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California’s great battle

The truth about electric cars
Pakistan in peril
How the music business survives
A life in stained glass OCTOBER 9TH–15TH 2010 Economist.com
Grow,
dammit, grow!
AN 18-PAGE SPECIAL REPORT ON THE WORLD ECONOMY
HOW A PLAN TO UPGRADE CITY SCHOOLS
BECAME AN OPPORTUNITY FOR LOCAL BUILDERS
©Goldman, Sachs & Co., 2010. All rights reserved.
PROGRESS IS EVERYONE’S BUSINESS
When cities have infrastructure projects, they need to raise money. We’ve helped cities
across America effi ciently raise funds to get these vital projects going. Which, in turn,
has gotten a lot of other good things going–students and teachers have new classrooms,
local businesses have new opportunities, and communities have a major investment in
their future. goldmansachs.com/progress
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all their guests, each and every time they visit.
RealBusiness.com
15 The world this week
Leaders
19 The world economy
The quest for growth
20 Redistricting in America
Time to bury Governor
Gerry
20 Cutbacks in Britain
Tories (rightly) biting the
hand that feeds them
22 Electric cars
Highly charged motoring
26 Zimbabwe
Call Robert Mugabe’s blu
Letters
28 On the euro, forests,
wind farms, mortgages
in America, the Senkaku
islands
Brieng
35 Zimbabwe
Can Robert Mugabe ever be
persuaded to give up?
United States
41 The California
governor’s race
Enter the housekeeper
42 Arnold Schwarzenegger
Rage against the machine
42 Polling diculties
Still worth reading?
44 Pete Rouse
A man for harder times
46 Indiana’s Senate race
The blue blip
46 Southern Baptists
The new Calvins
48 Wave power
Help from the moon
48 Birdwatching
Rara avis
50 Lexington
The best Congress money
can buy?
The Americas
53 Brazil’s election
A miss, but not by a mile
54 Brazil’s electoral laws
Send in the clown
54 Ecuador’s police mutiny
A strike against democracy
55 Human rights in
Argentina
Ex-guerrilla wins asylum
55 Chile’s Mapuches
Amended terrorism law
Asia
57 Pakistan’s shaky
government
Hobbling along
58 America and Pakistan
On the brink
58 American troops in
Afghanistan
The Petraeus strategy
60 Railways in Tibet
Mount Everest is singing
for joy
62 Commonwealth games
At least they started
62 South Korea’s kimchi
crisis
Of cabbages and Kims
63 Banyan
Asia and Europe
Middle East and Africa
67 Iran’s economy
Sanctions begin to bite
68 Women in South Africa
Struggling ahead
70 Bombings in Nigeria
A bloody election omen
70 African governance
A rum old mix
Special report:
The world economy
How to grow
After page 70
Europe
71 France’s president
Watch out, world
72 The Netherlands’
forerunner
Not exactly Dutch courage
72 Ireland’s politics
How now Brian Cowen?
74 Latvia’s election
Guts and glory
74 Germany’s Greens
In higher places
76 German beer drinking
Oktobergloom
78 Charlemagne
The Geert Wilders problem
Daily analysis and opinion from
our 19 blogs, plus audio and video
content, debates and a daily chart
Economist.com/blogs
E-mail: newsletters and
mobile edition
Economist.com/email
Print edition: available online by
7pm London time each Thursday
Economist.com/print
Audio edition: available online
to download each Friday
Economist.com/audioedition
The Economist online
Volume 397 Number 8703
First published in September 1843
to take part in "a severe contest between
intelligence, which presses forward, and
an unworthy, timid ignorance obstructing
our progress."
Editorial oces in London and also:
Bangkok, Beijing, Berlin, Brussels, Cairo,
Chicago, Delhi, Frankfurt, Hong Kong,
Jerusalem, Johannesburg, Los Angeles,
Mexico City, Moscow, New York, Paris,
San Francisco, São Paulo, Tokyo, Washington
Contents continues overleaf
Contents
On the cover
Economic growth may
depend on structural
reforms as much as prudent
macroeconomic policy:
leader, page 19. Without
faster growth the rich
world’s economies will be
stuck, argues our special
report, after page 70.
Ireland is in a pickle, page
72, but Latvia is improving,
page 74. The cash ooding
into the emerging world:
Economics focus, page 112
Tories Britain’s government is
beginning to address the
grotesque irrationalities in
the ways public money is
spent: leader, page 20. The
controversy over restricting
child benet, page 79. David
Cameron’s mixed message,
page 82
Pakistan The government in
Islamabad desperately needs
help. Instead, it seems to be
alienating its potential allies,
page 57. America is losing
patience, page 58
California Forget the battle
for Congress: the most
interesting vote might just be
one reforming the way
America’s largest state
chooses its representatives:
leader, page 20. A very close
governor’s race, page 41.
Farewell, Arnie, page 42
1
The Economist October 9th 2010 9
10 Contents The Economist October 9th 2010
©2010 The Economist Newspaper Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or
otherwise, without the prior permission of The Economist Newspaper Limited. The Economist (ISSN 0013-0613) is published every week, except for a year-end double issue, by The Economist Newspaper Limited, 750 3rd Avenue, 5th Floor, New York, N Y 10017.
The Economist is a registered trademark of The Economist Newspaper Limited. Periodicals postage paid at New York, NY and additional mailing oces. Postmaster: Send address changes to The Economist, P.O. Box 46978, St. Louis , MO. 63146-6978, USA.
Canada Post publications mail (Canadian distribution) sales agreement no. 40012331. Return undeliverable Canadian addresses to The Economist, PO Box 7258 STN A, Toronto, ON M5W 1X9. GST R123236267. Printed by RR Donnelley, Strasburg, VA. 22657
PEFC certied
This copy of The Economist
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Subscription service
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Britain
79 The row over welfare cuts
And for my next trick
80 The Tory right
Blue on blue
80 Housing immigrants
Bleak house
81 Fire-service reform
More with less
82 Bagehot
David Cameron: radical or
father of the nation?
International
85 Holy places
Unholy rows
86 Aquifers
Deep waters, slowly
drying up
87 Alien torts
Trial trails
87 Global health funding
Passing the tin
Business
89 Electric cars
A sparky new motor
90 Microsoft’s mobile
operating system
Windows or curtains
91 Video communication
Beaming in Grandma
91 Car hire
Drive my car
94 Fast-food restaurants
Dough rising
94 Bright Food
A growing appetite
95 Irish companies
Riding the tiger
98 Schumpeter
The other demographic
dividend
Brieng
101 What’s working in music
Having a ball
Finance and economics
105 Investment banking
The big squeeze
106 Buttonwood
The magic of QE
107 Regulating Swiss banks
First mover
107 The ash crash
Autopsy
108 Oil prices
Crude awakening
110 The Japanese economy
Easy does it
110 SocGen’s rogue trader
All his fault
112 Economics focus
Capital ows to emerging
markets
Science and technology
115 Chinese ethics
Scientists behaving badly
116 A dusty neighbour
Asteroid Lutetia
116 The 2010 Nobel prizes
Making new things
118 Extraterrestrial
intelligence
Phoning ET
Books and arts
119 Global dominance
Why the West rulesfor
now
120 James Wolfensohn
Banker to the world
121 James Ellroy’s women
Killer instinct
121 Edith Cavell
Carve her name with pride
122 Eadweard Muybridge
Man in motion
Obituary
124 Michael Lassen
A life in glass
137 Economic and nancial
indicators
Statistics on 42
economies, plus our
monthly poll of forecasters
and a closer look at
eective tax rates
Principal commercial oces:
25 St James’s Street, London sw1a 1hg
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Other commercial oces:
Chicago, Dubai, Frankfurt, Los Angeles,
Paris, San Francisco and Singapore
Music business In a
supposedly benighted
industry, a lot of things are
making money, pages 101-103
Electric cars A welcome
addition to the roadbut they
are neither as useful nor as
green as many claim: leader,
page 22. Carmakers are
betting heavily that
consumers and governments
will smile on their new
products, page 89
Stained glass Our obituary
of Michael Lassen, a
stained-glass artist, page 124.
A closer look at Eadweard
Muybridge, page 122
Investment banking
Why the industry’s best days
may be behind it, page 105.
Switzerland gets extra tough
with its banks, page 107. As
does France with Jérôme
Kerviel, page 110
with greater energy efficiency...
and the impact on our environment.
reducing expenses...
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The world this week
1
The Economist October 9th 2010 15
Israel’s prime minister, Binya-
min Netanyahu, pondered an
American suggestion that he
should freeze the building of
Jewish settlements on the
West Bank for another 60 days
in exchange for American
security and political guaran-
tees. Leaders of the Arab
League’s 22 countries called a
meeting in Libya on October
8th to discuss what the Pales-
tinians should do if the Israe-
lis reject the proposal.
At least 12 people were killed
by two car-bombs on October
1st near a ceremony held in
Nigeria’s capital, Abuja, to
celebrate the country’s 50th
anniversary of independence.
Amedia magnate, Raymond
Dokpesi, was briey held. He
is chief of sta to Ibrahim
Babangida, a former military
ruler from the north who plans
to run again for the presidency
next year against the incum-
bent, Goodluck Jonathan, a
southerner.
The UN said that a Congolese
commander, Sadoke Kokunda
Mayele, was arrested on suspi-
cion of encouraging the gang-
rape of more than 300 people
in Northern Kivu province in
eastern Congo, where lawless-
ness and warlordism prevail
despite the presence of the
largest UN peacekeeping force
in the world.
Aprominent Ethiopian oppo-
sition leader, Birtukan Mi-
deksa, was freed ve years
after being imprisoned for life
following a disputed election
in 2005. Four months ago the
government of Meles Zenawi,
who presumably agreed to her
release, easily won another
awed general election.
Toxic shock
Four people were killed by a
huge toxic spill from an indus-
trial plant in western Hun-
gary. Fears are growing that
the sludge could reach the
Danube, endangering other
countries in the region.
As expected, Bosnians voted
along ethnic lines in their
elections. The politically dead-
locked country will struggle to
push through the reforms
needed to improve its econ-
omy and move towards Euro-
pean Union membership.
Geert Wilders, a populist
anti-Islamic Dutch politician,
went on trial for incitement to
racial hatred. Mr Wilders
recently concluded a deal with
two centre-right parties that
will see his Freedom Party
prop up their minority govern-
ment in parliament.
Latvia’s centre-right govern-
ment was re-elected with an
increased share of the vote
despite the country’s brutal
IMF and EU-backed austerity
programme. Latvia’s economy
shrank by 18% in 2009, the
biggest decline among EU
members.
Rouse in the House
Pete Rouse, a veteran staer
from the Senate, took over as
White House chief of sta,
following the departure of
Rahm Emanuel to campaign to
become mayor of Chicago.
Faisal Shahzad, who pleaded
guilty to trying to set o a
car-bomb in Times Square in
May, was sentenced to life
imprisonment.
Nancy Pelosi, the speaker of
the House of Representatives,
urged her fellow Democrats to
go on the attack against their
Republican rivals. Most pun-
dits predict a Republican take-
over of the House at next
month’s mid-term elections,
but the polls have started to
tighten a bit.
Jaw jaw not war war
Afghanistan’s government
has entered into clandestine
talks with representatives of
the most powerful branch of
the Taliban, according to a
report in the Washington Post.
Agovernment spokesman
denied there were any negotia-
tions, as did the Taliban. An-
other source said that the
Taliban are intent on nding a
way out of the war, which
might mean accepting a token
position in the government in
return for the withdrawal of
foreign troops.
Taliban ghters launched a
spate of attacks on NATO
supply convoys in Pakistan.
The convoys were stuck there
after Pakistan closed the Tor-
kham border crossing into
Afghanistan in response to the
deaths of two of its soldiers
killed by Americans in a cross-
border incursion. The Ameri-
can ambassador to Pakistan
apologised.
Japan and China signalled the
end of a row that began in
September when a Chinese
shing boat hit two Japanese
patrol vessels near a disputed
group of islands. The coun-
tries’ prime ministers met at an
Asia-Europe summit in Brus-
sels and said they would mend
strained relations.
Vietnam demanded that
China release nine Vietnam-
ese shermen it arrested in
September near another group
of disputed islands. China said
the men were shing illegally
with explosives. Vietnam
denied the charge and claimed
that the men were captured in
its territory.
The Commonwealth games
began in India’s capital, Delhi,
on October 3rd with a spectac-
ular opening ceremony and no
disasters. The opening of the
event quieted widespread
criticism after weeks of chaotic
preparation. But spectators
stayed away in droves.
Green upset
Brazil’s presidential election
will go to a run-o between
Dilma Rousse, protégé of Luiz
Inácio Lula da Silva, the out-
going president, and the oppo-
sition’s José Serra. Ms Rousse
won 46.9% of the vote, but was
denied the outright victory
some polls had predicted by
an unexpectedly strong show-
ing by Marina Silva of the
Green Party, who won 19%.
Lima elected its rst woman
mayor. Susana Villarán, a
moderate left-winger, ap-
peared to have won narrowly
over Lourdes Flores, a conser-
vative. The race marked a rare
strong performance for Peru’s
left, which has not held the
capital’s mayoralty since 1983,
and may boost it in next year’s
presidential election.
Nicaragua’s supreme court
cleared the way for Daniel
Ortega, the president, to cling
to power. The Sandinista
leader had failed to persuade
the national assembly to re-
peal the constitutional limit of
two non-consecutive terms.
But his allies in the court up-
held a previous ruling by
magistrates that overturned
the re-election ban. Mr Ortega,
who helped to topple Nica-
ragua’s dictatorship in 1979, is
now expected to seek a third
term in oce next year.
Apolice rebellion in Ecuador
was described by the presi-
dent, Rafael Correa, as an
attempted coup. Mr Correa
was attacked with tear gas and
trapped in a hospital for 12
hours by police who were
protesting against civil-service
reforms that could cut their
benets. The siege was eventu-
ally broken up by the army. A
state of emergency was briey
imposed.
Politics
16 The world this week The Economist October 9th 2010
Other economic data and news
can be found on pages 137-138
The IMF said that the global
economy had grown faster
than expected in the rst half
of 2010and predicted that it
would grow by 4.8% over the
year as a whole. The fund
forecast that global growth
would slow to 4.2% in 2011, and
warned that recovery re-
mained fragile. America and
other developed economies
were set to experience more
sluggish growth in the coming
year because of budget cuts, it
said. Emerging markets would
continue to boom.
The IMF also revised its esti-
mate for the total of bank
write-downs and loan provi-
sions related to the nancial
crisis. It said these would
amount to $2.2 trillion be-
tween 2007 and 2010, down
from $2.3 trillion in April. The
fund put the value of write-
downs still to be realised at
roughly $550 billion.
The Bank of Japancut interest
rates from 0.1% to a range
between zero and 0.1% and
announced that it might estab-
lish a fund to buy ¥5 trillion
($60 billion) of assets, in-
cluding government bonds
and corporate bonds. The
central bank had been under
political pressure to intervene
to boost growth. The yen fell
briey against the dollar on the
news but soon bounced back.
FX-rated
Wen Jiabao, the Chinese prime
minister, told European lead-
ers during a visit to Brussels
that an unstable yuan put the
global economy in peril. He
was responding to continuing
criticism that the Chinese
currency is articially under
valued. Dominique Strauss-
Kahn, the president of the IMF,
weighed in, alerting countries
to the dangers of manipulating
exchange rates to deal with
domestic problems and
sounding a warning against a
currency war. France’s presi-
dent, Nicolas Sarkozy, who
will be assuming the presiden-
cy of the G20later this year,
said he wanted reform of the
international monetary sys-
tem to be at the top of the
agenda at the group’s Novem-
ber summit in Seoul.
Fitch, a credit-rating agency,
downgraded Ireland because
of the eect that bailing out
Anglo Irish Bank and other
failed lenders will have on the
country’s scal health. The
cost of the bail-out could reach
50 billion ($69 billion), caus-
ing the Irish decit to explode
to 32% of GDP this year.
Moody’s, another agency, said
it may follow.
Greece presented an ambi-
tious draft budget for 2011. The
government plans further
expenditure cuts and an in-
crease in revenue to close the
scal decit to 7% of the coun-
try’s GDP, lower than the 7.6%
target set in agreement with
the IMF, the European Union
and the European Central
Bank, which are funding
Greece’s 110 billion ($151
billion) bail-out. The draft
budget estimates the Greek
economy will contract by 4%
in 2010 and by 2.6% in 2011.
Rogue, moi?
AFrench judge sentenced
Jérôme Kerviel, a former
trader at Société Générale, to
ve years in prison (two of
which will be suspended). He
was also told to repay the bank
4.9 billion ($6.7 billion) for
losses it incurred as a result of
his unauthorised trades, but
SocGen said it would negoti-
ate a reduction. Mr Kerviel
failed to convince the court
that his former employer was
complicit in his activities. He
said he would appeal against
the decision.
American Express will go to
court after the American De-
partment of Justice sued it for
anti-competitive conduct over
the swipe fees that it charges
merchants. Visa and Master-
Card reached a settlement
with the American authorities
over the same charges, under
which the two card companies
will no longer stop retailers
from steering customers to
alternative, cheaper means of
payment. Amex charges the
highest swipe fee of the three.
General Electric said that it
would pay $3 billion to buy
Dresser, a maker of oil- and
gaseld equipment. GE has
expanded its energy business
over the past decade. In 2009
the American conglomerate’s
energy revenues amounted to
$40 billion.
HTC, a Taiwanese smart-
phone manufacturer, reported
record third-quarter prots of
NT$11.1billion ($360m), almost
twice what it made a year
before. HTC is the world’s
largest maker of handsets that
use Microsoft and Google
operating systems. The strong
results were driven by its
newest models that use Goo-
gle’s Android software.
Not out of the Red yet
The chairman of the board of
Liverpool football club, Mar-
tin Broughton, said he would
go to court to push through a
deal to sell the team to New
England Sports Ventures, the
company that owns the Bos-
ton Red Sox. Tom Hicks and
George Gillett, the owners of
the English club, opposed the
sale, arguing that the oer of
£300m ($476m) was too low.
Time to sell Liverpool is run-
ning out: the Royal Bank of
Scotland has given the club’s
owners until October 15th to
repay loans of about £200m.
Business
Bank write-downs and
loss provisions
Source: IMF *Forecast
Q2 2007-Q4 2010*, $bn
0 300 600 900
US
Britain
Euro area
Asia
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Leaders
L
OOK at the world economy as
a whole, and you could be
forgiven for thinking that the re-
covery is in pretty decent shape.
This week the IMF predicted
that global GDP should expand
by 4.8% this yearslower than
in the boom before the nancial
crisis, but well above the world’s underlying speed limit of
around 4%. Growth above trend is exactly what you would ex-
pect in a rebound from recession.
Yet this respectable average hides a series of problems.
Most obviously, there is the gap between the vitality of the big
emerging economies, some of which have been sprinting
along at close to 10%, and the sluggishness of many rich ones.
Macroeconomic policy is also weirdly skewed: many emerg-
ing economies are loth to let their currencies rise to reect their
vigour, even as fragile rich ones are embarking on austerity
programmes. And nally there is a crucial missing ingredient
just about everywhere: micro structural reform, without
which current growth rates are unlikely to last.
Aworld out of balance
In the emerging world the macroeconomic errors come from
politicians behaving as if growth there were more fragile than
it is. The pace has slowed a bit, but from breakneck speed to
merely very fast. Most vital signs, from productivity to govern-
ment debt, are healthy. Yet many policymakers are buying
boatloads of dollars to stop their currencies rising as foreign
capital pours in from Western investors seeking better returns
(see page 112). And emerging economies, as a group, still save
more than they invest, which explains why global imbal-
ancesnotably the controversial surplus in China and decit
in Americaremain so big. That makes little sense. Poor coun-
tries, especially young ones, ought in theory to invest more
than they save, and so be a net source of demand for richer,
older ones, all the more so when the latter are in bad shape.
In the rich world the danger is the reverse: politicians cut-
ting back on the basis that growth is assured. Big asset busts are
usually followed by years of weakness as the over-borrowed
repair their balance-sheets. Experience suggests that several
years of slow growth lie ahead. Rich countries are planning
tax rises and spending cuts worth 1.25% of their collective GDP
in 2011, the biggest synchronised scal tightening on record. In
many places a budgetary squeeze is necessary, but not all; and,
taken as a whole, cutting this much this early is a risk.
Even if demand remains strong enough to cope with this
onslaught, the rich world’s longer-term growth prospects are
darkeningas our special report this week makes clear. Eu-
rope’s working-age population is about to start declining; Ja-
pan’s is already doing so. Even in America the ageing of the
baby-boomers points to a slower-growing workforce. In the-
ory, faster productivity growth could oset this, but in most
rich economies that was waning before the crisis hitand the
crash has clobbered productive potential. A feeble recovery
could make matters worse, as the unemployed lose their skills,
public debt builds up and rms put o investment.
A gaping growth gap between the emerging and rich
worlds will, of course, shift economic heft more quickly to-
wards emerging economies. A fast-growing emerging world is
ne, but a stagnating rich one serves nobodyespecially if
trade tensions start to rise. Western voters may nd it intoler-
able that the likes of China still run big surpluses, thanks in
part to those weak currencies. Protectionist rhetoric is already
rising in the United States.
All policies great and small
The world would be better served by policies that both im-
prove rich countries’ prospects and reorient growth in emerg-
ing economies. These should come in two parts. First, as this
newspaper has often argued, macroeconomic policies must
be recalibrated. Emerging economies need to allow their cur-
rencies to rise more. The rich should tread carefully with scal
consolidation: sensible budget repairs should be less about
short-term decit-slashing and more about lasting scal re-
forms, from raising pension ages to trimming health-care costs.
Second, and just as important, is microeconomic reform.
No matter what Congress threatens about the yuan, China’s
trade surplus will not disappear until it boosts investment in
services, removes distortions that depress workers’ share of
income and encourages households to save less. From tele-
coms to insurance, China is full of service oligopolies that
need to be broken up.
Similar growth tonics need to be applied in much of the
rich world, both to boost domestic spending in surplus econo-
mies, such as Germany and Japan, and to raise productivity.
America is more productive than the euro zone and Japan
largely because the latter both have a lousy record in services
(too many rules and not enough competition). Many labour
markets also need an overhaul, especially in southern Europe,
where it is still far too dicult to adjust wages or re perma-
nent workers. One advantage of the crisis for Spain and Greece
is that they have been forced to make a start on this.
The United States also has its own microeconomic to-do
list, albeit of a dierent sort. The most urgent item is the fester-
ing mass of underwater mortgages. Almost 25% of homeown-
ers with mortgages owe more than their houses are worth.
Faster, more thorough debt restructuring is needed, to make it
easier for workers to move to where jobs are more plentiful
and to hasten nancial recovery. Schemes for unemployment
insurance and training also need attention, so that high job-
lessness does not become entrenched.
None of these structural reforms is easy. Peer pressure could
help. Rather than being xated on harsher budget-decit rules,
the European Union’s members should pledge to complete
the single market in services, to open up cosy national markets
to greater competition. The members of the G20 big econo-
mies could commit themselves to specic structural goals,
from raising retirement ages to deregulating things like tran-
sport. A bold microeconomic agenda will not yield instant re-
wards. Nor is it a substitute for getting the macroeconomics
right. But without it global growth will eventually falter. 7
The quest for growth
It may depend on structural reforms as much as prudent macroeconomic policy
The Economist October 9th 2010 19
20 Leaders The Economist October 9th 2010
1
A
MERICAN exceptionalism
comes in many forms, but
one of the odder ones is the way
it sets its electoral boundaries. In
every other democracy worthy
of the name, independent com-
missions perform the sensitive
and vital task of adjusting
boundaries to take account of shifts in population. But in no
fewer than 44 of America’s 50 states, it is state legislatures,
composed as they are of party politicians, who decide where
the lines should be drawn for seats in the House of Representa-
tives in Washington, DC. The potential for abuse is so obvious
that it is a kind of miracle that the system has survived as long
as it has. But on November 2nd a big blow could be struck
against the ancient practice of gerrymandering.
That is when California’s voters will decide whether or not
to turn the task over to an independent Citizen Redistricting
Commission, laboriously constructed so as to be balanced
and independent by a process of screening and random selec-
tion. So far only Arizona has anything remotely as good at the
congressional level (though some 31 states, including Califor-
nia, have moved in this direction as far as their own state legis-
lative elections are concerned). A further seven states have
nominally independent commissions for their congressional
seats that are, in practice, partly answerable to the politicians.
The issue is particularly important just now. America is
about to publish the results of its decennial census, so 2011will
be a year of haggling over boundaries to reect the new num-
bers, a process known as redistricting. That in turn makes No-
vember’s elections to state legislatures much more important
than usual. In most states the newly elected legislators will be
the ones drawing or approving the new lines. If the Republi-
cans do seize control of Congress at this year’s mid-terms, an
important part of the reason will be the ways in which their
state-level legislators redrew the lines in big states like Texas,
Ohio and Florida after the census of 2000.
Letting state legislators control the redistricting process is
wrong in several ways. Most obviously, it tends to give an un-
fair advantage, which lasts a whole decade, to whichever
party happens to be on top at the crucial time. It also leads to
electoral boundaries drawn purely to maximise political gain
but making no geographical or administrative sense. Most
famously, Governor Gerry of Massachusetts in 1812 devised a
district shaped like a salamander; but modern times have pro-
duced far worse ones, such as Illinois’s 17th congressional dis-
trict, known as the rabbit on a skateboard (pictured left).
Worse, politically controlled redistricting helps drive the
hyper-partisanship of politics. In turbulent political times,
when large swings in the vote are possible, party bosses feel
driven to construct safer seats than they once used to need.
With fewer seats changing hands on election day, this tends to
shift the focus of politics away from the general election itself,
and on to the primaries in which the parties select their candi-
dates. The turnout in primaries is tiny, typically only between
10% and 20% of voters, and tends to be disproportionately
composed of activists. So those selected tend to be politically
slanted to the left or the right extremes.
California’s sadly dysfunctional government has suered
from this extremism: it is one reason why the moderate Arnold
Schwarzenegger has got so little done (see page 42). Angry Cal-
ifornians have already voted to change the system for the state
legislature from 2012 and they have a history, when stirred, of
setting political fashions (good and bad). Most other states
don’t have the power to change voting rules by popular ballot,
meaning that legislatures will, in eect, have to vote to disem-
power themselves. For all these reasons, the more powerful
the message California can send on this issue the better. 7
Electoral boundaries in America
Time to bury Governor Gerry
Forget the battle for Congress: the important vote in November could be California’s on gerrymandering
B
RITAIN’S new chancellor of
the exchequer is normally
regarded as a rather divisive
character. Yet by announcing
that he is planning to cut child
benet to higher-rate taxpayers,
George Osborne seems to have
united the entire nation in oppo-
sition to the coalition government’s plans.
From 2013 higher-rate taxpayerscurrently those with in-
comes over £44,000 ($70,000)will no longer receive child
benet (a weekly credit of £20 for the rst child; less for second
and subsequent children). Even though only 15% of families
with children include a higher-rate earner, the right-wing press
sees this as an ungrateful attack on the middle classes (which
in Britain means better-o people, while in America it means
the less well-o). They were, after all, disproportionately re-
sponsible for voting the government into power. To the left, it
undermines the notion of universal benets which is crucial
to retaining widespread support for a generous welfare state.
For both those reasons, Mr Osborne is right. Spending cuts
should hit everybody. The very rich are already paying higher
taxes; the poor are going to be hard hit by benet cuts. The mid-
dle classes, however dened, must take their share too, and
paying well-o people to look after their children is silly. But
the bigger reason to approve of Mr Osborne’s plans is that he
Public spending
Biting the hand that feeds him
George Osborne is taking the axe to middle-class entitlements. Quite right
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22 Leaders The Economist October 9th 2010
2
1
has started to chisel away at the idea that the state should not
just be a safety net but a universal provider.
There are good reasons for the state to provide certain es-
sential services, such as defence, education and health. There
are also good reasons for government to help people in di-
culties. Beyond that, the state should tend to leave people to
make their own decisions with their own money.
Most governments in decent countries claim to start from
that principle. Over the years, however, it gets eroded. Left-
wing governments like to increase the size of the state. Right-
wing governments like to hand out benets to their own peo-
ple. So this leviathan gets bigger and biggeruntil, in Britain, it
spends around half of GDP.
It takes a crisis, of the sort that has hit the world economy, to
reverse this trend. Mr Osborne has bravely seized the opportu-
nity, but he needs to go much further than just child benet.
The rich get a host of small perks from the state. Older people,
regardless of wealth, get a winter-fuel allowance, a free televi-
sion licence and free bus travel. Those should all go (with the
poor helped in more ecient ways). But another, far more con-
tentious issue is coming up for discussion: higher education.
Your money or your gown
Next week Lord Browne, a former head of BP, will produce a
report on university funding. He is expected to say that stu-
dents should pay most of the costs of their education. There
will be a horrible row if the government takes his adviceop-
position to raising fees, like opposition to cutting child benet,
comes from both the left and the right. It should press ahead.
At present students pay £3,290 a year for their tuition. That
covers less than half of the cost on average (and the best uni-
versities, and some courses, cost a lot more than the average).
British university students, especially those at the rst-tier uni-
versities, thus get a fantastic bargain. Students at leading Amer-
ican universities pay seven times as much; they tend to work
their way through college to pay for their tuition. And British
university students, especially those at Oxbridge, come dis-
proportionately from prosperous families.
Yet the system is not sustainable. Successive governments
have demanded that universities take on more students, while
refusing either to fund the academics properly or allow them
to raise fees. The quality of education is therefore suering.
Somehow, universities must get more money.
There are two plausible arguments against raising fees. One
is that society, as well as individuals, benets when young
people are better educated. That is true, but according to a re-
cent study by the OECD, in Britain individuals get more than
two-thirds of the benets of higher education: the students are
the main winners. The other argument concerns access. The
higher fees rise, the harder it will be for poorer students to go to
university, for they will have to carry bigger debts into adult-
hood. That is true; but the alternative is to continue running
down higher education or to make poorer citizens pay for the
benets mostly enjoyed by the prosperous.
These are hard cuts for the government to make. Reducing
middle-class entitlements is, after all, biting the hand that
feeds it. But if it fails to make these cuts, the battle over the def-
icit is lost. That thought should give it courage. 7
D
ESIGNED especially for city
and suburban motoring,
this handsome automobile is
smooth, quiet and easy to drive,
and being powered by electric-
ity it can be charged up at home.
Tempting? The sales pitch is not
for one of the new electric cars
from General Motors, Nissan or Renault, but for a 1905 Victoria
Phaeton from Studebaker of South Bend, Indiana.
Electric cars have come and gone over the years. Usually an
oil crisis has given them a boost; this time it is a combination of
oil prices, fears about energy security and climate change.
A decade ago the Toyota Prius took hybrid cars into the
mainstream. Two years ago Elon Musk’s Tesla all-electric
sports car made them sexy. Now the big car rms are pushing
all-electric cars for the mass market. At the Paris Motor Show
this week they unveiled electric vehicles of all shapes and
sizes. Some go on sale in the next few months.
This represents a huge leap forward for the industry, but the
showroom patter will be misleading, for two reasons. First, al-
though electric cars are nippy, stylish and as easy to drive as
conventional vehicles, electric motoring has some distinct dis-
advantages. Second, they are not really as green as their pro-
moters claim.
The idea of recharging an electric car at home for only a few
dollars and never again having to visit a lling station is entic-
ing. For most journeys, the limitations of battery capacity are
irrelevant. As salesmen will be quick to point out, 99% of the
time people do only short runsthe daily commute, trips to
the shops and to pick up the childrenall of which are well
within the range of most electric cars.
But that nal 1% of journeys presumably includes the sum-
mer holiday when people pile into the car and head o for the
coast. Hopping on the train laden with suitcases and children
may not be an attractive alternative. And even the relatively
short ranges that salesmen advertise may be optimistic. On a
cold, wet night when lots of electrical systems are running and
the vehicle is laden with passengers and luggage, a car may
lose around a third of its supposed range.
The joy of petrol
Carmakers are taking dierent approaches to these limita-
tions. The Nissan Leaf or Renault Fluence are powered only by
a battery. Once they have travelled 160km (100 miles) or so, the
battery needs recharging, which can take some eight hours. By
contrast, the Chevrolet Volt’s battery has less than half that
range, but it carries a petrol generator which gives the car an-
other 480km. Micro cars with just two seats and ranges of only
around 50km are also coming: they will charge quickly and
Electric cars
Highly charged motoring
Electric cars, though a welcome development, are neither as useful nor as green as their proponents claim
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26 Leaders The Economist October 9th 2010
2 work well in crowded cities. But for a combination of cheap-
ness and eciency, a petrol-powered car is hard to beat.
And what of electric cars’ environmental credentials? Elec-
tric cars are being hugely subsidised by taxpayers£5,000
($7,940) in Britain and up to $7,500 in Americaon the ground
that they are zero-emission vehicles. Makers of electric cars
claim that this is an ecient way to reduce greenhouse-gas
emissions. Road transport accounts for a tenth of such emis-
sions worldwide; the sorts of biofuels currently in use are not
much greener than petrol; and next-generation biofuels are
proving slow to come to the market.
Although electric cars may not themselves produce green-
house gases, generating the electricity they use does. How
green they are depends on the fuel mix at the power plants in
the country in which they are driven. An electric car in Britain
today, for instance, produces around 20% less in CO
2
emissions
than a car with a petrol engine. Even if the generating mix gets
greener, electric vehicles are so expensive to produce, that they
will still be a relatively costly way of abating CO
2
emissions.
Sceptics therefore doubt that the subsidy is a good use of pub-
lic money. According to Richard Pike, chief executive of the
Royal Society of Chemistry, replacing all of Britain’s cars with
subsidised electric cars would cost the taxpayer £150 billion
and, with Britain’s current fuel mix, cut CO
2
emissions from
cars by about 2%. For the same money, Britain could replace its
entire power-generation stock with solar cells and cut its emis-
sions by a third.
The only ecient way to cut greenhouse-gas emissions is to
impose a carbon tax. If electric cars are a good way of reducing
emissions, a carbon tax will enable them to ourish. Taxes, of
course, are not as popular as subsidies. But subsidies are al-
most always a waste of public resources. At this particular
time, throwing more taxpayers’ money at the car industry
seems a daft thing to do. 7
O
NE of the most dishearten-
ing things about Zimba-
bwe is that its repellent leader,
Robert Mugabe, though loathed
by manyprobably mostpeo-
ple in his own country, is widely
admired across Africa, includ-
ing its most powerful country,
South Africa. One reason for this is that he has persuaded
many Africans that the main cause of his country’s ruin is the
wicked imposition of sanctions by the West, orchestrated by
Britain, the evil former colonial power, and the United States.
This is rubbish. There are no general sanctions stopping
trade or nancial dealings with Zimbabwe, as there were
against its forerunner, Rhodesia, when its white-supremacist
leader, Ian Smith, refused to accept black-majority rule. Rather,
Mr Mugabe and some 200 people in his ruling set are banned
from travel to the United States, the European Union and a
handful of other countries, and their assets in those places are
frozen. A congressional act also stops America nancing Zim-
babwean government bodies and companies deemed close to
Mr Mugabe’s ruling party through the World Bank and other
institutions. But the overwhelming reason why banks are loth
to lend to Zimbabwe is that Mr Mugabe’s reckless policies, es-
pecially the conscation of white-owned farms, have entirely
destroyed Zimbabwe’s creditworthiness. The personal sanc-
tions have little to do with the country’s economic plight and
yet, as our brieng this week explains, they hand Mr Mugabe a
populist excuse for it.
Nevertheless the West (and in particular Britain, which still
steers Europe’s policy on Zimbabwe) should now change
course and oer to lift the sanctions in return for a few critical-
ly important pledges by Mr Mugabe. Some 18 months ago a un-
ity government took shape ve months after a global political
agreement had laid out a detailed formula under which Mr
Mugabe would remain president but share power with Mor-
gan Tsvangirai as prime minister. As leader of the Movement
for Democratic Change (MDC), Mr Tsvangirai actually won a
general election, against all odds, in March 2008. He also won
the rst round of a presidential contest and would have dis-
placed Mr Mugabe but for a campaign of terror against the
MDC that forced its candidate to withdraw. Western govern-
ments say they will lift the sanctions only if Mr Mugabe meets
the terms of the global political agreement, which he contin-
ues brazenly to out. It is a bargain that will not be struck.
But Mr Mugabe’s recent declaration that an election must
be held next year oers a fresh chance to break the deadlock.
Britain and the West should oer to lift sanctions if Mr Mugabe
accepts unrestricted international election monitoring. In the
past South Africa and the Southern African Development
Community (SADC), a 15-country regional club, have laid out
ne-sounding electoral guidelines that Mr Mugabe has merri-
ly ignored. This time, if sanctions are to go, it must be agreed
that a wider range of monitors, including teams from the Com-
monwealth, the EU and the UN, are let inand allowed to stay
a month before and after the poll. South Africa and SADC are
still crucial. But theyand Mr Mugabemust be persuaded to
let international bodies from outside Africa join the fray.
The Cameron is coming
Mr Mugabe has let it be known that he wants to re-engage with
the new British government under David Cameron, whose
Conservative predecessors he admires for brokering the 1980
Lancaster House accord that rst put him in power. It is time to
call his blu. It is clearly a risk, as Mr Mugabe has broken his
word so many times. But if he does it again, the sanctions can
always be reimposed. Mr Tsvangirai agrees with this ap-
proach. And South Africa’s president, Jacob Zuma, is less
prone than his misguided predecessor, Thabo Mbeki, to treat
Mr Tsvangirai like dirt. Muttering about the old colonial power
throwing its weight around may be heard. But Mr Cameron
and Mr Zuma must lance this boil together. Once they lock Mr
Mugabe into publicly accepting election conditions, the sanc-
tions should be lifted. 7
Zimbabwe
Call Robert Mugabe’s blu
Lift the sanctions if Zimbabwe’s venally clever leader agrees to have a properly monitored election
The euro
SIR You dismissed the claim
that the euro’s long-term sur-
vival requires a political union
(Euro follies, September
25th) by claiming that plenty
of previous examples of a
shared currencymanaged
without a shared govern-
ment. It is true that a currency
union between a minnow (eg,
Ireland, Panama or Luxem-
bourg) and a whale (eg, Britain,
America or Belgium) can
manage without a shared
government. But that is be-
cause the whale is able com-
pletely to ignore the needs of
the minnow when setting
monetary policy. This is not
possible between roughly
equal-sized partners, like
Germany, France and Italy.
The Latin Monetary Union
(LMU), which you cite, was not
a true monetary union in the
sense of a shared currency. It
was a xed exchange rate
mechanism, based on the
franc, which excluded bank
notes. Even so, the lack of a
central, supranational au-
thority proved its undoing.
Without such an authority, the
union had to be run by the
strongest member country.
But, after 1870, France lacked
the will and the power to pol-
ice it. Although the LMU
limped along until it was killed
o by the rst world war, its
original dynamism had al-
ready dissipated within four or
ve years of its 1865 founding.
Finally, the euro is not just a
monetary union. The e in
EMUstands for economic. Its
goal is a political union. That is
an openly stated and honour-
able aim with which one can
agree or disagree. To dismiss it
is silly and wrong.
Gabriel Stein
Director
Lombard Street Research Ltd
London
Seeing REDD
SIR Your special report on
forests (Seeing the wood,
September 25th) succinctly
captured the fact that mone-
tary ow through the Reduced
Emissions from Deforestation
and Forest Degradation
(REDD) mechanism to forest
communities is slowed by the
problems of unclear land
ownership. A key factor in the
success of REDDis the applica-
tion of geospatial technology
in the form of geographical
information systems (GIS) to
collate, map and report forest
carbon emission information
to investors and international
regulatory agencies.
GIS is the same technology
that under-pins the determina-
tion of property lines and land
tenure, as well as the mapping
of land-use patterns in general.
Thus investments in REDD, by
providing support for imple-
menting GIS for forestry, have
a dual benet. They not only
allow those countries to meet
the requirements to validate
REDDpayments but also help
them to establish the technical
basis for economic devel-
opment. It isn’t the solution,
but it is a start.
D. James Baker
Director
Global Carbon Measurement
Programme
The William J. Clinton
Foundation
Philadelphia
SIR In your recent coverage
of the REDDprogramme you
neglected to mention the
disincentive of donor coun-
tries to monitor compliance.
Many donor countries support
REDDbecause of the cheap
carbon credits that they will
receive. When this is the case
they will not want to look too
carefully at results for fear of
losing their credits. Impartial
third-party monitoring from
an initial baseline level of
forests is essential for the real
success of the programme,
along with a willingness to
withhold payments to coun-
tries who do not comply.
Lee J. Alston
Krister Andersson
Institute of Behavioural Science
University of Colorado
Boulder, Colorado
SIR There are two reasons
other than those you men-
tioned for some guarded opti-
mism in respect to sustainable
tropical forestry. First, as the
discount rate is at the lowest
level it has been in decades,
forest assets are much more
competitive with other asset
Letters
1
28 The Economist October 9th 2010
classes. Further, mature natu-
ral forests provide strong cur-
rent, and stable cashow,
reducing the duration and
volatility of the investment.
Second, temperate forestry
is well known to add positive
diversication eects to in-
vestment portfolios. The eect
in the tropics should be even
greater due to the inecient
nature of markets for tropical
forests and forest products. As
investors see the value of
diversication into sustainable
tropical forestry on their port-
folio then even a small asset
allocation into this asset class
will have huge positive eects
on forest preservation at a time
the world needs stable tropical
forest holdings most.
Jeffrey S. Atkin
Chief executive
Sustainable Forest Systems LP
Mill Valley, California
Blowing in the wind
SIR You painted an unneces-
sarily bleak view of today’s
wind industry (Wild is the
wind, September 25th). Wind-
turbine installations in Ameri-
ca are down but in Europe this
year we expect the building of
turbines to be at a similar level
to 2009a record year when
wind power accounted for
40% of all new power-generat-
ing capacity installed in the
European Union.
Also, improved siting has
greatly reduced bird fatalities,
and in comparison with cars,
high-tension lines and cats, for
example, turbines are a minor
menace to birds.
Julian Scola
Communications director
The European Wind Energy
Association
Brussels
The right way up
SIR You suggested allowing
bankruptcy judges and special
trustees to write down balan-
ces of loans for homeowners
in America who are upside
down in their mortgages (Are
we there yet, September 18th).
This ignores the fact that a loan
balance represents dollars
belonging to someone, either
an investor or bank depositor,
used to support the purchase
of collateral property. Who
would absorb the shortfall if
this was allowed?
As a banker, I’m sympathe-
tic to those borrowers who are
in this upside-down situation.
We try to help our customers
through these troubled times.
But there is a great dierence in
our attempts to assist these
borrowers and any situation
which would give them an
entitlement to have their loan
obligation reduced. There has
always been a moral, as well as
a nancial, obligation to repay
loans. If we begin to take steps
to set aside that moral obliga-
tion, the troubles we see today
will pale in signicance.
Joe F. Ferguson
Chief executive
Stephens Federal Bank
Toccoa, Georgia
Amountain or a molehill?
SIR The main Senkaku island
is indeed home to goats and a
rare species of mole, but it is
not virtually uninhabitable
(Getting their goat, Septem-
ber 18th). A Japanese shing
village thrived there for de-
cades until 1945. The Senkakus’
habitability is legally signif-
icant as rocks which cannot
sustain human habitation or
economic life of their own
would not be in the 200-mile
exclusive economic zone (EEZ)
prescribed by the UNConven-
tion on the Law of the Sea.
Japan’s current EEZ claims use
the Senkakus for baselines.
Something else might get
Beijing’s goat. The American-
Japan Mutual Security treaty
says that America will act to
meet the common danger in
case of an attack on territories
under the administration of
Japan. In 2004, a State Depart-
ment spokesman said that the
Mutual Security treaty applies
to the Senkaku Islands. I don’t
think he was kidding.
John J. Tkacik, junior
Alexandria, Virginia 7
The Economist October 9th 2010 Letters 29
2
Letters are welcome and should be
addressed to the Editor at
The Economist, 25 St James’s Street,
London sw1A 1hg
E-mail: letters@economist.com
Fax: 020 7839 4092
More letters are available at:
Economist.com/letters
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The Economist October 9th 2010
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fiscal 2010. For more information, visit www.ifc.org.
IFC’s Central Asia Corporate Governance Project is aimed at improving the investment
environment in Kazakhstan, Tajikistan and the Kyrgyz Republic by providing advisory
services to companies, banks, educational institutions and the government. Project
activities will include training and consultations on corporate governance, as well as work
on legislative reform in this area. For this project IFC is currently seeking to recruit
Project Manager
who will oversee all aspects of project implementation including compliance with all
donor obligations and agreements as well as all IFC and World Bank Group policies. The
position is based in Almaty, Kazakstan.
Duties and responsibilities:
• Oversee all regional-based aspects of further elaborating the design and
implementation of the project, including assuring that all program work exemplifies
internationally accepted best practice in the following areas:
1) training managers of private Central Asian companies and banks on the concept of
corporate governance (through seminars and individual consultations);
2) development of publications and training materials on corporate governance for
Central Asian companies and banks (to be developed together with local staff with
input from regional corporate governance projects);
3) establishment of the content, timing, and target audiences for training sessions and
responsibility for their delivery;
4) distribution of publications to Central Asian companies, banks, government officials,
journalists and shareholders;
5) policy advice to the Central Asian government on corporate governance legislation,
regulation and enforcement;
6) training Central Asian counterpart organizations on corporate governance issues as
well as work with educational institutions.
• Manage and oversee the professional development of a team of local professionals
including legal, financial consulting, accounting, and communications departments, as
well as support staff;
• Identify anticipated client needs and proactively design new products, services and
delivery methods to address these needs;
• Systematically consolidate and analyze lessons learned from project implementation
experience and share, along with subject matter knowledge, with team members and
colleagues across the region and IFC;
• Act as a mentor for new Project Managers and other corporate governance teams in
the region;
• Build a visible presence for the Project within the country and IFC in the region and
manage a local public awareness campaign to support project activities;
• Monitor potential local market receptivity to new IFC projects and/or services in the
region and participate in the development of such projects;
• Identify potential sources of additional project funds and funding for new projects in
Central Asia;
• Control local expenditures against grants according to IFC and donor guidelines;
• Cooperate with investment officers in Central Asia on assessing corporate governance
practices in potential IFC investee companies;
• Report to and maintain an effective working relationship with donors financing the
project;
• Ensure clients and donors clearly understand IFC’s strategy in the country and region
and resolve conflicting stakeholder needs when necessary;
• Manage relations with project partners and other international organizations working on
corporate development issues in Central Asia; and
• Represent IFC in-country as needed.
Requirements/Qualifications :
• Master’s or equivalent professional degree and/or at least eight years of relevant
experience;
• Legal, accounting, audit or business background contributing to knowledge of
corporate governance;
• Experience managing private sector development projects in transition countries
desired;
• Strong leadership, organizational, and communications skills;
• Relevant experience working in the region;
• Fluency in English; proficiency in Russian and/or any Central Asian languages.
IFC offers challenging and rewarding careers and interesting opportunities for
professional and personal growth. For corporate information, full job description and how
to apply, please visit www.ifc.org, then click on Careers -> Current Opportunities -> Job
reference # 101955. Deadline is October 24, 2010. All applications will be treated in the
strictest confidence.
Only short-listed candidates will be contacted.
IFC finances and advises projects that have a positive developmental impact and that
comply with high environmental and social standards.
www.ifc.org
Executive Focus
31
The Economist October 9th 2010
Executive Focus
32
The Economist October 9th 2010
Executive Focus
33
The Economist October 9th 2010
Executive Focus
Video: Tea with Evan Williams
Twitter’s co-founder, who has just stepped
down as chief executive, talks about the
company’s new interface and serving the
needs of dierent markets around the world
Economist.com/node/21011549
United States: Hands o the warfare state
Will the tea-party movement embrace cuts to
spending on the military?
Economist.com/node/21011495
Europe: Divided they stand
Twenty years after the unication of east and
west, in many ways Germany remains a
divided country
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Africa: Political mineeld
A battle is raging in South Africa over the
putative nationalisation of the protable
mining industry, which is now back on the
ANC’s agenda
Economist.com/node/21011525
Asia: Propaganda war
As South Korea steps up psychological
operations against the North, girl-band
music videos may become ammunition
Economist.com/node/21011555
Business: The Léo Way
Léo Apotheker, Hewlett-Packard’s surprise
choice as its new boss, will have to rebuild
the tech rm’s morale
Economist.com/node/21011401
Business education: Paper ghts back
Students have been less than impressed with
trials that substitute e-readers for weighty
text books and case-study materials
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Economics: Wild Irish woes
Our network of experts debate how the Irish
government should respond to multiple
crises: a weak economy, a sinking banking
industry and growing public debt
Economist.com/node/21011470
Technology: To be snied at
Suerers of locked-in syndrome can still
sni. This may provide a voice for people with
no other means of communication
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How to feel like a traveller in your home city
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How best to compute the well-to-wheels
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Global debt clock
Debt clocks are familiar to anyone who has
been to Times Square in New York. Our
clock shows the global gure for all
governments’ debt in dollar terms. An
accompanying map breaks the numbers
down by country. The total ticks upwards
by $1m or so every ve seconds
Economist.com/node/21011544
Mobile intelligence
This week we launch our sister publication,
Intelligent Life, in America. It will appear
exclusively as an iPad app that is not yet
available in other countries. Intelligent
Life is a quarterly covering life, culture and
style. The current edition can be
downloaded free from the App Store
Moreintelligentlife.com/ipad
Aquestion of faith
Religion is a force for good, compelling
people to pursue virtuous and productive
lives, argues a historian of religion in
support of the motion. On the contrary, it
gives people bad reasons to do good things
and inspires the erce defence of dogmatic
views, argues the opposer. Join the debate
Economist.com/debate
Digital highlights
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I
F YOU take President Robert Mugabe’s re-
cent declaration at face value, Zimbabwe
will have another general election by the
end of next year. That will be three-and-a-
half years after his long-ruling Zanu-PF
party indisputably lost to the rival Move-
ment for Democratic Change (MDC) led by
Morgan Tsvangirai (right, above), but then
refused to concede. Mr Tsvangirai, as com-
pensation, became a distinctly second-d-
dle prime minister. Next time, despite all
the tricks Mr Mugabe and his party are sure
to play, they could well lose again. There is
at least a chance that the president will step
down and that, at last, less fettered power
will be handed to Mr Tsvangirai.
Manyperhaps mostperceptive Zim-
babweans think such a prospect fanciful.
Why, they ask, should the thugs round Mr
Mugabe behave any dierently next time,
especially when their own ill-gotten gains
are at stake? And yet, though the economy
is still in ruins, politics messy and human
rights persistently violated, the picture is
denitely less bad than it was two years
ago. It is widely considered, with good rea-
son, that Mr Mugabe is running rings
round Mr Tsvangirai and is preventing the
MDC and its allies from enjoying their
rights as a majority in parliament. All the
same, a steady momentum is growing for
changeand against Mr Mugabe.
Moreover, though recent reports of the
86-year-old leader’s impending demise
were based on his occasional sleepiness at
ocial functions and a stumble or two on
ceremonial steps, plainly he could drop
dead tomorrow. Behind the scenes, feud-
ing within the ruling party over the succes-
sion is getting hotter.
Last electoral time round, at the end of
March 2008, the playing eld was so heavi-
ly tilted against the MDC that few thought
it could winyet it did so clearly, albeit by a
narrow ocial margin. Mr Mugabe also
decisively lost the rst round of the presi-
dential poll, held on the same day, to Mr
Tsvangirai. Only after a bizarre ve-week
silence from a terried electoral commis-
sion did Mr Mugabe, bolstered by his secu-
rity men and their lethal machinery of re-
pression, declare that Mr Tsvangirai had
fallen just short of the required 50%. The
shaken president then set about bludgeon-
ing the challenger and his MDC into sub-
missionresulting, after the murder of at
least 200 MDC supporters, in Mr Tsvangi-
rai’s withdrawal from the run-o some
three bloody months later.
After that, while the MDC and its allies
had a slim majority in the lower house of
parliament, Zimbabwe’s slide into ruin
continued. Within months of Mr Mugabe’s
re-election as president, ination had
reached several billion per cent a year.
Eventually, early last year, Zimbabwe’s
own currency was abolished altogether, to
be replaced by the American dollar.
Shortly afterwards, a government of
national unity (known jokingly as the
Gnu) took oce. Five months earlier the
two main parties, plus a breakaway from
the MDC under Arthur Mutambara, had
signed a global political agreement
(GPA), spelling out how power would be
shared. Mr Mugabe remained president
and Mr Tsvangirai became prime minister,
with Mr Mutambara as his deputy.
Since then, things have undoubtedly
improved. The economy’s dollarisation is
by far the biggest factor in Zimbabwe’s
fragile recovery. As the Zimbabwe dollar
gradually became worthless, civil ser-
vants, including teachers and doctors, saw
their pay shrivel until there was no point in
working. Now, though manyperhaps
mostZimbabweans are still on the bread-
line and 80% have no jobs, at least those in
work can predict their income. Ination is
ocially running at 5% a year. After years
of contraction, the economy is growingat
8.1% this year, says the nance minister,
Tendai Biti, an MDC man.
Health care and education have im-
proved markedly, from rock-bottom. Hos-
pitals that had run out of the most basic
medicines, as well as sta, have begun to
function again. More recently more than
13m textbooks, paid for by Western donors,
have started to be delivered under the eye
of Unicef to all the country’s 5,600-odd
primary schools.
Sales of beer and beverages are sharply
up on a year ago. Other indicators, such as
sales of roong material, point to busier
Can Robert Mugabe ever be persuaded
to give up?
Brieng Zimbabwe
HARARE
Afearful stalemate looks unbreakable for the moment. But a sensible solution may
yet be found
1
The Economist October 9th 2010 35
36 Brieng Zimbabwe The Economist October 9th 2010
2
1
economic activity. Trac in downtown
Harare is a lot more clogged than a couple
of years agoand not just because many of
the trac lights are still not working.
The decline in some types of farming
may have bottomed out. Tobacco produc-
tion, for instance, which peaked at around
230m kg in 2000, just as the mass expropri-
ation of white farms got going, slumped to
around 59m kg last year. But this year’s
sales suggest that output, thanks in part to
a rise in smallholder planting, may have
risen to around 120m kg (though that gure
may include smuggled imports). Some
minerals are also beginning to do better
again, notably gold and platinum. And
though the ruling party and its military
backers plainly hope to lch the diamonds
from newly developed elds in the Ma-
range area, Mr Biti is determined to ensure
that the Treasury also benets.
With recovery, the proportion of Zim-
babweans needing food handouts has
dropped sharply. Two years ago the UN’s
World Food Programme found that at least
half the country’s 8m-9m people relied on
them. This year probably only 15% of rural
folk will do so.
Breadbasket no more
But the economy as a whole is still in dire
straits. Driving for 140km (87 miles) along
the main arterial road eastwards from Ha-
rare, you pass mile after mile of derelict
and seemingly empty farmland that was
once among the most productive in Africa.
Not a single pedigree cow is to be seen
nor, for that matter, one white face. Grass
along many of the verges has been burnt,
apparently because hungry people have
been trying to ush out rodents for food.
Milk production, though well up on last
year’s gure, is seven times smaller than it
was. Beef production has fallen nearly
fourfold. You see the same desolate picture
across the country, once the region’s bread-
basket as well as one of the world’s largest
producers of top-quality tobacco.
Of the 4,500 white farmers who owned
6,800 farms, barely 150 still hold their origi-
nal tracts, according to John Worsley-Wor-
swick, who runs Justice for Agriculture, a
lobby that stands up for commercial farm-
ers and their employees. Another 200 or
so have stayed on at least a portion of their
land, often as managers or leaseholders.
(At least 75% of the country’s white farm-
ers, he notes, bought their land on the open
market after independence in 1980, having
acquired certicates to show that neither
the government nor black Zimbabweans
wished or were able to buy it.) The inva-
sions are still going on, despite the GPA’s
assurance that they would stop, with
white farmers still subjected to assault and
arson as the police look on. Around
278,000 whites once lived in Zimbabwe;
now, at a guess, there are around 12,000.
Alarge majority of the 350,000 perma-
nent black workers and 270,000 seasonal
ones who worked on white farms, with at
least 1.5m dependants between them, have
lost their livelihoods as a result of the ex-
propriations. Most of them were denied
land elsewhere in the communally owned
rural areas (formerly known as tribal trust
lands) because they or their forebears
came from poorer neighbouring countries,
such as Malawi, Zambia and Mozam-
bique. Fewer than 2% of them have bene-
ted from the conscations. Thousands
have been reduced to living in shacks on
the edge of towns. Many were among the
700,000 victims of Operation Murambats-
vina, when Zanu-PF decided to sweep
away entire shanty-towns in 2005.
The exodus of Zimbabweans abroad,
especially to South Africa, has yet to be
stemmed, though nearly 420,000 people
have been helped to return this year. Fig-
ures are disputed, but economic chaos and
political repression may have caused a
good 3m Zimbabweans to emigrate. The
UN’s refugee agency counted 149,000 of
them applying for political asylum in
South Africa last year alone, quite apart
from the much larger number who have
slipped over the border for work and melt-
ed into the population.
Despite the country’s surge in eco-
nomic activity, a drastic decline in manu-
facturing will be hard to reverse, as cheap
Chinese goods ood the local market. Mr
Mugabe’s law on indigenisation and eco-
nomic empowerment, enacted in 2007
but due for implementation only this year,
has deterred all but the boldest rms, at
home and abroad, from investing.
The aim of the law is to ensure that all
businesses worth more than $500,000
should be majority-owned by black Zim-
babweans. The denition of indigenous
rules out native-born whitesand, for that
matter, rich black South Africans, though
Zanu-PF is always liable to make excep-
tions for people who pay enough. Mr Mu-
gabe and his allies are candidly racist in es-
pousing the bill, which they promote as
complementary to the land-conscation
policy: large-scale property as well as land
should belong only to blacks, however lib-
eral individual whites may have been dur-
ing the struggle for independence.
The human-rights picture is less horri-
ble than it was two years ago, when
Zanu-PF conducted a reign of terror, partic-
ularly in the countryside, in response to
the MDC’s election victory. And that itself
came only a year after thugs presumed to
be operating under the aegis of Zanu-PF
nearly killed Mr Tsvangirai, breaking his
skull, and, in a separate incident in prison,
beating him to a pulp, before he was
charged with treason, a capital oence.
(The mutilated body of Edward Chi-
komba, the cameraman who conveyed the
picture of Mr Tsvangirai’s battered head to
the wider world, was found by the road-
side outside Harare, the capital, two weeks
later.) Thousands of villagers who were
thought to have voted for the MDC were
displaced, their houses often burned
down. Hundreds were killed.
Short sleeves, long sleeves
But though violence on such a scale has
ended for the moment, fear is growing
again, partly because Zanu-PF senses that
another election may be in the ong. In
the past few months a Constitutional Par-
liamentary Committee, known as COPAC,
has been sending outreach teams
around the country, in theory to discuss a
new constitution that is supposed to be
drafted in parliament, then endorsed in a
referendum. More than a thousand meet-
ings have been held. Many have been
peaceful, but Zanu-PF thugs, in an exercise
known as Operation Chimumumu
(dumb person), have been beating up
and in a few cases killing suspected MDC
supporters who disagree with a so-called
Kariba draft favoured by Mr Mugabe. It
would, among other things, allow the old
man in theory another ten years in oce.
We don’t have short sleeves, long
sleeves any more, says an opposition
leader near Macheke, east of Harare, refer-
ring to the way the Zanu-PF thugs treated
those suspected of voting for the MDC:
short sleeves meant that their arms were
axed above the elbow, long sleeves at the
wrist. But the fear is growing. All that
our people want is food and peace, says a
worried priest in a rural area north-east of
Harare. But these [Zanu-PF] guys are start-
ing to come back. A queasy feeling per-
sists that, while the violence is mostly low-
key and conned to the countryside, it
could erupt in the run-up to another elec-
tion. Jabulani Sibanda, a leader of the so-
called vets, most of whom are far too
young to have been true veterans of the
guerrilla war against Iain Smith in the
1970s, has recently been terrorising villag-
ers suspected of MDC sympathies in parts
of central Zimbabwe.
Although the terror of mid-2008 sub-
sided once it was clear that Mr Mugabe
was still pretty much in charge, many lead-
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38 Brieng Zimbabwe The Economist October 9th 2010
2 ing human-rights campaigners have ed
the country: Jestina Mukoko, abducted in
late 2008 and held in secret for several
months; Noel Kututwa, director of the Zim-
babwe Election Support Network, whose
band of 8,000-odd brave volunteer moni-
tors prevented Zanu-PF from wholesale
ballot-stung at the polling stations; Ger-
trude Hambira of the farm workers’ union;
and, most recently, Roy Bennett, the MDC’s
white treasurer and deputy agriculture
minister-designate, re-elected as an MP in a
landslide in an entirely black constituency,
whom, for that very reason, Mr Mugabe
still refuses to appoint. After Mr Bennett’s
eventual acquittal this year on a
trumped-up charge of terrorism, for which
he spent months in prison, the police say
they want to interrogate him on new un-
specied charges; he is in hiding abroad.
Tsvangirai’s travails
The political picture is patchier still. Plainly,
Mr Mugabe has abided only by those parts
of the GPA that suit him. A few advances
can, however, be chalked up. Commis-
sions on the media, human rights and elec-
tions have been set up under decent chair-
men. The media has more space, with new
licences approved for eight publications,
including NewsDay, which oers a far
more rounded picture than the Zanu-PF-
controlled Herald. The Daily News, by far
Zimbabwe’s best newspaper until its
presses were blown up in 2001, may revive
soon. The very fact that Mr Tsvangirai and
Mr Mugabe sit down together in cabinet
every Monday, apparently without ran-
cour, marks a dramatic turnaround.
But on a range of issues Mr Mugabe en-
sures that his prime minister is often kept
out of the loop, in blatant deance of the
GPA. He has refused, among many other
things, to remove the central-bank gover-
nor, Gideon Gono, or the attorney-general,
Johannes Tomana, both leading authors of
the country’s economic and human-rights
disasters. Above all, he has kept his hands
tightly on the levers of hard power: the
courts, still largely in the hands of Zanu-PF
judges, and in particular the army, the po-
lice and the feared Central Intelligence Or-
ganisation (CIO). By various means, in-
cluding dirty tricks, deaths and suspen-
sions, the MDC’s wafer-thin majority in
the lower house has been whittled away,
though it technically still has control if the
unreliable Mr Mutambara’s small slice of
the party votes with the main bit.
Owing partly to the MDC’s own lack of
guile, the country’s three most repressive
laws, the Public Order and Security Act
(known as POSA), the Access to Informa-
tion and Protection of Privacy Act (AIPPA)
and the Criminal Law (Codication and
Reform) Act, are still in force. The sole
broadcaster is still under Mr Mugabe’s
thumband full of hate-speak. Even when
some of his closest aides and MPs have
been arrested or accused on spurious char-
ges, Mr Tsvangirai has been unable to pre-
vent the police or CIO from obeying Zanu-
PF’s orders to hamstring his party, disperse
meetings and beat up its members.
Yet he remains incorrigibly hopeful, re-
fusing to criticise Mr Mugabe even for his
patent foot-dragging and abuse of the
terms of the GPA, which states that the se-
curity forces and courts should be politi-
cally neutral. He’s an old man who wants
to let go, he says of the president. He’s
looking for an exit strategy that restores his
legacy in Zimbabwe and the world.
Mr Tsvangirai has been accused of
weakness and dithering by some of his
supporters, who want him to express the
people’s outrage more forcibly. Even on
such core issues as the land conscations
and the indigenisation act, he sounds
emollient. We can’t reverse the land re-
form, he says. But there should be a one-
family-one-farm policy and we must
provide for compensation [for the white
farmers] as a matter of principle. We
have modied the [indigenisation] law,
he says, without demanding its removal.
New sectoral thresholds must be laid
down, so that in some parts of the econ-
omy, for instance in mining, maybe only
5% of the company would have to be allo-
cated to black Zimbabweanson a will-
ing-buyer-willing-seller basis, at proper
value. This is a far cry from Mr Mugabe’s
ferocious insistence on 51% of all mid-sized
companies and all land going willy-nilly to
blacks. But it does not signify at-out oppo-
sition to drastic, race-based redistribution.
Mr Tsvangirai’s apparent aim, rather
than demanding in vain that the GPA’s
terms be met, is to entrench his MDC in
government and prepare the road towards
a fresh round of elections by the end of
next year. That involves preparing a new
voter roll and ensuring that, for a change,
the election is properly monitored. In the
past, the Southern African Development
Community (SADC), an inuential 15-
country regional club which South Africa
unocially leads, has whitewashed
awed polls in Mr Mugabe’s favour. Now,
thinks Mr Tsvangirai, SADC and South Af-
rica, especially its current president, Jacob
Zuma, having accepted him as a legitimate
prime minister rather than an upstart or a
traitor, are likely to give him a fairer wind.
Mr Tsvangirai also calls for the lifting of
the personal sanctions imposed by the
European Union, the United States and a
few other countries against Mr Mugabe
and 200 or so of his closest colleagues,
who blame these measures entirely for
Zimbabwe’s misfortunes. But in return the
president must, he says, guarantee that the
coming election will be conducted fairly.
Is this mere wishful thinking? Mr Tsvan-
girai, noting that against the odds the MDC
still managed to win the previous general
election, evidently thinks he can pull o
the feat more decisively next time. He has
also let it be known that he would, if given
the chance, form a government of all the
talents, including the less venal members
of Zanu-PF. He has promised not to im-
pose a policy of retribution.
He even thinks he can accommodate
the securocrats, as Zimbabwe’s high-
ranking military people and police are
known, who have become ever more pow-
erful and rich (from the proceeds of dia-
monds, among other things) since the sul-
lied election of 2008, and who are now
considered Zanu-PF’s most important con-
stituency. Undoubtedly, the security peo-
ple are jockeying behind the scenes as the
succession draws near. These men with
guns probably think they can keep Mr
Tsvangirai out of power altogetherand
for good. But the prime minister is a survi-
vor, and may be cannier than he looks. 7
The whites have lost everythingand so has she
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graduates. But brainpower is not Ontario’s only advantage: Ontario’s economic
hub, Toronto, is the third largest financial center in North America. And Ontario’s
low combined federal/provincial corporate income tax rate – lower than the U.S.
federal/state average – helps create a cost-effective business environment. All of
which make Ontario an ideal business location. That’s why the world works here.
NESTLED BESIDE FOUR GREAT LAKES,
YOU’LL FIND ONE IMMENSE TALENT POOL.
i nv e s t i n o n t a r i o. c o m / t a l e n t
Also in this section
42 Farewell to Arnold Schwarzenegger
42 Polling diculties
44 The new White House chief of sta
46 Indiana’s Senate race
46 Southern Baptists
48 Wave power
48 Birdwatching
50 Lexington: The best Congress
money can buy?
O
N OCTOBER 2nd Meg Whitman, the
Republican candidate, began her sec-
ond debate against Jerry Brown, her
Democratic opponent, by admitting to a
Hispanic audience that I cannot win the
governor’s race without the Latino vote.
And yet the ensuing debatewith ques-
tions asked in Spanish by Latino modera-
torsmight just have cost her that vote, and
thus the entire election.
If Ms Whitman, a billionaire and for-
mer boss of eBay, had had her choice of
topics, they would have been the evils of
California’s belated budget, red tape and
government waste, all of which she, as a
tough businesswoman, promises to cut in
an eort to create jobs. And she would
have reminded voters that several public-
sector unions, whose taxpayer-funded lar-
gesse towards their pensioners is one of
California’s biggest economic problems,
are putting their money behind Mr Brown.
But the biggest issue, instead, was illegal
immigration. And the reason for that was
Ms Whitman herself.
Only days earlier, a sobbing Mexican
mother, Nicandra Diaz Santillan, had told a
stunned press corps in Los Angeles that
she had worked as a housekeeper for Ms
Whitman for nine years until June 2009,
when she confessed that she was an illegal
immigrant. According to Ms Diaz Santillan,
Ms Whitman, who was promising to be
tough as nails on illegal immigrants and
their employers to win the Republican
nomination, promptly red her. Wiping
away tears, Ms Diaz Santillan said that Ms
Whitman was throwing me away like a
piece of garbage.
Ms Whitman’s campaign immediately
alleged that Mr Brown’s mob was some-
how behind this performance. But the
damage to her campaign was done, as
polls are beginning to show. Ms Whitman
is now open to charges of hypocrisy, after
pledging ad nauseamfor a year to hold em-
ployers of illegal immigrants account-
able. As Mr Brown said during their de-
bate, this apparently does not include
herself.
Thus she began the nal month of the
campaign on the defensive. This was unex-
pected. By mid-September, Ms Whitman
had already set a record by spending more
of her own money for a state oce ($119m)
than anyone else in American history. Her
strategy was to drown out the campaign of
Jerry Brown, a former governor and cur-
rent attorney-general but a pauper by com-
parison, with constant and ubiquitous at-
tack ads, forcing him either to spend his
money early or to leave her attacks unan-
swered.
Mr Brown chose the second option,
hoarding his money, a bit more than $20m,
all summer. Prominent Democratic con-
sultants had advised against this strategy,
warning that Ms Whitman would open a
permanent lead before the autumn. The
surprise was that she did not. Polls taken
just before Ms Diaz Santillan’s revelations
showed the race, in eect, tied.
Voters, moreover, remain genuinely
split on the central question of the race.
Some 43%, according to one poll, consider
experience of running a business (ie, Ms
Whitman) more useful for the governor’s
job, whereas 44% value experience of run-
ning government (Mr Brown).
The good intentions of outsiders rare-
ly go far in this complex state. The incum-
bent governor, Arnold Schwarzenegger,
also campaigned as a moderate Republi-
can with a promise to blow up the boxes
in Sacramento, but failed as he ran into the
thicket of voter initiatives, interest groups
and partisan legislators (see next story). Mr
Brown’s pitch is that after a lifetime of po-
litical experience (or two, if you include his
father, who also ran the state), the older,
wiser Governor Moonbeam knows his
way through this particular galaxy.
The main concern about Mr Brown,
however, is his cosiness with unions, who
have been running their own attack ads
against Ms Whitman. Fixing California
will require cutting the excessive public
pensions that unions have negotiated
since 1999. One theory posits, on the Nix-
on-to-China model, that Mr Brown is the
only candidate who can do this. The oppo-
The California governor’s race
Enter the housekeeper
For daily analysis and debate on America, visit
Economist.com/unitedstates
United States
Los angeles
An illegal immigrant disrupts the race to run the world’s eighth-largest economy
Close, but no cigar (yet)
Source: RealClearPolitics.com
Average poll ratings, %
O N D
2009
J F M A M J J A S O
2010
30
35
40
45
50
Jerry Brown
Meg Whitman
1
The Economist October 9th 2010 41
42 United States The Economist October 9th 2010
2
1
site theory is that Mr Brown will be be-
holden and thus impotent. Mr Brown likes
to cite his age, 72, as evidence that he has no
ambitions beyond this last run, hinting
that the old maverick would take on the
unions. But it is only a hint.
Both candidates deserve equal blame
for not addressing with any specicity Cal-
ifornia’s most urgent problem. The state
faces a decit of $19.1billion and still has no
budget, three months after the state consti-
tution says it was due. As The Economist
went to press, there was talk of a compro-
mise that relies on spending cuts and wild-
ly optimistic accounting. Fixing both the
balance and the budget process will be the
biggest task of the next governor.
So it was into a campaign starved of
substance that the issue of illegal immigra-
tion inserted itself. The problem is smaller
than it has been for years, with fewer mi-
grants crossing the border into the state.
But as an emotional ashpoint it is potent,
especially among the 21% of voters who
are Latino. This may also explain why
Carly Fiorina, the Republican candidate
for US Senate, is trailing the incumbent,
Barbara Boxer, despite low approval rat-
ings for Ms Boxer.
And Latinos now like Ms Whitman
less. One questioner in the debate asked
why she showed no compassion for her
former housekeeper. Another query from
an impressive, but undocumented, stu-
dent forced Ms Whitman to say that the
questioner should be deported. Heads
were shaking in the audience as a terrible
debate, and week, for Ms Whitman drew
to a close. 7
N
OWADAYS fewer than one in three
Californians think their governor is
doing a good job. That puts Arnold
Schwarzenegger almost in the same terri-
tory as Gray Davis, who was recalled in
2003. During debates his fellow Republi-
can, Meg Whitman, has politely stressed
how dierent she would be, while Jerry
Brown argues that bringing in well-mean-
ing amateur politicians, even rich and fam-
ous ones, does not work. The left moans
that the Governator cut spending, the right
that he did not cut taxes enough.
If Mr Schwarzenegger is depressed, he
does not show it. Few politicians any-
where exude optimism more physically.
Sure, Californian politics is impossible
(There is maze you have to go through,
then a mineeld, then an obstacle course:
you become an athlete) but from behind
his cigar he reels o a set of achievements,
from reforming state workers’ compensa-
tion to making schools better and building
levees. He has managed to keep spending
rises below ination. His main regret is not
building more things: he waxes lyrical
about visiting South Korea and counting
the cranes on the skyline.
So there is a record to defend. The pro-
blem has to do with unmet expectations,
probably including his own. Back when
Mr Schwarzenegger bulldozed his way to
the governorship alongside Mr Davis’s re-
call, the hope was that this cyborg ex ma-
chinacould change the world’s least gover-
nable big economy. It was not just that his
celebrity guaranteed him an audience; his
brand of hedonistic Republicanism was
close to the state’s moderate centre, unlike
the partisan, gerrymandered legislature.
Since then, as even Mr Schwarzeneg-
ger’s friends admit, the system won too of-
ten. But was it his fault? California’s gover-
norship is a pretty weak one: the state’s
government is a mess of competing dis-
tricts, counties and cities, with much of the
budget mandated by ballot initiatives. The
Governator relied on using that referen-
dum system to bypass the legislature. But
those centrist voters soon let him down: a
series of reforms were easily defeated by
the big public-sector unions in 2005. The
governor was soon in the sort of slow slug-
fest his foes excelled at. One Democrat
calls him a Hollywood negotiator, better
at dividing up the spoils than settling
down for lengthy line-by-line brawls.
Against this, Mr Schwarzenegger still
managed to win re-election in 2006, and
he has doggedly clung to the centre. On pri-
sons, for instance, he has deed right-
wingers by repeatedly making the case
that California locks up too many people.
He has kept going on public-sector pen-
sions and this month won a victory of
sorts. There is talk of him setting up an in-
stitution to campaign for reform. He
doesn’t give things up, observes one ally.
In retrospect, this supremely lucky man
was unlucky in his timingon two scores.
First, his successor will have the advantage
of several political reforms he did push
throughopen primaries and an end to
gerrymandering in the state legislature
that should make politics in the near future
less loopily partisan. Second, the mood
has changed. Seven years ago Californians
were furious enough to elect him but not to
follow through. Now more of them may
realise what a mess their state is in. 7
Arnold Schwarzenegger
Rage against the
machine
sacramento
Acase of right man, right ideas, wrong
time, wrong voters?
Did they deserve him?
T
HEY are used to determine spending
on political campaigns, to guide tactical
voting and to enthuse or cow voters. News
outlets, bloggers and activists cannot get
enough of them. Candidates live and die
by them. But even pollsters are worried
that many of the political polls in individ-
ual races unveiled in the run-up to the mid-
term elections in November may be inac-
curate. We’re in a dark age for polling,
says Jay Leve, boss of SurveyUSA, a polling
rm. It’s a very uncertain time.
The immediate problem is the rapid
growth in the number of people who have
only a mobile phone, and are thus exclud-
ed from surveys conducted by landline.
About a quarter of Americans are now
cellphone-onlys (CPOs) in the industry
Political polls
Still worth
reading?
Washington, dc
It is getting ever harder to work out
what the American public thinks
44 United States The Economist October 9th 2010
2
Pete Rouse
Anew man for harder times
I
F THEY ever remade The West Wing,
the cry would go out to cast Rahm
Emanuel in the role which, in real life, he
has just given up. Diminutive, pugna-
cious and profane, he was the chief of
sta from central casting. But now that
the psychodrama that is Mr Emanuel has
moved to Chicago to run for mayor, the
White House and those who study it will
have to adapt to the subdued, camera-
shy personality of Pete Rouse, the man
Barack Obama has for the time being put
in his place.
As a once and future politician, Mr
Emanuel was used to being in the spot-
light and brought his dramatic ways to
the West Wing. Mr Rouse’s career has, in
contrast, been spent backstage. He is a
quiet man and workaholic, who lives
alone with his beloved cats. He spent
three decades as a Senate aide, including
19 years of service as chief of sta to Tom
Daschle, the former Democratic majority
leader, whom he saw as a future presi-
dent. When Mr Daschle failed narrowly
to win re-election in South Dakota in
2004, Mr Rouse accepted an oer from
the incoming Mr Obama, a freshman
senator and rising star from Illinois, to
run his oce in the Senate.
According to The Bridge, David
Remnick’s biography of Mr Obama, his
new boss told Mr Rouse: I want to get
established and work with my col-
leagues and develop a reputation as a
good senator, and we’ll see what hap-
pens. Mr Rouse sensed that Mr Obama
could have a big future, but expected him
to run for president in 2016 or whatev-
er. Nonetheless, in January 2006 he had
the prescience to send Mr Obama a
memo advising him to lay a plan, below
the radar, to run in 2008 should a per-
fect storm of personal and political fac-
tors create an opportunity.
Whereupon history and Mr Obama’s
career went into fast-forward. Mr Rouse
followed the new president to the White
House and now, at 64, nds himself chief
of sta to a beleaguered president at a
time when a fair chunk of Mr Obama’s
big future is already behind him and the
immediate future looks bleak.
Although Mr Rouse’s consummate
knowledge of Congress will still be use-
ful (his nickname there was the 101st
senator), the mid-term elections in
November could transfer control of the
House and even the Senate from the
Democrats to the Republicans. That
brings the prospect of gridlock and sub-
poenas. If Mr Obama’s rst two years in
oce were the time for seizing opportu-
nity and pushing through legislation, the
next two may require withstanding a
siege. Not a bad time, arguably, to bid
farewell to the showman and replace
him with the strategist.
Washington, dc
The departure of Rahm Emanuel will change the style of the West Wing
The man in the middle takes over
jargon, and this poses both practical and
statistical diculties. They are less likely to
answer their phones, and less likely to par-
ticipate in a survey when they do, says
Frank Newport of Gallup, another polling
rm. They often retain their telephone
numbers, including the area code, when
they move from state to state, so it is hard to
know where they are. And it costs more to
call a mobile phone in the rst place.
The extra expense is bad enough for or-
dinary polling rms, but for those that use
automated recordings (also known as ro-
bocalls) to conduct their polls, it is ruin-
ous. Their overall costs are lower, so the
proportional increase is greater. Worse,
automated services are prohibited from
calling mobile phones by law, so robopoll-
ing outts have to hire real people to reach
them. If CPOs make up 10% of a sample,
reckons Mr Leve, the cost of conducting an
ordinary poll rises by 25%, whereas the
cost of a robopoll doubles.
The local newspapers and television
stations that have underpinned the prolif-
eration of robopolls in recent years (they
accounted for almost half of all polls dur-
ing the elections of 2008) simply cannot af-
ford the extra cost, Mr Leve says. As it is,
many of them are slashing their polling
budgets or shutting down in-house polling
operations. Many are opting to conduct
polls by landline only, to save money.
That is likely to lead to a signicant sta-
tistical bias. CPOs are younger, less white,
and poorer than the average American.
They are also more likely to vote Demo-
cratic. In a recent poll conducted by the
Pew Research Centre for the People and
the Press, a landline-only sample showed
a 6% preference for Republican candidates;
when CPOs were added, the two parties
ended up level-pegging.
At the national level it is easy enough,
though expensive, to account for this by
surveying CPOs and including them in the
sample in proportion to their share of the
population. But there are no reliable statis-
tics at the state or local level on the share of
CPOs in the population. So when pollsters
go to the trouble of calling some of these
people, they are left guessing about how to
weight their views. Given the number of
close contests this yearRealClearPolitics,
a website, currently rates ve of the 37 Sen-
ate races and nine of the 37 governor races
as toss-ups, for examplea small bias
could lead to lots of mistaken predictions.
Pollsters can always rinse their data
to try to correct such aws. As Mr Newport
of Gallup points out, most rms produced
reasonably accurate ndings ahead of this
year’s primaries. It helps that the sort of
people who do not have landlines are also
the sort who tend to turn out in relatively
low numbers in mid-term elections, notes
Scott Keeter of the Pew Centre.
But even if fears of a systematic bias
prove unfounded, the fuss about CPOs
points to a broader problem for pollsters:
the ever-increasing diculty of persuad-
ing Americans to take part in political
polls. The proportion of those called who
end up taking part in a survey has fallen
steadily, from 35% or so in the 1990s to 15%
or less now, according to Mr Keeter. Reach-
ing young people is especially dicult.
Only old ladies answer the phone, com-
plains Bill McIntur of Public Opinion
Strategies, a Republican polling rm.
Several studies by the Pew Centre in re-
cent years have concluded that dwindling
participation rates have not reduced the
accuracy of political polling. But at the
very least they make polling more expen-
sive, since more calls are required to drum
up a decent sample. And there must come
a point when participation rates get so low
and unrepresentative that no amount of
rinsing can clean up the data. In the mean-
time Mr Leve, for one, advises extreme
caution when looking at state or local
