during the crisis curbed Britons’ obsession with property. That changed in 2013. Prices rose by 6.8% in the year to January, according to the O?ce for National Statistics (see ?rst chart). They are still increasing fastest in London—up 13.2% compared with last year—but the in?ation has spread to outer boroughs. In Brent, an unfashionable part of north-west London, prices have risen 31% in a year, according to a report from Nationwide, a building society. It recorded chunky increases in every part of Britain. These higher prices are a problem for

?rst-time buyers, but they are not yet unsustainable. Nationally, house prices remain 16% below their pre-crisis peak, adjusted for in?ation. Prices are high relative to wages, but that is not surprising. Successive governments have failed to free enough land for new housing developments, while doggedly preserving green belts. Borrowing costs have fallen over recent decades, in part because of a global glut of savings, making it easier for Britons to sustain large mortgages. Neither factor is likely to reverse any time soon. Even so, the housing market is notoriously prone to bubbles. In January Mark Carney, the bank’s governor, warned MPs

of the dangers of “extrapolative expectations”—people rushing to buy on the assumption that prices will continue to surge. Hints of that are visible. People increasingly think house prices will keep climbing (see second chart). Even though the government’s “Help to Buy” schemes, which subsidise higher-risk mortgages, are probably having only a moderate direct impact, publicity surrounding them has fed a broader conviction that prices can only go up. Moreover, as borrowers chase higher prices their ?nances are becoming stretched. At the end of 2013, the average new loan for ?rst-time buyers was 3.4 times the borrower’s income—the highest level on record. Barclays, a bank, currently o?ers mortgages as large as 5.5 times the borrower’s income. While interest rates are low, payments on such large loans are manageable. But when rates eventually rise, these borrowers could struggle. A wave of mortgage defaults, accompanied by falling house prices as banks try to sell repossessed houses, could cause yet an- 1

Bricking it
House-price indices, Q3 2007=100 London Britain Britain ex-London 130 120 London 110 100 2 90 80 2006 07 08 09 10 11 12 13
Sources: ONS; Royal Institution of Chartered Surveyors

House-price inflation forecasts
Next 12 months, % increase

8 6 4

England and Wales 0
D J F M A M J J A S O N D J F M

2012

13

14

Interactive: Compare Britain’s regional housing data over time at: Economist.com/ukhouseprices

26 Britain
2 other British banking crisis.

The Economist April 12th 2014
tests, and will probably have it by the summer. That would allow it to curb the size of new loans, without increasing costs for existing borrowers. An alternative is more vigorous stress tests of mortgage lenders themselves, using stringent scenarios that assume interest rates rise sharply while house prices fall. Forcing lenders to hold bu?ers large enough to withstand such a shock should deter them from o?ering the riskiest kinds of mortgage. Kevin Daly, an economist at Goldman Sachs, an investment bank, thinks the FPC will enforce tougher a?ordability tests this year, possibly as soon as June. That would take some heat out of the market. It could also be unpopular. Poorer people would have to save for longer to buy a house. Wealthy home-owners would lose the comfort of swiftly rising prices. And George Osborne, the chancellor of the exchequer, would probably regret the cooling of a pre-election housing boomlet. But the FPC is independent for a reason. It should not fear to act. 7

The Bank of England’s new Financial Policy Committee (FPC) says it is watching for “emerging vulnerabilities” in the market. Formed less than a year ago to confront threats to ?nancial stability, including bubbles, its range of “macroprudential” tools aim to in?uence the behaviour of the ?nancial system. Whereas politicians hope rising house prices will cheer voters ahead of next year’s general election, the committee can a?ord to take a longer view. With interest rates expected to remain low for a few more years, it is mulling what to do. Dabbing the brakes One approach is stricter vetting of borrowers. From April 26th banks will have to check that applicants have enough spare cash to cope if the Bank of England raises interest rates as markets expect (to around 3% in 2019). That is still a remarkably low standard. Future interest rates are uncertain; in past decades they have frequently exceeded 5%. The FPC has requested the power to impose tougher interest-rate

Libel

A book too far
Worries about libel jinx a study of Russian corruption

K

Maria Miller

Culture, media and sport
A minister’s downfall spurs unhealthy debate

A

MINISTER is caught up in a scandal, attempts to tough it out and ?nally steps down citing the “distraction” caused to government business. On April 9th Maria Miller, the culture secretary, completed her passage down this welltrodden path. The furore concerned the revelation that she had claimed more expenses for a home in London than she was entitled to. Beyond the predictable trajectory of Ms Miller’s downfall, however, the saga and its aftermath were notable for the allegations of tokenism that came with them. When David Cameron, the prime minister, threw his support behind Ms Miller, cynics saw an attempt to reverse his poor polling among women voters. Others muttered that Ms Miller—who had championed the government’s gay marriage legislation—was a victim of her party’s culture wars, and that colleagues who opposed the measure were failing to speak out on her behalf. When she resigned, Mr Cameron announced that he would split her former role between Sajid Javid, a Muslim MP with Pakistani roots, and Nicky Morgan, a fast-rising woman MP. That brought muddle-headed accusations of female underrepresentation from the Labour Party and plaudits from Conservatives worried about their polling among ethnic minority and women voters.

All this was so much nonsense. Mr Cameron mostly backed Ms Miller out of loyalty and habit (as he has with embattled ministers in the past). Her lack of trenchant supporters had more to do with her failure to cultivate allies than her stance on gay marriage. The promotions of Mr Javid and Ms Morgan were commendable because of their strong records, not because of their race or sex. Undoubtedly, British politics is too white, too male and generally unrepresentative. And things can be done to correct that. But Ms Miller’s defenestration has little to do with it.

AREN DAWISHA, an American professor, has just completed a lengthy book on the origins of high-level corruption in Russia, focusing on the links between the ex-KGB, business and gangsterdom in St Petersburg in the early1990s. Western intelligence agencies have chewed on this topic for years. But Mrs Dawisha’s research is based on rare (hushed-up, some say) published material. She was expecting the bookto come out this year with Cambridge University Press (CUP), which has published her seven previous works. But it has got cold feet. An email, seen by The Economist, tells her that though the book’s scholarly quality is not in question, the potential legal costs and di?culties involved in being required to prove that its premise is true, or even in getting a detailed opinion of the risks, are too great. “Those implicated in the premise of the book—that Putin has a close circle of criminal oligarchs at his disposal and has spent his career cultivating this circle— would be motivated to sue and could afford to do so,” writes her editor. Mrs Dawisha terms this “pre-emptive bookburning”. She is crossest about the legal system, exploited, she says, by rich Russians who are “out to make a further mockery” of Britain’s institutions. Her material, she says, backs up the sanctions newly imposed by Western countries on Vladimir Putin’s inner circle. CUP says its e-mail to Mrs Dawisha was con?dential and notes it had no contract with her (though critics would say that in academic publishing such formal deals are as rare as advances). Worries about abuse have led to reform of English libel law. Defendants can invoke the public interest, and “honest opinion”. But these defences are “new and untested”, CUP told Mrs Dawisha. To be fair, British news outlets might also consider her subject too hot to handle. Reforms have not changed the central problem: libel litigation is extremely costly. That helps rich plainti?s, but deters others—even a big publisher in business since 1584. CUP is bound to further the “acquisition, advancement, conservation, and dissemination of knowledge in all subjects”. Just not controversial ones. 7
Internship: The Britain section is looking for an intern to work for several months this summer. Applicants should send a cv and an article of 600-700 words suitable for publication in the section. A stipend will be paid. Applications must reach us by May 3rd at britainintern@economist.com

Sod this, I’m o? to the theatre

The Economist April 12th 2014 Welfare reform Urban beekeeping

Britain 27

Bedrooms and brickbats
The bedroom tax will probably survive

Honey monsters
City dwellers cultivate a taste of the country

W

O

N A sunny spring morning, a small group of protesters wait at the Department of Work and Pensions with a giant card for Iain Duncan Smith. It is his birthday. But the card also marks a year since the introduction of the “bedroom tax”, as opposition politicians call the welfare secretary’s scheme to encourage people in subsidised social housing to move to smaller properties. “One year on and still causing misery”, it reads. Since 2010, the coalition has introduced plenty of changes to the welfare system. But few are as unpopular as the bedroom tax (o?cially, the “removal of the spareroom subsidy”). According to Ed Miliband, the Labour leader, it symbolises an “out-oftouch, uncaring Tory government that stands up for the privileged few”. In February the nationalists in Scotland triumphantly scrapped it. The Liberal Democrats are split by it. Yet despite the tide of anger, it will probably survive. Before April 2013 tenants with spare rooms got enough housing bene?t to cover their full rent. Since then, they have had to pay for them themselves. On average, that means ?nding another ?14 per week, typically out of other welfare bene?ts—which are hardly generous to begin with. The government says this is fair because people “underoccupying” their homes are preventing larger families from using the space more fully. The charge encourages tenants with spare bedrooms to downsize—or to rent them out. It is also meant to cut around ?360m per year from the bene?ts bill. Whether it can do so depends largely on people being able to move. So far just 6% of those a?ected have done, according to a BBC survey. A high proportion live in post-industrial northern towns, where councils own plenty of 1950s and 1960s family homes but comparatively few smaller ?ats. In Liverpool, for example, 24% of social tenants are a?ected by the policy. In Westminster, by contrast, where there is enormous demand for housing, the ?gure is just 5%. Yet the numbers of people a?ected is falling. When the policy came into e?ect last April, 560,000 households were hit. By November, that had fallen to around 500,000. Research by the Joseph Rowntree Foundation (JRF), a charity, explains the shortfall. Some people had found work; some had reached retirement age, whereupon the scheme no longer applies. And

HEN Camilla Goddard ?rst started to keep bees in London, it was di?cult to ?nd places away from anxious neighbours or teenage vandals. Nine years later she has hives all over the city: in parks, churchyards, primary schools and on the roofs of hotels. She collects swarms from people’s attics and sells honey at her local shop. A hobby has become a thriving business. Apiculture is fashionable. Since 2008 membership of the British Beekeepers Association (BBKA) has almost doubled, to 24,000 people. Around 1,500 are in London. Courses in the capital are always buzzing, says Angela Woods, an enthusiast. Despite the stereotype of beekeepers as luxuriantly bearded eccentrics, many newbies are young—women are particularly keen. The boom was partly a by-product of worries about bees and awareness of the huge bene?ts they bring. Colonies in many countries have been su?ering mysterious sudden collapses since 2006. Urban eco-warriors found beekeeping an appealing practical outlet for their angst.

Businesses, keen for green plaudits, also leapt on the trend. Fortnum & Mason, London’s poshest department store, has hives on its roof (this newspaper, a neighbour, does not—yet). Hives ?t snugly in London gardens and bees seem to like city life. In the concrete jungle pesticides are rare. Nectar surprisingly abounds, and not just in gardens: parks have waterlilies and other exotic plants. Brambles and wild ?owers line railway tracks. Chestnut trees give honey from Greenwich a heavy, nutty taste; bees that feed on rose bushes in Regent’s Park produce an almost inedibly aromatic gloop. London is not yet ?owing with honey. Membership growth has slowed at the BBKA. The cost of hives has risen. Green types are planting bee-friendly gardens instead of hosting apiaries of their own. And the harsh winter of 2012, which killed around a third of all the colonies in Britain, has put some beginners o?. Busy Londoners want to connect with nature, says Ms Woods. But without the sting of disappointment.

