America’s angry white working class

Eye robot: how machines could see
Fixing the housing market
What junk bonds did for you
Britain’s savage spending cuts OCTOBER 23RD–29TH 2010 Economist.com
INSIDE THIS WEEK: A 14-PAGE SPECIAL REPORT ON TURKEY
The next emperor
Will Xi Jinping change China?
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9 The world this week
Leaders
13 China’s succession
The next emperor
14 Turkey and the West
A divorce?
15 Brazil’s election
Second round, second
thoughts?
15 American property
Home truths
16 Biological diversity
The least of God’s
creatures has value
18 Britain’s spending review
Ouch!
Letters
20 On far-right politicians,
guns in America, child
benet, electric cars,
swearing
Brieng
27 Germany’s role in
the world
Will it now take centre
stage?
United States
33 The mid-terms
States’ ghts
34 New York’s governorship
Strange meeting
34 Ballot measures
Up to the fourth branch
35 Pat Toomey v Joe Sestak
Suspennsylvania
36 New Mexico
An immigration
election too
36 Biotechnology in North
Carolina
After tobacco
38 Infrastructure
False expectations
38 Free internet
The librarian’s tale
40 Lexington
Poor whites and the
president
The Americas
43 Brazil’s election
Serra’s late surge
44 Chile’s copper industry
Reviving Codelco
44 Media freedom
Shooting the messenger
45 Obesity in Mexico
One taco too many
Asia
47 China’s next leader
Xi who must be obeyed
48 China’s mued media
Censor, withhold thy pen
51 Pakistan’s political crises
A dust-up in Karachi
51 Anglo-Indians
Some corner of a foreign
eld
52 Australia’s climate policy
Greening Oz
52 Mongolian mining
Nomads no more
54 Banyan
Indonesia’s disappointing
president
Middle East and Africa
57 Electricity in Nigeria
Let there be light
58 Ethiopia and China
Looking east
58 Graft in South Africa
Brothers in arms
60 Bloggers in the
Middle East
Don’t be too cheeky
60 Israel and Palestine
We built this city on
rock’n’roll
Special report: Turkey
Anchors aweigh
After page 60
Europe
61 France’s protests
They shall not pass
62 Spanish politics
Zapatero’s endgame
62 Portugal’s public nances
The apology of Sócrates
63 Moscow’s new mayor
A graduate of the school
of Putin
63 Poland and Lithuania
Narcissistic dierences
64 Charlemagne
Another treaty? Why not?
Volume 397 Number 8705
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
1
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
On the cover
A crown prince is anointed in
a vast country facing vaster
stresses. China is in a fragile
state: leader, page 13. Xi
Jinping will have his work cut
out, page 47. Censoring the
press, page 48. China’s new
ve-year plan is at odds with
itself, page 88
Britain George Osborne’s
austerity programme is
justied, but the government
needs a bolder redesign of the
British state: leader, page 18.