polls this year. 7
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46 United States The Economist October 9th 2010
1
O
N A recent Sunday afternoon Brad
Ellsworth milled about a policemen’s
picnic in Gary, talking football as smoke
rose from the barbecue. Mr Ellsworth is a
Democrat running for Senate; he has been
in Gary a lot. The city and its surrounding
county, their steel plants towering near
Chicago, are a rare Democratic stronghold
in Indiana. In 2008 the county rushed to
vote for Barack Obama, helping a Demo-
crat win Indiana for the rst time since
1964. Mr Ellsworth hopes for a similar
boost. At the picnic Gary’s mayor tried to
revive the excitement of two years ago.
We must come out and vote, he insisted.
This is not, however, 2008. Moderates
who voted for Mr Obama in Indiana are re-
considering their support. The rst-time
voters of 2008 are discouraged by a lack of
progress. People are disappointed, ex-
plains Shirley Cooper, a police chaplain
who brought her family to Gary’s picnic.
Mr Ellsworth wants to succeed Evan Bayh,
a Democratic senator who announced in
February that he would retire. But the
Democrats’ winning streak in Indiana may
have come to an end.
Indiana is home to pragmatic conserva-
tives, with a few southern counties dipped
in the Bible Belt. Even before Mr Obama’s
election, however, Democrats were enjoy-
ing a surge in the state. In 2006 Mr Ells-
worth was elected to Congress from the
bloody eighth, a southern district fond
of booting out incumbents. Two years lat-
er, Mr Obama’s advertisements and su-
perb ground campaign won 1,374,039
votes, 42% more than John Kerry had
earned in 2004. All of a sudden, this red
state seemed rather purple.
The political landscape has changed
quickly. Over the past two years Hoosiers
have been horried that their Democratic
congressmen tend to vote with Democrat-
ic leaders. Three Democratic seats may
now fall to Republicans. Mr Bayh, a former
governor, was as beloved as a Democrat
could be in a conservative state. His an-
nouncement in February made his Senate
seat unexpectedly vulnerable.
Dan Coats, the Republican nominee,
would not seem the most likely victor. In
an anti-Washington year, he is no outsider.
The 67-year-old has already served in both
the House and the Senate. After leaving
politics he was a lobbyist and ambassador
to Germany. In 2005, while overseeing
Harriet Miers’s disastrous nomination to
the Supreme Court, he told CNN that jus-
tices had become too intellectual.
Mr Ellsworth, in contrast, would seem
the perfect replacement for Mr Bayh. He is
handsome, mild-mannered and hails from
a conservative southern county. He can
credibly say that he is not of Washing-
tonhe has served in Congress for four
years but spent most of his career as a
county sheri. He is anti-abortion and pro-
gun, with the endorsement of the National
Rie Association. He voted against the
House climate bill. In any other state, such
credentials might sound like those of a Re-
publican. Sounds like an Indiana Demo-
crat to me! Mr Ellsworth says.
Yet all this may be for naught. Mr
Obama’s allure in 2008 is impossible to
replicate, so some voters may simply stay
at home. Making matters worse, many res-
idents of urban, Democratic strongholds
are still unfamiliar with Mr Ellsworth, who
got a late start in the race. Many moderates,
meanwhile, don’t like his votes for the
health-care bill and the stimulus.
Mr Coats has a sensible demeanour.
Voters know his name and that he has con-
servative credentials. Democrats argue
that the voters of 2008 could, if mobilised,
change Hoosier politics in this election and
those to come. For now, however, Indiana
looks set to return to its old ways. 7
Indiana’s Senate race
The blue blip
Gary, Indiana
Indiana’s Democratic experiment may
end in November
Conservative Indiana strikes back
T
HE Southern Baptist Convention is the
largest Protestant group in America. It
claims about 16m members, and long ago
spread beyond its geographical origins to
every state in the union. But since around
1990 the denomination has been losing
ground, relative to America’s population,
to other evangelical churches. So a cadre of
Young Turks are looking back to the 16th
century for fresh inspiration.
According to Lifeway Research, the
SBC’s statistical arm, 10% of all SBC pastors
now identify themselves as Calvinists.
And that proportion could well rise; a third
of recent graduates from SBC seminaries
espouse doctrines that hark back to the re-
former John Calvin, with the Southern
Baptist Theological Seminary in Louis-
ville, Kentucky, a particular source. The
SBC evicted its theological liberals back in
the 1980s; now, war has been joined be-
tween the conservatives.
Calvinism emphasises that Jesus died
only for the elect; Baptists believe Jesus
died for everyone. Baptists, by denition,
believe that baptism must be an informed
choice by the individual, therefore limited
to adults; Calvinists believe infants may be
baptised. Calvinists think that God selects
certain people for damnation; Baptists are
more easy-going.
You have a seismic shift in the SBC,
says Wade Burleson, an Oklahoma pastor
whose Grace and Truth to You blog is a
rallying point for the neo-Calvinists.
Change is happening at the SBC and the
older established leadership isn’t getting it.
It’s becoming far more Reformed theologi-
cally than what some are used to. The old
guard is dying and retiring and the new
guard is young and Reformed.
Young Baptists are ocking to confer-
ences that feature Calvinist teachers such
as John Piper of Bethlehem Baptist church
in Minneapolis, or Mark Driscoll, a am-
boyant, controversial pastor who leads Se-
attle’s largest congregation, the non-de-
nominational Mars Hill church. Up-and-
coming pastors, Mr Burleson says, are tired
of a constant emphasis on numbers and
church size. What converts are drawn to,
he says, is theological training and rigorous
Bible study.
The Baptists certainly need perking up.
Their annual convention in Orlando this
June drew only six reporters from the sec-
ular press. Annual baptisms in the SBC
rose slightly (by 2.2%) in 2009, but total
church membership dropped fractionally,
Southern Baptists
The new Calvins
Washington, dc
Tensions inside one of America’s most
successful churches
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More than 63% of paper is recovered for recycling, compared to 35% for metals, and 7% for plastic.
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I
N EASTPORT, a little coastal town on the
easternmost point of the United States,
dierent means of livelihood have come
and gone. Ground-shing, sardine-pro-
cessing and a busy deepwater port have all
had their day. But residents hope that the
sea (with the moon’s help) may still oer
something protable and a bit more pre-
dictable. The area has some of the greatest
tidal variants in the country, rising and fall-
ing by roughly 20 feet (seven metres) on a
reliable twice-a-day schedule. When it
ows into and out of the region’s many in-
lets, that current can turn a turbine.
Tidal-power technology is in its infan-
cy, but a handful of speculative ventures
are under way in Eastport. The rst to test
its prototype is the Ocean Renewable Pow-
er Company (OrpC), which in August
launched a $2.5m tidal grid-compatible
power system, the rst in the United States.
From the surface it looks like nothing more
exciting than a stationary grey barge; but
below are two spinning turbines, known
as foils, which look like a whirling carbon-
bre double-helix. The project generates
just enough power to run the control room
and batteries for a coastguard vessel. If it
can get a federal commercial permit, the
company plans to unveil another $7m in-
stallation in 2011, powering 50-75 homes.
Ingenious it may be, but commercial vi-
ability is a long way o. Tidal-power parti-
sans praise its reliability and easiness on
the eyein contrast with the giant wind tur-
bines near some New England tourist ha-
vensand note that over half of America’s
electricity is used in states that border on
the ocean. But there are limitations. Most of
America’s tidal-energy capacity is in Alas-
ka, too far from big population centres. In-
dustry analysts reckon that, at maximum
capacity, tidal power could generate 13 giga-
watts nationwide, small beer compared
with the 35 gigawatts of wind generation
that already exists. Still, areas like Maine
could benet if the costs go down. A re-
cent study shows that Maine could gen-
erate 250 megawatts
from the tide, 100 of
that in the Eastport
area alone.
Perhaps the big-
gest benet could be
to Eastport’s economy.
In a country where unem-
ployment reaches 13% in some
months, young people are moving
away, replaced by seasonal part-timers. If
I wasn’t doing this I wouldn’t have a local
job, says Ryan Beaumont, an ORPC em-
ployee who used to work in the sardine in-
dustry. The town is striving to make the
venture succeed: oering cheap oce
space and allowing use of its idle port and
tugboats. This month Eastport received a
$1.4m federal grant to build a manufactur-
ing plant for the ocean-energy industry.
But some of Eastport’s 1,500 year-round
residents are sceptical. Proposals made
with similar fanfare have failed in the past.
Even tidal power has its history of broken
promises. In the 1930s Franklin Roosevelt
unveiled a federal project to harness tidal
power with dams; it fell through a year lat-
er. Maybe this time will be dierent. 7
Wave power
Help from the moon
Eastport, Maine
Aless unsightly rival to oshore wind
48 United States The Economist October 9th 2010
2
T
HE white-tailed kite cruising over
the coastal grassland at Stratford
Point is feeling pugnacious. It hounds
an alarmed kestrel out of the park, then
barrels through a ock of seagulls.
Satised, the kite returns to its perch
and shows o the black epaulettes on
its grey back. That’s just such a won-
derful bird, gasps one of the watchers.
The wonderful bird stares back at her.
It looks completely at home. But for
all the condence with which it hover-
hunts in Connecticut, the kite is the rst
of its kind to be recorded in the state
and only the second in New England.
Its western range now extends to Ore-
gon, but in the eastern United States
the white-tailed kite remains a bird of
the South. Normally, South Carolina
marks its northern limit. Which is why,
since arriving on August
1st, the kite has caused
hundreds of birdwatch-
ers (or twitchers, as the
British like to call them)
to migrate to Stratford.
The white-tail is not
the only southern bird to
drift north recently. Mis-
sissippi kites now nest in
New England. Black vul-
tures, once just vagrants
this far north, thrive in
New Haven. Rising tem-
peratures in the north-east
may have helped. This year
saw the hottest summer ever
recorded, and that seems to
suit the southerners.
Whatever the explanation,
birdwatchers are entranced.
They hover in optimis-
tic vigil, cameras
and binocu-
lars poised.
More than
6,000 people
follow the up-
dates on the Con-
necticut Audubon
Society’s blog. Many drive for hours,
eager to glimpse the rarity before the
cold fronts of autumn carry it back
south. I was out there shing yester-
day evening, says one enthusiast, and
I swear it ew right over me. And then it
ew over me again. I just couldn’t
believe it. If summers keep sizzling,
there may come a time when white-
tailed kites overhead are no longer
unbelievable.
Stratford point, connecticut
The benets of global warming
Birdwatching
Rara avis
to 16.2m, something once unthinkable in
the denomination that produced Jimmy
Carter and Bill Clinton. Sunday-school at-
tendance, a more accurate indicator of
numbers, is 7.7m, down from 8.2m in 1994.
Several Calvinists spoke at a pastors’
conference before the Orlando gathering.
One was the Southern Seminary’s presi-
dent, Al Mohler, the denomination’s best-
known Calvinist. Another was C.J. Maha-
ney, pastor of the 3,000-member Cove-
nant Life church in the Washington, DC,
suburbs, which bills itself as a reformed-
charismatic congregation: two words that
are anathema to many Southern Baptists.
Some worried Baptist leaders claim
that the neo-Calvinists are rewriting the
history of the 165-year-old SBC. People try
to argue that Southern Baptists have al-
ways been Calvinist and we’ve departed
from the way in the past 80 years, says
Richard Land, president of the SBC’s Ethics
and Religious Liberty Commission. That
is demonstrably false.
Mr Land is a contributor to Whosoever
Will: A Biblical and Theological Critique of
Five-Point Calvinism, which is in its
fourth printing since its publication in
April. He says Calvinist seminary gradu-
ates keep their beliefs below the radar
when they’re out applying for work, only
to uncover them once safe in a job.
The Baptists have missed out on other
trends, such as the 1970s charismatic
movement. They now have to decide
whether neo-Calvinism is a movement
they can safely ignoreor whether it may
take over their church. 7
I
T IS fair to say that the Supreme Court of Chief Justice John Rob-
erts is not extravagantly admired by Democrats. Of all its con-
servative rulings, the one they nd most enraging as November’s
mid-term elections approach is undoubtedly its 5-4 decision in
January in the case of Citizens United. This held that since the
rst amendment tells Congress to make no law abridging the
freedom of speech, previous legislation that barred companies,
unions and other groups from paying directly for political adver-
tisements during election campaigns was unconstitutional.
Barack Obama was furious. This was a green light to a stam-
pede of special-interest money that would enable Big Oil, Wall
Street banks, health-insurance companies and other powerful in-
terests to drown out the voices of everyday Americans. As the
mid-terms have neared, the cries of foul have multiplied. David
Axelrod, one of Mr Obama’s advisers, complained in September
about an audacious stealth campaign by powerful corporate
special interests using front groups to pour millions into mis-
leading, negative campaign ads that could tip the scales in the
coming election. The New York Times bemoaned the most secre-
tive election cycle since the Watergate years.
Vast right-wing conspiracy, revisited
How valid are these complaints? This cycle has indeed seen the
emergence of an exotic bestiary of organisations bearing innoc-
uous labels such as Crossroads GPS, Americans for Job Security
and Americans for Prosperity. These are raising lavish sums for
pro-Republican political advertising, but the ads do not disclose
the source of their funding. Voters would plainly see such adver-
tising dierently if they knew, say, that Crossroads GPS and its
partner, American Crossroads, were connected to Karl Rove
(George Bush’s former strategy guru), or that Americans for Job
Security was formed by the insurance industry, or that Ameri-
cans for Prosperity is funded by the billionaire Koch brothers in
order (says Mr Axelrod) to support their right-wing agenda and
corporate interests. An investigation by the Washington Post con-
cludes that special interests have increased their spending ve-
fold compared with the 2006 mid-terms, and that the disclosed
proportion has declined from more than 90% to less than half.
That said, the impact of Citizens United is in danger of being
vastly exaggerated. The bipartisan Centre for Public Integrity re-
ports that in recent weeks organisations with Republican ali-
ations have spent ve times more than their Democratic counter-
parts. Add to this the message from the White House that
vengeful, deep-pocketed businesses and shadowy special inter-
ests are poised to buy the November elections, and you might
well conclude that money is destroying American democracy.
This is just not true. Consider, for a start, these two words: Meg
Whitman. The former chief executive of eBay has by now spent
about $120m of her own money on her campaign to become go-
vernor of California, and yet the latest polls have her trailing her
Democratic rival, Jerry Brown, who says he has spent $11m.
This is not to say that possession of a personal fortune is a fatal
handicap in politics. Michael Bloomberg’s three terms as mayor
of New York and Jon Corzine’s victory in the New Jersey gover-
nor’s race of 2005 suggest the opposite. But Mr Corzine failed to
buy his way to re-election last year. The moral of such stories, and
the conclusion of a mountain of research, is that although money
can sway the odd race here and there, it is generally subject to the
law of diminishing returns. Once a candidate has spent enough
to become known, the value of each extra dollar falls. A study by
Americans for Campaign Reform in 2008 put that minimum at
$700,000 for a crack at a seat in the House of Representatives.
This leads some to argue that instead of seeking to cap cam-
paign contributions and spending, reformers should aim to help
candidates across the magic threshold. A bill languishing in Con-
gress, the Fair Elections Now Act, would oer public matching
funds. Yet even that may be unnecessary. Gary Jacobson of the
University of California in San Diego says the wielders of cam-
paign funds have become expert at spotting competitive candi-
dates and giving them the money they need to make a ght of it.
Besides, the Democrats are hardly penniless. The Democratic
National Committee raised more than $16m in September, main-
ly from small donors, and has tended to do better at this than the
Republican National Committee, whose mismanagement under
the lackadaisical Michael Steele is one reason why Republicans
are turning to outside organisations. And though outspent so far
in the advertising war, trade unions (no less liberated than com-
panies by the Citizens United ruling) have been working hard on
the get-out-the-vote ground war at which they excel. Mr Jacob-
son expects the mid-terms to see many races between well--
nanced Democrats and Republican candidates with less money
of their own but more help from outside organisations.
In other words: a pretty fair ght. Thomas Mann of the Brook-
ings Institution says that the Citizens United decision will no
more determine the mid-terms than Mr Obama’s outspending of
John McCain in 2008 swung the presidential race. That contest
was determined by the fundamental politics (rejection of the
Bush legacy, the charm of Mr Obama), as November’s will be (the
jobless recovery, disappointment with Mr Obama). Bill Gal-
ston, also at Brookings, goes so far as to wonder whether the fuss
about it might be a pre-emptive attempt to explain away a defeat.
Politics in the United States is contaminated by money in
many ways. But if the Democrats are hammered in November, it
will not be because of the judicial activism of a conservative Su-
preme Court. It will be because they have done too few things
that voters admire, and too many they do not like. To that extent
at least, American democracy remains in rude health. 7
The best Congress money can buy?
For all the money sloshing around in American politics, you still cannot buy the results of elections
Lexington
50 United States The Economist October 9th 2010
Economist.com/blogs/lexington
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Also in this section
54 Brazil’s electoral quirks
54 Ecuador’s police mutiny
55 Human rights in Argentina
W
ITH 46.9% of the vote, Dilma Rous-
se fell short of the absolute major-
ity she needed to be elected president on
October 3rd. So on October 31st she will go
head-to-head with José Serra, the run-
ner-up, who got 32.6%. Luiz Inácio Lula da
Silva, the hugely popular outgoing presi-
dent and Ms Rousse’s mentor, publicly
reminded her during the campaign that he
had won neither of his own victories in
the rst round. She did well for a woman
who had never before run for oce. But
her vote was some three to four percentage
points less than polls had predicted, and
during her unsmiling statement on elec-
tion night Ms Rousse was visibly deated
by her failure to win outright.
It was not Mr Serra but Marina Silva of
the Green Party who denied Ms Rousse a
rst-round victory. In the opinion polls, Ms
Silva had been stuck at around 10% for
months. But on the night she got a startling
19.3%. That makes her the most successful
third candidate in any of Brazil’s six post-
dictatorship presidential contests.
Abroad, particularly in Europe, a green
candidate gaining a fth of the presidential
vote caught many eyes. But although some
of those who voted for Ms Silva are indeed
environmentalists, others have dierent
reasons for supporting her. Some like her
evangelical Protestantism. Her steely se-
renity appealed to those seeking an alter-
native to the uncharismatic front-runners.
And Ms Silva’s life story matches Lula’s
against abortion, but some Catholic bish-
ops and evangelical pastors advised their
ocks to cast their votes elsewhere.
Other voters were repelled by scandals
swirling around Erenice Guerra, a close as-
sociate of Ms Rousse who resigned last
month as Lula’s chief of sta. Women in
politics are generally regarded as more eth-
ical than men, points out Fátima Jordão, a
sociologist at the Patrícia Galvão Institute,
a non-prot organisation in São Paulo, and
are therefore punished more severely by
voters for perceived lapses.
Both Mr Serra and Ms Rousse are now
courting Ms Silva, hoping to inherit her
vote. The Green Party’s president has said
he leans towards Mr Serra, but Ms Silva
herself was once a member of Ms Rous-
se’s Workers’ Party (PT). She is fond of
Lula, though not of Ms Rousse, whom
she regards as one of the proponents of in-
dustrial development who continually
overruled her when she was Lula’s
environment minister. Her party is to meet
soon to decide whom, if anyone, to sup-
port; she may yet remain above the fray.
An endorsement from Ms Silva might
not in fact make much dierence. Suppor-
ters of a third candidate tend to be quite in-
dependent. Those who switched late from
Ms Rousse might nd a speedy move to
Mr Serra too dizzying to contemplate. Al-
berto Almeida of the Instituto Análise, a
consultancy in São Paulo, notes that in 70%
of elections at national and local level that
have gone to a run-o, the leader in the rst
round won in the end. He predicts a vic-
tory for Ms Rousse on October 31st, with
a ten-point lead.
That voters who turned away from Ms
Rousse chose Ms Silva is bad news for Mr
Serra’s centrist Party of Brazilian Social De-
mocracy (psdb). He failed to attract either
young voters with no memories of the
hyperination his party conquered in the
own rise from poverty to power. One of 11
children of Amazonian rubber-tappers,
she grew up hungry and learnt to read only
in her teens. She put herself through
school and university by working as a
maid. Although she is now out of the race,
she has carved out a new standing as a na-
tional political gure. Like Lula’s, her per-
sonal appeal transcends party.
The late switch from Ms Rousse to Ms
Silva may have been caused partly by a
row about Brazil’s abortion laws. Ms Rous-
se tried to nesse earlier pro-choice re-
marks by saying she was personally
The Americas
Brazil’s presidential election
Amiss, but not by a mile
Brasília
Three more weeks of campaigning lie ahead but, despite a surprising last-minute
stumble, Dilma Rousse (pictured) is still likely to become the next president
On the cusp of a super-majority
Sources: TSE
Federal Chamber of Deputies, 513 seats
Senate, 81 seats
Post-election
(Pre-election)
(Pre-election)
Post-election
PT
88 (79)
PT allies
222 (216)
PSDB
53 (59)
PSDB
allies
55 (71)
Other 95 (88)
PT
13 (8)
PT allies
35 (33)
PSDB
11 (16)
PSDB
allies
8 (13)
Other 14 (11)
Brazil’s National Congress
1
The Economist October 9th 2010 53
For daily analysis and debate on the Americas, visit
Economist.com/americas
55 Chile’s Mapuches
54 The Americas The Economist October 9th 2010
2
1
1990s, or the poor northern ones in whose
hearts Lula reigns. It did badly in Congress,
too: a few races are stuck in legal limbo (see
box), but both the party and its coalition
partners lost seats in both houses.
Unless Mr Serra pulls o an extraordi-
nary coup on October 31st, his party will
have to regroup around the states in which
it is still strong, and nd a new ag-bearer.
It retained the governorships of São Paulo
and Minas Gerais, which between them
give it control of more than 40% of all state
tax receipts. The party’s likeliest next presi-
dential candidate is Aécio Neves, a former
governor of Minas Gerais who is now a
senator. A younger, more charismatic man
than Mr Serra, he is not only popular in his
home state but also well-known national-
ly (he is the grandson of Tancredo Neves,
who was elected president in 1985).
If, as still seems probable, Ms Rousse
wins on October 31st, she will lead a co-
alition that will probably have more than
three-fths of both houses, enough to
change the constitution. In neither of
Lula’s governments did he command such
support in the Senate. That stopped him
from doing much that he wanted.
It has been chastening for Ms Rousse
and her party to have been checked in
their triumphal progress towards an inher-
ited presidency. Her opponents worry that
Ms Rousse would continue a trend in
Lula’s second term to expand the state, and
that she might prove to be a less pragmatic
leftist than he was. They will be heartened
that she has been denied the kind of blank
cheque that a rst-round victory might
have implied. The next month may even
inject livelier policy debate into what has
been a dull campaign.
Lula, who turned Ms Rousse from a
back-room technocrat into an election
winner by campaigning at her side, has
found his queen-making power has limits.
But in the end he is likely to prevail. 7
Brazil’s electoral laws
Send in the clown
T
HE whizzy electronic ballot boxes
that Brazil uses for elections meant
that most results were announced before
bedtime on polling day. But no tech-
nology can speed up the country’s
courts. Just one day before the election
they ruled that votes for candidates who
had been barred from standing, mostly
under a new anti-corruption law passed
this year, should be set aside. Because of
the delay, the results of this precisely
tallied election are still uncertain.
In the races for state governor and
federal and state legislatures, a total of
11m votes went to ineligible candidates.
In the northern state of Pará, for example,
two of the three front-runners for the
national Senate were blacklisted. How-
ever, politicians can appeal against their
inclusion on the list. Those who win their
challenges by December 31st will prob-
ably displace their rivals who have been
declared victors by default.
Contests for the lower house of Con-
gress are even more chaotic. When candi-
dates get more votes than they need to
win, they pass the surplus on to their
allies. The courts have yet to decide
whether politicians can be elected on
disqualied candidates’ coat-tails. If they
cannot, the results of appeals could aect
the legislative balances of power.
Some candidates without legal trou-
bles had otherwise dubious qualica-
tions. The self-styled Miss Pear (curvy,
corseted) and Miss Melon (self-explana-
tory) did gratifyingly badly in their bids
to enter state legislatures. But Tiririca
(Grumpy), a clown best known for a hit
single, won more votes (1.35m) than any
other candidate for the lower house of
Congress. What does a federal deputy
do? To be honest, I don’t know, ran his
ads. But vote for me and I’ll let you
know. He will have to take a literacy test
before he can take oce. But even if he
fails, three of his allies will tumble into
Congress in his parti-coloured wake.
BRASÍLIA
Nice voting machines; shame about the candidates
N
ONE of the three Ecuadorean presi-
dents elected between 1996 and 2004
nished their four-year terms. One was
impeached for mental incapacity, one
fell to a military revolt and one was top-
pled by street protests. Two years ago Ra-
fael Correa, who served in the illegitimate
government that followed the 2005 prot-
ests and went on to be elected president in
2006, got through a new constitution that
he promised would stabilise the country.
Yet on September 30th Ecuador was
once again plunged into chaos. Police
across the country mutinied against a civil-
service law that would have streamlined
and standardised pay for public employ-
ees, reducing the discretionary bonuses of
some workers. They abandoned their
posts and seized their barracks, leaving
much of the country without protection
and prompting outbreaks of looting.
Mr Correa went to the central barracks
in Quito, the capital, to talk to the rebel-
lious ocers. But he refused to backtrack
over the new law. Infuriated by the jeering
mutineers, he bared his chest theatrically
and dared them to kill him. After then try-
ing to ee, he was attacked with tear gas.
One protesting ocer reportedly tried to
hit his knee, which had been operated on
ten days earlier.
He was then taken to the adjacent po-
lice hospital, where he declared a state of
emergency. The foreign minister called on
the president’s supporters to march to the
hospital and free him. He stayed there until
the evening, when loyal forces drove him
back to the presidential palace through
gunre from some of the striking ocers.
According to the health ministry, eight peo-
ple were killed and 274 were injured.
It was certainly ugly, illegal and unac-
ceptable, but was the mutiny a coup, as Mr
Correa insisted? Some foreign leaders said
it was, as did José Miguel Insulza, the secre-
tary-general of the Organisation of Ameri-
can States. It had clearly been planned: air-
force troops blocking the runway of Qui-
to’s airport unfurled pre-printed banners.
But no coup leaders stepped forward to de-
mand that Mr Correa step down or to pro-
claim a new government. General Ernesto
González, the armed forces chief, had
pledged his support for democracy even
though he asked that the law be modied.
Basking in victimhood, Mr Correa has
emerged strengthened from the aair, at
least temporarily. His approval rating rose
by ve to ten percentage points in polls tak-
en shortly after the mutiny. Six police com-
manders have resigned, allowing him to
Ecuador’s police mutiny
Astrike against
democracy
quito
The president survives an uprising by
security forces
Lane closed
The Economist October 9th 2010 The Americas 55
2 appoint a selection of more loyal ocers.
He has announced a purge of the ranks of
the police. But he has also had to make
some concessions to the protesters: the
wages of some 7,000 middle-ranking po-
lice and army ocers are now going to be
corrected upwards.
That is a price the government can ill af-
ford to pay. Mr Correa has spent freely after
he ordered a default on some of Ecuador’s
foreign bonds. He has almost doubled po-
lice wages and bought new pistols for the
force, for example. But money is starting to
run short. The civil-service law was a be-
lated attempt to place limits on the govern-
ment’s wage bill. Yet some in his own party
have opposed plans to raise money to pay
pensions by issuing new government
bonds. That prompted the president to say
that he might use his constitutional power
to dissolve Congress, which would allow
him to govern by decree until a fresh elec-
tion is held, although he has withdrawn
the threat for now.
The opposition now fears a witch-hunt.
Another worrying aspect of the police re-
bellion is that, in spite of the resignation of
its commanders, the political power of the
army may have been reinforced. Despite
the temporary boost to his popularity, Mr
Correa may soon nd that governing Ecua-
dor has not got any easier than it was for
his predecessors. 7
A
RGENTINA’S ruling couple have made
prosecuting the political violence of
the past a signature issue. Néstor Kirchner,
who was president in 2003-07, and Cris-
tina Fernández de Kirchner, his wife and
successor, frequently call for memory
and justice for the victims of the coun-
try’s 1976-83 dictatorship. During their
terms, hundreds of ex-soldiers accused of
atrocities have been arrested.
No such justice has been extended to
the (far fewer) victims of Argentina’s leftist
guerrillas. In fact, several erstwhile mem-
bers of such groups have served in the
Kirchners’ cabinets. But the rst couple
says there is no double standard, because
the Supreme Court has approved the re-
opening solely of cases of crimes against
humanity, which can formally be commit-
ted only by the state. On September 30th,
however, Ms Fernández sabotaged her
own claim to support an apolitical reckon-
ing with the past, when her underlings rec-
ommended that she give asylum to a for-
mer Chilean guerrilla leader.
In 2004 Chile issued an arrest warrant
for Galvarino Apablaza, a founder of a
Communist guerrilla group that fought
against the dictatorship of Augusto Pino-
chet. The crimes he is accused of, however,
took place after democracy was restored:
planning the kidnapping of a newspaper
owner’s son and the murder of Jaime Guz-
mán, a pro-Pinochet senator, in 1991.
The Argentine authorities soon caught
Mr Apablaza, who was living near Buenos
Aires with his wife, Paula Chaín. Chile re-
quested his extradition, and Mr Apablaza
applied for asylum. The Supreme Court
said it would not rule on his extradition
until the asylum issue was settled. On Sep-
tember 1st, one of Mr Apablaza’s former as-
sociates accused him of being a ringleader
in Mr Guzmán’s murder. In response, the
Supreme Court changed its decision, and
said the extradition should proceed unless
Mr Apablaza was granted asylum.
This put Ms Fernández in a bind. She is
a close ally of the Mothers of the Plaza de
Mayo, a group that protested against the
kidnappings of their children during Ar-
gentina’s dictatorship but later became an
extreme leftist organisation. They say that
Mr Apablaza cannot get a fair trial in Chile
because a harsh Pinochet-era anti-terro-
rism law is still in eect (see box). Ms Fer-
nández has her own ties to Mr Apablaza:
Ms Chaín works in her press oce.
But granting Mr Apablaza asylum poses
its own risks. It would strain relations with
Chile and hinder Argentina’s own extradi-
tion requestssuch as for eight Iranians
charged with bombing a Jewish communi-
ty centre in Buenos Aires in 1994. More-
over, the Kirchners are already criticised
for classifying as dirty war victims eight
guerrillas who died attacking an army
base in 1975, entitling their families to rich
payouts. Protecting Mr Apablaza would
make their calls for justice look even more
like an excuse to settle old scores.
Ms Fernández said she would follow
the advice of the national refugees com-
mission, a nominally independent body
whose voting members are all govern-
ment ocials. On September 30th, it duly
endorsed Mr Apablaza’s request for asy-
lum. It said that as a political militant and
ghter against the dictatorship he was
not a common citizensuggesting that
former guerrillas are above the law.
Chile summoned Argentina’s ambas-
sador and delayed bilateral meetings. Its
president, Sebastián Piñera, called the rul-
ing a setback for justice and human
rights. His coalition includes a party Mr
Guzmán founded. Latin America’s many
former guerrillas will be glad to know they
can take shelter in a country whose in-
alienable principles, in Mr Kirchner’s
words, include the constant ght against
impunity. Those who care about justice
will have to look elsewhere. 7
Human rights in Argentina
Do as I say
BUENOS AIRES
The rst couple plan to grant asylum to
aformer Chilean guerrilla leader
Chile’s Mapuches
Trying violence
A
S A presidential candidate in 2009,
Sebastián Piñera called Mapuche
Indian activists accused of burning
farms and lorries criminals. He criti-
cised the president, Michelle Bachelet,
for not using the country’s harsh terro-
rism law to quell their protests for con-
trol of their ancestral land. Ms Bachelet
later had them charged with terrorism.
But on October 1st, Mr Piñera, her succes-
sor, got the charges withdrawn.
The Mapuches forced him into this
about-face by launching a hunger strike
in July, which grew to include 38 prison-
ers. They wanted a change in the terro-
rism law, which dates from Chile’s mil-
itary dictatorship. Although later
amended, it remains controversial. Since
1990 it has been used mainly against
Mapuche activists. In 2007 the unHu-
man Rights Committee said its procedur-
al guarantees should be strengthened.
The hunger strikers also wanted to end
military courts’ jurisdiction over civil-
ians, so that Mapuches who attacked
police could not be tried twice for the
same incident. Mr Piñera supports this.
Few Chileans back the Mapuches,
and Mr Piñera’s conservative allies in
Congress had blocked previous eorts to
reform the terrorism law. But the presi-
dent wants to avoid the bad foreign press
that followed the deaths of hunger-
strikers in Cuba and Venezuela this year.
On September 30th Congress
changed the law so that a presumption
of terrorist intentions no longer trumps
the presumption of innocence. Defence
lawyers will be able to question protect-
ed witnesses. The penalties for arson, a
common Mapuche practice, will be
reduced. Yet the conict is not over: ten
activists are still refusing food.
santiago
Achange in the terrorism law
Will drum for land
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lotusknows.com
Also in this section
58 America and Pakistan
58 The Petraeus strategy in Kandahar
60 China, Tibet and India
62 The Commonwealth games in India
62 South Korea’s kimchi crisis
63 Banyan: Asia meets Europeand
complains
W
E’RE not even living from day to
day, but from one [hourly news]
bulletin to the next. So says a senior Paki-
stani ocial, underlining the paralysis
spreading over the federal government in
Islamabad. The administration of Presi-
dent Asif Zardari, which faces some of the
toughest problems of any government
anywhere, is consumed by intrigue and in-
competence. Foreign donors are looking
on with alarm; Pakistan’s army with frus-
tration; and the Talibanboth in Pakistan
and Afghanistandoubtless with glee.
Pakistan faces two huge immediate pro-
blems: how to rebuild much of the country
after this summer’s oods, which ravaged
100,000 square kilometres and aected
20m people; and how to deal with the
threat of the Pakistani Taliban. In the face
of these, the government needs all the help
it can get. Instead, it seems intent on falling
out with one group after another.
Relations with America have gone
downhill since Pakistan closed the main
mountain pass into Afghanistan at Tork-
ham, in response to the killing of two Paki-
stani paramilitary soldiers in a cross-bor-
der incursion by American helicopters.
The interior minister has even wondered
aloud whether America is an ally or an en-
emy (see next article).
Pakistan’s army is profoundly dissatis-
ed with the government’s performance,
particularly on the economic front. The
armed forces, say insiders, have given the
event he would win kudos as a political
martyr and improve the chances of his
Pakistan People’s Party whenever the next
vote is held. It’s a slow-motion unravel-
ling of this regime, says Mushahid Hus-
sain, the secretary-general of an opposi-
tion party. The government has been
unable to rise to the occasion. The oods
are a game-changer.
Certainly not every problem is of the
government’s making. After years of con-
ict between the judiciary and Mr Zar-
dari’s party, the courts seem determined to
unseat the president. Opposition parties
are talking about joining up to pass a vote
of no condence in the administration,
which is a long way short of a majority in
parliament. The international relief eort
has been doing less to help the ood vic-
tims than it might have done. A bewilder-
ing array of UN agencies, Western govern-
ments and NGOs are duplicating eorts
and eating up big chunks of aid money in
administrative costs.
Whoever is at fault, the result is that
many ood victims have been left to fend
for themselves, struggling to remake their
homes or rebuild their ruined farms with
the few resources they can muster. The
government is currently distributing $230
to each household, but that is woefully in-
adequate. Wheat farmers whose crop was
washed away need seed and fertiliser now
if next year’s crop is not to be lost, too.
The responses of both the federal and
provincial governments have been feeble.
Nobody trusts either to use donations hon-
estly or to implement projects eciently. In
the most populous and richest province,
Punjab, the provincial government has
raised about $12m in ood reliefonly $2
for each person aected. In desperation
the provincial government, which is run
by the Pakistan Muslim League (Nawaz) of
Nawaz Sharif, the main opposition leader,
government a list of the most useless and
light-ngered ocials, whom they want
dismissed. The American administration
is said to support this demand.
But Mr Zardari is reluctant. He does not
want to be seen to be acting under compul-
sion. He is resisting sacking some of his
most trusted lieutenants, though he may
have to. He is more concerned with ght-
ing his own legal battles. Next week the
courts are due to resume a hearing about a
legal amnesty that wiped away old graft
charges against him and other ocials.
International donors, who have so far
given $640m in response to a United Na-
tions appeal, plus $866m outside it, are
frustrated by the government’s inability to
put forward any sort of post-ood recon-
struction plan. All the money is for emer-
gency relief and early recovery. There is
no plan or money for long-term rebuilding.
Nor has the government taken the chance
to push through economic reforms that, as
the oods have made clear, are urgently
needed. It has so far failed, for instance, to
introduce any revenue-raising measures to
increase woefully low levels of tax collec-
tion (tax accounts for just 9% of GDP),
though it says it will bring in a sales tax.
Supporters of Mr Zardari hoped he
would use the oods as an opportunity to
improve the government. Instead he is in
confrontational mood, believing, appar-
ently, that he will benet whether he sur-
vives or is thrown out, since in the latter
Asia
Pakistan’s shaky government
Hobbling along
islamabad
The government needs help. Instead, it seems to be alienating its potential allies
1
The Economist October 9th 2010 57
For daily analysis and debate on Asia, visit
Economist.com/asia
58 Asia The Economist October 9th 2010
2
1
has tried to outsource its reconstruction ef-
forts altogether.
Recognising the absence of trust in any
level of government, Mr Sharif (whose
brother is chief minister of Punjab) has
asked the private sector to take up recon-
struction work, urging businesses and
charities to adopt damaged villages and to
undertake projects such as rebuilding
houses and schools. The government
would merely oer advice. An initial list of
over 200 villages has been drawn up. The
scheme shows that at least the Punjab gov-
ernment is thinking creatively. But given
that 500,000 homes and 1.7m acres of
farmland were damaged in Punjab alone,
it is hard to see how a task on this scale can
be outsourcedand doubtful that the priv-
ate sector has the appetite to take it on.
Mr Zardari insisted this week that the
victory of his reconciliatory approach to
politics was that no one wants an undem-
ocratic act now. Certainly it is hard to see
Pakistan’s army stepping in, even to install
a new civilian government of technocrats,
a favourite theory in Islamabad. But an-
other, perhaps more accurate way of un-
derstanding the president’s comment is
that he has made such a mess of running
the country that nobodynot even the
armed forceswants to take it over. Except,
of course, the Pakistani Taliban. 7
I
T IS hard to say which is deteriorating
faster: the Pakistani government’s ability
to deal with the country’s innumerable
problems, or its scratchy, ambivalent rela-
tionship with America. The past few days
have seen an increase in tension after
NATO forces made two unauthorised in-
cursions into Pakistan. The second, on Sep-
tember 30th, which killed two Pakistani
soldiers in the north-western Kuram re-
gion, triggered a swift reaction. Respond-
ing to growing public outrage over cross-
border drone attacks by the American-led
forces in Afghanistan and to revelations in
a recent book by Bob Woodward that
3,000 CIAoperatives are active in its tribal
regions, Pakistan closed the main supply
route for NATOconvoys. The interior min-
ister, Rehman Malik, said: We will have to
see whether we are allies or enemies.
Since then things have got worse. Un-
able to get through the main Torkham
crossing in the Khyber Pass, NATO con-
voys that bring up to 80% of the supplies
needed by international forces in Afghani-
stan from Karachi in the south have been
sitting ducks. Since the border closure
there have been half a dozen attacks by Ta-
liban militants on the convoys, one involv-
ing 14 gunmen in three pickup trucks who
opened re on a large group of fuel tankers
near Quetta, torching at least ten and kill-
ing one of the drivers. Reecting the gov-
ernment’s apparent indierence to (or
even acquiescence in) the attacks, the local
police chief said it was up to NATOto pro-
vide security for its convoys.
The border may soon be reopened,
when a joint inquiry by NATO and Paki-
stan into the helicopter attack agrees on an
acceptable form of words. Pakistan wants
an apology and promises of no recurrence;
on October 6th America’s ambassador in
Islamabad duly grovelled, but the com-
mander of NATOforces, General David Pe-
traeus, could only promise to try harder
not to repeat the mistake. The underlying
problem of insurgents using North Waziri-
stan as a haven from which to launch at-
tacks and assist jihadist terrorists remains.
The past week has seen many reports,
mostly emanating from Islamabad, of a
well-advanced al-Qaeda plot to launch
commando attacks in Berlin, Paris and
London similar to those that took place in
Mumbai in 2008. The rumours have been
played down by European intelligence
agencies, which describe the threat as
non-specic. But there were a record 26
Predator drone attacks last month, a spike
in activity that suggests something is going
on. One attack, on September 8th, appears
to have killed Abdul Jabbar, a British citi-
zen who, according to intelligence sources
in Pakistan, was being trained to lead a hit
squad in Europe. Pakistan’s ambassador to
America also revealed that another strike,
on October 4th, killed eight militants, in-
cluding four Germans.
Given the reluctance of the Pakistani
authorities to take on the terrorist groups
in North Waziristan, particularly the brutal
Haqqani network that is believed to have
links with Pakistan’s ISI (Inter-Services In-
telligence agency), and given growing pub-
lic fury over encroachments on the coun-
try’s sovereignty, the tension is unlikely to
go away. Even the one potentially hopeful
development this weekreports of Ameri-
can-backed secret talks between the Af-
ghan Quetta Shura Taliban and the govern-
ment of Hamid Karzaicould cause new
strain if Pakistan reacts badly to being left
out. A breakdown in relations between
America and Pakistan is a real and danger-
ous possibility. 7
America and Pakistan
On the brink
Closing the border to NATO trucks is a
sign of a fracturing relationship
L
AME, toothless and 80 years old, Haji
Beardad is not exactly imposing. Yet the
American soldiers in the northern Arghan-
dab valley in Kandahar province court him
assiduously, promising a school and a
mosque for his village of Kuhak. For Haji
Beardad, frail as he looks, is an important
ally. Since he told the Americans that his
people would co-operate with Afghan se-
curity forces and keep watch for outsiders,
attacks in Kuhak have dropped sharply.
I’ve told everybody in the village to report
if someone comes to visit or we’ll have
him arrested, he says.
Nagahan, a village west of Kuhak, even
has a local militia to keep the Taliban out,
in exchange for American promises of de-
velopmentand sometimes plain cash.
We’re paying them o, says Captain Da-
vid Ahern of Alpha company, 1st battalion,
66th armoured regiment. Violence in Na-
gahan has also dropped sharply.
The Arghandab valley, a staging-post
for insurgents attacking the city of Kanda-
har to the south, is a test of the West’s new-
ish strategy in Afghanistan. The province
gave birth to the Taliban, who ran the val-
ley until recently. The surge of American
troops reached the valley earlier this year.
Now, after a summer of the heaviest ght-
ing since 2001, it is swarming with Ameri-
American troops in Afghanistan
The Petraeus
strategy up close
ARGHANDAB DISTRICT, KANDAHAR
Slow and bloody nation-building in
Kandahar province
SLEEP IS NOT A PERK.
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can provide, we’ve committed to putting flat bed seats in all international BusinessElite®
cabins across our wide-body fleet. Not recliners, not angled lie-flats – fully horizontal beds
that let you sleep the way you do at home. Try them now to London-Heathrow, Sydney,
Johannesburg, and Dubai, and look for them on all of our long-haul flights soon.
DELTA.COM
60 Asia The Economist October 9th 2010
2
1
can and Afghan troops, with a chain of
outposts and checkpoints along the valley.
Insurgent activity is on the wane, though
commanders concede that this may reect
the usual winding down of the Afghan
ghting season in September.
As the villages of Kuhak and Nagahan
show, regular patrolling by American and
Afghan forces, coupled with an under-
standing with elders who are ready to
stand up to the Taliban, can yield results.
But these leaders are hard to nd. In many
places the locals are not keen. Even if they
do not support the insurgents, as many ap-
pear not to, they may be too afraid to co-
operate with the allies. Some have been
beaten or executed by the Taliban. In the
village of Pir Paymal, we thought we were
making headway. Then they received
some threats and now they’re scared
again, shrugs Sta Sergeant Anthony To-
masello of Bravo company, only a few
miles south-east of Kuhak.
In some areas no locals are left because
the Taliban have scared them away. What
typically remains is a cluster of aban-
doned houses and a mineeld of booby
traps and bombs, scattered on roads and in
the elds among empty villages. This ter-
rain is a soldier’s nightmare: orchards and
elds parcelled into the tiniest plots by irri-
gation canals in which the only way to get
around is on foot, chasing the ghosts of an
enemy who almost never shows himself.
Because of the threat of mines, it can take
four hours to cross a kilometre.
Despite their success with the occasion-
al village elder, the Americans have been
taking a pounding. Bravo company has
suered a staggering 28 casualties in two
months, though luckily nobody has been
killed. By the end of September things
were so bad that the 1st battalion had to
launch another operation to sweep clean
an area it had supposedly held for months.
We haven’t made much of a dent, admits
Sergeant Tomasello.
The coming winter calm may give them
some breathing space. I only need one or
two villages like Kuhak in every company
sector for people to see the benets of
peace and development, and to want to
have it too, says Lieutenant-Colonel
Rodger Lemons, the commander responsi-
ble for most of the valley. But there is no
way to tell whether this will happen until
next summer, when ghting begins anew.
Until then, the Americans are left strug-
gling to rebuild the valley’s destroyed tri-
bal structure by getting local elders to work
with the state administration and the
edgling security forces. This is an under-
taking of breathtaking audacity, as the al-
lies admit. To be sure, there are signs that
local government is coming back to life,
though there are too few civil servants
who are suciently qualied and brave.
Meanwhile, the Americans must plug the
holes themselves. 7
M
OUNT EVEREST is singing for joy
and the Brahmaputra River swirl-
ing with happiness. Or so says an ocial
Chinese newspaper (using the Tibetan
names, Qomolangma and the Yarlung
Tsangpo). After much delay, China has
started to extend its controversial railway
line in Tibet that will draw more tourists to
the mountain and boost trade with South
Asia. How happy the outcome will be is
not so clear.
Planning for the 253km (157-mile) line
from the Tibetan capital, Lhasa, to the re-
gion’s second city, Shigatse, began in 2002,
four years before Lhasa itself was connect-
ed to China’s railway network. The au-
thorities appear not have been deterred by
the problems that the railway brought to
Lhasa. A tourism boom and a ood of im-
migrants from China’s interior contributed
to an explosion of unrest among embit-
tered Tibetans in March 2008. The launch
ceremony in Lhasa of the $2 billion exten-
sion on September 26th was celebrated by
dancing children in elaborate Tibetan cos-
tumes. Chinese television said the line
would be of great signicance for the
strengthening of ethnic unity.
Like the route to Lhasa, which crossed
the highest terrain of any railway in the
world, the single-track extension will in-
volve considerable technical diculties.
Nearly half of it will go through tunnels or
over bridges (96 of them). It will cross areas
prone to earthquakes, landslides and sand
storms. Whereas the line to Lhasa had to
traverse unstable permafrost, the new one
will be challenged by geothermal elds
with hot springs. All this at an oxygen-
starved altitude of 3,550-4,000 metres.
The railway will make it easier to reach
Mount Everest, which can expect to see a
lot more tourists eager to be photographed
in front of the world’s highest peak (Shiga-
tse is also due to open an airport soon, Ti-
bet’s fth for civilian use). In 2007 the Chi-
nese side of the mountain recorded 27,476
visits by Chinese tourists, almost twice as
many as in 2006, after the new rail service
to Lhasa had opened. Environmentalists
are worried.
So are the Indians. The government in
Delhi has been nervously watching Chi-
na’s build-up of infrastructure in Tibet. The
extension to Shigatse, besides facilitating
military movements near China’s border
with India, is likely to boost trade with Ne-
pal, where the two giants are vying for in-
uence in a power struggle that is still go-
ing on. China has long-term plans for more
extensions of the line, to Nyalam on the
border with Nepal and to Dromo near
Bhutan and the Indian state of Sikkim. Ne-
Railways in Tibet
Mount Everest is
singing for joy
beijing
Everyone else is worried
Shadows over Qomolangma
62 Asia The Economist October 9th 2010
2
South Korea’s kimchi crisis
Of cabbages and Kims
I
N SEOUL, the South Korean govern-
ment is staring nervously across the
border, wondering about the succession
under way in North Korea. The city is
also preparing for a G20 summit in No-
vember. But the word on everyone’s lips
is cabbage. The price of this humble
vegetable, which forms the basis of
kimchi, the Korean national dish, is soar-
ing. Everyone from the president to the
commonest crook and blogger is getting
in on the act.
It is hard to exaggerate the importance
to Korean life of kimchi, which is usually
made of fermented cabbage. Its presence
at every meal, as well as its health bene-
ts, give it an almost religious status. It is a
national symbol, and the one food item
that (in an entirely unscientic poll un-
dertaken by The Economist) a majority of
Koreans cannot live without.
It is unfortunate, then, that one head
of cabbage can now cost over 11,000 won
($10), more than pork and up from 2,000-
3,000 won a year ago (see chart). Kimchi
is now being dubbed keum-chi, the rst
syllable being Korean for gold.
Such is the clamour for the stu that
when the municipal authority of one
rural town announced that it would sell
cheap packets of cabbage in brine, its
website was inundated with inquiries
and crashed. Last week a group of men
was arrested for trying to steal 400 cab-
bages in rural Gangwon province.
Apoor harvest brought on by bad
weather was the original culprit, but
with prices soaring, hoarding may also
be responsible. Year-on-year ination
jumped from 2.6% to 3.6% between Au-
gust and September, pushed up by cab-
bage’s new status as the Ferrari of vegeta-
bles. Annual cabbage-price ination is
now 400% in Seoul, say ocial statistics.
Normally, Koreans serve home-grown
kimchi as a matter of honour. But people
are now looking abroad for their x,
sparking a debate about the suitability or
otherwise of dierent countries’ cab-
bages. Many Koreans think Chinese-
grown agricultural produce is unsafe, but
they are having to swallow their pride
about that. President Lee Myung-bak says
he will be getting his personal stash from
Western producers, earning him compar-
isons to Marie-Antoinette from South
Korea’s numerous and critical bloggers.
His administration has announced the
temporary lifting of taris on imported
cabbages, in advance of the traditional
kimjang season, in which kimchi is pre-
pared for the winter.
The country has not yet seen rioting in
the streets, as happened in Mexico’s
tortilla crisis of 2007. Nor are trenchcoat-
clad men whispering down dark alleys,
psst, want some cabbage? However,
Korea’s kimchi crisis is a worry, not just
for cabbage-munchers but policymakers.
Food-price inationas in much of the
worldis a serious matter.
seoul
Forget mad dictators. The price of cabbage is what really worries Koreans
Going through a bad patch
Source: Korea Price Research Centre
Cabbage price in Seoul, ’000 won per 2.5kg
S O N D
2009
J F M A M J J A S
2010
0
2
4
6
8
10
12
pal wants the railway extended to Kath-
mandu, which India fears would give Chi-
na more clout in a country India sees as
part of its sphere of inuence. Another
proposed line, from Lhasa east to Nyingchi,
would bring the network close to the Indi-
an state of Arunachal Pradesh, which most
of China claims.
Tibetans might have mixed feelings too.
The rail link to Lhasa brought dispropor-
tionate benets to ethnic Han Chinese
whose language and culture enabled them
to take quicker advantage of the Han tou-
rist inux. Tibet Business News said the ma-
jority of traders in Shigatse were migrants
from beyond Tibet. It quoted a woman
from neighbouring Sichuan Province say-
ing that the railway would cut her costs of
doing business in Shigatse by half. Expect
more like her to come. 7
F
INALLY, Delhi dazzles, gushed the
front page of the Times of India on
October 4th, the day after the opening cer-
emony of the Commonwealth games,
which the Indian capital is hosting until
October 14th. Spectacular though the
show undoubtedly was, not everybody
was starry-eyed. Spectators booed Suresh
Kalmadi, head of the organising commit-
tee, as he made his welcoming speech.
Cracks later appeared in the running
tracks. And Australian ocials com-
plained that their athletes had been
treated like cattle as they were forced to
endure an hour-long wait in a stiing tun-
nel before the ceremony.
After a shambolic prelude to the games,
the opening extravaganza, a mostly well-
organised display of Indian showman-
ship, was unsurprisingly hailed as a turn-
around. Days before, Delhi seemed to be
heading towards humiliation. Some ven-
ues were unnished, a footbridge col-
lapsed and rooms for athletes were found
to be lthily uninhabitable. Many of the
problems were blamed on corruption,
with Mr Kalmadi himself among the ac-
cused. By the time the games kicked o, the
city looked in better shape, though bird
droppings were found in the swimming
pool and the scales used to weigh boxers
had added a couple of kilogramsenough,
apparently, to disqualify competitors.
More worrying, the 60,000-strong
crowd that gathered for the glitzy opening
ceremony seemed to melt back into the
city, perhaps never to return. Many early
events were said to have featured more
participants than observers. This was per-
haps partly because so many star athletes
had pulled out, citing security concerns.
With 100,000 security personnel de-
ployed in the city centre, and lengthy secu-
rity checks at each event, their worries
may have been overstated.
There were memorable high points in
the early days, including a rousing recep-
tion for athletes from India’s arch-rival,
Pakistan, as they marched into the stadi-
um. There were also nice comic touches,
including Mr Kalmadi’s description of the
heir to the British throne (who opened the
games) as Prince Diana.
But however smoothly the games pro-
ceed in the coming days, they have already
cost India dear, from the $3 billion that the
government says it has spent to the esti-
mated 100,000 slum-dwellers who have
lost their homes to bulldozers. In a letter
also on the front page of the Times of India
before the opening ceremony, Azim
Premji, head of Wipro, one of India’s larg-
est software rms, put the true cost of the
games at $6 billion (way over budget) and
asked pointedly: Is this drain on public
funds for the greater common good? In
the rst week of events, India may have
avoided humiliation but it has not provid-
ed a convincing answer to that question. 7
The Commonwealth games in Delhi
At least they
started
DELHI
But has India got its priorities right?
I
F A club is judged by how fast its membership grows, then
ASEM, the Asia-Europe Meeting, must be counted a runaway
success. Its rst summit in Bangkok in 1996 was attended by 25
countries. Its eighth in Brussels this week attracted no fewer than
46, as well as representatives of the European Union and the As-
sociation of South-East Asian Nations (ASEAN). Size, however, is
not everything. Many who took part in the Brussels summit la-
mented its failure to achieve ASEM’s founding goal a new com-
prehensive Asia-Europe Partnership. The consensus was also
that this is Europe’s fault. Both ideas are questionable.
The charge-sheet of alleged European crimes is a familiar one,
albeit rewritten with fresh evidence. There is the arrogance of the
EU’s lecturing Asia over human rights. There is Europe’s failure to
grasp that it is in terminal decline and must cede to a thrusting
Asia some of the space that European countries occupy in the glo-
bal institutions set up after the second world war. A test-case dis-
cussed in Brussels was European over-representation on the
board of the IMF. The oer to share two of Europe’s eight seats
hardly seemed to grasp this nettle.
Third is Europe’s inability to speak with one voice, and the
ability of national interest groups to hijack policy. At an EU sum-
mit in September, the Europeans agreed to help Pakistan after its
recent devastating oods by oering preferential taris for its tex-
tile exports. But this had to be watered down after objections
from France, Italy, Poland and Portugal.
The reforms set in train by the EU’s Lisbon treaty to bring great-
er coherence to European foreign policy seem to many Asian
eyes to have made things worse. They have also given rise to a re-
lated complaint, that the EUis too preoccupied with its own inter-
nal workings to notice that it is losing friends and failing to inu-
ence people. Kishore Mahbubani, a Singaporean former
diplomat who is now dean of the Lee Kuan Yew School of Public
Policy, put this trenchantly in an article in Time in March: Europe
just doesn’t get it. It does not get how irrelevant it is becoming to
the rest of the world. He blamed Europe’s obsession with re-
structuring its internal arrangements.
It seems odd, then, that one gesture the EUhas made towards
getting more involved in Asian aairs has been rebued. This is
its aspiration to join yet another regional talking-shop, the East
Asia Summit. This groups the ten members of ASEANwith Aus-
tralia, China, India, Japan, New Zealand and South Korea. Russia
and America are to join next year. The group has the potential to
become one of the more important of the plethora of forums ll-
ing the calendars of Asia-Pacic leaders.
EUmembership was at rst held up for technical reasons, be-
cause one condition was to sign the Treaty of Amity and Co-op-
eration with ASEAN, something open only to countries, not or-
ganisations. That obstacle has been removed. But still ASEAN
refused to allow any mention in the closing ASEM chairman’s
statement even of the EU’s aspiration to join. The feeling, appar-
ently, is that the EU has not done enough to deserve the honour.
For the EU’s critics, its own summit in September was a good
example of its failings. Called to give new momentum to the un-
ion’s external relations, it was instead overshadowed by a row
with France over the expulsion of Roma immigrants. So it com-
bined evidence of both hypocrisy over human rights with the
EU’s habitual navel-gazing. This belies the summit’s conclusions,
which aspired to make the EUan eective global actor, ready to
share in the responsibility for global security and to take the lead
in the denition of joint responses to common challenges.
All daydreams, at least for now, says Shada Islam of the
European Policy Centre, a Brussels think-tank. She agrees with
ASEANthat the EUis not ready yet for a seat at the grand-strategy
table. But this may not be a fair benchmark by which to measure
the state of EU-Asian relations. Trade, its bedrock, is thriving. Be-
tween the EUand Asian ASEMmembers it increased by over 25%
in the rst half of 2010 compared with the same months in 2009.
And China, at least, seems to have decided that Europe and its
currency are worth saving, making investments in Spain and in
Greece. Stopping in Athens on his way to the ASEMsummit, Wen
Jiabao, the Chinese prime minister, promised more support. Yet
this may in part be a tactical manoeuvre to deect criticism from
Europe and America over the level of China’s currency and, in
general, to be nicer to Europe at a time when relations with Amer-
ica and Japan have been rocky.
China’s friend-in-need sympathy to the EU’s stricken econo-
mies seems in sharp contrast to the harangues to which some of
its ocials and academics were subjecting the EUjust a year ago.
But in fact both approaches reect a desire to see a reasonably co-
hesive EU as well as a viable euro. Asian expressions of frustra-
tion with the EU often seem to betray an impatience with the
pace of European integration that ignores the diculty of the pro-
cess. It is also the sort of interference in other countries’ internal
aairs they rail against when directed towards Asia.
Ameeting too many?
In this context, ASEM, which is often portrayed as a rather desper-
ate measure by Europeans to cling to their vestigial Asian inter-
ests, seems more like an Asian drive to engage Europe. It does at
least provide a venue for meetings. Naoto Kan, Japan’s prime
minister, for example, attended in the apparentand realised
hope of bumping into Mr Wen and beginning to patch up rela-
tions. There are plenty of other forums in the coming weeks
where they could also have met. ASEMhas yet to prove its neces-
sity. But to suggest that relations between Europe and Asia are do-
ing all right and do not need an elaborate, articial multilateral
process is heresy. Easier just to bash the EU. 7
And never the twain?
Asians and Europeans both beat up the European Union for its failures in Asia. Give Brussels a break
Banyan
Economist.com/blogs/banyan
The Economist October 9th 2010 Asia 63
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Also in this section
68 South Africa’s women doing better
70 Ominous bombings in Nigeria
70 Measuring African governance
S
ANCTIONS imposed by the United
States have long made it a bother to use
credit cards in Iran. As a convenience to
visitors annoyed by having to lug wads of
cash, Iran’s savvier carpet dealers and
hoteliers have evaded the blockade by col-
lecting credit-card charges overseas, in
places such as Dubai, and then wiring the
funds to their local accounts.
That neat trick has now grown trickier.
Complying with recently tightened inter-
national sanctions, nancial regulators in
the United Arab Emirates (UAE), which in-
cludes Dubai, have frozen dozens of Irani-
an bank accounts and clamped strict con-
trols on currency transfers to the Islamic
Republic. The sudden squeeze on foreign-
currency supplies, which also hit Dubai’s
large and lucrative merchandise re-export
trade with Iran, sent Iran’s rial, which had
held steady against the American dollar
for years, into an abrupt 15% plunge late last
month. Jittery citizens mobbed Tehran’s
currency dealers, desperate to buy dollars
before another fall.
Iran’s central bank soon intervened, in-
jecting enough dollars to steady the mar-
ket. Yet the brief panic revealed that, for all
the bluster of their leaders, ordinary Irani-
ans are increasingly worried and indeed
hurt by sanctions. These now take many
forms, from an outright ban on the import
of Persian carpets to America that took ef-
fect last month to the targeting of individ-
ual ocials for alleged human-rights
abuses, the stopping of Iranian operations
by big multinational rms and a growing
reluctance by shipping and insurance com-
panies to service Iran-bound cargoes.
Even taken together, the sanctions are
unlikely to bring the world’s fth-biggest
crude-oil exporter to its knees. The loop-
holes remain big enough, and the attrac-
tion of Iran’s 75m-strong market strong
enough, to keep goods and money ow-
ing. Although South Korea joined Japan
last month in slapping sanctions on a
range of Iranian banks and rms, bringing
it into line with other American allies, it re-
mains keen to protect trade with Iran that
topped $10 billion last year, so it quickly
signed a deal to let Korean and Iranian
traders settle accounts via special facilities
in two Korean banks and in Korean curren-
cy. The Asian powerhouse, China, sees no
need for such sleight of hand, and has rap-
idly expanded its share of Iran’s market, as
has neighbouring Turkey.
Yet the sanctions, stiened in June by a
fourth round of UN Security Council mea-
sures intended to punish Iran for its nuc-
lear ambitions, are inexorably adding to
the cost and hassle of doing business. Al-
most all the biggest international traders in
rened petroleum products, for instance,
have stopped dealing with Iran, forcing the
country to rely on costlier small-scale over-
land shipments for much of the petrol that
it still has to import because of underin-
vestment in rening.
The sanctions have also stemmed the
ow of much-needed foreign investment
and skills, particularly to the energy sector
that accounts for 80% of Iran’s export earn-
ings. In recent months ve large European
oil companies that have long kept toeholds
in Iran, in the hope of one day taking ad-
vantage of its vast unexploited potential,
especially in natural gas, have promised to
pull out for good. Inpex, Japan’s biggest oil-
exploration rm, says it is likely to suspend
operations in Iran. In June South Korea’s
GS Engineering and Construction can-
celled a $1.2 billion gas-processing project.
Largely as a result of such setbacks, Iran’s
oil ministry is unlikely to hit its targets of
raising oil-production capacity by 35% by
2015 and launching exports of liqueed
natural gas, concludes a recent report by
Nomura, a Japanese stockbroker. Instead,
oil output is likely to fall by 15% and exports
by as much as 25%.
None of this has dented the exuberance
of Mahmoud Ahmadinejad, Iran’s presi-
dent, who recently repeated his prediction
that capitalism is doomed. Instead he has
trumpeted minor achievements, such as a
free-trade deal with neighbouring Arme-
nia and an agreement to resume direct
ights between Iran and Egypt after a 30-
year hiatus, as signs of diplomatic success.
Iran’s foreign-currency reserves, he insists
without revealing gures, can keep the rial
steady for years to come
Perhaps the president is right to believe
that foreign challenges are not Iran’s big-
gest worry. After crushing its reformist op-
ponents, his conservative faction has bro-
ken out in increasingly rancorous internal
wrangling. The biggest looming issue is Mr
Ahmadinejad’s plan to slash consumer
subsidies that cost his government $70 bil-
lion-100 billion a year, a quarter of GDP.
Already lumbered with feeble economic
growth and high unemployment, Iranians
now face the prospect of sharp rises in
prices of food, fuel and transport. The com-
ing winter looks set to be harsh. 7
Iran’s economy
Sanctions begin to bite
Middle East and Africa
President Mahmoud Ahmadinejad’s regime may be more vulnerable to economic
distress at home than to Israeli or American missiles
The Economist October 9th 2010 67
For daily analysis and debate on the Middle East
and Africa, visit
Economist.com/middleeast
Economist .com/africa
68 Middle East and Africa The Economist October 9th 2010
I
N THE latest Mo Ibrahim Index on Afri-
can governance (see box, next page),
South Africa is ranked fourth out of 53 Afri-
can countries for its record on women’s
rights. In the World Economic Forum’s
gender gap index it comes an impressive
sixth out of 134 countries in the world. In
the UNDP’s gender empowerment mea-
sure it also does well, being placed 26th
out of 182 countries. But in the UN’s gen-
der-related development index it is
ranked a poor 129th, again out of 182. Such a
wide discrepancy is not simply because
the various bodies measure dierent
things, but also because the picture of
women in South Africa is so mixed.
In the founding provisions of South
Africa’s 1996 constitution, non-sexism is
given equal billing with non-racialism.
To promote women’s rights in what had
been a predominantly patriarchal society
among whites as well as blacks, the ruling
African National Congress (ANC) has
brought in a slew of laws over the past 16
years, legalising abortion, giving women
equal power in marriage, cracking down
on domestic violence, criminalising sexual
harassment at work, banning all gender
discrimination and providing women of
any skin colour with the same degree of af-
rmative action in education, employ-
ment and politics as blacks, coloureds
(people of mixed race) and Indians. Anoth-
er gender-equality bill is due soon.
On paper South Africa has one of the
world’s most impressive legal arsenals for
protecting women’s rights. But the gap be-
tween principle and practice is often wide.
In some areas, particularly in politics, it
does well. Women played a big part in the
liberation struggle and the ANC has pro-
moted their cause. Women hold 44% of
parliamentary seats, the third-highest pro-
portion in the world, and 41% of cabinet
posts, including many of those often as-
signed to men: defence, agriculture, foreign
aairs, mining, science and technology,
and home aairs. Gill Marcus is the rst fe-
male governor of the central bank. The
Democratic Alliance, the country’s main
opposition party, is headed by Helen Zille.
In other areas, however, women’s pro-
gress has been slower. More than a decade
after the passage of the Employment Equ-
ity Act, which requires companies with
over 50 people to hire and promote wom-
en (as well as blacks and the disabled) in
proportion to their representation in the
population as a whole (52%), white men
still dominate senior management and
company boards in both the public and
private sectors. The Women’s Business As-
sociation says that a fth of the country’s
private-sector boards have no women
(and that only 10% of chief executives and
board chairmen are women). Universities,
where more than half of undergraduates
are now female, have done more, with
women now accounting for 45% of aca-
demic sta. About a quarter of judges are
female.
Although women make up nearly half
the labour force, most are in lower-wage
sectors, particularly domestic service. So
women on average still get less than two-
thirds of a man’s pay packet. Women are
also more likely to be unemployed and to
head the poorest households. The intro-
duction of a child-support grant for chil-
dren up to the age of 15, recently raised to 18,
has helped, but it amounts to only 250 rand
($36) a child each month.
It is in the home, particularly in black
ones, that attitudes have changed least.
There men continue to rule the roost,
sometimes imposing their authority with
drug- or alcohol-fuelled brutality. In its lat-
est world report, Human Rights Watch, a
New York-based lobby, describes the level
of physical and sexual violence against
South African women as shockingly
high. South Africa has one of the highest
incidences of reported rape in the world.
In a study by the World Health Organisa-
tion, fully 40% of South African women
claimed that their rst experience of sex
was non-consensual. South Africa also has
one of the world’s highest murder rates.
The (black) founder of a new women’s-
rights lobby, the Sonke Gender Justice Net-
work, says his biggest challenge is to con-
vince men that abusing women is cultural-
ly unacceptable. But women are some-
times complicit, too. Violence is often seen
as a normal part of male-female relations.
According to recent research by the Centre
for the Study of Violence and Reconcilia-
tion, a Johannesburg-based group, most
black women believe a man has a right to
have sex with his wife or partner whenev-
er he wants. Another study showed that
most black teenagers felt it is ne to force
sex on a girl if you know her or if she ac-
cepts a drink from you.
Traditional customs die hard. President
Jacob Zuma has at least 21 children by at
least ten dierent women, four of whom
he married; he is now engaged to another,
who is pregnant. In certain rural areas
women are still expected to walk a few
paces behind their husbands. In KwaZulu-
Natal thousands of bare-breasted maidens
display their virginal beauty in a dance be-
fore the polygamous Zulu king, Goodwill
Zwelithini. In villages in the eastern Cape
teenage girls continue to be forced into
marriages with older men who treat them
as virtual slaves. Women who do not t
into the community are still sometimes
burned as witches. Lesbians are gang-
raped to cure them of their follies.
The lot of ordinary South African wom-
en is still hard. But it is getting distinctly bet-
ter. And a growing number of them are do-
ing very well. 7
Women in South Africa
Walking several paces behind
Johannesburg
South African women are improving their lot, but it is a struggle
Catching the eye of the Zulu king
“The customer service is amazing. It’s like
nothing I have ever experienced before.”
MIRIAM RACCAH
EXECUTIVE DIRECTOR AND CO-FOUNDER, GIRLS PREPARATORY CHARTER SCHOOL OF NEW YORK
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70 Middle East and Africa The Economist October 9th 2010
An index of African governance
Arum old mix
O
NCE again Africa’s worthiest and
perhaps happiest countries, accord-
ing to Mo Ibrahim’s latest measure of
all-round governance, scrutinising data
gathered for last year, are oshore. Mauri-
tius is the runaway winner, followed by
the Seychelles in second place and Cape
Verde fourth (see table). On the African
mainland, Botswana, with the advan-
tages of ethnic homogeneity, a small
population, diamonds and good leaders,
does best, in third place, with South
Africa, by far the weightiest country in
Africa, fth. At the other end of the scale,
the most wretched land is Somalia, with
Chad, the Democratic Republic of Congo
and Zimbabwe competing for Africa’s
wooden spoon.
There are no big changes in the peck-
ing order. The yardsticks applied by Mr
Ibrahim, a Sudanese-born British tele-
coms magnate and philanthropist, judge
countries on a mix of four main criteria:
safety and the rule of law (looking at
the murder rate and corruption, among
other things); participation and human
rights (that little matter of being able
peacefully to chuck out a bad govern-
ment); sustainable economic opportuni-
ty (including such things as scal man-
agement, free markets and ination); and
human development (in essence,
education and health care).
Some countries do surprisingly well
despite their lack of democracy. Tunisia,
which is run by a dictator but gives its
people a decent life in other respects,
comes eighth; Libya, which has one of
the nastiest human-rights records in
Africa but gives its people loads of wel-
fare, is a respectable 23rd. Others, despite
wealth and civil vibrancy, do notably
badly. Nigeria is down in 40th place and
Angola, though it oozes oil, comes a
dismal 43rd. Two countries favoured by
many development bus, Rwanda and
Ethiopia, do badly because of their dete-
riorating human-rights records: Rwanda
is in 31st place and Ethiopia in 34th.
In regional and religious terms, it may
be noted that Muslim and Maghreb
countries do badly on the democracy
and human-rights index. Green-minded
advocates also think Mr Ibrahim should
think of applying a new criterion for
managing natural resources and tackling
climate change. Urban planning and
innovation could also usefully be mea-
sured. Particularly pleasing, for Mr Ibra-
him and for Africa’s well-wishers at
large, is that governments across the
continent are taking the table seriously.
There is nothing like a bit of naming,
shaming and praising.
Nairobi
From happy islands to the swamps of misery
Laughing or crying
Source: Mo Ibrahim Foundation *2008/09 data
African governance league table 2010*
Rank Best Rank Worst
1 Mauritius 46 Equatorial Guinea
2 Seychelles 47 Central African Rep.
3 Botswana 48 Sudan
4 Cape Verde 49 Eritrea
5 South Africa 50 Zimbabwe
6 Namibia 51 Congo
7 Ghana 52 Chad
8 Tunisia 53 Somalia
A
LL that was left of two cars packed with
explosives was their smouldering
chassis after they had been blown up on
October 1st near Eagle Square in Abuja, Ni-
geria’s capital, while surrounded by unsus-
pecting citizens celebrating the 50th anni-
versary of their country’s independence.
At least 12 people died and dozens were in-
jured in this year’s most worrying act of
political violence. A well-known rebel
group, the Movement for the Emancipa-
tion of the Niger Delta (MEND), which is
most active in the oil-producing south,
claimed responsibility but blamed the gov-
ernment for the deaths, insisting that it had
ignored back-channel warnings given 24
hours before the blasts.
The attacks took place close to President
Goodluck Jonathan, as he was reviewing a
parade a few hundred yards away in front
of invited dignitaries. Shortly before the
bombings he had declared: There is cer-
tainly much to celebrate: our freedom, our
strength, our unity and our resilience.
Such qualities will be sorely needed in
the next few months. The president is
standing for re-election in a poll due on
January 22nd, having acquired the top job
only because his predecessor, Umaru
Yar’Adua, died in May, three years into his
four-year term of oce. Mr Jonathan had
been a fairly lacklustre deputy. Some, espe-
cially in the north, whose people generally
reckon on one of their own having an
eight-year stay as president, dispute his
right to stand and have promised him a
tough ght.
Campaigning may now focus on pro-
posals for new anti-terror laws. The elec-
tion may even be postponed. Ocials
have said they need extra time to compile
accurate voter lists. Since the end of mili-
tary rule in 1999, Nigeria has held several
elections. All of them have been marred by
violence and claims of fraud.
The president says he is determined to
have a clean and peaceful poll. In the im-
mediate aftermath of the recent attack, he
chose a new national security adviser,
completing a reshue of security posts
that began a month ago with the appoint-
ment of new heads of the police, the
armed forces and the intelligence service.
Few Nigerians are sure about whom
they should blame for the bombings.
MEND is a ssile organisation. Some 100
former ghters, including MEND’s former
leader, met the president on October 5th
and said they had nothing to do with the
attack. The group had never hit the capital
before. Yet the government seemed keen to
blame it. Presumably as a result of a re-
quest by the Nigerian government, Henry
Okah, a former MEND leader now living in
South Africa, was arrested in Johannes-
burg. His lawyers denied that he was in-
volved in the attacks.
Meanwhile, in a move that further
muddied the waters, security forces in Ni-
geria detained and questioned Raymond
Dokpesi, a media baron who recently be-
came the chief of sta to Ibrahim Baban-
gida, a northern former general who ruled
Nigeria from 1985 to 1993 and now intends
to stand against Mr Jonathan in the coming
election. Security sources say that Mr Dok-
pesi, who owns a television network and a
shipping line, was implicated by text mes-
sages found on the mobile phone of an-
other suspect but was later released. His ar-
rest particularly upset Mr Jonathan’s
northern opponents.
The attack in Abuja is unlikely to be the
last act of political violence in Nigeria be-
fore the poll. The country’s police say they
foiled a similar attack in September. Secu-
rity at airports has been stepped up. The
episode has made everyone involved in
Nigeria’s steamy politics twitchy. 7
Bombings in Nigeria
Abloody election omen
Alethal bombing gives Nigeria the jitters in the run-up to a momentous poll
October 9th 2010
How to grow
A special report on the world economy
The forces of nature can strike at any time.
Let’s discuss how to plug our defences.
As the Earth’s climate is changing, so are the frequency and intensity of floods and storms. What’s the answer: retreat from
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Plug into www.swissre.com
The Economist October 9th 2010 A special report on the world economy 3
Without faster growth the rich world’s economies will be stuck. But what
can be done to achieve it? Our economics team sets out the options
The next few years could be dened as
much by the stagnation of the West as by
the emergence of the rest, for three main
reasons. The rst is the sheer scale of the re-
cession of 2008-09 and the weakness of
the subsequent recovery. For the advanced
economies as a whole, the slump that fol-
lowed the global nancial crisis was by far
the deepest since the 1930s. It has left an un-
precedented degree of unemployed work-
ers and underused factories in its wake. Al-
though output stopped shrinking in most
countries a year ago, the recovery is prov-
ing too weak to put that idle capacity back
to work quickly (see chart 1, next page). The
OECD, the Paris-based organisation that
tracks advanced economies, does not ex-
pect this output gap to close until 2015.
The second reason to worry about stag-
nation has to do with slowing supply. The
level of demand determines whether
economies run above or below their
trend rate of growth, but that trend rate
itself depends on the supply of workers
and their productivity. That productivity in
turn depends on the rate of capital invest-
ment and the pace of innovation. Across
the rich world the supply of workers is
about to slow as the number of pensioners
rises. In western Europe the change will be
especially marked. Over the coming de-
cade the region’s working-age population,
which until now has been rising slowly,
will shrink by some 0.3% a year. In Japan,
where the pool of potential workers is al-
How to grow
W
HAT will tomorrow’s historians see
as the dening economic trend of the
early 21st century? There are plenty of po-
tential candidates, from the remaking of -
nance in the wake of the crash of 2008 to
the explosion of sovereign debt. But the list
will almost certainly be topped by the dra-
matic shift in global economic heft.
Ten years ago rich countries dominated
the world economy, contributing around
two-thirds of global GDPafter allowing for
dierences in purchasing power. Since
then that share has fallen to just over half.
In another decade it could be down to 40%.
The bulk of global output will be produced
in the emerging world.
The pace of the shift testies to these
countries’ success. Thanks to globalisation
and good policies, virtually all developing
countries are catching up with their richer
peers. In 2002-08 more than 85% of devel-
oping economies grew faster than Ameri-
ca’s, compared with less than a third be-
tween 1960 and 2000, and virtually none
in the century before that.
This rise of the rest is a remarkable
achievement, bringing with it unprece-
dented improvements in living standards
for the majority of people on the planet.
But there is another, less happy, explana-
tion for the rapid shift in the global centre
of economic gravity: the lack of growth in
the big rich economies of America, west-
ern Europe and Japan. That will be the fo-
cus of this special report.
An audio interview with the authors is at
Economist.com/audiovideo/specialreports
A list of acknowledgments and sources is at
Economist.com/specialreports
Withdrawal symptoms
After the stimulus, the hangover. Page 6
The cost of repair
A battered nance sector means slower
growth. Page 14
From hoarding to hiring
Some countries have successfully preserved
jobs. Now they must create new ones.
Page 17
Pass and move
Spain oers a test case for labour-market
reform in Europe. Page 21
Smart work
Faster productivity growth will be an
important part of rich economies’ revival.
Page 22
Abetter way
The rich world should worry about growth-
promoting reforms more than short-term
scal austerity. Page 28
Also in this section
1
4 A special report on the world economy The Economist October 9th 2010
2
1
ready shrinking, the pace of decline will
more than double, to around 0.7% a year.
America’s demography is far more favour-
able, but the growth in its working-age
population, at some 0.3% a year over the
coming two decades, will be less than a
third of the post-war average.
With millions of workers unemployed,
an impending slowdown in the labour
supply might not seem much of a problem.
But these demographic shifts set the
boundaries for rich countries’ medium-
term future, including their ability to ser-
vice their public debt. Unless more immi-
grants are allowed in, or a larger propor-
tion of the working-age population joins
the labour force, or people retire later, or
their productivity accelerates, the ageing
population will translate into perma-
nently slower potential growth.
Calculations by Dale Jorgenson of Har-
vard University and Khuong Vu of the Na-
tional University of Singapore make the
point starkly. They show that the average
underlying annual growth rate of the G7
group of big rich economies between 1998
and 2008 was 2.1%. On current demo-
graphic trends, and assuming that produc-
tivity improves at the same rate as in the
past ten years, that potential rate of growth
will come down to 1.45% a year over the
next ten years, its slowest pace since the
second world war.
Faster productivity growth could help
to mitigate the slowdown, but it does not
seem to be forthcoming. Before the nan-
cial crisis hit, the trend in productivity
growth was at or slowing in many rich
countries even as it soared in the emerging
world. Growth in output per worker in
America, which had risen sharply in the
late 1990s thanks to increased output of in-
formation technology, and again in the ear-
ly part of this decade as the gains from IT
spread throughout the economy, began to
ag after 2004. It revived during the reces-
sion as rms slashed their labour force, but
that boost may not last. Japan’s productivi-
ty slumped after its bubble burst in the ear-
ly 1990s. Western Europe’s, overall, has
also weakened since the mid-1990s.
The third reason to fret about the rich
world’s stagnation is that the hangover
from the nancial crisis and the feebleness
of the recovery could themselves dent
economies’ potential. Long periods of high
unemployment tend to reduce rather than
augment the pool of potential workers.
The unemployed lose their skills, and disil-
lusioned workers drop out of the work-
force. The shrinking of banks’ balance-
sheets that follows a nancial bust makes
credit more costly and harder to come by.
Optimists point to America’s experi-
ence over the past century as evidence that
recessions, even severe ones, need not do
lasting damage. After every downturn the
economy eventually bounced back so that
for the period as a whole America’s under-
lying growth rate per person remained re-
markably stable (see chart 2). Despite a lack
of demand, America’s underlying produc-
tivity grew faster in the 1930s than in any
other decade of the 20th century. Today’s
high unemployment may also be prepar-
ing the ground for more ecient processes.
Most economists, however, reckon that
rich economies’ capacity has already sus-
tained some damage, especially in coun-
tries where much of the growth came from
bubble industries like construction, as in
Spain, and nance, as in Britain. The OECD
now reckons that the fallout from the -
nancial crisis will, on average, knock some
3% o rich countries’ potential output.
Most of that decline has already occurred.
The longer that demand remains weak,
the greater the damage is likely to be. Ja-
pan’s experience over the past two de-
cades is a cautionary example, especially
to fast-ageing European economies. The
country’s nancial crash in the early 1990s
contributed to a slump in productivity
growth. Soon afterwards the working-age
population began to shrink. A series of
policy mistakes caused the hangover from
the nancial crisis to linger. The economy
failed to recover and deation set in. The
result was a persistent combination of
weak demand and slowing supply.
To avoid Japan’s fate, rich countries
need to foster growth in two ways, by sup-
porting short-term demand and by boost-
ing long-term supply. Unfortunately, to-
day’s policymakers often see these two
strategies as alternatives rather than com-
plements. Many of the Keynesian econo-
mists who fret about the lack of private de-
mand think that concerns about econo-
mies’ medium-term potential are beside
the point at the moment. They include Paul
Krugman, a Nobel laureate and commen-
tator in the New York Times, and many of
President Barack Obama’s economic team.
Stimulus v austerity
European economists put more emphasis
on boosting medium-term growth, favour-
ing reforms such as making labour markets
more exible. They tend to reject further
scal stimulus to prop up demand. Jean-
Claude Trichet, the president of the Euro-
pean Central Bank, is a strong advocate of
structural reforms in Europe. But he is also
one of the most ardent champions of the
idea that cutting budget decits will itself
boost growth. All this has led to a passion-
2
Onwards, ever upwards
Sources: US Department of Commerce; BLS; The Economist
US real GDP per person, 2009 $’000
1
2
4
6
8
10
20
40
60
1869 90 1910 30 50 70 90 2009
Log
scale
3
All right for some
Source: The Conference Board *Structural trend