A new kind of pinstripe
more may now be moving. Mutual exchanges—where tenants swap council homes with each other—appear to have taken o?. Meanwhile, some housing associations and councils are buying smaller homes and selling large ones. Scrapping the tax outright could undo some of these improvements. Steve Wilcox, the author of the JRF’s report, suggests tweaks that would make it work better. Exempting tenants with severe disabilities, who may need a room for a carer or equipment, would help. They currently have to apply for emergency funds from local authorities: a messy, bureaucratic process. So too would boosting that pot of money. Such pragmatism will not appeal to the Labour Party. For Mr Miliband, the bedroom tax is a helpful springboard for a wider war on welfare reform. Yet if elected in 2015, he too will want to cut the de?cit. Tweaks might then be welcome. 7

28 Britain Carwyn Jones

The Economist April 12th 2014
ual businesses, so can do more to help them, even “jumping on a plane” if they sni? an investment opportunity. Amazon’s decision to build a new distribution centre in Wales is one example. The government clinched the deal by o?ering the retail giant a 30-acre site near Swansea— with planning permission and infrastructure links—in just 100 days. Mr Jones is con?dent that his new approach is working. Wales’s unemployment rate is now lower than those of Northern Ireland, England or Scotland, he notes. His sta?ers add that Wales’s exports were up by 11% in 2013. Those of the rest of Britain rose by just 0.4%. But even if he is right, one big thing threatens his plans: underperformance in Welsh schools, which do poorly on measures of literacy and numeracy. In last year’s PISA ranking of maths scores in 65 countries, England came 26th and Wales 43rd—a wider gap than in previous years. Mr Jones accepts that such results damage the principality’s economic reputation, and touts new money for underperforming schools. But he has little interest in structural changes that have done much to improve standards across the border in England: for example, he has no plans to introduce academies (free from local authority control), free schools (state-funded independent schools) or comprehensive league tables. That is a shame. Mr Jones is right to highlight, and to burnish, Wales’s strengths (including the phone signal on Snowdon, which is really not that bad). But its weaknesses require even more attention. Without sterling schools he will struggle to turn the land of the red dragon into a tiger. 7

A mountain to climb
CARDIFF

If Wales wants a tiger economy, it ?rst needs better schools

C

ARWYN JONES has a bone to pick with an old Welsh tourism advertisement. It featured a hiker on the peak of Snowdon, the highest mountain in Wales, and boasted that he would receive no pesky work calls (his phone being out of range). “It made us look like the middle of nowhere,” complains the ?rst minister, “—completely the wrong image.” Mr Jones’s spell as leader of the devolved Welsh government, which began in 2009, has been one long attempt to shake o? such impressions. By some measures, the principality is indeed an economic backwater. One in four jobs is in the public sector; the secondhighest proportion in Britain after Northern Ireland. Wages are 8.4% lower than in England. The Welsh valleys receive the highest level of EU regional funding, along with rural parts of Romania. In the early 1990s o?cials even pitched Wales as a lowwage economy, until they realised it could not compete with much cheaper labour in eastern Europe and Asia. The election of the ?rst devolved Welsh government in 1999 brought a new push for high-wage jobs. But it had little regard for Wales’s strengths and weaknesses. Mr Jones is con?dent that he has hit on the right approach: to lend ?rm support to industries in which the principality can claim to be internationally competitive and champion them abroad. He has led delegations to Turkey, China and India and, fresh from a visit to the United States, ?zzes with accounts of wooing ?rms, ringing the bell at the New York Stock Exchange and recruiting new members to the Welsh caucus in Congress. The ?rst minister hails from Bridgend, a town wedged between the coal-mining valleys and the steelyards and ports of the south coast. One of the last gasps of these heavy industries—the miners’ strike of 1984-5—prompted him to join the Labour Party. But unlike past generations of leftwing Welsh politicians he has shunned ?ery radicalism. Instead he resembles a stolidly un?ashy social democrat of a type common in continental Europe. His corporatist willingness to mix business and government is a re?ection of that style. Mr Jones has no compunction about selecting certain industries for special care. For example, he wants to build up Wales’s aeronautical-engineering sector (big ?rms like Airbus, EADS and GE already have sites there). In 2013 he launched an acad-

Uplifting Mr Jones
emy, run by EADs, to train school-leavers. Another bene?ciary of Mr Jones’s targeted support is Sapiens, an Israeli software ?rm which has received a grant from his government’s training subsidy scheme. On a recent visit he beamed as Geraint, a new hire, explained how he worked as a bingo caller before joining the ?rm as a trainee programmer. The ?rst minister reckons that many more such IT companies will come to the principality if they are given the right encouragement. Wales’s small size makes such government activism all the more e?ective, he argues—political leaders are close to individ-

Department stores

Chinese takeaway

Old British brands get a lift in Asia

C

LARKS shoes have more cachet with Chinese shoppers than with British ones. DAKS, an upmarket British clothing brand, has two stores in Britain but sells through 43 in Asia. Marks & Spencer is labouring to coax matronly Britons back into its shops, but plans to open 250 new ones overseas. Now House of Fraser, a 165-yearold department-store chain, is to seek more growth and glamour abroad than it can ?nd at home. Yuan Yafei, China’s joint 92nd-richest person, says he wants to “bring the House of Fraser to the whole [of] China”. Nanjing Xinjiekou, a department store controlled by his Sanpower Group, is to take an 89%

stake, valuing House of Fraser at ?450m ($754m). A complication is Mike Ashley, owner of the Sports Direct chain of sportswear shops (and of Newcastle United football club), who snapped up an 11% stake in House of Fraser after Sanpower made its o?er. His intentions are unclear. House of Fraser is not a glittering prize. It is burdened with debt and a de?cit in its pension plan. The holding company that owns it reported a pre-tax loss of ?8.2m in the year ending January 2013. Trading has perked up, thanks to online sales and popular own-label products. Last Christmas was its “best ever”. But the layout of some of House of Fraser’s 60 stores is “not ideal”, 1

The Economist April 12th 2014
2 says Tony Shiret, a retail analyst at Espirito

Britain 29
Kong’s Fung brothers made a similar bet by buying Gieves & Hawkes, a Savile Row tailor, in 2012. Department stores may be past their prime in Britain, but in China their sales will grow by more than 38% by 2019, predicts Verdict, a retail consultancy. Mr Ashley’s thinking is more di?cult to discern. Does he hope to make a quick pro?t, as he did in January after Sports Direct bought, and then quickly re-sold, a 4.6% stake in Debenhams? (He has swapped his holding for the right to buy 6.6% of the retailer if its share price falls to a certain level.) Perhaps he wants another outlet for ?ogging sportswear. House of Fraser has challenged Mr Ashley’s purchase, saying the seller should have o?ered the stake to other shareholders ?rst. In the 1980s House ofFraser was the subject ofa histrionic row between a British tycoon, Tiny Rowland, who coveted the company, and an Egyptian investor, Mohamed Al Fayed, who bought it. The retailer hopes to sell itself more quietly this time. 7

Santo Investment Bank. It will take a lot of investment to spruce them up. Department stores have su?ered since the 1970s, when customers started driving out of town to buy big-ticket items such as televisions. Harrods and Selfridges have ?rmly positioned themselves as purveyors of luxury goods. House of Fraser, along with Debenhams and Marks & Spencer, occupy less elevated ranks between them and “fast-fashion” retailers such as Primark. The “murky middle” is an uncomfortable place for most brands, says Allyson Stewart-Allen, a marketing consultant. Grocery giant Tesco is losing market share to discounters and upmarket emporia; its ?nance director quit on April 4th. China o?ers a fresh start (though plenty of British retailers, including Tesco, have found the going hard there). Mr Yuan hopes that House of Fraser’s British heritage and its royal warrant will entrance China’s burgeoning consumer class. Hong

Going grey
Gross value added*
% change between Q3 2009 and Q4 2013

10 – 0 + 10 Professional and business services Real estate All sectors Manufacturing Finance and insurance Public administration
Source: ONS

20

30

*Nominal terms

Professional and business services

To the rescue

Britain’s new champions are bean-counters and PowerPoint artists

I

N HIS budget speech in 2011, George Osborne, the chancellor of the exchequer, laid out a new vision for Britain’s economy. Finance would no longer race ahead of other sectors; a “march of the makers” would see manufacturing resurge. Three years later, the economy is rebalancing— but not as he thought it would. As expected, Britain’s ?nancial-services industry remains sickly. It employs 56,000 fewer people than before the crisis, according to a report published on March 31st by the Confederation of British Industry, an umbrella group, and PwC, an accountancy ?rm. Nor are ?nancial services rebounding as the economy recovers. Figures from the Financial Conduct Authority, a regulator, suggest that, excluding back-o?ce jobs, the number ofbankers has fallen by more than 10% since the crisis, reaching the lowest ?gure for a decade in 2013. Manufacturing is starting to return. Yet on April 8th the O?ce for National Statistics said that factory output is still 8.2% lower than in 2008. Industrial closures have continued since the end of the recession— Dunlop, a tyremaker, says it will close its factory in Birmingham next month after 125 years of production in the city. Though industries such as carmaking are reviving, that may be more thanks to falling wages than to increased productivity. Instead, professional and business ser-

vices are picking up the slack (see chart). Firms in this industry—which includes accountants and consultants as well as out?ts that run call centres and other stu? essential to businesses—now contribute 27% more to GDP than at the start of the recovery, and have increased sta? numbers by 13%. Management consultancies have

Dress-down Friday

done particularly well. Their revenues have grown by 24% since the crisis, according to Alan Leaman of the MCA, an industry body. That has encouraged accountancy and legal ?rms to get into the whiteboards-and-?ipcharts business too. Much of the new demand is from abroad, says David Sproul, the boss of Deloitte, an accountancy ?rm. Business-services exports have risen 21% since the recovery began. Britain’s trade surplus in services has doubled to 5% of GDP—the second-largest in the world, after America’s. Architects now earn over 50% more from exports than they did in 2009. Around half of the world’s legal exports are British. Many new clients are in Asia and the Middle East, where Britain’s professional services are valued even more highly than its ?nancial ones. This success is reshaping both the capital and the country. So many accountants and consultants now throng the streets around Shoe Lane, in central London, that some have taken to calling it “Deloitte town”. Large business-services clusters mean the economies of London and Manchester are probably performing better than those of Edinburgh and Leeds, which rely more on ?nance, says Richard Holt at Capital Economics, a consultancy. And more British manufacturers are selling services with their products, according to Tim Baines at Aston University. Boosters speak awkwardly of “manuservicing”, but they may have a point. RollsRoyce now earns more from tasks such as managing clients’ procurement strategies and maintaining the aerospace engines it sells than it does from making them. Cynics say box-tickers have bene?ted lavishly from the weighty stacks of regulation that have been pumped out since the crisis. But whereas earnings from ?nance and manufacturing are volatile, a bigger business-services industry should steady the economy. Since 1985 the sector’s share of output has grown almost every year, according to the Work Foundation, a thinktank. It even created jobs during the recession. Bean-counting and data-mining are not glamorous occupations. But they do pay the bills. 7

30 Britain

The Economist April 12th 2014

Bagehot The perils of pessimism
Campaigners to keep Scotland British need a more positive case for the union Together can now raise its game, as it must, in particular by providing the more positive message demanded in East Kilbride. Ever since it was formed, under the preternaturally unexcitable leadership of Alistair Darling, a former Labour chancellor of the exchequer, Better Together has been criticised for being too negative. Its leaders suggest this is because ofa misunderstanding of their task. While noting the historical, cultural and other advantages of the union, the unionists’ urgent need is to expose the nationalist vision for Scotland as a bonny pipe-dream. In e?ect a promise of Scandinavian-style public services and American levels of taxation, it relies on numerous absurd assumptions—including earning twice as much from North Sea oil as seems likely and retaining whichever aspects of British nationhood, including sterling, the state pension and the BBC, would be convenient. Mindful of Scots’ aversion to hectoring from Westminster, Mr Darling tends to cast grave doubt on such rosy predictions rather than demolish them. But in February the unionist campaign underwent a tonal shift when George Osborne, the Tory chancellor, and his Labour and Lib Dem counterparts, Ed Balls and Danny Alexander, all insisted that an independent Scotland must kiss goodbye to the pound. With reference to the troubles in the euro zone, their arguments against a currency union were su?ciently clear, if not incontrovertible, to cast doubt on one of the nationalists’ fundamental claims. Yet the onslaught, instead of clinching the unionist case, appears to have got right up Scottish noses— even to the extent of hardening the Yes vote. Polling suggests that almost half of Scots did not believe Mr Osborne and his peers. That is not only because they hate Tories, though many do. It is also because the unionists’ relentlessly gloomy predictions for an independent Scotland are starting to strain credulity. Flashes of hyperbole do not help—as this week when Lord Robertson, a former Labour defence secretary, called the prospect of secession “cataclysmic”. Moreover, even if Scots are convinced by the unionists’ grim harping on their future indebtedness, welfare-dependence and scarce oil, suggests John Curtice of Strathclyde University, there is a risk they will consider this so demoralising as to vote for independence anyway. It could hardly, they might re?ect, be much worse. Enough dreariness already Mr Darling needs to start rationalising the gloom a little. That does not mean easing up on the nationalists and their fantasies, which must be exposed. Nor, as Tory MPs want, should he ramp up the emotional case for the union—for that is ground on which Alex Salmond, the nationalists’ charismatic leader, cannot lose. Yet the unionists need one or two solid proposals to set against his wild promises. At the least, Better Together’s members should agree the broad outlines of the future devolution that most Scots want. It should not be too di?cult. All the parties are committed to this in principle and there is little di?erence between the proposals already aired by Labour and the Lib Dems. The danger is that this search for common ground leads to feuding. There are already signs of it. In Westminster, Tory MPs are busy sniping at Mr Darling’s dour leadership of the campaign; meanwhile Labour, which holds 40 of Scotland’s 59 constituencies, seems reluctant to throw its full weight behind it. Accompanying a Labour MP through his tough north Glasgow constituency, your columnist heard him make no mention of Better Together. This is not good enough. To be sure of victory, the unionist campaign must ful?l the promise of its name. 7

A

FTER the speeches were done, at a recent rally in Calderglen High School for “Better Together”—the cross-party campaign to keep Scotland British—there was time for questions. They were mostly the same. The inquisitors, typically retired and articulate, asked the assembled politicians—including a Conservative cabinet minister and a serving and former Labour MP—to make a “positive case” for keeping the 307-year-old union intact. “Why are we better together?” said one. This was awkward. It was bad enough that the venue, in East Kilbride, on the southern edge of Glasgow, was cavernous and the audience small. It was worse that this mismatch had been occasioned by a sudden switch from a nearby community centre, after reports that nationalist hoodlums—campaigning to sunder the union at Scotland’s independence referendum in September—were planning to disrupt it. But what was most dismal, for Bagehot and the other assembled unionists, was the lack of a good answer to the question. Justine Greening, the well-regarded international development secretary, from She?eld and Westminster, appeared to have given it little thought. Visibly bothered by her failure to o?er a bold defence of Britain as we know it, she roused herself, as the meeting was closing, for a last hurrah: “I don’t know why it works, like a wine (I don’t know, can you bottle it?), but somehow it does.” With that, she was up and o? to the airport, trailed by brief applause. It is Better Together that may, just possibly, be in danger of bottling it. Because the long-standing majority opposed to Scottish independence has started to shrink. Strip away the “Don’t knows” and the median polling is 56% in favour of the union and 44% against. That is still a solid-looking cushion for Britain. It is also true, as Better Together’s leaders note, that the Yes camp had been predicted to make gains around now, with many workingclass Glaswegians among the undecided. So Britain is not done yet. All the same, the vote is starting to look uncomfortably close. That need be no bad thing—unionist leaders have long recognised the danger of complacency. “Everybody needs to know that this is a serious contest, and one which it is not impossible that the nationalists could win,” says the Liberal-Democrat Scottish secretary, Alistair Carmichael. The question is whether Better