Implementing the spending
cuts, page 67. The opposition
against them, page 68. The
armed forces survive (just
about) to ght another day,
page 69. David Cameron’s
gamble: Bagehot, page 70
Turkey It is not turning its
back on the West, but it might
if Europe and America cannot
come to terms with its success:
leader, page 14. Turkey has
made astonishing progress in
the past decade: read our
special report after page 60
America’s elections
Working-class whites and
Barack Obama: Lexington,
page 40. Elections for
governorships and state
legislatures could aect
America as much as the more
famous mid-term battle for
Congress, page 33
The Economist October 23rd 2010 5
6 Contents The Economist October 23rd 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
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Britain
67 Cutting back the state
Day of the long knives
68 The enemies of austerity
Coalition of the unwilling
69 The strategic defence
review
A retreat, but not a rout
70 Bagehot
Austerity and global
ambitions
International
71 Political parties
The party’s (largely) over
72 Health-care management
How to save lives
73 Archiving the web
Born digital
73 The pope’s new cardinals
Unbendable
Business
75 Smart-phone lawsuits
The great patent battle
76 Privatising Coal India
Powering the tiger
76 Daimler’s innovation unit
Thinking outside the car
77 Gender arbitrage in
South Korea
Proting from sexism
77 The Channel tunnel
A Franco-German spat
78 Cheap drugs
Attack of the biosimilars
81 Luxury goods
Bling is back
81 Shoplifting
A national ranking
82 Schumpeter
Companies aren’t charities
Brieng
83 Drexel Burnham
Lambert’s legacy
Stars of the junkyard
Finance and economics
87 Terra Firma and Citigroup
Don’t stop the music
88 Alternative investments
in Europe
Goalless draw
88 China’s ve-year plan
A new epic
89 Buttonwood
Energy and the economy
90 Global house prices
Floor to ceiling
90 The AIA oering
Bailing out
92 BNP Paribas
Stop. Think. Act
94 Economics focus
Negative equity
Science and technology
97 Computer vision
Eye robot
98 Policing
The aftershocks of crime
98 Clean water
Silver threads of life
99 Evolution and coat colour
Well spotted
Books and arts
101 Zimbabwe’s opposition
Battered yet resilient
102 George Washington
First among equals
102 The Caucasus
Playground for war
103 Mahmoud Darwish
Sad prophet
103 In defence of weeds
Shards of green
104 John Baldessari
A pioneer of conceptual art
104 New lm: Hereafter
Dancing with death
Obituary
106 Benoît Mandelbrot
He made maths pretty
117 Economic and nancial
indicators
Statistics on 42
economies, plus closer
looks at hotel revenue and
valuing stockmarkets
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Junk bonds Twenty years
after Michael Milken and
Drexel Burnham Lambert
came crashing down, the
nancial revolution that they
fostered lives on, pages
83-85. Private equity’s
rebound, page 87
Property Our latest round-up
of house prices shows that
they are on the rise in most
markets, page 90. Preventing
foreclosures won’t x
America’s housing mess.
Encouraging banks to write
down mortgages might:
leader, page 15. America’s
huge negative-equity
problem: Economics focus,
page 94
Books on Zimbabwe Robert
Mugabe’s gangsters may have
ransacked a country, but they
have also prompted some
wonderful literature, page 101
Robots Poor eyesight remains
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humans. But it is improving, in
part by mimicking natural
vision, page 97
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The world this week
1
The Economist October 23rd 2010 9
George Osborne, the
chancellor of the exchequer,
announced the long-awaited
results of a public-spending
review aimed at slashing
Britain’s decit. Government
departments face an average
19% budget cut, with up to half
a million public-sector jobs
expected to go. The opposition
Labour Party described the
proposals as reckless and a
danger to economic recovery.
Earlier, the government pro-
duced the results of its defence
review, which cuts the defence
budget by 7.5% in real terms
over the next four years.
Protests in France over the
government’s controversial
pension reform escalated,
with blockades at fuel depots
and disruption in schools.
Strikes at the country’s rener-
ies led to a third of the coun-
try’s petrol stations running
dry. The government contin-
ued to stand rm.
Angela Merkel, the German
chancellor, waded into Ger-
many’s debate on immigra-
tion, saying that multicultur-
alism had utterly failed. In a
speech to the Turkish parlia-
ment, President Christian
Wul echoed Ms Merkel’s calls
for integration, but rejected the
idea that multi-kulti was dead.
Germany performed an
abrupt U-turn at a meeting of
European nance ministers to
update the euro-zone rule
book. Having previously
backed automatic sanctions
for countries in breach of
budget rules, the Germans
agreed to a proposal from
France that politicians should
have more say over the treat-
ment of wrongdoers.
Six people were killed when
Islamist militants stormed the
Chechen parliament building
in Grozny. The attack contin-
ued a trend of rising violence
in the north Caucasus this year
following an end to Russian
military activities in Chechnya
last year.