Forecast
GDP per person employed*
% increase on previous year
0
1
2
3
4
5
1970 75 80 85 90 95 2000 05 10

Advanced
economies
Emerging economies
1
Yawning
Source: OECD
*Difference between actual
and potential GDP
Output gap* as % of potential GDP, forecast
7 6 5 4 3 2 1 0 –
Japan
Germany
France
United
States
OECD
Canada
Italy
Spain
Britain
2010 2011
WVgXVe#Xdb
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of 8arclays 8ank FLC, which underLakes US securiLies business in Lhe nane of iLs wholly-owned subsidiary 8arclays CapiLal lnc., an SlFC and FlNPA nenber. ©2010 8arclays 8ank FLC.
All righLs reserved. 8arclays CapiLal is a Lradenark of 8arclays 8ank FLC.
6i7VgXaVnh8Ve^iVadjgldgaYgZkdakZhVgdjcYZmeVcY^c\ndjgh#CenLered on
your business, our inLegraLed approach Lo clienL coverage gives you access Lo a
wide range of experLise across geographies, indusLries and invesLnenL banking
producLs. As a leader in all asseL classes in Lhe Anericas, Asia Facific and EMEA,
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6 A special report on the world economy The Economist October 9th 2010
2
1
ate but narrow debate about scal stimu-
lus versus austerity.
This special report will argue that both
sides are blinkered. Governments should
think more coherently about how to sup-
port demand and boost supply at the same
time. The exact priorities will dier from
country to country, but there are several
common themes. First, the Keynesians are
right to observe that, for the rich world as a
whole, there is a danger of overdoing the
short-term budget austerity. Excessive
budget-cutting poses a risk to the recovery,
not least because it cannot easily be oset
by looser monetary policy. Improvements
to the structure of taxation and spending
matter as much as the short-term decits.
Second, there is an equally big risk of ig-
noring threats to economies’ potential
growth and of missing the opportunity for
growth-enhancing microeconomic re-
forms. Most rich-country governments
have learned one important lesson from
previous nancial crises: they have
cleaned up their banking sectors reason-
ably quickly. But more competition and de-
regulation deserve higher billing, especial-
ly in services, which in all rich countries
are likely to be the source of most future
employment and productivity growth.
Instead, too many governments are de-
termined to boost innovation by reinvent-
ing industrial policy. Making the jobless
more employable should be higher on the
list, especially in America, where record
levels of long-term unemployment sug-
gest that labour markets may not be as ex-
ible as many people believe.
Faster growth is not a silver bullet. It
will not eliminate the need to trim back
unrealistic promises to pensioners; no rich
country can simply grow its way out of
looming pension and health-care commit-
ments. Nor will it stop the relentless shift
of economic gravity to the emerging
world. Since developing economies are
more populous than rich ones, they will
inevitably come to dominate the world
economy. But whether that shift takes
place against a background of prosperity
or stagnation depends on the pace of
growth in the rich countries. For the mo-
ment, worryingly, too many of them seem
to be headed for stagnation. 7
S
OME Americans have always taken the
national debt personally. During the
1940 census (according to the late David
McCord Wright, an American economist) a
housewife was asked if she had a mort-
gage on her home. Yes, she replied. For
$40 billion.
That gure (about 40% of 1940 GDP)
now seems quaint. The federal debt held
by the public was $8.9 trillion in August
2010, or about 60% of GDP. Add to that the
Treasury debt held by America’s public-
pension scheme, and the national debt
reached $10 trillion back in September
2008. The extra digit obliged the national
debt clock near New York’s Times Square
to move its dollar sign to make room.
Many of today’s Americans feel as in-
dignant about the debt as that 1940s house-
wife did. But they are just as proigate as
their government (see chart 4, next page).
Their mortgages and other debts also
amount to around $13 trillion, almost 120%
of their annual disposable income.
The most remarkable thing about that
gure, though, is not how big it is, but that it
is smaller than it was two years ago. For
over 60 years after the second world war,
household debt moved in only one direc-
tion: upwards. Then, in the second quarter
of 2008, it started to fallnot just as a pro-
portion of income, or after allowing for in-
ation, but in everyday dollars and cents.
Between March 1st 2008 and June 30th
2010 households reduced their debts by
$473 billion. Businesses and banks joined
in later. Although the federal debt dis-
played on the Times Square clock is ticking
remorselessly upwards, the true national
debt, including households, banks and
rms, is now lower than it was in the rst
quarter of 2009.
In 2008-09, for the rst time since the
1930s Depression, consumer spending in
real terms fell for two years in a row.
Households are now saving 6% of their
disposable income, compared with just
2.7% in the years before the crisis. Com-
bined with the stockmarket’s tful rallies,
this frugality has helped American house-
holds rebuild some of the wealth washed
away by the recession. Their net worth is
now about 490% of their disposable in-
come, compared with just 440% in the
worst months of the crisis. As a cushion
against a riskier world, American house-
holds will probably try to set aside a stash
of assets worth some 540-550% of their in-
come, according to Martin Sommer of the
IMF and Jirka Slacalek of the European
Central Bank. If that gure is right, their
balance-sheet repairs are currently only
half completed.
Withdrawal symptoms
After the stimulus, the hangover
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8 A special report on the world economy The Economist October 9th 2010
2
1
This new thrift is not conned to Amer-
ica. Household debt is also falling in Spain.
In Britain households saved 6.3% of their
disposable income in 2009 (though less in
the rst half of 2010), compared with 2% in
2008. Nor is the frugality limited to house-
holds. In the wake of the nancial crisis,
companies across the rich world have
been piling up cash. Small rms have been
unable, and many big rms have been un-
willing, to borrow. In Japan and Britain cor-
porate investment fell by about a quarter
from peak to trough. The pace of invest-
ment has recovered somewhat, but com-
panies are still not rushing to add new fac-
tories and machinery when so much of
their existing capacity lies idle.
All told, across the OECD households
and businesses are forecast to spend $2.6
trillion less than their incomes this year,
the equivalent of 7% of GDP. This follows
another huge private-sector surplus, of
7.2%, the year before. In 2007, by contrast,
the rich world’s households and business-
es ran a combined decit. This astonishing
rise in private saving is the main reason
why the recession was so deep and the re-
covery is so muted. After two years of priv-
ate-sector austerity in the rich countries,
the biggest macroeconomic controversy
now facing their governments is whether
to embrace some austerity of their own.
Squirrel it away
Squirrels save by burying nuts in the
ground. In sophisticated economies, peo-
ple save by amassing nancial claims on
someone else. Savers therefore need bor-
rowers. In textbook economics house-
holds save and banks use those savings to
lend to rms. For both households and
rms to run a surplus, someone else must
run a decit. That someone else could be a
foreign nation. But none of the economies
outside the OECD is big enough to absorb
the excess private saving of the rich world.
China would have to run a current-ac-
count decit of over 40% of GDP to oset a
$2.6 trillion surplus. Even if the task were
spread across all the Asian countries out-
side the OECD (of which Japan and South
Korea are members), they would have to
run decits of over 25% each.
The only other possibility is govern-
ments. That is why the rich world’s private
surpluses have been mirrored by equally
vast public decits. Last year the OECD’s
governments ran a combined decit of
7.9% of GDP, and this year it is likely to be
only marginally less. Among the big econ-
omies, Britain’s decit will be the largest, at
11.5%, with America not far behind. In an
accounting sense, these eye-popping de-
cits are simply the counterpart of private
surpluses. In an economic sense, their re-
markable increase is less the outcome of
government proigacy than private thrift.
According to the IMF, when the nal
bill for the budgetary cost of the crisis is
calculated a few years hence, the unpopu-
lar bank bail-outs and scals splash-outs
will account for less than 30% of it. The rest
will be down to the crisis itself, which
squeezed revenues and reduced growth.
Regardless of its source, borrowing on
this scale plays havoc with the public -
nances. According to the IMF, gross gov-
ernment debt in the world’s big rich econo-
mies reached 97% last year and is rising at
its fastest pace in modern history. By 2015
the IMF expects them to have a combined
debt burden of 110% of GDP, against less
than 70% in 2007.
Earlier this year fears about soaring
public decits and debt in some countries
seemed about to bring on another nan-
cial meltdown, thanks to Greece’s brush
with default. More than 200 years ago
America’s rst treasury secretary, Alex-
ander Hamilton, warned of the extrava-
gant premium countries must pay if their
credit is questionable. This spring
Greece’s credit was severely questioned.
The premium, or spread, it had to pay on its
bonds, relative to German bunds, rose ex-
travagantly, from about 2% at the start of
the year to almost 10% at the height of the
crisis in May. Spreads on Irish, Portuguese
and, to a lesser extent, Spanish debt also
spiked. These fears re-emerged in Septem-
ber, particularly in Ireland.
Greece had to be bailed out by the EU
and the IMF. Along with other wobbly
euro-zone borrowers, it was forced to
make radical budget cuts. But the Greek cri-
sis had a palpable eect even on countries
under no obvious pressure from nancial
markets, especially Britain, where the new
coalition government announced tax in-
creases and dramatic cuts in spending. Ac-
cording to the Institute for Fiscal Studies,
these are even tougher than the cuts im-
posed on Britain by the IMF in 1976.
In America bond yields are near record
lows and the economy is slowing, but the
government’s eorts to introduce a second
stimulus have foundered (though it is now
trying again). Much of the political debate
in Washington, DC, is about the scale of s-
cal tightening; in particular, whether to al-
low any of the Bush tax cuts to expire at the
end of this year, as scheduled.
Even though the rich world’s econo-
mies continue to operate below capacity,
in 2011they are heading for what is likely to
be their biggest collective budget squeeze
in at least four decades. The appetite for
government releveraging is coming to an
end before private deleveraging is over.
Too soon to tighten?
Is this a mistake? Economists are deeply di-
vided. Many Keynesians think the answer
is yes. They fret that the costs and risks of
higher public debt are wildly exaggerated,
and that as long as households are cutting
back and economies are operating so far
below their potential, governments
should not try to trim public decits.
Nonsense, say the advocates of auster-
ity, pointing to the ckleness of nancial
markets and to the dangers government
debt poses to long-term growth. Many
claim that scal austerity could even boost
growth in the short term. By reducing the
spectre of massive government debt, it
would lift private condence and unlock
spending. Entrepreneurs would be em-
boldened to invest and households might
feel freer to spend, without fear of future
tax increases to help repay the debt.
Keynesians are right that decits, so far,
have been more a symptom than a source
of economic distress. The scal swing un-
doubtedly helped to contain the damage
from the crisis. Without it the private sec-
tor’s determination to save would have de-
pressed spending across the economy
even further. That would have caused a
correspondingly steeper fall in incomes,
making it harder for households to repair
their balance-sheets.
Nor are most rich countries anywhere
close to the limits of what they can borrow.
A new study from the IMF suggests that
most advanced economies still have plen-
ty of scal space. In America and Britain,
for instance, the fund’s economists calcu-
4
Chipping away at the mountain
Source: Federal Reserve
US non-government debt, $trn
2004 05 06 07 08 09 10
0
10
20
30
40
50
Households Business Financial
sector
10 A special report on the world economy The Economist October 9th 2010
2
1
late that public debt will not reach its abso-
lute limit until it hits 160% of GDP or more,
far higher than its current levels. The wolf
is not at the door.
But termites are in the woodwork, as
Charles Schultze, a former White House of-
cial, once put it. Governments have big
underlying structural budget gaps that will
not be lled by economic recovery. Rising
health-care and pension spending will put
relentless pressure on government debt.
Eventually the rich world’s economies will
return to full employment, and when they
do, public borrowing will crowd out priv-
ate investment and hurt growth.
How much damage can these termites
do, and when does it get serious? Carmen
Reinhart of the University of Maryland
and Ken Rogo of Harvard University
have examined the eects of a couple of
centuries of sovereign debt. Their verdict is
that public debt does little discernible
harm until it reaches about 90% of a coun-
try’s GDP, but then the eect on growth
can be sudden and big.
So far and no farther
Other scholars reach somewhat grimmer
conclusions. Looking at 99 countries since
1980, Mehmet Caner and Thomas Grennes
of North Carolina State University with
Fritzi Koehler-Geib of the World Bank
identied a threshold of 77% of GDP. Every
member of the G7 will breach that limit
this year. If the authors have got it right,
these debts will knock half a percentage
point o the collective growth rate of the
G20’s rich members.
The IMF says governments should as-
pire to cut their debt ratios back to 60% by
2030. To do so they will have to perform
some scal heroics. Their budgets will
have to swing from a projected underlying
primary decit of 4.9% of GDP in 2010 (see
chart 5) to a surplus of 3.8% by 2020 and
stay there for a decade, even as ageing pop-
ulations add 4-5% of GDP to their scal
costs. In America, Britain, Greece, Ireland,
Japan and Spain a swing of 9% or more of
GDP is required.
Given the scale of the task, it seems best
not to put it o for too long, especially
since economies are no longer shrinking,
just growing slowly. Numerous studies
suggest that consolidation based on
spending cuts is more likely to stick, and
will do more to boost medium-term
growth, than measures involving tax in-
creases. Cutting public-sector wages and
welfare payments is better than cutting
government investment.
Putting in place reforms that slow
down the rise in pension and health-care
spending ought to be a particular priority,
since the net present value of govern-
ments’ promises to the elderly dwarf to-
day’s debts. Raising the retirement age is a
particularly good idea because it simulta-
neously cuts governments’ liabilities and
boosts future growth and tax revenue as
people work longer. If revenues must be
raised, taxes on consumption and proper-
ty are less harmful to growth than those on
income or saving.
By these standards most rich-country
scal-consolidation plans score reason-
ably well. Britain’s government plans to
squeeze three-quarters of its budget ad-
justment from spending cuts. In Greece the
share is 51% and in Spain 62%. Several Euro-
pean countries are raising their statutory
retirement ages, albeit in small steps.
Where there have been tax increases, they
have mostly been on VAT. By comparison,
America’s scal plansa rise in taxes on in-
come and capital if the Bush cuts expire,
and no progress on reforming pensions or
health-care spendingare much worse.
However, the advocates of austerity
tend to exaggerate the benecial eect on
short-term growth of such contractions
(even if properly designed). Alberto Ale-
sina and Silvia Ardagna of Harvard Uni-
versity have identied many examples of
economies that expanded even as their
decits were squeezed through spending
cuts (though not tax increases), yet a study
in the IMF’s latest World Economic Outlook
shows that in some of their examples the
decits were not really squeezed.
For instance, in 1998 Japan’s govern-
ment injected over ¥24 trillion into Japan
National Railway; in the following year it
did not. Between those two years its bud-
get balance appeared to improve by about
4.8% of GDP even though it had neither cut
spending nor raised taxes. Similarly, in 1995
Germany’s government took on east Ger-
man housing and industrial debts worth
about 6.8% of GDP. The following year its
budget seemed to improve dramatically
after that one-o eventeven though there
had been no squeeze.
The IMF’s researchers looked at coun-
tries that actually raised taxes or cut spend-
ing and found no evidence that such mea-
sures boosted growth. In fact, they reckon
that a scal contraction worth 1% of GDP
typically cuts output by about 0.5% after
two years. To cut public debt below 60% by
2030, as the IMF advocates, America
would have to endure that kind of scal
pain every year for ten years.
Ration the morphine
Fiscal tightening hurts less if oset by mon-
etary easing. Central banks typically cut in-
terest rates and the currency weakens
when governments tighten scal policy.
These lower interest and exchange rates
roughly halve the pain of budgetary re-
pairs, the IMF calculates.
But governments cannot expect as
much monetary morphine this time. If
households are paying back debt, cheaper
credit may provide less of a stimulus than
at other times. Since so many governments
are tightening at once, and not every coun-
try’s currency can cheapen against every
other’s, they may not benet from much of
a depreciation.
Moreover, central banks cannot cut
their policy rates by as much as govern-
ments might like. Rates in America, Britain
and Japan are already at or near zero. In
such cases a scal contraction of 1% of GDP
is more damaging to growth, knocking
about 1% o output in the following year,
according to the IMF’s researchers.
This lack of leeway is a real constraint
on recovery. But although central banks
cannot lower their policy rates any further,
they are not impotent. They can, and do,
ease monetary policy in other ways. Some
have tried to steer inationary expecta-
tions with words. The Fed has promised to
keep rates exceptionally low for an ex-
tended period. Several have swelled their
balance-sheets by printing money to buy
assets, such as government bonds, a pro-
cess known as quantitative easing.
The biggest easer, relative to the size of
the economy, has been the Bank of Eng-
land. Since March 2009 it has bought al-
most £200 billion-worth of government
bonds, or gilts, equivalent to 14% of GDP, as
well as a smattering of corporate bonds.
The Bank’s research shows that its pur-
chases of gilts raised their price, as well as
5
Recovery position
Source: IMF
Advanced economies, general government
balances, % of GDP
10
8
6
4
2
0
2
+

200506 07 08 09 10 11 12 13 14 15
Cyclically adjusted primary balance
Overall balance
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In a severe economic annum with low global morale, Egypt’s
performance and staying power constituted an upbeat
exception. Egypt continues to bustle with economic activity;
over the 2009/2010 fiscal year, Egypt yielded foreign direct
investment (FDI) inflows worth $6.8 billion. In addition, Egypt
had its economic outlook upgraded by Moody’s and was
heralded as the best destination for FDI in North Africa and
second best in the whole continent by FDI Intelligence. Even
if previous growth rates of around 7% were not matched, this
year’s 5.3% is still highly commendable.
The lure of opportunity has been so strong that private
sector contributions exceeded 59% of total investments,
and 11.6% of GDP, while newly established companies
were 1,227 higher than the average of the past four years.
The government is currently promoting 46 mega projects
under the public-private partnership (PPP) initiative with a
total investment cost of $16 billion. These focus on infra-
structure (railroads and ports), utilities (water and waste
water treatment plants), tourism, technological industries,
and the Medical City in Alexandria.
So how has this nation of over 80 million citizens man-
aged to maintain high tides of interest during a worldwide
economic slump? Successful economic reform fostered the
Arab world’s largest and most skilled workforce, a relatively
well diversified economy and a robust external position that
have made it a stable stepping stone for doing business
throughout the Middle East and North Africa.
Regaining its status as an influential axis of advancement
in the MENA region, Egypt constructed a road linking Upper
Egypt Governorates (Assiut, Sohag, and Qena) with the Red
Sea area. Funded by the Ministry of Investment, the 412 km
Upper Egypt—Red Sea Road aims to facilitate trade with
African, Asian and Arab countries. In February 2010, the first
phase of the $764 million dual-lane highway was completed,
effectively reducing travel time between the cities of Assiut
and Safaga, ensuring rapid and cheaper movement of truck-
EGYPT: High Tides of Opportunity
During two years of a global financial tempest, the calm waters of the mighty Nile continued to flow unhindered.
Consistent growth rates, robust infrastructure and resolute political stability maintained Egypt’s undeniably
reliable economic climate. As purveyors of diversified investment opportunities, Egypt has proven its unbridled
ambition to put itself on a path of developed advancement with upgraded business index rankings. As a progres-
sive Arab state at a confluence of three continents, and the connecting maritime channel between East and West,
Egypt’s merits go well beyond its established success sectors of tourism, transportation and manufacturing.
ADVERTISEMENT
freight, and speeding up construction projects put on the
backburner in Upper Egypt.
A major investment development on the northwestern
Suez shore is Sokhna port. Fast becoming a new industrial
hub for Egypt and the gateway of choice for Egyptian trade
to and from Asia and the Middle East, a Special Economic
Zone was designated adjacent to the port, providing highly
attractive incentives for logistics services, medium and
light industries.

