The city that is China’s future Backlash against the jihadists Securitisation is back Conglomerates: from dodo to phoenix
JANUARY 11TH– 17TH 2014

Who is a Jew?




6 The world this week Leaders 9 Privatisation The $9 trillion sale 10 France’s economic woes Can Fran?ois do a Gerhard? 10 Drug legalisation Of bongs and bureaucrats 11 Securitisation Back from the dead 12 Britain’s planning laws An Englishman’s home On the cover It’s time for governments to launch a new wave of privatisations, this time centred on property: leader, page 9. Advanced countries have been slow to sell or make better use of their assets. They are missing a big opportunity, pages 19-22 Letters 14 On France, hotels, Heathrow, William Petty, our country of the year Brie ng 19 State-owned assets Setting out the store 20 Privatisation in Greece Hellishly Hellenic Asia 23 Bangladesh’s election Another beating 24 Cambodian democracy Bloodied and probably broken 25 Politics in India Stirring the pot 26 Banyan The trouble with democracy China 27 Urban renewal (1) New economic frontiers 28 Urban renewal (2) Not so grim up north 29 Sir Run Run Shaw Hong Kong’s movie mogul United States 31 The economy Is this the year growth takes o ? 32 Pot in Colorado High time 33 The decline of smoking Pu ed out 33 Robert Gates’s memoir Everything was political 34 New Orleans mayoral election No switch for Mitch 34 Criminal justice Sick tales 35 Positive parenting Beyond the naughty step 35 Chris Christie Bridge to nowhere 36 Lexington The Robin Hood trap The Americas 37 Precarious Argentina Holding the ring 38 Reforms in Cuba Seat belt, mirrors, brake 38 Mexico’s cowboy pilgrims Saddle up, kneel down Middle East and Africa Syria, Iraq and al-Qaeda Backlash against the jihadists Israel and Palestine Progress, after all Egypt and its referendum Back to the old bad habits? Rural decline in Iran Nothing idyllic South Africa Nelson Mandela’s family feuds

The Economist January 11th 2014 3

Who is a Jew? Competing answers to an increasingly pressing question, page 51


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Backlash against the jihadists Growing hostility to the most extreme of the jihadists, from Baghdad to Beirut, may change the course of the civil wars in Iraq and Syria, page 39. In Egypt an army-backed government forges ahead, with elections in the o ng, page 41

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Volume 410 Number 8869
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, Los Angeles, Mexico City, Moscow, New Delhi, New York, Paris, San Francisco, S?o Paulo, Singapore, Tokyo, Washington DC

Europe 43 France’s president Hollande, liberal? 44 Angela Merkel’s pelvis Dangerous at low speed 44 Balkan politics Serbian shenanigans 45 Latvia’s government New currency, new leader 45 Italian politics Left upset 46 Charlemagne Greece’s Aegean stables

Chinese cities Foshan, a coastal city that grew rich by making consumer goods, points towards China’s future, page 27. Baiyin, a hub for mining and heavy industry, also tries to reinvent itself, page 28

1 Contents continues overleaf

4 Contents

The Economist January 11th 2014

Britain 47 House-building Breaking the stranglehold 48 Ornithological trends This bird has own 49 Bagehot Osborne the weathermaker International 51 Jewishness Who is a Jew? Business 53 Big carmakers Kings of the road 54 Electric cars Charging into America 54 IBM A cure for the Big Blues 55 Samsung Flu ed lines 56 German weapons rms No farewell to arms 56 Cruise operators Sailing into headwinds 57 Cosmetics in China Because it’s no longer worth it 58 Schumpeter Conglomerates: from dodo to phoenix Finance and economics 59 The return of securitisation Back from the dead 60 The return of IPOs Back with a boom 61 Turkey’s troubled economy The mask is o 61 Euro-area economy In the danger zone 62 Private placements Ex uno plures 63 New York city’s retirement funds Pension complex 63 Cutting energy subsidies Fuelling controversy 64 Free exchange This time is worse

Science and technology 66 Astronomy Planetology comes of age 67 Diabetes and insulin Not-so-bitter pill 67 Academic publishing No peeking 68 Biomedical research budgets The party’s over Books and arts 69 Pussy Riot Riotous assembly 70 Planet Earth Piece of junk 70 Literary heroines Come the X-chromosome 71 Yu Hua’s stories Learning to live 71 New cinema: Her I me mine Business books quarterly 72 Corporate culture A CEO’s guide 73 Entertainment companies Hit hunger 73 American banks Why they need to be big 74 Business strategy and technology Big Bang Theory 80 Economic and nancial indicators Statistics on 42 economies, plus our poll of forecasters Obituary 82 Mikhail Kalashnikov The man behind the gun Next week We publish a special report on tech startups. There is an explosion of them, thanks to cheap and ubiquitous building blocks for digital products and services. Ludwig Siegele explains why it matters
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Conglomerates Once seen as heading for extinction, conglomerates are spreading their wings: Schumpeter, page 58

Securitisation It helped cause the crisis, but is now seen as part of the solution: leader, page 11. The comeback, page 59

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The world this week
ghting. In a separate meeting Sudan’s president, Omar al-Bashir, met Mr Kiir in Juba, South Sudan’s capital. diplomat in New York on charges of visa fraud and underpaying her nanny. The government in Delhi is furious, even threatening to impose tra c nes on American embassy cars in the Indian capital. Thailand’s anti-corruption body decided to charge more than 300 politicians for trying to change the constitution. Most of them are from the governing party. The move is a further twist in Thailand’s political gridlock ahead of an election on February 2nd.

The Economist January 11th 2014
years about how to deal with the American tyre company’s loss-making site.

An ugly statistic The murder of Mónica Spear, an actress and a former Miss Venezuela, and her husband prompted protests in the country about levels of violence. Uno cial gures put the number of homicides in Venezuela, which has a population of 30m, at almost 25,000 in 2013.
The most prominent of Syria’s al-Qaeda-linked rebel factions, the Islamic State of Iraq and al-Sham (meaning Greater Syria), widely known as ISIS, was attacked and reportedly defeated in a number of places in northern Syria by its less jihad-minded rivals, as President Bashar Assad and his government forces looked happily on. Meanwhile, the UN’s secretary-general invited an array of countries, including the United States, Russia, Turkey and Saudi Arabia, but not Iran, the Syrian government’s closest regional ally, to attend peace talks in Geneva on January 22nd. ISIS was also engaged in battles against Iraqi government forces in Anbar, a province west of Baghdad abutting both Syria and Jordan. Its men controlled much of the province’s two biggest cities, Ramadi and Falluja, but the prime minister, Nuri al-Maliki, said he was determined to recapture them. Egyptians prepared to vote in a referendum on January 14th and 15th on a new constitution put forward by the armybacked government, which ousted an Islamist-led one last July. Followers of the Muslim Brotherhood, the former ruling party that has recently been banned as a terrorist movement, are calling for a boycott. Representatives of South Sudan’s government under President Salva Kiir and of rebels loyal to his former vicepresident, Riek Machar, met in Ethiopia’s capital, Addis Ababa, to discuss peace. Their forces back home continued Reforms allowing Cubans to buy and sell modern cars without needing special permits from the government came into force. But absurdly high prices more than $250,000 for a Peugeot meant more lookers than buyers. Brazil’s nance minister, Guido Mantega, sought to alleviate concerns about the public nances, announcing that the country had posted a larger-than-expected primary budget surplus last year.

The inequality agenda Six Republicans joined Democrats in the Senate to prevent a libuster of a bill that would temporarily reinstate unemployment bene ts for people who have been out of work for more than 26 weeks. Bene ts were extended in 2008, but the programme expired in December, ending the bene t for 1.3m people.
New York’s governor, Andrew Cuomo, announced that marijuana would be allowed for limited medical purposes in the state, which despite its liberal leanings has stern laws on the drug’s use. Meanwhile, the legalisation of marijuana for recreational use in Colorado was popular, with licensed shops reporting that they were running out of the weed because of high demand. Chris Christie, New Jersey’s normally ebullient governor, said he was outraged that one of his aides had apparently colluded with o cials to cause tra c problems in a town where the mayor had not supported Mr Christie’s re-election bid. He denied knowing about the a air, but the vindictiveness displayed by his sta may dent his popularity.

The political battle eld

Beat policemen Around 350 police o cers in Ankara, Turkey’s capital, were removed from their posts. The purge of the police force came in the wake of a wide-ranging corruption investigation that plunged the country’s political leadership into crisis. The government of the prime minister, Recep Tayyip Erdogan, is intensifying e orts to sideline those who are driving the investigation, including plans for a law to give it greater control over the judiciary.
Princess Cristina, the youngest daughter of Spain’s King Juan Carlos, was charged with tax fraud and money laundering, an unwelcome scandal after a series of public-relations disasters that have beset the increasingly unpopular royal family. The examining magistrate summoned the princess to appear in court on March 8th. The move could lead to the rst trial of a member of the Spanish royal family. Laimdota Straujuma was set to become Latvia’s rst female prime minister. She will replace Valdis Dombrovskis, who stepped down amid public anger at the collapse of a supermarket roof in Riga, Latvia’s capital, last November, killing 54 people. Elections are due in October. Workers at a Goodyear factory in northern France released two managers they had held captive for 30 hours in a dispute over plans to close it. Union leaders and managers have been negotiating for

Bangladesh’s ruling Awami League won a general election, after a boycott by the main opposition party. Voter turnout was low. At least 150 people died in violence before the election and during it. Security forces in Cambodia shot and killed ve garment workers at a march against low wages. The protest formed part of a wider opposition movement against the threedecade rule of Hun Sen as prime minister. America’s energy secretary postponed a trip to India because of an increasingly bitter row over the arrest and strip search of a female Indian

Much of North America shivered through a polar vortex , with many towns as far south as central Florida recording their coldest temperatures in 20 years. New York endured a bone-numbing -16°C (4°F), though that was positively balmy compared with the 40°C recorded in Brimson, 1 Minnesota.

The Economist January 11th 2014
American authorities were not informed. Mr Mado was arrested in December 2008. Leo Strine, the outspoken head of Delaware’s Court of Chancery, a big venue for business disputes and shareholder litigation, was nominated by the governor to be the state’s chief justice. More than half of America’s publicly traded companies are incorporated in Delaware. its value in December and then rising again to $1,000 before Alibaba’s decision.
Bond yields
10-year government, % 15 12 9

The world this week 7
Falling sales led L’Oréal, a French cosmetics company, to stop selling its Garnier brand in China and instead promote its other merchandise. Revlon, a rival, recently announced that it was pulling out of the Chinese market, where online retailers o er heavy discounts on many premium beauty products.

Samsung released a forecast of its operating pro t for the last quarter of 2013 that fell far short of expectations. Most of that may be because of one-o factors, such as forking out for special bonuses, though the South Korean group is facing sti competition at the cheaper end of the smartphone market. However, Samsung took market share from Apple at the pricier end of the market last year, and its tablet business, where margins are rising, is doing well.



6 3 0 12 13 14



Staying in Detroit Alan Mulally, who runs Ford Motors, ruled himself out as a contender to replace Steve Ballmer as Microsoft’s chief executive. Speculation had been mounting that Mr Mulally was the front-runner to take over when Mr Ballmer steps down this year.
Car sales in Brazil dipped by 0.9% in 2013, the rst fall after ten years in which sales averaged growth of 10%. Brazil’s government has relied on the car industry to keep the economy motoring along, o ering incentives to boost factory jobs; and the Brazilian market has become more important to carmakers, such as Fiat. Moody’s cut Qantas Airways’ credit rating to junk status, because of a marked deterioration in the carrier’s ability to compete with Virgin Australia in its key domestic market. Qantas has embarked on a big cost-cutting exercise. JPMorgan Chase dug deep into its pockets again to pay another ne, this time stumping up $2.6 billion to settle criminal and civil charges that it failed to heed warnings about Bernard Mado ’s Ponzi scheme. JPMorgan was his rm’s primary banker, but did not address misgivings about transactions as far back as the early 1990s. The bank’s London o ce became increasingly suspicious and in October 2008 led a report with British regulators listing its concerns.

Billions lost on bullion The Swiss National Bank said that the value of its gold reserves fell by SFr15 billion ($17 billion) in 2013. Gold prices tumbled by 28% last year, the steepest annual drop since 1981, ending a 12-year bull run for the precious metal as investors instead piled into booming stockmarkets. Switzerland’s central bank holds more than 1,000 tonnes of gold. America holds the largest amount of gold in the world, around 8,100 tonnes.
Bitcoin’s status as a global virtual currency was knocked back when Alibaba, China’s biggest e-commerce rm, banned it from being used on its websites. This follows curbs on Bitcoin introduced by China’s central bank. Bitcoin’s price is still volatile, losing half

Source: Thomson Reuters

Ireland’s rst sale of a government bond since exiting its bail-out programme late last year was almost four times oversubscribed. The sale of a ten-year bond raised 3.8 billion ($5.1 billion) with a yield below 3.5%; at the height of its debt crisis Ireland’s borrowing costs approached 14%. The Bank of England’s survey of credit conditions showed demand for mortgages in Britain from October to December rising at the fastest pace since the survey began in 2007. A government scheme that backs house purchases has been a factor, though the central bank cited market share objectives, higher expectations for house prices and an increased appetite for risk as driving most of the demand.

Bargain hunters Sales in American shops during the pre-Christmas period rose by 2.7%, the slowest pace since 2009. Retailers did well over the Thanksgiving break, but their customers held o from splurging again until they were tempted back by price-slashing promotions in the week before Christmas.
A company that makes a new type of freight pallet from glass bre and resin composite stacked up one of the most successful IPOs on London’s Alternative Investment Market over the past 12 months. RM2 International is expanding production of its pallets, which it claims are stronger and longer-lasting than wooden ones. Pallets carry the world’s cargo: 2.3 billion are used in North America alone. Other economic data and news can be found on pages 80-81

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The Economist January 11th 2014 9

The $9 trillion sale
Governments should launch a new wave of privatisations, this time centred on property MAGINE you were heavily in debt, owned a large portfolio of equities and under-used property and were having trouble cutting your spending much like most Western governments. Wouldn’t you think of o oading some of your assets? Politicians push privatisation at di erent times for di erent reasons. In Britain in the 1980s, Margaret Thatcher used it to curb the power of the unions. Eastern European countries employed it later to dismantle command economies. Today, with public indebtedness at its highest peacetime level in advanced economies, the main rationale is to raise cash. Taxpayers might think that the best family silver has already been sold, but plenty is still in the cupboard (see pages 19-22). State-owned enterprises in OECD countries are worth around $2 trillion. Then there are minority stakes in companies, plus $2 trillion or so in utilities and other assets held by local governments. But the real treasures are non- nancial assets buildings, land, subsoil resources which the IMF believes are worth three-quarters of GDP on average in rich economies: $35 trillion across the OECD. Some of these assets could not or should not be sold. What price the Louvre, the Parthenon or Yellowstone National Park? Murky government accounting makes it impossible to know what portion of the total such treasures make up. But it is clear that the overall list includes thousands of marketable holdings with little or no heritage value. America’s federal government owns nearly 1m buildings (of which 45,000 were found to be unneeded or under-used in a 2011 audit) and about a fth of the country’s land area, beneath which lie vast reserves of oil, gas and other minerals; America’s fracking revolution has so far been almost entirely on private land. The Greek state’s largest stock of unrealised value lies in its more than 80,000 non-heritage buildings and plots of land. With only one holiday home for every 100 in Spain, Greece should be able to tempt developers and other investors at the right price. Analysts at PwC reckon Sweden has marketable state-owned property worth $100 billion-120 billion. If that is typical of the OECD, its governments are sitting on saleable land and buildings worth up to $9 trillion equivalent to almost a fth of their combined gross debt. Get on with it Governments seem strangely reluctant to exploit these revenue-raising opportunities. That is partly because privatisation always faces opposition. Particular sensitivities surround land, as Ronald Reagan discovered when his plan to sell swathes of America’s West were shot down by a coalition of greens and ranchers who enjoyed grazing rights, and as the British government found in 2010 when environmentalists scuppered its attempt to sell Forestry Commission land. In recent years the big transactions, apart from reprivatisations of rescued banks, have mostly taken place in emerging markets. Activity is starting to pick up in Europe: the British


government sold Royal Mail last year, and is setting a good example both in transparency over its land and property holdings and in its readiness to sell them. But, overall, caution rules. Italy, for example, carries a public-debt burden of 132% of GDP, yet its privatisation plans are timid even though the state has proportionately more to sell than most other rich countries, with corporate stakes worth perhaps $225 billion and non- nancial assets worth as much as $1.6 trillion. Now that markets have regained their composure, it is time to be bolder. There are ways of encouraging sales. Data collection on public property is shockingly poor. It is patchy even in Scandinavia, where governments pride themselves on their openness. Governments need to get a better idea of what they hold. E ective land registries, giving certainty to title, are essential: Greece’s registry remains a mess. Too many governments use a aky form of cash basis accounting that obscures the costs of holding property. Too few produce proper balance-sheets. Better beancounting would make it easier to ascertain what might be better o in private hands. Governments also need to sweat whatever remains in state hands. There is no single model for managing public assets, but any successful strategy would include setting private-sector-style nancial benchmarks, replacing cronies with experienced managers and shielding them from political interference. Not only is this good in itself, but it can also lead naturally to privatisation. That was the case in Sweden a decade ago, when creating a professionally managed holding company for state assets revealed many to be non-core, leading to a selling splurge by a left-leaning government. Where are the successors to Thatcher and Reagan? Privatisation is no panacea for pro igate governments. Selling assets is a one-o that provides only brief respite for those addicted to overspending (though, once sold, assets from ports to companies tend to generate far more business). It also has to be weighed against lost revenue if the assets provide an income stream: oil-rich Norway gets a quarter of its government revenue from well-managed state companies. Selling when markets are depressed is generally a bad idea. Governments also need to learn from mistakes made in past waves of privatisation. Without robust regulation, sello s enrich insiders and lead to backlashes. That happened in Britain (over rail and utilities) and emerging markets (telecoms, banking and more). The Royal Mail sale was a reminder of the political risks: price an asset too high and the deal might op; price it too low and the taxpayer feels cheated. Nevertheless, for governments that are serious about bringing their spending in line with revenues, privatisation is a useful tool. It allows governments to cut their debts and improve their credit ratings, thus reducing their outgoings, and it improves the economy’s e ciency by boosting competition and by applying private-sector capital and skills to newly privatised assets. Thatcher and Reagan used privatisation as a tool to transform utilities, telecoms and transport. Their 21st-century successors need to do the same for buildings, land and resources. Huge value is waiting to be unlocked. 7