Out of many, one
The Central Committee of
China’s Communist Party
met in Beijing and announced
that Xi Jinping, who has long
been expected to succeed Hu
Jintao as the party’s leader, had
been promoted to an impor-
tant military post. Mr Hu,
China’s president, is expected
to step down in 2012; Mr Xi, his
promotion now conrmed,
stands ready to succeed him.
His political inclinations are as
little-known as the machina-
tions that brought him up
through the ranks. Mr Xi’s
father was a famous commu-
nist bureaucrat and an early
champion of market reforms.
The New York Times reported
that American and NATO
forces have helped Taliban
ocials travel from sanctu-
aries in Pakistan to attend talks
with Afghanistan’s govern-
ment in Kabul. The meetings
are said to have involved
senior members of the three
biggest insurgent groups in
Afghanistan.
The political rivalry between
two big political parties in
Karachi erupted into bloody
street-ghting which left over
70 dead. The violence was
sparked by a by-election for
the seat of Raza Haider, a
member of the Muttahida
Qaumi Movement (MQM)
assassinated in August. The
MQM, which represents Paki-
stan’s Urdu-speaking commu-
nity, has blamed its main
opponents, the Pushtu-speak-
ing Awami National Party, for
Mr Haider’s death.
A risk-analysis rm published
an index that identies South
Asia as the region most vulner-
able to the eects of climate
change. Of the 16 countries
listed as being at extreme
risk over the next 30 years, ve
are South Asian. A heavy
dependence on agriculture
and weak public institutions
make the region especially
vulnerable.
Energetic stu
The Iraqi government held the
rst big auction of gaselds
since the fall of Saddam Hus-
sein and awarded licences to
companies from neighbouring
Kuwait and Turkey, among
others. Iraq wants to become a
big gas supplier to the Euro-
pean Union as well as avert a
domestic electricity shortage
by building gas-powered
generators.
Iran is to hold an espionage
trial for three Americans ar-
rested on the Iraqi border last
year, according to their lawyer.
One of the three, Sarah
Shourd, was released on bail
last month. The other two
continue to be held in Tehran.
The three say they were hiking
in a mountainous border
region and have denied the
spying charges.
A Saudi prince was jailed for
life in Britain after being found
guilty of abusing and then
murdering his servant.
South Africa’s public-sector
unions accepted a government
pay oer, ending a long-run-
ning dispute that resulted in
the temporary closure of
schools and hospitals this
summer. Under the new deal,
workers will receive a 7.5%
wage rise backdated to July 1st,
plus a housing allowance.
Run-up to the run-o
A series of polls in Brazil
found a narrowing lead for
Dilma Rousse, the chosen
successor of President Luiz
Inácio Lula da Silva, over José
Serra, her opponent in the
run-o presidential election
due on October 31st. Ms Rous-
se won 47% of the vote in the
rst round; her rival got 33%.
Felipe Calderón, Mexico’s
president, proposed allowing
civilian courts to try soldiers
charged with raping, torturing
or organising the disappear-
ances of civilians. Military
tribunals have jurisdiction
over such cases. Human-rights
campaigners said the plan did
not go far enough to end impu-
nity for the army.
Mexican authorities seized a
shipment of 134 tonnes of
marijuana destined for the
United States, the largest single
capture on record. The drugs
had a street value of $435m.
Hugo Chávez, Venezuela’s
president, travelled to Moscow
to meet his Russian counter-
part, Dmitry Medvedev. The
two signed an agreement in
which Russia promised to
build two nuclear reactors in
Venezuela and buy oil assets.
On the trail
The Democrats stepped up
their campaigning in the mid-
terms. At a rally in Columbus,
Ohio, Barack Obama acknowl-
edged that this would be a
dicult election for his
party. As evidence of how the
Democrats are having to de-
ploy resources in normally
safe territory, Bill Clinton
whipped up the crowd at a
rally in Los Angeles in support
of candidates in California.
All seven candidates in the
New York governor’s race
took part in a televised debate.
Andrew Cuomo, the Demo-
crat, remains the front-runner
after the event. Carl Paladino,
the Republican, left the stage
during closing remarks to nd
a lavatory.