Positive energy
Naturally endowed with hydrocarbon fuels, Egypt now
has the third largest proven gas reserves of the African
continent following highly promising offshore exploration
results. Egypt also reached its highest-ever oil reserves
during the 2009-2010 fiscal year with 18.3 billion proven
barrels of oil.
While Egypt penned oil agreements with a number of
international corporations at a value of $8 billion in 2009-
2010, foreign investment in the field of oil and gas explora-
tion reached $16.3 billion last year.
In addition to being a major exporter of natural gas
via the Arab Gas Pipeline to Jordan, Syria and Lebanon,
Egypt has taken up the strategic process of ramping up its
petrochemical sector with new and expanded refineries.
With petrochemicals representing about 12% of Egypt’s total
industrial production and worth around $7 billion annually,
international industry experts believe that the country is set
to become one of the region’s leading players.
The government however, realizing that its reserves
have an expiry date, has already announced the com-
mencement of a nuclear power plant and has pursued a
dedicated framework for increasing private investment in
renewable energy. Although this is a relatively new market
in Egypt, its abundance of land, sunshine and strong winds
make Egypt an investor’s dream when it comes to sustain-
able resources. A recent tender for a 250MW renewable
energy wind park on the East coast received no less than
32 bids.
The government’s aim in all these developments is to
secure a promising future for its citizens. Projects that will
empower and expand its already competitive labour pool
of 26 million are materializing on an almost daily basis.
Specialized research and development zones are being set
up in Alexandria to invest in biotech, pharmaceutical and
irrigation systems for arid lands. Tourism is being boosted
with landmark projects in Luxor, Marsa Matruh, and from
2013, Egypt’s glorious history will be exhibited in the Grand
Egyptian Museum, a gem of architecture on Giza Plateau
housing over 50,000 artifacts, and fronted by the gigantic
statue of Ramses II. Ultimately, Egypt’s dependability and
diversity withstand even the toughest times.
THIS SUPPLEMENT HAS BEEN PRODUCED BY WORLD PROFILE GROUP. IT DID NOT INVOLVE ANY REPORTING OR EDITING BY STAFF OF THE ECONOMIST. NO ENDORSEMENT IS IMPLIED.
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14 A special report on the world economy The Economist October 9th 2010
2
1
that of other securities that compete with
government paper. When prices go up,
yields go down: they fell by about one per-
centage point on gilts and 0.7 points on the
safest corporate bonds and by 1.5 points on
riskier junk bonds.
But it is not clear whether quantitative
easing on its own changes people’s expec-
tations of monetary policy and ination. A
more direct way to do so would be to raise
the Bank’s ination target, currently set at
2%. A gure of 4-5% might make central
bankers’ lives easier, according to some
economists. But most central bankers do
not like the idea. They think that the costs
of higher, and possibly more volatile, ina-
tion would outweigh any gains. A less-dis-
cussed but potentially more useful innova-
tion would be price-level targeting (PLT),
meaning that a central bank targets the lev-
el of prices, not their rate of change. Target-
ing a price level that rises by 2% a year is dif-
ferent from targeting an ination rate of 2%
a year because rather than washing its
hands of past mistakes, the central bank
has to make up for past errors, returning
prices to their prescribed path.
That should make ination expecta-
tions a more powerful stabilising force. In a
slump, ination often falls uncomfortably
low: prices might rise by only 1% over the
year, for example. Under PLT, the central
bank has to make up this lost ground, so
prices might rise faster than 2% to catch up.
With a conventional ination target, by
contrast, the central bank must promise in-
ation no higher than 2% in each and every
year, regardless of the rate the year before.
In central banking, as in many indus-
tries, the most innovative outts are often
the small ones. Ination-targeting was pio-
neered by New Zealand’s central bank 20
years ago before being taken up by bigger
institutions such as the Bank of England.
America’s Federal Reserve is still suspi-
cious of it. Similarly, much of the best re-
search on PLT is being conducted at the
Bank of Canada. It will take time to catch
on even if its theoretical appeal survives
contact with reality.
What seems clear is that if the eco-
nomic weakness persists and ination
rates fall further, central banks may be-
come more willing to experiment. Policies
that look outré today may seem necessary
tomorrow. It is worth recalling that less
than two years after it began quantitative
easing in March 2001 the Bank of Japan
was buying equities. And in 2003 it was ad-
vised to adopt price-level targeting by
none other than Ben Bernanke, now the
Fed’s chairman.
Beware self-fullling prophecies
Some economists argue that central banks’
determination to avoid deation could
have the opposite eect. The Fed’s pledge
to keep interest rates low for an extended
period, for instance, suggests that it be-
lieves the economy will remain underem-
ployed (and ination subdued) for an ex-
tended period. If its pessimism spreads, it
may become self-fullling. People will
hoard cash because they expect prices to
fall and investments to fail, thus prolong-
ing the economy’s weakness.
This is the peril that befell Japan, ac-
cording to James Bullard of the St Louis
Fed. The private sector came to expect de-
ation and its expectations were duly ful-
lled. The central bank could not cut rates
below zero, and it did not raise them be-
cause ination was already too low. Mr
Bullard argues that America is closer to a
Japanese-style outcome today than at any
time in recent history.
Others worry not that the Fed will pro-
long the slump but that it may sow the
seeds of the next crisis. Low rates are sup-
posed to help the economy mobilise its re-
sources, but they can also cause it to misal-
locate them. After the 2001 recession they
generated excessive growth of sectors
that rely on either xed-asset investment
or credit, argues Raghuram Rajan of the
University of Chicago. He fears that by set-
ting rates at zero the Fed may merely
pump up growth in the short term only to
see it collapse later. Low rates subsidise
borrowers at the expense of savers. If this
transfer were easier for voters to see, they
might nd a lot to dislike. But because the
Fed picks investors’ pockets silently and
forciblyno one asks questions about
cost, he writes.
Given that the main reason for the re-
cession and the weakness of the recovery
is the dramatic increase in private thrift,
this seems an odd short-term concern. The
rich world is short of private borrowing
and awash with saving. Overall credit has
been shrinking. Nonetheless, Mr Rajan’s
worries about the medium term are rea-
sonable. Years of ultra-loose monetary
policy are likely to have unwelcome side-
eects. That is a reason for governments to
beware of overly fast scal tightening. It is
also a reason to look for antidotes to stag-
nation beyond macroeconomic policy.
The longer-term remedy must be creating
new jobs and increasing productivity, but
the most urgent need is to hurry up the re-
pairs to a broken nancial system. 7
A
LL recessions are painful, but the hang-
overs that follow nancial crises are
particularly long and grim. Growth is sub-
stantially lower than it is during normal
recoveries as households and rms reduce
their debt burdens. That is the depressing
conclusion from a growing body of re-
search on the aftermath of big nancial
busts. In one such study, Prakash Kannan,
an economist at the IMF, looked at 83 reces-
sions in 21 countries since 1970. He found
that in recessions that followed nancial
crises, growth was a lot slower and credit
growth stagnatedwhereas after normal
recessions it soared (see chart 6, next page).
So far the current recovery is following
this post-crisis script. Output is sluggish
and credit is growing weakly or shrinking
across much of the rich world. But is this
because over-leveraged households and
rms have become less willing to borrow,
or because banks have become less willing
to lend? In other words, is the credit pro-
blem one of demand or supply? The an-
swer will make a dierence to the rich
world’s growth prospects and to the way
policymakers should respond. People’s
unwillingness to borrow bodes ill for
short-term demand. Firms’ reluctance to
invest also risks denting productivity
growth. But a broken nancial system’s in-
ability to allocate capital eciently has
bigger long-term consequences.
In practice, both supply and demand
probably play a role. There is plenty of evi-
dence that consumers and rms have be-
The cost of repair
Abattered nance sector means slower growth
The Economist October 9th 2010 A special report on the world economy 15
2
1
come less willing to borrow. A study by
Atif Mian of the University of California at
Berkeley and Amir Su of the University
of Chicago, for instance, shows a close cor-
relation between American car sales and
the level of household debt. In places
where households had heavier debt bur-
dens at the start of the recession, subse-
quent car sales were weaker.
Across the rich world, companies, par-
ticularly big ones, have been piling up
cash. Firms’ cash stockpiles are at, or near,
record levels, and bond investors are clam-
ouring for more corporate debt. In August
Johnson & Johnson, a top-rated American
pharmaceutical, medical device and con-
sumer-products company, issued $1.1 bil-
lion in bonds at the lowest yields then on
record for ten- and 30-year corporate debt,
even though its operating cash ow far ex-
ceeds its investment needs.
The historical record suggests that the
lack of demand for credit is likely to persist.
In a recent paper Carmen and Vincent
Reinhart estimate that in past crises it took
an average of seven years for households
and businesses to bring their debts and
debt service back to tolerable levels rela-
tive to income. In many countries that pro-
cess has yet to begin. In America, where
progress has been fastest, the Reinharts
reckon that about half the rise in the ratio
of credit to GDP accumulated during the
boom era has been unwound.
At the same time the supply of credit is
clearly constrained. Banks in the euro zone
continue to tighten credit standards, and in
America they have only just begun to ease
standards after several years of tightening.
Most worrying is the potential damage
that starving companies of credit will do to
productivity.
Credit crunches do not aect all compa-
nies the same way. In a paper in 1996, Mr
Rajan and Luigi Zingales, also of the Uni-
versity of Chicago, argued that the more a
company depends on external nancing
such as bank loans or issues of stocks and
bonds, rather than internal cashow, the
more sensitive its fortunes are to the health
of the nancial system. Mr Kannan of the
IMF came to the same conclusion in his
study. In the 13 recessions caused by nan-
cial crises, the industries most dependent
on external nance grew 0.8 percentage
points more slowly, on average, than those
least dependent. There was no such gap
after other kinds of recession.
Cash conundrum
The latest recession is likely to have similar
eects. For example, Luc Laeven, an econo-
mist at the IMF, and Randy Kroszner of the
University of Chicago have found that list-
ed biotech companies, which make up 10%
of America’s total stockmarket listings, are
heavily dependent on external nance
and their growth is likely to suer far more
from a withdrawal of credit than that of
the overall economy. As Mr Laeven says,
we may only see the real impact ve years
from now when, without a crisis, some of
those investments would have paid o
and generated new products.
Venture-capital raising, which never
fully recovered from the bursting of the in-
ternet bubble in 2000, has been harmed
immensely by the latest crisis, says Steve
Jurvetson at Draper Fisher Jurvetson, a
venture-capital rm (see chart 7, next page).
Endowments, foundations and pension
funds, enthusiastic participants in venture
capital before the crisis, pulled back after
their stock and private-equity holdings
were clobbered. The moribund IPO mar-
ket makes it harder for venture funds to
cash in their investments.
If the bear market in IPOs proves transi-
tory (which is what usually happens), the
harm will be small. A prolonged drought
would be another matter. In the mid-1970s
the dearth of venture capital and IPOs set
back the development of computer and
network technologies that would prove to
have such a revolutionary impact in the
1980s and 1990s, says Josh Lerner of Har-
vard University. Venture-capital rms raise
only about a third as much money in Eu-
rope as in America. The aftermath of the
crisis could widen the gap by reinforcing
continental mistrust of free-wheeling An-
glo-Saxon nance.
What will ultimately be more impor-
tant, though, is the health of banks. Early-
stage entrepreneurs are generally thought
to rely on them less than on friends, family,
venture capitalists and angel investors. But
Alicia Robb at the University of California
at Santa Cruz and David Robinson of Duke
University, who examined the sources of
nance of 4,000 American start-ups,
found that bank loans are far more impor-
tant than other sources of nance. On aver-
age, new rms borrow seven times as
much from banks as they do from friends
and family.
Mr Robinson says the damage to
start-up nancing from the crisis is poten-
tially quite severe. The collapse in house
prices has undercut the many entrepre-
neurs who rely on home-equity loans.
This will also depress jobs growth, which
over time depends disproportionately not
on either small or large rms but on small
rms that become large, according to work
by the Kauman Foundation.
Japan oers a sobering case history.
Regulators were slow to force banks to re-
cognise the problem of collapsed collateral
values, but they did require banks to meet
new international standards for capital.
Banks that acknowledged non-performing
loans risked falling below those standards,
so they kept zombie borrowers alive on a
drip-feed of fresh money. They continued
to extend credit to insolvent borrowers,
gambling that somehow these rms
would recover or that the government
would bail them out, according to Ricardo
Caballero, Takeo Hoshi and Anil Kashyap
in a 2006 paper.
They estimate that zombie companies
those getting by on subsidised credit
which had made up 5-15% of banks’ bor-
rowers in the early 1990s, increased their
share to 25% later that decade. The eects
were variable. Zombies were much less
prevalent in manufacturing, which was
constantly exposed to international com-
petition, than in construction and retailing,
where job turnover and productivity
growth were lower.
6
The worst kind
Developed-world recessions*, trough =100
Source: Prakash Kannan, IMF *Based on 83 recessions in 21 industrial countries since 1970
Bank credit GDP
98
100
102
104
106
108
110
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8
Quarters from recession trough
98
100
102
104
106
108
110
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8
After financial crises Without financial crises
Quarters from recession trough
16 A special report on the world economy The Economist October 9th 2010
2
1
Policymakers have laboured to learn
these lessons. In America and Europe they
have imposed stress tests to see how vul-
nerable their banks are to bad loans. Ire-
land and Germany have set up bad
banks to shift bad loans to the public sec-
tor, as Sweden and Korea successfully did
after their respective crises in the 1990s.
Still, there is a widespread belief that
banks have not fully owned up to their
problems, partly because of political pres-
sure. Germany’s Landesbanken, which
have ties to local politicians and rms, are
widely thought to be in deeper trouble
than the stress tests suggest.
In America, banks and Fannie Mae and
Freddie Mac, the nationalised mortgage
companies, have been discouraged by fed-
eral and state governments from foreclos-
ing on homeowners unable to keep up
their payments. Banks do not mind all that
much since it allows them to put o recog-
nising losses. But the non-performing
loans may come to constitute a drain on
banks’ resources that inhibits lending to
more productive borrowers.
In Japan bad loans were to corpora-
tions rather than households, but the pro-
blem is essentially the same. Despite their
noble intent, federal subsidies that keep
stressed owners in their homes delay the
necessary reallocation of capital away
from property. Fortunately we’ve been
pretty unsuccessful, says Mr Jorgenson, a
productivity expert at Harvard University,
noting the small number of temporary
mortgage modications that have become
permanent.
Weak banks are not the only reason for
a credit squeeze. There is also uncertainty
over the eect of new regulations on the -
nancial system’s ability to channel savers’
funds into investments. America recently
passed its biggest overhaul of nancial
rules since the 1930s, known as the Dodd-
Frank act after its leading congressional
sponsors. On September 12th the Basel
Committee of international bank regula-
tors agreed on a new set of requirements
for banks’ liquidity and capital. These
rules, known as Basel 3, will require global
banks to have common equity equal to at
least 7% of their risk-weighted assets,
against 2% now. That includes a minimum
common-equity standard of 4.5% plus a
countercyclical buer of another 2.5%.
Experience shows that higher capital
requirements do dent credit growth, at
least in the short term. The rst Basel agree-
ment on bank capital contributed signi-
cantly to a steep decline in loan growth in
America in the early 1990s, according to a
2000 study by the Bank for International
Settlements (BIS).
Bankers say the new rules will also hurt
lending. The Institute of International Fi-
nance, which is backed by the world’s big
banks, argued in a report published in June
that the rules then being contemplated
would trim annual economic growth by
0.5 percentage points in America, 0.9 in the
euro area and 0.4 points in Japan over ve
years. But in a study of its own the BIS pre-
dicted a far more modest eect: less than
0.2 percentage points in most countries,
though in the medium term there would
be a gain from greater stability.
Make me virtuous, but not yet
Compelling banks to set aside a lot more
capital without much warning is clearly
risky. The Federal Reserve found it would
have to lower short-term interest rates by
40 basis points to soften the impact of big-
ger capital buers on growthan impossi-
bility now that rates are, in eect, at zero. To
deal with this concern, the new Basel rules
have a long lead time. The minimum level
for common equity is not due to take eect
until 2015, and the additional buer not un-
til 2019.
Equally contentious is the eect of the
post-crisis regulatory clampdown on high-
octane nance. America’s new nancial
rules compel banks to trim their holdings
of private equity and hedge funds. They re-
quire greater transparency in derivatives
7
Nothing ventured, nothing gained
Source: Thomson Reuters
Venture capital, net funds raised, $bn
0
20
40
60
80
100
120
1997 99 2001 03 05 07 09 10
United States Europe
The Economist October 9th 2010 A special report on the world economy 17
2
1
markets and demand greater disclosure
from hedge funds. These new rules are as
yet imperfectly understood, but are al-
ready having an eect. For example, Ford
Motor’s credit arm pulled an asset-backed
bond deal because credit-rating agencies,
fearful of new liabilities under the Dodd-
Frank act, forbid the use of their opinions
in the deal document. The deal went
ahead when the Securities and Exchange
Commission temporarily suspended the
requirement that deal documents include
such ratings.
In Britain and America sophisticated -
nance is ingrained enough to survive
tighter regulation. Continental Europe,
however, has never had America’s breadth
of nancing options for fast-growing com-
panies such as junk bonds, mezzanine
debt and private equity, note Thomas Phil-
ippon and Nicolas Véron in a 2008 report
for Bruegel, a Brussels-based think-tank.
So far the European response has been
less draconian than many feared. New
rules currently being negotiated by the
European parliament and EUnance min-
isters could stop foreign hedge funds and
private-equity funds from marketing
themselves to EUinvestors unless they ac-
cept certain restrictions. But Mr Véron
notes that they have yet to pass, and Britain
has raised objections. New proposals for
regulating derivatives trading, released by
the European Commission on September
15th, were less onerous than expected, and
in some ways less likely to discourage in-
novation than America’s new rules.
Nonetheless, increased regulation is
likely to slow the pace of nancial innova-
tion. How much that matters depends on
whether such innovation boosts growth. It
has become fashionable to say it does not.
Paul Volcker, a former Fed chairman, has
caustically called the ATMcash dispenser
the only worthwhile nancial innovation
of recent decades, a sentiment widely
shared by venture capitalists and non--
nancial businesses. I can’t think of any -
nancial or banker product or service that’s
ever helped us, says Mr Jurvetson. Engi-
neers contribute to the economy, lawyers
and bankerssubtract.
In a new book Amar Bhidé, a professor
at Tufts University, argues that modern
banks reduced loan decisions to arm’s-
length algorithms based on credit scores
and asset values, biasing them towards ho-
mogeneous loans such as residential mort-
gages. Yet the prospects of young, innova-
tive businesses are not easily summarised
in a credit score; a bank manager must
sample its wares, kick the delivery van’s
tyres and meet the founders. Mr Bhidé says
that is how banks worked before deregula-
tion in the 1980s and 1990s, and thinks a re-
turn to that old model would boost credit
to young businesses.
The uses of novelty
However, this too easily dismisses the con-
tribution of nancial innovation. Work by
Mr Laeven of the IMF with Ross Levine
and Stelios Michalopoulos suggests that -
nance innovates to meet the changing
needs of the economy as it evolves; wheth-
er that innovation is benecial depends on
the economic purpose it serves. Subprime
CDOs helped facilitate a reckless overin-
vestment in property, whereas preferred
shares, a 19th-century innovation, -
nanced that era’s railroad boom.
Financial innovation may even help
the economy cope with the aftermath of
the crisis. Lloyds Banking Group and Rabo-
bank have led the way in issuing contin-
gent convertible bonds which can be con-
verted to equity if the bank is about to
become undercapitalised. In theory, this
lessens the risk of future insolvency and
taxpayer bail-out and lowers the cost of
raising fresh equity capital. Private-equity
rms are currently dabbling in buying
deeply discounted underwater mort-
gages from banks, then restructuring the
terms to prevent foreclosure. There is even
a edgling market in bonds explicitly
backed by delinquent mortgages. Mean-
while, American local governments are is-
suing property assessed clean energy or
PACE bonds, then lending the proceeds to
homeowners to make their homes more
energy-ecient. Homeowners repay the
loans through their property tax.
There are many more ideas on the
drawing board. Robert Shiller of Yale Uni-
versity, whose theories led to the develop-
ment of property derivatives, has pro-
posed their use in developing home-
equity insurance for homeowners. Mr Ca-
ballero and Pablo Kurlat of the Massachu-
setts Institute of Technology would like to
see governments sell tradable insurance
credits which give any nancial institu-
tion the right to buy a government guaran-
tee in a nancial crisis.
Nothing may come of these ideas, yet
their potential should not be dismissed. In
the early 1990s America’s Resolution Trust
Corporation used securitisation to ooad
billions of dollars in property loans inher-
ited from busted banks more quickly and
at better prices than if it had disposed of
them one at a time. It would be ironic if -
nancial innovation, so reviled for helping
to bring on the latest crisis, were to play a
part in cleaning up the mess. 7
H
IGH unemployment is the most visi-
ble scar left by the recession. In the 32
rich OECDcountries the downturn and its
aftermath threw over 17m people out of
work. There was a comparable rise in the
number of people who would take a full-
time job if it were available but instead
have settled for part-time work or given up
looking altogether. This rise in unemploy-
ment matches that in the deepest of the
OECD’s post-war recessions. But, astonish-
ingly, the damage is not as bad as it might
have been.
When output falls, employment fol-
lows. This link is predictable enough to
qualify as an economic law, named after
Arthur Okun, who showed that when
America’s GDP fell by 2%, its unemploy-
ment rate rose by about half that. In this re-
cession, however, Okun’s law did not
work as expected in a number of coun-
tries. In America, New Zealand and Spain
it applied with a vengeance: Spanish em-
ployment fell by twice as much as output.
But in most countries its eect was merci-
fully mild. In Germany unemployment by
the end of 2009 was lower than it had
been two years earlier.
These disparate outcomes have chal-
lenged long-held stereotypes. The German
labour market has undergone a strange
mutation from a bulwark of eurosclerosis
into a champion of exibility, writes Joa-
From hoarding to hiring
Some countries have successfully preserved jobs. Now they must create new ones
18 A special report on the world economy The Economist October 9th 2010
2
1
chim Möller of the Institute for Employ-
ment Research (IAB). America, long the
poster child for ecient labour markets,
suddenly looks sclerotic. Not only is it
grappling with unemployment of 9.6%,
but almost half of its jobless have been out
of work for more than six months, the
highest share since the Depression.
What explains this divergence of for-
tunes? First, the eects of the recession
were unevenly spread. In countries such as
America, Spain or Ireland, the bursting of
housing bubbles caused construction to
slump, with the loss of many jobs that are
unlikely to return soon. By contrast, in ex-
porting countries such as Germany or Ja-
pan the damage was done mainly by the
collapse of global trade, which proved
more temporary.
Second, labour-market rules vary
widely. Some countries have long tried to
trump Okun’s law with legislation of their
own, making it costly or cumbersome to
lay o workers. Pierre Cahuc of France’s
École Polytechnique and his colleagues
point to Spain’s rules on ring permanent
sta, which are particularly tough, though
recent reforms have eased them slightly.
That has been good for those lucky enough
to hold a permanent contract. But Spanish
rules give little protection to temporary
workers. So employers hired lots of them
they made up about 30% of all employees
before the crisisand red them when the
downturn arrived.
But what made the biggest dierence
was companies’ response to the crisis. In
most rich countries they cut hours more
than bodies. German rms last year re-
duced working time by the equivalent of
1.4m full-time employees. And even when
their sta did clock in, they worked less
hard. For the rst time in decades output
per hour fell, reducing the input of labour
by the equivalent of 1m people.
The German government encouraged
this labour-hoarding with its celebrated
Kurzarbeit scheme that subsidises shorter
working weeks. But this was responsible
for only about a quarter of the reduction in
working hours. Firms were not forced or
bribed to keep their workers; they chose to
do so. Before the recession industries such
as metals, chemicals and machinery had
found it hard to ll vacancies. Workers in
these industries are highly trained and spe-
cialised and can cost up to 32,000
($42,000) each to replace. When demand
for labour falls, rms want to hang on to
them, just as they might mothball an ex-
pensive piece of machinery.
In America, in contrast, rms proved
keener to cut workers than hours. In the
1973-75 recession, the OECDcalculates, em-
ployment cuts accounted for less than a
third of the reduction in man-hours. The
remainder was achieved by shortening the
working week or year. In the recent reces-
sion the split was reversed. Robert Gordon
of Northwestern University says that
American rms have come to view their
employees as disposable.
Mr Gordon’s judgment on the Ameri-
can labour market is one-sided. If Ameri-
can rms are quicker to re their workers
than their European rivals, they are also
quicker to hire. Over recent decades Amer-
icans have entered unemployment at sev-
en times the rate of Germans, but they
have exited from it ten times as fast: some
58% of workers who are unemployed one
month will not be the next, according to
calculations by Michael Elsby of the Uni-
versity of Michigan, Bart Hobijn of the San
Francisco Fed and Aysegül Sahin of the
New York Fed. Discarded American work-
ers have not rusted on the scrapheap, as so
many do in Europe.
At its best, then, the American labour
market does not dispose of its workers; it
recycles them. Sadly, the market is now far
from its best. For every 100 people unem-
ployed in the autumn of 2009, only 24 had
escaped their predicament within a
month, an historic low. The harder it is to
escape joblessness, the longer people re-
main unemployed; and the longer they re-
main unemployed, the harder they nd it
to escape. Mr Elsby and his co-authors fear
that America will be stuck with a persis-
tent residue of long-term unemployed
workers with relatively weak search eec-
tiveness, depressing the strength of the re-
covery. Students of Europe’s stubborn
unemployment in the 1980s call this scle-
rosis, an accumulation of scar tissue that
makes the market more rigid.
One obvious reason why American
workers are taking longer to escape from
unemployment is a lack of job openings.
As long as vacancies remain low, unem-
ployment will remain high. That is anoth-
er economic relationship stable enough to
carry someone’s name: the Beveridge
curve, named after William Beveridge, a
British economist. His curve is, however, a
poor guide to the recent behaviour of
America’s labour market. In 2009 a fairly
steady stream of job openings did not stop
unemployment rising from 7.7% to 10%.
And in the rst months of this year vacan-
cies jumped, with little eect on the jobless
rate (see chart 9).
Keep them keen
What explains this puzzle? Some econo-
mists blame the extension of unemploy-
ment benets, which America’s jobless
can now claim for 99 weeks, as long as in
France. European benets will buy you
European sclerosis, argues Robert Barro, an
economist at Harvard University. He reck-
ons that the unemployment rate would be
6.8% rather than 9.5% if benets had re-
mained at 26 weeks. Most other econo-
mists think the eect is much smaller.
Whatever the magnitude, there is
bound to be some impact. The sooner the
money runs out, the sooner people grab a
job. The interesting question is not wheth-
er longer benets delay re-employment,
but why. Mr Barro thinks it is a case of
moral hazard: if people are insured
8
More misery
Source: OECD
Labour market, Q4
0 10 20 5 15
2007
2009
Spain
2007
2009
Italy
2007
2009
United
States
2007
2009
France
2007
2009
OECD
2007
2009
Germany
2007
2009
Britain
2007
2009
Japan
Unemployment as % of labour force
of which: unemployed for 12 months or more
9
Slightly out of line
Sources: BLS; Thomson Reuters
US Beveridge curve, Jan 2007-Jul 2010
Unemployment rate, %
J
o
b

o
p
e
n
i
n
g
s

r
a
t
e
,

%
1.5
2.0
2.5
3.0
3.5
4 5 6 7 8 9 10
Jan 2007
Jan 2009
Oct 2009
Jul 2010
Mar 2007 Apr
2010
20 A special report on the world economy The Economist October 9th 2010
2
1
against a risk such as joblessness, they will
try less hard to escape it. But Raj Chetty of
Harvard has a subtler answer.
He points out that workers who receive
generous lump-sum severance payments
also take longer to nd a new job. The
lump-sum payouts are theirs to keep
whether they take another job or not, so by
taking their time they are spending their
own money. They may nd this worth
their while because by waiting for the right
job they will secure higher earnings. In an
ideal world the unemployed would -
nance their own job search by borrowing
against these higher future wages. In the
real world, however, benets have to ll
the gap.
Some economists do not take the Bever-
idge curve too literally. They point out that
there may be a oor below which vacan-
cies will not fall, however dire the state of
the job market. Even shrinking rms post
vacancies for about 2% of their jobs, ac-
cording to Steven Davis of the University
of Chicago, Jason Faberman of the Phila-
delphia Fed and John Haltiwanger of the
University of Maryland. And in the early
stages of an upturn there is often a lag be-
tween vacancies rising and unemploy-
ment falling. It takes time to ll the posts
the recovery opens up. Moreover, for every
jobless worker who lls a vacancy, a dis-
couraged worker may renew his job
search, rejoining the labour force and add-
ing to the ocial unemployment tally. So it
is just a matter of time before the Beveridge
curve snaps back into shape.
Redrawing the Beveridge curve
Other economists are worried that the odd
behaviour of the Beveridge curve suggests
a mismatch between the skills of jobseek-
ers and those required for new jobs. David
Autor, of the Massachusetts Institute of
Technology, believes that the recession has
reinforced trends that began 30 years ago.
He reckons the American labour market
has polarised, creating jobs for the well-
educated and the low-paid but oering lit-
tle in between. Janitors and managers
weathered the recession, but white-collar
sales, oce and administrative jobsthe
production jobs of the information age
fell by 8% between 2007 and 2009. The
production jobs of the manufacturing age,
such as craftsmen’s, repairmen’s and
machine operators’, fared even worse.
Even as the economy has regained (and
surpassed) its former size, it has not recov-
ered its shape. So workers red from a sun-
set industry may have to break into sunrise
industries to get a job. A shift in occupation
may also require a change of mindset as
much as skillset. Too often the construc-
tion worker does not think of himself as a
health technician, says Larry Katz of Har-
vard University.
The new jobs may also be in a dierent
place. But the recession has left Americans
uncharacteristically at-footed, accord-
ing to William Frey of the Brookings Insti-
tution. The share of people moving house
from March 2007 to March 2009 was the
lowest since gures were rst collected in
1947. The share moving across state bor-
ders, at 1.6%, was half that in 1999-2000.
Mr Frey puts much of the blame on the
housing market. If you cannot nd a buyer
for your home, you cannot move to a new
one. Almost one in four Americans with
mortgages have negative equity, owing
more than their house is worth. They often
decide to stay put rather than default. Ac-
cording to Marcello Estevão and Evridiki
Tsounta of the IMF, geographic immobility
and skill mismatches reinforce each other.
As a result, they say, America’s underlying,
or structural, rate of unemployment rose
from 5% before the nancial crisis to be-
tween 6% and 6.75% in 2009. So even if the
recovery gathers steam, almost one-third
of the rise in joblessness may endure.
Few policymakers think that America’s
jobless problem is mainly structural. An
exception is Narayana Kocherlakota, presi-
dent of the Minneapolis Fed, who reckons
that most of it is. And Edmund Phelps, a
Nobel prize-winning economist at Colum-
bia University, worries that the focus on
decient demand lulls us into failing to
‘think structural’ in dealing with long-term
problems. The economy is not like a skat-
er who just needs help to get up after a fall,
he wrote recently in the New York Times.
Our skater has broken some bones and
needs real attention.
What kind of attention? Among a long
list of proposals, he advocates tax credits
for companies employing low-paid work-
ers. In January Mr Obama proposed a
$5,000 credit for rms that hired people in
2010. As a at sum, the credit would have
represented a bigger subsidy to low-paid
workers. But scepticism about a stimulus
forced him to scale the tax break back to
$1,000 for hiring people who had been un-
employed for 60 days or more. That may
be a pity. According to a study by Ms Sahin
and two colleagues, the $1,000 credit could
cut the unemployment rate by almost one
percentage point. But a $5,000 credit might
have cut it by over three points, at least in
the short run.
Hiring incentives might tempt employ-
ers, but they will not help if workers have
the wrong skills or are stuck in the wrong
part of the country. That is why the IMF’s
economists also advocate an overhaul of
federal training programmes and more ef-
fort to deal with negative equity, for in-
stance by changing America’s bankruptcy
law to allow judges to restructure mort-
gage debt. America spends only 0.17% of
GDP on active labour-market policies,
such as training and job search, far less
than the OECDaverage. Such schemes as it
has are fragmented and not particularly ef-
fective. That may need to change. Having
long taken their labour market’s exibility
for granted, Americans may now have to
work at it.
Even as Americans are beginning to
fear that their labour market is turning
European, Europeans still feel under pres-
sure to turn Anglo-Saxon. The American
labour market may be less dynamic than it
was, but it is still more dynamic than Eu-
10
Europe’s job miracle
Source: McKinsey Global Institute
Sources of job creation/destruction, 1995-2008, m
0
10
20
30
10
+

EU-15 United States
Change in
participation rates
Change in
unemployment rates
Shifts in
age structure
Population
growth
The Economist October 9th 2010 A special report on the world economy 21
2
1
W
HEN Spain won the World Cup in
July, it conrmed its reputation for
uid and ecient football. If only its econ-
omy worked as well. GDP growth is slug-
gish and a fth of the workforce is unem-
ployed. Two features of Spain’s jobs
market share much of the blame: the high
cost of ring permanent workers, and a
wage system that binds rms to industry-
wide pay deals. On June 16th, the day
Spain played its rst World Cup match,
the government set out its plans to cure
these ills. The reform bill, passed by parlia-
ment on September 9th, falls well short of
what was needed but may nevertheless
do some good.
Changes were long overdue. Because it
is so costly to lay o workers, businesses
are reluctant to hire them in the rst place.
A 1994 measure to promote jobs made it
easier to hire temporary workers and led
to a sharp rise in their numbers. But only a
small proportion of them move on to
protected jobs. Most are laid o at the
end of their contract. The high churn
among temporary workers, most of them
young, female or migrant, means rms
have little incentive to train them.
This has pushed many into low-skilled
work. The impact on Spain’s productivity
is compounded by rigid wage rules. Last
year nominal pay rose by 3% despite the
weak economy. Firms have to pay the
rates that are negotiated centrally be-
tween unions and employer groups, rath-
er than tailor pay to prevailing business
conditions. That costs jobs and hurts e-
ciency. Firms cannot undercut rivals on
wages, which limits their ability to grow.
Research by Rafael Doménech, at BBVA, a
Madrid-based bank, shows that Spanish
rms are less productive than American
ones partly because they tend to be small.
Ideally the rules would allow wage
bargaining to take place locally and pro-
mote a good balance between job exibil-
ity and security for all workers. A group of
100 Spanish economists had pushed for a
single contract, with employment rights
that rise gradually with tenure. That
would make it cheap and easy to get rid of
recent recruits that turn out to be ops
(which is an appealing feature of tempo-
rary contracts), but rms would also have
an incentive to invest in the workers they
hold on to.
The reforms fall short of that. A change
in the main contract for new permanent
workers lowers severance pay from 45 to
33 days’ wages for each year worked. (Ex-
isting workers are unaected.) This could
fall to 20 days’ pay for all workers at rms
that can show they face large and persis-
tent losses. Spain’s complex wage-bar-
gaining system remains intact but rms
can now opt out if their employees agree.
How eective these new rules will be
depends on how they are interpreted. It
could take years to clarify under what cir-
cumstances rms can re workers and
pay only 20 days’ compensation, says
Luis Garicano, of the London School of
Economics. In the past, Spain’s labour
courts have taken a dim view of rms
seeking to cut jobs. Firms may nd it tricky
to persuade workers to accept lower
wages than mandated by national pay
deals. Spain’s jobless benets are quite
generous and are paid for long periods, so
many workers may opt for redundancy
rather than take a pay cut.
Alot also depends on how actively the
government promotes the reforms. A big
worry is that the labour ministry seems
just as attached to the status quo as labour
unions and business groups are. And
even if ocials support the changes, few
economists expect Spain’s jobless rate to
plummet. But a fall in the share of tempo-
rary employees in the workforce, and
weaker wage growth in response to high
unemployment, would be promising
signs that the reforms are working.
Since only a year ago the possibility of
any reform at all seemed remote, even
such mild progress has been greeted with
relief. This takes Spain from worst to bet-
ter, says Angel Ubide, at Tudor Invest-
ment Corporation. But it may not catch up
with its football team for a while.
Spain oers a test case for
labour-market reform in Europe Pass and move
11
Easy come, easy go
Source: OECD
*Jobs with a pre-set termination date

2006
Temporary* employment, 2009, % of total
0 10 20 30
Poland
Spain
Portugal
Germany
Japan
France
Italy
OECD
Britain
United States

rope’s. America’s exit rate from unemploy-
ment, at 24% a month, is still far faster than
rates in recent decades in France (8%), Ger-
many (6%) and Italy (4%). And although
long-term unemployment in America has
risen markedly (at the end of 2009 2.2% of
workers had been out of a job for more
than a year, compared with 0.5% before the
recession), a bigger proportion of workers
in Germany, France and Italy has been job-
less for more than a year.
Many European countries fail to make
the most of their working-age population,
even as that population is poised to shrink.
In Germany it has already contracted by
2.2% over the past decade. Countries with
an unfavourable demography grow more
slowly not only because fewer people
work but also because they save and invest
less. From 1990 to 2008 the combined GDP
of the EU-15 (the 15 members of the EU prior
to its 2004 enlargement) grew by about 2%
a year on average. Thanks to a less favour-
able demography it can expect to grow
only 1.6% a year over the next two decades,
other things equal, according to the McKin-
sey Global Institute (MGI).
Governments are not entirely power-
less to deal with the eects of demo-
graphic trends. They can raise the retire-
ment age, open the doors to immigration
and tempt more people into the labour
force. Japan, for instance, is greying faster
than Europe, but its employment rates are
better than America’s. In Denmark the
working-age population is already shrink-
22 A special report on the world economy The Economist October 9th 2010
2
1
P
RODUCTIVITY growth is the closest
economics gets to a magic elixir, espe-
cially for ageing advanced economies.
When workers produce more for every
hour they toil, living standards rise and
governments have more resources to ser-
vice their debts and support those who
cannot work. As the rich world emerges
from the nancial crisis, faster productivity
growth could counteract the drag from ad-
verse demography. But slower productivi-
ty growth could make matters worse.
Workers’ productivity depends on their
skills, the amount of capital invested in
helping them to do their jobs and the pace
of innovationthe process of generating
ideas that lead to new products and more
ecient business practices. Financial cri-
ses and deep recessions can aect these
variables in several ways. As this special
report has argued, workers’ skills may
erode if long-term unemployment rises.
The disruption to the nancial sector and
the reluctance of businesses to invest in
the face of uncertain demand may also re-
duce the rate of capital formation, delaying
the factory upgrades and ITpurchases that
would boost workers’ eciency.
Financial crises can aect the pace of in-
novation, too, though it is hard to predict
which way. Deep recessions can slow it
down as rms slash their spending on re-
search and development. But they can also
boost the pace of eciency gains as weak
demand forces rms to rethink their pro-
ducts and cost structures and the weakest
companies are winnowed out. According
to Alexander Field of Santa Clara Universi-
ty, the 1930s saw the fastest eciency im-
provements in America’s history amid
large-scale restructuring.
Here we go again
Almost every government in the rich
world has a spanking new innovation
strategy. Industrial policyout of fashion
since its most credible champion, Japan,
lost its way in the 1990sis staging a come-
back. But mostly such policies end up sub-
sidising well-connected industries and
products. Green technology is a favour-
ite receptacle for such subsidies.
In 2008 France created a sovereign-
wealth fund as part of its response to the -
nancial crisis; it promises to promote bio-
technology ventures, though it has also
sunk capital into conventional manufac-
turers that happened to need money. In
2009 Britain followed suit with a strategic
investment fund. The Japanese too are
back in the game. In June the newly invigo-
rated Ministry of Economy, Trade and In-
dustry (METI) unveiled a plan to promote
ve strategic sectors, ranging from environ-
mental products to robotics. However, past
experiments with industrial policy, from
France’s Minitel, an attempt to create a gov-
ernment-run national communications
network, to Spain’s expensive subsidies to
jump-start solar power, suggest that gov-
ernments are not much good at picking
promising sectors or products.
More important, the politicians’ current
focus on fostering productivity growth via
exciting high-tech breakthroughs misses a
big part of what really drives innovation:
the diusion of better business processes
and management methods. This sort of in-
novation is generally the result of compet-
itive pressure. The best thing that govern-
ments can do to foster new ideas is to get
out of the way. This is especially true in the
most regulated and least competitive parts
of the economy, notably services.
To see why competition matters so
much, consider the recent history of pro-
ductivity in the rich world. On the eve of
the recession the rate of growth in workers’
output per hour was slowing. So, too, was
the pace of improvement in total factor
productivity (a measure of the overall e-
ciency with which capital and workers are
used which is economists’ best gauge of
the speed of innovation). But that broad
trend masks considerable dierences.
Over the past 15 years America’s under-
lying productivity growthadjusted for
the ups and downs of the business cycle
has outperformed most other rich econo-
Smart work
Faster productivity growth will be an important part of rich economies’ revival
ing, but a larger proportion of this smaller
population is actually working.
Indeed, a number of European coun-
tries have changed far more than many (es-
pecially Americans) give them credit for. In
a forthcoming report the MGI heralds the
unsung progress in European labour
markets. Despite a far smaller growth in
their population, the 15 west European
member states of the EUcreated more jobs
than America between 1995 and 2008.
They countered their adverse demography
by reducing their jobless rates and boost-
ing participation in the labour market. For
example, the share of working-age women
in the labour force rose by 11 percentage
points between 1990 and 2010.
The EU-15 still get less out work out of
their population than America does (733
hours per person per year against Ameri-
ca’s 913). But the gap is closing. To narrow it
further, Europe does not necessarily have
to become like America. It could greatly
improve its performance simply by adopt-
ing its own continent’s best practice every-
where. Some progress along those lines is
being made. Greece is overhauling its la-
bour rules; Spain has just passed a modest
reform (see box, previous page). But there
is much more to be done.
Taking up the slack
In Sweden 88% of women aged between
25 and 54 take part in the labour market. It
helps that the country’s extensive day-care
facilities for children are largely reserved
for workers, and that couples le their tax
returns separately so that households do
not get hit by higher marginal tax rates on
their second incomes.
A larger share of Sweden’s older peo-
ple, too, remain in the labour force than
anywhere else on the continent, not least
because they accrue higher retirement
benets for each year they work after the
age of 61. If other Europeans aged between
55 and 64 were as industrious as older
Swedes, the continent could reduce the
gap in hours with America by almost a
quarter, according to the MGI.
The rest of Europe could also learn from
Denmark’s eorts to beat unemployment
and from the Netherlands’ success in get-
ting youngsters into work. To echo an old
joke, heaven is where women and older
people work like the Swedes, the young
work like the Dutch and the unemployed
nd jobs like the Danes. Hell is where
workers get into unemployment like the
Americans and out of it like the Italians. 7
24 A special report on the world economy The Economist October 9th 2010
2
1
mies’ by a wide margin (see chart 12).
Workers’ output per hour soared in the late
1990s, thanks largely to investment in com-
puters and software. At rst this advance
was powered by productivity gains within
the technology sector. From 2000 onwards
eciency gains spread through the wider
economy, especially in services such as re-
tailing and wholesaling, helped by the de-
regulated and competitive nature of Amer-
ica’s economy. The improvements were
extraordinary, though they slowed after
the middle of the decade.
The recent history of productivity in
Europe is almost the mirror image of
America’s. Up to the mid-1990s the conti-
nent’s output per hour grew faster than
America’s (see chart 13), helped by imports
of tried and tested ideas from across the
water. Thanks to this process of catch-up,
by 1995 Europe’s output per hour reached
over 90% of the American level. But then
Europe slowed, and by 2008 the gure was
back down to 83%. This partly reected Eu-
rope’s labour-market reforms, which
brought more low-skilled workers into the
workforce. That seemed a price well worth
paying for higher employment. But the
main reason for Europe’s disappointing
productivity performance was that it
failed to squeeze productivity gains from
its service sector.
A forthcoming history of European
growth by Marcel Timmer and Robert In-
klaar of the University of Groningen,
Mary O’Mahony of Birmingham Universi-
ty and Bart Van Ark of the Conference
Board, a business-research organisation,
carefully dissects the statistics for individ-
ual countries and industries and nds con-
siderable variation within Europe. Finland
and Sweden improved their productivity
growth whereas Italy and Spain were par-
ticularly sluggish. Europe also did better in
some sectors than in others; for example,
telecommunications was a bright spot. But
overall, compared with America, Euro-
pean rms invested relatively little in ser-
vices and innovative business practices. A
new McKinsey study suggests that around
two-thirds of the dierential in productivi-
ty growth between America and Europe
between 1995 and 2005 can be explained
by the gap in local services, such as retail
and wholesale services.
Europe’s service markets are smaller
than America’s, fragmented along nation-
al lines and heavily regulated. The OECD
has tracked regulation of product and ser-
vices markets across countries since 1998. It
measures the degree of state control, barri-
ers to competition and obstacles to starting
a new company, assigning a score to each
market of between 0 and 6 (where 0 is the
least restrictive). Overall the absolute level
of product regulation fell between 1998
and 2008, and the variation between
countries lessened. America and Britain
score joint best, with 0.84. The EU average
is 1.4. But when it comes to services, the va-
riation is larger and Europe has made
much less progress.
In professional services, the OECD’s
score for Europe is fully twice as high as for
America (meaning it is twice as restrictive).
As the McKinsey report notes, many Euro-
pean countries are rife with anti-competi-
tive rules. Architects’ and lawyers’ fees in
Italy and Germany are subject to price
oors and ceilings. Notaries in France,
Spain and Greece and pharmacies in
Greece are banned from advertising their
services. Such restrictions limit the ability
of ecient newcomers to compete for
market share, cosseting incumbents and
raising costs across the economy.
In Japan productivity growth slumped
after the country’s asset bubble burst at the
start of the 1990s. One reason, as an earlier
section of this report has described, was
the failure to deal decisively with the bad
loans clogging its banks, which propped
up inecient zombie companies rather
than forcing them into liquidation. That
meant less capital was available to lend to
upstart rms. Another problem was the
lack of competition. Japan’s service sector,
unlike its world-class manufacturers, is
fragmented, protected from foreign com-
petition and heavily regulated, so it failed
to capture the gains of the ITrevolution.
Over the years Japan made various ef-
forts at regulatory reform, from freeing up
the energy market and mobile telephony
in the mid-1990s to liberalising the nan-
cial sector in the late 1990s. These have
borne some fruit. Japan’s total factor pro-
ductivity growth, unlike Europe’s, began to
improve after 2000. But coupled with the
continuing weakness of investment, the
reforms were too modest to bring about a
decisive change in the country’s overall
productivity prospects.
Learn Swedish
Sweden oers a more encouraging lesson.
In the aftermath of its banking bust in the
early 1990s it not only cleaned up its banks
quickly but also embarked on a radical
programme of microeconomic deregula-
tion. The government reformed its tax and
pension systems and freed up whole
swaths of the economy, from aviation, tele-
communications and electricity to bank-
ing and retailing. Thanks to these reforms,
Swedish productivity growth, which had
averaged 1.2% a year from 1980 to 1990, ac-
celerated to a remarkable 2.2% a year from
1991 to 1998 and 2.5% from 1999 to 2005, ac-
cording to the McKinsey Global Institute.
Sweden’s retailers put in a particularly
impressive performance. In 1990, McKin-
sey found, they were 5% less productive
than America’s, mainly because a thicket
of regulations ensured that stores were
much smaller and competition less in-
tense. Local laws restricted access to land
for large stores, existing retailers colluded
on prices and incumbent chains pressed
suppliers to boycott cheaper competitors.
But in 1992 the laws were changed to weak-
en municipal land-use restrictions, and
Swedish entry into the EUand the creation
of a new competition authority raised
competitive pressures. Large stores and
vertically integrated chains rapidly gained
market share. By 2005 Sweden’s retail pro-
ductivity was 14% higher than America’s.
The restructuring of retail banking ser-
vices was another success story. Consoli-
dation driven by the nancial crisis and by
12
It’s getting harder
Source: The Conference Board *Structural trend

Forecast
GDP per hour worked*
% increase on previous year
0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1980 85 90 95 2000 05 10

United States
Japan
Euro area
13
Not catching up
Source: The Conference Board *Forecast
GDP per hour worked
As % of US GDP per hour worked
60
70
80
90
100
110
1980 85 90 95 2000 05 10
*
Italy Spain
Britain Germany France
26 A special report on the world economy The Economist October 9th 2010
2
1
EU entry increased competition. New
niche players introduced innovative pro-
ducts like telephone and internet banking
that later spread to larger banks. Many
branches were closed, and by 2006 Swe-
den had one of the lowest branch densities
in Europe. Between 1995 and 2002 banking
productivity grew by 4.6% a year, much
faster than in other European countries.
Swedish banks’ productivity went from
slightly behind to slightly ahead of Ameri-
can levels.
All this suggests that for many rich
countries the quickest route to faster pro-
ductivity growth will be to use the crisis to
deregulate the service sector. A recent
study by the Bank of France and the OECD
looked at 20 sectors in 15 OECD countries
between 1984 and 2007. It found that re-
ducing regulation on upstream services
would have a marked eect not just on
productivity in those sectors but also on
other parts of the economy. The logic is
simple: more ecient lawyers, distributors
or banks enable rms across the economy
to become more productive. The size of the
potential gains calculated by the Bank of
France is stunning. Getting rid of all price,
market-entry and other competition-re-
stricting regulations would boost annual
total factor productivity growth by one
percentage point in a typical country in
their sample, enough to more than double
its pace.
Getting rid of all anti-competitive regu-
lation may be impossible, but even the
more modest goal of embracing best prac-
tice would yield large benets. The IMF
has calculated that if countries could re-
duce regulation to the average of the least
restrictive three OECD countries, annual
productivity growth would rise by some
0.2 percentage points in America, 0.3 per-
centage points in the euro area and 0.6 per-
centage points in Japan. The larger gains for
Europe and Japan reect the amount of de-
regulation left to be done. In both cases the
productivity gains to be achieved from
moving to best practice would all but
counter the drag on growth from unfavour-
able demography.
Even in America there would be bene-
ts. But, alas, the regulatory pendulum is
moving in the opposite direction as the
Obama administration pushes through
new rules on industries from health care to
nance. So far the damage may be limited.
Many of Mr Obama’s regulatory changes,
from tougher fuel-eciency requirements
to curbs on deep-water drilling, were
meant to benet consumers and the envi-
ronment, not to curb competition and pro-
tect incumbents. Some of the White
House’s ideas, such as the overhaul of
broadband internet access, would in fact
increase competition. The biggest risk lies
in nance, where America’s new rules
could easily hold back innovation.
An unlikely role model
The country that is grasping the challenge
of deregulation most energetically is
Greece, whose debt crisis has earned it a
reputation for macroeconomic misman-
agement. Under pressure from the IMF
and its European partners, the Greek gov-
ernment has embarked on one of the most
radical reforms in modern history to boost
its productive potential.
Again, this involves freeing up an his-
torically cushioned service sector. So far
the main battleground has been trucking.
Before Greece descended into crisis, its lor-
ry drivers required special licences, and
none had been granted for several de-
cades. So a licence changed hands in the
secondary market for about 300,000,
driving up the costs of everything that trav-
elled by road in Greece. But under a reform
recently passed by the Greek government,
the number of licences is due to double.
Greek lorry drivers went on strike in prot-
est, but the government did not budge.
Lawyers and pharmacists too are slated for
deregulation.
If Greece can stick to its plans, it will,
like Sweden, show that crises can oer
valuable opportunities. Without the coun-
try’s brush with default and the conditions
attached to the resulting bail-out, its lead-
ers would have been unlikely to muster
the necessary political will.
The sluggish progress of reform else-
where underlines this point. Germany,
which ranks 25th out of 30 OECDcountries
on the complications of its licence and per-
mit system, approaches deregulation on
tiptoes: it recently reduced restrictions on
price-setting by architects and allowed
chimney-sweeps easier market access.
Two French economists, Jacques Delpla
and Charles Wyplosz, have argued that in-
cumbent service providers should be paid
o in exchange for accepting competition.
They reckon that compensating French
14
Services with a smile
Source: McKinsey Global Institute
Productivity growth, 1995-2005
Contribution by sector, %
5
0
5
10
15
20
25
+