10 Leaders France’s economic woes

The Economist January 11th 2014

Can Fran?ois do a Gerhard?
The president is talking reform. It is in his interest, and his country’s, that he should carry it out UROPE’S weakness has been most evident around its periphery in Greece, Portugal, Spain and Italy. Yet by some measures, France is in worse shape. Among EU countries in the past 25 years, only Italy has seen slower growth. France’s budget de cit is bigger than Italy’s and its current-account deficit is the largest in the euro zone. But it is the contrast with Germany that is most painful. Since the creation of the euro, in 1999, France’s GDP per head has risen by just 0.8% a year, against Germany’s 1.3%; its unit labour costs, then below Germany’s, are now higher; its exports, then worth almost 60% of Germany’s, now total less than 40%. Unemployment in France is near 11%, a 16-year high; in Germany it is just over 5%, a 20-year low. And whereas most of the euro zone is now growing, France may be entering another recession. This weakness is undermining e orts to x the euro. The Franco-German engine that usually powers the EU is broken, and France’s failure to reform is provoking a backlash against e orts such as the creation of a banking union needed to shore up the single currency. Why, German taxpayers ask, should their credit support unreformed Gallic practices? The response to all this from Fran?ois Hollande, France’s Socialist president since mid-2012, has so far been hapless. His early objections to excessive austerity came to nothing. Rather than cut public spending (at 57% of GDP, the highest in the euro zone), he has raised taxes, including a payroll charge on high earners of 75%. Instead of the proper pension reforms seen elsewhere, he has marginally lengthened the contribution period. Far from copying the deep structural reforms undertaken in peripheral countries, he has barely begun liberalising labour and product markets or trimming France’s social-welfare


spending, the highest in the OECD rich-country club. Such soft-pedalling has got Mr Hollande nowhere. Polls now rank him as the least popular president of the Fifth Republic; many young people are talking of leaving the country. Yet there is now a glimmer of light. In his new-year message, Mr Hollande at last spoke seriously of cutting taxes and public spending, improving competitiveness and creating a more investor-friendly climate. And he o ered French business what he called a responsibility pact (see page 43). Reforming France will require wholesale changes. Taxes are too high and the state is too big. Both need to be scaled back. Then must come greater liberalisation of the labour market, a fuller pension shake-up and deep cuts in social-welfare charges on business. His last chance Given his domestic record, voters have every reason to be sceptical that Mr Hollande will live up to his promises. But he has demonstrated some boldness in acting abroad. It is in his own interest to take radical action at home, too. If Mr Hollande allows the economy to slide, he will spoil his chances of re-election in 2017. He cannot spend his way out of trouble, because France is too heavily in debt, so reform is his only option. He has plenty of time to implement changes before the next election. French presidents have a lot of power, and he is ready to pass reforms by decree, not legislation. The centre-right is in disarray, partly because Marine Le Pen’s Front National is riding high. Although he is unpopular with some in his party, he has little to fear from his left; anyway, the French left often proves more reformist than the right. Ten years ago Germany was labelled the sick man of Europe . Then Gerhard Schr?der, a Social Democrat, liberalised radically, and Germany bounced back. So could France now, if only its president were bold enough. 7

Drug legalisation

Of bongs and bureaucrats
How to tax and regulate marijuana HEY came to Denver, the mile-high city, to get high. They shivered in the cold as they waited for the rst legal recreational marijuana (cannabis) shops in Colorado to open on January 1st. It is too early to judge whether the experiment is working, but the early signs are good (see page 32). The rst American state to allow toking-for-fun has not been seized by reefer madness. Its pot shops are more orderly than, say, a British pub at closing time. One report claimed that 37 Coloradans died of marijuana overdoses on the rst day of legalisation,


but it was in the Daily Currant, a spoof newspaper. Few readers were fooled: one reason why Americans keep voting to relax marijuana laws is that they have mostly come round to the view that dope is less hazardous than booze. Opponents of drug prohibition (a position The Economist has held since 1993) may be tempted to celebrate. There is no doubt which way the tide is owing. Most Americans now believe that marijuana should be legalised, taxed and regulated. Twenty states plus Washington, DC, allow the consumption of pot for medical purposes; Washington state will soon join Colorado in licensing sales to those who simply want to enjoy a spli . If legalisation works in America (and Uruguay, which legalised pot last month), it will surely spread. But there’s the 1

The Economist January 11th 2014
2 rub: if the rst-movers mess up the details, public opinion may

Leaders 11

shift and the campaign against prohibition could stall. Legalisation is just the rst step. Pot must also be regulated. Because it is more dangerous than chocolate or chips, it needs to be subject to more stringent safety checks than food. As with alcohol, anybody who wants to produce it for sale, or sell it, should be licensed, as they will be in Colorado. It should carry clear labels showing its tetrahydrocannabinol (THC) content, just as cans of beer display their alcoholic strength consumers should know what they are smoking. Colorado seems to be handling this well: labels are clear, safety rules stringent. Deciding how to tax the stu means asking some fundamental questions. Where governments want to raise revenue without distorting markets, the best approach is to charge businesses a at fee, like a cab licence. Firms then have an incentive to do as much business as they can. But where governments want to discourage consumption as with cigarettes and alcohol they should tax each unit sold. Although marijuana does not harm people as reliably as cigarettes do, nor as alcohol does incite citizens to kill each other, it is not good for you. And although too little research has been done on the extent of the harm it can do, it is thought to raise the risk of schizophrenia and undermine motivation. This argues for a consumption tax, and a fairly sti one at that. But two arguments pull in the opposite direction. Marijuana may have a bene cial side-e ect: if pot-smoking displaces li-

quor-drinking, it might actually be good for public health. And if taxes are set too high, the black market will ourish. That will deprive the state of revenue and push consumers towards unregulated, and therefore more dangerous, weed. Better than booze Colorado is setting the tax at more than 25%; state and federal levies on a six-pack of beer are only about 8%. The dope tax should probably be lower than those on booze, but alcohol taxes should be higher than they are now. What level the dope tax should be set at will become clearer as more information emerges about health e ects and about the substitution of both dope for alcohol and legal marijuana for illegal stu . One obstacle to Colorado’s experiment is Uncle Sam. Marijuana remains illegal under federal law. Barack Obama’s Justice Department has said it probably will not prosecute pot shops that are legal under state law, but banks shun them for fear of violating federal money-laundering rules. So the business is largely cash only, which makes it harder to tax. Such murkiness serves no purpose. The feds should explicitly allow banks and credit-card rms to handle any transactions that are legal in the state where they occur. Advocates of legal marijuana have long predicted that it will do less harm than prohibition; opponents have passionately disagreed. How Colorado regulates the trade will help determine who wins the argument. 7


It’s back
Once a cause of the nancial world’s problems, securitisation is now part of the solution IVEN their role in the 2008 meltdown, and their subsequent branding as toxic sludge, it is not surprising that securitised nancial products have had a quiet few years. Yet the transformation of mortgages, credit-card debt and other recurring cash ows into new marketable securities is enjoying something of a resurgence. Once apparently destined for the nancial history books, the alphabet soup of ABSs (assetbacked securities), MBSs (their mortgage version), CLOs (collateralised loan obligations) and others had a bumper year in 2013. More growth is expected this year (see page 59). Not everybody is thrilled. Some observers argue that the risks securitisation poses are too grave. But its revival should be welcomed, for it is probably essential to continued economic recovery, particularly in Europe. Use carefully In its simplest form, securitisation is straightforward and benecial. For example, a carmaker expecting lots of monthly payments from customers who have taken out nancing can get investors to fund its business more cheaply by selling them its claim to those payments. A bank on the receiving end of mortgage repayments or credit-card receivables can do something similar: bundle the loans up and sell them, or use them as collateral to get funding, which it can then use to issue more loans.


This boosts both credit and growth. Used recklessly, though, securitisation can be dangerous. It fuelled the catastrophic boom in American subprime mortgages. Some banks, aware that home loans would be sliced, diced, repackaged and sold on, gave up even cursory checks on their borrowers’ creditworthiness. Investors piled in blindly, snapping up supposedly safe tranches of bundled-up debt that proved to be anything but. The boom turned to bust and bail-outs. Yet structured nance cannot bear sole responsibility for the crisis. It was more the conduit for irrational nancial exuberance than its cause. Lax lending standards in boom times predate the emergence of securitisation (in the 1970s) by several centuries at least. Most structured products performed well through the crisis, with the notable exception of those related to American residential mortgages. Defaults in Europe remained low despite the recession. And although there are still risks, securitisation should be safer in the future than in the past because of new, post-crisis regulations to reduce the danger of excesses. The principle that the party creating a new security needs to retain some exposure to the underlying credit (the skin in the game rule) should help ensure that underwriting standards do not get too slack. That will hamper the desirable transferring of risk but, given recent history, it is probably prudent to put a little sand in the gears. Some of the Kafkaesque structures spawned by securitisation such as collateralised debt obligations (CDOs) that in- 1

12 Leaders
2 vested in other CDOs that themselves invested in MBSs have

The Economist January 11th 2014

been made prohibitively di cult to recreate. That is also sensible: whereas simple securitisation should be welcomed back, the over-engineered versions that rendered the nancial system needlessly opaque should not. Europe stands to bene t most from securitisation’s return. Lenders across Europe are under pressure to improve the ratio of capital they hold to loans made. One way of doing this is to stop extending credit, which is, unfortunately, what many banks have done. If they instead slimmed themselves through securitisation, by bundling and repackaging loans and selling

them to outside investors such as insurance rms or asset managers, they could lend more money to credit-starved companies. That would have the added bene t of spreading risk away from wobbly banks. Securitisation certainly has a black mark against it, but it is far too useful to be banished for good. Almost all nancial innovations, from the humble mortgage to the joint-stock company, have had to re-establish their reputations after a bust at some point in their history. Society bene ted from their eventual rehabilitation as it most probably will from the revival of securitisation. 7

Britain’s planning laws

An Englishman’s home
The shortage of housing is a gathering national crisis. Rev up the bulldozers OW that the economy is at last growing again, the to come 400 burning issue in Britain is the Home completions, ’000 300 cost of living. Prices have out200 stripped wages for the past six 100 years. Politicians have duly harHouse prices, ?’000 0 ried energy companies to cut 1970 80 90 2000 12 their bills, and irted with raising the minimum wage. But the thing that is really out of control is the cost of housing. In the past year wages have risen by 1%; property prices are up by 8.4%. This is merely the latest in a long surge. If since 1971 the price of groceries had risen as steeply as the cost of housing, a chicken would cost ?51 ($83). By subsidising mortgages, and thus boosting demand, the government is exacerbating the problem. But that is not the main reason for rising prices. Driven by a baby-boom, immigration and longer lives, Britain’s population is growing by around 0.8% per year, faster than in most rich countries. Foreign wealth, meantime, is pouring into London. If supply were rising fast too, increasing demand would not matter; but it is not. Though some 221,000 additional households are formed in England annually, just 108,000 homes were built in the year to September 2013. The lack of housing is an economic drag. About three-quarters of English job growth last year was in London and its hinterlands, but high prices make it hard for people to move there from less favoured spots. It also damages lives. New British homes are smaller than those anywhere else in Europe, household size is rising in London and slums are spreading as immigrants squash into shared houses (and, sometimes, garden sheds). Inequality is growing, because the higher property prices are, the greater the advantage that accrues to those whose parents own their homes. This is all the result of deliberate policymaking. Since the 1940s house-building in Britain has been regulated by a system designed to prevent urban sprawl, something it has achieved spectacularly well. It is almost impossible to construct any new building anywhere without permission from the local council. In the places where people most want to live suburbs at the edge of big cities councils tend not to give it. Ministers have tried to override local NIMBYs (see page 47). The previous, Labour, government set regional house-building targets and bullied councils to accept high allocations. The


current coalition has scrapped that approach in the name of local democracy but it, too, has resorted to strong-arming councils to release more land. It has also worked with the Bank of England to reduce the cost of credit and has subsidised high loan-to-value mortgages through a scheme called Help to Buy . This has boosted demand for housing but not supply. A much better way of encouraging house-building would be to give local councils bigger incentives to allow it. NIMBYism is not always irrational. Housing developments spoil views; incomers ll roads, schools and doctors’ surgeries. Yet though land prices can soar 200-fold when planning permission is granted, councils cannot extract much of the increased value to spend on services. A new scheme, the Community Infrastructure Levy, nods in the right direction. But it is hedged with restrictions and is expected to raise just ?650m a year nationally. That is not nearly enough to change minds. Local governments, which are short of cash these days, could be allowed to charge developers much more. But the ideal solution would be a tax on the value of land. This would be low or zero for agricultural land and would jump as soon as permission to build is granted. It would prod builders to get to work quickly. It would also help to capture the gains in house prices that result from investment in transport or schools. The green belts that stop development around big cities should go, or at least be greatly weakened. They increase journey times without adding to human happiness. London’s, in particular, mostly protects scrubby agricultural elds and pony paddocks. Parts would be prettier with housing on. This blessed plot The government should also do more to organise and pay for industrial wastelands to be prepared for housing. Browneld sites are typically built on only when land prices rise enough to cover the high cost of development. Urban development corporations, such as the one established in the 1980s to regenerate east London’s docklands, could assemble such plots of land more e ectively than private developers. Not all these policies would be popular or easy. Even the modest planning reforms introduced by the coalition are resented. Building on elds in a country that is as crowded as England will always rile some people, however well-designed the system. But the alternative is worse: a nation of renters and rentiers, where only the rich own houses. 7

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Deconstructing France SIR Bleak chic (December 21st) contended that many countries rank far above France in happiness. Yet happiness is intrinsically hard to gauge, and these global barometers rely on a naive, capitalistic scale to measure it. Nor am I surprised that austerity-battered countries are happier, for in their world of instant grati cation a mere tri e is enough instantly, albeit brie y, to satisfy them. Your article almost stumbled on the truth but instead faltered at the doorstep when it said that people everywhere are more than likely to say they are happy. It is people who don’t know any better who are likely to say they are happy. Moreover, you read Candide out of context. It was written in response to the optimistic doctrine that ours is the best of all possible worlds. Rather than promote pessimism it shuns a possibly dangerous optimistic attitude. Voltaire was arguing against a certain illusory, happy resignation, which he believed one must overcome, for why else would we need to cultivate our gardens? Existentialism o ers a genuineness that might easily be mistaken for ennui by the uninitiated, but in reality goes deeper than that. The French are Albert Camus’s nation of absurd men, and they would rather face the truth of life than live in ignorant bliss. A baby laughs at the most trivial thing and thinks himself happy; an adult does not. The French believe that pleasure should triumph over desk-slavery, and simply know better. KENNETH CHARLES CURMI Hamrun, Malta Hotel checking SIR To say that the age of the grand hotel ran from 1860 to 1960 is to make it seem that Paris’s Grand had no antecedents ( Be my guest , December 21st). The age began in the 1820s with the Tremont House in Boston (1828) followed by the rst Astor House in New York (1834) and the Burnet House in Cincinnati (1848), none of them the size of the Grand but all of them grander than anything previous. The Illustrated London News called the Burnet the best hotel in the world. All initiated the standard of comparative luxury enlarged by later hotels. All were designed by an underrated antebellum architect named Isaiah Rogers, and he is now recognised as the father of the luxury hotel. JAMES O’GORMAN Professor emeritus Wellesley College Wellesley, Massachusetts Paying to use Heathrow SIR Your leader on expanding Heathrow airport barely mentioned pricing ( Go west , December 21st). Last October the Civil Aviation Authority announced that airport charges at Heathrow should be xed in real terms until 2019. That is crazy. Heathrow is at capacity and monopoly regulation is therefore counterproductive: prices should clear the market. Consumers would ultimately pay, but this is just an extension of the principle of peak-load pricing, which we accept for rail travel but for some reason not for air travel. And passengers have in any case done pretty well over the past two decades of budget airlines; they have also rationally switched demand to other airports where there is still spare capacity. Higher prices at Heathrow would further encourage this trend. If there is any increase in capacity, consumers should pay for it. Allowing the market, rather than the Civil Aviation Authority, to determine what consumers pay for using Heathrow would be a good way to start this process. STEPHEN WRIGHT Professor of economics Birkbeck College London SIR The sprawling megalopolis of south-east England should have more than just one world-class hub airport. The solution is to replace Gatwick’s glori ed portakabins with proper terminals, add more runways, and build a high-speed rail link to Canary Wharf. It would become the airport of choice for anyone going to or from the City. Moscow proves it works with two true airport hubs: Sheremetyevo and Domodedovo. LOREN GERLACH London Petty’s cash ledger SIR You credited William Petty with inventing economics in the 17th century, but did not do full justice to his costbene t calculations (Free exchange, December 21st). The good doctor estimated the value of a person to be somewhere between ?60-90 and in Political Arithmetick he suggested these values could be used to compute the loss we have sustained from the plague and war. In 1667 he argued that given the value of an individual and the cost of transporting people away from the plague in London and caring for them, every pound spent would yield a return of ?84 as the probability of survival increased. (He also suggested that an individual in England was worth ?90, and in Ireland ?70.) In a lecture on anatomy in 1676 Petty argued that the state should intervene to assure better medicine, which could save 200,000 subjects a year and thus represented a sensible state expenditure. Today’s economic estimates are more re ned and the data are more exact, but the arguments presented by Petty still resonate in public policy. RASHI FEIN Professor emeritus of the economics of medicine Harvard Medical School Boston Handing back the gong SIR As a Uruguayan I was disappointed that you chose Uruguay as country of the year ( Earth’s got talent , December 21st). Have you read the law that legalises marijuana? It adds new Soviet-style measures where marijuana users must register, pharma-

The Economist January 11th 2014
cies must sell the stu , the amounts for growers and users are rigidly xed, licences for growing it are required and new regulatory bureaucracies are created. I might add that the Uruguayan government is not noted for its e ciency. Why was marijuana not simply decriminalised? We have other, more pressing problems, such as the falling ratings in the latest PISA surveys, which show that 40% of young Uruguayans do not nish high school. IN?S CODURI Montevideo, Uruguay SIR You like Uruguay’s president because he ies economy class and drives a Beetle, without mentioning that he ignores the constitution in passing many decrees and has handed the state airline to an obscure investment group against all recommendations. You concluded that Uruguay is bold, liberal and fun-loving , even though it is the opposite of all those things. Please pass me the joint you were smoking. MARIO NAVARRO PIZZO Montevideo, Uruguay SIR I was pleased to see that Somaliland made your shortlist for country of the year, for keeping piracy and Islamic extremism at bay. Just one point to clarify. You state that Somaliland on most reckonings is not a country. On most reckonings we most certainly are. We have a strong legal case for recognition as an independent nation state, underpinned by historical precedent and the overwhelming support of the people of Somaliland who voted for independence in 2001. We have a democratic government, stable institutions and a thriving free market economy. MOHAMED BEHI YONIS Foreign minister of Somaliland Hargeisa 7
Letters are welcome and should be addressed to the Editor at The Economist, 25 St James’s Street, London sw1A 1hg E-mail: Fax: 020 7839 4092 More letters are available at:

Executive Focus
Director - CGIAR Research Program on Dryland Systems
Creating new approaches for Integrated Agricultural Production Systems for Food Security and Better Livelihoods in the Dry Areas. Opportunity for an outstanding research manager to lead an innovative new global research program on dryland agricultural systems. Internationally Recruited Position in Amman, Jordan. Please apply online at by January 31, 2014. The Challenge The Dryland Systems Research Program is a major new effort to speed up the identi?cation, testing, and delivery of solutions to increase food and nutrition security, and improve livelihoods in the world’s most fragile agro-ecosystems. Current reductionist, piecemeal, and single-dimension research approaches to improve agriculture in low-income countries are no longer effective. If you share this feeling and are a dynamic manager who has produced and led innovative research on agriculture and livelihoods in dryland systems, we encourage you to apply to this challenging senior position. The Dryland Systems Program starts in 2012. Its integrated agro-ecosystems approach should develop research to produce solutions to bene?t low income countries and their rural communities. It combines knowledge from applied research using the latest innovation system approaches, communication and knowledge sharing strategies, and tools. The Program’s new thinking and ?ndings will be harnessed to create measurable, sustainable, and large scale impact on rural livelihoods. The Program has a growing annual budget of over $40 Million. Details are available at: http:// and Your Role As the Director of the Dryland Systems Program, you will be working closely with partners and stakeholders to develop the research portfolio to achieve clearly de?ned results of the Program. This involves coordinating the inputs and results of the work of implementation multi-disciplinary teams, and effective management of partnerships. Project management and building of an extensive network of collaborators and partners are critical success factors. Your Responsibilities As the Director of the Program, you report directly to the Director General of ICARDA, the Center leading the Program. You will: ? Ensure effective and ef?cient implementation of the Program to achieve its objectives meeting qualitative and quantitative standards and ensure timely and high quality reporting on the Program. ? Coordinate the inputs of implementation teams in the targeted regions. ? Lead resource mobilization efforts. ICARDA - The Lead Center - and Partners The International Center for Agricultural Research in the Dry Areas (ICARDA) is leading this Program. ICARDA is an international autonomous, non-pro?t, research center with a 36-year history in dry areas. We are supported by the CGIAR consortium of agricultural research centers. For more details: The Program is implemented by a wide range of partners including eight CGIAR Centers (ICARDA, ICRISAT, Bioversity, CIP, ICRAF, ILRI, IWMI,WorldFish), Sub-Saharan Africa Challenge Program, national agricultural research systems, and advanced research institutes. Terms of appointment, salary and bene?ts The post is in Amman, the Hashemite Kingdom of Jordan. The initial contract will be for 3 years and renewable based on performance. ? Ensure scienti?c excellence and global in?uence of the Program. ? Ensure effective partnerships with research and development partners. ? Represent the Program globally to ensure high visibility and to create positive views of investors, stakeholders, and the public. What will you need to bring to the position? ? PhD degree in a discipline relevant to the Program with broad knowledge, preferably of agricultural production systems in the drylands of developing countries. ? Minimum of 10 years international experience at senior management level. At least 5 years’ experience should be in leading multi-country and multi-disciplinary large projects. ? Proven sustainable impact of your research and development initiatives. ? Proven leadership skills in a multi-disciplinary and multicultural environment. ? A successful track record of mobilizing resources from diverse sources. ? Excellent negotiation and team-building skills. ? Excellent command of spoken and written English and communication skills.


We are an equal opportunity employer and encourage applications from women

Institute of International Finance (IIF) Washington, DC
The IIF is one of the world’s largest global associations of ?nancial institutions. We provide economic and ?nancial analysis, serve as a forum for exchanging views and developing proposals on global regulatory issues; and represent our members in discussions with the public sector on global economic and ?nancial policy issues. Detailed descriptions of each of the three positions below can be found on our website at Chief Representative, IIF Regional Of?ce in Dubai The IIF will be opening an of?ce in Dubai as a hub for regional activities in the Middle East and Africa. The Chief Representative will be responsible for developing and enhancing relationships with regional ?nancial ?rms and helping to identify and address the most important issues facing ?nancial institutions from the perspective of ?rms in the two regions. Applicants should have 10-15 years of experience in the regional ?nancial services industry. S/he should have a graduate degree, preferably in economics, ?nance, or an international discipline. Flexibility to cover varied subject-matters is essential. Excellent English speaking and writing skills are mandatory. Knowledge of Arabic and/or French is a plus. Travel in the MENA region and in Sub-Saharan Africa will be required. Deputy Director, Capital Markets & Emerging Markets Policy The Institute's Capital Markets and Emerging Markets Policy (CEM) Dept. analyzes developments in international capital markets and monitors potential systemic risks. The Deputy Director will work across the full range of CEM products, including analytical research, working group activities, membership outreach and events. S/he will edit and oversee production of CEM research and develop ideas for the systematic monitoring of global markets (a particular focus will be the implications of regulatory change for ?nancial services ?rms, ?nancial market structures and practices). Applicants must have 10-15 years of experience in credit and capital market analysis related to ?nancial markets and institutions, especially during periods of rapid regulatory change. A strong understanding of ?nancial markets and the private ?nancial sector is important. Expertise in the use of appropriate spreadsheets and databases, modeling techniques, and ?nancial analysis tools, as well as the ability to identify and use market sources of data and intelligence is required. The ability to write clear, concise and informative reports is essential. International experience and perspectives are highly desirable. Policy Advisor, Regulatory Affairs The Policy Advisor will conduct analysis of new international regulatory initiatives by groups such as the G20, the FSB, the Basel Committee, IOSCO, the IAIS, the European Commission; support the development of global industry positions on a wide range of challenging regulatory issues by developing position papers, response documents and other analytical pieces; manage the work of a range of high-level industry committees and working groups, and engage in dialogue with international policymakers on behalf of IIF members. Successful candidates must be strongly motivated, highly articulate, exercise effective judgment and have strong analytical abilities. S/he will likely have a graduate degree in ?nance, risk, law, economics, international studies or another relevant discipline from a leading university (or the equivalent in experience). At least 10 years of experience in the ?nancial sector, the regulatory/supervisory community or a trade association are required. Knowledge of ?nancial derivatives and their regulation would be advantageous. S/he must be ?uent in English and have excellent oral and written communication skills. To apply for any of these positions, please email cover letter, with salary requirements, and resume to in Microsoft Word format. For more information on the IIF, please refer to our website at

The Economist January 11th 2014


Executive Focus

Hospital CEO/Administrator

UAE-Abu Dhabi Hospital

The CEO/Administrator will be responsible for planning, managing and directing the overall operations of a new Hospital based in Abu Dhabi. The appointed person must ensure attainment of strategic objectives and the delivery of quality health care services while developing and managing the budget for the hospital.

Education: Bachelor’s degree in healthcare administration, business administration, ?nance, or clinical specialty. Masters degree in healthcare administration, business administration, or clinical specialty preferred. Equivalent combination of education, training, and experience may substitute for education requirements. Experience: Minimum ?ve years experience in healthcare administration/management with experience in facility operations management, personnel management, and/or ?nance. Minimum of two years experience at Administrator level preferred.

Excellent relocation package Please forward your CVs to Interviews are expected to take place during the period 13-17 January 2014.

The Economist January 11th 2014

Executive Focus


Now Hiring
The C40 Cities Climate Leadership Group is hiring for three executive team positions, and other senior roles.
C40 supports the world’s megacities in achieving meaningful reductions of greenhouse gas emissions and climate risk. Through C40, the governments of 63 world cities share knowledge and work together on local efforts that achieve global impact. C40 has staff of 40 (growing to 60 in 2014), with recruiting in London & New York, and an annual operating budget of $10 million. As a membership organization, it is governed by a 10-city Steering Committee chaired by Mayor Eduardo Paes of Rio, and led by Board President Michael R. Bloomberg, former Mayor of New York. It works in partnership with the William J. Clinton Foundation. Currently open executive team posts include: Director of Operations (HR & Finance), Director of Communications, and Director of Governance & Global Partnerships.
All job descriptions may be found at

Rwanda Development Bank (BRD)
Job Opportunity: Chief Operations Of?cer(COO)

Better Quality, Better Outcomes, Better Value

President & Chief Executive Of?cer
The Rwanda Development Bank (BRD) supports Rwanda’s development mission. In existence since 1967, BRD has in recent times seen unprecedented growth– a changing institution in a rapidly changing economy. The bank is recognized as one of the most dynamic development ?nancial institution (FDI) in the region. The bank now seeks to hire an experienced COO to drive key results. Alberta Health Services (AHS) is Canada’s ?rst and largest province-wide, fully integrated health system. Encompassing over 450 facilities, more than 100,000 dedicated employees strive to promote wellness and provide exemplary care for Albertans across the continuum, from primary care through specialized acute care. A robust medical and health disciplines teaching and research platform is embedded within AHS, in af?liation with AHS’ vital health sciences academic partners. With an operating budget of approximately $13.35 billion, and serving over 3.9 million Albertans, AHS is positioned for transformational change in a consumer-focussed environment. A quality imperative will shape AHS’ culture of excellence and accountability. A new President & Chief Executive Of?cer is sought to lead this world-class health service delivery organization. An accomplished and acknowledged health care leader, the ideal candidate possesses the drive and determination to deliver optimal health care service and outcomes for Albertans. Passionate about AHS’ potential as a high performance organization, the strategic leader sought will know how to build organizational capacity, inspire our talented staff, and provide judicious ?nancial stewardship for this complex and operationally sophisticated enterprise. A consummate communicator, possessing relentless energy, the new CEO will embrace and build durable relationships with government and Alberta Health, the broader public, and a spectrum of community and voluntary organizations throughout the province. With a bias for action and thoughtful innovation, the new CEO will ensure AHS truly provides the best health care quality, outcomes and value for Albertans. Further information about Alberta Health Services may be found on their web site: To provide an expression of interest or explore this opportunity further, please contact Jim Stonehouse at or by telephone at 416-593-0900 x2240.

The Role:
You will report to the Chief Executive Of?cer (CEO) and be accountable for the day-to-day effectiveness of the bank’s operations; drive a culture of compliance and results; grow and mentor critical skill sets; strengthen the bank’s service culture; and signi?cantly contribute to the Bank’s development mission – helping to drive the bank’s quest for growth and transformation.

The Quali?cations:
You will be a seasoned banker with turnaround experience within similar institutions; and have a strong hands-on banking experience with practical insights in key enabling platforms, including ICT in order to drive impactful results in a changing environment. You will have as a minimum: a Masters degree in banking, economics, ?nance or related discipline; and at least 10 years banking experience at leadership level in premier institutions. You will have proven experience in extracting a superior institutional value.

How to Apply:
Please apply with full details (application letter, curriculum vitae, contact details) before close of business day on Friday 31st January 2014. Apply to: The CEO, Development Bank of Rwanda (BRD) PO Box 1341, Kigali – Rwanda Email:;;; and

The Economist January 11th 2014

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Brie ng State-owned assets

The Economist January 11th 2014 19

Setting out the store

Advanced countries have been slow to sell or make better use of their assets. They are missing a big opportunity


HE past quarter of a century has seen several bursts of selling by the world’s governments, mostly but not always in benign market conditions. Those in the OECD, a rich-country club, divested plenty of stu in the 20 years before the global nancial crisis. The rst privatisation wave, which built up from the mid-1980s and peaked in 2000, was largely European. The drive to cut state intervention under Margaret Thatcher in Britain soon spread to the continent. The movement gathered pace after 1991, when eastern Europe put thousands of rusting state-owned enterprises (SOEs) on the block. A second wave came in the mid-2000s, as European economies sought to cash in on buoyant markets. But activity in OECD countries slowed sharply as the nancial crisis began. In fact, it reversed. Bail-outs of failing banks and companies have contributed to a dramatic increase in government purchases of corporate equity during the past ve years. A more lasting feature is the expansion of the state capitalism practised by China and other emerging economic powers. Governments have actually bought more equity than they have sold in most years since 2007, though sales far exceeded purchases in 2013. Today privatisation is once again alive and well , says William Megginson of the Michael Price College of Business at the

University of Oklahoma. According to a global tally he recently completed, 2012 was the third-best year ever, and preliminary evidence suggests that 2013 may have been better (see chart 1). However, the geography of sell-o s has changed, with emerging markets now to the fore. China, for instance, has been selling minority stakes in banking, energy, engineering and broadcasting; Brazil is selling airports to help nance a $20 billion investment programme. Eleven of the 20 largest IPOs between 2005 and 2013 were sales of minority stakes by SOEs, mostly in developing countries. By contrast, state-owned assets

More selling, less buying
Worldwide, $bn Privatisations Nationalisations and state investments 350 300 250 200 150 100 50 1988 95 2000 05 0 10 13*


Source: William Megginson, University of Oklahoma

are now the forgotten side of the balancesheet in many advanced economies, says Dag Detter, managing partner of Whetstone Solutions, an adviser to governments on asset restructuring. They shouldn’t be. Governments of OECD countries still oversee vast piles of assets, from banks and utilities to buildings, land and the riches beneath (see table on next page). Selling some of these holdings could work wonders: reduce debt, nance infrastructure, boost economic e ciency. But governments often barely grasp the value locked up in them. The picture is clearest for companies or company-like entities held by central governments. According to data compiled by the OECD and published on its website, its 34 member countries had 2,111 fully or majority-owned SOEs, with 5.9m employees, at the end of 2012. Their combined value (allowing for some but not all pensionfund liabilities) is estimated at $2.2 trillion, roughly the same size as the global hedgefund industry. Most are in network industries such as telecoms, electricity and transport. In addition, many countries have large minority stakes in listed rms. Those in which they hold a stake of between 10% and 50% have a combined market value of $890 billion and employ 2.9m people. The data are far from perfect. The quality of reporting varies widely, as do de nitions of what counts as a state-owned company: most include only central-government holdings. If all assets held at subnational level, such as local water companies, were included, the total value could be more than $4 trillion, reckons Hans Christiansen, an OECD economist. Moreover, his team has had to extrapolate because some OECD members, in- 1

20 Brie ng State-owned assets
2 cluding America and Japan, provide

The Economist January 11th 2014
rate, accounting for 40% of developable sites round Britain) might be surplus. The government, said the chief treasury secretary, Danny Alexander, should not act as some kind of compulsive hoarder . Japan has di erent reasons to revive sell-o s, such as to nance reconstruction after its devastating earthquake and tsunami in 2011. Eyes are once again turning to Japan Post, a giant postal-to- nancial-services conglomerate whose oft-postponed partial sale could at last happen in 2015 and raise ?4 trillion ($40 billion) or more. Australia wants to sell nancial, postal and aviation assets to o set the fall in revenues caused by the commodities slowdown. In almost all the countries of Europe, privatisation is likely to surprise on the upside as long as markets continue to mend, reckons Mr Megginson. Mr Christiansen expects to see three main areas of activity in coming years. First will be the resumption of partial sell-o s in industries such as telecoms, transport and utilities. Many residual stakes in partly privatised rms could be sold down further. France, for instance, still has hefty stakes in GDF SUEZ, Renault, Thales and Orange. The government of Fran?ois Hollande may be ideologically opposed to privatisation, but

patchy data. America is apparently so queasy about discussions of public ownership of commercial assets that the Treasury takes no part in the OECD’s working group on the issue, even though it has vast holdings, from Amtrak and the 520,000employee Postal Service to power generators and airports. The club’s e orts to calculate the value that SOEs add to, or subtract from, economies were abandoned after several countries, including America, refused to co-operate. Privatisation has begun picking up again recently in the OECD for a variety of reasons. Britain’s Conservative-led coalition is focused on (some would say obsessed with) reducing the public debt-toGDP ratio. Having recently sold the Royal Mail through a public o ering, it is hoping to o oad other assets, including its stake in URENCO, a uranium enricher, and its student-loan portfolio. From January 8th, under a new Treasury scheme, members of the public and businesses will be allowed to buy government land and buildings on the open market. A website will shortly be set up to help potential buyers see which bits of the government’s ?337 billionworth of holdings ($527 billion at today’s

Plenty to browse
2013 or latest, $trn
Ranked by assets as % of gross debt

Government assets and liabilities nonvalue of gross financial state-owned debt assets firms* 0.4 0.4 0.2 2.6 2.7 2.9 17.7 2.3 12.2 0.3 0.2 1.6 1.3 1.4 0.2 2.5 1.6 1.6 10.3 1.2 6.6 0.1 na 0.7 0.20 0.02 0.29 0.28 0.23 0.13 0.06 0.12 0.48 0.04 0.18 0.03

GDP South Korea Australia Norway France Italy Germany Britain Japan Switzerland Sweden Canada 1.2 1.5 0.5 2.7 2.1 3.6 2.5 5.0 0.6 0.6 1.8

United States 16.7

Sources: IMF; OECD

*Including minority stakes

Privatisation in Greece

Hellishly Hellenic

The problems and promise of state holdings


it is hoping to reduce industrial stakes to raise funds for livelier sectors, such as broadband and health. The second area of growth should be in eastern Europe, where hundreds of large rms, including manufacturers, remain in state hands. Poland will sell down its stakes in listed rms to make up for an expected reduction in EU structural funds. And the third area is the reprivatisation of nancial institutions rescued during the crisis. This process is under way: the largest privatisation in 2012 was the $18 billion offering of America’s residual stake in AIG, an insurance company. Parking meters, anyone? State-owned entities regularly invest in other countries’ privatisations: sovereignwealth funds were among the investors in Royal Mail, for instance. In many cases, governments will want to hold on to blocking stakes typically 25% in companies they consider strategic . Sometimes the law obliges them to do so. That will not necessarily deter potential investors, who can enjoy good returns even from companies with small public oats. From 2001 to 2012 the overall stock returns of listed SOEs in Europe, the Middle East, Africa and Latin America outperformed their benchmark indices, according to Morgan Stanley. This re ects the sharing of rents in sectors where, for a time at least, competition is limited, says Aldo Musacchio of Harvard Business School, co-author of Leviathan Evolving , a forthcoming book on state capitalism. In America, even partial sales of federal assets can be a political mine eld. When President Barack Obama suggested selling the Tennessee Valley Authority, an electricity provider, even prominent Republicans squealed in protest, claiming that it would make power more expensive but also seeming to want to cling on to this Roose- 1

REECE is a bad advertisement for government ownership and for privatisation. Its state holdings are poorly managed and mostly subject to political meddling. The privatisation programme, launched through gritted teeth when the economy imploded, is woefully behind schedule. The government managed to miss its revenue target for 2013 even after scaling it back twice, to just 1.3 billion. Everyone knows that sell-o s could do little to close Greece’s 12- gure nancing shortfall. But they could help, and the country’s creditors are impatient. The programme is under review, but Greece’s institutions and polity are so dysfunctional that nothing short of a bone-marrow transplant will do, says a consultant to international lenders. One promising idea to transfer assets that could be sold or restructured to a holding company abroad, say in Luxembourg, where they would be insulated from interfering politicians has already been shot down. The Finns pushed this proposal, believing it could serve as a model for other troubled economies, such as Portugal. But it was met with hostility by Greek ministers. Advisers are pushing alternative

proposals that might allow Greece to raise funds while avoiding re sales. Some believe big sums could be raised from private investors by pledging state assets’ expected future cash ows say, ticket sales or rents as security against new bonds. At the transaction’s maturity, the asset could either be sold in the market and the loan repaid, or handed to the lender. Some of the funds raised could be used to pay down debt, others to develop the asset in the hope of increasing the price. An added advantage is that it would get Greece back into the capital markets, closed to it since 2010. This instrument could work best for property, argue consultants commissioned by the European Stability Mechanism, the euro zone’s bail-out fund, to examine the options. State-owned residential properties are currently estimated to be worth 3.3 billion. With investment of 50 per square metre, or 7 billion, these could fetch nearly 20 billion over ten years a net-presentvalue gain of 1.1 billion. But many properties lack clear title, and there is no proper land registry. Even with political will (lacking so far), setting up the necessary legal structures could take years.