Politics
10 The world this week The Economist October 23rd 2010
Other economic data and news
can be found on pages 117-118
China jolted markets when it
unexpectedly increased
interest rates for the rst time
since December 2007. The
People’s Bank of China upped
its one-year deposit rate from
2.25% to 2.50% and its lending
rate from 5.31% to 5.56%. Recent
data, such as September’s 9.1%
rise in property prices, have
heightened concerns among
Chinese ocials about
ination. China’s economic
growth rate, meanwhile,
slowed in the third quarter, to
9.6% from a year earlier.
Brazil raised taxes on foreign
inows of capital for the
second time this month. An
inux of dollars has helped
the real to appreciate by nearly
40% since the start of 2009.
With currency tensions rising,
Tim Geithner, America’s trea-
sury secretary, told an audi-
ence in California that no
country could devalue its way
to prosperity.
Dotting the is
Bank of America reopened
home-foreclosure applications
in 23 states, ten days after it
halted all such procedures
when allegations surfaced that
documents were being signed
o with just a cursory check.
The bank is continuing its
review of practices in 27 states.
BofAis not the only nancial
company to be accused of
robosigning foreclosures;
JPMorgan Chase and GMAC
have also suspended some of
their operations. America’s
state attorneys-general are
pressing for a full investigation.
America’s big banks pub-
lished a mixed bag of third-
quarter results. Bank of Ameri-
ca reported a loss of $7.3 billion
as it booked an accounting
charge on new consumer-
banking regulations. Without
the charge it earned $3.1billion.
Morgan Stanley’s headline
prot fell by 67% compared
with a year earlier and at
Goldman Sachs net income
was down by 40%, to $1.9
billion. Citigroup turned a
prot of $2.2 billion and said it
hoped to reinstate shareholder
dividends by 2012 as it emerges
from government oversight.
Wells Fargo reported a net
prot of $3.3 billion.
Hedge funds saw assets jump
by a total of $120 billion in the
third quarter, the biggest rise in
three years, according to
Hedge Fund Research, which
monitors the industry’s perfor-
mance. Total assets invested in
the hedge-fund industry stood
at $1.77 trillion.
European nance ministers
agreed on a set of regulations
for the alternative-investment
industry. After an 18-month
review, the new AIFMrules
are considerably weaker than
those demanded by European
politicians at the height of the
nancial crisis.
BHPBillitonand Rio Tinto
formally abandoned their
proposal to combine iron-ore
production in the Pilbara
region of Western Australia.
The mining companies have
been gradually backing away
from the arrangement, which
was announced in June 2009,
in the face of resolute opposi-
tion from steelmakers and
competition regulators in
Australia, the European Union
and China, the world’s biggest
buyer of iron ore.
Safety rst
BPsaid it would sell some of
its assets in Venezuela and
Vietnam to TNK-BP, its Rus-
sian joint venture, for $1.8
billion. The sale forms part of
BP’s plan to divest assets worth
up to $30 billion by the end of
2011to help meet its nancial
obligations resulting from the
oil spill in the Gulf of Mexico.
The energy company also
informed its employees that it
would link bonuses in the
fourth quarter solely to their
performance on a range of
safety and operational risk-
management measures.
Apple posted a net prot of
$4.3 billion and revenue of
$20.3 billion for the three
months ending September
25th; both gures were up by
around 70% from a year earlier.
Apple sold 14.1m iPhones in
the quarter, almost double the
number from a year ago, and
4.2m iPads, though many
analysts were expecting sales
of its pioneering tablet
computer to be higher.
Atrial opened in New York to
consider a claim for damages
brought by Terra Firma
Capital Partners against
Citigroupfor advice the bank
allegedly gave to the private-
equity rm in its 2007 bid for
EMI, a struggling music com-
pany. Guy Hands, Terra Firma’s
boss, claims that the head of
Citi’s investment-banking unit
in Britain told him not to lower
his oer for EMI because a
rival private-equity rm was
also bidding (it had actually
pulled out). Citi denies the
claim, and questions why it
has taken so long for Mr Hands
to bring his case.