United States EU-15
Primary resources
Manufacturing
Infrastructure
Services:
Local
Business
Professional/
financial
Property
Other
28 A special report on the world economy The Economist October 9th 2010
2
1
O
NCE you start thinking about
growth, said Robert Lucas, a No-
bel prize-winning economist, it’s hard to
think about anything else. Judging by
their rhetoric, the world’s policymakers
are indeed thinking about little else. The
statement released after the most recent
meeting of G20 leaders in Toronto in June
mentioned the word growth 29 times in
nine pages. Mr Obama says his economic
policy is all about laying the foundations
for long-term growth. Britain’s prime
minister, David Cameron, used his rst
speech in oce to lay out a strategy for
economic growth. Japan’s government
unveiled a ten-year new growth strategy
in June.
The task is immense. The rich world’s
nascent recoveries are losing momentum
even though joblessness remains worry-
ingly high. The slowdown has been most
obvious in America, where GDP growth
shrank to a paltry 1.6% annual rate in the
second quarter and appears to have re-
mained stuck at much the same level over
the summer. The housing market has
turned down again and the pace of job cre-
ation remains painfully slow.
Led by a surge in German GDP, the euro
area fared relatively better in the rst half
of this year, but as the rebound in global
trade wanes, Germany’s export-depen-
dent economy is slowing again. The coun-
try’s latest gures for investor condence
look a lot feebler than they did earlier this
year. Japan’s economy, too, is weakening
for much the same reason.
The OECD’s September forecast reck-
ons that the annual rate of GDP growth in
the G7 group of big rich economies will fall
to 1.5% in the second half of this year, a full
percentage point below its forecast in May.
Gloomier analysts worry about a double-
dip recession. Even optimists no longer
expect anything more than tepid growth in
2011(see chart 15).
Looking further ahead, towards the
middle of this decade, the picture remains
dark as rst debt and then ageing popula-
tions will weigh heavily on the rich
world’s prospects. The fall-out of the nan-
cial bust will weigh on private spending
for several more years as banking systems
are repaired and households and rms pay
down their debts. Even in America, where
households are moving out of the red fast-
er than elsewhere, they have at best got
only halfway there.
According to the analysis by Carmen
and Vincent Reinhart mentioned earlier in
this report, GDP per head, on average,
grows 1% a year more slowly in the decade
after big crises than in the decade before.
Since rich economies as a group grew by
an average of 2.5% a year before the nan-
cial crisis and then slumped by more than
A better way
The rich world should worry about growth-promoting reforms more than short-term scal austerity
15
Don’t hang your hopes too high
Source: The Economist poll of forecasters
GDP, 2011 forecast, % increase on previous year
0 0.5 1.0 1.5 2.0 2.5 3.0
Canada
United
States
Britain
Germany
Japan
France
EU-13
Italy
Spain
March forecast September forecast
taxi drivers for deregulation would cost
4.5 billion. But buying o the losers from
reforms may not hold much appeal.
Boosting European integration could be
another way to cut through national resis-
tance to deregulation. As Mario Monti, a
former EU competition commissioner,
pointed out in a recent call for action, 70%
of the EU’s GDP is in services but only 20%
of those services cross borders. The EU’s
Services Directive, which is supposed to
boost cross-country competition in ser-
vices, has proved fairly toothless.
How governments can help
Activism on the part of governments is not
always misguided. Their investment in ba-
sic research is important. The grants doled
out by America’s National Institutes of
Health, for example, generate the raw
ideas that pharmaceutical rms turn into
protable medicines. America’s Defence
Department created the beginnings of the
internet. Public spending on building and
maintaining infrastructure also matters,
though economists argue about how
much. Governments can encourage priv-
ate R&Dspending with tax credits and sub-
sidies, and the evidence suggests that more
R&Dspending overall boosts growth. Oth-
er research shows that rms which spend
more on R&D are also often quicker to
adopt other innovations.
But these traditional ways of encourag-
ing innovation may be less relevant now
that research has become more global and
more concentrated on software than on
hardware. Since the mid-1990s China
alone has accounted for a third of the in-
crease in global spending on research and
development. Big rms maintain research
facilities in many countries. Dreaming up
new products and services, as well as bet-
ter ways of producing old ones, increasing-
ly involves collaboration across borders
and companies. As Mr Jorgenson of Har-
vard University puts it: Think Google, not
lab coats.
In this more uid world the old kind of
government incentives, such as tax credits
and subsidies, may do less to boost inno-
vation than more imaginative induce-
ments, such as oering rms prizes for
breakthrough innovations. Bigger eorts to
remove remaining barriers to collabora-
tion, from limitations on high-skilled im-
migration to excessively rigid land-use
rules, should also help.
A smart innovation agenda, in short,
would be quite dierent from the one that
most rich governments seem to favour. It
would be more about freeing markets and
less about picking winners; more about
creating the right conditions for bright
ideas to emerge and less about promises of
things like green jobs. But pursuing that
kind of policy requires courage and vi-
sionand most of the rich economies are
not displaying enough of either. 7
The Economist October 9th 2010 A special report on the world economy 29
2
1
3% during the recession, that suggests they
might grow by less than 1.7% a year over the
next few years.
Slower growth in advanced economies
will mean lower private investment, high-
er unemployment and higher public debt,
all of which will hurt their longer-term ca-
pacity to grow. At the same time the ad-
verse eect of ageing (and in many cases
shrinking) populations on growth will be-
come much more noticeable, especially in
Europe, where a big rise in the share of
women in the labour force has hitherto
concealed the demographic drag.
The overall eect of these various ele-
ments is likely to be big. The grimmest pre-
dictions of the consequences of demogra-
phy, higher public debt and lower private
investment suggest that the potential
growth rate of the big advanced econo-
mies as a group could halve, from above
2% before the crisis to around 1% over the
next few years. Small wonder that Mr Tri-
chet, the president of the European Central
Bank and a man not normally given to hy-
perbole, worries that the next ten years
could be a lost decade.
Are today’s growth strategies good
enough to prove him wrong? There are
three big reasons to doubt it. First, rich
countries, collectively, are relying too
much on foreign demand as a source of
growth. Second, they are at risk of both
overdoing and mismanaging short-term
scal austerity. Third, most are paying far
too little attention to structural reforms
that would speed up the pace of debt re-
duction, make high unemployment less
likely to become entrenched and boost
productivity growth.
Begin with the wishful thinking on for-
eign demand. At every international eco-
nomic gathering there is talk of the impor-
tance of rebalancing the pattern of
global demand. The world economy must
rely less on spending by over-indebted An-
glo-Saxon consumers and cajole more
spending out of thriftier Germans and Jap-
anese, as well as rms and households in
fast-growing emerging economies, nota-
bly China. Yet there is little sign that these
eorts have done any good so far.
The rich world’s decit countries, such
as America and Britain, certainly want to
push exports to counter weak consumer
demand. The Obama administration has
said it would like to double America’s ex-
ports in ve years. Britain’s new govern-
ment has put export promotion at the
heart of its foreign policy. But the surplus
economies, particularly Germany and Ja-
pan, are equally determined to go on fo-
cusing on trade. Japan recently intervened
in currency markets for the rst time in six
years to stem the yen’s rise.
Nor is there much sign of a rapid rebal-
ancing towards the emerging world. Chi-
na, as the biggest saver, should bear the
brunt of such a shift. Its current-account
surplus declined sharply between 2008
and 2009, but this year it is rising again. Al-
though the government promised a more
exible currency in June, the yuan has
barely moved in recent months.
More important, the structural barriers
that get in the way of higher domestic
spendingfrom government monopolies
in many services to taxes, subsidies and
corporate-governance rules that favour
prots over wageswill take years to re-
move. Nor is there much sign that other
emerging economies are keen to run big
decits for now. In the longer term faster
growth in poorer countries’ demand is
bound to be good for the advanced econo-
mies, but it will take time.
Adangerous squeeze
The rich countries also seem to underesti-
mate the risks that scal austerity poses to
domestic demand. Virtually all the ad-
vanced economies are planning some
combination of tax increases and spend-
ing cuts next year as their stimulus pack-
ages expire and budget consolidation be-
gins. Collectively, says the IMF, these will
amount to a tightening of some 1.25% of
GDP. That would be the biggest simulta-
neous scal squeeze since modern records
began. The IMF’s own recent analyses,
which refute the idea that scal contrac-
tions boost growth in the short term, sug-
gest that such a tightening might reduce the
rich world’s already weak growth next
year by a percentage point or so.
Is this a sensible trade-o? Countries in
which nancial markets have lost con-
dence, such as Ireland or Spain, have no
choice. Others must weigh the costs of
slower growth against the benets of
greater prudence, particularly the reduced
risk of a sudden jump in bond yields and
the prospect of lower public debt later. For
many individual economies, particularly
open and indebted ones, that points to-
wards earlier austerity. But what makes
sense for individual countries may not
make sense for the rich world as a whole.
More important, policymakers’ obses-
sion with cutting decits in the short term
has deected attention from the more im-
portant question of how to do it. Some
countries are setting about it the right way.
France, for instance, is pushing through
pension reform; and in Britain three-quar-
ters of the scal adjustment will come
from spending cuts. But America, if Mr
Obama has his way and the Bush tax cuts
for high earners are eliminated, is heading
for the worst possible outcome: raising tax-
es on income and capital but failing to trim
the country’s pension liabilities and rising
health-care costs.
In most rich countries the detailed
plans for scal austerity contrast sharply
with a lamentable lack of microeconomic
ambition. Greece is the only rich economy
that is responding to the crisis with broad
30 A special report on the world economy The Economist October 9th 2010
Future special reports
Turkey October 23rd 2010
Smart systems November 6th 2010
Japan November 20th 2010
Security in Asia December 4th 2010
Global elites January 22nd 2011
and radical reforms to boost its productive
potential. In Britain, whose economy is al-
ready relatively deregulated, spending
cuts will help reduce the role of the state.
But elsewhere progress has been limited.
Spain has gone some way towards freeing
its labour markets, and Japan’s growth
strategy proposes a series of small liberal-
ising steps, such as cutting rules around
nursing care. But Germany’s politicians are
far keener to denounce decits than to de-
regulate domestic services. And in Ameri-
ca the policy debate revolves almost en-
tirely around demand, the wisdom of
stimulus and the Bush tax cuts. Most o-
cials barely acknowledge that supply-side
reforms, such as an overhaul of training
schemes to help combat long-term jobless-
ness, or bigger eorts to reduce household
debts, might even be necessary.
The economic case for a growth strat-
egy that combines hefty scal cuts with
timid structural reforms is not obvious, es-
pecially when private demand is likely to
stay weak. In the long run bold productivi-
ty-enhancing reforms will do more to
boost the rich world’s growth prospects
than short-term scal austerity. And better
growth prospects will, themselves, make
government debt less onerous. In a recent
study, economists at the IMF analysed the
respective impact of decit reduction, glo-
bal rebalancing and productivity-enhanc-
ing structural reforms on the growth pros-
pects of big rich economies and found that
by far the strongest positive eect came
from structural reforms.
There is also a political logic to favour-
ing a bigger prop for demand along with
bolder action on structural reforms. The
contrasting stories of Sweden and Japan
suggest that although big crises can oer
an opportunity to overhaul an entire econ-
omy, a prolonged period of sluggish
growth makes structural reforms increas-
ingly dicult. Both politicians and voters
become accustomed to gradual decline. In
many rich countries an extended bout of
high unemployment could easily lead to
policies such as protectionism that will
further hurt long-term growth.
All told, there is a case for changing the
debate about growth in the rich world. Fis-
cal consolidation should be more nuanced
and supply-side reforms should be given
greater prominence. This is particularly
true for America. In an ideal world, Ameri-
ca’s politicians would come up with a
package of medium-term spending cuts
and tax reforms to ll the country’s scal
gap. But since that is impossible, given that
Republicans refuse to countenance any tax
increases and Democrats refuse to cut any
spending on entitlements, the best short-
term remedy would be to extend the Bush
tax cuts for another three years.
America’s structural reforms ought to
focus on encouraging households to re-
duce their debts more quickly and tackling
entrenched joblessness. By the standards
of previous nancial crises America’s
banks have been recapitalised remarkably
quickly, but much less has been done to
deal with the $800 billion-worth of Amer-
ican mortgages (almost 25% of the total)
where the house is worth less than the out-
standing loan. Legal reforms that made it
easier to reduce this debt overhang would
allow a more ecient allocation of capital
and hence boost investment. They would
help to deal with high unemployment, too,
by making it easier for workers to move to
new jobs. A comprehensive strategy to
counter structural joblessness would also
include things like hiring subsidies for the
hard-to-employ and an overhaul of train-
ing schemes.
Outside America the design of scal
consolidation is more sensible, though the
scale may be excessive. In both continental
Europe and Japan reform should concen-
trate on boosting growth by freeing up la-
bour markets and services. Rules that stie
competition should be struck out in indus-
tries from health care to road transport.
The to-do list is familiar, not least be-
cause the OECD has spent years catalogu-
ing and comparing the rich world’s supply-
side rigidities. It even produces a handy an-
nual publication, called Going for
Growth, that sets out priorities. But rich-
world governments have found it hard to
summon up the political courage to act.
The recession and its grim aftermath oer
an opportunity to do better.
If the rich world really wants to go for
growth, it must get away from its narrow
focus on public debt and embark on a
broader economic overhaul. Instead of
promising to halve their budget decits by
2013, for instance, big rich economies could
decide to raise their retirement ages or free
up their professional services. Fiscal con-
solidation would not be ignored: it would
just not be the only priority.
An American ocial famously
quipped after the 2007-08 debacle that
you should never let a serious crisis go to
waste. It is advice that the rich world
would do well to heed. 7
2
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Also in this section
72 The new Dutch government
72 Irish politics
74 Latvia’s election
74 Germany’s Green party
76 German beer drinking
78 Charlemagne: The Geert Wilders
problem
F
IFTEEN years ago he was cast aside by
the Gaullist right because he backed a ri-
val candidate to Jacques Chirac for the
French presidency. Four years later he was
in disgrace with his own camp for securing
amere 13% of the vote as leader of the party
list in elections to the European Parlia-
ment. But Nicolas Sarkozy is nothing if not
aghter. He punched his way back into the
government in 2002 and secured the presi-
dency in 2007. Now, despite crushingly
low poll ratings, he is once again trying to
plot his comeback.
The starting point could hardly be more
testing. This month Mr Sarkozy’s populari-
ty rating fell to 26%, according to TNS
Sofres, a pollster, a nadir it has touched
only once before, in July. At least 1m people
have taken to the streets during one-day
strikes this autumn against the govern-
ment’s raising of the minimum retirement
age. An open-ended strike has been called
for October 12th. Abroad, Mr Sarkozy’s im-
age has been dented by the highly publi-
cised evacuation of illegal Romani camps
in Francealthough most French voters
seem to approve. At home, a breezy oppo-
sition Socialist Party has started to believe
that the next presidential election, in 2012,
is there for the taking.
Mr Sarkozy seems to be devising a two-
pronged ghtback. First, he hopes to use
security space between Russia and the
EU. Many EU countries considered this to
be a Russian ploy to weaken NATO, and
American ocials are watching nervously.
Mr Sarkozy, who returned France to
NATO’s integrated military command last
year, argues that Russia needs to be treated
as a partner rather than a threat, especially
if the West wants its help over such matters
as Iran’s nuclear programme.
Mr Sarkozy’s second front is a plan to re-
fresh his government and give domestic
policy a boost. Before the summer he said
he would reshue his government by late
October, after parliament had passed pen-
sion reform (the legislation is currently be-
fore the upper house). Since then Paris has
been awash with rumours. Certain minis-
ters seem likely to go. They include Eric
Woerth, the labour minister caught up in
an alleged political-favours aair linked to
Liliane Bettencourt, the billionaire heiress
to the L’Oréal cosmetics company. Bernard
Kouchner, the foreign minister, who comes
from the political left, has said that he al-
most quit over the Romani expulsions, and
could now step down. Some heavy-
weights, such as Alain Juppé, a former
prime minister, may return to high oce.
But the biggest question-mark hangs
over François Fillon, the prime minister.
He is the second longest-lasting occupant
of the job since Raymond Barre, who
served under Valéry Giscard d’Estaing in
1976-81. French presidents in trouble tradi-
tionally boot out their prime minister. Yet
Mr Fillon, whose calm, professorial style
contrasts with Mr Sarkozy’s hyperactivity,
is unusually popular. And there is no obvi-
ous replacement. Christine Lagarde, the -
nance minister, is well liked and interna-
tionally respected, but lacks political clout.
France’s presidency of the G20, which
starts in mid-November and is followed by
the G8 presidency in 2011, as a means to re-
assert his voice abroad and to boost his
standing at home. When France held the
rotating European Union presidency in the
second half of 2008, Mr Sarkozy’s popular-
ity rating climbed from 38% to 46%, accord-
ing to OpinionWay, another pollster.
Never short on ambition, Mr Sarkozy
wants the G20 to become the forum for
talks about global economic stability and
governance, including exchange-rate vola-
tility. Monetary imbalances threaten all
our economies, he declared in Brussels
this week. There are plans for the two G20
summits in France next year to be preced-
ed by thematic seminars steered by va-
rious world leaders, the better to squeeze
meaningful decisions out of the summit
meetings themselves. To this end the
French have been quietly talking to the
Chinese, trying to get the idea of exchange-
rate co-ordination on the table.
A foretaste of Mr Sarkozy’s new diplo-
macy will be on display on October 18th
and 19th, when he meets Germany’s chan-
cellor, Angela Merkel, and Russia’s presi-
dent, Dmitry Medvedev, in the Normandy
resort of Deauville. He will revive an idea
he rst raised in 2008, in response to Rus-
sian proposals, for a new economic and
France’s president
Watch out, world
For daily analysis and debate on Europe, visit
Economist.com/europe
Europe
Paris
France’s unloved president plots his comeback
1
The Economist October 9th 2010 71
72 Europe The Economist October 9th 2010
2
1
Michèle Alliot-Marie, the justice minister,
is too linked to the Chirac era. Mr Sarkozy
could reach for a younger face, such as Bru-
no Le Maire (agriculture minister) or Fran-
çois Baroin (budget minister). Or he could
defy tradition and keep Mr Fillon on. The
uncertainty makes for distracting parlour
games, but not for stable policymaking.
Is a new government likely to do any-
thing useful in the 18 months left before the
2012 presidential election? Aides to Mr Sar-
kozy had been arguing that there was no
time for any more reforms after the retire-
ment-age increase. But now the tune
seems to be changing. Senior ocials insist
that the president will continue to reform
the country until his last minute in oce.
One idea is to rethink the tax system.
This week Mr Fillon raised the prospect of
the abolition of France’s wealth tax, im-
posed yearly on almost all assets worth
over 790,000 ($1.1m), and the tax shield
that limits all personal taxation to 50% of
income. Mr Sarkozy had supported the
shield, partly to help lure tax exiles back
home. But it has led to rebates worth mil-
lions for some of France’s richest people,
including Mrs Bettencourt, who got a
cheque from the state for 30m this year.
In a country where nearly 8m people live
on less than 949 a month, the shield has
become a symbol of scal injustice to
many. Some way of combining the aboli-
tion of both the shield and the wealth tax
with a higher upper tax band could be
seen as fairer, by rich and poor alike.
Yet such plans await Mr Sarkozy’s re-
shue decision. There is no guarantee that
a new government, or a fresh round of glo-
betrotting, will be enough to lift his miser-
able poll numbers. Unease over the style
and clannishness of his mercurial presi-
dency will remain. A diplomatic urry
may exasperate foreign friends, and lead to
little. The experience of Mr Sarkozy’s two
immediate predecessors, both of whom
were re-elected, oers little comfort (see
chart). At this stage in his rst term, Fran-
çois Mitterrand was unpopular, but less so
than Mr Sarkozywhereas Mr Chirac had
already regained the poll numbers he en-
joyed in the months after his election. 7
Down in a hole
Source: TNS Sofres
Confidence in the president, % polled
Year 1 Year 2 Year 3 Year 4
0
20
40
60
80
Sarkozy (2007-10)
Chirac
(1995-98)
Mitterrand (1981-84)
M
EET the Netherlands. A small, au-
ent, densely populated northern
European country, economically timid,
with the potential for ethnic strife simmer-
ing just under its quiet surface. That is the
picture painted by the agreement underly-
ing the new Dutch centre-right minority
government, consisting of the liberal VVD
and the Christian Democrats. With the
backbench support of the far-right Free-
dom Party and its leader, Geert Wilders
(see Charlemagne, page 78), the new gov-
ernment will have a majority of just one in
the 150-seat parliament.
Mr Wilders has extracted a range of
policy goodies in return for his support.
The new government will ban the face-
covering Islamic veil, and forbid police and
workers in judicial institutions from wear-
ing the headscarf. Immigration via mar-
riage will be curbed. State subsidies for
newcomers’ language courses will be
turned into loans, and a failure to pass the
subsequent tests could become grounds
for a refusal to grant residence permits.
The agreement is long on heavy-hand-
ed police tactics as a response to crime-rid-
den ethnically mixed neighbourhoods,
but has nothing to say about poor infra-
structure, school drop-out rates, skills
shortages and low social mobility among
both immigrants and natives in such areas.
More surprisingly, the government has
shunned any serious attempts at structural
economic reform. Mark Rutte, leader of the
VVD and prime minister-in-waiting, cam-
paigned on a pledge to revitalise the Dutch
economy. But no substantial eort will be
made to reform either the labour market or
the inated government-subsidised hous-
ing market. The generous pension system
will remain, and the pension age will creep
up by just a year, from 65 to 66, and then
not until 2020. This must be the most con-
servative and anti-reform economic pro-
gramme we have had in the past 40 years,
says Sweder van Wijnbergen, professor of
economics at the University of Amster-
dam.
And despite the professed radical liber-
alism of both the VVD and Mr Wilders,
there is a whi of social conservatism to
their vision for the country. Nobody ques-
tions issues such as euthanasia, abortion
or gay marriage, considered to be private
matters, but this liberal spirit will not ex-
tend to the public spacethe famous coee
shops of Amsterdam will become mem-
bers-only clubs closed to foreigners. The
ranks of the police will grow by 3,000, a
policy which will please Mr Wilders.
Under the new dispensation the Neth-
erlands, traditionally a fairly outward-
looking place, will adopt a more critical at-
titude towards the European Union. The
government is likely to oppose Turkey’s EU
membership bid, and will look sceptically
on any further expansion of the club.
Spending on foreign aid will be cut.
Some observers expect that the new co-
alition, the rst minority government in
modern Dutch history, will fall apart at the
rst hint of trouble. But the parties may
hold each other in a rmer grip than some
expect. They are well attuned to the con-
cerns of Dutch voters, many of whom, out-
side the big cities that are frequented by
tourists, are a socially conservative bunch,
anxious about the economic and social
changes globalisation can bring. Instead of
helping them to face up to today’s chal-
lenges, the government has chosen to play
upon their fears. 7
Politics in the Netherlands
Not exactly Dutch
courage
THE HAGUE
The new government unveils its
uninspiring vision for the country
I
T IS a critical moment, says Garret Fitz-
Gerald, a former Irish prime minister. As
the Irish people brace themselves for even
more scal austerity, the challenge for the
political class, Mr FitzGerald suggests, is to
put country before party so as to ensure
that Ireland avoids Greece’s fatea loss of
economic sovereignty and a euro-zone
bail-out.
To do this Brian Cowen, the prime min-
ister, must take some more tough deci-
sions, and soon. His Fianna Fail-led co-
alition has pledged to outline its scal
plans for the next four years ahead of the
December 7th budget. Olli Rehn, the EU’s
economics commissioner, has said that
Ireland’s politics
How now Brian
Cowen?
Dublin
Ireland’s prime minister struggles to
reassure investors and voters
From green to red
Source: Irish finance ministry
Ireland’s budget deficit, % of GDP
0
5
10
15
20
25
30
35
2008 09 10 11 12 13 14
F O R E C A S T
Networking
A product of Lufthansa.
Fly from 17 U.S. gateways to more than 400 worldwide destinations
and never leave your friends behind. Post departure and arrival info
and set in-flight updates from your smartphone at MySkyStatus.com
and alerts will be sent via Facebook and Twitter.
With MySkyStatus

, in-the-air doesn’t
mean out-of-touch.
lufthansa.com/myskystatus
74 Europe The Economist October 9th 2010
2
1
they must include sector-specic adjust-
ment measures. By January, when the gov-
ernment is due to resume borrowing, Mr
Cowen needs to have done enough to con-
vince bond investors that there is a credi-
ble plan in place to bring the budget decit
down to 3% of GDP by 2014.
Investors’ nervousness about Ireland’s
ability to meet that target has greatly in-
creased in recent months, as the cost of
bailing out the country’s banks, especially
Allied Irish and Anglo Irish, has soared
close to a massive 50 billion ($69 billion).
With no growth likely this year, the budget
decit has been revised up to 11.9% of GDP,
excluding the bank bail-out costs. If these
are added in, the gure rises to an eye-wa-
tering 32%. The government’s borrowing
costs have risen sharply, with the yield on
ten-year Irish bonds now more than four
percentage points higher than their Ger-
man equivalents. Not surprisingly the rat-
ing agencies are nervous: this week one
downgraded Ireland and another gave
warning it could do so.
Mr Cowen has withstood some minor
backbench revolts against his leadership,
but he is struggling to retain public con-
dence. Some were outraged by his hoarse-
ness during a recent radio interview that
followed a night of socialising with party
colleagues. In parliament, where the gov-
ernment’s majority has been steadily
eroding thanks to defections and dissent,
the coalition depends on the support of in-
creasingly fretful independents. Luckily for
Mr Cowen, Fine Gael, the main opposition
party, has failed to capitalise on the govern-
ment’s diculties. In June its leader, Enda
Kenny, survived a leadership challenge
and he is once again under pressure. This
makes a snap election less likely.
Yet after three years of austerity in
which household wealth has fallen by al-
most a third, most of the public remain
deeply pessimistic. In one opinion poll,
70% of respondents said they felt that the
worst was yet to come for the economy.
Most also believed that a change of gov-
ernment would have no economic impact.
The patriotic rallying call of Mr FitzGerald
has never seemed more necessary. 7 Is Cowen throttling a recovery?
Latvia’s election
Guts and glory
L
ATVIA’S recent history has seen o
several axioms of modern political
economy. One is that maintaining a xed
exchange rate in the midst of a slump is
suicidal. Latvia kept its currency peg to
the euro and has regained competitive-
ness through an internal devaluation,
with large cuts in wages and public
spending: a scal adjustment equivalent
to some 14% of GDP.
Another axiom is that voters punish
governments that impose tough austerity
programmes. But the coalition headed by
Valdis Dombrovskis, the prime minister,
won the parliamentary election on Octo-
ber 2nd with 58.6% of the vote, despite
presiding over a record 18% drop in GDP
in 2009. Mr Dombrovskis’s Unity party
almost doubled its seats in parliament, to
33 (out of 100).
Voters have also disproved another
proposition: that money inevitably dis-
torts the political process, particularly in
poor countries. The main oligarch-
backed party, For a Good Latvia, col-
lapsed to just eight seats (from 33 before),
despite showering money on the cam-
paign and buying the country’s best-
known independent newspaper. Voters
appear to have blamed it, with justice, for
reckless policies in the boom years.
Foreigners who bailed out Latvia with
a 7.5 billion ($10.9 billion) loan in late
2008 are relieved. The economy is return-
ing to growth, with sharp rises in exports
and industrial production (though un-
employment remains high). But Mr
Dombrovskis is facing a new problem.
The runner-up in the election was Har-
mony Centre, a centre-left party backed
by most of the country’s ethnic Russians,
and also by ethnic Latvians fed up with
the established parties. It has won 29
seats in the new parliament.
With this showing Harmony Centre
could try to tempt away Mr Dombrov-
skis’s main coalition partner, the Greens
and Farmers Union, which won 22 seats.
To avert that, Mr Dombrovskis could
oer Harmony Centre a deal, perhaps in
place of the smallest coalition party, a
new ultra-nationalist alliance which has
eight seats and an unpleasant fringe.
Harmony Centre is already in power
in the capital, Riga. But bringing a pro-
Russian party into the national govern-
ment, even in a minor role, would be a
big political risk, and Mr Dombrovskis
may prefer to stick to his existing part-
ners. The new government must be
formed by November 2ndand start
work on next year’s budget. That will
mean yet more spending cuts and tax
rises to meet the decit target of 6% of
GDP set by international lenders. Meet-
ing the conditions to adopt the euro in
2014, the government’s aim, will be more
demanding still.
Latvians defy conventional wisdom by re-electing an austerity government
L
EADING lights of Germany’s Green
party can sound like Zen masters.
Only one who changes can stay true to
himself, intones Renate Künast, co-chair-
man of the Greens in the Bundestag.
Ludger Volmer, once party chairman,
speaks of the art of inconsistency. Koan-
like utterances come naturally to a party
that grew out of youthful protests in the
1970s, became an anti-party party in
1980 and then wielded power as part of a
centre-left government from 1998 to 2005.
Now in opposition, the Greens are riding
higher in polls than ever. In elections next
year they could take charge of one or even
two state governments for the rst time.
That would be a big shift. Post-war Ger-
man politics has been ruled by the Chris-
tian Democratic Union (CDU) and the So-
cial Democratic Party (SPD), which usually
form majorities by recruiting smaller part-
ners (the CDU now governs with the liber-
al Free Democratic Party, or FDP). But the
big parties’ share of the vote has been de-
clining for years. In Baden-Württemberg, a
CDU stronghold that holds elections in
March, and in Berlin, an SPDef that votes
next autumn, the Greens are ahead of the
SPD (one poll says they have also closed
the gap nationally). This threatens to up-
end the traditional hierarchy of the centre-
left parties, which Gerhard Schröder, a for-
Germany’s Greens
Greenery in high
places
Berlin
Germany’s Green party is ourishing
76 Europe The Economist October 9th 2010
2
mer SPD chancellor, likened to that of
cook and waiter.
If Germans are developing a taste for
Green cuisine, it is partly because the other
options look unappetising. Voters are dis-
appointed with both the governing par-
ties, especially the FDP, some of whose
supporters are tempted by Green-tinged
liberalism. The SPD is still in the throes of
an identity crisis brought on by its relative-
ly reformist record in government, which
alienated its working-class base.
More important, Greens insist, is the
tastiness of their own recipes. The values
and political purposes the Greens fought
for for 30 years are now becoming main-
stream, says Ralf Fücks, head of the Hein-
rich Böll Foundation, a Green-linked think-
tank. Ecology matters as much as ever but
now it is seen as the driver of an innova-
tion-fuelled great transformation of the
economy. Rights for women (half the
Greens’ political jobs are reserved for
them), immigrants and gays are big
themes. The state has much to do, from im-
proving education and welfare to re-regu-
lating nance. Reassuringly, all this is to
take place within the framework of liber-
al democracy and a market-based econ-
omy, says Mr Fücks.
This is radicalism plus responsibility,
greenery plus growth, party politics and
anti-party attitudes all at once. In pursuit
of their goals the Greens are prepared for
every pragmatic compromise, says Mr
Volmer, who wrote a book about them
after leaving politics. But as the party ad-
vances it will nd it harder to sustain tacti-
cal agility along with delity to principle.
Its keenest supporters are well-educat-
ed urbanites; no party’s voters are richer.
Socially and economically they are as bür-
gerlich (bourgeois) as supporters of the two
centre-right parties. But they vote for their
values, not their interests. We don’t repre-
sent a Bürgertumthat thinks only of itself,
says Ms Künast.
Now they are at the barricades once
again. Protests erupted in September after
Angela Merkel, the chancellor, decided to
extend a 2022 deadline for phasing out nu-
clear power set by Mr Schröder’s SPD-
Green coalition. In Stuttgart, Baden-Würt-
temberg’s capital, the Greens have helped
lead resistance to a grand project to shift
the city’s rail trac underground. On Sep-
tember 30th scores of demonstrators were
hurt in clashes with police. Mr Fücks sees a
danger we will fall back into hostility we
thought we had overcome.
Conict has been clarifying. The
Greens had been irting with the CDU as a
possible coalition partner. This makes
sense, especially since hopes of resurrect-
ing the SPD-Green coalition have dimin-
ished now that the ex-communist Left
party is established as a fth force in the
Bundestag. But a pairing with the CDU
would stretch the Greens’ capacity for cre-
ative inconsistency to the limit. That op-
tion is o the table and left-right polarisa-
tion has returned, at least temporarily.
The Greens will soon start to discover
just how mainstream their ideas really are.
Mrs Merkel has begun to attack them as en-
emies of progress. Plans for spending and
taxing more can be made to look drearily
left-wing rather than intriguingly progres-
sive. Some analysts think the Green ascent
is a political bubble.
Not so, says Lothar Probst of the Uni-
versity of Bremen. The Greens’ middle-
aged, university-educated constituency is
growing as a proportion of the electorate.
The party is unlikely to eclipse the SPD by
the time of the next federal election in 2013,
but it could catch up soon after that. The
rst Green chancellor will no doubt have a
taste for paradox. 7
German beer drinking
Oktobergloom
T
HE morning after the night before is a
time for reection. Waking this week
after the 177th Oktoberfest, Müncheners
were not alone in nursing a hangover.
Although festival-goers downed a record
7m litres of beer this year, Braumeisters
are left with a painful headache of their
own: the shrinking German appetite for
beer. In 1991the average German quaed
142 litres of the stu, but intake has de-
clined every year since. By 2009 German
consumption per head had fallen below
110 litres, less than in the Czech Republic,
Ireland and Austria. Another fall is ex-
pected this year.
An ageing, shrinking population is
drinking less. But habits are also chang-
ing. Young people have acquired a taste
for more exotic or non-alcoholic drinks.
Richer people see wine as more up-
market than beer. To the disappointment
of many, drinking beer at lunchtime is
frowned upon. Even among the tradi-
tionally hard-boozing middle-aged,
health concerns have curbed drinking.
This trend is not unique to Germany:
beer drinking is stable or in decline in all
mature markets. But it is especially strik-
ing because of beer’s national symbol-
ism. This is a centuries-old industry,
governed by the world’s oldest food law,
the 1516 Reinheitsgebot (purity law). Per-
versely, the taste for quality creates pro-
blems of its own. Mass-produced beers
are derided as Spülwasser (dishwater).
The four biggest global brewers have less
than a fth of the German market, com-
pared with nearly half the global one.
Instead, local brewers dominate, creating
the most fragmented big beer market in
the world. Prices are kept low by erce
competition among 1,300 breweries,
more than the rest of Europe combined.
Unable to cut costs or squeeze retailers’
margins, smaller brewers are struggling.
Germany has not fallen out of love
with beer. It is the world’s fth-largest
market, and by far the biggest in Europe.
But for the brewers, a gentle long-term
decline looks inevitable. In 20 years’ time
consumption may fall to as little as 80
litres per head, predicts Marc-Oliver
Huhnholz of the German Brewers’ Asso-
ciation. More and more breweries will
have to close, he says. We are not sure
where the journey will go.
BERLIN
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Achieving more together
H
IS big bleach-blond mane was unmistakable, but this time
his mouth, the biggest in Dutch politics, stayed shut. Geert
Wilders, leader of the anti-immigrant Freedom Party, is on trial
for incitement to hatred and discrimination against Muslims. But
when he appeared before judges in Amsterdam on October 4th,
this champion of free speech declined to speak.
The court heard some of Mr Wilders’s greatest hits: the Koran
is the ‘Mein Kampf’ of a religion that intends to eliminate others
(2007); Islam wants to control, subdue and is out for the destruc-
tion of our Western civilisation (2008); a Koran stripped of its
hateful verses, should actually have the format of a Donald
Duck [comic book] (2007, again). The judges’ questions were
comically innocent. Did Mr Wilders really say such things? Was it
in the heat of the moment? Had he received legal advice? Did he
really need to refer to Donald Duck? Stubborn silence.
Maybe the state should not be in the business of prosecuting
politicians for their oensive views. But these are highly charged
times in the Netherlands. The threat of murder hangs over the tra-
ditionally tolerant country. In 2002 Pim Fortuyn, an earlier anti-
immigrant politician, was killed. Two years later so was Theo van
Gogh, an anti-Islamist lm-maker. Mr Wilders now moves only
with a posse of bodyguards, and lives at a secret location.
Even more importantly, he has become the political kingmak-
er. His party came third in June’s general election, winning 15% of
the vote, and will now prop up a minority government of the lib-
eral VVDwith the centre-right Christian Democrats. In exchange,
Mr Wilders has secured the promise of tighter immigration rules,
aban on some Islamic garb and more money for care of the elder-
ly. Newspapers are calling this the Wilders 1 government.
Mr Wilders’s party is only one of many anti-immigrant and
anti-Islam groups that are gaining ground in northern European
countries previously known for their liberal social attitudes. The
Dutch coalition deal was copied from Denmark, where the Dan-
ish People’s Party has backed a minority government since 2001.
In Sweden’s recent election the far-right Sweden Democrats won
seats for the rst time, denying Fredrik Reinfeldt, the prime min-
ister, a centre-right majority (he is now running a minority gov-
ernment). These parties, all with their own special characteris-
tics, are distinct from older far-right groups such as France’s
National Front and Italy’s Northern League, and have still less to
do with thuggish movements in eastern Europe. But a common
theme is a dislike of foreigners, especially Muslims.
A big question is whether Germany, the European country
most inoculated from right-wing extremism, may be next. There
have been stirrings of late, such as the sacking from the board of
the Bundesbank of Thilo Sarrazin, a former Social Democratic
politician, who published a book saying Muslim migrants were
making Germany more stupid. Enter the inevitable Mr Wild-
ers. He was in Berlin earlier this month to launch a new party
called Die Freiheit (Freedom), founded by René Stadtkewitz, for-
merly a member of the Berlin branch of the Christian Democrats.
To cheers, Mr Wilders declared that Germans, too, needed to de-
fend their identity against Islamisation.
Mr Wilders should not be underestimated. By identifying the
enemy as Islam and not foreigners, and by casting his rhetoric in
terms of freedom rather than race, he becomes harder to label as
a reactionary, racist or neo-Nazi. Mr Wilders does not want to as-
sociate with the fascist sort. He has no truck with anti-Semitism
and fervently supports Israel. He is, for want of a better term, a
radical liberal: he defends women’s emancipation and gay rights.
He is ghting to defend the West’s liberties; the enemy is Islam
(not Muslims, he says), which seeks, violently, to destroy them.
Such views chime with some American conservatives. The
Washington Times this week called for Mr Wilders’s acquittal.
Daniel Pipes, an American scholar and prominent scourge of Is-
lamic radicalism, has called him the most important European
alive today. Mr Wilders was invited to speak at a rally at New
York’s Ground Zero to mark the 2001 September 11th attacks and
oppose the construction of a new Islamic centre nearby. Yet
Americans (and Europeans) should be wary of embracing Mr
Wilders. To expose violent Islamist ideology is legitimate, even
necessary; to attack Islam and the Koran is dangerous stupidity
that weakens the civilisation Mr Wilders claims to defend.
Defanging the extremes
What should democratic parties do when lots of voters back a
far-right party? At a time of recession, populism cannot just be
wished away. One answer is to address legitimate grievances
about the scale and nature of immigration. (In France Nicolas Sar-
kozy has, controversially, pinched far-right rhetoric.) Another is
to use the law to curb blatant examples of hate speech.
But the temptation for many is to isolate the extremists, per-
haps with an alliance of mainstream left and right. That risks in-
tensifying voters’ sense that politicians are not listening to them,
further boosting the extremists, but it may be necessary against
the most odious groups. Some, like Mr Reinfeldt in Sweden, may
try to ignore the far right. More stable would be a Dutch-style deal
to secure their backing for a minority government; some Chris-
tian Democrats hope this will tame the wilder side of Mr Wilders.
The danger is that it just gives him power without responsibility
and without forcing him to recant outrageous positions.
A better, braver strategy, in some cases, might be to bring far-
right leaders into the cabinet, exposing their ideas to reality and
their personalities to the public gaze. It may make for tetchy gov-
ernment, but it could also moderate the extremes. So roll the dice
and make Mr Wilders foreign minister: for how long could he
keep telling the world to ban the Koran? 7
A false prophet
Why Geert Wilders is a problem, not a solution
Charlemagne
78 Europe The Economist October 9th 2010
Economist.com/blogs/charlemagne
For daily analysis and debate on Britain, visit
Economist.com/britain
Also in this section
80 The Tory right
80 Housing immigrants
81 Fire-service reform
82 Bagehot: David Cameron, war leader
T
HIS week’s Conservative Party confer-
ence was its rst as a governing party
since 1996. But any sense of triumphalism
was notable by its absence as the Tories
gathered in Birmingham. In part that was
because they failed to win the May general
election outright, and had to strike a co-
alition deal with the Liberal Democrats.
But the mood was also sombre because the
conference came two weeks before George
Osborne, the Tory chancellor of the exche-
quer, will reveal precisely where savage
public-spending cuts will be made, as the
government attempts to slash Britain’s s-
cal decit. On October 4th he gave an ad-
vance preview of one such cut: it caused an
almighty ruckus, clouding out the sunnier
messages from Birmingham.
Mr Osborne said that from 2013 child
benet, at present paid to all mothers,
would be withdrawn from families in
which one parent earns enough to pay the
higher rate of income tax; this year the
threshold is £43,875 ($69,750). The reform,
saving £1 billion a year and aecting 1.2m
out of the 7.8m families who receive the
benet, was, Mr Osborne said, tough but
fair. It was very dicult, argued the chan-
cellor, to justify taxing people on low in-
comes to pay for the child benet of those
earning so much more than them.
That may have sounded perfectly rea-
sonable to Mr Osborne and David Camer-
on, the prime minister, but critics immedi-
ately spotted what seemed a glaringly
savings by 2014-15, the nal year of this par-
liament. These will come primarily from
an across-the-board switch to less gener-
ous uprating of benets and tax credits, to-
gether with economies in specic pay-
ments. For example, a three-year freeze on
child-benet rates is already due to con-
tribute £1 billion in 2014-15. Changes to
housing benet will save nearly £2 billion.
That £11 billion may sound a lot, but by
2014 the Treasury wants to cut spending by
£83 billion altogether. The welfare cuts al-
ready announced would contribute only
13% of that overall reduction, even though
welfare currently makes up 28% of all pub-
lic expenditure. So the chancellor probably
needs to nd about another £10 billion of
welfare savings.
The obvious target is universal bene-
ts, paid to all regardless of their in-
comesof which child benet, costing
around £12 billion a year, is a prime exam-
ple. Now that the universal principle has
been broken, Mr Osborne could also, for
example, restrict the winter-fuel payments
and free bus travel now dispensed to
everyone aged 60 or over.
But even if the chancellor nds a lot
more savings from universal benets, he
will also need to extract some extra econo-
mies from the means-tested ones that go to
poorer claimants. That will arguably be
politically easier for him, now that he has
demonstrated his willingness to make
middle-class mums cross. Mr Osborne
said last month that he intended taking
away several billions of pounds (report-
edly £4 billion a year) from the 5m work-
ing-age people who live on benet. He
added some detail in his conference
speech by announcing a cap on the total
amount of benets that any one house-
hold can claim. From 2013 this will be set at
the post-tax income of a typical working
family, reckoned at £500 a week. That mea-
unfair anomaly: the treatment of stay-at-
home mums. Their families will lose
child benet if their partner’s earnings ex-
ceed the higher-rate threshold. By contrast,
families where both parents earn close to
the threshold could retain the benet on
joint earnings of over £80,000. Moreover,
any cut to child benet was always likely to
prove neuralgic: its lineage can be traced
back to family allowances, which were in-
troduced in the mid-1940s, making it a pil-
lar of the post-war welfare state.
Confronted by indignant mums and fu-
rious headlines in some newspapers, and
with some senior Tories privately grum-
bling that they had not been informed of
the announcement, Mr Cameron hinted at
a possible inglorious retreat. The blow
could be softened, he suggested, by a poli-
cy he favours but which had been shelved:
a tax break for married couples. That
seems implausible, since the plan has been
to restrict the putative marriage perk to ba-
sic-rate taxpayers on grounds of cost.
Still, even if the Conservatives’ reform
was ineptly executed, it was a move in the
right direction. For if the government is to
have any chance of making its planned
spending cuts without mutilating public
services, it will have to nd many more
savings in the welfare billthe biggest
chunk of public expenditure, dwarng
even the National Health Service.
Already in his budget in June Mr Os-
borne had identied £11 billion of welfare
Britain
The row over welfare cuts
And for my next trick
The controversy over restricting child benet is a foretaste of the much greater
political strife to come
1
The Economist October 9th 2010 79
80 Britain The Economist October 9th 2010
2
1
sure is likely to force some welfare-depen-
dent families out of expensive accommo-
dation, especially in London.
But since it will aect only around
50,000 families, Mr Osborne will have to
cut a lot deeper. His task will be easier than
it might have been because he has struck a
deal with Iain Duncan Smith, a former
Tory leader now in charge of most of the
welfare system. The two men have been
feuding over the costs involved in Mr Dun-
can Smith’s ambition to streamline bene-
ts and sharpen the incentives for people
to get back into work. It now appears that
his reform will be introduced more gradu-
ally (stretching over two parliaments),
which should reduce the initial cost from
£3 billion a year to £1billion, and lessen the
risks of the upheaval being botched.
Even if Mr Osborne can excise £10 bil-
lion of additional savings from the welfare
bill, the spending cuts for most of the de-
partments providing public services will
be brutal, not least since it is now looking
as if the Ministry of Defence will get o
lightly. And the government must reckon
not just with opposition among the public
but among its employees. An interim re-
port on October 7th from John Hutton, a
former Labour minister whom the chan-
cellor asked to investigate public-service
pensions, suggested higher employee con-
tributions, which will anger public-sector
sta already facing a two-year pay freeze.
This week’s row over child benet, bitter
and embarrassing though it has been, was
merely a foretaste of the strife to come. 7
S
INCE the Conservative-Liberal Demo-
crat government was formed in May,
most observers have looked to the Lib
Dems as the main source of disaection.
Yet the big arguments within the cabinet so
far have been blue on blue, mostly in-
volving causes dear to the Tory right. Liam
Fox, the defence secretary, has warned of
the threat to the armed forces and national
security posed by impending spending
cuts. Until an agreement was reached re-
cently, the zeal for welfare reform of Iain
Duncan Smith, the work and pensions sec-
retary, received short shrift from a sceptical
Treasury. Meanwhile, Ken Clarke’s liberal
noises as justice secretaryhe has ques-
tioned the utility of short prison sen-
tenceshave provoked anger among fel-
low Tories, including very senior ones.
The right’s grievances with David Cam-
eron are not only about policy. They have
long regarded the prime minister’s leader-
ship style as aloof and cliquey, and have
neither forgotten nor forgiven his failure to
win a general election they believed was
eminently winnable. He aggravated this
anger by retaining almost all the advisers
responsible for the election campaign,
while asking some Tory frontbenchers to
make way for Lib Dems in the cabinet.
For now, the right’s resentment is con-
ned to grumbling. It helps that this wing
of the party approves of the government’s
main missions: cutting spending and de-
centralising public services. But, as Mr
Cameron knows, the pacifying novelty of
being in power after 13 years will wear o.
The Conservatives’ autumn conference
in Birmingham had been intended to
soothe these disgruntled Tories. Sure
enough, most of the policy announce-
ments were popular among the grassroots.
As well as his more divisive plan to with-
draw child benet from high-earning fam-
ilies (see previous story), George Osborne,
the chancellor of the exchequer, said a lim-
it would be set on the amount a household
can claim in benets. On October 5th Mr
Clarke said prisoners should work a 40-
hour week on the minimum wage, with
some of their earnings going to their vic-
tims. That is the kind of prison reform that
Tories can live with. The next day, William
Hague, the foreign secretary, said a bill
would be introduced in Parliament requir-
ing any new transfer of power to the Euro-
pean Union to be put to a referendum.
Perhaps the biggest gift for the Tory
base was a hint rather than a clear an-
nouncement. Responding to the child-ben-
et row, Mr Cameron suggested that his
old plan to recognise marriage in the tax
system may be revived, and perhaps even
made more generous. His big speech on
October 6th struck other recognisably Tory
notes. He lauded wealth creators, con-
rmed that he would retain Britain’s nuc-
lear deterrent and reiterated his determi-
nation to tackle welfare dependency.
This kind of party management is wise,
and overdue. Mr Cameron will need
friends as his government is bueted by
unpopularity in the coming years. But his
dilemma is that pacifying the Tory base
may conict with his simultaneous eort
to portray himself as a one nation prime
minister (see Bagehot). In quite a smooth
division of labour, Mr Osborne has gradu-
ally emerged as the de facto Tory party
leader, guarding his tribe’s interests within
the coalition while Mr Cameron oats
above the political fray.
Tories distressed by that pose should be
cheered by the fact that it could prove hard
to maintain. Gordon Brown played father
of the nation in his early months as prime
minister. It was not long before his mania
for partisan calculation was exposed. 7
The Tory right
Blue on blue
birMingham
Can David Cameron keep his own
party happy?
O
FF the road from Slough to Windsor to
the west of London, behind a bill-
board for Furniture Village and under the
stars, is Zdzistaw Karczynski’s home. His
shelter lacks the fat beige sofa and soft car-
pet in the poster above him, but it is tidy
enough: a single bed tucked under wood-
en struts against a park wall; an anorak
drying on the line; a pot and a little cook-
stove ready for action; and, at a distance, a
pile of unholy-looking rubbish topped by
an eviscerated mattress.
Zdziko (his nickname), a bricklayer and
plasterer in Poland, worked in Britain as a
gardener until, two years ago, the jobs
dried up. The 52-year-old has been sleep-
ing rough for over a year. He hates the cold,
and the thugs who recently beat him up.
Home to a large industrial estate,
Slough has always welcomed immigrants,
Housing immigrants
Bleak house
slougH
Where do migrant workers live in a
crowded, post-recession town?
The Economist October 9th 2010 Britain 81
2
Fire-service reform
More with less
M
OST organisations employ a few
duds. But Tony McGuirk, Mersey-
side’s chief re ocer, upset some people
when, at a conference held during the
summer by Reform, a think-tank, he said
so. We’ve got some bone idle people in
the public sector, he admitted, infuriat-
ing trade unionists. As it happens, Mr
McGuirk is an expert in tackling waste: he
has cut the number of re-related deaths
in Merseyside while holding down costs.
In 1999-2000 there were 2,140 res in
the Merseyside area and 15 re-related
deaths; last year (2009-10), there were
1,299 and 8. Meanwhile, the number of
traditional re ocers has fallen from
1,400 to 850, saving money. According to
an Audit Commission report of 2008,
Merseyside re service is the country’s
most ecient, relative to population.
The reforms were prompted by the
death of a child in 1999 that the re ser-
vice could have anticipated: in a poor
family, who smoked, used a chip pan and
had no re alarm. Until then, Merseyside
re service hadn’t been much interested
in social issues. Its job was to get an en-
gine to a re within minutes. And it did a
good job in those terms: for 88% of re
fatalities, a crew arrived within ve
minutes of the emergency call.
Mr McGuirk saw that speedy re-
sponse wasn’t enough: prevention was
the key. At the time, no re service in the
country concentrated on preventing res
in the home. With the backing of the
local political authorities, Mr McGuirk
and his team resolved to evangelise,
providing basic re-safety advice, check-
ing 350,000 homes and tting 700,000
smoke alarms. They liaised with social
services and recruited new kinds of sta,
such as advocates who took the safety
message into ethnic communities.
All this involved cutting the number
of re ocers, who, Mr McGuirk realised,
were underemployed for long periods
during their shifts. Anyway, fewer res
required fewer rescuers. Although no
one was made redundant involuntarily,
in 2006 the re-brigade union called a
strike. Protesters dubbed the re chief
McJerk; 2,000 of them walked through
Liverpool carrying banners with slogans
such as I hate McGuirk.
Ironically, it was soon clear that the
200 ocers who stayed at work could
run the service at full capacity. I told the
local press they would never notice there
was a strike, says Mr McGuirk. It’s not
my job to be popular, it’s to deliver. The
strike was defeated in a month.
The re service has long been regard-
ed by politicians and civil servants as
essentially unreformable. But the Mer-
seyside story oers hope that savings can
be made in even the most intransigent
public servicesby preventing problems
rather than merely coping with them. Mr
McGuirk, in short, shows that more can
indeed be done with less.
ALiverpool reman demonstrates how it can be done
Prevention would have been better
and felt more than most the rapid inux of
east Europeans from 2004. Zdziko is one of
dozens of migrants to Slough whom the
economic downturn has made homeless.
But hundreds who have jobs live in condi-
tions that are almost as bad as his.
For nearly a year, the borough council
has waged war on Slough shedsout-
buildings including garden sheds, wooden
lean-tos and garagesthat some house-
holders have rented out without planning
permission or safety inspections, mainly
to migrants. Prompted originally by com-
plaints from other locals, and nanced by a
grant from central government (now
stopped), ocials have inspected these
structures, street by street.
We were appalled at how dangerous
some of them are, says Keith Ford,
Slough’s head of building standards, citing
faulty wiring, rising damp, re risks and
dubious sanitary facilities. So far, his team
has found about 500housing more than
1,000, mainly east European migrants
that contravene safety or planning rules.
They commonly rent for £130-150 ($210-
240) a week. Landlords are being told to
take out the cookers and lavatories and
promise not to let the sheds in future with-
out permission, or face prosecution.
Even worse than the sheds are many
houses in multiple occupancy, known as
HMOs. Fire is their biggest hazard: a recent
suit won by the council against the land-
lord of an unlicensed HMO found at least
six people living in a three-storey house
with no re doors and a kitchen squashed
in under the stairs.
The council thinks Slough has 3,500
HMOs, with at least 17,500 mostly immi-
grant tenants, and is trying to identify
them all. Later this year, ocials will put
forward proposals tightening the licensing
requirements. They are explaining the
rules to landlords and encouraging them
to seek accreditation. Most are not deliber-
ate crooks, thinks Mr Ford, but are just
copying their neighbours and unaware
that they are breaking the rules.
Slough’s crackdown on substandard
rented accommodation, which can exploit
occupants and irritate residents who see
their neighbourhoods degenerating,
seems reasonable. But it does raise an awk-
ward question: where do the migrants go
when they lose their rooms? To date
Slough has rehoused four families previ-
ously living in sheds; one left Slough and
three left Britain. Some might have had
help in relocating from the council’s rent-
deposit scheme. As for the rest, unfortu-
nately we are not able to work out where
they are going, says Manju Dhar, head of
private-sector housing at the council.
Mandy McGuire, who runs Slough’s
Homeless Our Concern (SHOC), a charity,
has some ideas. The number of east Euro-
peans who come to her day centre to
shower, eat and pick up new skills has in-
creased dramatically in the past two years,
she says: 24 homeless Poles showed up on
September 4th alone.
Many, like Zdziko, are on the streets be-
cause they cannot nd work. But the push
against illegal dwellings may be a factor
too. Most of the homeless are single men
who never registered formally to work and
are thus not entitled to much in the way of
benets. Drink and drugs are increasingly
problematic, Ms McGuire says. Slough
badly needs a night shelter for the home-
less, she believes, but SHOCitself does not
have the money to run one.
Father Darius Kuwaczka, a priest at the
Polish church of Divine Mercy, thinks only
a few Polish migrants have returned home,
one obvious solution. Others say that
those who fail to make good in Britain are
ashamed to go back to their families.
That could be about to change. Barka, a
charity that aims to repatriate destitute Pol-
ish migrants and help them get back on
their feet at its centres in Poland, is now
working with SHOC. Zdziko was sched-
uled to meet them this week. 7
V
ISIT any British oce, and you stand a good chance of seeing
a postcard, mug or other trinket bearing the message Keep
Calm and Carry On, beneath the crown of King George VI.
There is little mystery about the craze for this bracing injunction
crafted by the Ministry of Information on the eve of war in 1939. It
taps directly into the country’s mythic image of itself: unshowily
brave and just a little sti, brewing tea as the bombs fall.
The Keep Calm slogan being already taken, the Conserva-
tive Party had to make do with a Churchillian pastiche of its own
devisingTogether in the National Interestat its annual con-
ference in Birmingham this week. This was everywhere: embla-
zoned across the main stage, hanging from banners and slipped
in some guise into every minister’s speech. In contrast, the word
Conservative seemed almost banished. It is dangerous to infer
too much from martial bluster in British politics: at the rst hint of
trouble, channelling Churchill is a default tactic for beleaguered
leaders of all sorts. Yet even so, senior Tories showed unusual
zeal in presenting themselves as a movement of national unity.
The chancellor of the exchequer, George Osborne, harked
back to a few days in spring when the country stood on the brink
of an economic abyss. He praised David Cameron for seeing
that the national interest demanded coalition with the Liberal
Democrats. Calm on the bond markets did not mean Britain
could relax, the chancellor told delegates. Our victory is the very
absence of war, he said, as they nodded in polite baement.
Now together, we must win the peace. Playing against type,
Ken Clarke, the justice secretarya rumpled, paunchy, suede-
shoed jazz lover distrusted by the party’s rightturned Colonel
Blimp, thundering that had the party failed to form a coalition it
would have been a disgraceful dereliction of duty. Politicians,
he beamed, had proved they could set aside party battles.
At its simplest, this is a sleight of hand: presenting coalition
rule as an act of selessness, rather than a consequence of failing
to secure a majority at the general election. The Conservatives
are helped by the rarity of coalition rule in Britain. In countries
where coalitions are the norm, voters would fall about at the idea
that multi-party rule involves putting aside partisan strife. But in
Britain the last formal coalition was a wartime government of na-
tional unity, a fact that lingers in the folk memory. The whi of
cordite is also helpful to the coalition’s drive to portray Mr Os-
borne’s plan for eliminating most of the structural decit within
ve years as a campaign of necessity rather than political choice.
It implies that opposition to it is unpatriotic, or at least extreme.
This bid to depict the Tories as somehow above mere party
politics was intensely personalised. Ministerial tributes to Mr
Cameron repeatedly portrayed him as a visionary who under-
stood the need for national unity, and the guarantor that coalition
rule will be tough but fair. Again and again, Mr Cameron’s own
personality and biography were oered up as proof that today’s
Conservatives are a moderate, post-partisan party.
Talk to Tory sources, and their descriptions of the coalition
sound strangely like Mr Cameron, their well-brought up boss.
After Labour’s arrogant, chaotic decision-making on a Down-
ing Street sofa, it is said, this coalition is made up of two parties
that are polite to each other and take decisions properly
round a table. Even Mr Cameron (a sleeves-rolled-up chap keen
on decency and responsibility) drifts close to self-referential trib-
utes, hailing his government for rolling up its sleeves and put-
ting aside political interests to do the right thing.
Standing by his pledge to preserve the National Health Ser-
vice from spending cuts, Mr Cameron told the BBCthat this might
sound a surprising policy from a Conservative Party. Well, he
said, it was not a surprise from the sort of Conservative Party
that I lead. Midway through conference week, a gigantic kerfuf-
e broke out after Mr Osborne announced a plan to take away
child benet from higher-rate taxpayers, triggering howls from
the conservative press that the party was anti-family. Mr Camer-
on backed his chancellor, but swiftly took his wife and newborn
baby, Florence, for a stroll around a conference hotel that just hap-
pened to be full of photographers.
Panic and freak out
Mr Cameron is good at carrying o such hokum without blush-
ing: a skill not to be undervalued in a politician. He remains more
popular than his party in opinion polls, and his biography, nota-
bly years of caring for a gravely disabled son, Ivan, who died in
2009, does buttress his claim to understand the importance of
public services. But there are big risks to an approach so closely
tied to one man’s personal reputation.
For one thing, personal trust is a fragile and easily damaged as-
set. For another, few of Mr Cameron’s close colleagues can carry
o the tough but fair combination with his assurance. Mr Os-
borne, a partisan street ghter beneath his languidly posh exteri-
or, unexpectedly declared himself a one nation Conservative
in his conference speech and declared that much of the welfare
budget was money well spent. But then he told a cheering hall
(with the faintest curl of the lip) that if people thought living on
benets was a lifestyle choice then we need to make them
think again. The combined eect strained credulity.
Most importantly, the temptation to paint the prime minister
as a post-partisan father of the nation muddles his message: for
better or worse, his coalition has bold and risky plans for shaking
up the country. The country wants leadership not partisanship
Mr Cameron said in his conference speech. But he also said: Let’s
leave Labour defending the status quoWe are the radicals
now. Keep calm, by all means. But the coalition does not want to
carry on as before. It cannot have it both ways. 7
Keep calm, but don’t carry on
David Cameron can’t be both a radical and a father of the nation
Bagehot
82 Britain The Economist October 9th 2010
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Also in this section
86 Saving cross-border aquifers
87 Alien torts and multinationals
87 Fundraising for global health
A
CROSS northern India, householders
who were braced for a bout of violent
sectarian strife are sighing with relief. The
people most aected by one of the world’s
biggest arguments over sacred turf, in the
town of Ayodhya, seemed to accept the
verdict, even if it was not quite what they
wanted. On September 30th judges in the
state of Uttar Pradesh ruled that the con-
tested site should be split between Hindus
and Muslims, with the latter getting a third.
We must abide by the court’s decision
and move on, declared Mohammed
Hashim Ansari, a 90-year-old Muslim who
has been involved in litigation over the site
since 1961. Such stoicism is impressive. As a
boy, he had prayed in a ne sandstone
mosque, the Babri Masjid, which had
stood on the site since the 16th century. In
1992 Hindus tore it down. They believe
their god-king Ram was born there. About
2,000 people died in the ensuing violence.
In the run-up to the latest verdict, many
feared more bloodshed. But India’s prime
minister and other public gures hailed
the compromise ruling and the calm reac-
tion as a sign of maturing attitudes.
The news is less encouraging in the
holy land, where amid oundering peace
talks between Israelis and Palestinians, ac-
rimony over sacred turf is surging to new
extremes. In a West Bank village near Beth-
lehem, locals say that on October 4th hard-
line Jewish settlers set re to their mosque
and torched copies of the Koran. Tempers
cooled a little a day later when a group of
settler rabbis delivered replacement copies
of the holy book, in an unusual gesture of
reconciliation.
Elsewhere in Jerusalem and the West
Bank, the mood is at its bleakest in places
which more than one faith deems sacred.
Take the site in Nablus that many Jews re-
vere as the grave of Joseph, the biblical pa-
triarch. Muslims associate the place with
an Islamic holy man who died 200 years
ago. In the 19th century, it was amicably fre-
quented by Muslims, Jews and Christians.
Recently it has become a battleground.
From the 1980s a zealous Jewish group de-
veloped a study centre and synagogue,
even though the surrounding area was run
by the Palestinians. In October 2000, after
much bitter ghting, the Israelis ceded the
site to Palestinian control; the Jewish syna-
gogue was immediately trashed.
In recent months, as a goodwill gesture,
the Palestinians agreed to restore the place
and give renewed access to Jews. But they
may be ruing their decision. Within hours
of the restoration’s completion, about
1,000 Israeli pilgrims arrived in armoured
vehicles and bulletproof buses. Israeli mil-
itary jeeps closed the roads and imposed a
curfew on local Palestinians. In the alleys
next to the Balata refugee camp, Jewish
worshippers danced the night away to a
raucous beat. Such night-time incursions
are planned at least once a month.
The renovation was meant to mark a
new era of co-operation over holy places.
Afew weeks ago Israel’s chief rabbis went
to Nablus to rededicate the shrine. The
tomb’s dome is again whitewashed, de-
spite requests by Muslims to paint it green,
the colour of Islam.
Religious conict, not rapprochement,
seems to be the aim of some hotheads. The
rabbinic circle of Israel’s main settler coun-
cil, Yesha, has denounced the hiring of an
Arab to restore the shrine. Tzipi Hotobelli, a
Holy places
Unholy rows
International
DELHI AND NABLUS
Holy places should unite humanity. Too often, they have the opposite eect
My God lives there. Your god doesn’t
Source: The Economist