The Economist January 11th 2014
2 veltian relic for its own sake.

Brie ng State-owned assets 21
detailed inventory of its buildings, points out Leonard Gilroy of the Reason Foundation, a think-tank. Management of these assets has improved a bit since the creation in 2004, by executive order, of a council to push reform in this area. But there is still far to go, as shown in a series of reports from the Government Accountability O ce. One, in 2011, estimated that in 2009 at least 45,000 government buildings were underused or unneeded. America also has, for historical reasons, vast swathes of federally owned land concentrated in the West (see map). The Department of the Interior oversees more than 500m acres, around a fth of the land area of the country. In scal 2011 its agencies spent $13 billion more than they collected for use of land and resources a deficit that critics want to see closed through better management or land sales. One possibility, other than selling to individuals or developers, would be to sell to non-pro t conservation trusts. These have mushroomed over the past decade: there are now 1,700, some handsomely funded, supported by hundreds of thousands of volunteers. Another approach would be to transfer ownership to state administrations, which have generally been more creative than the feds in their management of parks, grazing land and buildings, says Chris Edwards of the Cato Institute, a libertarian think-tank. A study conducted for a land-management task-force in Nevada (which is 84.5% government-owned) concluded that state-managed land generates net revenue of $6.29 an acre on average, compared with a net loss of $1.86 for federally managed land. However, both ranchers and greens support the status quo. The greatest value could lie beneath. The Green River Formation, a eld of sedimentary rock beneath Colorado, Utah and Wyoming, contains the world’s largest deposits of oil shale. Three-quarters of this is under federally controlled land. Leases from oil- and gas- elds under federal land could potentially generate royalty, rent and bonus payments of $150 billion (excluding operators’ tax payments) over ten years, according to the Congressional Budget Ofce. Up to now, almost all of the shale-oil and gas revolution in America has taken place on private land. Putting a value on public-sector bricks, mortar and soil is tricky. The IMF paper sheds some light, though its authors load their ndings with caveats because of national di erences in coverage and valuation techniques. They estimate that non- nancial assets average 75% of GDP in advanced economies, though levels range widely, from 40-50% in Canada and Germany to 120% in Japan (see chart 2). In most countries, these are worth more than nancial assets (stakes in listed rms, sovereign-wealth and securities holdings and the like). The value of the two combined is

There is more activity at the state and local level, particularly in infrastructure projects, though much of this involves privatisation of management, not ownership, through the o ering of long-term concessions to build and operate toll roads, bridges and the like. A decade ago such public-private partnerships (PPPs) were rare, but more than 30 states have now passed laws allowing them. Private operators have been taking over management of other assets, too, from parking to lotteries. However, these transactions are not always well structured. Although it brought in $1.2 billion up-front, Chicago’s sale of a 75-year concession to manage its parking meters in 2008 is widely viewed to have been a lousy deal for the city. PPPs have a mixed record in Britain, too, though the Conservative-led government wants to do more and has even tried so far without success to privatise management of its defence-procurement arm. What lies beneath The greatest untapped opportunities may lie in land, buildings, subsoil resources and other non- nancial assets. However, their scale is hard to gauge because of poor data-collection and accounting. Of the 35 countries that provide data on such assets to the International Monetary Fund, the OECD and Eurostat, only 16 report all categories, according to an IMF report. Some countries do not even record properties, let alone value them. Greece is a particular o ender. The picture is generally murkier still at regional level. Portugal’s experience is not untypical: a decade ago it passed a law requiring its local authorities to value their property, but some have still not done so and methodologies di er among those that have. Local politicians often drag their feet, fearing that greater transparency will usher in painful rationalisation. This matters, because local and regional administrations hold most of the non- nancial sovereign assets in some of the largest economies. In America, by contrast, the situation may be worse in Washington, DC, than in the states. The federal government lacks a

Worth a bit
Government non-financial assets as % of GDP
2012 or latest


Central government 0 Japan New Zealand Italy France United States Britain Norway Russia Canada Germany Switzerland Hong Kong
Source: IMF

Local government 40 60 80 100 120


typically more than half gross public debt. In 2011 economists at UBS estimated that some euro-zone countries’ public xed assets (land, buildings, plant) were worth two to three times more than their nancial assets. The bank reckoned that xed assets held by euro-zone central governments alone could be worth 4 trillion, net of depreciation far above the value of their state-owned companies, and even exceeding that of state-owned corporate assets across the entire OECD. Cathedral for sale: 1 France, with its wealth of public buildings on prime sites, has the highest concentration of state-owned property in Europe. According to government nancial statements for 2012, property directly owned by the French state is worth 190 billion. Of this, 54 billion is valued at fair market value because it is deemed either to have a use that is not speci c to the state or to be easily convertible (eg, into o ces, shops or housing). The remainder is valued either at cost, at discounted replacement cost (for prisons) or at a symbolic value for monuments and other historic buildings (for instance, 1 for each of the 96 cathedrals transferred from the Catholic church to the state a century ago). Land represents only 4% of value of the total portfolio held by the state, which suggests it is underestimated, says Arnaud Burillon, a property expert with PwC. Moreover, the 190 billion does not include property owned by hundreds of state-controlled operators, including museums, palaces and the National Forest Ofce, which controls 4.5 billion acres. Their portfolios were appraised at a modest 42 billion in 2009. Nor does it include properties held by local authorities: 37,000 municipalities, 101 departments and 22 regions. In addition to their administrative o ces, these authorities own schools, hos- 1














Federal lands
Bureau of Land Management
Source: Bureau of Land Management

Other federal lands

22 Brie ng State-owned assets
2 pitals, retirement homes and more, and

The Economist January 11th 2014
its nancial statements each month. It even imposes a capital charge on government departments for properties and their contents, payable to the treasury. This has encouraged some selling of art and of under-used buildings. It’s not popular with the civil servants, but it has focused minds, says Mr Ball. Now leasing, Place de la Concorde Some public buildings will always be o limits: no crisis is big enough to warrant the sale of the Parthenon. But government o ces and diplomatic buildings are ripe for rationalisation. Activity is picking up, mostly in markets where dizzying price rises have made staying on prime sites hard to justify. More than a dozen foreign missions in London, including the Dutch and American ones, are cashing out and moving to less fancy (sometimes safer) districts, or considering doing so. Canada’s be undone. Sweden reversed the sale of its forests after an outcry over public right of access; Britain pulled back, also after a public outcry, from trying to sell o Forestry Commission land in 2010. Privatisation is not always possible, or desirable. Keeping land in state hands is sometimes the only way to protect vulnerable landscapes, plants and wildlife. Proceeds from sales have to be balanced against the loss of future revenue (if the assets are a source of income) and even, in some cases, social cohesion. Sometimes it pays to wait: in industries such as transport and utilities, prices for consumers may rise sharply because of insu cient competition if regulations are not overhauled before assets are sold. The Shareholder Executive, an arm of the Department for Business, Innovation & Skills, controls some of Britain’s largest state holdings (though not the stakes in bailed-out banks, which are held at arm’s length by the Treasury). Mark Russell, its chief executive, favours privatisation, but says there should be no rush to sell holdings that are deemed to be a good and in which greater e ciency can be achieved at marginal cost to the taxpayer , he says. He cites Companies House, the national corporate registry, as an example. Assets that remain state-owned in Britain will be in better hands than they were in the past, Mr Russell argues. Before his unit was set up a decade ago, holdings were typically scattered among di erent government departments, with civil servants providing much of the advice. Now they are under one roof, overseen by teams with corporate- nance and privateequity backgrounds. The Shareholder Executive is partly modelled on the highly regarded sovereign-asset managers in Nordic countries. Their approach is characterised by a clear separation of ownership and management (to avoid the government acting as both market participant and regulator), private-sector-style openness (along with the short-termism) and a rm but not intrusive role in governance. Such shake-ups will, in any case, often lead naturally to sell-o s over time. In the late 1990s Sweden’s Social Democrats launched a plan to rationalise, but not sell, state assets. The overhaul, led by Mr Detter, exposed the super uity of many SOE subsidiaries and other holdings, spurring the government to put three times more under the hammer than the nominally more privatisation-friendly previous administration had done. All of which points to a huge opportunity for governments to sell or sweat more assets, and by doing so reduce scal stress. With political courage and some imaginative structuring of transactions, they should be able to lay to rest the widely accepted idea that their boldest moves are already behind them. 7

none of these institutions has to produce a balance-sheet. Even in countries with reputations for public-sector openness, estimates can only be rough. To calculate the overall market value of sovereign assets in Sweden, Jorgen Sigvardsson, also of PwC, used a methodology that extrapolates from property-tax values (and thus excludes untaxed property, such as historic buildings). His estimate: a total of $230 billion in 2009, of which property accounted for $100 billion-120 billion and corporate assets (including the state’s stakes in Telia Sonera and SAS) for $90 billion. If his numbercrunching is accurate, and if state-owned property accounts for a similar share of the economy elsewhere, OECD governments own land and buildings worth some $9 trillion, equivalent to 18% of their general government gross debt. Britain, too, has done more than most to catalogue and appraise its holdings. Every few years it publishes a National Asset Register. The latest, in 2007, contained 1,110 pages of tables, including breakdowns of the estimated value of each government department’s tangible xed assets (including heritage sites), intangibles (such as software licences) and shareholdings. It assigns value to holdings as minor as the dormitory at Woodbridge Air eld worth ?2.8m, since you ask. That is a mere speck on the Ministry of Defence’s balancesheet: its tangible assets are ?70.4 billion, a quarter of the total for all government departments. Local-authority assets are totted up separately. As of March 2012, authorities in England alone had xed assets of ?234 billion, 75% of which were land and buildings, including public housing. Few countries display such attention to detail. Ian Ball, former head of the International Federation of Accountants (IFAC), points out that many countries do not even know the book value of their assets, let alone the market value, because they lack information to calculate depreciation. Most make do with cash basis accounting rather than the accrual accounting used in the private sector. This helps obscure weak nances, because costs are counted only when the bill comes due, not when the obligation is incurred. And if there is no cost of capital associated with, say, ministry o ces, there is less pressure to use them e ciently or dispose of them. IFAC has led a crusade to get countries to adopt a public-sector version of the IFRS accounting rules used by many large companies. This standard, known as IPSAS, has been adopted in full or in part by Britain, France, Canada and New Zealand, among others. Germany is holding out. New Zealand probably comes closest to managing assets as a company would, in some respects going even further: it not only uses the accrual method but updates

High Commission building on Grosvenor Square was sold last November for ?306m. The buyer, an Indian developer, plans to turn the grand building into luxury ats. Leasing can generate e ciencies, too. France, for instance, has leased out a defence-ministry building on the Place de la Concorde, moving its occupants to less plush o ces on the outskirts of Paris. Leasing provides a steady stream of revenue that can help trim annual de cits, as opposed to the one-o debt-reducing pop that comes from a sale. It can also be an attractive option for nancially troubled countries that would struggle to obtain fair value in a disposal, because investors would know it was a re sale. Though governments are increasingly considering reforms to streamline public administrations, receipts and savings have been modest so far. Governments often fear stirring up controversy over assets that have a place in the public’s heart. The brouhaha can reach a level that forces deals to


The Economist January 11th 2014 23 Also in this section 24 Cambodian democracy 25 Politics in India 26 Banyan: The trouble with democracy

For daily analysis and debate on Asia, visit

Bangladesh’s election

Another beating

Sheikh Hasina plans to hang on to o ce after an electoral farce


T IS becoming hard to know whether Sheikh Hasina, Bangladesh’s prime minister, is a cynically good actress or cut o from political reality. Smiling before journalists in Dhaka, the capital, on January 6th, she chided opposition parties for their mistake in boycotting general elections the day before, then waved aside doubts over the legitimacy of her victory. Either way, her country’s democracy is in a rotten state. Of a potential electorate of 92m (out of more than 150m people), only a minority turned out. The government says just under 40% voted in contested seats; others think much less. It does not give Sheikh Hasina’s Awami League (AL), which has ruled since 2009, much of a basis for another term. Many polling stations saw almost no voters, then suspiciously large numbers of ballots cast late in the day. Of the 300 constituencies, just over half, 153, had no contest at all, since only AL candidates or allies registered. In the capital voting took place in just nine of 20 seats. The main opposition Bangladesh Nationalist Party (BNP) and a host of smaller parties refused a contest they said would be unfair unless supervised by a caretaker government of the kind seen in the previous four elections. But Sheikh Hasina scrapped the constitutional provision for that in 2011. The BNP’s leader, Khaleda Zia, long a bitter rival to the prime minister, remains under what amounts to house arrest. Mo-

hammad Hossain Ershad, a former dictator who leads the third-biggest party, Jatiyo, has been locked up in an army hospital since he belatedly joined the poll boycott. A fourth party, Jamaat-e-Islami, an Islamist and thuggish out t, was banned from the polls for being too religious. On January 7th police arrested yet more opposition gures, including a close adviser to Mrs Zia as he left a meeting with journalists. Thousands of activists have been detained. Political intimidation is o cially explained away as an e ort to stop the violence that has persisted since the AL claimed victory. On polling day alone, over 20 people were shot by police, or beaten or burned to death as rival goons from the BNP and the League clashed and as opposition thugs petrol-bombed buses, apparently to discourage voting. In some cases violent attacks appeared staged especially for television and other cameras. In all, it is an ugly start to what is bound to be another bloody year. In 2013, 500 or so people were killed in political clashes, one of the most violent years since independence. The government, with some cause, blames the BNP and, especially, its Islamist allies. Since the election, pro-Jamaat hoodlums have reportedly attacked minority Hindu families in rural areas. Yet the League also bears responsibility for the unrest. A awed war-crimes trial, in which leading opposition gures have been sentenced to hang for what they did

in the independence war of 1971, has greatly raised tensions. The trials and executions will go on for months. It is less clear how long Sheikh Hasina believes she can brazen things out. That, a close adviser concedes, is the trillion-dollar question . He expects another year or more before new elections. Several factors favour her as she prepares to be sworn in at the end of the month. Not least, the BNP is in disarray, its leaders either uninspiring or locked up. Its recourse to months of crippling strikes and street protests, in association with Jamaat, was desperate and did not go down well with most Bangladeshis. Foreigners will press for a new vote, but not rmly. Western countries all refused to send observers to the recent polls. On January 6th American, British and other governments lamented the violence and the awed election in equal measure. Yet none has gone so far as to say that Sheikh Hasina’s victory, and thus her government, is illegitimate. Outsiders could threaten to cut aid or trade bene ts (especially valuable duty-free access for clothes to the EU). But they will be wary of undermining laudable anti-poverty e orts. So Sheikh Hasina probably thinks she can hold on. If she is seen to o er negotiations with Mrs Zia, that may be enough to buy her time. O cial proposals for future elections are likely to include all-party caretaker administrations and a revamped election commission. But agreement on these would take months and may never be reached. Meanwhile the government will press the BNP hard to break ties with Jamaat. Sheikh Hasina enjoys a degree of political cover. The biggest neighbour, India, did send observers to the polls, and praised her for holding them at all. Despite earlier Indian e orts to look even-handed, among Bangladeshis the perception is growing that India heavily favours Sheikh Hasina 1

24 Asia
2 over her rivals. It is certainly eager to see Ja-

The Economist January 11th 2014
barracks in the coming months. Much depends on what sort of leadership the opposition can o er in particular, whether it can turn its popular refusal to take part in a awed election into a wider protest calling for new and fair polls. Once, when Mrs Zia was asked whether she believed Sheikh Hasina would step down after an election, she called her a despot who thinks she will never have to relinquish power . But even if all goes well, that prediction is likely to take months to be proven wrong. 7 continued to call for Mr Hun Sen’s resignation. They regard him as guilty of rigging last July’s general election. Like Mr Hun Sen himself, most of the local media championed the Vietnamese victory of decades ago and ignored the repression of Cambodians today. However, footage shot by protesters and journalists went viral on social media. Even in the provinces, villagers watched images of the violence against the garment-workers. In addition to those killed and wounded, at least another 28 protesters have been detained; many more went into hiding after government thugs smashed their way through Freedom Park, a zone in the heart of the capital where demonstrators had established a semi-permanent base. Two leaders of the CNRP, Sam Rainsy and Kem Sokha, have been summoned to appear in court. Meanwhile, general repression orders have been extended. Public gatherings of ten or more people have been banned, and universities have told students not to hold political rallies or even take part in sensitive political discussion . The army and police, wearing riot gear and brandishing automatic weapons, are out in the streets. After more than $100 billion in foreign aid and two decades of oversight by the UN, the future for Cambodian democracy now looks uncertain. Some in the ruling party say that the usual democratic processes, including the right to demonstrate and perhaps even a working parliament, will be suspended until the next election, not due until 2018. The economy is teetering, too. Foreign garment-makers such as Levi Strauss, Puma and Gap are among the brands reviewing their options following the violence against Cambodian workers. Combined, foreign rms have bought more than $5 billion-worth of Cambodianmade garments over the past year. The industry contributes around a third of the government’s annual budget. For now, labour unions have told their members to return to work, and further street protests have been called o . Mr Sam Rainsy, for his part, is ignoring his summons. He vows to organise the anti-government forces into myriad small groups and spread them out across the countryside where they would be harder to detect and suppress. This will not please Mr Hun Sen. His distaste for any form of dissent runs deep. But this month’s show of force will only sap the strongman’s popularity further. It was already declining: despite using all its resources at the most recent election to produce a good showing, Mr Hun Sen’s party lost a humiliating number of seats. The prime minister’s crackdown now will win him few friends. Away from events touting the glories of his party’s past, smiling faces will be rare. 7

maat and other Islamists weakened. At home, the Bangladeshi army is unlikely to repeat its futile e ort in 2007 to banish both the atrocious begums, Mrs Zia and Sheikh Hasina, from politics altogether. The army made a mess of its attempt at governing, in 2007-08. Sheikh Hasina also bene ts from having sweetened the armed forces with lucrative UN peacekeeping duties and promises of Russian weapons and Chinese submarines that should encourage them to remain in their