Europe

The Economist April 12th 2014 31 Also in this section 32 France and Europe 33 Italy’s government 33 Spain’s recovery 34 Press freedom in the Balkans 35 Charlemagne: The laws of euro-nomics

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

Ukraine and Russia

Wearily back to the battle?eld
KIEV

The disturbances in eastern Ukraine demonstrate that Russia wants to destabilise the country before next month’s election

P

ETRO POROSHENKO, the front-runner in Ukraine’s presidential election, due on May 25th, exudes con?dence. “There is no uncertainty. Ukraine will have free and fair elections and a strong legitimate president who will bring it closer to Europe. No Russian troops will cross the border.” His words are like psychotherapy. After a revolutionary winter, the overthrow of a president, Viktor Yanukovych, and the annexation of Crimea by Russia, Ukrainians feel fragile and exhausted. They crave respite, peace and normal life. Instead, they are getting provocations, threats of invasion and gas-price rises, and Russian-fuelled separatism. All this is part of what is known as the “Russian spring”. The activity of Russian agents in eastern Ukraine had seemed to be subsiding; separatist rallies were abating. But on April 6th the Russian spring returned spectacularly. In a carefully co-ordinated action, groups ofmen, some armed, tookover government buildings in Donetsk, Luhansk and Kharkiv, declared the “independence” of eastern Ukrainian republics, demanded referendums and called for Russian assistance. They aped the Maidan protesters in Kiev with barricades made of car tyres and the distribution of food. The theatrics were said to be directed from Moscow with money from Mr Yanukovych and his son, who still control some local mayors in the Donetsk region. Yet there was little popular support, as most people in the east support

Ukraine’s sovereignty. That small invading groups could so easily take over government buildings testi?ed to the weakness of the interim Kiev government and the inaction of the local police, who are demoralised and humiliated by having to serve those whom they fought against only a few weeks ago. Senior o?cials, including Arsen Avakov, the interior minister, were sent to the region to supervise the police. Some government buildings were then retaken, though others remain in the hands of separatists. John Kerry, America’s secretary of state, called Russia’s actions “an illegal and illegitimate e?ort to destabilise a sovereign state. This could potentially be a contrived pretext for military intervention, just as we
EU members

LATVIA LITHUANIA

Moscow
500 km

POLAND
VAKIA SLO ARY HUNG

BELARUS
Lviv Kiev Kharkiv Luhansk Donetsk

R U S S IA UKR A IN E
MOLDOVA

Odessa
CRIMEA

ROMANIA
BULGARIA

Sochi

Black Sea

GEORGIA

TURKEY

saw in Crimea.” Russia may yet use its army, ultimately the only way that it could grab more Ukrainian territory. But its preference is to achieve this outcome by forcing Ukraine to accept what it calls “federalisation”, which in reality means partition. The threat of military action and the fomenting of separatism in the east and south are designed to persuade the Americans and Europeans to support Russia in this goal, as the lesser of two evils. Ukrainian politicians accept that decentralisation of power would make local government more transparent and accountable. But they strongly resist the idea of self-determination for each region as demanded by the Kremlin (which has, in effect, rejected the idea for Russia itself). Whether Russia orders tanks across the border with Ukraine when its “federalist” plan is rejected or whether it continues to destabilise the country by other means, it is certainly not about to leave Ukraine alone. The immediate goal may be to torpedo the presidential election and stop the emergence of a strong, legitimate government. Many Ukrainian observers fear that Russia will use May 9th, Victory Day, to stage more provocations. Russia’s propaganda is based on second world war rhetoric, portraying the government in Kiev as western Ukrainian “fascists” attacking Russian-speakers in the east and the south. Yulia Tymoshenko, a former prime minister who was released from jail after Mr Yanukovych’s overthrow and is now running against Mr Poroshenko for president, says it is essential that Ukraine keeps calm and does not respond to Vladimir Putin’s provocations. “Ukraine has no single trump card, no real argument to stop military aggression. The only talks between Kiev and Moscow would be about complete capitulation,” she argues. The fate of Ukraine may ultimately be 1

32 Europe
2 decided in Moscow, Washington and Brus-

The Economist April 12th 2014 France and Europe
As part of this fresh approach, JeanPierre Jouyet, a centrist who was a minister under Nicolas Sarkozy, Mr Hollande’s centre-right predecessor, was appointed as the president’s new chief of sta?. (This also con?rms the grip of the 1980 graduating class from the Ecole Nationale d’Administration, which included Mr Jouyet, Mr Hollande, Ségolène Royal, his ex-partner and now environment minister, and Michel Sapin, the new ?nance minister.) Mr Valls was less clear on where the 50 billion budget savings will come from, referring only to a three-way e?ort from local authorities, social security and central government. He said nothing about paying for his extra tax cuts, although he promises a mini-budget before the summer. As Guillaume Menuet, an economist at Citi Research, says, this is a “policy shift that will not be fully ?nanced”. As it is, the 2013 de?cit came in at 4.3% of GDP, above the 4.1% forecast. With growth fragile, it looks impossible for France to keep its promise to reduce the de?cit to 3% next year. Indeed, Mr Valls said as much, declaring that he believed in “budgetary responsibility, not austerity” and that he favoured “a change of rhythm” so as not to cramp growth. The new government is preparing to make a request to the European Commission for more time. Mr Sapin and Arnaud Montebourg, the anti-austerity economy minister, went separately to Berlin on April 7th to talk to the German government, the ?rst to make the claim of ?scal responsibility, the second to say that de?cit targets are of “secondary” importance. So far, Brussels and Berlin have been sceptical. There is no good reason for France to have a delay, said Olli Rehn, the economics commissioner, adding that stronger euro-zone growth makes it less justi?able. France’s serial requests are treated as duplicitous by those who ask why big countries break rules that smaller ones have to obey (a game that ?rst began when France and Germany bust the stability pact in 2002). The Hollande government has already been given one delay. Another would mark the third time in seven years that France has missed targets. After an inept presidency for nearly two years, however, there is a sense that France may at last be moving in the right direction. None of its friends will want to imperil the chance of revived growth in the euro zone’s second-biggest economy. The best guess is that France will yet again get its way, but Mr Valls will have to show that he can translate ?ne words into deeds— and that any concession does not become an excuse for muddling on. 7
Corrections: In “The battle for Turkey’s future” (March 29th) we said Turkish GDP per head had tripled in real terms under AK rule. It tripled in nominal terms; but in real terms the rise was about 50%. In the Charlemagne column “Adrif t over energy” (March 22nd) we misspelt the Lithuanian por t of Klaipeda as Klapeida. Sorr y.

sels, but the country’s political and business elite is not powerless. The failure to have representatives from the east in the interim government has made Mr Putin’s meddling easier. But the intervention of Ukrainian oligarchs has made it harder. Consider Rinat Akhmetov, Ukraine’s richest businessman and Mr Yanukovych’s former backer, who emerged as an important power-broker in Donetsk, going to see the separatists in the middle of the night. As he said, “I told them that if they are for Russian language, I am prepared to support them. If they are for decentralisation, I am also ready to support them. But for me [Donetsk] is part of Ukraine, and I asked them to support me in this.” Mr Akhmetov employs some 300,000 people in the region, and has no intention of losing his dominance there. His miners are wary of Russia, which exports coal to Ukraine. But he also has no interest in a strong central power in Kiev that could deprive him of the privileges on which his businesses have long thrived. He seems to support Mrs Tymoshenko, who would also be more palatable to the Kremlin. In the polls, Mr Poroshenko is well ahead, even though Mrs Tymoshenko’s core support is more enthusiastic, especially in rural areas. Mr Poroshenko’s rating of nearly 30% has been boosted by a deal with Vitaly Klitschko, a former heavyweight boxer, who dropped out ofthe presidential race in his favour. As a successful businessman and chocolate king, Mr Poroshenko is helpfully associated with peace and stability. He says his priority is to ?ght corruption, which has permeated Ukraine for 20 years. “It is also the only way to glue the country together. Maidan was not a pro-western revolution or pro-eastern revolution. It was an anti-criminal and anti-corruption revolution,” he says. Yet many Ukrainians were dismayed when they heard that Mr Poroshenko had been endorsed by Dmitry Firtash, a main bene?ciary of shady gas deals between Russia and Ukraine who has just been arrested in Austria at America’s request, and his business partner, Sergei Levochkin, a former chief of sta? to Mr Yanukovych. “At the moment, the country can only be held together by the union of the oligarchs”, says Yulia Mostovaya, editor of the weekly Zerkalo Nedeli. “The renewal of the political system which everyone was hoping for has not taken place”. Whoever wins the election will be closely scrutinised by Maidan. A new government will have to make reforms without in?icting too much pain on the east or antagonising the west. Building a state and ?ghting corruption in a country dealing with separatism, outside aggression and economic pressure may prove all but impossible. Now, with Ukraine’s existence at stake, there may be no other way. 7

More special pleading
PARIS

France leads the way in seeking more leeway from Brussels. Next may be Italy

“T

RUTH, e?ciency, con?dence.” Under this guiding trinity, Manuel Valls made his inaugural speech as prime minister on April 8th, promising budget savings and tax cuts that amount to an about-turn in policy. There would be no more tax increases, Mr Valls declared, and businesses needed to be supported, not caricatured and maligned. But at the same time, he made clear that he was quite prepared to put his country on yet another collision course with Brussels rather than “destroy growth” by sticking too rigidly to France’s ?scal commitments. The prime minister’s speech to a rowdy parliament was strong on passion. “Few countries in the world allow foreign-born citizens to reach the top of government,” he said, speaking as somebody born in Spain. It was also heavy on ambition. Mr Valls promised to halve the number of re-

Borrowers’ brigade
Budget deficit
% of GDP, 2014 forecast Unemployment rate, February 2014

0 Spain France Italy Germany
nil

1

2

3

4

5

6
25.6 10.4 13.0 6.7* *March 2014

Sources: European Commission; National statistics

gions to 11 by 2017 and scrap elected assemblies in departments by 2021. Bureaucratic France has 90 public-sector sta? per 1,000 people compared to 50 in Germany. Most enjoy almost total job security. These radical measures imply a cull that will inevitably be seen as a direct assault on local Socialist o?cials who form the backbone of Mr Valls’s own party. Mr Valls’s ?scal plans were equally bold. In 2013 four-?fths of ?scal consolidation came from tax increases, not spending cuts, according to the Cour des Comptes, the public auditor. Now Mr Valls promises the reverse. On top of 50 billion ($68 billion) of budget savings and 30 billion of payroll-tax cuts for companies already announced by President Fran?ois Hollande, he announced another 5 billion of reduced charges for low-paid employees— worth up to 500 a year each—and 6 billion in business-tax cuts. And there is to be a steady reduction in the corporate-tax rate from 33% to 28% by 2020.