Security restrictions apply during unrest
Holy places, selected
Fury Tourist
Sacred because... Row factor access
Ayodhya Hindu god Ram born there. Hindu extremists demolished ** Easy
(India) Site of big mosque since mosque in 1992; Muslims
16th century want to rebuild it
Cordoba cathedral Biggest mosque in Spain Some Muslims would like it back ** Easy
(Spain) until 1236
Hagia Sofia Byzantine-era Orthodox Now a museum; Christians and * Easy
(Istanbul/Constantinople) church; Ottoman mosque Muslims hanker to use it again
Holy Sepulchre Burial place of Jesus Rival Orthodox and Catholic churches ** Easy
(Jerusalem) compete to use, run and maintain it
Mecca Birthplace of Muhammad Shia and Sufi Muslims say Sunni *** Muslims
(Saudi Arabia) and of Islam. Mandatory custodians demolish shrines only
pilgrimage site and hassle pilgrims
Temple Mount Site of divine presence for Prayers by non-Muslims banned. ***** Usually
(Jerusalem) Jews; of Muhammad’s ascent Muslim visits restricted. possible

to heaven (for Muslims) Archaeological research contested
1
The Economist October 9th 2010 85
86 International The Economist October 9th 2010
2 parliamentary ally of Binyamin Netanya-
hu, Israel’s prime minister, added her voice
to calls for a full Jewish takeover. The
tomb should be under Jewish sovereign-
ty, she said. Students who had once stud-
ied the Torah in the tomb have ambitious
ideas for another kind of two-state sol-
ution: a Torah-compliant state in Judea, as
they call the main bit of the West Bank, and
a sinful secular state of Israel nearby.
In more liberal circles, dedicated to in-
terfaith harmony, the point is often made
that the gure of Abraham or Ibrahim un-
ites all three monotheistic faiths. But the
burial-place in Hebron of Abraham and
his wife Sarah is perhaps the region’s most
contested place after Jerusalem. After Isra-
el’s takeover in 1967, access to the place was
at rst divided carefully between Jews and
Muslims. But especially since 1994, when a
Jewish extremist killed 29 Muslims, the
mood has grown ever-darker. The need to
control the tomb is one of the reasons Is-
raelis give for holding on to Hebron, where
160,000 Palestinians live at odds with 500
hardline settlers. A little to the north, the
tomb of the biblical matriarch, Rachel, is
now surrounded by an Israeli garrison
with an eight-metre-high wall jutting into
Bethlehem. This prevents nearby Chris-
tians and Muslims from visiting the place,
as they used to.
Muslims complain of being kept from
other places as well. In the heart of Yitzhar
settlement, in the hills above Nablus, the
dome-topped shrine of Sheikh Salman al-
Farisi is now barred to Muslims. A spokes-
man for Yitzhar says that, for security rea-
sons, Arabs are not allowed in Jewish set-
tlements. Many of Yitzhar’s residents are
raised on the teachings of Yitzchak Gins-
burgh, an American rabbi, who ran a Torah
school at Joseph’s tomb before Palestin-
ians chased it out. Israel jailed him after he
praised the Hebron massacre. But his disci-
ples are undeterred. This year Jewish radi-
cals have vandalised or assaulted four
mosques. One is in Silwan in East Jerusa-
lem, a poor Arab area that settlers covet.
For all the rhetoric of ancient hatred, re-
ligious rows have grown worse in modern
times. Across the Ottoman empire, from
the Balkans to Anatolia to Palestine, Chris-
tians and Muslims mingled peaceably at
shared sacred places. That survives in
some locations: on the island of Buyukada
near Istanbul, where Muslim pilgrims
climb a steep hill to a Greek monastery; in
the Christian convent of Seidnaya near Da-
mascus, popular with Muslim women
who long to conceive; and at the ancient
monastery on Mount Sinai, where Muslim
Bedouins revere St Catherine.
Scholars of religion argue intensely
about this. Glenn Bowman of the Univer-
sity of Kent sees the sharing of holy places
as a natural state of aairs which can be
undermined only by political or religious
elites. His research demonstrates the roles
of Israeli ocials, Islamists and Greek
bishops in marring the harmony between
Christians and Muslims who frequented a
monastic site near Bethlehem.
Robert Hayden of the University of
Pittsburgh is more pessimistic. He sees site-
sharing as a temporary truce between a
dominant and subordinate faith, or else an
arrangement imposed by an imperial
power, say Ottoman or British, for the sake
of social peace. Among the best-known
sharing regimes is the one for the six Chris-
tian communities that vie for control of Je-
rusalem’s Holy Sepulchre. With precise al-
locations for every side-chapel and every
lamp, the system was devised by the Otto-
mans, inherited by the British, and is now
run by the Israelis.
Indians sometimes claim that Hindus
and Muslims mingled happily in the era
before British rule. Mr Hayden points to
cases where the British just held the ring,
until independence allowed a local group,
usually Hindu, to gain the upper hand.
A contrasting and more optimistic his-
torical perspective comes from Acharya
Satyendra Das, the chief Hindu priest at a
makeshift temple to Ram built where the
mosque once stood. Until the site was poli-
ticised by Hindu hardliners, both faiths
had rubbed along, he insists. Hindus and
Muslims prayed inside the complex for
many years, and he hopes that they will do
so again. Local people wouldn’t have any
problem with a mosque and a temple be-
ing built on the site now the verdict has
come, declares the priest. Perhaps he
should visit Israel. 7
C
LEMENT weather and plentiful water
mean that Punjab produces an eighth
of India’s total food grains. But the water
table has dropped by ten metres since 1973
and the rate of decline is accelerating on
both the Indian and the Pakistani sides of
the region. It is a similar story for the north-
western Sahara aquifer system (NWSAS),
shared by Algeria, Tunisia and Libya. With-
drawals increased ninefold between 1950
and 2008. Springs are drying up and soil
salinity has increased.
Such depletion of aquifers is a classic
tragedy of the commons. Farmers pump,
oblivious of others’ actions or the impact
of their own. Scarcity stokes this rather
than braking it. Worse, much abstracted
water is used in inecient irrigation; com-
pounding that, underpricing means it is of-
ten used for watering low-value crops.
Powerful farming lobbies have little inter-
est in changing the status quo.
Aquifers, like sh stocks, are most at risk
when they cross national borders, making
property rights weaker. Groundwater pro-
vides about a fth of the planet’s water
needs and half its drinking water. In arid
countries such as Libya or Saudi Arabia,
that gure is close to 100%. Almost 96% of
the planet’s freshwater resources are
stored as groundwater, half of which strad-
dles borders. UNESCO, a United Nations
body, estimates that 273 aquifers are
shared by two or more countries.
The signing this summer of a treaty be-
tween Brazil, Argentina, Uruguay and Par-
aguay to protect the Guarani aquifer, after
asix-year study of the region’s underwater
resources, has thus come as a nice surprise.
It may even be a trend. Mali, Niger and Ni-
Aquifers
Deep waters, slowly drying up
Depletion of aquifers is a looming tragedy. New agreements oer hope
1
Global health funding
Passing the tin
C
AMPAIGNERS for global public
health are rarely cheery. But they had
high hopes that, despite the nancial
crisis, the Global Fund, which is the main
multilateral agency dealing with AIDS,
tuberculosis and malaria, would get lots
more money from donors at a meeting
on October 4th and 5th in New York.
The fund wanted to double its budget
to $20 billion over the next three years.
This would have allowed it, for instance,
to triple the number of antiretroviral
treatments for HIVfrom 2.5m at the end
of 2009 to 7.5m. It also wanted more cash
to ght malaria. A recent study by Bob
Snow of Oxford University, published in
the Lancet, a medical journal, argues that
anti-malaria work is as much as 60%
short of the $4.9 billion required.
Yet donors managed only $11.7 billion
in promises, below even the $13 billion
minimum that the agency said it needed.
This decision will result in the deaths of
millions, thundered Médecins Sans
Frontières, a charity. Michel Kazatchkine,
the Global Fund’s boss, says that existing
schemes will not be cut, but calls the
shortfall a blow to planned new ones. He
vows to keep seeking more money.
Britain is one possible source. It did
not commit any money this week (its
newish government still has to work out
its aid strategy) but may contribute in
future. If economic growth rebounds,
other European countries where aid is
calculated as a percentage of national
output may also pitch in more.
Another ray of hope comes from
America, says Paul Zeitz, head of the
Global Aids Alliance, an activist group.
Not only did America promise $4 billion,
the biggest ever contribution to the agen-
cy, but it did so for the rst time as a three-
year pledge. This gives the fund longer-
term nancial security. The pledge also
came with an intriguing, if still imprecise,
demand for reform at the Global Fund. If
the agency improves its transparency
and eciency, the American taxpayer
may contribute even more.
NEW YORK
Donors scrimp on cash for global public health
The Economist October 9th 2010 International 87
W
HEN lawyers for a group of Burmese
villagers used an obscure American
law in 1996 to sue Unocal, an oil company,
for using forced labour and other abuses
while constructing a pipeline in Myanmar,
human-rights campaigners saw a new
way of attacking companies (as opposed
to their executives in person) for misdeeds
abroad. A urry of headline-grabbing suits
followed. Nine Nigerians, including rela-
tives of Ken Saro-Wiwa, a playwright, ac-
cused Shell of complicity in human-rights
abuses. Vietnamese villagers sued Dow
Chemical and others for injuries caused by
the Agent Orange herbicide.
This avenue was abruptly closed re-
cently when the second circuit Court of
Appeals in New York ruled on September
17th that corporations could not be held lia-
ble under the Alien Tort Claims Act for
breaches of international law abroad.
Businesses had long argued this, but no
American court had ruled clearly on the is-
sue before. Both companies and their ac-
cusers reckoned that the courts treated the
principle of liability as a given.
The decision, if upheld, will bring new
clarity and an end to such lawsuits. But un-
til all avenues of appeal are exhausted, the
precedent will not be rmly set. The Su-
preme Court declined on October 4th to
rule immediately on the specic question
of whether corporations could be held lia-
ble under international law. It had been
asked to do so by Talisman Energy of Can-
ada, which won a case brought by Suda-
nese plaintis who accused it of conspir-
ing with their government to commit
genocide.
The Alien Tort statute was always a thin
lever for those who want to get national
courts to use international human-rights
law against multinational companies. In
some 60 cases so far, the plaintis have
gained plenty of publicity, but won no out-
right victories. (Shell settled out of court, as
did Unocal.) Adopted in 1789, possibly to
target pirates, the statute allows for civil ac-
tions by aliens for wrongful acts commit-
ted in violation of the law of nations or a
treaty of the United States. Its cloudy ori-
gins make room for creative interpretation
by human-rights campaigners and compa-
nies alike and have caused much confu-
sion in the courts.
That can be seen in the strongly worded
dissent written by Judge Pierre Leval in the
New York case on the central question of
whether corporations are covered by inter-
national laws that explicitly mention only
states and natural persons. He decried the
absurdity of allowing individuals to es-
cape civil liability for slave-trading or pira-
cy as long as they are incorporated.
Businesses will welcome an end to
these cases. But the respite may be short-
lived. Courts in other countries, such as the
Netherlands and Britain, have recently be-
come more active in punishing rms for
misdeeds abroad and human-rights cam-
paigners have taken note. John Ruggie, the
special representative for the United Na-
tions secretary-general on business and
human rights, will wind up his six-year
study with a report next year that could
also lead to new restraints on corporations.
Even if America drops the baton, another
country may well pick it up. 7
Alien torts
Trial trails
An American court blocks
human-rights suits against businesses
geria are due to sign a provisional deal ear-
ly next year to set up a body to run the Iul-
lemeden aquifer, where withdrawals have
exceeded recharge ever since 1995, endan-
gering the Niger river in the dry season.
The two deals follow a UN resolution in
2008 on creating a legal regime for aquifers
(it may become a full convention next
year). Lifting sanctions on Libya has had an
eect, too. The Libyans say they may stop
growing wheat using water from the
NWSASand the Nubian sandstone aquifer
system, the world’s largest fossil aquifer,
which they share with Egypt, Chad and Su-
dan. An agreement in 1992 set up a body to
run this but it has stayed largely dormant.
Now sampling and monitoring have re-
sumed, under the aegis of the Internation-
al Atomic Energy Agency (which has a
sideline in environmental monitoring).
Such scientic work is crucial because
aquifers are still poorly understood. Until a
UNESCO inventory in 2008, nobody knew
even how many transboundary aquifers
existed. Experts are still rening the count:
the American-Mexico border may include
8, 10, 18 or 20 aquifers, depending on how
you measure them. Dening sustainability
vexes hydrologists too, particularly with
ancient fossil aquifers that will inevitably
run dry eventually. Estimates for the life of
the Nubian sandstone aquifer range from a
century to a millennium. 7
2
Source: “How Expense Ratios and Start Ratings Predict Success,” August 9, 2010. Vanguard provides services to the
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12/31/2009. Based on 2009 industry average expense ratio of 1.19% and Vanguard average expense ratio of 0.23%. For more
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contained in the prospectus; read and consider it carefully before investing. All investments are subject to risk. Vanguard
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Also in this section
90 Microsoft’s mobile operating system
91 Videophones enter the living room
91 Car-hire rms seek casual drivers
94 Fast-food restaurants
94 Bright Food and United Biscuits
95 Irish companies defy the slump
98 Schumpeter: The other demographic
dividend
T
HE star of this week’s Paris Motor
Show was a Jaguar supercar. The C-X75
can accelerate to 100kph (62mph) in just 3.4
seconds and has a top speed of 330kph. It is
powered by batteries that are recharged by
miniature diesel-sipping jet turbines. Al-
though it is a mere experimental vehicle,
the excited response shows that carmakers
have come to see electric vehicles as part
of their future. How large a part will de-
pend on how drivers react to the rather less
racy electric oerings from big producers
such as General Motors (GM), Mitsubishi,
Nissan and Renault.
The rst mass-market electric cars are
now arriving in showrooms in America,
Europe and Japan (see table). They come in
three avours. Pure electric vehicles like
Nissan’s Leaf can be driven for 150km or so
before they need to be recharged for six to
eight hours. Range-extenders like GM’s
Volt (the Ampera in Europe) are powered
by an electric motor that can be recharged
either from the mains or by an on-board in-
ternal-combustion engine. Then there are
familiar hybrids like the Toyota Prius, now
being adapted to take a charging cord and
with a longer electric-only range.
Mitsubishi was one of the rst away,
launching its electric i-MiEV in Japan in
April. Production of European models be-
gan on October 6th, including versions for
France’s PSAgroup, which will sell the cars
as a Peugeot iOn or Citroën C-ZERO. But
GM and the Renault-Nissan alliance are
making the biggest push into the mass
market. The latter will launch four Nissan
and four Renault electric models in the
next two years. Carlos Ghosn, head of Re-
nault-Nissan, believes that by 2020 one in
ten new cars in Europe will be electric,
while hybrids, such as the Prius, will have
a similar share of the market.
Governments are solidly behind the
new vehicles, which they see as essential
for bringing down carbon-dioxide emis-
sions and reducing pollution in cities. The
Volt was one of the reasons why the White
House propped up GMin 2009 when the
carmaker entered bankruptcy. Dan Aker-
son, GM’s new chief executive, says the
company is committed to electrication
and has other electric cars under develop-
ment. Generous government subsidies are
on oer: American buyers will be able to
obtain up to $7,500 towards the purchase
of an electric car.
Mr Ghosn reckons incentives will be
needed for another four years or so. He
thinks electric cars will compete without
subsidies against conventional cars only
when production reaches about 500,000
per model. It is far from sure that cash-
strapped governments will keep their wal-
lets open that long. And other questions
loom over the new electric cars.
The big one is range anxiety. Drivers
are not used to thinking precisely about
how far they will drive before returning
home. Electric cars (at least the ones with-
out petrol engines to top up the battery) de-
mand that they do. And some tests have
suggested that manufacturers’ claims
about the ranges of their vehicles are opti-
mistic. A car that is full of passengers and
running the heating or air-conditioning
will drain the battery more quickly. Yet the
manufacturers believe these concerns can
be overcome.
So far, BMWhas carried out the biggest
test of electric motoring. It leased 600 elec-
tric Mini Es to drivers in Britain, Germany
and the United States. Before getting their
cars most drivers said they expected the
150km range to be restrictive. But the driv-
ing patterns of Mini E users in Berlin
turned out to dier only slightly from those
in ordinary Minis. Even in California, land
of freeways and long commutes, Mini E
Electric cars
Asparky new motor
For daily analysis and debate on business and
our weekly Money talks podcast, visit
Economist.com/business-nance
Business
Paris
The rst mass-market electric cars are arriving in showrooms. They represent a big
gamble for carmakers
1
The Economist October 9th 2010 89
Plugging in
Sources: Company reports; The Economist *In first market

Net of government subsidy

Estimate
§
Excludes battery
Claimed
electric-only British-market
Electric car On-sale date* Technology range, km price

, £
Mitsubishi i-MiEV Apr 2010 Battery 160 23,990
Nissan Leaf Dec 2010 Battery 160 23,990
GM Chevrolet Volt/Ampera Dec 2010 Battery/range extender 64 25,000


Renault Fluence mid 2011 Battery 160 18,000
‡§
Toyota Prius Plug-in 2012 Hybrid 20 tba
90 Business The Economist October 9th 2010
2 drivers clocked up 48km a day, not far be-
hind the American average of 64km. Most
Mini E users recharged their cars at home,
and some did so only two or three times a
week rather than every night. BMWcon-
cludes from these tests that electric cars are
suitable for most people and that range
anxiety fades as drivers get used to them.
Another study, by Deloitte, a consultan-
cy, found that three-quarters of Americans
would not consider buying an electric car
unless it had a range of 300 miles. But the
carmakers do not have to convince every-
one at the outset. In Deloitte’s survey, those
who were inclined to buy tended to be ear-
ly adopters of new technologies. They
were typically young with a much higher-
than-average household income. They
were living in an urban or suburban area
commonly southern Californiaand had
a garage with electrical power where they
could recharge the car. Such drivers would
probably treat electric vehicles as second
cars, and prize them for their green show-
o value. Mr Ghosn sees electric drive as
a complementary technology.
A further problem, which government
subsidies have not entirely eliminated, is
sticker shock. Electric cars are expensive.
BMWreckons they will be a premium pro-
duct, which is why it plans to launch a light
electric citycar with a fancy composite
body in 2013. Renault is trying to hold
down prices by separating the cost of the
battery from its new electric car, the
Fluence. In Britain the car will cost around
£18,000 ($28,660) after a £5,000 govern-
ment subsidyabout the same as a diesel-
powered equivalent. Buyers will lease the
battery for about £80 a month. Renault be-
lieves drivers who are used to paying regu-
larly for fuel will tolerate this charge. Leas-
ing the battery should also alleviate
concerns about its reliability. GM is re-
sponding to the same concern by guaran-
teeing the battery in its Volt for eight years
or 100,000 miles.
One issue that is important to many
buyers is how the value of electric cars will
hold up in the second-hand market. The
answer will not become clear for several
years. Some in the industry think that a
shortage of cars could drive up prices, at
least at rst. But they could plummet if the
batteries cause problems or users nd the
range of the vehicles too limiting.
Electric cars are evolving quickly. Al-
though he refuses to reveal gures, Mr
Ghosn says the cost per kilowatt-hour
(kWh) of battery capacity for Renault-Nis-
san cars has fallen by half in four years.
Earlier this year Boston Consulting Group
estimated that electric cars will not be fully
competitive until costs fall to about $200
per kwh. That would substantially reduce
the cost of the 24 kwh battery used by the
Nissan Leaf. According to industry ru-
mours, Renault-Nissan has got its costs
down to below $400 per kwh, so if it can
continue this progress its cars will become
much more competitive.
Other technical improvements are on
the way, including systems that could
charge a battery in as little as ve minutes.
Such developments should make electric
cars more usable and increase their popu-
larity. But that will cause another problem:
early adopters may nd that technology
changes so rapidly that their shiny new
electric cars soon seem old-fashioned. 7
A
T A company meeting last year, Steve
Ballmer, Microsoft’s pugnacious boss,
spied an employee taking a photo on an
Apple iPhone. He promptly grabbed the of-
fending device and pretended to stamp on
it. Microsoft would love to crush competi-
tors in the smart-phone market, but it has
repeatedly failed to come up with compel-
ling oerings of its own. Now the software
rm is gearing up for another assault on a
business that is crucial to its future.
On October 11th Microsoft is due to un-
veil phones from manufacturers such as
HTCand Samsung that incorporate its new
operating system, Windows Phone 7
(WP7). An accompanying media blitz will
seek to position it as an attractive alterna-
tive to Apple’s iPhone, Google’s Android
and Symbian, which powers many Nokia
phones (see chart). The stakes are high for
Microsoft and for Mr Ballmer, whose stew-
ardship of the rm is the subject of intense
debate. Microsoft’s share price has fallen
by almost 20% since the beginning of this
year, while the S&P 500 stockmarket index
has risen by 4%.
Microsoft hopes not only to prot from
selling licences for its software but also to
push its other services via the phones.
Bing, the rm’s internet search engine,
Xbox Live, its gaming platform, and Zune,
its music and video player, are baked into
the new operating system. Microsoft is
also betting that WP7 will help it preserve
its once vice-like grip on the workplace.
That hold is slipping as rms let employees
toting iPhones and Android-based devices
use them for work.
The new phones boast a slick touch-
screen interface and several novel features,
including one that makes it easier than on
most smart-phones to post news and pho-
tos to social networks on the move. Micro-
soft has also laid down minimum stan-
dards to which phonemakers must adhere
for things such as built-in cameras. Some
earlier Windows phones suered from
poor hardware. There isn’t a thing about
our approach to this business that we ha-
ven’t changed, says Greg Sullivan, a Mi-
crosoft executive.
The rm is also expected to spend enor-
mous sums promoting its new system. Ac-
cording to some estimates, it has ear-
marked $400m-500m to boost WP7, an
amount that is likely to be matched by
phonemakers and telecoms companies
that will oer the new devices. By compar-
ison, Motorola, Verizon and Google spent
$100m on the launch of the Android-pow-
ered Droid smart-phone at the end of
2009, reckons Deutsche Bank. Microsoft is
also taking to the courts. Last week it sued
Motorola, arguing that the rm’s phones
violated some of its patents.
Such legal quarrels are unlikely to halt
the rise of Android. Google’s operating sys-
tem is now the most popular one among
recent buyers of smart-phones in America,
although Apple will become a stronger
competitor if it releases a Verizon iPhone,
as has been rumoured. Microsoft is way
behind the competition and the chances of
it catching up are fairly low, says Brent
Thill of UBS, an investment bank. He
points out that it will take time to persuade
developers to create a rich range of soft-
ware applications for Microsoft’s operat-
ing system. IDC, another research com-
pany, reckons that by 2014 Microsoft will
still trail both Apple and Android, as well
as Research in Motion (RIM), the maker of
the BlackBerry.
Hence persistent speculation in Silicon
Valley that the software behemoth, which
has a $37 billion cash pile, might be tempt-
ed to bid for RIM, whose phones are popu-
lar with corporate road-warriors. If Mr
Ballmer is still around to negotiate such a
deal, it might be the best chance he has of
putting Microsoft’s stamp on the smart-
phone world. 7
Microsoft’s mobile operating system
Windows or
curtains
San Francisco
The software giant is desperate to make
asplash in the smart-phone business
A meagre slice of pie
Source: IDC
Global market share of mobile-device
operating systems, 2010 forecast, %
Symbian
40.1
BlackBerry
17.9
Android
16.3
Apple
14.7
Windows Phone
6.8
Others
4.2
Correction: In "Trading places" (October 2nd) we
incorrectly said that in 2008-09 the Japanese led 11%
fewer international patents and the Chinese 18% more
than the previous year. In fact, the Japanese led 4%
more international patents and the Chinese led 29%
more. Also, America has 1.4m patents in force, not 14m.
Sorry.
The Economist October 9th 2010 Business 91
1
T
ECHNOLOGICAL prophets have fore-
cast the triumph of video calling ever
since 1936, when Germany’s Reichspost
launched the rst public videophone ser-
vice. But a urry of announcements from
technology companies suggests that its
time may have come at last. On October
6th Cisco unveiled a video-calling system
for the living room called umi telepre-
sence. The same day Logitech launched a
television set-top box that doubles as a
videophone. Microsoft’s new Kinect Xbox
game console, due in November, oers
video conferencing.
The market for professional video gear
is also in ux. Skype, a service that allows
users to make calls from their personal
computers (PCs), is moving into corporate
territory by oering video conferencing,
among other bells and whistles. PCs from
HP will soon come with video software
from Vidyo, a start-up. And in April Cisco
bought Tandberg, another maker of video
gear, for $3.3 billion.
Video communication is becoming
more popular, in part because the technol-
ogy is improving. Video calls accounted for
about 40% of the 95 billion minutes that
people spent on Skype in the rst half of
this year. Although Cisco has sold only
about 900 telepresence rooms so far, this is
far from shabby, considering that such sys-
tems cost up to $350,000 a pop and often
entail expensive network upgrades (with
which the rm makes most of its money).
Vendors of cheaper systems, such as Poly-
com, are not doing badly either.
Scott Morrison of Gartner, a market re-
searcher, says that video communication
is spreading from one place to another.
Having used it at home to let Grandma see
the children on the PC, people now feel
more comfortable trying video communi-
cation at work. Most important, senior ex-
ecutives have warmed to the high-end tele-
presence systems sold by Cisco and others,
boosting the use of the technology further
down the corporate hierarchy.
Cisco and Logitech want to build on
this momentum, particularly in the home.
Cisco’s gear is the more daring because it is
a dedicated video-calling system. The
package includes a camera and a console,
which together cost $599. Users also have
to pay $25 a month for unlimited calls. And
they need a high-denition television set
as well as a fast internet connection to get
good results.
Yet despite all the progress, video com-
munication is probably still not ready to
take the world by storm. Most systems are
not compatible: common technical stan-
dards are years away, as is a common vid-
eo phone book. And video-calling may be-
gin to encounter sti resistance. Gartner
forecasts that the growth of high-end tele-
presence systems will allow companies to
keep more workers at their desks, saving
2.1m airline journeys per year by 2012 and
cutting car-rental costs (see box). But it is
not clear that travelling salesmen, for ex-
ample, will take to the technology.
Another open question is whether cus-
tomers will plump for dedicated video-
communication systems over those that
also serve other purposes, such as a PCor a
game console. Companies need both
Video communication
Beaming in
Grandma
Videophones have nally reached the
living room
Car hire
Drive my car
A
NEBRASKAN called Joe Saunders is
credited with starting the rst car-
hire business: in 1916 he began lending his
Ford Model Tto travelling salesmen.
Business customers have been the bed-
rock of the industry ever since. But the
recession caused corporate travel to
decline by about 20%, twice as much as
leisure travel did. And companies that
pared their travel budgets during the
downturn seem inclined to keep their
employees desk-bound even as the
economy recovers. So car-rental compa-
nies are revving up to attract more leisure
travellers in future.
For the past few months Hertz and
Avis Budget, which between them have
around 37% of the American market,
have outbid each other in pursuit of
Dollar Thrifty. That rm oers lower-cost
rentals, mostly to people on holiday,
making it somewhat less susceptible to
economic downturns. On September
30th Hertz’s shareholders voted against
its $1.5 billion bid, making Avis the likely
winner. Now Avis must secure regu-
latory approval for the deal, which may
involve shedding $325m-worth of assets
to avoid antitrust scrutiny.
Even if rental companies can capture
more holiday drivers, they will struggle
to grow even modestly in the next few
years. IbisWorld, a research rm, thinks
the industry’s total revenue will not
return to its 2008 size of $28 billion until
at least 2015. The business has already
consolidated dramatically. In 1999 there
were nine national car-rental companies
in America; by 2009 there were just four,
including Dollar Thrifty. To increase
revenues, car-hire rms will instead try to
develop new business lines. They have
focused more on their relationships with
insurance companies, providing cars
temporarily to people whose own have
been stolen or damaged.
They are also looking to capture other
kinds of customer. Zipcar, a company
that supplies cars by the hour to mem-
bers, has proved there is demand for
shorter-term hire. In June the outt led
for an initial public oering worth
around $75m. Hertz has followed Zipcar’s
lead by rolling out a programme called
Connect by Hertz, which allows people
to hire cars for relatively short spells.
Hertz need not worry about eating into
its existing customer-base, says Chris
Agnew of MKMPartners, a research and
trading rm. Short-term schemes attract a
dierent set from the besuited folk who
hire cars by the day. And with many
households unable to aord cars, de-
mand should be strong.
New York
In hot pursuit of the casual consumer
Porsche turned to SAP to help
streamline operations at their
Leipzig plant, allowing them to
produce two different models of
cars at the same time on the same
production line. Find out more at
sap.com/vroomier
RUN
BETTER.
SAP HELPS PORSCHE
DO WHAT THEY DO BEST,
EVEN BETTER.
© 2010 SAP AG. SAP and the SAP logo are trademarks and registered trademarks of SAP AG in Germany and several other countries.
94 Business The Economist October 9th 2010
2
1
types: dedicated ones for important meet-
ings and PC-based ones for everyday com-
munication. But will consumers spend a
few hundred dollars for an extra device?
Then again, experts were equally sceptical
when Cisco launched its executive tele-
presence systems.
Whatever system they pick, consumers
will come up with new ways to use it. Al-
ready some families host Skype dinners,
with relatives calling in. Others never hang
up, thus turning a display in the kitchen
into a window on somebody else’s home.
Similarly, some rms have started to ex-
periment with virtual water-coolers,
connecting their oce kitchens by means
of a permanent video link. Whether this
improves productivity or simply encour-
ages long-distance debates about football
and American Idol is unknown. 7
Y
OU can pay what you like, says one
of the two cheery female greeters at
the door of Panera’s restaurant in St Louis.
We will tell you the recommended price
for your meal, but it is up to you if you
want to pay that, a bit more, or less. This
honour-based approach to selling fast
food was launched a few months ago as a
pilot scheme. The goal is to let customers
who are feeling the strain of the weak
economy dine with dignity among regular
customers, with none of the stigma of the
soup kitchen.
Around 4,000 people a day visit the res-
taurant, which is operated as a non-prot
entity under the brand Panera Cares.
About 65% pay the recommended amount.
The remainder are roughly divided be-
tween over-payers and those who pay less
or nothing. An attempt by cynics working
in a nearby courthouse to break the system
by paying pennies for an armful of sand-
wiches and soups was blocked by limiting
the oer to one meal per person in the res-
taurant. The store is close to breaking even.
There are plans to open more shared re-
sponsibility restaurants soon, including
one in Detroitalbeit in the sort of neigh-
bourhood where many people should be
able to aord the full asking price.
The launch of this non-prot experi-
ment was a natural extension of the cus-
tomer-centric approach that has helped
Panera’s shares out-perform those of other
restaurant businesses over the past ten
years, says Ron Shaich, who recently
stepped down as chief executive of the
company he built. The rm had a good re-
cession. As other competitors cut costs dur-
ing the downturn, We decided to stay the
course, says Mr Shaich. Panera improved
its salads, among other things. As a result,
Mr Shaich, who is still active at the com-
pany, claims double digit growth in
same-store sales. Panera has reported re-
cord revenues and prots. On October 5th
the rm’s share price hit an all-time high.
Mr Shaich had his rst big success in the
restaurant business with Au Bon Pain, a
chain selling coee and cakes. In 1998 he
sold that business to focus on its then
smaller sister company, Panera. He be-
lieved that its more relaxed, country-style
restaurants were better placed to benet
from long-term trends such as the growing
demand for a third space for people to
use when not at home or in the oce. Of-
fering free WiFi long before Starbucks did,
and encouraging community organisa-
tions such as book clubs and church
groups to meet in its restaurants, has
helped Panera earn around $2m a store,
against the Seattle coee giant’s average of
about $750,000, according to Mr Shaich.
The number of Panera restaurants
soared from 160 in 1997 to over 1,400 at the
end of 2009, with another 80 or more due
to open this year as the rm takes advan-
tage of the weak commercial property
market. Mr Shaich was in New York recent-
ly, checking out potential sites for Panera’s
rst Manhattan store.
But competition is heating up in the
fast casual restaurant sector that Panera
helped to create. In Manhattan the chain
will have to battle with hundreds of con-
ventional diners, as well as rapidly grow-
ing chains such as Le Pain Quotidien and
Pret A Manger. Then there is Starbucks,
with a coee shop seemingly on every
block in wealthy neighbourhoods, and the
similarly ubiquitous (and now healthier
salad-serving) McDonald’s. Surviving
among such giants will be dicult. Per-
haps wisely, given New Yorkers’ notori-
ously hardnosed approach to life, Panera
will not be giving them the option of pay-
ing what they like for food. 7
Fast-food restaurants
Dough rising
St Louis
Panera’s restaurants are thriving in the
downturn
Feed me till I want no more
B
RIGHT FOOD is a hungry company.
The Shanghai government-controlled
rm is reportedly among the bidders for
GNC, an American nutrition-supplement
chain. And it is pursuing a deal for Britain’s
United Biscuits. Although Chinese compa-
nies have bought old European or Ameri-
can brands in other industries such as per-
sonal computers and cars, they have not
shown much of an appetite for food and
drink so far. But as their global reach grows,
the Chinese are developing a taste for
Western snacks.
United Biscuits, which makes such fa-
vourite British snacks as McVitie’s diges-
tive biscuits, Jaa Cakes and Hula Hoops,
has been put up for sale by Blackstone and
PAI, a French-American private-equity
rm. The would-be buyer already runs
four listed companies and has 3,300 retail
shops throughout China. Bright Food
makes dairy products, ice-cream, tinned
food, sweets, honey products and rice
wine but no biscuits. The deal would value
United Biscuits at more than £2 billion ($3.2
billion).
Why does Bright Food want to buy a
debt-laden business that has been on the
block for a while without attracting a seri-
ous bid for the whole business? One rea-
son is the need to sweeten the company’s
Bright Food
Agrowing
appetite
Why a Chinese food company wants to
gobble up Western outts
The Economist October 9th 2010 Business 95
2
A
S IRELAND’S government bails out its
banks yet again and wrestles with a
budget decit a third as big as its GDP,
prompting a downgrade by Fitch, a credit-
rating agency, on October 6th, many Irish
businesses are struggling. Failure rates
have exceeded 2009 levels for all but two
months so far this year. Curiously, though,
the nancial crisis has made some rms
more competitive than they were at the
height of the boom.
The costs of running a business in Ire-
land have dropped steeply. Oce rents
have fallen by 50% and labour costs are 10%
lower than in early 2008. The euro has
weakened against most global currencies,
favouring exports out of the euro zone.
Irish companies with global reach are
beneting, especially if they have a foot-
hold in fast-growing emerging markets.
Kerry Group, which supplies food ingredi-
ents and avours to 140 countries, saw a
6.7% growth in sales and a 12.9% growth in
trading prot in the rst half of the year,
compared with the same period in 2009.
Smurt Kappa, a leading maker of pack-
aging in Europe and Latin America, is also
regaining lost ground. It cut costs drastical-
ly after going public at an inated price in
2007. Although CRH, a maker of building
materials, is heavily exposed to the con-
struction downturn in America and Eu-
rope it has joint ventures in Turkey, China
and India and a strong balance-sheet.
These two companies are seen as a safer
bet, when it comes to paying their bills,
than the government. That at any rate is
the market view, according to the price of a
credit-default swap which pays out if the
borrower defaults (see chart).
Life is much harder for companies that
rely on Irish and British consumers. Con-
struction and service outts have been hit
hard. Musgrave, which owns supermarket
and convenience-store brands in Britain,
Ireland and Spain, has seen retail margins
drop. Since 2008 the average revenue from
a weekly shop at its supermarkets has fall-
en from 150 ($208) to 125. Musgrave sup-
ports retailers, which operate its fran-
chises, such as SuperValu in Ireland and
Northern Ireland and Londis in Britain,
rather than employing them directly. It has
acted as their banker when bank credit has
dried up. Luckily it is a cash-rich, privately
owned company with net debt of a mere
59m at the end of last year.
Many businesses, including retailers,
would be in much better shape if they
could negotiate cheaper leases. Most
leases written before March this year,
when the law was changed, only allow for
rents to be increased when they are re-
viewed. Since some were written at the
height of the property boom they are well
above the prevailing market rate. But cut-
ting cheaper deals with landlords (or their
banks) has not been easy. The Irish Busi-
ness and Employers Confederation is lob-
bying the government to break the logjam.
Beyond even the government’s control,
however, are international macroeconom-
ic developments, including pending deci-
sions in Britain and America for new
rounds of central-bank stimulus. Those
would tend to weaken the dollar and ster-
ling against the euro, making life for Irish
exporters more dicult again. 7
Irish companies
Riding the tiger
It’s not all Celtic gloom for the well-placed entrepreneur
Safer than the state
Source: Markit
Five-year credit-default-swap spreads
Percentage points
O N D
2009
J F M A M J J A S O
2010
0
2
4
6
1
3
5
Smurfit Kappa
CRH Ireland
Retail space and workers are on sale, too
image: Bright Food was implicated in a
scandal two years ago when six babies
died from drinking baby formula contami-
nated with melamine, an industrial chemi-
cal. Chinese consumers still distrust do-
mestic foodmakers and are willing to pay a
premium for foreign brands. Moreover,
United Biscuits would give Bright Food a
road into foreign food markets that it
would otherwise have to build slowly and
expensively.
Most of all, China’s biscuit market is
booming. According to a recent report by
Euromonitor, a research rm, retail sales of
biscuits in China are gathering pace with a
growth rate of 9% so far this year. Kraft, an
American rm that makes the popular
Oreo cookie, has done best, capturing 17%
of the market. Bright Food is keen to ac-
quire from United Biscuits the secrets of
baking bestselling snacks.
When Kraft took over Britain’s Cad-
bury earlier this year, the British press
fumed about the loss of a much-loved
chocolate-maker. Bright Food believes it
can avoid a public outcry. It argues that Un-
ited Biscuits is already owned by foreign-
ers. Moreover, the rm says it is not trying
to take out costsa euphemism for closing
factories and slashing jobs. That has not
stopped the Daily Mail, a newspaper that
claims to be the voice of middle England,
from spluttering about a hammer blow
to British manufacturing.
Even if the takeover of United Biscuits
goes ahead smoothly, commercial success
may prove elusive. Several prominent pur-
chases by Chinese rms have opped. In
2004 France’s Thomson and China’s TCL
formed TTE, the world’s largest television
manufacturer. The joint venture has been
an unmitigated disaster. A year later Le-
novo, a Chinese maker of personal com-
puters, bought IBM’s computer business,
only to nd that it overpaid mightily for the
American rm. Bright Food may end up
with indigestion. 7
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LOBALS is one of those fast-growing Indian IT companies
that Westerners simultaneously admire and fear. Founded
in 2000, it already has oces in 11 countries and customers
around the world. The chairman and chief executive, Suhas Gop-
inath, is just 24 years old. Most of his employees are also in their
mid-twenties.
Mr Gopinath is an illustration of a striking business revolu-
tion. Emerging-world businesses have traditionally been ob-
sessed with seniority. Ambitious youngsters in countries like In-
dia have been equally obsessed with job security. Well-paying
jobs, preferably with multinational rms, are the key to success in
the marriage market. But this is changing rapidly.
Nandan Nilekani, one of the founders of Infosys, reports that
he now comes across mould-breaking young leaders wherever
he goes in India. They are even to be found in big companies such
as ICICI, a leading bank, Hindustan Unilever, a consumer-goods
giant, and Comat Technologies, which provides information to
rural Indians. Vivek Wadhwa, an American academic who stud-
ies entrepreneurship, says he is inundated with requests for
meetings whenever he visits the emerging world. He met 125
edgling entrepreneurs during a recent trip to New Delhi and
will talk to as many as he can manage in Beijing soon.
The rise of young entrepreneurs is extending the meaning of
the demographic dividend. Demographers have often noted that
most of the emerging world will stay young while the rich world
ages. In 2020 the median age in India will be 28, compared with
38 in America, 45 in western Europe and 49 in Japan. But the divi-
dend will be paid not just in the form of more favourable depen-
dency ratios but also in a more entrepreneurial business culture.
Young people are innately more inclined to overthrow the exist-
ing order than are their elders. This predisposition is being rein-
forced by two big changes in the emerging world.
The rst is the information-technology revolution. The Bos-
ton Consulting Group calculates that there are already about
610m internet users in the BRICI countries (Brazil, Russia, India,
China and Indonesia). BCGpredicts that this number will nearly
double by 2015. And in one respect many consumers in emerging
markets are leapfrogging over their Western peers. They are
much more likely to access the internet via mobile devices
(which are ubiquitous in the emerging world) rather than PCs.
That gives local entrepreneurs an advantage, says Rob Salkowitz,
the author of Young World Rising. Whereas Western compa-
nies are hampered by legacy systems and legacy mindsets, they
can build their companies around the coming technology.
The second is a pro-entrepreneurial revolution. Global institu-
tions such as the World Bank and the World Economic Forum
have helped to popularise entrepreneurialism. Mr Gopinath was
encouraged to stick to his guns as an entrepreneur when the WEF
elected him its youngest ever Young Leader. Several big compa-
nies have also encouraged the trend. Microsoft is helping local
businesses and NGOs improve information-technology infra-
structure. Goldman Sachs is spending $100m on female entrepre-
neurs, many of them in emerging markets.
But even more important than these external nudges are inter-
nal changes. The rise of a cohort of highly successful local start-
ups such as India’s Infosys, Argentina’s Globant and Ghana’s
SOFTtribe has had a dramatic eect on thinking across the re-
gion. These companies have demonstrated that young entrepre-
neurs can succeed mightily: the seven founders of Infosys were
in their 20s when they set the company up. They have also
created a group of middle-class people who have the wherewith-
al to bankroll risk: parents who have made money in Infosys or
young people who decide to set up on their own after a few fat
years in the corporate world.
Great expectations
These young entrepreneurs have already begun to shape some
markets such as mobile video games and online karaoke. They
have also demonstrated an impressive ability to identify gaps in
other markets. Three years ago Bright Simons, a young Ghanaian,
came up with an ingenious idea for dealing with the epidemic of
counterfeit drugs. He asked drug producers to tag their products
with unique bar codes. Consumers can then use their mobile
phones to send a copy of the bar code to the producers to make
sure the drugs are authentic. Kamal Quadir turned his back on a
career on Wall Street in order to found CellBazaar, which pro-
vides the 20m subscribers to Bangladesh’s GrameenPhone with
a virtual marketplace where they can sell things as humble as
sacks of potatoes.
This argument needs to be qualied. China, the emerging
word’s most powerful engine, is ageing rapidly, thanks to the one-
child policy: by 2020 the average age in China will be 37, almost
the same as in America. Young entrepreneurs have plenty of ob-
stacles to mount. In Nigeria the fashion for cyber-crime has all but
killed legitimate cyber-business: PayPal will not accept payments
from people with Nigerian internet address. In Latin America
many young entrepreneurs operate in an informal economy
where innovation is rare and capital hard to come by.
Yet entrepreneurial energies are moving eastward. The fact
that many rich-world companies have responded to the eco-
nomic slump by stopping hiring younger workers will only accel-
erate the shift. One of the most popular lms in America at the
moment is The Social Network, about a group of young Har-
vard students who founded one of the world’s fastest-growing
companies, Facebook. The next Facebook is increasingly likely to
be founded in India or Indonesia rather than middle-aged Ameri-
ca or doddery old Europe. 7
The other demographic dividend
Emerging markets are teeming with young entrepreneurs
Schumpeter
Economist.com/blogs/schumpeter
98 Business The Economist October 9th 2010
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Welcome to an even quieter world.
E
VEN by the elevated standards of such
things, Lady Gaga’s Monster Ball con-
cert is over the top. The show, which is
loosely organised around the theme of a
woman’s search for the ultimate party, fea-
tures a fountain of fake blood, a burning pi-
ano and a host of dancing men. At one
point Gaga is encased in a spinning gyro-
scope. Later she is done up to resemble a re-
mote-controlled snowake. At about $100
plus parking, nearly all the shows are sell-
ing out. Welcome to the supposedly
doomed music business.
For the past ten years sales of recorded
music have declined so steeply as to be-
come a cautionary tale about the disrup-
tive power of the internet. The rise of ille-
gal le-sharing and the end of the digital
replacement cycle, in which people
bought CDs to replace tapes and records,
caused spending to collapse. Sales of CDs,
tapes and records have slid by 40% in Brit-
ain since 2001, according to the BPI, which
represents record labels. In Japan, the
world’s biggest CD sales market, the num-
ber of discs sold fell by 6% in 2008 and 24%
in 2009. Price cuts meant that revenues
dropped even more steeply.
The rise in digital music-sales is scant
compensation. People tend to buy tracks,
not albums, from sites like Apple’s iTunes.
They can obtain their favourite music
much more cheaply than they could in the
CD era. And even digital sales are now
stalling. In Japan, mobile and online sin-
gle-track sales rose only a shade during
2009. So far this year Americans have
bought 841m digital tracks, mostly from
Apple’s iTunes, according to Nielsen
Soundscandown from 847m at this point
last year. Apple now oers plenty of other
opportunities to spend money, from iPads
to more than 250,000 apps. Music execu-
tives believe the company is cannibalising
the musical part of its own business.
Yet the music business is surprisingly
healthy, and becoming more so. Will Page
of PRS for Music, which collects royalties
on behalf of artists, has added up the en-
tire British music business. He reckons it
turned over £3.9 billion ($6.1 billion) in
2009, 5% more than in 2008. It was the sec-
ond consecutive year of growth. Much of
the money bypassed the record compa-
nies. But even they managed to pull in £1.1
billion last year, up 2% from 2008. A sur-
prising number of things are making mon-
ey for artists and music rms, and others
show great promise. The music business is
not dying. But it is changing profoundly.
The longest, loudest boom is in live mu-
sic. Between 1999 and 2009 concert-ticket
sales in America tripled in value, from $1.5
billion to $4.6 billion (see chart 1). Ticket
sales wobbled in America during the sum-
mer of 2010, but that was partly because
some big-selling acts took a break. One of
the most reliable earners, Bono, U2’s sing-
er, was put out of action when he injured
his back in May. Next year many of the big
acts will be on the road again, and a bump-
er year is expected.
It is not that more people are going to
concerts. Rather, they are paying more to
get in. In 1996 a ticket to one of America’s
top 100 concert tours cost $25.81, according
to Pollstar, a research rm that tracks the
market. If prices had increased in line with
ination, the average ticket would have
cost $35.30 last year. In fact it cost $62.57.
Well-known acts charge much more. The
worldwide average ticket price to see Ma-
donna last year was $114. For Simon & Gar-
funkel it was an eye-watering $169. Leading
musicians have also, by roundabout
means, seized a larger share of the mysteri-
ous service charges that are often tacked
onto tickets.
Having a ball
Brieng What’s working in music
In the supposedly benighted music business, a lot of things are making money
1
The Economist October 9th 2010 101
1
Rock on
Source: Pollstar
Estimated concert-ticket sales in North America
$bn
0
1
2
3
4
5
1990 92 94 96 98 2000 02 04 06 08 09
102 Brieng What’s working in music The Economist October 9th 2010
2
1
Fans complain bitterly about the rising
price of live music. Yet they keep paying for
concerts. One reason is that the live-music
experience has vastly improved. Lots of
shiny new venues have been built since
the mid-1990s, many subsidised by gov-
ernments in the hope that they would revi-
talise decayed downtowns. And musi-
cians are much more enthusiastic about
performing live. The misery of touring was
once a familiar musicians’ gripe, inspiring
songs from the Rolling Stones’ Torn and
Frayed to Ice-T’s Lifestyles of the Rich
and Infamous. But those songs were writ-
ten in the days when touring was a way of
marketing recorded music. Now it is a di-
rect source of prot.
However much fans pay to get into a
venue (and thanks to ticket touts they often
pay more than even the greediest artists
charge) they tend to have cash left over.
This they spend on merchandise. We
have grown along with the touring busi-
ness, says Tom Bennett, the head of Brava-
do, which sells T-shirts and other para-
phernalia. Bravado’s revenues have more
than doubled since 2007, when it was ac-
quired by Universal Music Groupal-
though that is partly because it has signed
up new acts. And merchandise has moved
well beyond the arena. Nearly all Brava-
do’s turnover used to come from sales at
concerts. Now about half comes from re-
tail stores.
You can always get what you want
The re-release of the Rolling Stones’ 1972 al-
bum Exile on Main Street in May was ac-
companied by a merchandising blitz that
illustrates how far the business has
evolved beyond selling black T-shirts. Bra-
vado released more than 100 items, from
baseball caps to boxes containing signed
lithographs. There were not only album-
cover T-shirts but also a higher-priced as
worn by collection, featuring reproduc-
tions of clothes that members of the band
happened to be wearing in the early 1970s.
The huge range of items at dierent prices
meant products found their way into bud-
get stores like Target as well as dearer ones
like Bloomingdale’s.
The Stones are wily old businessmen:
they were among the rst to realise that
fans would pay more for concert tickets.
But even up-and-coming acts now try to
build livelihoods around merchandising
and live performance. Scorcher, a rapper
from London who recently signed his rst
record deal, set up a clothing label even be-
fore he made his rst video. He invariably
wears his own products in the music vid-
eos that he gives away on websites like
YouTube. Scorcher is not so much selling
music as using music to sell. If you buy
into me musically, you will also buy into
the clothing and the lifestyle, he explains.
Music’s cachet and emotional pull also
make it a potent weapon for businesses
that want to build their own brands. The
Rolling Stones (again) led the way in re-
cruiting tour sponsors, from Sprint, a
phone company, to Ameriquest, which
sold mortgages. Sponsorship can lead to
musicians wearing a company’s clothes
and naming songs after it: Rascall Flatts, a
country music band, has done both for
American Living, a label carried by JCPen-
ney. IEG, a rm that tracks the market, esti-
mates that the value of tour sponsorships
in North America will reach $1.74 billion
this year, up from $1.38 billion in 2006.
Music’s best business customer is tele-
vision. Watch an evening’s worth of TV
and count how many times you hear mu-
sic in the background, says Jeremy Las-
celles, chief executive of Chrysalis. Your
correspondent tried, and found that a new
tune appeared, on average, every 40 sec-
onds. Many necessitated payments to
songwriters and the music publishers, like
Chrysalis, that represent them. Publishers
have become increasingly adept at hawk-
ing their wares to programme-makers.
And music is not always in the background
of TVprogrammes. Some of the most pop-
ular shows of the past few yearsAmeri-
can Idol, Glee and The X-Factorhave
been music shows.
Because it derives revenues from busi-
ness as well as consumers, publishing is
much more stable than recording. Record
companies’ publishing departments,
which once seemed rather dowdy next to
sexy, talent-spotting A&R, have become vi-
tal cash machines. Publishing supplied
29% of EMI’s revenues and 45% of its prots
in the year to March 2010. The outt’s new
boss, Roger Faxon, comes from that side of
the businessa reection of how the eco-
nomics of music have shifted.
On television, music is either sup-
ported by advertising or bundled invisibly
into the cost of pay-TVsubscriptions. That
model is spreading from the box to the
web. Free music-streaming services like
We7 and Spotify have proliferated in Eu-
rope: the latter claims 10m users. America
has Vevo, a music-video website linked to
YouTube and owned in part by Universal
Music Group and Sony Music Entertain-
ment. Because Vevo’s content is consistent-
ly professional, it draws advertisers. Rio
Carae, who runs the outt, says compa-
nies pay $25-30 to reach 1,000 viewers.
That is more than television networks tend
to get, although Vevo reaches fewer people
and runs many fewer ads (just 15 seconds
every six-and-a-half minutes).
I feel free
The free music-streaming services have
not yet brought in money commensurate
with their huge audiences. In 2009 ad-sup-
ported digital music earned just £8.2m for
British record companies, less than 1% of
total revenues. But some have started
charging fans for tunes on mobile phones
charges that may be bundled into monthly
voice taris. Some music executives view
the streaming services as the industry’s
best hope.
Whether they are or not depends on
where the new users of free streaming
websites come from. If Spotify and Vevo
are drawing people away from the CD
racks and the iTunes store, they are under-
mining the industry. If, on the other hand,
people are streaming music online rather
than downloading it illegally from a BitTor-
rent site, the industry gains. It has con-
verted a user who is worth nothing to
someone who is worth a little. And the
pool of pirates is so huge at present (IFPI,
an international trade group, reckons that
19 out of every 20 tracks downloaded are il-
legal) that it ought to be possible to make
serious money from persuading people to
make the switch. The growth of legitimate
streaming services has driven overall rev-
enues up in South Korea and Sweden.
The possibility that music-streaming
websites will turn CDbuyers into freeload-
ers is a concern only in countries where
people still buy music. That is not the case
everywhere. Rampant piracy means just
$19m-worth of CDs were sold in China last
yearabout the same as in Hungary. In
such countries it makes sense to give away
music, surrounding and interspersing it
with advertisements. Websites like
2
Paying the piped
Source: CISAC/The Economist *Estimate
Gross royalty collections, €bn
0
2
4
6
8
1998 2000 02 04 06 08 09*
Europe
US/Canada
Asia Pacific
Rest of world
3
Golden oldies
Source: BPI
Britons’ spending on recorded music, 2009
By age group, %
0
20
40
60
80
100
20-29 60+
Other internet
Supermarkets
Music shops
Amazon
iTunes
All other
The Economist October 9th 2010 Brieng What’s working in music 103
2 Top100.cn and Google are doing that. Re-
cord labels have also licensed music to No-
kia, which bundles it into the price of its
mobile phones.
The proliferation of FMradio and mul-
tichannel television in emerging markets is
also driving revenues from copyrights. At
the same time, restaurants and clubs are
being strong-armed into paying for the
music they play. CISAC, an umbrella orga-
nisation for collection societies, has report-
ed steady or rising receipts in the past de-
cade (see chart 2 on the previous page). But
there is still a long way to go before collec-
tions reach European levels in emerging
markets or elsewhere in the rich world. In
America, for example, radio stations do
not pay performance rights, although
there have been legislative eorts to
change that.
Rising income from live performance,
merchandising, sponsorship, publishing,
online streaming and emerging markets
has come to counterbalance losses from
declining CDsales. As a result, some musi-
cians are singing a dierent tune. Last year
a new group, the Featured Artists Co-
alition, objected to government plans to
punish le-sharers by suspending their
broadband connections. Its leaders, in-
cluding established artists such as Billy
Bragg and Annie Lennox, argue that le-
sharing is a useful form of promotion. But
not everybody agrees.
The sharpest rebuke came from Lily Al-
len, a songwriter and pop singer who was
then 24 years old. File-sharing was ne for
long-in-the-tooth bands that do sell-out
arena tours and have the biggest Ferrari
collections in the world, she noted. But for
new acts it is a calamity. As revenues dry
up, record companies are becoming un-
willing to invest in young artists, apart
from those who have built an audience by
winning talent shows on television.
Ms Allen’s intervention went down
badly with the digital libertarians who
dominate discussion of le-sharing on the
internet. She was nonetheless rightand
she could have gone further. Music piracy
is fundamentally a generational issue.
Polls have consistently shown that teen-
agers and young adults are the most likely
to acquire music online illegally. They nat-
urally prefer music made by people of
their own age (such as Ms Allen), who
write about the sort of things they experi-
ence. So the young steal from the young,
while middle-aged fans continue to buy
CDs put out by middle-aged musicians.
City with no children in
In a sense, the recorded-music market is
not so much dying as greying. In 2002 peo-
ple aged 12 to 19 accounted for 16.4% of all
spending on albums in Britain, according
to TNS Worldpanel. That was almost dou-
ble the share of people aged 60 or over
(8.8%). The two groups have now switched
positions. By 2008 teenagers accounted for
just 12% of spending on albums, whether
digital or physical. By contrast, the older
fans’ share had gone up to 13.8%. The
over-60s do not just spend more on music
albums than teenagers. They spend more
on pop-music albums.
The consequences can be seen in the
pop charts. America’s bestselling album
since 2000 is 1, a collection of Beatles hits
from the 1960s. At one point last year four
of the top ten albums in Britain were Beat-
les recordings and the number-one album
was a collection of songs by Vera Lynn,
who was then 92 years old. The bestselling
album worldwide last year was I
Dreamed a Dream by Susan Boyle, a mid-
dle-aged Scot. Universal Music’s bestsell-
ing album in Japan in the rst half of this
year was Vocalist 4 by Hideaki Toku-
naga, Japan’s answer to Harry Connick Jr.
If most of your fans are middle-aged, CD
sales are holding up well.
The ageing of the recorded-music mar-
ket has been accelerated by trends in retail-
ing. As independent record shops and spe-
cialist media stores like Zavvi (formerly
Virgin) have closed, supermarkets have
emerged as leading outlets for music. Brit-
ain’s four big supermarketsTesco, Asda,
Sainsbury’s and Morrisonsaccounted for
24% of all music sales in the country last
year. By comparison, Amazon.com had
13% of the market and iTunes only 11%.
Supermarkets are patronised dispro-
portionately by the middle-aged and the
old (see chart 3, also on the previous page).
People aged 40 and over account for 62% of
spending on music in Tesco, according to
Kantar, a research rm. Partly because of
their clientele, partly because supermar-
kets are mass-market enterprises, they
tend to stock mainstream fare. People
who are shopping for Midlake or The Na-
tional won’t nd them in a supermarket,
says Geo Taylor of the BPI, referring to
two American indie bands. But I bet Kylie
Minogue’s album is there.
The growing clout of middle-aged and
old listeners extends beyond recorded mu-
sic. Many of the acts selling out stadiums
are old, says Rob Hallett, the head of AEG
Live. The top three American touring acts
last year were U2 (average age: 49), Bruce
Springsteen (61) and a double bill of Billy
Joel (61) and Elton John (63). And that raises
a worrying question: what happens when
their knees give out?
Many of the acts that now draw huge
crowds emerged in an era of multi-album
record contracts, lavish marketing and ra-
dio payola. They built their brands gradu-
ally, overcoming the occasional lousy al-
bum. They invaded other countries
when they felt the time was right. As a re-
sult, they have legions of fans who are pre-
pared to stump up for concert tickets. Be-
cause their songs appeal to several
generations of listeners, they are attractive
to advertisers and TV programme-makers.
The young dreamers in shows like The X-
Factor commonly perform songs that are
more than a quarter of a century old.
Some music executives fret that the sta-
dium-lling acts will not be replaced. It is
true that the starmaking machines run by
the record companies are creaking. But this
does not mean there will be no more pop-
ular acts. Musicians will build fan bases in
other waysthrough social networks, by
recording music for TV or simply by trek-
king from gig to gig (which is how bands
became famous for much of the 20th cen-
tury). Some will rise with a speed that
would have shocked their predecessors
witness Lady Gaga or Justin Bieber, a 16-
year-old singer who was almost unknown
a year ago. Those who doubt their staying
power may wish to consider that adults
have long believed the music their teenage
children listen to will not endure as long as
the tunes they grew up with. 7
Springsteen’s still the boss
With you when
you manage millions, but need a one-on-one
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Also in this section
106 Buttonwood: The magic of QE
107 Polishing the Swiss nish
107 Dissecting the ash crash
108 Oil prices stir
110 The Bank of Japan’s easing
110 The verdict on SocGen’s rogue trader
112 Economics focus: Capital ows to
emerging markets
E
VEN by its own notoriously cyclical
standards, investment banking has
been on a stomach-churning ride in the
past ve years. After an apparently golden
age, with quarter after quarter of record
prots, came the bursting of the debt bub-
ble, a deluge of red ink and bail-outs; then,
last year, rms bounced back obscenely
quickly thanks to record trading prots.
Now they are being squeezed once more,
and this time the slump may last.
American banking giants’ third-quarter
results, starting with JPMorgan Chase on
October 13th, will show that trading rev-
enues fell by perhaps 20-30% from the pre-
vious quarter. With nervy investors sitting
on their hands, client activity was pain-
fully slow across the board, according to
Jeeries, a middle-sized bank.
Things are not much better in origina-
tion businesses. Several trends that bu-
oyed underwriting last year, such as banks’
rush to raise capital and the boom in bond
issuance as companies renanced at low
rates, have zzled. Merger-advisory busi-
ness has picked up but not by enough to
compensate. As one Wall Streeter puts it:
If we extrapolated our third-quarter re-
turns, we’d shoot ourselves. Overall, 2010
will be a year to forget (see chart).
The ugly results will make for dicult
decisions on bonuses as the year draws to
a close. Firms won’t want to lose their tal-
ent: witness Goldman Sachs’s unusual
mid year payout of restricted shares for
vestment banking, argue optimists. But
this time could be dierent because market
and regulatory pressures have substan-
tially weakened the economics of the
business, says Shubh Saumya of the Bos-
ton Consulting Group. There is less lever-
age to supercharge returns. Some previous-
ly money-spinning activities are shadows
of their former selves. Revenues from sell-
ing and trading structured products are al-
most two-thirds lower than in 2006. New
regulations and accounting rules have
made securitisation less appealing.
The biggest impact will come from the
Basel 3 capital requirements, which could
be nalised at next month’s G20summit in
Seoul. Higher charges, especially for trad-
ing, could cause global wholesale banks’
risk-weighted assets to balloon by one-
fth on average, reckons Huw van Steenis
of Morgan Stanley.
This will force some to reassess their ex-
posure to racy stu. Even JPMorgan Chase,
which boasts of its fortress balance-
sheet, has said it will cut some investment-
banking exposures to counter the eects of
Basel 3. In future, numerous trading busi-
nesses will no longer be able to beat their
cost of capital, says Brad Hintz of Alliance
Bernstein, though some of these may still
be run as loss-leaders. Firms are seeking
out less capital-intensive opportunities in
areas like equities and advisory work.
Adding to the pressure on the indus-
try’s trading culture is America’s Volcker
rule, which restricts banks’ proprietary
trading, or punting with their own capital
in markets. JPMorgan Chase is shifting 45
prop traders into its asset-management
arm, where they can continue to place
bets, but only for clients. Morgan Stanley is
looking at a possible spin-o of PDT, its
quantitative-trading arm, one hope being
that the bank can still make some money
from the independent entity if it borrows.
partners aected by Britain’s bonus tax.
But they face growing pressure to cut costs,
and 40-50% of their revenues still ow to
employees. Chopping people often comes
more easily to banks than cutting pay. Bank
of America is sacking up to 5% of its capital-
markets unit. Others will followin a re-
versal of a hiring spree earlier this year
unless markets improve markedly in the
fourth quarter. Meredith Whitney, an ana-
lyst with a reputation for prescience,
thinks up to 80,000 jobs could go on Wall
Street in the next two years.
Capital-markets activity tends to be
closely linked with overall economic
growth. When output picks up, so will in-
Investment banking
The big squeeze
Finance and economics
NEW YORK
Why the industry’s best days may be behind it
Restructured
Source: Oliver Wyman *Forecast
Global investment-banking revenues, $bn
50
0
50
100
150
200
250
300
350
+