Cambodian democracy

Bruised, bloodied and probably broken

The strongman orders a crackdown on dissent


N THE capital everyone still loyal to Hun Sen, Cambodia’s long-serving prime minister, was putting on a brave face. This was, after all, a time for cross-border backslapping to mark the 35th anniversary of the Vietnamese invasion of Cambodia which drove out Pol Pot and his murderous Khmer Rouge and installed a new government the same one that rules today. Ordinary Cambodians, however, were locked out of festivities carefully stagemanaged by the Cambodian People’s Party (CPP) near the banks of the Mekong river in Phnom Penh. More than 20,000 schoolchildren, senior military o cials and hand-picked members of the party faithful applauded on cue as Heng Samrin, an elder of the CPP, spoke of the harmonious and vibrant society that emerged back in 1979, following decades of war. Mr Hun

Sen smiled and waved. But he kept resolutely quiet about what is going on in his country today. At few points in his 30 years of rule has Cambodia been tenser. In particular he made no mention of his crackdown on dissent this month in which ve people were killed and another 20 injured. It brought to a sudden halt months of protests by the opposition Cambodian National Rescue Party (CNRP), by striking garment-workers from the factories around Phnom Penh, and by people objecting to land grabs by developers close to the government which had left them homeless. The three strains of dissent were galvanising into a single force. Rallies of more than 60,000 were becoming common, with unions pushing to double the minimum wage (to $160 a month) as the CNRP

The Economist January 11th 2014 Politics in India

Asia 25
bring national in uence. A party with 20-30 parliamentary seats can count as a national actor with a say in post-election coalition bargaining. How likely is that for the AAP? Sympathetic observers see Mr Kejriwal already in uencing politics for the better. His party rejects many corporate donations, is transparent about where it gets its money and raises funds mostly from a wide base of small donors. The AAP is sta ed by volunteers. Its youth and idealism, says a columnist, Pratap Bhanu Mehta, is a welcome antidote to years of public cynicism towards India’s two big parties corrupt, geriatric and in thrall, in the case of Congress, to dynasts. Both Congress and the BJP are wary of the harm the new party might in ict on them. In an e ort to draw more attention to itself, Congress is likely to name Mr Gandhi as its prime ministerial candidate on January 17th. It also promises a bigger campaigning role for his sister, Priyanka Gandhi. She is seen by some as a more decisive, e ective gure than her brother, though her husband is tainted by allegations of corruption (which he denies). Yet relying on the Nehru-Gandhi name to bring in votes looks an outdated practice in the face of the AAP’s urban activism. Narendra Modi, the BJP’s strongman leader, remains the front-runner to be the next prime minister. But having noted Mr Kejriwal’s success in Delhi, he may have to adjust his strategy. Mr Modi is also starting to solicit small donations from supporters, and hopes to build teams of active volunteers. Their stated goal is to get the BJP 272 seats, an absolute majority, at the general election. That looks a fanciful tally, far above any previous BJP haul. It would become even more improbable should Mr Kejriwal manage to build even a modest national campaign. 7

Stirring the pot

A new political party opens up Indian politics


MEASURE of his sudden success is how intensely Arvind Kejriwal provokes either cheer or dismay. Mr Kejriwal is a former civil servant who leads India’s newest and brightest movement, the Common Man or Aam Aadmi Party (AAP), born in 2012 of an anti-graft campaign. Barely two months ago political analysts wondered, before an election there, whether he could in uence local politics in Delhi, the capital. Now they ask how he might a ect India’s general election, which will probably take place in April. Without a scintilla of governing experience, so far the AAP has exceeded expectations. In December it got 30% of votes in polls for Delhi’s assembly, taking 28 of 70 seats (the national capital territory is in effect a state). It both walloped the incumbent Congress and took support from the main opposition, the Bharatiya Janata Party (BJP). Backed by Congress’s few remaining legislators, on January 2nd Mr Kejriwal was con rmed as Delhi’s powerful chief minister. His rst days in o ce have been true to form. Champion of the little man, he refuses to move into the enormous Lutyens bungalow in New Delhi which was long the chief minister’s residence. He and his team of young ministers spurn the ashing red beacons on o cial cars that Delhiites so resent. Police will lose powers to ne rickshaw drivers for petty o ences, playing to a core group of supporters. And taxpayers will subsidise a xed quantity of electricity and water for every household. That is popular, given high rates of in ation, though it does nothing for many without wires or pipes in the rst place. Now Mr Kejriwal has a platform for campaigning beyond Delhi. On January 5th the party said that it will compete in a pending state assembly election in Haryana, Mr Kejriwal’s home state, as well as launch a national drive for members. In the general election it will contest parliamentary seats in 20 of India’s 35 states and territories. Crucially, it will stand in all 80 constituencies in Uttar Pradesh (UP), a huge northern state of over 200m people that is sure to shape the overall result. Look out especially for the Amethi constituency of Rahul Gandhi, Congress’s scion, where the AAP hopes for an upset. Just as its governing abilities in Delhi are untested, so its national electoral chances are unclear. Mostly its appeal is in cities, where voters are particularly fed up

with national rule by Congress but less prone to voting by religion or caste. They are also likely to be most swayed by the enthusiastic media and online coverage of Mr Kejriwal. This is a big slab of voters: 53 Indian cities now have 1m or more residents, accounting for around 70 out of 543 parliamentary constituencies for the lower house. A single-issue, anti-graft movement will probably broaden into a grouping of socially active, left-leaning, secular voters. It would mean drawing in activists on local issues, for example those against a nuclear power station in a coastal part of southern Tamil Nadu, or right-to-information campaigners who oppose mining rms in Goa and Karnataka. On the other hand, as the AAP takes positions on more subjects, it is likelier to stumble. This week one leader caused a furore by suggesting, reasonably enough, that majority-Muslim Kashmiris deserve a say over army deployment keeping order in Kashmir. That provoked a group of 30 right-wing Hindu thugs to smash windows of an AAP o ce near Mr Kejriwal’s home. The further Mr Kejriwal and his colleagues stray from campaigning against corruption, the likelier they are to make enemies or put their foot in it. Nonetheless, a development of recent years the fragmentation of Indian politics and the rise of small but potent regional parties means even moderate success can

This supporter champions new brooms

26 Asia

The Economist January 11th 2014


The trouble with democracy

With varying degrees of justi cation, election boycotts are in vogue in Asia tion it ran in 2001-06 than because of the thuggery of some of its supporters. Both sides are to blame for the political violence that has seen some 150 people killed during the campaign and on polling day itself. No incumbent ruling party has ever won a second term in Bangladesh; each election is a victory of hope over experience. After the BNP’s previous term ended, the army stepped in to back a two-year technocratic interim administration and to try to build a political system that did not depend on the two Begums . It failed. So democracy in Bangladesh remains the ef of two parties that have consistently done all they can to undermine it. Nepal, in contrast, is enjoying a rare burst of political optimism, after more than ve years of fractious stalemate since the previous election in 2008. Despite Maoist threats, turnout in the election was more than 70%. The result was a defeat for the mainstream (non-boycotting) Maoists, whose record in power had bequeathed them the nickname cashists . But, despite crying foul because of alleged electoral fraud, they have agreed to join the assembly to draft a constitution. Not much, however, suggests the new assembly will nd it easier than its predecessor to nd a constitutional settlement all can accept. Thailand could also do with a new constitution. The current one no longer works. The political system has broken and no one can see the way to devise a new one. The main opposition group, the Democrat Party, should contemplate a name change: to the anti-Democrats , perhaps, or the catchier Born to Rule! . It is boycotting next month’s election not because it would be unfair (though it might be), but because it would lose. It has not won a general election for more than two decades. Its supporters in the south are outnumbered by those in the north and north-east of the country, who keep on voting in proxies for Thaksin Shinawatra, an exiled former prime minister. The forces that the Born to Rules represent, including much of Thailand’s traditional elite, nd this impossible to accept. They are openly campaigning for what amounts to dictatorship, though they do not call it that. Democracy has not worked for the Democrats. Even if they thought they had some chance of winning an election, they might have had second thoughts after last year’s votes in two of Thailand’s neighbours. The Cambodian opposition resisted the temptation to boycott an election in July. It did surprisingly well in a country where the ruling Cambodian People’s Party still functions in many ways like what it once was, the one party in a one-party state. But, despite an alliance with striking garment-workers, the opposition remains far from power. In Malaysia, the opposition knew the voting system was biased in favour of the ruling coalition, more than is usual even with a rst-past-the-post system. In May it lost the election despite winning the popular vote. Constituencies are gerrymandered, but the opposition alleged further rigging and cried foul. Yet in a relatively mature parliamentary system, it seems tacitly to accept it will have to wait for vindication until the next election. The Maldivian exception In a column in need of democratic heroes, here is one nominee: the Maldives’ Mr Nasheed. He was president from 2008 to 2012, succeeding a 30-year dictatorship, but was toppled in a coup. Yet he accepted last year’s perverse electoral defeat graciously. He had an eye, says an adviser, on the long term. Other Asian leaders have yet to realise that the true mark of a democrat is not how he wins power in an election but how he loses it. 7


HOSE living in dictatorships often harbour the delusion that the point of democracy is that you get the government you want. Those living in democracies soon realise that is not the system’s most salient feature: rather, it is that a large number of voters get the government they do not want and are expected to put up with it until the next election. In many young democracies, politicians nd this hard to accept. So governments rig elections to make sure they win; and opposition parties reject elections they think they will lose. For combinations of these two reasons, Asia is experiencing a wave of election boycotts. The poll held on January 5th in Bangladesh was a foregone conclusion after the opposition refused to take part. In Nepal 33 parties rejected a constituent-assembly election in November, including one faction of the once-ruling Maoists, who staged a menacing active boycott . In Thailand the oldest political party, the Democrats, despite long agitating for dissolution of parliament, is shunning the resulting general election, due on February 2nd. As for those that did contest elections last year, opposition parties in Cambodia and Malaysia are still refusing to accept that they lost. And the tiny Maldives seemed prepared to hold as many elections as it took for the country’s most popular politician, Mohamed Nasheed, to lose. The election in Bangladesh was a farce. Because of the boycott, the incumbent Awami League had won a parliamentary majority even before polling stations opened. But the opposition Bangladesh Nationalist Party (BNP) did have a strong case that the election would have been farcical even if it had taken part. So deep and bitter is the antagonism between the League and the BNP and their leaders, Sheikh Hasina, the prime minister, and Khaleda Zia of the BNP, that neither has ever trusted the other to run a proper election. Since 1991 governments have had to stand down well before elections, which were held under supposedly neutral caretaker administrations. But after winning a landslide in December 2008, the League used its big parliamentary majority to amend the constitution to do away with this requirement. Even so, the BNP would probably have contested the election had it maintained the big lead it held up to a few months ago in the opinion polls. But it did not, less because of the memory of how corrupt, high-handed and generally dreadful an administra-


The Economist January 11th 2014 27 Also in this section 28 An inland city tries to reform 29 Death of a lm mogul

For daily analysis and debate on China, visit

Urban renewal (1)

New frontiers

The fate of China’s economic reforms will be determined locally. Our rst article looks at a wealthy city near the coast; our second, at a poorer one inland.


HE furniture market in Foshan claims to be the biggest in the world. It boasts a bewildering mix of things to sit on, sleep in and eat at. One shop, named the Louvre , o ers a range of styles from neoclassical to postmodern, which an assistant de nes as a cross between European and modern, suitable for successful people . The market, which sprawls over 3m square metres (32m square feet), showcases the manufacturing powers of Foshan, a city of 7m people in the southern province of Guangdong. The city is an archipelago of industrial clusters, dedicated to furniture, textiles, appliances, ceramics and the equipment required to make them. These clusters have produced some of China’s most successful private rms, such as Midea, a maker of household appliances, which began as a bottle-lid workshop, and now employs 135,000 people, generating over $16 billion in revenue in 2012. Many economists worry that China will succumb to a middle-income trap , failing to make the jump from an early stage of growth, based on cheap labour and brute capital accumulation, to a more sophisticated stage, based on educated workers and improvements in productivity. But no economy, let alone one the size of China’s, moves in lockstep from one growth model to another. Some regions always outpace others. Provinces like Gansu, in China’s north-west, are still struggling to wean themselves o stateowned mines and smokestacks (see next

GANSU Baiyin Lanzhou

Beijing Huangcun
Ye llo w


Yellow Sea



I N A Shuangxi
GUANGDONG Guangzhou Shenzhen Foshan Hong Kong

E Ch S



South China Sea
750 km

article). Other parts of China’s economy are already comfortably high-income, according to the World Bank’s de nition. For example, Foshan’s GDP per head was almost $15,000 in 2012, higher than in some member states of the European Union. Foshan best represents China’s emerging economic frontier , according to the Fung Global Institute (FGI), a think-tank in Hong Kong. With the help of researchers from the National Development and Reform Commission, China’s planning agency, the institute is studying Foshan for clues about the rest of the economy’s future. Foshan’s example is relevant to other parts of China, it argues. Unlike the nearby metropolis of Shenzhen, it was never a special economic zone. Unlike neighbour-

ing Guangzhou, it is not a provincial capital. It also shares many of the country’s growing pains. Lacking oil and coal, it is prone to electricity shortages. It is heavily polluted and highly indebted: its government pays 47% of its tax revenues on servicing its liabilities. Wages are going up, land is running out, and growth is slowing down. To tackle such problems, China’s Communist Party endorsed a long list of bold reforms at its long-awaited third plenum in November. Economists welcomed the list even as they worried that ofcials would fail to implement it. But in China, implementation is often a process of gradual di usion not abrupt transition. Some of the principles proposed by the plenum are already in practice in Foshan. Some may have been inspired by it. The third plenum resolved that the market should play a decisive role in the allocation of resources. In Foshan it already does. In the early 1990s Shunde, one of the city’s districts, pioneered the sale of government-backed enterprises to their managers, workers and outside investors. Foshan now has about one private enterprise for every 20 residents. In 2012 they grew twice as fast as the remaining stateowned rms. November’s party plenum also called for private capital to play a bigger role in public infrastructure. In Foshan over the past nine years the government has allowed private rms to bid for over 500 projects, including power generation, water plants, and rubbish-incineration plants, according to Liu Yuelun, the city’s mayor. Ahead of the party’s call to consolidate the state bureaucracy, Shunde district had already slashed the number of its departments from 41 to 16. Another national aim is to unify parts of China’s land market, allowing rural land to be leased on similar terms to stateowned urban plots. In the 1980s Foshan 1

28 China
2 had already created a shadow market in

The Economist January 11th 2014
growth and environmental protection. In the past the government would approve a new company before the sewerage system was ready to cope. Four of Foshan’s inland rivers are heavily polluted. In 2003 it tightened environmental regulations on its local ceramic rms, an industry with centuries-old roots in Foshan. Ten years later, fewer than 60 out of 600 rms remained. The rest did not pollute less. They just polluted elsewhere. Pollution is now a barrier to Foshan’s development, rather than a byproduct of it. We understand that our poor environment does not attract talented people, notes Mr Liu, the mayor. We want to provide greener lands for them. Mr Liu hopes that new, cleaner clusters will supersede its older, dirtier ones. The east of the city, which is connected to Guangzhou by underground, hosts a cluster of back-o ces for Guangzhou’s nance industry. Foshan is also building a new cluster dubbed the Sino-German Industrial Services Zone, dedicated to the services that high-end manufacturing requires. The new zone straddles the Dongping river. One bank represents Foshan’s prosperous, tangible present a busy port, loading and unloading containers full of manufactured goods. On the other bank is Foshan’s vision of its future: a pleasant ribbon of parkland, decorated with cherry trees, mudats to attract birds and a skate-boarding rink. The park includes a man-made beach and pond, open to the public, where up to 2,000 people can bathe. In the past Foshan’s enterprises made great leaps by assimilating foreign technology. Its ceramics industry, for example, imported a German oven in 1983 that increased output tenfold. The Sino-German zone is an attempt to import something else: not German kit so much as German credibility. The international tie-in is a sign of Foshan’s ambition to become a liveable city, attractive to the kind of people that a sophisticated service industry needs. Like its furniture, Foshan’s new city aims to be somewhat European, modern and suitable for successful people. 7

communal land, which villagers leased to budding industrialists, contrary to national law that reserved such land for rural purposes. Because these land rights were technically illegal, many big rms eschewed them. But that made them all the cheaper for scrappy, small rms willing to live in the legal shadows. This grey market allowed Foshan’s industrial clusters to grow organically, according to economic logic rather than arbitrary land laws, argues the FGI. It also allowed villagers to reap some of the gains of Foshan’s industrial transformation. By 2010, the FGI calculates, the average Foshan resident owned property worth almost $50,000. Will Foshan’s experiments inspire nationwide reform? Its lessons sometimes get lost in translation. Shunde’s sales of government-backed rms is one example. It sold its most pro table rms before selling the lossmakers, a strategy it likened to marrying o the prettiest daughter rst, according to Linda Chelan Li of the City University of Hong Kong. The national government, in contrast, let small, lossmaking rms go but clung tight to big, profitable ones. These SOEs remain powerful and pro table and all the harder to reform as a consequence. Foshan’s penchant for experimentation also re ects its unusual administrative history. Until 2002 two of its districts, Shunde and Nanhai, were cities in their own right. Their governments still collect more revenues than the city itself. This allows decentralised and more responsive decision-making. When the upper level of government gives more authority to subdistricts, they have a stronger sense of responsibility, says Mayor Liu. In response to the demand of local industry, for example, Shunde district built an impressive polytechnic, which now teaches 11,000 students. Its quali cations are not recognised as degrees by the Ministry of Education but they are highly valued by local employers. A skilled graduate can earn up to 6,000 yuan ($990) a month, says Fu Qingju of Keda, an equipmentmaker. The quantity of workers will grow more slowly as migration to Foshan slows, but the quality can always improve. Do you copy? Foshan’s success may prove hard to imitate or to sustain. Its prosperity rests on the bene t that rms derive from proximity to others. But these clusters are hard to replicate. Why would companies ock to a new cluster when one already exists? China is dotted with ambitious local governments keen to build hubs of high-tech rms and services. Not all of them can succeed. In addition, when industries cluster in one location, pollution also concentrates in the same spot. Foshan has experienced the stark trade-o between industrial