The Economist April 12th 2014 Italy’s government Spain’s recovery

Europe 33

The last chance
ROME

Better but not best
MADRID

Matteo Renzi may have to ?ght, and borrow more, to realise his bold agenda

The economy is improving, but it still has a long way to go

I

N THE rare moments of re?ection his frenetic schedule allows him, Italy’s new prime minister, Matteo Renzi, will admit he is con?dent of a good start, but less certain how it will all end. He sees the crucial clash in his country as no longer between left and right, but between conservatives and innovators. Given the strength of opposition to change from the public administration, trade unions, many parts of business and ?nance and Italy’s bloated political class, whose privileges and sinecures he aims to scrap, a more sanguine assessment would be foolhardy. The government’s framework economic policy document, outlined on April 8th, shows the narrowness of the bounds within which he will have to operate—and how easily he could overstep them. Its centrepiece is a reduction in income tax for the less well-o? that will cost an estimated 6.7 billion ($9.2 billion) this year. Its justi?cation is more political than economic: it will help Mr Renzi’s centre-left Democratic Party (PD) in the European election in May, when a good result is essential to satisfy a party in which many prominent older ?gures resent the 39-year-old former mayor of Florence. But the document says the tax cut will have a negligible impact on growth this year (though a greater one later). To pay for it, Mr Renzi wants cuts in public spending of 4.5 billion, plus two one-o? measures: repayment of the state’s vast debts to private companies (most of which does not count as current spending but should generate higher VAT revenues) and a windfall for Italian ?nancial institutions from revaluing the stakes that they hold in the Bank of Italy (which the government wants to tax at 26%). It is a strategy that raises many questions. The government’s forecast for GDP growth this year is central to its other calculations: is it too optimistic? The latest policy review lowers the forecast to 0.8% from 1.1%, but the EU, IMF and most analysts are pencilling in only 0.6%. And how will the European Commission respond when it ?nds that almost a third of the revenue increases to ?nance the tax cut are one-o?s that could fail to materialise? Doubts have been aired over whether revaluing the central-bank shares constitutes illicit state aid. Others have been voiced over whether higher VAT revenues will feed into the treasury’s co?ers this year: there are questions about the procedure for repaying the

A

Renzi, Roman tribune
state’s debts and the deadline originally set for July has been put back a second time to October. Perhaps most importantly, how many structural cuts can be made by year’s end? The government’s estimate is near the upper end of the range given by the author of the government’s spending review. Mr Renzi is fervent in his avowal that reversing the growth ofItaly’s public debt is a priority, and not for its EU partners, but for Italians themselves. He has backed away from his plan to keep the budget de?cit at its end-2013 level of 3% of GDP and has reestablished a target of 2.6% for this year. But given the number of variables surrounding his policies, it is hard not to conclude that he may eventually join France’s new young prime minister in running a de?cit above the agreed target, asking Brussels to cut him more slack. To persuade the Italian public of the need for spending cuts, he has astutely concentrated on what is called “the cost of politics”. He has won plaudits for auctioning o? ministerial cars and capping the salaries of top managers. But with less fanfare he has approved up to 1 billion of healthcare cuts. The resistance of Italy’s heavily unionised state employees to these and other savings highlights the danger of bureaucratic obstruction. A joke in Mr Renzi’s circle has it that the government does not need a minister for public administration, but a minister against it. So far, the prime minister’s mettle has not been tested in a ?ght with Italy’s many vested interests. But he has a powerful weapon when the time comes. He has convinced many Italians, as well as those cheering him on in Brussels and Berlin, that he is Italy’s last chance of getting out of its relentless decline—and he claims that he will not hesitate to walk out of the government if he fails to get his way. 7

TOLL road snakes west out of Madrid, o?ering a fast alternative to the jammed motorway alongside. Hailed a decade ago as a cure for congestion, the road’s operator is now likely to be nationalised, as are those running three other loss-making roads into the capital. This is expected to cost taxpayers some 2 billion ($2.7 billion), adding to a soaring national debt and on top of a 50 billion bill for rescuing Spain’s banks. Toll roads were designed as a response to Madrid’s breakneck expansion, but a burst housing bubble stopped that in 2008. Spaniards, struggling with falling household incomes and loans, have become more tight-?sted. Tra?c on the four toll roads has almost halved. That alone demonstrates that, even as it recovers, Spain is still su?ering from the aftershocks of a double-dip recession that shrank GDP by 6.4% in total. In Brussels these days Spain is hailed as a prodigal son of the euro zone’s troubled southern periphery. The economy returned to growth in the third quarter of 2013, with rising exports compensating for weak consumer and public spending. The Madrid stockmarket is booming, foreign investors are back, the current account is in surplus, bond yields have hit eight-year lows and new jobs are being created. It adds up to big progress in a country that once threatened to break apart the euro. What saved Spain? The pledge in July 2012 by Mario Draghi, president of the European Central Bank, to be a true lender of last resort removed immediate doubts about the euro’s survival. But reforms by the centre-right government of Mariano Rajoy have also helped Spain to achieve an “internal devaluation” by lowering costs. Because it is in the euro, the alternative of currency devaluation is not available. Measuring internal devaluation is tricky, but unit labour costs dropped in Spain for four years until a small uptick in late 2013, helping to boost exports. Labour reforms have let employers o?er wage cuts rather than sackings, further driving down pay bills that began falling in 2010. Even so, Akos Valentinyi, of the German-based think-tank CESifo, says that Spain needs deeper labour market reform if it is to regain 3m lost jobs. Spain also has some of Europe’s highest income-tax rates, but puny overall tax revenue. A report commissioned by Cristobal Montoro, the tax minister, proposes a shift 1

34 Europe
2 from income tax and social-security contri-

The Economist April 12th 2014
Rafael Doménech of BBVA, a bank, says Spain should aspire to more than being the best of the worst and, instead, measure itself against Europe’s most successful economies. On this basis, it does badly. Research, technology and skills all lag. An education system that fails a section of the young will take years to ?x. Spain’s plethora of small companies may make productivity gains harder to achieve. Younger workers needed for the survival of the welfare state have emigrated or are jobless. Moreover, Spanish institutions are weak and often sclerotic in their actions. Spaniards may dream of a corruption-free country with minimal political interference. But short-term ambitions are more modest: a stable job is the most that many can hope for. 7 beaten up. Five vehicles belonging to the newspaper Vijesti have been set on ?re in the past three years and a small bomb went o? at its building last December. The threat of being murdered for investigating organised crime is also a big disincentive. In Macedonia one media ?rm was shut after a raid by tax inspectors who, it is believed, do not look so closely at the books of pro-government companies. Unfavourable stories invite libel suits. “There is clear pressure on journalists from many sides,” says Dunja Mijatovic at the Organisation for Security and Co-operation in Europe. The conviction last October of Tomislav Kezarovski for revealing the name of a protected witness in a murder case, who later admitted to giving false testimony, “sends a chilling message” to the media in Macedonia, says Ms Mijatovic. Even in Slovenia journalists have problems. Anuska Delic, who works for the daily Delo, has been indicted for revealing state secrets. She may just be collateral damage in a dirty game where those in power use the intelligence services to leak stories to harm enemies. In this grey zone apparently independent websites are often no such thing. In Kosovo they are “popping up like mushrooms”, says Agron Bajrami, editor of the daily Koha Ditore. Many seem to rely on political-party funding. Blatant corruption is also a problem. The Serbian-language public broadcaster, which backs the Serbian party in Kosovo’s government, has been mired in allegations of nepotism and misuse of public money. In Albania, says Remzi Lani, an analyst, the media are still “sandwiched between business and politics”. He adds that the biggest problems Albanian journalists face, including low pay and morale, are shared across the Balkans. “We have moved from an era of repression to one of pressure,” he laments. 7

butions to consumer taxes while closing business-tax loopholes. The current system is as hole-ridden as a Gruyère cheese, says the report’s co-author, Fernando Fernández. But the budget de?cit of 6.6% of GDP means that any cuts must be matched by tax rises elsewhere. And Mr Montoro refuses to increase sales tax. As jobs return, a virtuous cycle of improved con?dence, consumer spending and faster growth could begin. Analysts are raising their projections, with some seeing GDP growing by 1.3% this year. Even so, unemployment, now standing at almost 26%, will take a decade to fall substantially. And as it is, the budget de?cit barely fell last year, as public spending grew. The public debt has hit 94% of GDP.

Press freedom in the Balkans

Troublesome times
BELGRADE

The media feel under rising political and business pressure

T

HE media across the Balkans and in former Yugoslavia are doing badly, commercially and politically. Every year Reporters without Borders, a journalists’ lobby, ranks some 180 countries for media freedom. The highest spot in the region this year goes to Slovenia, but only at 34th. Of the others, Serbia is 54th and Croatia 65th, with Bosnia, Kosovo, Albania and Montenegro coming lower still and Macedonia way down at 123rd. For countries that are either in the European Union already (Slovenia and Croatia) or aspire to join, these lowly rankings ought to dismay. The underlying problems for the media are similar, but each country has its own worries. Serbia’s government has direct or indirect control of as much as 40% of advertising, much of it by state-owned companies. Few media are ready to risk this (though advertising channelled through two media-buying agencies close to the then president, Boris Tadic, did not save his government in 2012). After the election most media, including the public broadcasters, shifted shamelessly in favour of the new most powerful ?gure, Aleksandar Vucic. Editors know that Mr Vucic may sometimes call personally to upbraid them. He did not want his wedding reported, so it was not. When he was ?lmed rescuing a child stuck in snow he was incensed by videos mocking it as a pre-election stunt; o?cials tried to block them online. In Croatia political pressure is lower but big business is a concern. “I can report on anything related to politics,” says one Cro-

atian journalist, but she cannot touch anything to do with a big ?rm in business with her proprietor. Last year the government agreed to cut value-added tax on newspapers. In return, says the journalist, “court reporters” ?le enthusiastic stories about the government, “doing the dirty work so the rest of us can do what we want.” A similar story plays out in Bosnia. The country’s biggest construction magnate, Fahrudin Radoncic, owns a media group, has a political party and was the security minister. Montenegrin journalists working for media critical ofthe government risk being

Don’t read all about it for much longer

The Economist April 12th 2014

Europe 35

Charlemagne The laws of euro-nomics
German legalism is hampering rational crisis-management adviser to the European Commission and author of a new book on the crisis (and once a journalist on The Economist), the ECB has a de?ationary bias: contrast its inaction over falling prices with its hair-trigger response to the illusory danger of in?ation in 2011, when it raised interest rates at the height of the crisis. But that de?ationary bias also in part stems from Germany’s in?uence—and inevitably that of the court in Karlsruhe. Many expect Mr Weidmann’s agreement in principle to OMT and to the idea of bond buying to turn to disagreement over speci?c measures. Karlsruhe’s hostility to OMT casts a pall over quantitative easing. The judges made much of the distinction between monetary policy carried out by ECB technocrats and economic policy that needed greater political legitimacy. The court said buying the bonds of some countries to lower borrowing costs discriminates against others, impairs the market mechanism, increases the risk of losses for the ECB and violates the prohibition on monetary ?nancing of states. Yet almost any act of monetary policy is a form of redistribution between savers and borrowers. Mr Weidmann hints he would rather buy private debt than government bonds. A rival school of thought holds that, in fact, buying private debt resembles industrial policy, in that it might favour some sectors over others. In any case, there might not be enough corporate debt to buy, since most euro-zone companies are ?nanced by banks. So, beyond another small cut in interest rates (which are already close to zero), or the imposition of negative deposit rates, the ECB might end up buying sovereign bonds after all. One worry is that QE might not make much di?erence, doing too little to raise in?ation and failing to stimulate more lending. Ideally, the euro zone should ?rst ?x the banks. That might happen at the end of the year, when the ECB completes its review of bank balance-sheets before taking over as the euro zone’s lead bank supervisor. But new rules to impose losses on creditors will not come fully into force until 2016. The single resolution mechanism to wind down banks is too legally convoluted and lacks a credible taxpayer-?nanced backstop. Given the “bogus” banking union, as Mr Legrain calls it, the ECB might prefer to hide problems rather than to reveal losses that countries are unable or unwilling to bear. Argentina—or Japan? German legalism is a sign of a deeper disagreement: governments want the convenience of a single currency, but not the risksharing and transfers of a federation. Germany rejects liability for others. It has blocked Eurobonds and a common backstop for banks. It has bailed out troubled countries through loans, but only on strict conditions. It has tightened ?scal rules and persisted in running large surpluses, worsening de?ation and creating political resistance, most recently in France and Italy. And when German ministers have turned a blind eye, the Bundesbank and Karlsruhe have tried to limit risk-sharing through the ECB. ? ??The defence of the national treasury provides exciting work for lawyers, but it makes for poor crisis-management. To work properly, a currency union needs some degree of?scal union. Until the ECB stepped in as a lender of last resort in 2012, euro-zone countries were in e?ect so many Argentinas, all borrowing in a foreign currency. But unless it acts quickly to avert de?ation, they could yet become latter-day Japans. 7
Economist.com/blogs/charlemagne

S

OME say economics in Germany is treated as a branch of moral philosophy. More often it is the worst sort of contract law. Throughout the euro crisis legal pettifogging has hampered rational policy. The German ?nance ministry is ?lled with lawyers, not economists, starting with its boss, Wolfgang Sch?uble. Big decisions have often ended up at the constitutional court in Karlsruhe. The euro zone wasted time tightening ?scal rules that treated mostly symptoms (budget de?cits) not causes (a de?cient structure and crippled banks) and led to excessive austerity. The European Central Bank’s action that saved the euro in 2012 has recently been undermined by the Karlsruhe court, which thinks that the never-used “outright monetary transactions” (OMT) programme to buy bonds of countries that agree to reforms is illegal. And now excessive legalism has messed up the banking union, which will not live up to the promise to sever the doom-loop between weak banks and weak governments. ? ?Having survived and returned to weak growth, the euro zone faces a new danger: de?ation. But lawyerly nitpicking is again one factor holding up an e?ective response. De?ation raises the burden of debt and causes consumers to stop spending, because they expect cheaper prices. Low in?ation makes it harder to adjust wages and prices relative to Germany. Headline in?ation has dropped to an annual 0.5%, far below the ECB’s target of “below, but close to, 2%”. Some countries are already in de?ation; any new shock might push the euro into yet another crisis. ?Ensuring price stability is the core business of the ECB. Even the ultra-conservative Bundesbank in Germany, which opposes the ECB’s bond-buying, agrees it must act against de?ation or even persistently low in?ation. The Bundesbank’s head, Jens Weidmann, says he will consider entering the “uncharted waters” of QE (quantitative easing, in which central banks print money to buy assets and thus bring down long-term interest rates) already pursued in America, Britain and Japan. ?? German legalism is also a?ecting the ECB. Its president, Mario Draghi, who in July 2012 promised to do “whatever it takes” to save the euro, now seems to be doing whatever it takes to avoid a hard decision. He tries to talk down interest rates through “forward guidance”, and speaks of the ECB’s unanimous readiness to consider unconventional measures. To Philippe Legrain, a former

36

United States

The Economist April 12th 2014 Also in this section 37 Paying for Medicare 38 Albuquerque’s violent police 38 The CIA and torture 39 Rationalising military camou?age 39 America, Afghanistan and opium 40 The Civil Rights Act at 50 41 Lexington: The Democrats’ daughters

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

Environmental politics

A run for his money
SAN FRANCISCO

Tom Steyer is betting that campaigning on climate change can win elections. Is the verdant billionaire right?