2006 07 08 09 10*
“Flow” sales and trading (rates, equities, etc)
Structured sales and trading
Origination (M&A, underwriting, etc)
1
The Economist October 9th 2010 105
For daily analysis and debate on economics, visit
Economist.com/economics
106 Finance and economics The Economist October 9th 2010
2
1
Senior folk at Goldman’s mighty Principal
Strategies group are reportedly in talks
with Avenue Capital and other non-banks.
The big rms will still be able to do
some gambling. Volcker allows banks to
invest up to 3% of their Tier-1capital in prop
trading, hedge funds and private equity.
And they can take directional bets by not
hedging all of the marketmaking trades
they do for clients. Goldman, for instance,
went short volatility in equities in the
second quartera decision it came to rue.
Overall, however, investment banks will
have fewer opportunities to roll the dice.
Banks have not made it easy for them-
selves. They missed an opportunity to
overhaul their operations and pay policies
last year, instead preferring to ride the re-
bound and postpone dicult choices.
With regulatory change looming, these
must now be faced. Tushar Morzaria, chief
nancial ocer of JPMorgan Chase’s in-
vestment bank, says all banks have to
wrestle with very fundamental change.
As you would expect from an industry
with a history of innovation, good and
bad, rms are scurrying around for new
opportunities. Bank of America, for in-
stance, wants to expand in the middle mar-
ket; only 2,000 of its 40,000 middle-sized
corporate clients use both its commercial
and investment banks. It and many others
are throwing money and people at emerg-
ing markets. The hottest area of expansion
is also, tellingly, the dullest: transaction ser-
vices. This covers a host of businesses that
provide steady income and are not too cap-
ital-intensive, such as corporate cash man-
agement, foreign exchange, trade nance,
global custody and hedge-fund adminis-
tration. Some banks have moved invest-
ment bankers into these less glamorous
but more promising areas.
Working out the relative attractiveness
of dierent businesses is not easy because
B
ACK in the days of the gold standard
countries competed to show their
commitment to sound money. Nowa-
days, the competition is in a dierent di-
rection: to create more money and weak-
en the currency. Brazil’s nance minister
has talked of an international currency
war. Dominique Strauss-Kahn, the head
of the IMF, this week warned against us-
ing currencies as a policy weapon.
Wishing that your currency would de-
cline is not the same as making it do so.
The old tactic of cutting interest rates has
been pursued almost to exhaustion, al-
though Japan lowered rates to a 0-0.1%
band this week (see later story). But it is
hard to create much of a yield dierential
within the developed world when rates
are at or below 1% almost everywhere.
Intervention has been pursued in the
rich world by both the Japanese and the
Swiss. But intervention works best when
central banks co-ordinate their purchases,
and which country is going to help anoth-
er to devalue?
So that leaves the option of quantita-
tive easing (QE), or creating more money
to purchase assets. This is largely present-
ed as a tactic to stimulate the domestic
economy by lowering the cost of nance
and putting more money into the bank-
ing system. But the creation of extra mon-
ey in one country ought also, other things
being equal, to drive down its price in
terms of other currencies.
Over the past two years much of the
developed world has attempted some
form of QE. (The European Central Bank
has done less than its rivals, which may
help explain the euro’s relative strength.)
Some see this as competitive QE, a game
of I can print more money than you
can. Many investors believe the Federal
Reserve will be forced into another round
of QE, perhaps as soon as November.
The prospect of further QE helps to ex-
plain why gold, equities and government
bonds are all performing well at the same
time. Gold bugs are buying bullion for the
understandable reason that central banks
appear committed to printing more mon-
ey: they fear that eventually this will lead
to ination. Stockmarkets are buoyant on
the grounds that QE will eventually work
to revive the economy and head o the
prospect of a double-dip recession.
Meanwhile government-bond yields
have fallen because central banks seem to
spend most of the QE money buying their
own country’s debt. Traders see the central
banks as putting a oor under bond prices.
So QE is a kind of magic bullet, helping all
asset prices to rise.
That may help to explain why gold and
Treasury bonds both performed so strong-
ly in the third quarter, an unusual combi-
nation. Dhaval Joshi of RAB Capital, a
fund-management group, says that there
have only been four other quarters since
1980 when gold, equities and Treasury
bonds have strengthened simultaneously.
Why aren’t bond investors reacting
with more alarm to the process of money
creation? One possibility is that, with in-
ation and deation both plausible con-
sequences of a debt crisis, investors are
spreading their bets, buying gold as a
hedge against the former and bonds as a
hedge against the latter.
Another factor is dierent time hori-
zons. Ination may be the eventual result
of QE in a few years’ time. But as Paul Ab-
berley, head of xed income at Aviva In-
vestors, points out, in the short term the
risk appears to be deation. Bond-fund
managers have to worry about their re-
sults over the next quarter, or the next
year, if they want to retain clients. What
happens in 2015 is almost irrelevant.
Nevertheless, it is doubtful whether
the simultaneous strength of gold, equi-
ties and bonds can last much longer. Mr
Joshi says the four previous periods of tri-
ple strength since 1980 were all followed
by falls in Treasury-bond prices.
Nor are rising gold and equity prices
necessarily compatible. David Ranson of
Wainwright Economics has looked at the
relationship between gold and stock-
markets since 1824. Some might think that
shares, thanks to their links with the real
economy, would do well in inationary
times. But that is not what the data show.
When gold was up by more than 20%
over a ve-year period, the median return
from large-cap American stocks in the
same era was just 2.1%. And when gold fell
by more than 20%, the median large-cap
return was 99%.
Although asset prices may be buoyant
at the moment, there are other risks
ahead. Competitive devaluation is an in-
herently unstable system. Someone must
lose their share of world trade. And a poli-
cy of boosting exports can all too easily
turn into a policy of blocking imports.
The magic bullet Buttonwood
How the bulls believe quantitative easing will boost asset prices
Economist.com/blogs/buttonwood
The Economist October 9th 2010 Finance and economics 107
2
1
the nal shape of regulatory reform is un-
clear. In derivatives, for instance, the com-
mon wisdom is that big dealers will be
hurt as trades migrate to central clearing
and exchanges. But that will depend on fu-
ture capital charges for cleared and un-
cleared assets and the precise structure of
trading venues, which are still not known.
Dealers could benet from an increase in
trading volume, osetting tighter margins.
There could be other positive eects.
The boss of one European bank thinks the
Basel rules will cause borrowers to move
away from banks and into bond markets,
boosting debt-origination business for
some investment banks. Others point to
the $1.6 trillion cash pile on which Ameri-
can companies sit. If they start to deploy
that in mergers and securities markets, the
industry will benet.
And even if market growth is low, there
will be winners, such as the ow mon-
sters that have the scale and the systems
to handle vast ows of client trades in
shares, bonds, foreign exchange, rates,
commodities and more. Perversely, this
points to increased concentration. Among
those likely to be in the top tier are Gold-
man, Deutsche, JPMorgan, Barclays and
Credit Suisse. The risk is that acute compe-
tition in those areas drives down margins.
Flow business is the side of the boat all
banks are running towards, says Ted Moy-
nihan of Oliver Wyman, a consultancy.
The best rms, such as Goldman, used
to make returns on equity above 30%. Even
the laggards could clock 20% without
breaking a sweat. Now the best that most
can hope for is the teens, and even that will
require chopping and changing. With such
a foggy outlook, it is only natural that mar-
kets value many investment banks at or
below book value. If another golden age is
coming, investors can’t see it. 7
S
WISS banks’ reputation for safety is not
just a piece of marketing. Historically
their regulators have added a Swiss n-
ish to international capital rules that re-
quired their big banks to carry thicker safe-
ty buers than rms in other countries (see
chart). Supervisors judged that Swiss
banks needed extra safeguards to calm the
nerves of clients of their huge private-
banking arms. Given the banks’ size rela-
tive to Switzerland’s economy, taxpayers
needed more protection, too.
The crisis has only made those argu-
ments stronger. UBS suered one of the
worst loss rates of any large bank in the
world. The government was forced to in-
ject capital into it; many of its clients ed.
To augment the new Basel 3 capital rules, a
government-created committee of experts
this week recommended a new version of
the Swiss nish for the two biggest rms,
UBS and Credit Suisse. Whereas Basel 3 re-
quires banks to carry core capital of 7% of
risk-adjusted assets, the Swiss banks will
need 10%. On top of this they will have to
carry another nine percentage points’
worth of contingent-capital, or CoCo,
bonds that convert into equity if core-capi-
tal ratios fall too far. The proposals are al-
most certain to be adopted, and the banks
will have to comply by 2019.
Atotal buer of 19% may seem extreme.
It is not. Between the fourth quarter of
2007 and the rst quarter of 2009 UBS
made losses of 13% of risk-adjusted assets
on an underlying basis (ie, before tax,
goodwill and movements on its own
debt). Taking into account both the higher
headline ratios, and more conservative
rules for calculating risk-adjusted assets
under Basel 3, UBS will have to carry capi-
tal and CoCo bonds of SFr60 billion-75 bil-
lion ($58 billion-72 billion), about four
times the de facto requirement under the
old rules. Its underlying losses during the
crisis peaked at about SFr45 billion.
For the banks the immediate question
is how easy it will be to issue the new in-
struments. Although a couple of CoCo
bonds have been issued by rms else-
where, the scale of fund-raising required is
on an entirely new level, especially com-
pared with Switzerland’s small corporate-
bond market. The terms of the new bonds,
which will convert into equity in two
tranches with dierent trigger points, will
make them ddly to value.
Still, claims that the bonds will be im-
possible to sell or more expensive to issue
than equity look silly. Beyond the alterna-
tive universe of banking, creditors always
carry a remote risk of extreme loss. The
bonds can be viewed as a kind of catastro-
phe insurance for which a premium is re-
ceived in return for a small chance of a big
loss. If a bit daunted by the practicalities of
creating a new market for these instru-
ments, both Swiss rms seem reasonably
condent of meeting the new rules with-
out crippling their businesses.
Banks elsewhere may pity the Swiss. In
fact there is a fair chance that all large glo-
bal rms will be required to augment their
core capital with a layer of debt that con-
verts into equity. As a complement to its
new core-capital rules, the Basel club has
made proposals that would also allow reg-
ulators to convert the most junior layer of
banks’ debt (known as Tier-2 capital) into
shares if required. For most rms this layer
is about 4% of risk-adjusted assets. Interna-
tional discussions are also ongoing about
creating bail-in bonds that could be
swapped into core capital in a crisis. Argu-
ably both these approaches are less ddly
than CoCo bonds. And if international reg-
ulators cannot deliver, some countries
may come up with their own rules, partic-
ularly if they host banks that dwarf their
economies. A Finnish nish isn’t on the
cards, but a British one may well be. 7
Regulating Swiss banks
First mover
Switzerland gets extra tough with its
banks. Others will follow
I
T TOOK less than 30 minutes for the Dow
Jones Industrial Average to fall by nearly
1,000 points on May 6th, before rebound-
ing swiftly. It took ve months for regula-
tors to explain what happened that day.
On October 1st the Securities and Ex-
change Commission (SEC) and Commod-
ity Futures Trading Commission (CFTC) is-
sued a long-awaited report explaining the
causes of what has become known as the
ash crash.
According to the report, the stockmark-
et’s rapid plunge was sparked by the slop-
pily executed sell order of one mutual-
fund group (reportedly Waddell & Reed),
when the market was already jittery be-
cause of economic turmoil in Europe. The
rm started to sell $4.1 billion of E-Mini
futures contracts based on the S&P 500 in-
The ash crash
Autopsy
NEW YORK
The post mortem into the stockmarket
slide of May 6th
108 Finance and economics The Economist October 9th 2010
2
1
T
HE 50th birthday of OPEC in Septem-
ber was accompanied by few celebra-
tionsalthough philatelists salivating at
the prospect of the commemorative
stamps issued by the 12 countries in the oil
cartel may have held private parties. Mem-
bers, always mindful that not everyone is
happy with their sway over oil markets,
may yet permit themselves some back-
slapping at a gala dinner at OPEC’s next
meeting on October 14th. An organisation
dedicated to the stabilisation of oil mar-
kets and a steady income to producers
has done a decent job of late.
Benchmark West Texas Intermediate
(WTI) crude has mainly traded at between
$70 and $80 per barrel since mid-2009. Ear-
lier that year OPEC had cut production by
12% to support prices, which had collapsed
after the credit crisis from a peak of $147 a
barrel in 2008 to just $33. This June OPEC,
which supplies over two-fths of the
world’s oil, declared that it was comfort-
able with $70-80 a barrel. At this price
consumers do not complain too much.
And OPEC’s revenues this year should hit
$625 billion, according to the Centre for
Global Energy Studies, a consultancy, after
slumping in 2009. That will be roughly the
same as in 2007, when members pumped
1m barrels per day (bpd) more crude.
But oil could be heading beyond
OPEC’s comfort zone. According to Gold-
man Sachs, world demand in the rst eight
months of the year was 2.7m bpd higher
than in the same period in 2009. On Octo-
ber 6th WTI rose above $83 a barrel, a ve-
month high, and retreated only slightly
after reports of a surprising increase in
American stockpiles. In the short term the
price could get another boost from rising
stockmarkets. Before the crisis oil prices
tended to move in the opposite direction to
equities (higher prices mean higher costs
for energy-consuming rms). But since
March last year, says Adam Sieminski of
Deutsche Bank, oil prices and the S&P 500
share index have been positively correlat-
ed (see chart). Mr Sieminski also notes the
historical eect of American mid-term
elections on share prices. If the optimism
that customarily grips investors is repeated
around this November’s poll it could put
another $8 on the oil price.
In 2011 the fundamentals of supply and
demand are likely to exert more upward
pressure on prices. Francisco Blanch of
Bank of America Merrill Lynch reckons
that global demand is set to expand by
1.4m bpd as growth in developing coun-
tries osets a decline in demand from slug-
gish rich countries. As a result he expects
prices to hit $100 next year and to average
$85 a barrel over the course of 2011.
Looking still further out, the booming
economies of China, India and other de-
veloping countries are set to need much
more fuel in years to come. The rich world
should eventually rediscover its thirst, too.
Non-OPEC supplies, which have grown in
recent years, may start to decline in 2012.
New wells will fail to plug the gap left as
older elds dry up, despite the investment
that 2008’s higher prices encouraged.
Oil prices
Crude awakening
Astable commodity may be about to get
more volatile
Locked stocks and barrels
Source: Thomson Reuters
Share and oil prices
2008 09 10
200
400
600
800
1,000
1,200
1,400
1,600
20
40
60
80
100
120
140
160
S&P 500
West Texas Intermediate,
$ per barrel
dex through an algorithmic trade, taking
account only of volume, not time or price.
(A sale that big usually takes over ve
hours to complete; this one took 20 min-
utes.) After the rm carried out its sell or-
der, buyers, including high-frequency
traders who dart in and out of trades, pur-
chased the contracts. But as volume in-
creased, traders started to buy and resell
them in what the report calls a hot pota-
to eect. The algorithm responded to the
increase in volume by unloading the con-
tracts faster, pushing prices down further
(see chart).
The liquidity crunch then spread to the
equity market, as some automated trading
systems paused in response to the dramat-
ic price movements. Many traders with-
drew from the market. Some reverted to
manual systems but could not keep up
with the spike in volume. Stub quotes,
placeholder prices provided by market-
makers, caused some shares in household
names to be sold for as little as a cent. With-
in a short while many investors had a
chance to analyse trading data and re-
turned to the market. But investors remain
shaken by that afternoon’s rapid swings.
Those hoping that the report would
outline steps to avert a similar crash were
disappointed. The report is like the black-
box recording devices you recover from
aviation disasters, says Michael Kearns of
the University of Pennsylvania. It’s entire-
ly descriptive. It doesn’t say how to x any-
thing. The SEC has already put in place
some new policies, such as circuit-break-
ers which temporarily suspend trading if
a price moves by more than 10% in ve
minutes. But critics say still more needs to
be done.
An advisory committee on regulatory
issues has been asked by the SEC and
CFTC to submit recommendations later
this month on how to modernise market
structure and trading rules. Robert Engle of
New York University’s Stern School of
Business, a member of the committee,
wants to use peak-load pricing, which
would reward trading rms for staying in
the market during periods of high volatil-
ity. Others worried about the hyperactivi-
ty of high-frequency traders have suggest-
ed charging them for each trade they break,
although that would not necessarily im-
prove liquidity and is an idea that is unlike-
ly to be pursued.
Stub quotes are likely to be eliminated.
This could help address 90% of the issues
we saw on May 6th, says Andrew Lo of
the Massachusetts Institute of Technology.
The SEC is also considering rules that
would prevent trades from occurring un-
less they fell within a certain range based
on the security’s current price. These lim-
it-up/limit-down trading parameters
would help avert dramatic swings in
prices, just as circuit-breakers do, but with-
out causing trading to seize up. And regula-
tors would be wise to do more research
into the market for exchange-traded funds,
which showed itself to be particularly vul-
nerable to price swings on May 6th.
The ash-crash report provides some
vindication for high-frequency trading
rms, which had been widely blamed for
the mayhem that day. It is true that many
of them ed the market when prices plum-
meted but as the report points out, so did
other traders. That may not save them
from stricter rules. American supervisors
could still act to curb their speed; Britain’s
Treasury recently commissioned a study
on the eect of high-frequency traders on
markets. Fast as they are, they may not be
able to outpace regulators. 7
Turning up the volume
Source: SEC
E-Mini S&P 500 futures-contract index
Volume (contracts
per minute),’000 Price
0
20
40
60
80
1,060
1,110
1,140
1,180
09h 10h 11h 12h 13h 14h 15h 16h
May 6th 2010
110 Finance and economics The Economist October 9th 2010
2
SocGen’s rogue trader
All his fault
A
COUNTRY bumpkin from Brittany,
seduced by a corrupt banking system
and the avarice of his bosses, or a crook,
a fraud and a terrorist? These were the
competing descriptions that a French
court was asked to weigh in the case of
Jérôme Kerviel, a rogue trader who al-
most laid low Société Générale, France’s
second-biggest bank. On October 5th the
court ruled unequivocally that Mr Ker-
viel was guilty, sentencing him to ve
years in jail, the maximum sentence it
could hand down (although it suspended
two years of the term). Mr Kerviel, who
has become something of a popular hero
in France for outwitting fat-cat bankers, is
appealing against the decision.
The court’s order that Mr Kerviel
repay the bank 4.9 billion ($7 billion),
the amount that it lost in January 2008
unwinding his trades, also caused public
consternation. Although Mr Kerviel has
no hope of repaying even a fraction of
this sum, the award in eect repudiates
his argument that the bank shared the
blame for his trading because it had
looked the other way when his positions
were protable. Happily for SocGen it
also makes it more dicult for share-
holders to sue the bank.
Even so, SocGen has lots of egg on its
face. Its weak oversight allowed a rela-
tively junior employee to place bets
worth more than the bank’s entire capi-
tal. Although SocGen has since spent
130m tightening its controls, Britain’s
Financial Services Authority ned the
bank in August for weaknesses in its
record-keeping and reporting.
In this SocGen is not unique. Several
other banks have been ned for similar
misdemeanours. Traders routinely talk
about mysterious trades appearing or
disappearing, and of the diculty of
reconciling positions at the end of the
day. In benign markets and with honest
employees these mistakes usually bal-
ance one another out, but SocGen’s
experience sounds a loud warning to all
investment banks and their regulators
that they need to pay more attention to
the boring old back oce.
The case of Mr Kerviellike that of
Nick Leeson, whose bets almost two
decades ago destroyed Barings Bank
should not obscure wider questions,
either. How to remunerate legitimate
traders who stand to earn bucketloads if
they make successful bets but lose little if
they suer losses is prime among them.
Aharsh sentence for Jérôme Kerviel
JK scowling
J
APAN’S economy has long been sickly. It
now also has to contend with a stronger
yen, thanks in part to loose monetary
policy elsewhere in the rich world. That
alone gave the Bank of Japan (BoJ) reason
to act on October 5th. So too did criticism
that it has not done enough to spur the
economy, which has inspired Japanese
politicians to suggest legislation to weaken
the central bank’s independence.
Whatever its motivation, the BoJ this
week took three modest but symbolic
steps. First, it lowered its policy rate from
0.1% to a range between zero and 0.1%. That
signals to the market, and to disenchanted
politicians, that the BoJ cares. Second, the
BoJ stated that it would maintain its virtual
zero-rate policy until there was medium-
to long-term price stability. Until dea-
tionary Japan sees consumer prices rise by
between 0% and 2% a year (with an uno-
cial aim of 1%), the long-standing near-zero
policy rate will remain.
Third, the central bank said that it
would consider establishing a programme
to buy public- and private-sector assets
from banksincluding commercial paper,
corporate bonds and perhaps even ex-
change-traded funds and Japan real-estate
investment trusts. Since the nancial crisis
Japan has continued to accept nancial in-
struments as collateral in order to pump
money into the system, but has not bought
the assets. The eect would be to restart the
policy of quantitative easing that Japan
used to claw out of its banking crisis be-
tween 2001 and 2006. The initial amount
under consideration is about ¥5 trillion
($60 billion), ¥3.5 trillion of which is for
public-sector debt. That is on top of a sum
of ¥30 trillion already budgeted for BoJ
loans to banks.
The market had expected some form of
easing but had not imagined a whittling of
interest rates, however symbolic. The Nik-
kei 225 Stock Average hit a two-month high
on October 6th and bonds rose sharply.
From a political standpoint, too, the moves
were a success. The nance minister, Yoshi-
hiko Noda, said he expected the actions to
weaken the yen and improve the econ-
omy. Very timely, gushed Banri Kaieda,
the economics minister.
Whether the BoJ’s actions will have
any lasting impact on the economy is an-
other matter. The change in the policy rate
does not mean much in practice: it merely
reinforces the message that low rates are
here to stay for a while. The asset-purchase
programme is as yet too small to matter. An
expected round of fresh quantitative eas-
ing by America’s Federal Reserve later this
year will put more upward pressure on the
yen, which on October 7th reached a 15-
year high against the dollar, about where it
was before last month’s currency interven-
tion. Still, the BoJ seems willing to respond
to a worsening economic climate and to
political heat. The psychological boost that
represents should not be discounted. 7
The Japanese economy
Easy does it
Tokyo
Symbolic moves by the Bank of Japan
Correction: In Cutting edge (October 2nd 2010) we
said that Ireland implemented spending cuts and tax
hikes amounting to 2% of GDP in 2009. In fact, Ireland’s
scal tightening that year amounted to even more,
4.5% of GDP. Sorry.
OPEC is likely to respond by calling on its
spare capacitybelonging mainly to its
biggest member, Saudi Arabia. OPEC is
tight-lipped about how much it has on tap.
Some estimates put it at about 5m-6m bpd,
though others think the amount that could
readily hit the market is much lower.
Such calculations determine estimates
of when demand will begin to outpace
supply, a circumstance that, just as in 2008,
is likely to cause precipitous price spikes.
Jerey Currie of Goldman Sachs reckons
that demand could be bumping up
against capacity in 18 months. Other an-
alysts with greater doubts about global
growth and more optimism about OPEC’s
capacity give it four years or more. Given
the havoc of 2008 neither OPEC nor oil
buyers are likely to greet the moment with
a party, let alone a run of special stamps. 7
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M
ONSOON rains bring relief after the heat of summer but
they can also cause ooding. A ood following a drought is
a reasonable description of recent ows of private capital to
emerging markets. During the worst of the crisis these ows col-
lapsed, sending at least a few emerging economies into the arms
of the IMF. Now, attracted by the developing world’s better
growth prospects and exceptionally low interest rates in rich
countries, money is surging back.
It is hard to know just how much cash is owing in: complete
data on countries’ balance-of-payments positions are available
only with a long lag. Robin Brooks, an economist at Goldman
Sachs, has worked out a measure of net capital inows from g-
ures on countries’ foreign reserves and current-account balances.
He reckons that ows into 20 big emerging countries are now
running at a faster pace than before the crisis. According to his es-
timates, net capital inows to these countries between April
2009 and June this year ran at an annualised pace of $575 billion,
well in excess of average annual inows of $481billion in the two
years prior to September 2008.
As with monsoon rain, so with foreign capital. Policymakers
in emerging economies welcome this money but not unreserv-
edly. Many fret that the upward pressure on exchange rates from
the surge in foreign capital will cause their currencies to appreci-
ate too much. Critics point out that some appreciation is due: a
rise against rich-world currencies is both a natural consequence
of the faster growth of emerging economies and a way to correct
global imbalances. Emerging-market policymakers would argue
that their only concern is to prevent their exchange rates from
overshooting. They could cut interest rates to make their econo-
mies less attractive to foreign money. But at the moment most are
raising rates to curb ination.
If they do not want their currencies to rise, governments in
this position can intervene to try and dampen (or even prevent)
the appreciation. Some countries are trying to use capital controls
to limit the inows of foreign money, or at least to discourage the
most ckle kinds of capital. China has long applied stringent con-
trols. On October 4th Brazil doubled a tax it charges foreigners on
investments in xed-income securities to 4%. A day later South
Korean regulators said that they would soon begin to audit lend-
ers handling foreign-currency derivatives to curb volatility
caused by capital inows. More typically, countries intervene by
selling their own currencies and accumulating foreign-exchange
reserves. Because fast GDPgrowth and the capital ows it attracts
will eventually spur higher ination, the authorities’ ability to
stop a real currency appreciation is limited. Still, analysis by Mr
Brooks and his colleagues shows that many countries have been
trying to prevent their currencies from rising in nominal terms
and that some have dramatically ramped up their interventions
from pre-crisis levels. Despite the headlines they nd that China
is not the only big intervenerand that others have been working
much harder to hold their currencies down.
The economists note that the currencies of emerging Asian
countries face the strongest upward pressure because of changes
in the destination of private capital. As ows to eastern Europe
and Africa have shrivelled, Asia’s share of the total ow of capital
to the emerging world has gone from 61.3% in 2007 to 78.6% in the
rst half of 2010. Latin America’s share has also increased, from
15.2% to 20.9% over the same period. These are rising shares of a
growing total, meaning that both regions are now getting more
private capital than they were before the crisis. This eect is par-
ticularly marked for emerging Asia (see left-hand chart).
Asense of reserves
Mr Brooks and Fiona Lake, one of his colleagues, have looked at
annual foreign-exchange interventions by central banks in
emerging Asian economies, tracking the pace at which they built
up reserves by buying foreign currency. They argue that it is im-
portant to scale absolute amounts by the country’s base money
supply, pointing out that the eect of a $1 billion intervention by
Singapore has a much bigger eect on the domestic economy
than similar action by China. Comparing 2010 with 2006, the
year before the crisis, they nd that South Korea and Taiwan have
vastly increased their meddling in currency markets (see right-
hand chart). Relative to the size of its economy, China’s interven-
tion is small in both years, and smaller in 2010 than in 2006.
Not every country’s currency is under the same kind of pres-
sure. India, for example, seems not to have intervened much in
the foreign-exchange market, but its currency has not moved
much over the past year either. Part of the reason is that capital in-
ows have gone mainly to nance its persistent current-account
decit. By controlling for this kind of thing the analysts nd that
Malaysia and Thailand have had the most appreciation-friend-
ly regimes in Asia. Malaysia has largely been content to let its
currency oat upwards. The ringgit has risen by over 10% against
the dollar since the beginning of the year. Malaysia’s reserve ac-
cumulation has been much smaller in 2010 than in 2006. South
Korea, by contrast, has been absorbing virtually all of the upward
pressure on the won by accumulating additional reserves. For
Latin America, Mr Brooks and his colleague, Alberto Ramos, con-
clude that Peru is the country that has been trying the hardest to
prevent its currency from rising. Interventions by Brazil look rela-
tively modest once its size is taken into account. Colombia has
pretty much allowed its currency to rise.
Currency pressures will be a big theme of the annual meet-
ings of the IMF and World Bank this week and of November’s
G20 summit in Seoul. The Sino-American spat over the value of
the yuan tends to hog attention. But it is only one source of ten-
sion among many in the international monetary system. 7
Flood barriers
Après la crise, le déluge
Source: Goldman Sachs *Annualised

Year to date
Net capital flows
$bn, selected emerging markets
Foreign-exchange accumulation
Reserves as % of monetary base
200
100
0
100
200
300
400
500
600
+

2001* 03 05 07 09 10*
Latin America
Asia
Europe,
Middle East
& Africa
0 50 100 150 200 250
Singapore
Korea
Peru
Thailand
Taiwan
Brazil
Malaysia
China
India
2006 2010