Urban renewal (2)

Not so grim up north-west

A hub for mining and heavy industry tries to reinvent itself


OR decades after Baiyin’s largest mine opened in 1956, the city’s state-owned behemoth, the Baiyin Nonferrous Metals Company (BNMC), was China’s main supplier of copper. It also furnished prodigious amounts of zinc, lead and selenium from the region’s mines. Now the stu in the ground is nearly gone. Although Baiyin, a city of 1.7m on the Yellow River in the arid north-western province of Gansu, still has some mines and smelters, it must nd something else to do. The problem has hardly crept up unannounced. Even as Baiyin dug other pits and maintained output, the pit opened in 1956

was exhausted and shut by 1988; in 2003 the central government declared Baiyin a city on the path to resource exhaustion , and in 2008 selected it for a pilot programme in a transformation that will affect scores of similar cities. Several things complicate Baiyin’s renewal, concludes a study by Wang Haifei of Northwest Normal University. Not only is it remote, short of water and too dependent on digging things up from the ground but, according to Mr Wang, poor managers at its state-owned enterprises have failed to restructure its businesses or upgrade its technology. They did not train local techni-1

Dark, satanic Nonferrous Metals Group

The Economist January 11th 2014
2 cal sta or bring in talented managers from

China 29 Death of a lm mogul

elsewhere in China. It is obvious that the transformation of Baiyin is still di cult, he wrote. It is a long journey. Although Baiyin remains a grimy industrial city where many struggle to make a living, it is taking a few promising rst steps. The BNMC has been reborn as the Baiyin Nonferrous Metals Group (BNMG), with new investors and, it claims, strategies that will outlast the area’s failing mineral endowment. Zhang Jinlong, a BNMG o cial, acknowledges many problems but says that the company has spent heavily on technology that has already produced gains in e ciency and declines in pollution at the city’s remaining factories. The company has also won control of resources elsewhere in China and in other countries, including South Africa and Peru. Belatedly, Baiyin is starting to diversify its economy. It is getting help both from Gansu’s provincial government and from the central government, which has announced an increase of 5% in annual grants, to a total of 16.8 billion yuan ($2.7 billion), for the 69 cities that are now classied as resource-exhausted . The broad strategy for these places is managed by the National Development and Reform Commission (NDRC), China’s planning agency. O cials there say the cities are home to 600,000 unemployed miners and 1.8m residents living at subsistence levels. Resource-rich cities have made tremendous contributions to China’s economic take-o , says an NDRC o cial, but the sacri ce they made is also huge. New dogs and new tricks The planners need these cities to attract new industries. In Baiyin’s case, help has come from the Asian Development Bank (ADB), which since 2008 has given policy advice and $80m in loans for industrial transformation. The head of ADB’s Beijing o ce, Hamid Sharif, says Baiyin’s new mayor, Wang Haizhou, is modern, business-minded and already making his mark. The ADB has said that since it got involved, the number of enterprises in a high-tech park has grown from 55 to 124. The number of employees has risen from 1,800 to more than 14,000 and annual gross output of the park has gone from 1.2 billion yuan to 14.1 billion yuan. One of those enterprises is the Kang Shi Da contact-lens factory, where 260 employees use precision equipment from South Korea and Japan to make 20m coloured lenses a year, many of which are exported to South-East Asia. The boss, Tang Shunchu, reckons Baiyin got stuck in the stodgy mindset of China’s state-owned enterprise system. To get the place moving, it needs more outsiders (like him). He boasts that Kang Shi Da has helped China go from buying lenses from South

Kung fu ght king

Sir Run Run Shaw made his mark on Hollywood and the wider world


F HE had made a lm of his own life, Sir Run Run Shaw might have called it The Last Mogul . From a stylised opening scene in the late-Qing dynasty Shanghai of his childhood to his death in Hong Kong at the age of 106 on January 7th, it could have been a trademark production of Shaw Brothers, the studio that created the Hong Kong action-movie industry. It would be full of action itself, as when he and his brothers buried $4m worth of gold and jewellery in Singapore during the second world war to protect it from the Japanese. Before the war they had produced lms in South-East Asia,

Do Run Run
Korea to competing with it in third-country markets though his rm is so far only wholesaling to other packagers for resale. He says the rm needs to build brand recognition but, he insists, Our quality is excellent and we will eventually be able to sell under our own brand name. Another new zone, which is funded jointly by the provincial and municipal governments, is the Baiyin Technology Business Incubator, a business park covering 50 square kilometres (20 square miles). An o cial there, Wang Junying, says it is helping new companies to market themselves and also to raise money from banks and investors. The rst phase has focused on chemical rms, which can use a central testing lab at the business incubator for quality control, rather than send samples out of the prov-

but in 1957 Sir Run Run moved to Hong Kong. There he built the studio that would produce hundreds of lms such as The One-Armed Swordsman and Five Fingers of Death that began a global craze for martial arts. A Shaw lm would feature stars on strict contracts. One actor complained that working for Sir Run Run’s Hong Kong television company, TVB, was like putting an orange into a juicer: the juice belonged to TVB, and whatever remained belonged to you. Nevertheless, many went into the juicer and came out better for it Chow Yun-fat, Tony Leung and Wong Kar-wai among them. Bruce Lee, refusing to work under Shaw Brothers’ strict terms, achieved fame with a rival studio, but that too was started by a former Shaw associate. Everybody owes a debt to the Shaw brothers and Run Run Shaw, says Bey Logan, a Hong Kong lm producer. Sir Run Run also helped produce some American lms, such as Blade Runner . The Last Mogul would also make money, because that is what his lms did (he said movies that made money were his favourite kind). And then the proceeds would go to charity, just as Sir Run Run gave millions to good causes, increasingly in mainland China. Perhaps his subtlest in uence may have been to provide, at the height of Mao’s rule and beyond, an alternative vision of China to the world. For many, the Qing dynasty and Republican-era tableaux of Shaw Brothers lms were the images that endured long after the Red Guards had gone. ince. The second phase, due to open in 2014, aims to attract electronics rms. Not everyone is as upbeat as Mr Wang. An employee at one of the industrial parks complains of old-style thinking that persists in Baiyin. They think that if they just spend a lot of money then everything will change. But who would want to live here or work here? Mr Sharif of the ADB admits that luring skilled workers will be hard. But he also points to the potential in Baiyin’s nascent wind- and solar-energy industries. If it develops those, Baiyin may continue to enjoy a pleasant side-e ect of its industrial decline: improving air quality. In 2002 sulphur dioxide concentrations registered 15 times the regulatory limit. In 2013, according to the Baiyin Daily, the city enjoyed 334 good air days . 7

United States

The Economist January 11th 2014 31 Also in this section 32 Legal pot-for-fun in Colorado 33 The study that proved tobacco kills 33 Bob Gates’s ery memoir 34 New Orleans mayoral election 34 Disability fraud in New York 35 Positive parenting 35 Chris Christie’s bridge too far 36 Lexington: The Robin Hood trap

For daily analysis and debate on America, visit

The economy

Is this the year growth takes o ?

As Janet Yellen prepares to take over at the Fed, the omens are good


HEN Ben Bernanke became chairman of the Federal Reserve (America’s central bank) eight years ago, unemployment had just slipped below 5%, growth had clocked in at 3.5% and in ation was stable. The expansion in economic activity appears solid, the Fed declared the day before he took o ce. Yet beneath the surface a crisis was brewing and the worst slump since the 1930s. For Janet Yellen (pictured), who was con rmed by the Senate on January 6th to succeed Mr Bernanke next month, the situation is the opposite. Unemployment is 7%, growth has struggled to get past 2% and in ation is too low. Yet beneath the surface are tantalising signs that, as Barack Obama put it: 2014 can be a breakthrough year. It may have begun sooner. Booming exports and investment in business equip-

ment suggest that economic growth may have topped 3% (annualised) in the fourth quarter. If so, then GDP for all of 2013 would have grown by 2.7%, the rst time since the recession that it has performed as well as the Fed predicted (see chart 1). What they’re telling Yellen The central bank’s crystal-ball-gazers expect growth to reach 3% this year; privatesector seers say 2.8%. Recent experience calls for scepticism. Almost every year since 2008 both the Fed and private economists have predicted an uptick, only to be disappointed. This year, however, they disagree less about the prospects for unemployment and in ation. Such harmony usually foreshadows greater accuracy, according to Goldman Sachs, a bank. The chief reason for optimism is that scal policy will switch from being a galeforce headwind to a sti breeze. Higher taxes and federal spending cuts knocked 1.5 percentage points o growth in 2013. This year, Goldman reckons scal drag will total just 0.4 points. It may be even less: as The Economist went to press, Congress was debating a three-month renewal of extended unemployment bene ts. Household balance-sheets o er another reason to be upbeat. Thanks to rising stock and house prices, household net worth is back at a record high. Low mortgage rates, defaults and belt-tightening have brought household debt burdens almost back to their long-term trend. Thanks to rising prices, the number of homes

worth less than their mortgage dropped from 10.5m at the end of 2012 to just 6.4m in the third quarter of last year, reckons CoreLogic, a property-data rm (see chart 2). That should boost consumer spending and encourage banks to lend more. The Fed has already tweaked its prescription for the recovering economy by reducing ( tapering , in central-bankerspeak) its purchases of bonds with newly created money, from $85 billion to $75 billion a month a process known as quantitative easing . It expects to be buying none at all by late this year. At the same time, however, it plans to keep interest rates near zero until 2015, and perhaps longer if in ation, now around 1%, fails to move back to its 2% target. All this presents Ms Yellen with two distinct challenges: what to do if the optimists are right, and what to do if they are wrong. Benjamin Mandel of Citigroup notes that, using a conventional policy rule, even the Fed’s forecasts of unemployment and toolow in ation would call for interest rates to start rising in mid-2014 and reach nearly 3% by the end of 2015. As Fed sta recently pointed out, the central bank is defying such conventional rules on purpose: it wants to keep bond yields lower today, to 1

The Fed’s unshakeable optimism
GDP, % change on year earlier FOMC forecast* Actual 4 3 2 1 + 0 – 1 2 3


Bobbing up
to come that exceed Mortgages home value, % of total 30 25 20 15 10 5 0 2010
Source: CoreLogic

2 Total home equity, $trn 6 5 4 3 2 1 0 11 12 13









Source: Federal Reserve Board

*Federal Open Market Committee, final quarter of previous year ?Assumes 3% growth in 4th quarter of 2013

32 United States
2 stimulate growth. Nonetheless, as the

The Economist January 11th 2014
at a speech on January 3rd, warned: If the experience of the past few years teaches us anything, it is that we should be cautious in our forecasts. There have already been scattered signs of weakness in December: car sales, for example, were modest. The past few years’ disappointments are commonly blamed on bad luck: Europe’s crisis, scal discord or natural disasters. Larry Summers, once a contender to succeed Mr Bernanke, wonders if in fact America has entered a period of secular stagnation, in which chronically weak demand is the rule, not the exception. Or perhaps slowing growth in the workforce and productivity have hobbled the pace at which the economy can grow. There is little Ms Yellen can do about that; which is the most worrying prospect of all. 7 January 1st have names like Citi-Med and Evergreen Apothecary. (Retailers exult that they are no longer obliged to speak of medicine and patients .) During this time Colorado’s retailers must grow at least 70% of the marijuana they sell. Washington, by contrast, is creating a recreational market from scratch; this is why its shops are not expected to open until May or so. It will have a three-tier system, with separate licences for cultivation, processing and retail. The state will determine, Soviet-style, consumers’ annual needs in advance and cap overall production. The fate of its medical system, more chaotic than Colorado’s, is uncertain. Under federal law, marijuana remains illegal. The feds have pounced on dispensaries in states with badly run medical systems. But in August the Department of Justice suggested it would let the experiments in Washington and Colorado proceed if they did not impede eight enforcement priorities , including stopping pot from being tra cked by gangs, sold to minors or smuggled into other states. Worryingly for Colorado, its record in these areas is not stellar. Plenty of teenagers are getting their hands on medical marijuana procured by adults. Police in neighbouring states such as Kansas complain of Coloradan marijuana ooding border areas. Colorado has a fat rule book and most dispensaries are well run, but they can do little about customers passing pot to children or taking it across state lines. And in Colorado (but not Washington) anyone may grow up to six marijuana plants without a licence. Legalisation may prompt people to smoke and eat more marijuana. Prices for recreational pot are comparable to those in the illicit market ($55-$60 for an eighth, according to Darin Smith of the Denver Kush Club, a retail outlet). Some non-tokers will surely be tempted to take up the habit now that they need not deal with intimidating criminals in dark alleys; others may get high more often. The ill-e ects of marijuana, including cognitive impairment and a risk of dependency, are fairly well documented (though more research would help). Around 20% of users account for 80% of consumption; as Mark Kleiman, an analyst, points out, it is in a pro t-seeking industry’s interest to target these problem users. Set against this is the genuine pleasure that smoking or eating marijuana brings millions of adults. Moreover, increased marijuana use may turn out to be a net positive for public health if, as some studies suggest, it replaces some consumption of alcohol a far more destructive drug by most measures. That is not the only reason for o cials to welcome legal weed. Hefty excise and sales taxes will boost state co ers. In Colorado the Department of Revenue oversees regulation; this, says Sam Kamin, a law 1

economy improves, the incoming boss may face pressure to raise rates before she wants to. Several reserve bank presidents are already grumbling about the Fed’s leisurely schedule. The bank also has several vacancies coming up that may be lled by people less patient than Ms Yellen. Mr Obama is considering naming Stanley Fischer, a former governor of the Bank of Israel, to be the Fed’s vice-chairman. He has been sceptical of low-rate promises. If markets doubt a commitment to stay the course, rising bond yields could endanger the recovery. The second challenge is just the opposite: that the Fed’s forecast is, once again, too optimistic, as it was every year from 2008 to 2012. Mr Bernanke, though upbeat

Marijuana legalisation

High time

Colorado embarks on an unprecedented experiment


OR reasons as hazy as a cloud of Sour Diesel smoke, the number 420 is cherished by America’s stoners. So it was tting that on January 1st, 420 days after Coloradans awoke to discover that, along with Washington state, theirs had become the rst jurisdiction in the world to vote to remove the criminal prohibition on recreational marijuana, around 40 state-licensed pot shops ung open their doors to all-comers. Four-hour queues snaked along the streets of Denver and other cities. Swamped by newbies, many from out of state, shop sta toiled to explain the difference between sativa (which delivers a cerebral , energetic high suited to daytime use) and indica (a depressive e ect; better consumed late). Should’ve done it 40 years ago! growls a middle-aged man making his rst purchase at Medicine Man, one of Denver’s biggest retail outlets. (A homegrower, he later con des that he got bored smoking the same old strains.) For optimists, the votes in Colorado and Washington suggest that America’s war on drugs is nally winding down. The casualties have been legion: 750,000 people are arrested each year for marijuana alone; the subsequent blotted records can derail lives. Some 40,000 people languish in prison for pot-related o ences. Murderous gangs ll the supply gap created by prohibition. Public opinion appears to have reached a tipping point. Most Americans now favour legalisation; something that was unthinkable a generation ago (see chart on next page). Advocates have waged savvy

campaigns, gaining footholds by legalising marijuana for medical purposes (so far in 20 states and Washington, DC) and presenting a clean-cut, besuited image worlds away from the tie-dyed stereotypes. More states may free the weed before long. Yet legalisation is just the beginning of a process, and Colorado and Washington have taken di erent routes. Colorado has built on the foundations of its medicalmarijuana system. Until October (and 2016 in Denver) only medical-marijuana operators may receive licences to serve recreational customers, which is why many of the shops that welcomed newcomers on

Sativa or indica?