D

EMOCRATS have often feared big money in American politics, perhaps because most of it doesn’t go their way. When the Supreme Court struck down the caps on aggregate campaign donations last week, Republicans, broadly speaking, cheered and Democrats jeered. In the 2012 election cycle, four of the ?ve biggest donors to superPACs—independent groups that raise money, often from the extremely rich, and spend it on outlandish political advertising—were Republicans. Tom Steyer, a San Francisco-based billionaire who worries about climate change, is doing his best to help his fellow Democrats get over their qualms. Perhaps best known for his opposition to the proposed Keystone XL oil pipeline, Mr Steyer, a former hedge-fund investor, was the biggest superPAC spender last year, dropping $11.1m into his two groups. This year he looks likely to repeat that feat, hinting that he will invest at least $50m in one of them, the NextGen Climate Action Committee (NGCA), and that he will be seeking the same amount from other donors. The money will be spent to help elect politicians who share Mr Steyer’s environmental views, or kick out those who do not. In November’s mid-term elections, all 435 seats in the House of Representatives and 36 in the Senate will be up for grabs. So

will 36 governorships and countless state legislative seats. For NGCA to spend on any given race, says Mr Steyer, three conditions must apply. First, the leading candidates must have di?ering views on climate change (so Democratic fans of Keystone should be safe; their Republican opponents probably agree with them). Second, “something substantive” must have a chance of happening if the NGCA-backed candidate wins. Third, the race should have the potential to a?ect the national climate debate. That conversation has been stalled since a Democratic cap-and-trade bill died

CANADA
PACIFIC COAST COLLABORATIVE California

Quebec

UNITED STATES

REGIONAL GREENHOUSE GAS INITIATIVE

in the Senate in 2010. Nor is major environmental legislation likely in the next Congress (although Barack Obama is pursuing various emissions-reduction schemes through the Environmental Protection Agency). That is why Mr Steyer expects state races to occupy “the bulk” of his efforts this year. Rick Scott, the Republican governor of Florida, who has doubted the science of global warming, can expect to feel Mr Steyer’s ire, for example. The same may go for Tom Corbett, facing a tight reelection race for governor in Pennsylvania. The team is also looking closely at regional climate-change schemes (see map). Mr Steyer likes the Regional Greenhouse Gas Initiative, a shared e?ort between nine states in the north-east to reduce carbon emissions from power stations, and could intervene in elections in states that are considering joining. Out West, last October Mr Steyer helped broker the Paci?c Coast Action Plan on Climate and Energy, a nonbinding agreement between three American states and British Columbia in Canada. But sceptical legislatures in Oregon and Washington state have blocked bills that could turn words into action, such as carbon pricing, and so these too are likely to be targets (although a Steyer-backed Democratic candidate for the Washington Senate ?opped last November). California, Mr Steyer’s home state, has proved more willing to press ahead. Its cap-and-trade market, for example, has been operating smoothly for over a year; Quebec joined in January. So the state has proved a fertile training ground for Mr Steyer. In 2010 he helped see o? an electoral challenge to its main climate-change law; two years later he bankrolled a successful campaign to close a corporate-tax 1

The Economist April 12th 2014

United States 37 Health reform

Could care less
Americans who worry about the environment “a great deal”, % 45 40 35 30 25 2001 03
Source: Gallup

Medicare, the opera
NEW YORK

Another election, another nonsensical ?ght over the elderly

A

05

07

09

11

13 14

2 loophole, with half the proceeds ear-

marked for energy-e?ciency schemes in schools. In the run-up to that election Mr Steyer showed he can play nasty: after four large corporations attacked his proposal, he ran ads branding them as Californiahating tax-dodgers. They backed o?. California’s armies of climate-wonks, normally buried in fuel standards and renewableenergy mandates, are now watching Mr Steyer’s progress with giddy excitement. Some big-spending progressive campaigns, such as the e?orts of Michael Bloomberg, a former mayor of New York, to tighten gun laws around the country, have back?red. Mr Steyer’s aides consider themselves savvier operators. They speak enthusiastically about the targeted advertising and turnout models they used in the Virginia governor’s race last November, in which a Democrat bolstered by $8m of support from Mr Steyer defeated a Republican climate-sceptic. That election, says Chris Lehane, a senior aide to Mr Steyer and a Democratic campaign veteran, may be seen as a dry run for what is to come. Mr Steyer acknowledges that he faces deep-pocketed and committed foes; in 2012 oil and gas ?rms spent more than eight times as much on Republican candidates as on Democrats. Moreover, few Americans share his dedication to the climate cause (see chart). But dig into the data, he says, and you ?nd enough voters who care enough to swing certain elections. His team is prepared for a dirty war: climate “denialists” will be branded as anti-science and their funding sources exposed. Voters will be cleverly targeted: Latinos, for example, respond disproportionately to messages linking climate change to air quality. “It’s not about arguing that we won’t have any butter?ies in 20 years,” says Mr Lehane. Some NGCA advertisements may be aired as soon as next month. On top of his political adventuring, Mr Steyer o?ers a full portfolio of climate-policy services. Next Generation, which shares an o?ce with its near-namesake in downtown San Francisco, is a policy out?t; it is ?nalising a detailed analysis of the potential costs to business of climate change, which

PRIL has been a cheerful month for the A?ordable Care Act, better known as Obamacare. More than 7m Americans have signed up for private coverage through the law’s exchanges and, by the end of February, more than 3m people had enrolled in Medicaid, the health programme for the poor. According to the latest Gallup poll, America’s share of uninsured has fallen to its lowest level since 2008. These ?gures are good news for anyone keen to expand health coverage. They may not be so helpful for the Democrats’ election prospects. To understand why, consider another set of ?gures. More than 40m older Americans are enrolled in Medicare, the public-health programme for those aged 65 and older, with more than 15m of them in private Medicare plans. These are reliable voters in elections. And Republicans are singing them the same aria again and again: Democrats are raiding their bene?ts to pay for Obamacare. Democratic politicians are desperate to convince them otherwise. On April 7th health o?cials provided some help: after proposing in February to cut payments to private Medicare plans by 1.9%, the Centres for Medicare and Medicaid Services (CMS) said they would rise slightly instead. This will not quiet Republicans. Obamacare does indeed lower Medicare spending by $716 billion from 2013 to 2022. Of this, $156 billion comes from Medicare Advantage, which lets the

elderly use public money to buy private health plans. For years the government has paid more for these private plans, per person, than for traditional Medicare. Private insurers passed along the extra subsidy to consumers in the form of additional bene?ts or lower fees. Obamacare sought to bring private payments in line with traditional Medicare. This was not a radical idea, but it is politically controversial nevertheless. Medicare Advantage is increasingly popular—about three in ten Medicare bene?ciaries are enrolled in a private plan. Insurers argue that Obamacare’s cuts, combined with other measures, will force them to raise prices or cut bene?ts. Last month’s special election in Florida was a cautionary tale for Democrats. “To pay for Obamacare, Washington is forcing seniors to endure deep cuts to Medicare Advantage,” purred an advertisement. “Sadly, Alex Sink supports these cuts.” Ms Sink lost her campaign. Not surprisingly, Republicans as well as many anxious Democrats implored CMS not to lower payments. In February 40 senators wrote to CMS to ask as much. On April 3rd 29 congressional Democrats and Republicans sent their own letter. In the end CMS said it would raise payments by 0.4%. The true e?ect on Medicare Advantage is more complex. America’s Health Insurance Plans, the industry group that had lobbied against cuts, maintains that CMS’s changes still amount to lower payments. Ana Gupte of Leerink Swann, an investment bank, points out that delaying cuts now may mean a bigger cut next year. The ruckus belies a simple fact. Both Democrats and Republicans agree that Medicare spending must be contained. The budget proposed by congressional Republicans, written by Paul Ryan, would preserve all Obamacare’s cuts to Medicare, including those to Medicare Advantage. Just don’t expect Republicans to mention that on the campaign trail. da and New Hampshire. That is no coincidence. Candidates hoping to court such states will pay attention if Mr Steyer can demonstrate that campaigning on climate can win elections there. By that time, whisper some, Mr Steyer may be mulling a run for o?ce himself. In 2018 the race to be California’s governor is likely to be open; the Senate is another possibility. Neither campaign would come cheap, but that should not present di?culties. 7

should be published in June. AEE, which Mr Steyer co-founded three years ago, is a clean-energy trade association. What all the groups share, says Mr Steyer, is a belief in the importance of involving the private sector in discussions about policy. At present, though, the focus is political. Many of the elections that have attracted the attention of Mr Steyer’s team this year are in states likely to matter in the 2016 presidential election, including Iowa, Flori-

38 United States Police violence
press; many locals hope to see an outside monitor appointed to implement changes, with the backing of a federal judge. Others want to see a police oversight commission with teeth. Some think the police department has expanded too quickly in recent years, not vetting candidates properly. Killings spiked in 2010, Mr Berry’s ?rst full year in o?ce, but, the mayor says, over 50 changes have since been pressed on the force, including the compulsory body cameras that ?lmed the Boyd incident, and more will follow. Shootings have levelled o? in the past few years. Six separate investigations into the Boyd killing have opened. The mayor adds

The Economist April 12th 2014
that he understands the city’s anger. None of this has stopped some locals from calling for his head. The row comes at an unhappy time for Albuquerque’s home state. While most of its western neighbours are recovering at a fair clip, last year Gallup found that the jobcreation rate in New Mexico was the second-lowest in America, behind only tiny Rhode Island. Chamber-of-commerce types fret that the policing spat will deter investors. Joe Monahan, an Albuquerquebased blogger, says he can’t remember the last time things were this bad. Hours after the council meeting, four police stations were vandalised. 7

Breaking, and bad
ALBUQUERQUE, NEW MEXICO

Trigger-happy cops make unhappy citizens

“H

ERE comes the rabble,” a woman said. She was joining hundreds of citizens ?ling into Albuquerque’s City Hall on April 7th to voice their frustration about a police force they think has lost its way. It was local politics at its rawest. Temporary pallbearers set down in front of the dais a co?n bearing the names of dozens of victims of police shootings. As the nine councillors listened grimly, speaker after speaker expressed their fear of a department that is meant to protect them, or their anger at police killings that seem to go unpunished. Some were well-known activists; others admitted it was their ?rst visit to the chamber. It took over ?ve hours for everyone to have their say. The fuss was triggered by the release of a video that appears to show two police of?cers killing James Boyd, a homeless man camping illegally in the foothills east of the city. Boyd, a paranoid schizophrenic, is seen threatening to kill the police and wielding knives, but he seems to be turning away from the o?cers when two of them ?re six rounds at him. Another then unleashes an Alsatian on his prostrate body. Defenders of the police point out that the video shows only the last few minutes of a three-and-a-half-hour stando?. As the o?cers were aware, Boyd had a history of instability and violence; in 2010 he broke a woman o?cer’s nose. Yet the video spread quickly on social media. Nine days after its release, a largely peaceful demonstration against police violence turned ugly at night; provocateurs blocked tra?c and spat in o?cers’ faces. The police reacted as, perhaps, some protesters had hoped they would, with horses, riot gear and tear gas. Police in Albuquerque, home to slightly over half a million people, have shot 23 civilians dead since 2010: more than in many comparable cities. No police o?cer has been prosecuted for unlawful killing, yet the city has had to pay out $24m in legal settlements to victims’ relatives. The Police Oversight Commission is weak, underfunded and quarrelsome. Only a quarter of o?cers have been trained to deal with “crisis intervention”, as in the Boyd case. In 2012 the Department of Justice (DOJ) began an investigation into the police department for alleged civil-rights violations. Richard Berry, the mayor, was wary at ?rst, but last week he urged the department to get a move on. The DoJ was due to release its ?ndings just after The Economist went to

The CIA and torture

Into the light
WASHINGTON, DC

A pull-no-punches report is to be released

T

HOSE who do not publish history’s mistakes are doomed to repeat them. That, in essence, is the concern that lies behind plans by the Senate Intelligence Committee, with support from the White House, to declassify and release hundreds of pages from a scathing report into CIA detention, rendition and interrogation methods used after the September 11th 2001 attacks, which accuses the agency of misleading Congress and the White House about the value of intelligence extracted from more than 100 terror suspects in a worldwide network of secret “black sites”. The CIA has promised to work “expeditiously” to scrub the nearly 500-page summary of information that could imperil national security. Veterans of the

Fighting (but not emotional) Feinstein

spy agency, backed by many Republicans, have challenged the report—prepared by Democratic sta?ers of the Senate Intelligence Committee and drawing on millions of internal?CIA?records—as a ?awed and partisan bid to smear the CIA and the administration of George W. Bush. The attorney-general, Eric Holder, said on April 8th that President Barack Obama believes that bringing the programme “into the light” “will help the American people understand what happened in the past and can help guide us as we move forward” so that no government would contemplate such actions in the future. O?cials who have seen the report have briefed reporters that it describes previously undisclosed horrors, among them the “Salt Pit”, a site near Kabul, at which one terror suspect had his head repeatedly held under iced water and was repeatedly beaten. The report examines 20 case studies, arguing that, each time, the same intelligence could have been obtained without torture. The CIA insists that it is impossible to know what milder methods might have achieved, and may release its own response to the report. The agency is already locked in a remarkable public ?ght with the Democratic chairman of the intelligence committee, Senator Dianne Feinstein of California, traditionally a doughty defender of America’s spooks. Trust is at such a low ebb that Mrs Feinstein wants the White House to take the lead on editing the public report. On April 6th Michael Hayden, the CIA’s director from 2006 to 2009, had suggested that the senator was taking an “emotional” approach to the report. “An old male fall-back,” retorted Mrs Feinstein.