The wedding’s o
The Daily Beast, a popular
news and entertainment
website owned by Barry
Diller’s IAC/InterActiveCorp,
and Newsweekended their
negotiations on a merger after
failing to resolve who would
control which parts of the new
company. Tina Brown, the
Daily Beast’s editor, said of the
talks that The engagement
was fun, but the prenup got too
complex.
Business
Hedge funds
Source: Hedge Fund Research
Global assets under management, $trn
Q2 Q3 Q4
2008
Q1 Q2 Q3 Q4
09
Q1 Q2 Q3
10
0
0.5
1.0
1.5
2.0
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Leaders
W
ITH you in charge, I am
at ease, Mao Zedong is
supposed to have told his suc-
cessor, Hua Guofeng. It proved a
disastrous choice. Mr Hua lasted
a couple of years before being
toppled in 1978. A decade later
succession plans once again un-
ravelled spectacularly, against a backdrop of pro-democracy
unrest. Only once, eight years ago, has China’s Communist
Party managed a smooth transfer of powerto Hu Jintao. Now
a new transition is under way. The world should be nervous
about it for two reasons: the unknown character of China’s
next leader; and the brittle nature of a regime that is far less
monolithic and assured than many foreigners assume.
The man ordained to take over Mr Hu’s twin roles as party
chief in 2012 and president the following year is hardly a
household name. On October 18th Vice-President Xi Jinping
was given a new job as vice-chairman of China’s Central Mil-
itary Commission, which Mr Hu heads. This is a position for
leaders-in-waiting. The portly son of one of Communist Chi-
na’s founders, little known to the outside world until a few
years ago, Mr Xi is preparing to take the helm of a country with
the world’s second-biggest economy and its biggest armed
forcesand which is in the midst of wrenching social change.
Quite how he has risen so high in a party that, for all its
growing engagement with the world, remains deeply secre-
tive, is unclear. Mr Xi’s appointment was eerily similar to the
recent anointing of Kim Jong Un in North Korea: he too was
made vice-chairman of a military commission after a closed-
door party conclave, without public explanation. China’s
leaders at least oered a sentence on Mr Xi’s appointment, al-
beit at the end of an arid 4,600-character communiqué after
the fth party congress (see page 47).
On the positive side, Mr Xi has held some big posts in the
most economically dynamic and globally integrated parts of
the country: the coastal provinces of Fujian and Zhejiang as
well as, briey, Shanghai. He is a relatively cosmopolitan g-
ure. His wife is a popular singer. But it is impossible to assess
how well qualied he is to run the country or how assured his
succession is. On the face of it, one engineer whose father was
denounced during the Cultural Revolution is handing over to
another. But Mr Xi is a relative newcomer to the inner circle; he
has not served as long as Mr Hu had in 2002. There are plenty
in the party who resent the rise to power of well-connected
princelings like Mr Xi. A two-year transition will be a test.
All this one day will be yours
All the same, it is the immensity of the task, not the obscurity
of the man, that should make the world nervous. For all their
outward expressions of unity, there are signs of disagreement
among Chinese leaders over what the country’s priorities
should beboth on the economy and on political reform.
The economy is sprinting along by Western standards, but
China faces a hard adjustment to wean itself o excessive in-
vestment and exports in favour of more reliance on consump-
tion. The communiqué unveiled guidelines for a new ve-year
economic plan (see page 88). This calls for a more sustainable
pace of growth, with wage-earners getting a bigger share of the
national income. This would be good for China and the world,
helping to narrow the trade surplus that annoys America so
much. But the change will not be painless. Exporters fear busi-
ness will suer if wages soar or the yuan rises fast. Powerful
state-owned enterprises, used to cheap credit, land and energy,
will resist threats to these privileges.