358
nil
Despite the headlines China is not the most aggressive intervener in currency markets
Economics focus
112 Finance and economics The Economist October 9th 2010
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Also in this section
116 The 2010 Nobel prizes
118 The search for alien life
D
ISPUTES about science in Western
countries can sometimes be heated.
Seldom, though, do they descend into sti-
cus. But this is what seems to have hap-
pened in China on August 29th. That day
Fang Shimin, a well-known scientic blog-
ger and self-proclaimed science cop, was
attacked in the street by a gang. Nor was
this the rst such incident. In June Fang
Xuanchang (no relation), a science journal-
ist on Caijing magazine, was on the receiv-
ing end of similar treatment.
So far, it might be thought by smug
Westerners, so depressing. But then there
was a twist in the tale. One of the objects of
the two Fangs’ criticisms, Xiao Chuanguo,
a urologist at Huazhong University of Sci-
ence and Technology in Wuhan, was ar-
rested and charged with organising the as-
saults. Even more extraordinary (or
perhaps not, considering that he had been
detained for seven days without access to a
lawyer), he confessed his guilt on televi-
sion, on September 28th.
Virtue, then, has prevailed. And Chi-
nese science has taken a step towards the
standards of civilised discourse that West-
erners like to think prevail in their own
countries. Maybe. For the more you dig
into this strange tale, the more illuminating
it is of the need for Chinese science to clean
up its act.
Fang Shimin claims that Xin Yu Si (New
Threads), the website he runs, posts about
100 allegations of scientic fraud a year,
and he has become a folk hero as a result.
China has no proper procedures for deal-
ing with such fraud and Dr Fang believes
that, in the absence of such ocial chan-
nels, a platform of the sort his website pro-
vides is indispensable to the ght against
misconduct in science.
Some of the accusations undoubtedly
stand up and shine a light on the often-
murky business of Chinese science. Many,
however, are anonymous and lack specif-
ics, making it dicult for those accused to
mount a rebuttal even when they are inno-
cent. Indeed, New Threads reminds some
of those with longer memories of the hys-
teria of the Cultural Revolution, when any-
body could post any accusation on da zi
bao (big-character posters), and countless
lives were ruined as a consequence. Not
surprisingly, Dr Fang has many enemies.
Threadbare?
The bad blood between him and Dr Xiao
in particular goes back to New Threads’
foundation in 2000. Almost immediately
Dr Xiao, writing under the pseudonym of
Hun Jiao Shou (Confused Professor), be-
gan criticising Dr Fang for the way New
Threads went about its business. In 2001
Dr Xiao wrote to Science accusing Dr Fang
of plagiarism. Dr Fang had written an arti-
cle that drew on a paper in Science with-
out, Dr Xiao felt, proper acknowledgment
of the original researcher. Science’s editors,
however, disagreed after they had looked
into the matter.
In 2005, after several bitter exchanges,
Dr Fang managed to identify the Confused
Professor as Dr Xiao. Around the same
time, Dr Xiao applied to be elected to the
Chinese Academy of Engineering. Dr Fang
got hold of a copy of Dr Xiao’s application
and made several allegations in New
Threads, in newspapers and on television.
He said that Dr Xiao held full-time posi-
tions in America as well as China, thus
showing insucient loyalty to his Chinese
institution, and also that he included con-
ference abstracts as well as proper, peer-re-
viewed papers in his publication list
though neither of these is a mortal sin.
More seriously, Dr Fang alleged that Dr
Xiao had exaggerated the ecacy of a po-
tentially revolutionary surgical procedure
he had invented. This operation is intend-
ed to restore bladder function to people
with spina bida, a congenital defect that
causes nerve damage and a loss of sensa-
tion and muscle function below the waist.
Dr Xiao’s response was to take Dr Fang to
court for libelfrequently. He won two
cases, lost two, and several others remain
undecided. Then, last autumn, Science
News, a Chinese-language magazine of
which Fang Xuanchang was then execu-
tive editor, devoted two issues to articles
questioning the safety and ecacy of the
Xiao procedureusing as a source Fang
Shimin’s lawyer Peng Jian, a man with no
scientic or medical background.
Meanwhile, similar accusations were
posted under the pseudonym xysergroup
(xys are the initials of Xin Yu Si) on two pa-
tient-support websites in America, Spi-
naBidaConnection and CareCure, appar-
ently trying to warn patients away from
clinical trials based on Dr Xiao’s procedure
Chinese ethics
Scientists behaving badly
For daily analysis and debate on science and
technology, visit
Economist.com/science
Science and technology
Beijing
Recent events show China needs to clean up its scientic act
1
The Economist October 9th 2010 115
116 An asteroid called Lutetia
116 Science and technology The Economist October 9th 2010
2
1
that are being undertaken in the United
States. These accusations were odd be-
cause an independent pilot study of the
technique, whose results were published
formally in the August issue of the Journal
of Urology, but which have been common
knowledge since 2008, suggests most of
the patients involved have indeed experi-
enced improvements in bladder function.
If this were a lone spat, it would hardly
matter. But it seems symptomatic of some-
thing wider. In 2006, for example, 120 Chi-
nese scientists, many working in the Un-
ited States, wrote to the country’s
science-policy ocials warning of the
risks of unfounded allegations and anony-
mous personal attacks. They called for the
establishment of independent expert com-
mittees to investigate claims of scientic
misconduct. In particular, they argued, in-
vestigations should be carried out in con-
dence and innocence should be presumed
until guilt was proven.
Unfortunately, nothing has yet hap-
pened. No one, then, comes out looking
good. What started as an attempt to lighten
a dark corner of Chinese life has turned
into something that looks suspiciously like
a witch-hunt. The upshot is that Chinese
science needs to get its house in order. Mea-
sured by the number of published papers,
China is the second most productive scien-
tic nation on Earth. Incidents like this,
though, call into question how trustwor-
thy that productivity is. And that is not a
trivial matter. If China does not have hon-
est science, its development will be imped-
ed. Considering how many of the men
who run China are engineers, it is surpris-
ing this message has not yet got through. 7
C
ARBON is the basis of more molecules
than all the other elements put togeth-
er. It is, though, surprisingly inert. A lump
of graphite or a diamond will sit happily
on a laboratory bench without bursting
into ames, or even rusting, and is imper-
vious to the action of water. Better ways of
manipulating the element are therefore
welcome, particularly as organic chemi-
cals, as carbon compounds are known
whether or not they have ever been part of
a living creature, form the basis of much
human industry.
That this year’s Nobel prize for chemis-
try has been awarded for a better way of
synthesising organic compounds is thus
appropriate. The winners, Richard Heck,
Ei-ichi Negishi and Akira Suzuki, used pal-
ladium as a catalyst.
The ball was set rolling in the 1960s by
Dr Heck, of the University of Delaware. He
employed palladium to promote reactions
involving alkenesmolecules in which
two carbon atoms are joined by what is
known as a double bond (each carbon
atom can form up to four bonds with other
atoms, which is why there are so many
types of organic compound). Dr Negishi,
of Purdue University, then went on to im-
prove the process, by involving zinc-based
compounds in addition to the palladium.
Dr Suzuki, of Hokkaido University, applied
the nishing touches by adding boron
compounds to the mix. The result is a set of
chemical processes that are used regularly
to make a host of drugs, such as Taxol, an
anticancer agent, and other complex
chemicals, like fungicides.
The physics prize was also awarded for
what is, at bottom, a piece of carbon chem-
istry. This was the discovery of graphene, a
form of carbon one atom thick. Andre
Geim and Konstantin Novoselov, of the
University of Manchester, made graphene
in 2004 using what may be the simplest ex-
periment ever to win a Nobel prize: they
peeled it o the surface of a piece of graph-
ite using sticky tape.
Graphene is now touted as a wonder
material. It is electrically and thermally
conductive, is strong and is transparent. It
is thus proposed for applications that
range from lightweight materials for air-
craft to touch-screens for computers. Its
thinness, too, gives it unusual electrical
properties. One of these is that if it is
placed in a magnetic eld it exhibits a phe-
nomenon known as the relativistic quan-
tum Hall eect. This (put your analyst on
danger money) means magnetised gra-
phene is inhabited by quasiparticles,
which have the quantum properties of real
particles (electrons, protons and so on)
without actually being particles. That is
the sort of thing which might lead to truly
unexpected applications.
Aword of caution may be in order. The
1996 chemistry prize was also awarded for
a new form of carbon, buckminsterfulle-
rene. Buckyballs, as they became known
colloquially, are football-shaped mole-
cules made of 60 carbon atoms linked by
single and double bonds. Buckminsterful-
lerene, too, was promoted as a wonder-
substance when it was discovered. Both it
and its descendants, so-called buckytubes,
which are cylindrical molecules made of
pure carbon, are still much admired, but
they have not yet lived up to their promise.
In truth, graphene does look a more
plausible candidate for commercialisation
than buckminsterfullerene. Those electri-
cal properties are truly exciting, and some-
thing that can be turned into a lm which
is both strong and thin has a lot of poten-
tial applications. But there’s many a slip
’twixt cup and lip, and no important gra-
phene products are yet on the market.
Chemistry of a dierent sort
The other science prizethat for physiolo-
gy or medicinewent to a technology that
has already proved its worth 4m times
over. That is the number of people alive to-
day who were conceived by in vitro fertili-
sation (IVF). The winner, Robert Edwards,
began his research on mice in the 1950s, be-
fore moving to people. He gradually dis-
covered how human eggs mature to the
point where they can be fertilised, but had
little success getting such fertilised eggs to
develop into embryos that could be im-
planted into women, in order that they
could grow into children.
The breakthrough came when he
teamed up with Patrick Steptoe, a gynae-
The 2010 Nobel prizes
Making new
things
This year’s prizes are awarded for two
types of carbon chemistry, and IVF
Miss Brown and her creator
This is Lutetia, a 100km-long asteroid
visited in July by the European Space
Agency’s craft Rosetta. First results from
the encounter, announced at the American
Astronomical Society meeting in
Pasadena, suggest the asteroid, small
though it is, is covered with a layer of dust
A dusty neighbour
118 Science and technology The Economist October 9th 2010
2
F
OR ve decades astronomers have
searched the vast ocean of space in the
hope of picking up some kind of radio
message from the neighbours. That noth-
ing has been found has not deterred the
search for extraterrestrial intelligence, or
SETI to the cognoscenti. Despite those
years of eort, SETI has done little more
than dip a glass into the cosmic ocean, hav-
ing looked closely at only 750 of the Milky
Way’s billion or so star systems.
That will soon change. The Allen Tele-
scope Array, a cluster of radio telescopes
being built in California with SETI in mind,
will dramatically speed up the rate at
which such systems can be explored. On
top of that, as astronomers get
better at discovering planets, and
nd more habitable ones, the
number of plausible targets for
SETI will increase.
Until recently, SETI has been
uncontroversial. What could be
more wholesome than answer-
ing the question of whether hu-
mans are alone in the universe? A
SETI subcommittee within the
International Academy of Astro-
nautics (IAA), a scientic lobby
group, even fashioned a protocol
on how to respond if a signal
from aliens is received. This con-
cludes by saying that no reply
should be sent until appropriate
international consultations have
taken place. Mazlan Othman, the
head of the UN’s Oce for Outer
Space Aairs (yes, there really is
one) has suggested that her agen-
cy is ready-made for such co-or-
dinationleading one newspa-
per to dub her the alien ambassador.
Where things have become dicult is
over whether or not researchers should be
allowed to send signals into space pre-
emptively, in order to attract the attention
of any alien listeners who might be out
there. This is called active SETI, or METI,
where the M stands for messaging. At-
tempts to draft a second SETI protocol to
deal with this foundered several years ago,
and the chairman and two members of the
IAA’s committee resigned.
The acrimony was aired on October 4th
at a meeting organised by the Royal Soci-
ety at Chicheley Hall, in Britain. Those op-
posed to METI argue that broadcasting sig-
nals into space announcing the location of
Earth is tantamount to ringing a dinner
gong for any carnivorous, colonising or
anti-social aliens who might be listening.
Although Earth would be a rather long
way to go for lunch, the argument is that
the decision to take such a risk is not one
for a handful of scientists.
Alexander Zaitsev, chief scientist at the
Kotelnikov Institute of Radio Engineering
and Electronics, disagrees. Dr Zaitsev has
access to one of the world’s most powerful
radio transmitters, the Evpatoria, and he
has already sent a number of hello sig-
nals to nearby star systems. He argues that
radar astronomy, which is used to probe
things like asteroids and the surface of Ve-
nus, already gives o signals that could be
picked up by aliens. He is also on record,
though, as saying that humans have a mor-
al obligation to announce their presence.
Even without the intervention of peo-
ple like Dr Zaitsev, that may already have
happenedif anyone is listening. Some
people think signals emitted by television
and radio stations would be detectable
from nearby stars, thus rendering the de-
bate irrelevant. Indeed, some at the meet-
ing argued that if aliens were to use an as-
tronomical phenomenon called gravit-
ational lensing (in which the gravitational
eld of the sun bends and amplies radio
waves and light from Earth), human sig-
nals could be amplied to the point where
even the light from cities would be visible.
Michael Michaud, who resigned as
chairman of the IAA’s SETI group in 2007,
said that METI is not science but rather an
attempt to provoke a reaction. He wants
wider consultation. Seth Shostak, the
group’s current chairman, disagrees. He
says consultation does not guarantee a
correct answer; it seeks merely to
spread the blame if Earth gets wiped
outthough who would be left
to point the nger is unclear. He
also says that because there is a
small but real risk to sending
messages, any international con-
sultation would be likely to con-
clude that the broadcasters
should shut up.
David Brin, an author of sci-
ence ction who also resigned
from the SETI group, accused it of
attempting to stage-manage the
discussion. He said that those
proposing METI should involve
more of humanity in the debate
and must accept that a morato-
rium may be necessary. But he is
also realistic. In the not too dis-
tant future, he thinks, so many
people will have the power to
send signals into space that it will
not be possible to control interga-
lactic messaging. If that turns out
to be true, then hope it is ET lis-
tening, not the Daleks. 7
The search for extraterrestrial intelligence
Phoning ET
Chicheley
An argument over whether to send messages to aliens
Who invited you?
cologist who was working on the then-
novel technique of laparoscopy (keyhole
surgery). Dr Edwards realised that laparos-
copy could be used to extract eggs from
women’s ovaries in reasonably large num-
bers (until then, he had been relying on
more intrusive surgical methods to obtain
them). This, combined with hormone in-
jections to bring those eggs to the correct
state of maturity before they were re-
moved, meant that women who were in-
fertile because their Fallopian tubes were
blocked might have eggs extracted, fertil-
ised outside their bodies by sperm from
the man of their choice, and the embryos
that resulted implanted into their wombs
thus bypassing the Fallopian blockage.
The result, in 1978, was Louise Brown,
the rst of those 4m. Both Steptoe (who
died in 1988) and Dr Edwards were accused
at the time of playing God, being like Vic-
tor Frankenstein and so on. Even today,
there was a similar reaction from the Vati-
can to Dr Edwards’s award. The objection
seems to be that not all embryos created by
IVF are then implanted and brought to
term. Some people, it seems, put more val-
ue on insentient balls of cells than on the
full-grown human beings who would not
have been born without Dr Edwards’s in-
sight and persistence. Maybe they should
meet Miss Brown. 7
Also in this section
120 James Wolfensohn’s global life
121 James Ellroy’s women
121 Edith Cavell’s execution
122 Eadweard Muybridge’s photographs
I
AN MORRIS, a polymathic Stanford
University professor of classics and his-
tory, has written a remarkable book that
may come to be as widely read as Paul Ken-
nedy’s 1987 work, The Rise and Fall of the
Great Powers. Like Mr Kennedy’s epic, Mr
Morris’s Why the West RulesFor Now
uses history and an overarching theory to
address the anxieties of the present. Mr
Kennedy warned American policymakers
of the consequences of imperial over-
stretch, although it was the sudden implo-
sion of the Soviet Union that proved the
most spectacular vindication of his thesis.
For his part, Mr Morris sets out to show
two things that are just as important; rst
that civilisations throughout history have
waxed and waned, usually for reasons
their rulers were powerless to inuence,
and second, that the West’s dominance of
the past 200 years was neither inevitable
nor locked in for the future.
Mr Morris’s refrain is maps, not
chapsthe belief that human destiny is
mostly shaped by geography and the
eorts of ordinary people to cope with
whatever is thrown at them in the form of
climate change, famine, migration, disease
and state failure (what the author de-
scribes as the ve horsemen of the apoca-
lypse). He argues that history teaches us
that when the pressure is on, change takes
o. According to what he calls, somewhat
annoyingly, the Morris Theorem, Change
is caused by lazy, greedy, frightened people
looking for easier, more protable and
safer ways of doing things. And they rarely
know what they are doing.
Among the many things the author sets
out to explain is why, throughout human
history, social development has gone in ts
and starts, sometimes retreating in one
place for a millennium or two before sud-
denly spurting forward again elsewhere.
As a way of dramatising this, Mr Morris
presents these ebbs and ows in the form
of a contest between East and West. Why,
he asks, did British boats shoot their way
up the Yangzi in 1842 rather than Chinese
ones up the Thames, and why do many
more people from the East speak English
than Europeans speak Mandarin?
At rst glance the answer is obvious.
The industrial revolution began in the
West in the late 18th century thanks pri-
marily to the eorts of British engineers
and entrepreneurs who sought to exploit
the energy from the country’s abundant
coal stocks and use it to harness the power
of steam to drive ships, trains and ma-
chines in factories. The rapid march of
technology gave Britain a temporary edge
over every other country and allowed it to
project both economic and maritime mili-
tary power on a global scale that remained
virtually unchallenged for most of the next
100 years, and to establish the ascendancy
of the West that continues today. But why
did China, with its sophisticated textile in-
dustry, advanced metallurgy, massive sup-
plies of coal and lots of clever, inventive
people not get there rst? After all, a couple
of centuries earlier it had been higher up
the social-development scale than Britain,
or indeed anywhere else in the West.
And why, come to that, was Britain,
rather than China, the foremost naval
power of the age? More than 80 years
before Christopher Columbus set sail for
America with 90 seamen in three small
ships, the Chinese admiral, Zheng He, was
exploring the coasts of Africa and India
with a total of nearly 300 much bigger
vessels and 27,000 men. Mr Morris ob-
serves: Zheng had magnetic compasses
and knew enough about the Indian Ocean
to ll a 21-foot-long sea chart; Columbus
rarely knew where he was, let alone where
he was going.
Mr Morris begins his story more than
50,000 years ago, but it only really gets go-
ing with the beginning of agriculture and
the birth of large-scale organised societies
after the last ice age, around 12,000 years
ago. He shows how successive civilisa-
tions radiated outward from two
geographically distinct coresthe hilly
anks of western Eurasia and the area
between the Yangzi and Yellow rivers in
modern Chinabecause of their relative
abundance of domesticable plants and
animals. Development started in the West
about 2,000 years before similar advances
got going in the East. Its lead shrank from
about 1,000BC on, after which East and
West were roughly level until the slow col-
lapse of the Roman empire, which repre-
sented a peak of Western social develop-
ment not matched until the start of the
early modern era in the 17th century.
Books and arts
Global power
On top of the world
Why the West’s present dominance is both recent and temporary
Why the West RulesFor Now: The
Patterns of History and What They
Reveal About the Future. By Ian Morris.
Farrar, Straus and Giroux; 750 pages; $35.
To be published in Britain by Prole in
November; £25
1
The Economist October 9th 2010 119
Prospero, our online blog on books, arts and
culture appears every day. For analysis and
debate, visit
Economist.com/culture
120 Books and arts The Economist October 9th 2010
2
1
What Mr Morris shows is that over a
period of 10,000 years one civilisation
after another hit a hard ceiling of social
development before falling apart, unable
to control the forces its success had un-
leashed. For every two or three steps for-
ward, there was at least one step back. Dur-
ing those periods of advance the West
tended to pull ahead of the East, and dur-
ing the steps back the gap narrowed again.
On this went in a series of waves, each, Mr
Morris says, cresting higher than the last,
but with the West’s lead apparently locked
in. That process continued until the middle
of the sixth century ADwhen the East sud-
denly, and for the rst time, spurted ahead
as Europe entered the so-called Dark Ages
and the Sui dynasty united China, laying
the foundations for the East to hold the
lead for the next 1,000 years.
Although the West eventually caught
up, thanks in part because it began making
ships that could sail to America (the Atlan-
tic is much smaller than the Pacic) and be-
cause its constant wars helped develop
military technology, even by the mid-18th
century there was not much dierence be-
tween East and West. As Mr Morris ob-
serves: although the hard ceiling had
been pushed up a little, it remained as hard
as ever. The West may have caught up, but
according to a new breed of political econ-
omists, such as Thomas Malthus, iron laws
governing humanity, in particular the one
that held that people always converted the
extra wealth earned from rising productiv-
ity into more babies to consume it, would
prevent either the West’s or the East’s so-
cial development score rising much fur-
ther. Malthus, however, had not reckoned
on the transformative power of steam to
smash through the West’s hard ceiling.
Towards the end of his book, Mr Morris
attempts to answer the question posed in
the title. The West may still rule, but for
how much longer? His conclusion is that
although power, inuence and commer-
cial dynamism are shifting eastward at a
relentless pace, the question itself may be
wrong. If Eastern and Western social de-
velopment scores continue rising at their
current rates, Western rule will end early
in the next century. But the rise in the index
over the next 100 years, propelled by quan-
tum leaps in computing power and biosci-
ence, is so exponential that humankind
itself will be profoundly changed, making
distinctions between East and West seem
weirdly anachronistic.
There is, on the other hand, a real pos-
sibility that we fail to negotiate even the
next 50 years without triggering environ-
mental catastrophe, global pandemics or
nuclear war. In which case, both West and
East will simultaneously crash into the
hard ceiling of our own era. Mr Morris
ends on an optimistic note. If we can put
o Nightfall long enough, he says, the
dierence between the trials we face today
and those that eventually did in the Song
dynasty in China when it pressed against
the hard ceiling 1,000 years ago, or the Ro-
man empire 1,000 years before that, is that
we are so much more able to understand
and counter the forces that threaten usif
we have the wit and purpose to do so.
Mr Morris writes with clarity and vig-
our, if occasionally with a jaunty informal-
ity that becomes tiresome. That said, this is
an important bookone that challenges,
stimulates and entertains. Anyone who
does not believe there are lessons to be
learned from history should start here. 7
O
LYMPIC fencer, philanthropist, cellist,
international nancier, president of
the World Bank, global citizenJames
Wolfensohn often comes across as the
modern renaissance man. The friends of
Jim are the global elite. He has relentless
drive and a larger-than-average ego, so A
Global Life should have been a rollicking
read. Yet Mr Wolfensohn’s memoir is plod-
ding and for the most part bloodless; more
like the reminiscences of an old-school
London merchant banker than a free-
wheeling charmer.
The rst half of the book charts Mr Wol-
fensohn’s rise from a nancially insecure
youth in Australia to the upper echelons of
global nance, in London and then New
York. He was one of the rst to see the po-
tential of the Eurobond markets. After a
promising career at Schroders came to an
end when he was passed over for the
chairmanship (for being neither British
nor an aristocrat, he was told), he moved to
Salomon Brothers where he remained
through the tumultuous early 1980s. The
narrow, gentlemanly world of New York
investment banking was coming to an end,
and the new drivers were aggressive deal-
makers like Mr Wolfensohn whose brazen
condence and ability to make snap judg-
ments were essential to success. He left Sal-
omon to establish his own rm.
But Mr Wolfensohn, to his credit, has al-
ways cared about the less fortunate, and in
1995 he leapt at the oer to become presi-
dent of the World Bank. Sebastian Mallaby,
who worked for The Economist until 1999,
analysed this period of Mr Wolfensohn’s
life in detail in his 2004 book, The World’s
Banker. There is much to praise. Along
with Eugene Black in the 1950s and Robert
McNamara in the 1970s, Mr Wolfensohn
was one of the bank’s most inuential
presidents. He put debt relief for poor
countries rmly on its agenda, along with
a more open discussion of corruption. He
wooed the bank’s critics, especially some
of the hypercritical NGOs. Above all, his
indefatigable energy served as a tonic to an
institution that had been in the doldrums
for some time.
But all this came at a cost which Mr
Wolfensohn’s book ignores. As Mr Mal-
laby and many others have chronicled, the
president’s management style was often
temperamental. He threw tantrums and
threatened to resign. He also had little tol-
erance for internal dissent, driving out se-
nior managers who disagreed with him. In
his account the bank’s much-trumpeted
Comprehensive Development Frame-
work was a great leap forward in develop-
ment thinking. His critics saw it as unreal-
istic, using a mindless win-win argot to
paper over the inevitable conicts that
arose from competing objectives. Mr Wol-
fensohn depicts himself as a heroic gure,
battling tirelessly on behalf of the develop-
ing world against the baronies of the
bank’s bureaucracy. Others complain that
the result was actually an increase in
bureaucracy as the bank created more and
more safeguards to ring-fence itself from
risk. Although some of these barriers were
undoubtedly benecial, they also hugely
increased costs both for the bank and its
borrowers. These were estimated at
between $200m and $300m in 2001.
Mr Wolfensohn’s legacy was bur-
nished by two events. His successor at the
bank, Paul Wolfowitz, proved to be a disas-
ter, which served only to enhance Mr Wol-
fensohn’s reputation. Secondly, George
Bush went on to appoint the Australian
James Wolfensohn
Banker to the
world
A Global Life: My Journey Among Rich and
Poor, from Sydney to Wall Street to the
World Bank. By James Wolfensohn.
PublicAairs; 448 pages; $29.95
The Economist October 9th 2010 Books and arts 121
2
1
former banker as a special envoy of the
quartet of countries that was working to
facilitate a settlement between Israel and
the Palestinians. Mr Wolfensohn’s analysis
of how he came to realise he was being
used by both the Israeli prime minister, Ar-
iel Sharon, and the American administra-
tion, neither of which was interested in
achieving a real solution, is one of the
more gripping chapters in the book.
Description triumphs over reection in
Mr Wolfensohn’s account of his life. For a
man who spent so many years at the top of
international banking he has little to say
about global nance, a peculiar omission
given the troubles of the past three years.
His account of his tenure at the World Bank
hints at how America, while pressing de-
veloping countries to follow rule-based go-
vernance, blithely bent the rules so as to
force the World Bank to do things that
helped secure America’s interests. This
was most visible during the Russian debt
crisis in 1998, yet, again, the book contains
no deeper discussion of this.
Mr Wolfensohn has generally been a
force for good in the world. He can be enor-
mously charming and brutally honest. His
book, sadly, is neither. 7
J
AMES ELLROY’S parents separated when
he was a boy. In March 1958, on his tenth
birthday, his mother, Jean Hilliker, asked
James, an only child, which of them he
wanted to live with: her or his father.
When he chose his father, she walloped
him hard enough to knock him o the sofa
and onto a glass coee table. The stunned
youngster recalled something he had read
in a book about witchcraft and issued a
curse on his mother. He wished her dead.
Three months later her body was found
dumped by the side of a road in suburban
Los Angeles. The killer was never identi-
ed, the case never solved.
This grotesque coincidence, Mr Ellroy
explains in his remarkable memoir, gave
rise to an agonising sense of guilt and a life-
long search for women’s forgiveness. His
quest took an unconventional course that
may seem at once shocking and strangely
familiar to readers of The Black Dahlia,
LA Condential and Mr Ellroy’s other
bestselling crime novels.
It began with his peeping through win-
dows into girls’ bedrooms and soon esca-
lated to breaking and entering. Young Mr
Ellroy would wander around the girls’
houses when they were not at home, sni-
ing pillows and fondling hairbrushes. He
was always careful to keep his torch point-
ed at the oor if he was there at night and
to leave no trace of his visit. Afterwards he
would lie in the dark, fantasising, and mas-
turbate. Progress from looking to touching,
or even talking, was slow. Acute acne and
chronic awkwardness created diculties
that were compounded, in his 20s, by alco-
holism and drug addiction. He would
scrimp and save in order to spend nights
with Sunset Strip hookers, often just cud-
dling and chatting.
Self-belief, at least, was never a pro-
blem, and with success as a writer came
greater success with women. He describes
his relationships with the four women,
apart from his mother (well, sort of apart
from her), who have mattered most to him.
Helen, Joan, Karen and Erika were all com-
prehensively Jean Hillikerised, with mixed
results. Joan no longer speaks to him,
though he remains close to Helen and Ka-
ren. He moved in with Erika in 2009. Erika
stepped out of the shower yesterday
morning, he writes in the book’s closing
pages. She looked startlingly like Jean Hil-
liker. One wishes them the best of luck.
Mr Ellroy’s day-to-day life seems to in-
volve little apart from writing and promot-
ing his books, and lying around in the dark
fretting about women. Fame and riches
and the passing of years have made no dif-
ference. In all of this, friends and family are
nowhere to be seen. As one of his ex-lovers
perceptively tells him: All you’ve got is
your audience and your prey.
To which she might have added: and
your prose style. Mr Ellroy’s distinctive on-
page voice is part 1950s jive-talking jazz-
man, part high-minded seeker after eternal
truths. Meander and milk the moment for
meaning, he cautions himself at one
point, mid-courtship, when he fears things
are moving too fast. Pile on the pianissi-
mo and postpone the pizzazz. Such gee-
whizzery is hugely enjoyable in small
doses, but it involves a trade-o. What Mr
Ellroy gains in surface sizzle he loses in
emotional resonance. It is cool, but it
kiboshes any semblance of sincerity.
Nevertheless, it would be dicult to
doubt his 50-year obsession with his dead
mother. It’s kept me hungry and working
hard, he shrugs. No kidding. Mr Ellroy, in-
cidentally, has kept the cover designers at
Random House working hard as well. The
jackets of all of his 18 books look fantastic.
Few contemporary novelists are as consis-
tently well served. Once again the Random
House designers have come up with the
goods for The Hilliker Curseas, in his
weird way, has Mr Ellroy. 7
A literary memoir
Killer instinct
The Hilliker Curse: My Pursuit of Women.
By James Ellroy. Knopf; 203 pages; $24.95.
William Heinemann; £16.99
B
ORN British, Edith Cavell was the head
of a training school for nurses in Brus-
sels when she was executed by ring
squad on October 12th 1915. The German
occupying authority accused her of shel-
tering Allied soldiers at the school and
helping them to escape to Holland. As Di-
ana Souhami relates in a new biography,
when the priest arrived at the prison the
evening before the execution, the German
guard told him she was a ne woman
like this, he said, and stiened his back.
The execution was a propaganda coup
for the Allies. German violation of an Eng-
lishwoman made better copy than the
messy story of trench warfare. The Bishop
of London deplored this foulest crime
against a poor defenceless English girl.
The prime minister, Herbert Asquith, re-
minded the House of Commons that such
courage had built the British empire. Re-
cruitment posters exhorted young men to
Remember Edith Cavell and the num-
bers volunteering for the front doubled.
All this would have dismayed Cavell.
Her strength had less to do with king and
country than the quiet spirit of Thomas à
Kempis, a medieval Catholic monk whose
The Imitation of Christ she studied all
her life. Almost her last words were: Patri-
otism is not enough. I must have no hatred
or bitterness towards anyone.
The eldest of four, Cavell was born in
1865 and grew up in a small Norfolk village
where her father was vicar. The Reverend
Frederick Cavell was a stern Victorian pa-
terfamilias who ruled his family along
strict Christian lines: prayer, self-denial
and duty to others. The rural poor de-
pended on the charity of squire and par-
son, and the Cavell children were expect-
Edith Cavell
Carve her name
with pride
Edith Cavell. By Diana Souhami. Quercus;
416 pages; £25
122 Books and arts The Economist October 9th 2010
2
A
SKED to list the great British artists of
the 19th century, few people would
mention Eadweard Muybridge. Even if
they named the great British photogra-
phers of the same period, after William
Fox Talbot, Julia Margaret Cameron and
Roger Fenton, chances are that most peo-
ple might not quite remember Muybridge.
Yet the legacy of the man rst known as
Edward Muggeridge, who was born Eng-
lish but who worked for most of his career
in California, was central to art in the 20th
century and is still vital today.
Muybridge is best known for his de-
monstration that movement could be bro-
ken down into uid sequences of individ-
ual moments. That insight was made use
of by a succession of artists, from Auguste
Rodin to Francis Bacon. Muybridge’s
motion studies can be fairly credited as the
forerunners of the cinema. There is also
evidence that in 1888 he shared with
Thomas Edison some thoughts on com-
bining a new projection system he had
inventedthe zoopraxiscopewith Edi-
son’s phonograph. And the grid pattern of
his bestselling books on locomotion sur-
vives in the format of comic strips.
A travelling exhibition, which began at
the Corcoran Gallery of Art in Washing-
ton, DC, and has now opened in London,
reveals Muybridge as much more than
simply the pioneer of motion, however.
Good close attention is paid to his biogra-
phy, even if there are still important gaps.
The very rst line of the opening wall pan-
el admits: Where Muybridge learned his
skill as a photographer remains un-
known. Other parts of his life are more
familiar, in particular the fact that he cold-
bloodedly killed his wife’s lover. He was
acquitted in part because a jury could not
believe that a man who could lug the
heavy and cumbersome photographic
equipment of the time up into the Yosem-
ite Valley could be entirely sane.
Muybridge did not just invent another
name for himself. He excelled in a new
industry, and made up more than just its
technology as he went along. He was
adept, for example, at marketing himself
along with his photographs, and there is
plenty of evidence of that in this show,
from his illustrated trade cards and well-
designed logos, to the many photographs
of himself, quite naked, posing as a model
in some of the motion studies.
For each major undertaking Muybridge
invented the appropriate kind of photogra-
phy to suit. His investigation of galloping
horses for Leland Stanford, a California
politician and racehorse owner, is well
known. In each stride horses lift all four
hooves o the ground at once, something
that George Stubbs, the most famous horse
painter of the last 300 years, had guessed
at but which, until Muybridge, had never
been proved. The beautiful cyanotype
proofs for Animal Locomotion have re-
cently been restored and are being given
their rst public outing in this show. There
are also examples of the work Muybridge
did up and down the Pacic coast for the
national body in charge of lighthouses, in-
cluding a sequence of unusual large-for-
mat seascapes completed in the 1870s, at
precisely the time that Thomas Stevenson
(father of Robert Louis) was designing his
lighthouses around the coasts of Scotland.
The two great moments in this installa-
tion are a room containing mammoth
albumen prints of Yosemite and other
landscapes, and in another room, a giant
panorama of San Francisco. In each, the
images themselves and the way they are
presented add up to an unusually exciting
visual experience. But even they are not
the real core of the exhibition.
Muybridge was certainly a wonderful
photographer, as enthusiastic and curious
about his own medium as about the world
he photographed. As a technician he was a
remarkable pioneer. But he represents
more than technical advance alone. He
developed new standards to suit the new
techniques, and the new markets, that
were his own creation. Something beauti-
fully photographed, Muybridge’s entire
career reminds us, will be beautiful in the
photograph whatever it was like in fact.
That profound change in point of view
altered the visual arts for ever. 7
Eadweard Muybridge
Man in motion
The many inuences of an inventive early photographer
...............................................................
Eadweard Muybridge is at Tate Britain, London, until
January 16th 2011
ed, like their parents, to minister to them.
Both Cavell’s sisters took up nursing,
work which Florence Nightingale, in the
previous generation, had transformed into
a respectable calling. Before following
them, Cavell spent many lonely years as a
governess, that last resort of the unmar-
ried. Someday, somehow, I am going to do
something useful...something for people.
They are, most of them, so helpless, so hurt
and so unhappy. Cavell’s prophecy
would have been fullled if the story had
ended with the ten years that followed,
during which she trained and worked as a
nurse in hospitals founded specically for
the destitute sick, senile and lunatic. Ms
Souhami is always ready with social and
historical background material, and here
in particular expands on the state of public
health and health provision at the time.
But it’s the Brussels years and 1914 that
the reader waits for. Until then, there had
been nothing remarkable about Cavell,
who was charming, kind, but also, accord-
ing to her matron, not particularly reliable,
sometimes unpunctual and always an-
noyingly self-contained. (This quality was
to rattle her interrogators later.) In 1906, a
Belgian doctor, impressed by English nurs-
ing standards, was looking for an English
nurse to establish a training school in Brus-
sels. Cavell had once been governess to a
family there and spoke French uently.
One thing led to another, and she accepted
the challenge. By 1914 her nurses were in
demand and her reputation stood high.
Most biographies wind down. Here the
tension builds, even though this part of the
story is well known: the German invasion,
the terrible suering, the Allied soldiers
stranded after the retreat of the British
Expeditionary Force, then the resistance
network, the arrests, interrogations and
trials. Edith Cavell played her part, but the
book is as much a celebration of the
Belgians she worked with as of Cavell
herself. She would have approved. This is a
moving story, written from the heart. 7
A
LMOST nothing is known of the men
who built the great medieval cathe-
drals. A mason’s mark chiselled on a col-
umn; a game of nine-men’s-morris
scratched on a stone; a gargoyle’s half-hu-
man face, of foreman or master of works,
are all that remind observers of the crowds
of labouring souls who raised Canterbury
or Winchester, Beauvais or Cologne.
The dangers of such projects were le-
gion. Contemporary illustrations show ca-
thedral spires collapsing, vaults caving in,
high scaolding keeling over in a chaos of
planks and poles. Casualties were expect-
ed, and were many, though the fabric ac-
counts often could not name them. In
modern times the labour is no less peril-
ous; but in the days of health-and-safety
and hard hats, accidents are rare. Hence the
horror in Durham when, on September
3rd, Michael Lassen fell from a ladder as he
helped to x a new stained-glass window
in the south quire aisle of the cathedral. He
died some days later in hospital.
Climbing up in the south quire to look
at the traceries originally, he had found
them heavily ssured, like all Durham’s
ancient sandstone. Blocks were missing on
the exterior, and one side of the main arch
was worn away almost to a skeleton, as
though two or three centuries of wild
north-east weather had blown through it.
bled him; but he was not a keen marathon
runner for nothing.
His training had been traditional, in the
Government School of Stained Glass at
Hadamar in Germany; though English, he
had spent many childhood years in Bavar-
ia. After working as a glazer and glass-re-
storer, he had turned to glass-painting and
designing, gradually obtaining commis-
sions in churches all over Britain. His own
windows, at St Cadoc’s chapel in Cow-
bridge in South Wales, or in the Church of
Sts Peter and Paul at Great Somerford in
Wiltshire, showed a love of blocks of pure
colour carefully contained within thick,
angular leads, especially glowing blues
and rich reds: the medieval way of glass.
His gures, too, had a medieval solidity,
dignity and stillness about them.
Lead and re
The techniques needed to lead and x his
own glass had barely changed. He would
stretch the H-section lead strips, or cames,
to stop creep in the soft, ductile metal; cut
them expertly straight with his pliers, so as
to leave no gaps between them when they
were moulded round the glass pieces; ap-
ply the hot chisel-tip of the soldering iron
just long enough to melt the solder, not the
lead, when joining the strips together. The
double-layered and plated technique of
leading Mr Denny’s glass, with the lines al-
most lost in the painting, was at rst new to
him, and correspondingly tricky. But by the
time of the Durham project he had become
an enthusiast, and all was going well until
he fell.
Amemorial service for him was held at
the foot of the window while the scaold-
ing still covered it. Mr Lassen, who worked
from Bristol, was barely known in Dur-
ham, although he had once had a studio at
Worship Farm, not far away. To most of the
people who attended, extending the hu-
man crowd in the bottom panels of the
window, he was just that nice chap who
had had the accident. But when September
25th came, the day of dedication, he was
remembered in a dierent way. The clue
lay in George Herbert’s poem The Win-
dows which was sung as an anthem at
evensong. Man was a brittle crazy glass:
Yet in thy temple thou dost him aord
This glorious and transcendent place
To be a window, through thy grace.
As the congregation pressed through after-
wards into the south quire aisle they found
the windows still wreathed in incense, like
the cloud of God that had enveloped Jesus
on the mountain. Through it shone the
glass. Its golds and blues were smoky in
the evening light, but the central column
blazed white, like the transguration of a
man; and of all men, named or un-named,
whose lives and skills are embedded in the
stone and glass of great cathedrals. 7
But all the stone had been carefully stabil-
ised before his work began.
The window was of the Transguration
of Christ, made by Tom Denny, and one of
the largest to be installed in Durham in
modern times. Mr Lassen was working
from top to bottom, xing the glass he had
leaded. He started with the small quatre-
foil lights of the Holy Spirit and the cruci-
xion, proceeding down through the main
panels of Christ and his followers on the
mountain, with all the way the white shaft
of God’s transguring light growing broad-
er through the re-and-storm colours of
the glass. The four principal lights, nick-
named after the chief gures in them, were
Cuthbert, Moses, Elijah and Michael; they
became familiar friends. He was tting a
small panel at the bottom left-hand side, a
pane of bruised blue glass that showed the
broken and suering about to be trans-
formed by light, almost the last piece in the
window, when he fell. He was not particu-
larly high up, working at the ledge. But
stone ags are unforgiving.
Mr Lassen had been called in late to
lead and x this window. The man origi-
nally contracted had fallen ill, and the
deadline for the installation, the end of
September, was fast approaching. Help
was needed fast; Mr Lassen provided it, ex-
pertly and fully. The tight timetable trou-
Obituary
Michael Lassen, stained-glass artist, died on September 8th, aged 61
Michael Lassen
124 The Economist October 9th 2010
125
The Economist October 9th 2010
Courses
126
The Economist October 9th 2010
Courses
127
The Economist October 9th 2010
Courses
128
The Economist October 9th 2010
Courses
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The Economist October 9th 2010
Courses
130
The Economist October 9th 2010
Courses
131
The Economist October 9th 2010
Readers are Recommended
to make appropriate enquiries and take appropriate advice before sending money,
incurring any expense or entering into a binding commitment in relation to an
advertisement. The Economist Newspaper Limited shall not be liable to any person
for loss or damage incurred or suffered as a result of his / her accepting or offering
to accept an invitation contained in any advertisement published in The Economist.
Courses
Postgraduate Courses
132
The Economist October 9th 2010
FACULTY POSITION
Founding Director for the Graduate Program in
Technology Management
The UC Santa Barbara College of Engineering, a leader in interdisciplinary
research, is seeking applications and nominations for the Founding Director of
the Graduate Program in Technology Management. To be launched in 2011,
this one-year masters program will recruit engineering, science, mathematics,
management, and quantitative social science students with outstanding academic
records. The Founding Director will develop the curriculum and lead the effort
to hire additional members of the faculty team. An endowed chair and a senior
leadership position are available to support and empower this position. The
Director will be expected to pursue cutting-edge research related to technology
management.
Qualifications of the ideal candidate should include several of the following:
• Experience and leadership capabilities to build a new and exciting academic
program
• Outstanding credentials in academic work or technology business
• Ability to be an inspiring and rigorous instructor
• Experience at an executive level in technology management
• An interdisciplinary orientation and proven success in a major research
institution
All applicants and nominees will be held in strict confidence.
Please submit resume or CV and statement of interests by
December 31, 2010 for primary consideration, however, position will
remain open until filled. For more details and to apply, please see
http://engineering.ucsb.edu/positions/gptm_director.
An EO/AA Employer
COUNTRY REPRESENTATIVE, AFGHANISTAN
The Asia Foundation is seeking a Country Representative to
head its office in Kabul, Afghanistan.
For further information about key responsibilities, qualifications,
competencies, and the application process, please visit:
http://www.asiafoundation.org/about/employment/
The application deadline is October 22, 2010.
The Project Manager (PM) PIGGAREP is responsible to the Programme Manager – Pacific Futures through the
Climate Change Adviser to lead the Mitigation aspects of the climate change programme through managing
the implementation of the PIGGAREP.
The PM will assume overall responsibility for the day to day management and implementation of all project
activities and ensure the realisation of project objectives in accordance with the UNDP Project Document
(including the GEF Full Size Project Brief) and UNDP’s POPP. Some key functions include:
1. Overall management of the PIGGAREP
2. Capacity building of SPREP in GHG Mitigation
3. Communications and reporting
Essential Selection Criteria include:
1. Advanced degree (at least M.Sc. or equivalent) in engineering, energy, environmental management or
other field relevant to the project;
2. At least 10 years work experience in, and knowledge of, climate change and energy related issues and
activities in the Pacific island region or in other small island developing states;
3. Proven strategic, coordination, analytical, communication and facilitation skills;
4. Proven project and programme management experience, preferably with GEF and UNDP funded projects or
similar regional/multi country projects in small island developing countries, including budget preparation
and financial management;
5. Proven knowledge of climate change and energy issues, conventions, agreements and policies particularly
those relevant to the PICs;
6. Proven ability to work as part of an interdisciplinary and/or multi cultural team;
7. Ability to meet project deadlines;
8. Excellent working knowledge of English.
Full details of the PMPIGGAREP’s responsibilities, requirements and remuneration package can be obtained
from the Employment section of our website: www.sprep.org or by contacting the Personnel Officer on
telephone: (685) 21929 Ext. 230, Fax: (685) 20231, or direct Email: luanac@sprep.org
Basic salary ranges from 43,234SDRs to 57,697SDRs (including COLDA), equivalent to SAT$170,953 to
SAT$228,141 (including COLDA) per annum depending on qualifications and experience. Other attractive staff
entitlements such as housing & education allowances, medical benefits, life insurance, etc. will be available to
the successful candidate.
All applications to be clearly marked “Application for Project Manager PIGGAREP” and addressed to: The
Director, SPREP, P O Box 240, Apia or alternatively to email address: sprep@sprep.org
Closing date & time: Close of business, Friday 5 November 2010. Late applications will not be considered.
SPREP is an Equal Opportunity Employer
Secretariat of the Pacific Regional Environment Programme (SPREP)
Position Title: Project Manager – Pacific Islands Greenhouse
Gas Abatement through Renewable Energy Project
(PM-PIGGAREP) - READVERTISEMENT
Applications are invited for the above position with SPREP in Apia, Samoa.
Previous applicants need not reapply as all applications received will be considered.
Programme Officers (P2/P3)
For the area of Integrated Water Resources Management: PhD in hydrology;
water resources engineering; systems engineering; irrigation engineering;
ecology; aquatic ecology and/or limnology; geophysics; geography; information
technology; statistics evaluation; or other related studies required;
For the area of Knowledge Management/ Information Systems: PhD
in mathematical programming, water resources management, artificial
intelligence applied to natural resource management, forecasting and scenario
planning, modelling, economics.
We offer competitive net salary (tax-exempted) at P2/P3 level commensurate
to level of experience. Starting date 1 January 2011, subject to negotiation.
Location Bonn, Germany. Deadline for applications 14 November.
More information at www.unwater.unu.edu
The UN-Water Decade Programme
on Capacity Development (UNW-
DPC) hosted by the United Nations
University is looking for two
MERDEKA
SCHOLARSHIPS
Applications are invited from Malaysian citizens for the Merdeka
Scholarships, tenable from October 2011. The scholarships are
awarded to those wishing to undertake postgraduate degrees at the
University of Oxford.
Successful candidates will be of exceptional academic calibre. They
will have shown promise as future national leaders in their respective
fields. Candidates should be able to demonstrate how their study will
make a beneficial contribution to Malaysia.
The scholarships will cover university and college fees, maintenance
allowance and return air fares. They will be renewable annually for the
duration of the course.
The deadline for receipt of applications is 10th January 2011. Further
details and application forms may be obtained from the Academic
Office or from the website of the Oxford Centre for Islamic Studies:
The Academic Office, Tel: +44 1865 278730
Oxford Centre for Islamic Studies, Fax: +44 1865 248942
George Street, Email: academic.office@oxcis.ac.uk
Oxford OX1 2AR, UK Website: www.oxcis.ac.uk/merdeka
Appointments
Scholarships
133
The Economist October 9th 2010
HEAD – ASIA PROGRAMME
Chatham House seeks to appoint a Head of its Asia Programme in order
to expand significantly its work from South Asia through North East Asia.
A competitive package will be offered to secure the best candidate.
Chatham House, home of the Royal Institute of International Affairs for
90 years, is a self-governing, non-profit policy institute and membership
organization. It is one of the world’s leading sources of independent
analysis, informed debate and influential ideas on international affairs.
Central to Chatham House’s success is the scholarly and policy-oriented
research conducted by its various research programmes. The Head of
the Asia Programme will bring a strong individual reputation as a scholar
and policy expert in a particular regional or thematic area relevant to the
programme; the capacity to work on integrated research projects with
other parts of the institute; and a strong sense of initiative in order to reach
out to the policy, business, media and other communities linked to the
programme’s work.
For further details and a full job description visit www.chathamhouse.org.
uk. A 3-year contract will be offered in the first instance. Please email your
CV and a covering letter together with the names and email addresses of
three referees to Julie Martin, jmartin@chathamhouse.co.uk. Closing
date for applications is 5 p.m. on Friday 5 November 2010. Interviews will
take place in November - December 2010.
International Executive Search for CEO of the
Health Insurance Fund of Macedonia ( HIF )
The Government of Republic of Macedonia is committed to improve
accountability and efficiency of the Health Sector in Macedonia. According
to the Health Insurance Law, the Health Insurance Fund (www.fzo.org.
mk), as sole health service purchaser should be run by two directors
with equal authorities and responsibilities practicing ``four eye
principles``. We are looking for an experienced, enthusiastic and committed
manager with previous experience in running social health insurance funds
or related health insurance companies for the executive positions of one of
the directors. The best candidate is expected to provide strong leadership
to the HIF and to contribute towards building of the institution as strategic
purchaser of health care services.
The candidates should fulfil the following terms
• B.S or B.A in Economics, Finance, Business Administration, Public
Health Management, Medicine or Law.
• At least six years of working experience in finance or management or in
system and organization in health sector and health insurance
• Knowledge of regulation in health sector and health insurance
Salary according to EU standards commensurate with experience and
education will be negotiated. The benefits package will also include 25
days of paid vacation time earned annually; life insurance; low-cost medical
and dental care for you and your family; an automobile and a driver; as well
as no-cost accommodation.
Applications must arrive by post no later than 22 November 2010.
With attention to: ``President of Management Board of HIF,
application for CEO``
Contact: Health Insurance Fund of Macedonia
Address: St. Macedonia bb, 1000 Skopje,
Republic of Macedonia
The European Studies Institute (ESI) in Moscow (Russia)
is looking for a suitable person with experience in
working with Education and Training Institutions in
fields related to European Affairs. Applicants shall be
citizens of an EU Member State with good command
of both English and Russian languages. Duties include
both academic and administrative tasks.
More information, including application form,
CV, etc., is available on the website of the ESI at:
www.eurocollege.ru
The closing date for applications is 31 October 2010.
EXECUTIVE DEPUTY DIRECTOR
Appointments
134
The Economist October 9th 2010
The Institute for Security Studies (ISS) is an
independent, non-profit applied policy research
organisation with a focus on human security in
Africa. Its mission is to conceptualize, inform and
enhance the security debate on the African continent.
The ISS has offices in Addis Ababa, Cape Town, Nairobi,
Dakar and Pretoria (Head Office).
Positions in Pretoria and Addis Ababa
The ISS is currently advertising for the following senior positions:
• DEAN OF THE ISS PEACE ACADEMY – Addis Ababa, Ethiopia
• OFFICE DIRECTOR – Pretoria, South Africa
• PROGRAMME HEAD: ARMS MANAGEMENT PROGRAMME –
Pretoria, South Africa
• PROGRAMME HEAD: SECURITY SECTOR GOVERNANCE
PROGRAMME – Pretoria, South Africa
• EDITOR OF THE AFRICAN SECURITY REVIEW –
part time, Gauteng area, South Africa
For more information, detailed job specifications and to apply for any
of the above-mentioned positions, please refer to the ‘Careers and
Opportunities’ page of the ISS website, www.issafrica.org.
Preference will be given to candidates from Africa or the African
Diaspora. The ISS is an equal opportunities employer and
committed to achieving employment equity in the workplace.
The ISS serves the right not to fill any or all of the advertised
positions.
Knowledge empowers Africa
www.ISSAFRICA.ORG
Team Leader & Land Administration Experts
HTSPE is a leading international programme management
organisation currently providing technical assistance to the
MCA Mozambique Land Component. With the Needs
Assessment phase nearing completion we are now looking
for a new Team Leader to take the programme forward and
manage the implementation phase which will commence in
late 2010.
We are seeking an individual with proven experience of
managing large donor funded programmes in Sub-Saharan
Africa. Our ideal candidate will have the ability to balance
donor and client requirements and a strong understanding of
land issues in Africa. Experience of working with the MCC,
working in Mozambique and fluency in Portuguese would
be beneficial. Applicants should email their CVs to Penny
Buckle at hr@htspe.com quoting MOZ2.
We are also interested to hear from specialists with
international expertise in land administration, land information
management systems, GIS and mapping, land use planning,
land policy and land law who would be interested in
short-term inputs. If this is you please email as above quoting
MOZ3.
More information can be found at www.htspe.com
Appointments
Fellowships Tenders
135
The Economist October 9th 2010
GHANA GRID COMPANY LIMITED
TENDER FOR SUPPLY OF VARIOUS GOODS
INTERNATIONAL COMPETITIVE BIDDING
The Ghana Grid Company Limited (GRIDCo) of the Republic
of Ghana invites sealed tenders for the supply of the under-
listed items.
Details of the proposed supply are:
BID NUMBER CONTRACT NAME BID SALE PRICE
GR/GGCL/GD/0018/2010 Supply of Various
Transmission Line
Maintenance Tools and
Materials US$50.00
GR/GGCL/GD/0038/2010 Supply of Mobile
Transformer Oil
Treatment Plant, and
Transformer Oil US$50.00
1. Detailed specifications and quantities for the various items are
provided in the Bidding documents.
2. Bidding is open to eligible private, public or government-owned
legal entities.
3. Bidding documents in English may be purchased from the
FINANCE DEPARTMENT (PROCUREMENT UNIT), GHANA GRID
COMPANY LIMITED, LOCATED TWO (2) KILOMETERS OFF TEMA
MOTORWAY ROUNDABOUT TO AFLAO ROAD, (CLOSE TO TEMA
STEEL WORKS) upon the payment of a nonrefundable fee of
US$50.00. The method of payment will be by cash or by certified
cheque issued in the name of the Ghana Grid Company Limited
4. Bids would be on sale between 0900 hrs to 1500 hrs (local time)
each working day from October 4, 2010 to November 12, 2010.
5. Bidders shall submit with each Tender, a Tender Security in United
States Dollars as stated in the bidding document or its equivalent
in Ghana cedi.
6. Completed Bids must be addressed to:
THE DIRECTOR, FINANCE DEPARTMENT, GRIDCo, P. O. BOX
CS7979, TEMA and delivered to the CONFERENCE ROOM, GRIDCo
HEAD OFFICE, GHANA GRID COMPANY LIMITED, LOCATED 2
KILOMETERS OFF TEMA MOTORWAY ROUNDABOUT TO AFLAO
ROAD, (CLOSE TO THE TEMA STEEL WORKS) by 12:00 noon (local
time) on Friday November 12, 2010.
Interested Bidders may also obtain information from the address
above and on:
Telephone Nos.: +233-303-308892, Fax: 233-303-303325, Email:
gridcoprocurement@gridcogh.com
7. Bidders may, if they so wish, be present at the public opening
of the various Bids which would be held at the CONFERENCE
ROOM, GRIDCo HEAD OFFICE, GHANA GRID COMPANY LIMITED,
LOCATED 2 KILOMETERS OFF TEMA MOTORWAY ROUNDABOUT
TO AFLAO ROAD, (CLOSE TO THE TEMA STEEL WORKS)
immediately after the close of bids by 12:00 noon (local time) on
Friday November 12, 2010.
Tenders
136
The Economist October 9th 2010
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STATEMENT OF OWNERSHIP, MANAGEMENT, AND CIRCULATION
1. Publication Title: The Economist
2. Publication Number: 0013-0613
3. Filing Date: September 24, 2010
4. Issue Frequency: weekly except for combined year-end issue
5. Number of Issues Published Annually: 51
6. Annual Subscription Price: $138
7. Complete Mailing Address of Known Office of Publication:
750 3rd Avenue, 5th Floor, New York, NY 10017
Contact person: Deepak Shah 212-641-9818
8. Complete Mailing Address of Headquarters or General Business Office of Publisher:
750 3rd Avenue, 5th Floor, New York, NY 10017
9. Full Names and Complete Address of Publisher, Editor, and Managing Editor:
Publisher: Paul Rossi – 750 3rd Avenue, 5th Floor, New York, NY 10017
Editor: John Micklethwait – 25 St. James’s St., London, England SW1A 1HG
Managing Editor: Anne Foley – 25 St. James’s St., London, England SW1A 1HG
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Full Name – The Economist Newspaper, NA, Inc., wholly owned (indirectly) by The Economist Newspaper Ltd
Address – 25 St. James’s St., London, England SW1A 1HG
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trust shares are listed below:
Shareholder: The Financial Times Limited
Address: 1 Southwark Bridge, London SE1 9HL
Total Shareholding: 12,600,000
% of Total Issued Capital: 50%
Shareholder: Sir Evelyn de Rothschild
Address: 31 Tite Street, London SW3 4JP
Total Shareholding: 2,805,440
% of Total Issued Capital: 11.13%
Shareholder: The Eranda Foundation
Address: New Court, St. Swithin’s Lane, London EC4P 4DU
Total Shareholding: 2,012,550
% of Total Issued Capital: 7.98%
Shareholder: RIT Capital Partners PLC
Address: 27 St. James Place, London SW1A 1NR
Total Shareholding: 1,140,000
% of Total Issued Capital: 4.52%
Shareholder: ELR Investments LLC, c/o Carlyn McCaffery Weil Gotschal & Manges, LLP
Address: 767 Fifth Avenue, 22nd Floor, New York, NY 10153 USA
Total Shareholding: 400,000
% of Total Issued Capital: 1.59%
Shareholder: Roy Nominees Limited a/c 46002
Address: 71 Queen Victoria Street, London EC4E 4DE
Total Shareholding: 364,640
% of Total Issued Capital: 1.45%
Shareholder: Bruno Schroder
Address: Schroders PLC, 31 Gresham Street, London EC2V 7QA
Total Shareholding: 280,000
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14. Issue Date for Circulation Data Below: 9/26/09 – 9/18/10
15. Extent and Nature of Circulation:
Average No. Copies Each Issue During the Preceding 12 months
a. Total number of copies: 959,034
b. Paid Circulation:
1. Mailed Outside-County Paid Subscriptions Stated on PS Form 3541: 681,045
2. Mailed In-Country Paid Subscriptions Stated on PS Form 3541: N/A
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and other Paid Distribution Outside USPS: 139,399
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c. Total Paid Distribution: 820,444
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1. Free or Nominal Rate Outside-County Copies Included on PS Form 3541: 3,593
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e. Total Free or Nominal Rate Distribution: 3,593
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h. Total: 959,034
i. Percent Paid: 99.6%
No. Copies of Single Issue Published Nearest to Filing Date
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1. Mailed Outside-County Paid Subscriptions Stated on PS Form 3541: 690,556
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3. Paid Distribution Outside the Mails Including Sales Through Dealers and Carriers, Street Vendors, Counter Sales,
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Business & Personal
Announcements Tenders
The Economist poll of forecasters, October averages (previous month’s, if changed)
Real GDP, % change
Consumer prices

Current account

Low/high range

average

% change

% of GDP
2010 2011 2010 2011 2010 2011 2010 2011
Australia 2.2 / 3.5 2.6 / 4.1 3.1 3.3 2.8 (2.9) 3.0 –2.6 (-3.9) –2.7 (-3.7)
Belgium 1.1 / 2.1 1.0 / 2.0 1.7 (1.4) 1.5 (1.4) 2.0 (1.9) 1.9 (1.8) 0.3 (0.1) 0.5 (0.7)
Britain 0.3 / 1.7 0.6 / 2.5 1.5 1.8 (1.9) 3.0 2.7 (2.6) –1.7 (-1.6) –1.1 (-0.8)
Canada 2.6 / 3.3 2.1 / 3.2 3.0 (3.2) 2.6 (2.7) 1.7 (1.8) 1.9 (2.0) –2.5 (-2.2) –1.9 (-2.2)
France 1.4 / 1.7 1.1 / 1.9 1.6 (1.5) 1.4 1.7 1.5 –2.0 –1.8 (-1.9)
Germany 2.9 / 3.4 1.1 / 2.4 3.3 (3.0) 1.9 1.1 (1.0) 1.3 5.2 5.5
Italy 0.9 / 1.2 0.5 / 1.6 1.0 1.0 1.6 (1.5) 1.7 (1.6) –3.0 (-2.8) –2.7 (-2.6)
Japan 2.6 / 3.2 0.1 / 2.5 2.9 (2.8) 1.2 (1.4) –0.9 (-0.8) –0.3 (-0.2) 3.3 (3.4) 3.3 (3.5)
Netherlands 1.0 / 2.4 1.0 / 1.9 1.8 (1.7) 1.5 1.2 1.4 6.1 (5.8) 6.0 (5.7)
Spain –0.5 / 0.1 –0.3 / 1.0 –0.3 0.4 1.6 1.4 –4.6 (-4.2) –3.4 (-3.0)
Sweden 3.0 / 4.6 2.2 / 3.4 4.0 (3.5) 2.8 (2.7) 1.2 (1.3) 1.9 (2.0) 6.6 (6.8) 6.9 (6.7)
Switzerland 2.0 / 3.0 1.4 / 2.2 2.7 (2.3) 1.9 0.8 (0.9) 0.9 (1.0) 10.7 (8.9) 10.5 (8.9)
United States 2.2 / 2.8 1.5 / 3.1 2.6 (2.7) 2.4 1.6 1.5 –3.3 (-3.2) –3.2 (-3.4)
Euro area 0.6 / 1.7 0.8 / 1.9 1.5 1.3 1.5 1.5 (1.6) –0.5 (-0.3) –0.1 (0.0)
Sources: BNP Paribas, Citigroup, Commerzbank, Decision Economics, Deutsche Bank, Economist Intelligence Unit, Goldman Sachs, HSBC
Securities, ING, JPMorgan Chase, KBC Bank, Morgan Stanley, RBC, RBS, Schroders, Scotiabank, Société Générale, UBS
Output, prices and jobs
% change on year ago

Industrial

Gross domestic product

production

Consumer prices
Unemployment
latest qtr* 2010

2011

latest latest year ago 2010

rate

, %
United States +3.0 Q2 +1.7 +2.6 +2.4 +6.2 Aug +1.1 Aug –1.5 +1.6 9.6 Aug
Japan +2.4 Q2 +1.5 +2.9 +1.2 +15.4 Aug –0.9 Aug –2.2 –0.9 5.1 Aug
China +10.3 Q2 na +9.9 +8.6 +13.9 Aug +3.5 Aug –1.2 +3.0 9.6 2009
Britain +1.7 Q2 +4.7 +1.5 +1.8 +1.9 Jul +3.1 Aug
§
+1.6 +3.0 7.8 Jul
††
Canada +3.4 Q2 +2.0 +3.0 +2.6 +8.2 Jul +1.7 Aug –0.8 +1.7 8.1 Aug
Euro area +1.9 Q2 +3.9 +1.5 +1.3 +7.1 Jul +1.8 Sep –0.3 +1.5 10.1 Aug
Austria +2.3 Q2 +5.1 +1.3 +1.4 +6.8 Jul +1.4 Aug +0.5 +1.5 4.3 Aug
Belgium +2.4 Q2 +3.7 +1.7 +1.5 +10.4 Jun +2.9 Sep –1.2 +2.0 12.7 Aug
‡‡
France +1.7 Q2 +2.8 +1.6 +1.4 +5.5 Jul +1.4 Aug –0.2 +1.7 10.1 Aug
Germany +4.1 Q2 +9.0 +3.3 +1.9 +11.3 Jul +1.3 Sep –0.3 +1.1 7.5 Sep
Greece –3.7 Q2 –6.8 –3.9 –3.5 –8.5 Jul +5.5 Aug +0.8 +4.5 11.6 Jun
Italy +1.3 Q2 +1.8 +1.0 +1.0 +4.8 Jul +1.6 Sep +0.2 +1.6 8.2 Aug
Netherlands +2.2 Q2 +4.0 +1.8 +1.5 +6.5 Jul +1.6 Sep +0.4 +1.2 5.3 Aug
††
Spain –0.1 Q2 +0.7 –0.3 +0.4 +3.2 Aug +1.8 Aug –0.8 +1.6 20.5 Aug
Czech Republic +2.4 Q2 +3.8 +1.4 +2.0 +12.9 Aug +1.9 Aug +0.2 +1.6 8.6 Aug
Denmark +3.7 Q2 +7.1 +1.8 +1.8 –0.7 Aug +2.3 Aug +1.1 +2.1 4.1 Aug
Hungary +1.0 Q2 +0.1 +0.3 +2.5 +11.5 Jul +3.7 Aug +5.0 +4.5 11.0 Aug
††
Norway +0.6 Q2 –1.9 +1.0 +1.3 –7.8 Jul +1.9 Aug +1.9 +2.4 3.3 Jul
§§
Poland +3.5 Q2 na +3.0 +3.4 +13.5 Aug +2.0 Aug +3.7 +2.5 11.3 Aug
‡‡
Russia +4.5 Q2 na +4.5 +4.0 +7.0 Aug +7.0 Sep +10.7 +6.7 6.9 Aug
‡‡
Sweden +4.6 Q2 +8.0 +4.0 +2.8 +14.4 Jul +0.9 Aug –0.8 +1.2 7.4 Aug
‡‡
Switzerland +3.4 Q2 +3.5 +2.7 +1.9 +7.8 Q2 +0.3 Sep –0.9 +0.8 3.8 Aug
Turkey +10.3 Q2 na +6.1 +3.6 +8.6 Jul +9.2 Sep +5.3 +8.4 10.5 Jun
‡‡
Australia +3.3 Q2 +4.9 +3.1 +3.3 +4.9 Q2 +3.1 Q2 +1.5 +2.8 5.1 Sep
Hong Kong +6.5 Q2 +5.7 +5.8 +4.3 +2.2 Q2 +3.0 Aug –1.6 +2.2 4.2 Aug
††
India +8.8 Q2 na +8.4 +8.6 +13.8 Jul +9.9 Aug +11.7 +11.7 10.7 2009
Indonesia +6.2 Q2 na +5.9 +6.0 +3.7 Jul +5.8 Sep +2.8 +5.3 7.4 Feb
Malaysia +8.9 Q2 na +6.8 +4.2 +3.2 Jul +2.1 Aug –2.4 +1.8 3.3 Jul
Pakistan +4.1 2010** na +4.4 +3.2 +4.7 Jun +13.2 Aug +10.7 +12.9 5.5 Jul
Singapore +18.8 Q2 +24.0 +12.2 +4.1 +8.1 Aug +3.3 Aug –0.3 +2.6 2.2 Q2
South Korea +7.2 Q2 +5.8 +6.5 +3.9 +17.1 Aug +3.6 Sep +2.2 +3.1 3.4 Aug
Taiwan +12.5 Q2 +7.2 +9.2 +4.2 +23.4 Aug +0.3 Sep –0.9 +1.3 5.1 Aug
Thailand +9.1 Q2 +0.6 +7.0 +4.0 +8.7 Aug +3.0 Sep –1.0 +3.5 0.9 Jul
Argentina +11.8 Q2 +12.3 +6.8 +4.0 +5.9 Aug +11.1 Aug*** +5.9 +10.8 7.9 Q2
‡‡
Brazil +8.8 Q2 +5.1 +7.2 +4.5 +8.9 Aug +4.5 Aug +4.4 +4.9 6.7 Aug
‡‡
Chile +6.5 Q2 +18.4 +4.8 +5.7 +6.9 Aug +2.6 Aug –1.0 +1.7 8.3 Aug
††‡‡
Colombia +4.5 Q2 +3.9 +4.6 +4.4 +0.2 Jul +2.3 Sep +3.2 +2.5 11.2 Aug
‡‡
Mexico +7.6 Q2 +13.5 +4.6 +3.0 +5.4 Jul +3.7 Aug +5.1 +4.2 5.4 Aug
‡‡
Venezuela –1.9 Q2 na –3.0 –2.1 –1.6 Jun +28.5 Sep +28.9 +29.8 8.2 Q2
‡‡
Egypt +5.8 Q1 na +5.0 +5.5 +4.4 Q1 +10.9 Aug +9.0 +12.1 9.0 Q2
‡‡
Israel +4.8 Q2 +4.6 +3.7 +3.4 +19.7 Jul +1.8 Aug +3.1 +2.5 6.2 Q2
Saudi Arabia +0.2 2009 na +3.4 +3.7 na +6.1 Aug +4.1 +5.6 na
South Africa +3.0 Q2 +3.2 +2.8 +3.7 +7.5 Jul +3.5 Aug +6.4 +4.9 25.3 Q2
‡‡
*% change on previous quarter, annual rate.

The Economist poll or Economist Intelligence Unit estimate/forecast.

National definitions.
§
RPI inflation
rate 4.7 in August. **Year ending June.
††
Latest 3 months.
‡‡
Not seasonally adjusted.
§§
Centred 3-month average. ***Unofficial estimates are higher.
The Economist commodity-price index
2000=100
% change on
one one
Sep 28th Oct 5th* month year
Dollar index
All items 241.0 238.7 +3.8 +26.3
Food 236.0 226.4 –0.4 +16.8
Industrials
All 247.4 254.5 +9.0 +39.4
Nfa

231.9 231.6 +7.8 +57.8
Metals 255.9 267.1 +9.6 +32.2
Sterling index
All items 231.2 227.3 –0.2 +26.4
Euro index
All items 164.5 159.5 –4.6 +34.6
Gold
$ per oz 1,305.75 1,339.13 +6.6 +31.6
West Texas Intermediate
$ per barrel 76.13 82.75 +12.2 +16.6
*Provisional

Non-food agriculturals.
America’s GDP growth in the second quarter
was revised up by a tenth of a percentage
point, to 1.7% at an annual rate.
Japan’s central bank lowered the target for
its benchmark interest rate to a range be-
tween zero and 0.1%.
An early estimate put the euro area’s in-
ation rate at 1.8% in September, up from
1.6% in August. The currency zone’s economy
expanded by 1% in the second quarter,
leaving it 1.9% larger than a year earlier.
The unemployment rate in Germany fell to
7.5% in September from 7.6% in August.
Spanish industrial production rose by 3.2%
in the year to August.
Australia’s central bank deed expectations
of an interest-rate increase by keeping its
benchmark rate unchanged at 4.5%. The
country’s unemployment rate stayed at 5.1%
in September, even though the number of
people in work rose by more than expected.
India’s exports grew by 22.5% in the year to
August and imports soared by 32.2% in the
same period. The country’s trade decit was
a shade over $13 billion, up from $8.9 billion
a year earlier.
South Korea’s ination rate rose to 3.6% in
August from 2.6% in July.
Brazil’s industrial production rose by 8.9%
in the year to August, despite falling by 0.1%
that month.
Overview
Indicators for more countries, as well as
additional series, can be found at
Economist.com/indicators
Economic and nancial indicators
The Economist October 9th 2010 137
Effective tax rates
Source: KPMG
Selected countries, on gross income of $100,000
July 2010, %
0 10 20 30 40 50
Italy
India
Sweden
Germany
France
Britain
Canada
Brazil
Japan
China
United States
Singapore
Russia
Hong Kong
Income tax Employee social security
Looming debt and demographic crises
have governments searching for extra
revenue. But some have less room to raise
tax rates than others. KPMG, a consulting
rm, has compared the shares of gross
income paid in income tax and social-
security contributions across countries.
European countries top the list. Austerity
plans in Europe must therefore focus on
the spending side. At just under 40%, the
total burden of taxation in India is high
relative to China. But a thin social safety
net means that China’s residents save a
high share of their disposable income as
insurance, osetting some of the growth
eect of low tax rates. And for low rates,
nothing beats living in a banking centre, a
petro-state or (naturally) a tax haven.
Markets
% change on
Dec 31st 2009
Index one in local in $
Oct 6th week currency terms
United States (DJIA) 10,944.7 +1.0 +5.0 +5.0
United States (S&P 500) 1,160.8 +1.4 +4.1 +4.1
United States (NAScomp) 2,399.8 +1.0 +5.8 +5.8
Japan (Nikkei 225) 9,691.4 +1.4 –8.1 +3.2
Japan (Topix) 844.5 –0.3 –7.0 +4.5
China (SSEA) 2,782.0 +1.7 –19.1 –17.4
China (SSEB, $ terms) 262.8 +1.1 +2.0 +4.1
Britain (FTSE 100) 5,681.4 +2.0 +5.0 +3.3
Canada (S&P TSX) 12,498.0 +0.9 +6.4 +10.4
Euro area (FTSE Euro 100) 878.2 +0.8 –4.0 –7.1
Euro area (DJ STOXX 50) 2,780.0 +1.0 –6.2 –9.2
Austria (ATX) 2,623.3 +3.4 +5.1 +1.8
Belgium (Bel 20) 2,613.4 +0.4 +4.1 +0.7
France (CAC 40) 3,764.9 +0.7 –4.4 –7.4
Germany (DAX)* 6,270.7 +0.4 +5.3 +1.9
Greece (Athex Comp) 1,552.6 +5.9 –29.3 –31.6
Italy (FTSE/MIB) 20,568.3 +1.0 –11.5 –14.4
Netherlands (AEX) 337.0 +0.3 +0.5 –2.7
Spain (Madrid SE) 1,102.2 +1.9 –11.2 –14.1
Czech Republic (PX) 1,143.1 +2.0 +2.3 +7.0
Denmark (OMXCB) 389.2 +0.6 +23.3 +19.1
Hungary (BUX) 23,385.2 +2.5 +10.2 +6.3
Norway (OSEAX) 431.0 +1.9 +2.6 +2.3
Poland (WIG) 45,977.0 +2.5 +15.0 +15.6
Russia (RTS, $ terms) 1,578.4 +5.6 +7.6 +9.3
Sweden (OMXS30) 1,089.3 +0.4 +14.5 +21.8
Switzerland (SMI) 6,351.0 +0.6 –3.0 +4.1
Turkey (ISE) 66,879.7 +2.0 +26.6 +33.6
Australia (All Ord.) 4,738.0 +0.9 –3.0 +5.0
Hong Kong (Hang Seng) 22,880.4 +2.2 +4.6 +4.6
India (BSE) 20,543.1 +2.9 +17.6 +23.0
Indonesia (JSX) 3,603.4 +3.1 +42.2 +49.7
Malaysia (KLSE) 1,479.6 +1.2 +16.3 +28.8
Pakistan (KSE) 10,029.4 +0.1 +6.8 +4.8
Singapore (STI) 3,190.1 +2.7 +10.1 +18.1
South Korea (KOSPI) 1,904.0 +2.0 +13.1 +17.8
Taiwan (TWI) 8,284.0 +0.5 +1.2 +4.9
Thailand (SET) 979.0 +1.0 +33.3 +48.4
Argentina (MERV) 2,666.3 +0.9 +14.9 +10.3
Brazil (BVSP) 71,283.0 +3.0 +3.9 +7.8
Chile (IGPA) 22,288.9 –0.1 +34.0 +41.0
Colombia (IGBC) 14,927.9 +1.5 +28.7 +46.1
Mexico (IPC) 34,257.4 +3.2 +6.7 +11.5
Venezuela (IBC) 66,611.9 +2.0 +20.9 na
Egypt (Case 30) 6,845.3 +2.1 +10.3 +6.2
Israel (TA-100) 1,131.1 +0.2 +6.2 +12.4
Saudi Arabia (Tadawul) 6,417.7 +0.4 +4.8 +4.8
South Africa (JSE AS) 29,698.0 +2.2 +7.3 +15.1
Europe (FTSEurofirst 300) 1,070.7 +0.5 +2.4 –0.9
World, dev’d (MSCI) 1,199.0 +1.3 +2.6 +2.6
Emerging markets (MSCI) 1,096.9 +2.5 +10.9 +10.9
World, all (MSCI) 310.4 +1.4 +3.7 +3.7
World bonds (Citigroup) 896.7 +1.0 +8.0 +8.0
EMBI+ (JPMorgan) 567.1 +0.5 +15.0 +15.0
Hedge funds (HFRX)

1,177.8 0.2 +1.8 +1.8
Volatility, US (VIX) 21.8 23.3 21.7 (levels)
CDSs, Eur (iTRAXX)

90.4 –1.5 +29.1 +25.0
CDSs, N Am (CDX)

112.9 –0.5 +3.9 +3.9
Carbon trading (EU ETS) ¤ 15.6 –0.8 +22.9 +19.0
*Total return index.

Oct 5th.

Credit-default-swap spreads, basis points.
Sources: National statistics offices, central banks and stock exchanges;
Thomson Reuters; WM/Reuters; JPMorgan Chase; Bank Leumi le-Israel;
CBOE; CMIE; Danske Bank; EEX; HKMA; Markit; Standard Bank Group; UBS;
Westpac
Trade, exchange rates, budget balances and interest rates

Budget

Trade balance*

Current-account balance

balance

Interest rates, %
latest 12 latest 12 % of GDP
Currency units, per $
% of GDP 3-month 10-year gov’t
months, $bn months, $bn 2010

Oct 6th year ago 2010

latest bonds, latest
United States –604.7 Jul –430.9 Q2 –3.3 – – –9.0 0.22 2.40
Japan +87.5 Jul +180.3 Jul +3.3 82.9 89.1 –7.6 0.19 0.84
China +179.0 Aug +286.8 Q2 +4.9 6.69 6.83 –2.2 2.61 3.02
Britain –138.1 Jul –33.7 Q1 –1.7 0.63 0.63 –10.1 0.73 3.00
Canada –5.6 Jul –41.1 Q2 –2.5 1.01 1.06 –4.6 0.86 2.86
Euro area +12.9 Jul –68.2 Jul –0.5 0.72 0.68 –6.4 0.96 2.23
Austria –5.6 Jun +8.7 Q1 +1.5 0.72 0.68 –5.1 0.96 2.70
Belgium +20.6 Jun +1.7 Jun +0.3 0.72 0.68 –5.7 0.97 3.10
France –67.2 Aug –51.5 Jul –2.0 0.72 0.68 –7.9 0.96 2.58
Germany +207.9 Jul +179.0 Jul +5.2 0.72 0.68 –3.7 0.96 2.22
Greece –42.7 Jun –37.0 Jul –6.2 0.72 0.68 –9.5 0.96 9.87
Italy –22.3 Jul –72.9 Jul –3.0 0.72 0.68 –5.0 0.96 3.72
Netherlands +50.1 Jul +42.5 Q2 +6.1 0.72 0.68 –5.7 0.96 2.45
Spain –73.7 Jul –74.8 Jul –4.6 0.72 0.68 –9.6 0.96 4.00
Czech Republic +7.5 Aug –3.4 Jul –3.2 17.6 17.5 –5.4 1.21 3.37
Denmark +14.9 Jul +15.6 Jul +3.3 5.37 5.07 –5.6 1.18 2.33
Hungary +6.8 Jul +1.1 Q2 –0.3 195 183 –3.9 5.35 6.67
Norway +54.7 Aug +54.9 Q2 +14.8 5.80 5.71 9.5 2.59 3.05
Poland –5.6 Jul –10.9 Jul –2.8 2.85 2.88 –3.0 3.83 5.44
Russia +151.6 Aug +82.2 Q2 +5.0 29.8 29.8 –3.9 7.75 5.26
Sweden +8.0 Aug +29.2 Q2 +6.6 6.71 7.02 –1.8 1.29 2.43
Switzerland +19.8 Aug +78.7 Q2 +10.7 0.96 1.03 –0.4 0.18 1.35
Turkey –57.3 Aug –30.3 Jul –4.6 1.42 1.47 –4.5 7.68 3.53

Australia +2.5 Aug –49.5 Q2 –2.6 1.03 1.13 –2.4 4.83 5.01
Hong Kong –41.7 Aug +12.5 Q2 +8.3 7.76 7.75 3.0 0.35 1.84
India –121.8 Aug –38.4 Q1 –1.7 44.5 46.7 –5.5 6.40 8.23
Indonesia +20.1 Aug +9.7 Q2 +1.5 8,923 9,425 –1.5 6.95 3.89

Malaysia +35.9 Jul +29.2 Q2 +14.7 3.09 3.42 –5.3 2.93 2.61

Pakistan –15.6 Aug –3.5 Q2 –1.2 86.0 83.2 –6.3 12.94 8.97

Singapore +16.7 Aug +37.0 Q2 +18.1 1.31 1.40 –0.7 0.50 1.82
South Korea +40.5 Sep +34.2 Aug +3.2 1,118 1,171 –1.8 2.67 3.93
Taiwan +14.9 Aug +40.4 Q2 +9.3 30.8 32.1 –1.8 1.01 1.03
Thailand +11.5 Aug +12.6 Aug +3.9 29.9 33.4 –2.2 1.95 2.72
Argentina +13.9 Aug +8.0 Q2 +2.1 3.96 3.83 –2.5 12.44 na
Brazil +16.9 Sep –45.8 Aug –2.8 1.68 1.76 –2.1 10.66 6.16

Chile +13.8 Aug +3.2 Q2 +0.5 482 552 –2.1 3.00 1.87

Colombia +1.0 Jul –6.1 Q2 –1.8 1,799 1,896 –3.6 3.39 3.79

Mexico –2.3 Aug –5.2 Q2 –1.4 12.5 13.5 –1.0 4.18 6.00
Venezuela +31.1 Q2 +20.1 Q2 +10.9 5.30 na –3.2 14.51 6.55

Egypt –24.2 Q1 –4.3 Q2 +0.2 5.70 5.48 –8.3 9.42 5.20

Israel –5.0 Aug +8.0 Q2 +2.7 3.58 3.74 –3.9 1.94 3.40
Saudi Arabia +105.2 2009 +22.8 2009 +12.4 3.75 3.75 2.6 0.72 na
South Africa –1.3 Aug –10.9 Q2 –5.0 6.87 7.46 –7.3 5.98 7.88
*Merchandise trade only.

The Economist poll or Economist Intelligence Unit estimate.

Dollar-denominated bonds.
Indicators for more countries, as well as
additional series, can be found at
Economist.com/indicators
138 Economic and nancial indicators The Economist October 9th 2010
ΜασσΜυτυαλ Φινανχιαλ Γρουπ ρεφερσ το Μασσαχηυσεττσ Μυτυαλ Λιφε Ινσυρανχε Χο. (ΜασσΜυτυαλ), ιτσ αφ⇒λιατεδ χομπανιεσ ανδ σαλεσ ρεπρεσεντατιϖεσ. Ινσυρανχε
ισσυεδ βψ ανδ ρατινγσ αππλψ το ΜασσΜυτυαλ (Σπρινγ⇒ελδ, ΜΑ 01111) ανδ ιτσ συβσιδιαριεσ, Χ.Μ. Λιφε Ινσυρανχε Χο. ανδ ΜΜΛ Βαψ Στατε Λιφε Ινσυρανχε Χο.
(Εν⇒ελδ, ΧΤ 06082).
1
Φινανχιαλ στρενγτη ρατινγσ ασ οφ 9/1/10: Α.Μ. Βεστ (Α++); Φιτχη (ΑΑ+); Μοοδψ∏σ (Αα2); Στανδαρδ & Ποορ∏σ (ΑΑ+). ΧΡΝ201201−130184
At MassMutual, “mutual” is more than part of our name. It’s the foundation
of how we think. Tat means when you’re a participating policyholder, you’re
also an owner of the company. And your needs come first. Our prudent
approach focuses on long term economic value, not short term gains or
quarterly profits. And our financial strength ratings are among the highest of
any company in any industry.
1
So make a good decision. Find strength and
stability in a company owned by its participating policyholders. To learn
more about mutuality and the benefits of being a whole life policyholder,
visit MassMutual.com/Mutuality
ΛΙΦΕ⊇ΙΝΣΥΡΑΝΧΕ⊇+⊇ΡΕΤΙΡΕΜΕΝΤ/401(Κ)⊇ΠΛΑΝ⊇ΣΕΡςΙΧΕΣ⊇+⊇ΔΙΣΑΒΙΛΙΤΨ⊇ΙΝΧΟΜΕ⊇ΙΝΣΥΡΑΝΧΕ⊇+⊇ΛΟΝΓ⊇ΤΕΡΜ⊇ΧΑΡΕ⊇ΙΝΣΥΡΑΝΧΕ⊇+⊇ΑΝΝΥΙΤΙΕΣ⊇
It’s finding trust in a company
that puts your needs first.
WHAT I S THE SI GN OF A GOOD DECI SI ON?
SM
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