The Economist April 12th 2014 Military uniforms

United States 39 America, Afghanistan and opium

Out of sight
WASHINGTON, DC

Ten billion wasted
NEW YORK

America’s potty poppy policy Expense and stupidity too big to camou?age

A

“I

WEAR camo so I can feel safe,” says Sean, a member of the navy reserve. He cannot quite fathom why his combat uniform is di?erent from that of other American servicemen in the ?eld, depending on whether they are members of the army, the air force or the marines. And soon it may be di?erent no longer; for after years of ludicrously expensive design rivalry, the defence appropriation for 2014 prohibits the services from designing new uniforms, unless they will be used by all members of the armed forces. Remarkably, the Department of Defence has no single department dedicated to researching, developing and procuring the best uniforms for all troops. This caused no problems before 2002, when nearly every serviceman had a choice between a greenish camou?age uniform or a “co?ee stain” desert pattern. But over the past 12 years the services have each created their own style of camou?age. The e?ect has been both costly, and occasionally embarrassing. The marines led the way in 2002 with a versatile and e?ective new combat uniform, which also served to boost corps morale because the marine insignia was embedded in the design. This inspired a cascade of one-upsmanship among the other services. The air force, for instance, spent several years and more than $3m designing a new “tiger-stripe” uniform that proved unsuitable for combat—the camou?age was ine?ective, the trousers were uncomfortable and the fabric was too heavy, leading to “heat build-up”. The navy spent a lot less money developing the “aqua?age” uniform; but that is a silly blue ensemble that works best where sailors may least wish to blend, in the water. The worst o?ender has been the army. The service spent years and about $3.2m developing its own “universal” camou?age. This pattern was designed to work anywhere, but proved useless nearly everywhere. Soon after it was introduced in 2005, soldiers in Iraq and Afghanistan began complaining that the pattern turned them into targets. Troops from Syria and China were clearly better equipped. Reports suggest that a high-ranking military o?cial had chosen the pattern without consulting the data from years of studies. The army is said to have spent at least $5 billion on uniforms and equipment printed in this camou?age, which is still in use. In an emergency measure, the army

Spot the grunt
kitted out soldiers in Afghanistan in a new pattern starting in 2010, spending more than $38.8m on replacement gear in ?scal 2010 and 2011. Part of the problem, explains Timothy O’Neill, a retired lieutenant-colonel and camou?age expert, is that o?cers can be a bit too preoccupied with a uniform’s “CDI [chicks dig it] factor”. This vanity, together with bungled trials, missteps and a lack of co-operation, put the cost of developing these uniforms at more than $12m, according to a report from the Government Accountability O?ce (GAO) in 2012. This does not include the extra costs—which the GAO estimates in the tens of millions of dollars—of managing the stock and supply of so many di?erent combat uniforms. Nor does it include the high costs of replacing ine?ective camou?age in the ?eld. The armed forces spent around $300m on camou?age uniforms in 2011 alone. Stunned by these price tags, Congress in 2010 directed the Department of Defence to raise standards and cut costs. But little has been done. Many soldiers see the wisdom of returning to a shared uniform. But not the marines, who will stick to their pattern “like a hobo on a ham sandwich”, in the words of General James Amos, commandant of the marine corps. It is unclear what all this means for the army, which has been spending millions of dollars testing di?erent patterns for a new camou?age since 2010. It recently started tests for possible new uniforms, which will continue until the end of September. Replacing the service’s ?awed camou?age and equipment could cost another $4 billion over ?ve years, according to the GAO. “Research and development in government is always a long and painstaking process,“ says Mr O’Neill. “But if it were easy, then the government would waste even more money, and faster.” 7

MERICA invaded Afghanistan to wage war on terrorism. Once there, it found itself waging war on drugs, too. American soldiers provided security for eradication teams. American cash gave Afghan peasants incentives to grow wheat instead of poppies, and rewarded local politicians on whose turf opium production fell. In all, America has spent more than $10 billion trying to suppress the opium trade. And for what? Afghan farmers planted 200,000 hectares with opium poppies in 2013, according to the UN—a new record (see chart). John Sopko, the American o?cial whose job is to oversee how Uncle Sam’s money is spent in Afghanistan, told National Public Radio: “If the goal was to reduce cultivation, we failed. If the goal was to reduce opium production, we failed…If the goal was to break that narco-tra?cking nexus and the corrupting in?uence, we have failed.” Other analysts think the money was worse than wasted. E?orts to pull up poppies and shut down opium labs have been focused in the areas least hostile to American forces, for the obvious reason that anti-drug police are less likely to be killed there. This has displaced production into Taliban-controlled areas, argues Je?rey Clemens, an economist at the University of California, San Diego—and therefore enriched America’s enemies. The economics of the opium trade are stacked against the drug warriors. Demand for Afghan opium is relatively inelastic: the world’s heroin addicts cannot wait for their next ?x. So if the overall supply falls (because America has suppressed cultivation in friendly areas), the price shoots up. And a lot of that extra cash ?ows to the Taliban who, by UN estimates, earned $100m from the drug in 2011 and 2012.

Higher and higher
Afghanistan, opium cultivation, hectares, ’000 250 200 150 100 50 0

2000 02

04

06

08

10

12 13

Sources: UNODC; Ministry of Counter Narcotics

40 United States

The Economist April 12th 2014
is presumably due to con?dence rather than complacency. Real progress has been made. Barack Obama also spoke at the summit: the ?rst black president’s ?rst appearance at the o?cial archives of the great civil-rights president of the 20th century. The two presidents di?ered wildly in temperament—Mr Obama being more elegant than the average president, while Johnson did his part to lower the average—but they had, at least, this common cause. The fact that the president in question was Johnson is an enduring mystery of American politics and human psychology. A number of speakers at the summit examined it. Johnson’s predecessor, John F. Kennedy, was a vocal advocate for civil rights, but he had been unable to muscle a bill on the subject through a bitterly divided Congress. After he was assassinated in November 1963, no one expected that Johnson, who had been vice-president, would be much more successful on the subject. Few, in fact, expected him to try. During his long tenure as a senator from Texas, he had shown little enthusiasm for liberal ideals. He was not as critical of civil rights as some, and had even shepherded a couple of reform bills through the Senate in 1957 and 1960, but he had watered them down to ease the process, and the results were minor enough to seem merely political: a bid, from a southerner aspiring to be the Democratic presidential nominee, to win northern support. His embrace of the Civil Rights Act of 1964 might have been similarly opportunistic. The horror of Kennedy’s assassination galvanised support for the late president’s agenda, and civil-rights leaders including King quickly called on Johnson to move quickly in favour of reform. After bullying the 1964 law through Congress, however, Johnson continued unabated. By the end of his presidency he had also notched up major reforms of voting rights, immigration, education and health care, all in the name of his “Great Society”. Many historians argue that Johnson’s concern for social justice was longstanding, and trace its roots to south Texas, where he worked as a schoolteacher in a poor and predominantly Hispanic town, or to the rural hill country where he grew up in poverty himself. If his ideals preceded his presidency, however, Johnson did a good job of hiding it. On the day he signed the Civil Rights Act, he struck some downto-earth notes. To help with implementation, he said, he was planning to appoint an advisory committee of distinguished Americans, and he would ask Congress for supplemental appropriations. And the country’s greater commitment to freedom, the president suggested, was an operating assumption rather than a clarion call: “We will achieve these goals, because most Americans are law-abiding citizens who want to do what is right.” 7

The Civil Rights Act

Fifty years on

Celebrating half a century of a wilfully optimistic law

“T

HE purpose of this law is simple,” said President Lyndon Johnson on July 2nd 1964, as he prepared to sign the Civil Rights Act. It would forbid segregation at hotels and restaurants, he explained, and ban discriminatory rules for voter registration. It had passed both chambers of Congress with a two-thirds majority, meaning that both Democrats and Republicans had supported the bill. The law’s bulwark, he added, would be “voluntary compliance”. That was a wish as well as a warning. The law may have been simple, but Johnson intended its e?ects to be profound: “to promote a more abiding commitment to freedom, a more constant pursuit of justice, and a deeper respect for human dignity”. And he knew that many whites, particularly in the South and in his home state of Texas, would resist its implementation. In the second week of April the Lyndon B. Johnson Presidential Library in Austin, the Texas capital, hosted a summit on civil rights, celebrating the 50th anniversary of the law’s passage. The speakers included advocates, athletes and artists; blacks, whites and Hispanics; leaders of the movement and people born years later; and politicians from both parties, including the heaviest hitters available. Only ?ve people alive have held the o?ce of president of the United States. Four of them, including

the incumbent, spoke at the summit. (The ?fth, George H.W. Bush, served as an honorary co-chair.) The fact that the Civil Rights Act can now be the subject of a major conference is, in itself, a sign of how much the country has changed since its passage. In the early 1960s opposition to racial equality was widespread, brutal and sometimes lethal. It was also a more or less mainstream political position at the time the law was passed, and for years thereafter, at least in parts of the country. Former President Jimmy Carter, who spoke on the ?rst day of the summit, recalled that when he was elected governor of Georgia in 1970, segregation in public services such as schools was the norm, even though it was illegal. Even today, he continued, racial inequality can be seen in employment statistics and educational outcomes. “Too many people”, he warned, “are at ease with the stillexisting disparity.” It was a salient point. The next day, panellists paused over the fact that although life expectancies for blacks in the United States have greatly improved since the 1960s, the lifetime earnings di?erential between black and white workers has not changed much. That evening Bill Clinton, another former president, warned against recent e?orts to undermine the Voting Rights Act, which Johnson signed in 1965. The ease Mr Carter diagnosed, though,

The Economist April 12th 2014

United States 41

Lexington The Democrats’ daughters
Yet another way to point up the party’s di?erence from Republicans Kentucky Democrats are a revealing case study. For many Democrats, the state is a puzzle. Some of its frustrations are unique. Others re?ect the struggles Democrats have to win the trust of blue-collar voters across America. Like many of its neighbours, the state was run by white southern Democrats who felt orphaned by their national leaders’ embrace of civil rights for blacks. Unlike in neighbouring states, Kentucky Democrats have been slow to switch their allegiance, across-the-board, to the Republicans. The governor is a two-term Democrat, and Democrats control most statewide o?ces, as well as half the state legislature. In contrast, Republicans dominate congressional elections, and Barack Obama twice lost Kentucky by a landslide. Various reasons are o?ered for the Democrats’ partial survival. A small black population (the state is almost 90% white) lessened fears ofa blackDemocratic power-grab, explains Al Cross of the University of Kentucky. Part of it is family “tradition”, says Governor Steve Beshear. Locals are “tribal”, says David Cartmell, the Democratic mayor of Maysville, a tiny port city on the Ohio river that is Mrs Lundergan Grimes’s ancestral home. Mrs Lundergan Grimes won the county by two to one in her 2011 race to become secretary of state. Mr Cartmell’s mother and grandmother were both mayors (and Democrats), and are remembered fondly: the ?ood defences built by his grandmother can be seen from City Hall. Mr Clinton, who has campaigned for Mrs Lundergan Grimes, is popular too; Maysville’s economy boomed when he was president. Yet Mason County went solidly Republican red for Mr McConnell in 2008 and for Mitt Romney, the presidential candidate, four years later. In part, Republicans can thank local self-interest, and in part conservative values. Mr McConnell is praised for sending federal cash to build a cookery school—a giant cardboard cheque for $2.6m, adorned with the senator’s signature, hangs in the mayor’s o?ce. Coal trains rumble through Maysville daily, and locals deeply distrust environmental curbs on mining. Folk are keen on church, gun rights and the armed forces. Kentucky-fried values Locals like Democrats who are “Kentucky-fried”, says the state’s attorney-general, Jack Conway. It is the values of national Democrats that are often seen as alien. Enter Mrs Lundergan Grimes, who has never served in Washington, and whose name (and Clinton connections) should help stir tribal loyalties of the past. She is careful to send signals about old-time Kentucky values, calling herself pro-coal and pro-gun, for instance. But she has a 21st-century mission as well: delivering the party’s latest messages about economic populism, many aimed explicitly at women, a rising voter bloc with a strong Democratic bent. Addressing the Fayette County Democrats’ dinner this week, Mrs Lundergan Grimes painted free-market qualms about higher minimum wages and other interventions as an archaic defence of discrimination. Mr McConnell is “the senator of yesterday”, championing yesterday’s views on women and the economy, she declared, to cheers. Mr McConnell will still be hard to beat in Kentucky. Much will depend on how each party turns out the vote. Even so, expect more candidates with names to stir old-timers and a message of economic populism crafted to recruit new Democrats, especially women. For Democratic bigwigs, 2014 is more than a tough election year. More and more, theirs is a party preparing for Hillary Clinton. 7