The Economist January 11th 2014

United States 33 Robert Gates’s memoir
shows contempt for many in Mr Obama’s inner circle. Special disdain is reserved for Vice-President Joe Biden, who was wrong on nearly every major foreign policy and national security issue over the past four decades . Close Obama aides are dismissed as callow, aggressive, suspicious and leaky. He calls Team Obama more prone to micromanagement of national security than any White House he had seen since Richard Nixon and Henry Kissinger ruled the roost . Stung by what he felt were broken promises over defence spending and gays in the military, Mr Gates alleges: agreements with the Obama White House were good for only as long as they were politically convenient. Yet historians may nd most interest in Mr Gates’s more-in-sorrow-than-in-anger portrait of Mr Obama, a man 18 years his junior. Republican foreign-policy hawks, such as Senator Lindsey Graham of South Carolina, claim Mr Gates’s book as evidence that Mr Obama has caused havoc from Iraq to Syria by ignoring the military and refusing to lead. The book’s charge is subtler than that. Mr Gates depicts a president willing to overrule political advisers and take hard decisions, as with his 2009 military surge in Afghanistan. But in Mr Gates’s telling, Mr Obama is oddly reluctant to own those decisions. The Afghan surge is presented as the logical end point of a process that saw Mr Obama win the White House as an opponent of the bad war in Iraq, while hailing Afghanistan as a good war. Having declared Afghanistan a war of necessity and analysed his options for months, Mr Obama had to come up with a plan for winning. Yet the defence secretary came to doubt whether Mr Obama’s heart was in it. He describes a 2011 meeting overshadowed by rows with the Afghan president, Hamid Karzai, and by unhelpful brie ngs by General David Petraeus, then the military commander in Afghanistan. Mr Gates recalls thinking: The president doesn’t trust his commander, can’t stand Karzai, doesn’t believe in his own strategy, and doesn’t consider the war to be his. For him, it’s all about getting out. Mr Gates nds some similarities between Mr Bush and Mr Obama, calling both self-contained, aloof and damagingly arrogant with members of Congress or foreign leaders who might be allies. As a self-proclaimed realist, sceptical of the use of military force, Mr Gates is arguably closer in strategic worldview to Mr Obama. Yet he cannot hide his disillusion with a boss who comes across as a detached observer of his own foreign policy. I thought Obama did the right things on national security, Mr Gates writes, but everything came across as politically calculated. The president earned the respect of Mr Gates, a rare Republican in Team Obama, but never, it seems, his love. 7

High school high
Percentage of American: 12th-graders who use people saying marijuana marijuana daily use should be legalised 60 12 10 8 6 4 2 0 1975 80 85 90 95 2000 05 10 13
Sources: Pew Research Centre; University of Michigan

Everything was political

50 40 30 20 10 0

Barack Obama’s former defence secretary chides his old boss


2 professor at the University of Denver, is

good news for the industry, for marijuana may not be addictive, but money certainly is . The costs of enforcement including 22 eld inspectors will be more than covered by the fresh revenue. Perhaps the biggest sign of change is that even foes of legalisation accept the need to try to make it work. All-out drug warriors are hard to nd in Colorado. For their part, campaigners now focus on technical matters. For example, many pot businesses struggle to obtain basic nancial services because banks fear violating federal money-laundering rules. Colorado’s experiment will doubtless hit many hurdles along the way, but if it looks like working, others will copy it. 7

LWAYS keep an eye on the quiet ones. Robert Gates, a Washington veteran who served as George W. Bush’s nal defence secretary and stayed on as Barack Obama’s rst, has written an incendiary memoir that belies his reputation as an inscrutable, un appable team player (Team Obama even nicknamed him Yoda , after the Jedi master from Star Wars ). As a rare bipartisan gure in a polarised capital, who served eight presidents in his day, Mr Gates has startled Washington by revealing the passions beneath his poker face. He betrays real loathing for Congress (most members are parochial, incompetent, rude, thin-skinned, self-serving and hypocritical, is his verdict). He talks of congressional hearings turned into kangaroo courts by members in a permanent state of outrage . At the same time, Mr Gates, CIA chief during the presidency of the elder George Bush, confesses to the almostdebilitating grief that he came to feel over military casualties. His book, entitled, simply, Duty ,

Where there’s smoke It was the report that showed, without a whi of doubt, that cigarettes kill. On January 11th 1964 a Saturday, so to not roil the stockmarket Surgeon-General Luther Terry released a 387-page document entitled Smoking and Health . Ten scientists (all men; half smokers) analysed 7,000 studies to assess the e ects of tobacco on the human body. Its conclusions were incendiary. Cigarette smoking is causally related to lung cancer in men, it said. ( The data for women, it added, point in the same direction. ) The report clearly showed how smokers died younger (see chart 1). A year later, Congress required health warnings on every packet. Public understanding of the risks of smoking changed even faster. Ads in the 1950s had claimed that tobacco was good for you; after the report millions of Americans quit pu ng. In the past 50 years cigarette consumption per adult has fallen by 72% (see chart 2). The report called smoking a habit, not an addiction. But apart from that, it hit the co n nail on the head.
1 American cigarette consumption per person* ’000, per year

2 5 4


3 2 1

0 1900 20 40 60 80 2000 11
Sources: Surgeon-General; Centres for Disease Control; Department of Agriculture *Adults aged 18 and over

34 United States New Orleans mayoral election Criminal justice

The Economist January 11th 2014

No switch for Mitch

Fishy tales

Dozens of New York’s nest are indicted for disability fraud A white mayor charms a black city OU’RE gonna tell ‘em: ‘I don’t sleep well at night. I’m up three, four times. Usually, I nap on and o during the day. I put the television on, you know, I keep changing channels ‘cause I can’t concentrate on the television. Just to hear a voice in the house.’ So advised Joseph Esposito, a retired police o cer turned disability consultant , while coaching someone looking to fool his doctor so as to claim disability bene ts. He went on to say, in a phone call intercepted by investigators: If you can, you pretend to have panic attacks. Mr Esposito is one of 106, who include 80 retired police and re ghters, indicted by a grand jury for disability fraud on January 7th. Four, including Mr Esposito, were accused of masterminding the fraud. In exchange for generous kickbacks, they allegedly directed scores of retirees to lie about their health to obtain bene ts to which they were not entitled. All four pleaded not guilty. In all, the defendants allegedly received more than $21m in bene ts.



MALL wonder Mitch Landrieu is popular. His predecessor as mayor of New Orleans was Ray Nagin, a man of minimal competence (when Hurricane Katrina struck in 2005, he botched the evacuation), i y racial views (he declared that New Orleans should be a chocolate city) and questionable ethics (he is about to go on trial for corruption). After Mr Nagin, a merely mediocre mayor would have seemed an improvement. And Mr Landrieu is better than that. Granted, the Lower 9th Ward is still a ghost town, and will probably remain so. But most of the other badly ooded areas have gradually bounced back. An in ux of young folk, attracted by the city’s rich culture and laissez-faire lifestyle, has spawned a clutch of start-up businesses. A Hispanic surge has changed the city’s complexion. After a slow start, the recovery is in full ower. Even the murder rate has fallen, by roughly 20% in 2013. New Orleans is on a roll. Let’s keep it rolling, say Mr Landrieu’s campaign ads. As he seeks re-election on February 1st, his approval rating is around 65%. But Michael Bagneris, a local judge who resigned last month to take on Mr Landrieu, thinks there are chinks in the mayor’s armour. He chides him for still-high crime, gaping potholes, broken streetlights and overpaid aides. He promises to be a uniter; he says Mr Landrieu is the opposite. The race will not be about party a liation: both men are Democrats. There will be a racial subtext, however. Mr Bagneris is black; Mr Landrieu, white; New Orleans, 60% black. Should he wish to, Mr Bagneris could point out that the city’s recent boom has left many African-Americans behind. Income inequality between whites and blacks, already wide, has increased over the past decade. Only 53% of black men in Greater New Orleans are employed. Some blacks also chafe that so many powerful elective posts are held by whites not only the mayor, but also the district attorney, the coroner and most of the city council. However, it has been nearly a century since a sitting mayor of New Orleans lost a bid for a second term. (Even Mr Nagin was re-elected in 2006.) Mr Bagneris is from a notable political family but he is hardly a household name and lacks the money to turn himself into one. The Landrieu brand has always polled well among blacks in New Orleans, not least because Moon Landrieu, the mayor’s father, who held the

Several claimed they could no longer work or lead active lives. Yet investigators found, on Facebook, Twitter and YouTube, pictures of them playing basketball, using jet skis and ying helicopters. One man who claimed to be virtually housebound was snapped shing for marlin in Costa Rica (see below). Cyrus Vance, Manhattan’s district attorney, speculates that the scheme, which dates back to 1988, may have involved as many as 1,000 people and as much as $400m in bene ts. More indictments are expected. The number of Americans receiving disability payments has shot up from 4.9m in 1999 to 8.9m last year. Fraud is rife, according to Tom Coburn, a Republican senator from Oklahoma who led an inquiry in 2012 into the Social Security Administration’s disability programme. He found that a quarter of 300 randomly selected disability cases were awarded with insu cient, contradictory or incomplete evidence. It’s the sort of thing that makes taxpayers feel sick.

Housebound in New York
same post from 1970 to 1978, was the rst chief executive to appoint blacks to highranking positions in City Hall. Still, the younger Mr Landrieu is taking nothing for granted. His soaring TV ads, which feature gospel music and testimonials from satis ed African-American voters, pop up whenever the New Orleans Saints football team takes a breather. Racial animosities seem to have faded at the ballot box in the past few years, but Mr Landrieu was still delighted to receive the endorsement of America’s rst black president on January 6th. Mr Bagneris hu ed that Barack Obama was simply doing a favour to Mitch’s sister, Mary, a senator whose seat is at risk this year. He added (redundantly) that the president was a Washington insider . That won’t impress black New Orleans voters, who adore Mr Obama. For Mr Landrieu, the good times are set to keep rolling. 7

The Economist January 11th 2014 Positive parenting Chris Christie

United States 35

Beyond the naughty step

A bridge too far?

Attempts to go where calm and reasonableness fear to tread

A scandal threatens the New Jersey governor’s nice-thug image


N THE old days parents followed a simple rule: spare the rod and spoil the child. These days less violent forms of discipline are favoured. Supernanny, a television toddler-tamer, recommends the naughty step , to which ill-behaved brats are temporarily banished. Yet even this is too harsh, some psychologists say. Putting Howling Henry on the naughty step may interrupt his tantrum; but advocates of positive discipline say it does nothing to encourage him to solve his own problems (and thus build character). Some even suggest it may be psychologically damaging. Positive discipline, which is becoming a grassroots fashion in America, aims to teach children self-control and empathy. Rather than screaming at them to pick up the toys they have strewn on the oor, parents or teachers ask them to suggest their own way of tackling the problem. Adults are encouraged to think harder about the causes of bad behaviour. Families meet regularly to discuss all of the above. The Ravenswood School in Chicago has embraced positive discipline. When children quarrel, they are allowed to pick an option from a wheel of choice poster. These include share and take turns , balloon breath and a spell in the calm-down corner . In one classroom this has a tiny wicker chair, some fairy lights and an inviting box of picture books. Positive discipline is not new; Jane Nelson, a family counsellor and child-care guru, rst published a book with that title in 1981. No reliable statistics show how many parents or schools use it, but the Positive Discipline Association, a non-pro t that ran 18 training workshops in 2005, found itself running 51 in 2010. Doubters fret that positive really means permissive. Not so, says Marla Vannucci of the Adler School of Professional Psychology in Chicago. The goal is to connect with a child, rather than simply barking Shut up! or Go to your room! For example, a child who is getting underfoot in the kitchen may need to feel involved and be given something to do, such as rolling pastry or folding napkins. One who has given up on his homework may need to have the task broken down. A toddler who hits another may not know why he is angry; he may be removed or told: Use your gentle hands. Bribes are out: positive disciplinarians fear they may prevent a child from developing pride in a job well done. Negative time outs (eg, the naughty


It was my brother who ushed your iPhone
step) are also taboo. Mrs Nelson sco s at the notion that in order to make children act better they must be made to feel worse. Some experts think that time outs can damage younger children. (The Australian Association for Infant Mental Health, for example, considers them inappropriate for under-threes, since children of that age cannot regulate their own emotions and so learn nothing from being isolated.) However, Alina Morawska of the University of Queensland and Matthew Sanders of the University of Manchester have found that, for older children, time outs can work if done properly. Children removed from positive stimulation when they misbehave may come to associate good things with good behaviour. If they are bored to begin with, however, isolation may seem no worse by comparison. Rather than banishing kids to their rooms, positive disciplinarians ask them to go to their calm spot to regain control. (Parents can try this, too.) When all is calm, both sides can work out how to x whatever has been thrown, broken or hurt. Few plans, alas, survive contact with the enemy. Even Ms Vannucci admits to using a sticker reward chart with her fouryear-old. Her son responded by creating one for his mom. Each day she is good she wins sticker. Her ultimate reward is to choose which of her son’s stu ed animals she would like to sleep with. 7
Correction: In our article on neo-Nazis in North Dakota ("A racist mob of two", Dec 21st 2013) we said that Craig Cobb was removed, probably drunk, from a Leith council meeting for making racist remarks. In fact it was his chum Kynan Dutton. Sorry

HRIS CHRISTIE, New Jersey’s Republican governor, revels in his reputation as a bully. Fans praise his habit of picking ghts as straight talk . And New Jersey, home to The Sopranos , tends to favour grit over gu . So new evidence that sta in his o ce vindictively schemed to snarl tra c in a rival’s district has something of a ho-hum quality. A scandal without sex or blood? Could this really hurt a politician who won re-election in November by 22 points? Yes, it could. The story is water-cooler ready, which does not help the governor. In September the Port Authority closed two lanes of trafc on a bridge that links New Jersey with Manhattan for a so-called tra c study . The weeklong tra c jam that resulted was hardest on commuters in Fort Lee, a nearby suburb run by Mark Sokolich, a Democrat who refused to endorse Mr Christie in the election. Besides being a nuisance, the gridlock also reportedly kept ambulances from reaching an unconscious 91-year-old woman, who later died. State Democrats cried foul. On January 8th they found their smoking gun: e-mails from Bridget Anne Kelly, a senior Christie sta er, to the governor’s friends at the Port Authority signalling the closures. Time for some tra c problems in Fort Lee, she wrote. So far there is no evidence that Mr Christie was involved, and the governor was quick to deny it. What I’ve seen today for the rst time is unacceptable, he said, adding that the closures were completely inappropriate and unsanctioned . All the same, the news grates against his image as a man who is abrasive, sure, but on behalf of the little guy. And it reinforces other revelations that hint at a man who holds grudges. He won the election with the endorsement of more than 60 local Democratic o cials, which lent him an attractive bipartisan glow. Yet a report in the New York Times alleges that he exacts petty revenge against those who criticise him even mildly. Voters may forgive a bully if he gets things done. Lyndon Johnson, the foulmouthed arm-twister who pushed through the Civil Rights Act and the war on poverty , is now revered. But Mr Christie is no LBJ. As he prepares to run for the Republican presidential nomination, many and particularly Democrats are keen to see him sweat under a more powerful spotlight. It is ages until 2016, but he should start mending bridges now. 7

36 United States

The Economist January 11th 2014

Lexington The Robin Hood trap
Americans are angry about inequality, but that may not help Democrats much Many in Mr Obama’s party want him to build his state-of-theunion message, on January 28th, around such policies as a rise in the federal minimum wage. They point to polls showing twothirds of Americans backing higher wage oors, as well as to local victories on the issue, including a November referendum in SeaTac, a small Seattle suburb with a large airport in it. The same voices cheered when New York’s new Democratic mayor, Bill de Blasio, took o ce vowing to raise taxes on those earning more than $500,000 a year, to expand education for the youngest New Yorkers. They claimed Pope Francis as an ally after he questioned whether free markets really allow wealth to trickle down . Gleeful Democrats think all this puts Republicans on the defensive. It is true that ambitious Senate Republicans, such as Marco Rubio of Florida and Rand Paul of Kentucky, marked the LBJ anniversary by outlining conservative responses to inequality, focusing on economic growth. Paul Ryan, a congressman from Wisconsin (and devout Catholic) who was Mitt Romney’s 2012 running-mate, ventured that Pope Francis had not seen proper free markets at work, because the guy is from Argentina . Yet Democrats should be cautious. Policies can be popular but not win elections. As a centre-left party in a conservative country, Democrats win nationwide only by turning out as many of their own as possible, while also persuading millions of swing voters into their camp. A new study of election data from 1972 to 2008 by two political scientists, Jan Leighley of American University and Jonathan Nagler of New York University, unearthed two striking ndings about Americans and redistribution. First, those who turn out to vote are consistently more hostile to redistribution than those who do not largely because voters earn more and are better educated, on average, than non-voters. Second, the same low-income Americans who favour government safety-nets and interventions often fail to vote because they see no real di erences between the parties. The study is mixed news for Democrats. It suggests that populist appeals for more redistribution may boost turnout among the poor, by highlighting party di erences. But it also found that views of government intervention are strongly held. On many issues, you can’t tell voters and nonvoters apart, notes Mr Nagler. Not so with redistribution. The risk is that, as an issue, it is catnip to partisans, but too divisive to use for the equally vital task of wooing moderate swing-voters. Do lean times call for Men in Tights? All in all, the evidence is not iron-clad that unhappy Americans are turning left. New York and Seattle are deeply Democratic, for one thing, and hardly representative. Nor are all forms of redistribution equal. For most voters, plans to raise the minimum wage or to tax millionaires involve taking money from far-o rich people or companies. Put another way, they are Robin Hood policies. Other forms of intervention are much less popular, starting with Obamacare. That health law broadly transfers money and bene ts from the young and healthy to the old and sick, and from the better-o to the poor. Democrats predict that Americans will soon embrace the law, concluding that it creates more winners than losers. Perhaps. But for now, its transfers are widely seen as statist coercion worthy of the Sheri of Nottingham. The left appears blind to the risks. Mr Obama seems more cautious. His White House appearance with jobseekers presented unemployment insurance as an aid for those eager to work, rather than as a cure for inequality. Caution is wise. America is not ready for a president in green tights. 7

HE Adventures of Robin Hood , a 1950s Anglo-American TV series, overcame hurdles to become a hit on both sides of the Atlantic. Budgets were so puny that Sherwood Forest was played by just two trees, lmed from many di erent angles. Several writers were left-wingers blacklisted in Hollywood, using false names. Their hero was also, in theory, bent on redistribution from the rich to the poor, a perilous theme in those red-hunting days. This was solved by making Robin less an overt class warrior than a battler against villainy ( feared by the bad, loved by the good , as the theme song put it). The producers had cause to be prudent. As other Western countries built cradle-to-grave welfare states, America was a sceptical outlier. Now excited Democrats think a once-in-a-generation political shift is under way, driven by anger at growing inequality and social immobility. There is talk of the electoral rewards that await, if their party has the nerve to use the state’s powers to right economic wrongs. January 8th marked the 50th anniversary of President Lyndon Johnson’s war on poverty , involving public health, education and welfare programmes. Conservatives say that war was lost, citing the huge rise in welfare dependency and the sharp fall (from 95% to barely 83%) in the proportion of peakworking-age men who work. Democrats retort that without the safety net, poverty would be even worse. Many want to take the ght beyond the poor of Johnson’s oratory, in their sharecropper shacks , and start helping the middle class as well. Months ahead of tough mid-term elections, Democrats yearn to use inequality as a wedge issue, capturing the energy they sense on the left while painting Republicans as heartless. The year began with rows over extending bene ts for the long-term unemployed, after Congress let them lapse for 1.3m Americans. The Democrat-controlled Senate agreed on January 7th to consider restarting payments. Appearing in the White House with Americans whose bene ts are in peril, Mr Obama scolded conservatives for suggesting that welfare hurts the jobless by reducing incentives to work. He said he could not recall ever meeting an American who would rather have an unemployment cheque than the pride of having a job . But the Republican-controlled House of Representatives is reluctant to extend bene ts without o setting spending cuts or policy concessions.