As for political reform, Chinese leaders have talked about
democracy for the past 30 years, but done little. Rapid growth
and the spread of the internet and mobile phones have en-
abled Chinese citizens to communicate, vent their grievances
and pursue their dreams more freely than before, so long as
they do not attack the party. But some are now demanding
more say in how the country is run. In the past few weeks Chi-
na’s more liberal newspapers have enthused about calls by
the prime minister, Wen Jiabao, for political reform. Conser-
vative newspapers have censored them.
There is next to no chance of the cautious Mr Hu bringing in
big reforms before he steps down. This week’s communiqué
hailed the political advantages of China’s socialist system
and mentioned political reform only briey, sayingas Chi-
nese leaders so often dothat it will require vigorous yet
steady eort. Even Mr Wen, who will step down at the same
time as Mr Hu, has wanted to move at glacial speed.
Expect paranoia and you may be pleasantly surprised
Might Mr Xi speed things up? There is no shortage of conserva-
tives arguing for caution, but there is also a pragmatic argu-
ment for change: China’s economic gains could be jeopardised
by a failure to loosen the party’s hold. Explosions of public dis-
content, fuelled by resentment of government callousness to-
wards ordinary citizens, are becoming increasingly common
in villages, towns and cities across the country. The (admitted-
ly patchy) ocial data show a more than tenfold increase in
the annual number of large protests and disturbances since
1993, with more than 90,000 cases reported in each of the past
four years. In the past China’s leaders have relied on growth to
secure social stability. If and when a more serious slowdown
strikes, popular grumbles could increase.
The right path for Mr Xi should be clear: relax the party’s
grip on dissent, lift its shroud of secrecy and make vital eco-
nomic reforms. But the rest of the world would be unwise to
assume that reason will prevail. In times of uncertainty, the re-
gime is wont to appeal to nationalist sentiment. Large anti-Jap-
anese protests erupted during the latest party meeting. Ameri-
ca and the West have also been subjected to tongue-lashings.
The party meeting called on ocials to strengthen the coun-
try’s comprehensive national power.
Too many Westerners, including those urging trade sanc-
tions over the yuan, assume that they are dealing with a self-
condent, rational power that has come of age. Think instead
of a paranoid, introspective imperial court, already struggling
to keep up with its subjects and now embarking on a slightly
awkward successionand you may be less disappointed. 7
The next emperor
A crown prince is anointed in a vast kingdom facing vaster stresses. China is in a fragile state
The Economist October 23rd 2010 13
14 Leaders The Economist October 23rd 2010
I
TS strategic position, next to
the Middle East and Russia
and astride Europe and Asia,
means that Turkey has always
mattered. But over the past de-
cade its signicance has hugely
increased. For Turkey has gone
through two big, and not always
widely recognised, transformations: in its economic perfor-
mance and in its foreign policy.
For most of the post-war years the Turkish economy was, to
reuse Tsar Nicholas I’s 19th-century phrase, the sick man of
Europe, plagued by erratic growth, soaring ination and per-
iodic banking busts. Today ination is far lower, the banks are
solid and Turkey boasts the fastest-growing economy in the
OECD club of rich countries. Because it is resource-poor, this
growth reects fundamental strengths, especially in manufac-
turing and construction. Turkey makes things like furniture,
cars, cement (it is the world’s biggest exporter), shoes, televi-
sions and DVDplayers. In a sense, it is Europe’s BRIC: it might
be called the China of Europe.
On foreign policy this long-standing member of NATO,
with an army second in size only to America’s, has always
been a bulwark of the West. Turkey and Norway were the only
NATOmembers to border the Soviet Union. But Turkey’s pro-
Western stance led it to neglect its neighbourhood, including
many countries once in the Ottoman empire. Here, too, there
has been a transformation. Backed by its strong economy, Tur-
key has become highly active in its diplomacy across the Mid-
dle East, in the Balkans and as far aeld as Africaand not al-
ways to the satisfaction of its allies. In a sense, Turkey has
become a local diplomatic giantthe Brazil of the region.