H

EADLINE-writers are ready to call 2014 a banner year for Republicans. They point to signs that the mid-term elections in November will leave Democrats in a minority in both chambers of Congress. That may be right. But after visiting Kentucky, scene ofa Senate race that threatens to set records for expense and nastiness, Lexington wonders whether historians may view 2014 as something else: the year when Democratic women were placed front and centre in e?orts to reconnect with ordinary voters. The senior senator for Kentucky, Mitch McConnell, is a daunting foe. Leader of the Republican Party in the Senate, with an essentially limitless ability to raise campaign funds, his professorial exterior conceals a rare talent for political combat. During three decades in o?ce he has swatted aside Democratic challengers and dispatched Republicans who displeased him. To take on the 72-year-old Mr McConnell, Democrats are due to pick 35-year-old Alison Lundergan Grimes, Kentucky’s secretary of state, an elected post at the top of the state bureaucracy. Disciplined and combative in a slightly head-girlish way (“I don’t scare easy,” she likes to say) she is known to local activists as the daughter of Jerry Lundergan, a fast-talking, self-made Democratic power-broker, former state party chairman and friend of Bill and Hillary Clinton. She is not the only dynastic daughter ?ghting a big race in 2014. In Georgia, the Democratic Senate candidate will be Michelle Nunn, daughter of Sam Nunn, a long-time former senator. One of the year’s most vulnerable Democrats, Senator Mary Landrieu of Louisiana, can draw on local goodwill towards her father, Moon Landrieu, who as mayor of New Orleans worked hard to improve race relations. In Florida the Democrats have recruited Gwen Graham, daughter of Bob, a former senator and governor, to ?ght Republicans for a knife-edge House district. It is true that political sons have sought o?ce since America’s founding. It is true, too that some Republican daughters have stepped forward during this election season. Liz Cheney (daughter of the former vice-president) made a brief, fruitless run for her party’s Senate candidacy in Wyoming. A Republican governor’s daughter, Shelley Moore Capito, is running for the Senate in West Virginia—though she is already a seven-term congresswoman. But this year Democrats stand out for entrusting important contests to women with well-known names.

42

The Americas

The Economist April 12th 2014 Also in this section 43 Aboard an icebreaker in Canada 43 Chinese lending to Latin America 44 Bello: Italian lessons for Peru

For daily analysis and debate on the Americas, visit
Economist.com/americas

Cristina Fernández de Kirchner

The CFK psychodrama
Buenos Aires

Argentina’s president is weakened and isolated, but still powerful

Y

EARS ago, at a dinner in the Argentine presidential residence on the outskirts of Buenos Aires, a quarrel broke out between then president Néstor Kirchner and one of his senior ministers. Deeply offended, the minister left the palace only to be detained at the gates on “orders from the president”. Minutes later Kirchner appeared in a golf cart, urging the minister to come back and ?nish dinner. He hesitantly conceded but when he retook his seat, the president’s wife, then-senator Cristina Fernández de Kirchner, stopped him, stating icily: “He who stands up once from my table will never sit with us again.” That sort of attitude rewards loyalty, not debate. Ms Fernández, who went from senator to president in 2007 and was re-elected in 2011, cannot run for o?ce again next year. Economic problems and falling approval ratings have weakened her. But she remains Argentina’s most powerful politician and she cannot coast during the 20 months she has left in the presidential palace. The growth model that served the Kirchners well during the 2000s has run its course. The economy is widely expected to contract this year; in?ation is forecast to exceed 35%; reserves have been falling. Ms Fernández used to have a partner—a protector, even—to rely on. Until he died suddenly of a heart attack in 2010, Kirchner

shielded her from trouble. “Do me a favour,” he would say to Ms Fernández’s ministers and political allies. “If you have bad news, bring it to me. Don’t tell Cristina.” In a rare interview with Jorge Rial, an Argentine gossip journalist, in September, she recounted: “[Néstor] had a protective instinct towards me…I would get annoyed with this and tell him ‘Don’t treat me as though I’m a child.’” With Kirchner gone, Ms Fernández has got used to being in full control. Only a select few have the president’s ear. Some ministers speak only rarely with her, otherwise working through her secretary. In matters of economics, her most marked weakness, the president relies heavily on Juan Carlos Fábrega, the governor of the Central Bank, and Axel Kicillof, her young and dogmatic economy minister. But Ms Fernández’s true inner circle now consists of only two people. Since her husband’s death and the departure of Alberto Fernández (no relation), who was the Kirchners’ cabinet chief until he fell out with Ms Fernández in 2008, her closest adviser has been Carlos Zannini, her legal and technical secretary. Mr Zannini has kept his pro?le so low that few Argentines recognise his name. Those closer to him call him “El Chino” (the Chinaman), for his Maoist leanings during the 1970s.

Her only other con?dant is her son, Máximo, a college dropout who lives in the far reaches of Patagonia, the Kirchners’ home state. Although he holds no elected o?ce, Máximo wields plenty of power as the founder and leader of La Cámpora, a political youth organisation whose acolytes dot the boards of state-owned and private companies. Those who know Ms Fernández commend her work ethic. She will often call provincial governors late at night on their mobile phones to ask about the minutiae of a report she has devoured. She is a ?uent, if often aimless, orator, a skill she can use to shut down awkward debate. Joaquín Morales Solá, a political columnist for La Nación, a newspaper, remembers that during one interview, he was only able to slip in two questions in an hour and a half. The need to control extends to her image. She never appears in public without looking glammed up, once joking: “I was born in make-up.” Prada and progressivism Yet if Ms Fernández is indisputably in charge, Néstor’s words still resonate. The impression remains of someone who would prefer to avoid bad news than confront it. On the toughest problems facing Argentina, the president largely remains mum. In her most recent speech to Congress, which lasted almost three hours, she conspicuously avoided mentioning in?ation and insecurity—the two problems of most concern to Argentines today. “She believes that if she doesn’t address it, it won’t get worse,” explains Mr Fernández, the former cabinet chief. Reversing course is also not part of the president’s style. The word “mistake” is not 1

The Economist April 12th 2014
2 in her vocabulary. That, many speculate, is

The Americas 43
“Those wanting a devaluation will have to wait for another government,” she had insisted eight months before. The Central Bank also raised interest rates in an attempt to contain in?ation. That has caused the economy to slow sharply. Ms Fernández saved face by blaming speculators. But there have been other signs of pragmatism: compensation for Repsol, the Spanish ?rm whose controlling stake in YPF, the state oil ?rm, was nationalised in 2012; new and more credible in?ation data; a cut in water and gas subsidies; and a friendlier relationship with Jorge Bergoglio, the one-time archbishop of Buenos Aires now known as Pope Francis. This halting move towards orthodoxy is set to be the de?ning feature of Ms Fernández’s remaining time in o?ce. It is not in her nature to execute a bold U-turn; and there is no one in her inner circle urging her to do so. She will do what she needs to in order to prevent the economy from collapsing, but not enough to grasp the nettle of Argentina’s problems. That task will fall to her successor. What Ms Fernández hopes to do after leaving power is not clear. Her cranial surgery in 2013 may have changed her plans. According to a former government minister, “having recognised that what happened to Néstor could happen to her,” she is more concerned than before to spend time with her family. But she will want to conserve in?uence, if only to stop her enemies investigating allegations of moneylaundering and corruption within her circle. Ms Fernández has been loth to pick a presidential heir for fear that he eclipse her own authority. It is not clear how much the potential candidates crave her endorsement. The president who once aspired to run for a third term retains power, but it is draining away. 7

why she has not yet dismissed Amado Boudou, her useless vice-president. “Narcissism drives her more than reality,” says Mr Morales Solá. “To her, recognising errors is to admit weakness.” Ms Fernández is also a genuine believer in Kirchnerismo. “She truly buys her own dogma,” says Mr Fernández. “She is convinced that she’s the protagonist of her own revolution.” The ends of this revolution are more social inclusion; the means include raising trade barriers, persecuting big business, and doling out subsidies. That credo works for as long as there is money. Since the start of the year, with the commodity supercycle slowing and foreign-exchange reserves dwindling, the president has had to become more pragmatic. In January Mr Fábrega convinced her to devalue the peso by 15% in two days—a thing she’d pledged never to do.

Voisey’s Bay nickel mine

Chinese lending to Latin America

Ice and lolly
THE UMIAK I

Flexible friends
reinforced hull and a soupspoon-shaped bow that rides up over the ice, which can be as thick as ten metres in places. The ship is powered by a 30,000 horsepower engine, large enough to drive an oil tanker ten times its size. Satellite imagery helps identify where the ice is thickest. Even so, the Umiak I was stopped a few times by dense ice in the Gulf of St Lawrence and along the Labrador coast on a voyage last month. When the ice resists, the Umiak I reverses and tries again. The cooks put on ear protectors as the engine whines and the ship shudders. The Umiak I operates a shuttle service from Quebec City, a 1,850km voyage that usually takes three-and-a-half to four days. On its ?nal approach into Voisey’s Bay the ship takes the same route every time, with markers a few metres on each side, so as not to disturb Inuit. A group of hunters on snowmobiles wait as the ship passes, ready with a pontoon bridge to cross the open water that the icebreaker leaves behind. On the trip out, the deck is covered with more than 150 containers carrying mining supplies and food for the people who work there. Sometimes a hold is ?lled with diesel for the mine’s 12MW electricity-generating station. On the return voyage it carries as much as 30,000 tonnes of nickel-copper concentrate, which goes by train from Quebec City to Vale’s smelter in Sudbury, Ontario. That makes for a precious cargo: the price of nickel is well o? its peak but the load is still worth a cool $100m or so. China lends disproportionately to countries that lack other options

An icebreaker heads to the mines of northern Canada

B

Y ANY standards the Voisey’s Bay nickel mine is remote. Diamond prospectors found the deposit near the coast of Canada’s easternmost province of Newfoundland and Labrador in 1993 (see map); the mine, which is operated by Vale of Brazil, opened in 2005. No roads connect it to the outside world. Although a giant hydroelectric plant is just 365km (230 miles) away, at Churchill Falls, the mine gets no power from it. The 300 mine workers can be ?own in and out. The nickel has to be shipped—no easy task when the bay is closed o? by sea ice for six months a year. The only way to get ore out all year round is with a polar-class icebreaking bulk carrier, the Umiak I. It makes 12 trips a year. The Umiak I is the world’s most powerful icebreaking cargo ship. It has a
Umiak I route

T

HE rise of China has changed every region. But it has reinforced patterns, too. China’s demand for commodities has entrenched Latin America’s position as a supplier of raw materials. The country guzzles oil from Venezuela and Ecuador, copper from Chile, soyabeans from Argentina, and iron ore from Brazil—with which it signed a corn-import deal on April 8th. Chinese lending to the region also has a strong ?avour of natural resources. Data are patchy, but according to new ?gures from the China-Latin America Finance Database, a joint e?ort between the InterAmerican Dialogue, a think-tank, and Boston University, China committed almost $100 billion to Latin America between 2005 and 2013 (see chart). The biggest dol- 1

Hudson Bay

Less risky than it looks
Chinese lending to Latin America, 2005-13, $bn 0 Venezuela Argentina Brazil Ecuador Bahamas Mexico Peru Other
Number of loans

Voisey’s Bay
N

ONTARIO

Churchill Falls

L ab rad or Se a
DA

EW
FO

10

20

30

40

50
13 8 7 10 3 3 4 18

UN

DL

Q U E B E C

C

A

N

A

D A

Labrador

AN

ND
L AB

Sudbury Ottawa Toronto Quebec Montreal

Newfoundland

UNITED STATES

ATL ANTIC OCEAN
500 km

RAD
OR

Source: China-Latin America Finance Database

44 The Americas

The Economist April 12th 2014

Bello Peru’s Italian job
Economic success cannot inde?nitely co-exist with political weakness

W

HEN Bello reported on the latter years of Carlos Menem’s rule in Argentina, he would sometimes be enjoined to take no notice of the political scandals lapping around the regime. The important thing, he was told, was that the economy was run by responsible technocrats, as in “the Italian model” of the postwar decades. He heard something rather similar when Ollanta Humala was poised to win Peru’s presidency in 2011. Politics was a mess, a prominent banker con?ded, but what really mattered was that the economy was well managed. Almost three years into Mr Humala’s presidency, both of those things remain true. But far from being a reassurance, Peru’s adherence to the Italian model is actually a cause for concern. Mr Humala, a former army o?cer and a political chameleon, ?rst ran for president in 2006 as a supporter ofVenezuela’s Hugo Chávez. He lost that election and in 2011 reinvented himself as a pro-Brazilian social democrat. But after winning this race, he opted to stickwith the free-market policies that have brought a decade of strong growth. Miguel Castilla, the economy minister, is revered by private business. The most powerful member of the government, last year he beat back an ill-advised plan to nationalise the Peruvian operations of Repsol, a Spanish oil company. Although economic growth has slowed a little, Mr Castilla is con?dent that it will rise again to 6% or more for the next three years, thanks to big new mines and an ambitious programme of private-public infrastructure partnerships. On March 28th the government awarded a $6 billion contract to build a second metro line in Lima. But politically Mr Humala has struggled. His approval rating has fallen to 25%, down from 54% a year ago, according to