The Americas

The Economist January 11th 2014 37 Also in this section 38 Cuba’s meandering reforms 38 A pilgrimage in Mexico

For daily analysis and debate on the Americas, visit

Tensions in Argentina

Holding the ring

The government is struggling to stay on its feet


T HAS been a summer of discontent in Argentina. In December police forces in 20 of the country’s 24 districts went on strike in protest at low salaries, sparking the worst bout of looting since the crisis of 2001. A heatwave then knocked out the power in Buenos Aires during the holiday season, leaving tens of thousands without electricity for more than a fortnight. A combination of political torpor and economic fragility has once again raised questions about the precariousness of the country’s position. A few months ago things looked rosier. After brain surgery had forced her to rest for six weeks, President Cristina Fernández de Kirchner returned to work in November with aplomb. First she purged her cabinet of some of its more ine ectual ministers. Next she nodded through a $5 billion o er to compensate Spain’s Repsol for the nationalisation of YPF, an oil rm, in 2012. Ms Fernández even abandoned the widow’s weeds she had worn since her husband Nestor’s death in 2010. But clothes are easier to shed than Argentina’s grievances, exempli ed by striking police. Although police salaries are not meagre, they are devoured by in ation, which private economists estimate to be 25% and rising. Having seen the police win pay rises by downing batons, other publicsector employees may do the same. Railway workers and teachers’ unions are demanding wage rises of around 30% in 2014. As for the blackouts, the unusually

warm weather was not the only factor. Electricity and gas tari s have been arti cially depressed since 2002, when Eduardo Duhalde, then president, forbade the country’s private energy providers from charging more. Improvements to Argentina’s decaying electricity grid have been put o . Energy rms rely on government subsidies, estimated at around $11billion in 2013, to cover their costs. Ms Fernández is therefore in a quandary. Holding wage rises below in ation and quietly cutting subsidies is politically untenable. But continuing to spend will add to Argentina’s monetary and scal pressures. Dante Sica of, an economic consultancy, estimates that large pay rises for provincial public-sector employees could double the provinces’ scal

Getting rid of the country pile
Argentina’s foreign-exchange reserves*, $bn 50 40 30 20 10 0 2002 04 06 08 10 12 13
*Excluding gold Source: Thomson Reuters

de cits. On January 3rd the federal government, which is itself in the red, agreed to roll over the debt of 18 provinces to help ease their nancial strains. The government is resorting to familiar tactics to square the circle. It has negotiated an accord with supermarkets to freeze the prices of 193 common goods such as milk, sun ower oil and beef. It is blaming the electricity rms for the blackouts: on January 7th the planning ministry seized the providers’ meagre grid-improvement fund. To stop the draining of foreign-exchange reserves, it has raised taxes on credit-card purchases made abroad, from 20% to 35%. Such controls are not new: the government has in e ect banned the sale of foreign currency at the o cial exchange rate since 2011. But they fuel frustration. Argentina’s political classes already have their eyes on presidential elections in 2015. Ms Fernández was conspicuously absent during the period of the blackouts, on holiday in Patagonia. Her own ambitions may now extend only to handing the country’s problems over to a successor. That will depend on how well Argentina marshals its international reserves. By the end of 2013 those reserves had fallen to $30 billion (see chart); Argentina’s energy de cit will reach $9 billion this year, says Daniel Montamat, an energy consultant. To ensure that reserves do not dry up entirely, the government needs a good 2014 harvest and quiescent farmers. Agriculture is a crucial source of dollars, accounting for most of the country’s $10 billion export-tax take in 2013. But taxes are a sore point for farmers struggling with rising costs and an overvalued peso. Farming groups almost brought Ms Fernández down in 2008 by withholding sales. A repeat of this tactic in 2013 zzled because many small producers could not a ord to forgo earnings. Argentina may not be in outright crisis, but it is very far from being stable. 7

38 The Americas Reforms in Cuba Mexico’s cowboy pilgrims

The Economist January 11th 2014

Seat belt, mirrors, brake

Saddle up, kneel down

Rural values endure in an industrial heartland The road to capitalism does not run smooth



HEN the Cuban government said in December that it intended to let the population buy modern cars without requiring permits, many suspected there would be a catch. They were right. The cars, which can only be bought through state-owned suppliers, cost a fortune. A 2013 Peugeot 508, marketed in Europe as an a ordable saloon car costing around $30,000, has a price tag of more than a quarter of a million dollars at a rundown showroom in Havana. A Chinese Geely, with more than 80,000 kilometres (50,000 miles) on the clock, is on sale for around $30,000. The average salary in Cuba is less than $20 a month. What do they think they are selling? Aeroplanes? jokes Erik, a handyman, as he looks at the price-list. They don’t want to sell any cars. It’s all a show, agrees Ernesto, a mechanic. The prices certainly seem designed to deter purchasers. Some even wondered whether there had been a clerical error and prices had been listed in Cuban pesos, Cuba’s local currency, which is worth 24 times less than the dollar-pegged convertible peso (CUC). Another theory is that the high prices are a preview of a widely predicted devaluation of the CUC as part of the government’s commitment to unify the island’s two currencies. A further explanation may lie in the immediate e ect of the reform: the elimination of a thriving black-market trade in the permits to buy new cars. For decades these have been awarded to valued individuals such as exceptional party workers, sports stars and artists. But they had more recently become a currency themselves, swapping hands for around $12,000 each. The government says that those with permits will be rst in line to buy new cars a dubious bene t given that many have quadrupled in price since the reform. There could hardly be a stronger signal that this remains a controlled economy, says one Havana-based diplomat. Since taking over as president from his brother Fidel in 2008, Raúl Castro has taken some steps to reduce the state’s economic role. He has allowed small-scale self-employment, permitted Cubans to buy houses and given private farmers more autonomy to grow and sell their produce. But he has always insisted such reforms will be without haste . Now there are signs that he is deliberately slowing things down. On January 1st, the 55th anniversary of the revolution, Mr Castro gave a speech in

EFORE dawn on January 4th the mesquite trees around José Reyes Morin’s farm are lit up with Christmas lights. Inside the house, breakfast is eaten by candlelight. Mr Morin, a stickler for the old ways, doesn’t much believe in using electricity at home for anything other than religious occasions. Appetites sated, a score of cowboys, one young woman and your (less young) correspondent mount scraggy horses. Viva Cristo Rey, ( Long Live Christ the King ) shouts Mr Morin, silver-buttoned comandante of the group, as the riders set o on a three-day pilgrimage to the 23metre (75-foot) statue of Cristo Rey, high on a hill in the very centre of Mexico. That cry could once have got him killed as a Catholic reactionary. Today it is a call to rural traditions of faith and endurance in Mexico’s industrial heartland. As the sun rises, the group grows. By lunchtime about 850 horsemen, and a handful of women, are heading towards the monument, visible many miles away.

Sombreros o for church
Santiago, Cuba’s second-largest city. He made no mention of further reform, instead castigating unnamed foreign groups for attempting to introduce neoliberal and neocolonial thinking. That day the government also enacted a law banning the resale of clothes imported from abroad. The trade of tailor and dressmaker is one of around 200 private occupations that were o cially permitted in 2010. Since then thousands of entrepreneurs have stretched its de nition, setting up small clothing stores stocked with brands from Europe and the United States. The clothes are often imported in suit-

Priests whom they encounter remind them that they are riding in the hoofprints of the Cristero martyrs, who fought a guerrilla war against the anticlerical forces of President Plutarco Elías Calles in 1926-29. The rst Cristo Rey statue was blown to bits by callistas in 1928. One old-timer, who did his rst pilgrimage shortly after it started in 1956, recalls that when early pilgrims shouted Viva Cristo Rey , antagonists retorted: Long Live the Supreme Court of Justice . Their route threads past a General Motors factory in a state where Mazda and Honda also have car plants and an urban middle class is emerging. The pilgrims, who are mostly farmers, have di erent values. After a hard day’s riding, they sleep rough, using saddles as pillows. They are forbidden even a drop of tequila. Before bed, they line up for hours to confess, knees bent on the pavement, to a priest sitting on a chair under a streetlamp. At 5am, they get up for mass. Moustached, tattooed, scarred and shaven-headed, some look as roguish as any bandido. Many have worked north of the border as illegal immigrants. The culture is hierarchical and macho: most will not let their wives ride with them. But they murmur prayers with cherubic devotion and life revolves around families and horses. Along the route children run gleefully for sweets thrown by the horsemen, and entrust to them letters to the Three Kings, asking for presents on Epiphany. On that day, January 6th, some 3,000 saddle-sore riders eventually make it up the cobblestoned slope to the Cristo Rey, praying fervently. When your correspondent asks where to put the children’s letters, he is told he can throw them away. It’s only make believe, says one rider, with a cowboy’s bluntness. cases by Cuban travellers taking advantage of another reform, which eliminated the requirement for a permit to travel. Eva, a 27year-old from Havana, says that since 2011 she has been ying to Madrid every two months to stock up her fashion store in the back of her apartment. Now she says she will close her business. Every time we start to breathe a little, we know the government’s grip will soon tighten. 7
Correction: We got our own numbers wrong when we reported estimates for Argentina’s maize harvest in billions of tonnes ( Still lying after all these years , December 21st 2013). The units should have been in millions. Sorry.

Middle East and Africa

The Economist January 11th 2014 39 Also in this section 40 Progress over Israel-Palestine 41 Egypt’s controversial referendum 42 Rural decline in Iran 42 Nelson Mandela’s family feud

For daily analysis and debate on the Middle East and Africa, visit

Syria, Iraq and al-Qaeda

The jihadists may have gone too far

From Baghdad to Beirut, a growing backlash against the most extreme of the jihadists may change the course of civil wars in Syria and Iraq


N A region of opaque politics and oddly named actors, the Islamic State of Iraq and al-Sham (ISIS) lives up to its title. The group that started as an al-Qaeda a liate in Iraq has prospered there since the Americans left in 2011, subduing much of the rural, Sunni-dominated north and pursuing an aggressive terror campaign against Shias further south. ISIS expanded into Syria in April last year; al-Sham denotes a Greater Syria encompassing among swathes of what was the fertile crescent Lebanon, Palestine and even Jordan. Better armed and nanced, it has encroached steadily into areas freed from government control by other rebel groups, enforcing harsh, state-like authority along the Euphrates valley and across much of the north. But the group’s rapid rise may now be over. Today ISIS’s ghters, who include as many as 7,000 would-be jihadists from across the globe, face battles on three fronts. In Syria a wave of disgruntlement with the group turned into a tsunami after December 31st when its men returned the torture-marked corpse of a doctor-cumcommander with Ahrar al-Sham, a Sala st rebel group which had hitherto been an ally. A nal provocation came when ISIS abducted ve employees of Médecins Sans Frontières, a French-founded charity that is one of the few aid organisations still willing to work inside Syria. Since then, rebels of all stripes, includ-

ing al-Qaeda’s slightly milder Syrian a liate, Jabhat al-Nusra, other Islamist brigades and moderate Western-backed groups known as the Free Syrian Army, have joined forces, rapidly sweeping ISIS from strongholds across a swathe of northern Syria. In Raqqa, the biggest town wholly controlled by the opposition, most recently by ISIS, its ghters are now said to be holding out in a single building. The group is also said to have lost all but one of the border crossings to Turkey it once held, as well as its headquarters in the rebel-held half of Aleppo, Syria’s biggest city. ISIS is also under re in neighbouring Iraq. Exploiting the simmering resentment among minority Sunnis in the country’s north and west against the Shia-dominated Iraqi government in Baghdad, ISIS on January 3rd seized parts of Falluja and Ramadi, the main cities of Anbar province, which abuts Syria (see our map on next page). But this bold move may have played into the hands of Iraq’s prime minister, Nuri al-Maliki. Despite a year of unrest in Sunni areas and an intensi ed campaign of al-Qaeda bombs, Mr Maliki has shied so far from sending his Shia-dominated army into full-on combat. Now he has an excuse, as well as support from America which has promised to speed up its arms supplies, and also from remnants of the Sahwa, or awakening, a movement of Sunni tribes-

men who turned against al-Qaeda to ght alongside the Americans in 2008. In anticipation of an army assault on Falluja, some 13,000 families have ed the city, says the Iraqi Red Crescent. ISIS may have spread itself too thin by moving ghters from Syria to Iraq. Yet, if some reports prove credible, the group has opened a third Levantine front in Lebanon. In unveri ed recordings, ISIS claimed responsibility for a car bomb on January 2nd which targeted loyalists to Hizbullah, the Shia movement that backs Syria’s regime. This was the latest in a growing list of tit-for-tat exchanges between Lebanese groups aligned with opposing sides in Syria’s civil war. As horrid as each other Weakened central control in Syria and Iraq has opened space for ISIS’s brand of extremism, and the sectarian politics of both Mr Maliki and Bashar Assad’s Syrian regime have prompted some hapless Sunnis to embrace the group. And yet few actually agree with its radical ideas. Unlike other Syrian rebels, ISIS had its sights set not on capturing the capital, Damascus, but on creating its own Islamic state in the area between eastern Syria and north and western Iraq. ISIS’s methods, as well as its reliance on foreign ghters, are also unpopular. Even al-Qaeda’s chief, Ayman Zawahiri, has criticised ISIS’s indiscriminate attacks against Shias as well as moderate Sunnis. Its imprisonment of scores of aid workers and journalists, as well as Syrian activists and minority Kurds, Christians and Alawites, has tarnished the rebel movement as a whole, frightening o the foreign press and would-be providers of aid, especially from Western countries. The hostages may be held as an insurance policy against 1

40 Middle East and Africa
2 imagined future Western drone strikes or

The Economist January 11th 2014
Antakya Med. Sea Raqqa Aleppo Mosul
Euph ra

other military actions. But many Syrians unsurprisingly regard the tactic as evidence that ISIS, despite its ghting prowess, has thereby bolstered the regime, if it is not actively colluding with it. Jabhat al-Nusra, its al-Qaeda-linked rival, has o ered to call o clashes if ISIS works under a joint sharia court. But ISIS seems unlikely to back down. On January 6th it killed 50 people before surrendering its Aleppo base; it has set o car bombs there and elsewhere, too. Its spokesman declared on January 8th that ISIS ghters were hungry lions who drink blood and eat bones, nding nothing tastier than the blood of Sahwa , a gibe that is particularly insulting to other jihadist groups. A successful containment of ISIS would drastically change the dynamic in both Syria and Iraq. The group has assiduously worked to worsen the sectarian bitterness sweeping the region between Islam’s two main sects. In Syria Mr Assad has used ISIS to scare Western powers into viewing him as the least bad option for Syria, with policy altering accordingly. In Iraq the group has helped to make 2013 the bloodiest year since 2008. The clashes have also shown that there is life in some of the moderate rebels who were only recently considered a spent force. Two emergent coalitions, the Syrian





Ramadi Falluja ANBAR


250 km

Revolutionaries’ Front and al-Mujahideen, are now ghting alongside the more devout Islamist Front and Jabhat al-Nusra. Some groups engaged against ISIS appear to be backed by Saudi Arabia, an indication that ISIS may face foes increasingly well armed and nanced. But it would take a concerted e ort to defeat ISIS’s militias in Iraq or Syria. Syria’s rebels are united by little more than shared dislike for ISIS. The West has become warier of getting involved in the region. As France’s war in Mali shows, military action tends to suppress rather than eradicate groups bene ting from a power vacuum across the region. But for the rst time in many months, most Syrians feel united in satisfaction. It’s early days, says a cheered rebel commander in the Turkish city of Antakya, near Syria’s border. But this is good news. 7

Israel and Palestine

He may be getting somewhere, after all

John Kerry may be gradually persuading enough Israeli right-wingers that a Palestinian state is worth striving for


EW believed that John Kerry, the American secretary of state, would manage to haul the Israelis and Palestinians back into the negotiating room, let alone get them to discuss anything of substance. Yet six months since talks began, he may be able to present, within weeks, a framework agreement , after which nal details must be hammered out. Diplomats who had mocked his dogged prophetic conviction now sound shocked by his progress. Rejectionists on both sides who quietly presumed that the process would collapse under its own weight now express alarm. Consternation and confusion are visible on the faces of some ministers in Binyamin Netanyahu’s Israeli government. The day that its justice minister was championing a negotiated two-state settlement at Jerusalem’s Hebrew University, its trade minister was damning it at Tel Aviv’s. No sooner had the foreign minister called for moving Israel’s Arab citizens into a Palestinian state as part of a land-swap, than the

interior minister made a rare visit to a northern Arab town to hail its inhabitants as integral to Israel’s body politic. Mr Netanyahu, for his part, oats above the fray. We’re lacking a leader, says Dov Weisglass, once the close adviser of Ariel Sharon, the former Israeli prime minister who, as The Economist went to press, was on the verge of death, after six years in a coma. Mr Kerry’s methodical midwifery may be paying o . His team of 120, including four generals, has almost as great a command of detail as do the Israelis and Palestinians. What matters is a settlement, not lots of settlements, says Mr Kerry. He hugs the foreign minister, Avigdor Lieberman, a former rebrand who vilied Palestinians and was cordially detested by them in return, whereas his predecessor, Hillary Clinton, used to shun him. Mr Lieberman nowadays praises Mr Kerry for bringing peace closer than ever, and has turned the ten naysayers in his party’s parliamentary bloc into yes men. Yair Lapid,

the nance minister, has come out strongly in favour, bringing onside his 19 parliamentarians, the second-biggest party in the 120strong Knesset. Mr Kerry’s people have also courted the black-hatted Haredim, or ultra-Orthodox. All told, he has overseen a remarkable turnaround. After the election at the beginning of last year, a narrow majority in the Knesset would have shied from a negotiated two-state solution. Now, according to insiders, its members stand 85-35 or so in its favour. That should give Mr Netanyahu room to move. But he is a party man, loth to leave the rejectionist Likud movement in which he was raised, whereas Mr Sharon, after deciding against the wishes of most of his fellow Likudniks to evacuate the Gaza Strip in 2005, simply set up a new party of his own. Mr Netanyahu remembers that his own coalition toppled him when he signed an agreement at Wye River in 1998 to withdraw from territory. In his own eyes he moved dangerously far four years ago, when, in a speech at Bar Ilan University, he outed his party’s charter, which still promotes the vision of a Greater Israel, by embracing a two-state solution in principle. In any event, if Mr Netanyahu is to begin negotiating in earnest, he still has a long way to go. A framework agreement would be only a stepping stone, albeit a big one, to a nal settlement. At a Likud parliamentary caucus on January 6th, he sought to quieten his restless ock by insisting Israel must keep the holy sites of Hebron, the West Bank’s largest city, along with strategic heights such as Beit Aryeh, overlooking Israel’s main airport, and low places such as the Jordan Valley. Of the settlement blocs that must stay within Israel after a border adjustment, he now also includes Beit El, deep in the West Bank, looming above Ramallah, the Palestinians’ current seat of government. Mr Netanyahu moves onl


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