Ipsos, a pollster. He is on his ?fth cabinet in less than three years. His makeshift coalition commands only 43 of the 130 seats in Congress, which last month twice voted to reject the latest team. That prompted a minor constitutional crisis. Only after Mario Vargas Llosa, Peru’s leading novelist and a Humala supporter, warned melodramatically that a power vacuum might open the way to a military coup did parliament give its approval. In fact, the current cabinet is an improvement on its predecessors. It is stu?ed with capable technocrats. The problem is that the president himself has failed to provide the government with political leadership. Mr Humala has been almost reclusive, leaving the talking to Mr Castilla as well as to the bright and ambitious ?rst lady, Nadine Heredia. On security, the president prefers to work through army friends—a bad idea when radical reform of the police, the public prosecutor and the judiciary is needed. Yet Peru’s political problem goes much deeper than Mr Humala. His two predecessors were similarly unpopular. Peruvians hold their politicians and Congress in conChinese, and not simply because they help secure long-term energy supplies. They also reduce the risk of lending to less creditworthy countries like Venezuela and Argentina. Money from oil sales is deposited in the oil ?rm’s Chinese account, from where payments can be directly siphoned. It is no surprise that Chinese money is welcome in places where ?nancial markets are wary. Ecuador, which defaulted on its debts in 2008, has used Chinese loans both to ?ll in holes in its budget and to reestablish a record of repayment in advance of trying to tap bond markets again. But Chinese credit has its attractions in

tempt. It is not hard to understand why. Back in the 1980s economic collapse, hyperin?ation and the terrorism of the Shining Path destroyed the country’s faith in its leaders. In the 1990s Alberto Fujimori stabilised the economy and crushed the Shining Path. But he was an elected autocrat who sent tanks to close Congress and undermined the party system. Almost 70% of Peruvians work in the informal sector: they feel that if they have prospered, it is through their own e?orts, not because of the politicians. The real lesson from Italy is that if the political system is unable to act in the long-term interest of the majority, it ends up contaminating the economy with its failures. Peru is a democracy without meaningful parties. A regional election in October is likely to repeat the last one, in which 23 of the 25 regional presidents were independents. Thanks to mining and gas royalties, they command a big chunk of public money. One important region, ?ncash, has become a ma?a ministate. Ten political opponents of the regional president, César ?lvarez, have been murdered after denouncing corruption. His critics accuse Mr ?lvarez, who denies all wrongdoing, of having bought o? prosecutors. This month Mr Humala froze ?ncash’s bank accounts. Mr Humala’s predecessors completed their terms despite their unpopularity (though they were better at building alliances than he is). But what will happen if Mr Castilla proves over-optimistic? If the ?ow of money that has transformed Peru in the past two decades began to dry up, a discredited political system would be unable to bu?er and channel public discontent. The risk then is that the parallel lines of economics and politics would converge—just as they have in Italy. other economies, too. It often makes sense for countries to diversify sources of lending. Loans can open the door to direct investment. And as Kevin Gallagher of Boston University points out, the Chinese banks operate in largely di?erent sectors to the multilaterals. Of the money China has lent in the region since 2005, 85% has gone to infrastructure, energy and mining. Borrowers may have to spend a proportion of their loan on Chinese goods in return; some observers worry about the laxer environmental standards of Chinese banks. But the main thing is that money is available. Expect the loan ?gures to rise. 7

2 lops by far have come from the China De-

velopment Bank (CDB). These sums are meaningful. Chinese lenders committed some $15 billion last year; the World Bank $5.2 billion in ?scal year 2013; foreign commercial banks lent an estimated $17 billion. More than half of China’s lending to Latin America has been swallowed by Venezuela, which pays much of the loan back from the proceeds of long-term oil sales to China. Ecuador has struck similar deals, as has Petrobras, Brazil’s state-controlled oil ?rm, which negotiated a $10 billion credit line from CDB in 2009. Such loan-for-oil arrangements suit the

Middle East and Africa

The Economist April 12th 2014 45 Also in this section 48 Getting Arabic into the internet 48 South Africa’s taint of corruption 49 Angola is too oily

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

Israel-Palestine

A peace process that is going nowhere
JERUSALEM AND RAMALLAH

John Kerry’s dogged bid for a two-state solution has faltered

Z

E’EV ELKIN, Israel’s 43-year-old deputy foreign minister, who emigrated from eastern Ukraine in 1990, chuckles about the rise of “Russians” into his country’s highest posts. The foreign minister, Avigdor Lieberman, hails from Moldova, once part of the Soviet Union. “Recently the ministers of tourism, absorption, diaspora a?airs, the head of the Jewish agency— they’ve all been Russians,” jokes Mr Elkin. Most Russian-Israelis, he notes approvingly, are “right-wing”, meaning that they are hawks on Palestine. Mr Elkin openly opposes—under any circumstance, he breezily asserts—the stated desire of his prime minister, Binyamin Netanyahu, for a Palestinian state to co-exist alongside Israel, something John Kerry, America’s secretary of state, is failing to achieve after nearly eight months of frenetic diplomacy. A Palestinian one, however hedged about, would, says Mr Elkin, “threaten the existence of a Jewish state.” Better, he adds, to annex a chunk of the West Bank, the core of the Palestinians’ would-be state, to Israel. These days the West Bank, he adds with another chuckle, is “the most stable part of the Middle East”. Mr Elkin is not an oddity in ?atly opposing his prime minister from within his ruling Likud party, on what is still the most contentious issue in Israeli politics. A sizeable majority of Likud’s central committee and most of its 20 members in the 120-seat Knesset, Israel’s parliament, also oppose

the idea of two states, though Mr Netanyahu formally endorsed it, albeit tepidly, ?ve years ago. Indeed, says Mr Elkin, only “two or three” Likudniks in the Knesset back the prime minister wholeheartedly on this issue. Yet Mr Elkin ran the foreign ministry for a year when Mr Lieberman, under investigation for corruption, stood down from the o?ce until last November. Mr Lieberman, known in his early days in the Knesset for his virulent hostility to the Palestinians, especially those who are Israeli citizens, arguing that they should swear an oath of loyalty to the Jewish state or lose their voting rights, has come round to the two-state idea, with “transfers” of land: the Arab-populated areas of Israel should be placed within a Palestinian state. He has repackaged himself as “just a moderate racist”, jokes an Arab-Israeli member of the Knesset. Meanwhile Naftali Bennett, the ruling coalition’s economics minister, a bouncy IT-businessman whose Jewish Home party is the Knesset’s third-biggest, is outright hostile to the two-state notion, warning that if Messrs Netanyahu and Kerry sign even an anodyne “framework agreement” later this month, endorsing the broad principle of two states, he will remove his 12 Knesset members from the government, depriving it of a majority. Mr Kerry, adds Mr Bennett, has become a “mouthpiece for anti-Semitism” in his efforts to ?x a two-state deal.

For his part Yair Lapid, the ?nance minister, whose party is the second-biggest, with 19 seats, avoided the Palestinian issue at the general election a year ago, campaigning on an economic platform that appealed to Israel’s secular-minded middle class. But he has become more forceful in advocating “divorce and separation” from the Palestinians, making sure that he cannot be regarded as a feebly ?uttering dove. The only senior member of Mr Netanyahu’s cabinet who is eagerly in favour of cutting a deal that would require Israeli as well as Palestinian concessions is Tzipi Livni, the justice minister, who is entrusted with the negotiations. Her small (six-seat) party is a spin-o? from the late Ariel Sharon’s, which broke away from Likud in 2005. That was when Mr Sharon controversially decided, in the face of Mr Netanyahu’s ?erce opposition, to evacuate Israeli troops and settlers from the Gaza Strip, perhaps—some surmise—as a prelude to leaving most of the West Bank, though he denied this at the time. In other words, a majority of Knesset members in Israel’s ruling coalition and a majority of ministers are either against a two-state solution or lukewarm towards it—hardly the sort of government that Mr Kerry can count on. “Netanyahu’s been Tea Party’d,” says a Western diplomat, using a phrase that the Israeli prime minister has apparently uttered himself. Beyond the Rubicon The only way this bleak prognosis could change is if Mr Netanyahu himself were to “do a Sharon”—that is, to defy his own Likud party, forge a new out?t, reshape his coalition, and—in an expression that often comes up in Jerusalem and Tel Aviv— “cross the Rubicon” on the way to two states. And, on paper, he could indeed reshape a coalition that would more eagerly 1

46 Middle East and Africa
2 bid for a deal with the Palestinians.
20 km

The Economist April 12th 2014
Netanyahu is coming under pressure to ask for much more. A growing number of leading lights in his coalition, such as Mr Elkin, are calling for Israel to annex Area C, which encompasses 62% of the West Bank (including the Jordan Valley) and is home to a shrinking and scattered minority of the Palestinian population. Mr Kerry says no. But Mr Netanyahu, even at his most ?exible, is said to be demanding that Israel retain twice as much land in the West Bank as Mr Olmert proposed: perhaps 10-12%, compared with the 6.5% suggested, along with territorial swaps of equal area and quality, by Mr Olmert. “Netanyahu thinks Israel can co-exist with the Palestinians having autonomy but scattered on the West Bank that is totally divided and sliced up,” says a Palestinian close to Mr Abbas. “This is the same old movie we’ve seen many times—but this time it’s the worst-ever version.” Mr Kerry still hopes to pull both sides into accepting that the border can be adjusted so that at least 80% of the 575,000 Jewish settlers now in the West Bank and East Jerusalem (the mainly Arab-populated side ofthe city that was conquered by Israel in 1967) will fall within Israel, requiring perhaps as many as 100,000 Jews to be repatriated (or possibly absorbed into a Palestinian state) in the event of a ?nal deal. He is also seeking a formula acknowledging that the Palestinians have an “aspiration” for their capital to be in East Jerusalem rather than the blunter assertion that East Jerusalem would become their capital, along the lines of an ethnic division suggested by Bill Clinton at a conference in Taba that followed Camp David. But a close adviser to Mr Netanyahu says that, at this stage, any discussion of Jerusalem is “too problematic”; Mr Kerry has apparently yet to grapple with it in detail. What next for Palestine? For their part, the Palestinians are close to despairing of having a state of their own. Their leader, Mr Abbas, a prime proponent of liberation by negotiation, is boxed in by both the Israelis and his own people. For the Palestinians, the most onerous of the new Israeli demands is that they agree not only to recognise Israel, which the umbrella Palestine Liberation Organisation did back in 1988, but to recognise it as a speci?cally Jewish state. They fear this would cast the ?fth ofIsraelis who are Arabs into a second class of citizenship. More signi?cantly, Palestinians claim, it would mean that they would drop their age-old demand that refugees and their descendants have a “right of return” to their old homes in Israel that were abandoned when Israel was created in 1948. That would require the Palestinians, as they see it, to disavow their own historical narrative, instead acknowledging the Jews’ right to establish a state on the back of the 1

The current opposition, led by the Labour party leader, Yitzhak (“Bougie”) Herzog, with 12 seats, would leap at the chance. He has recently persuaded a rare assortment of opposition parties, including Shas, the biggest religious party, and a clutch of Arab-Israeli ones, to co-operate. If Likud were to split and Mr Bennett pulled out, Mr Netanyahu would still have a solid majority, were Labour and its allies to join him in a new two-state-seeking coalition. Moreover, opinion polls suggest that three-quarters of Israelis accept the principle of a twostate solution. Few observers think Mr Netanyahu has seriously contemplated such a drastic move. Tony Blair, representing the peacemaking “Quartet” of the UN, the United States, Russia and the European Union, still hopes that Mr Kerry has a chance of “re-anchoring” the negotiations, with the 1967 borders and land swaps as the basis for progress “to the next stage”. But others note that both Mr Netanyahu, barely challenged as the nation’s leader, and Israel itself, are comfortable with the status quo. Israel’s GDP per person is $37,000, according to the IMF, nearly 12 times that of its biggest Arab neighbour, Egypt, and far above most of the others. Indeed, it is higher than most EU countries’. And a bonanza from o?shore gas is in the o?ng. Militarily Israel feels pretty secure, especially in the short run. It is nearly a decade since it faced the sustained terrorism that traumatised Israelis during the Palestinians’ second intifada (uprising). Above all, the Palestinians are weak and divided. The Arab League and other potential sponsors seem uninterested in their plight, while other problems, such as Syria’s civil war, are more pressing. Why should Mr Netanyahu take the sort of risk that may have cost Mr Sharon his health and even his life? Man with a mission Mr Kerry has b

相关文档

twin peak The Economist - April 4, 2015 USA
economist-2014-03-29-mar
[Britain]The Economist 2014.08.09
The Economist (Intelligence Unit) - FTAs in South East Asia 2014
The_Economist_-_11TH_January-17TH_January_2014
The Economist - November 15 2014
The+Economist+-+November+8+2014
The_Economist_3_9_May_2014
Economist经济学人.2014-2-15
The Economist - February1-7 2014
电脑版