You might imagine that Western powers would welcome
such an advance. Instead, a more prosperous, bumptious Tur-
key is jangling many nerves. Europeans are trembling over the
prospect of being asked to admit such a populous state into the
European Union. The United States, which used to scold the
Europeans for their reluctance, is uncomfortable with Turkey’s
newly adventurous foreign policy. Critics in the West are
prone to hide behind the idea that Turkey is drifting towards
Muslim fundamentalism and somehow being lost by the
West. This judgment is completely wrong; yet the more that
people in the West persist in making it, the greater the chance
that they may genuinely lose Turkey.
The perils of democracy
In foreign policy, the government of Recep Tayyip Erdogan has
certainly fallen prey on occasion to excessive Muslim solidar-
ity. It has been too nice to Sudan’s ghastly president, Omar
al-Bashir, ignoring his indictment for war crimes. It made a
mistake by joining Brazil in an ill-fated Iranian nuclear initia-
tive that led to the embarrassing sight of Turkey, a member of
the UN Security Council in 2009-10, voting against tougher
sanctions on Iran. And its increasingly strident attacks on its
once-close ally, Israel, have angered not only the Israelis but
also many Americans, especially after the Turkish-led otilla
that tried to relieve the siege of Gaza this summer.
But wait a moment. Brazil was nice to Iran, without anyone
doubting its Western credentials. On Israel, Mr Erdogan has
certainly at times played to the Arab street. But many of Tur-
key’s complaints, such as over settlement-building in the West
Bank, are hardly controversial. It may have been ill-judged for
the government to have been involved with those who
launched the Gaza otilla, but this would not have turned into
such a catastrophe had the Israelis not killed nine people on
board the leading ship. More fundamentally, the Turkish gov-
ernment is doing what democracies tend to do: reecting its
people’s views. Many Muslims think the Palestinians have
been ill-treated. From an Israeli viewpoint it is no doubt awk-
ward to have its human-rights record questioned by an elected
prime minister, rather than by the usual Arab dictators. But
who would America rather hear as a Muslim voice? The auto-
crats in Egypt and Saudi Arabia? The clerics in Iran?
The Europeans are also in a funkover Turkey’s possible
membership of the EU. Negotiations have formally been go-
ing on for over ve years. No country that has begun such talks
has ever failed to be oered membership. But the leaders of
France, Germany, Austria and the Netherlands seem dead set
against Turkish entry, as is much of their public opinion. The
unresolved Cyprus dispute seems a near-insuperable road-
block. Yet if the EUchooses to exclude its own China, it will be
turning away the fastest-growing economy in its neighbour-
hood. It will also lose any hope of inuencing the region to its
east. At a time when many Europeans fret about being ignored
in the world, this would be an historic mistake.
How Western are they?
The common excuse for these follies is the claim that Turkey is
not really Westernand is becoming ever less so. Once again,
Mr Erdogan has done some unhelpful things. Critics note that,
ever since his mildly Islamist Justice and Development (AK)
party came to power in 2002, it has been engaged in a battle
with the Kemalist secular establishment. He is intolerant of
dissent, shown in his battles with critical media commenta-
tors. And he is increasingly impatient with the EU.
Yet fears of Turkey turning into the next Iran are absurd. A
new tolerance of the headscarf in universities does not imply
a sudden lurch into stoning adulteresses. Mr Erdogan’s run-ins
with his opponents have certainly created a polarised society;
he should adopt a more conciliatory tone if he wins re-elec-
tion next June. But his opponents in the media still write their
critical columns. It is troublemakers in the army who have
posed a greater threat to democracy in recent times.
In short, Turkey is heading in a good direction. It remains a
shining (and rare) example in the Muslim world of a vibrant
democracy with the rule of law and a thriving free-market
economy. Much though Western leaders would like to turn the
argument into one about Turkey, the real question is for them.
Are Americans and Europeans prepared to accept Turkey for
what it is: a Muslim democracy, with a dierent culture and
diplomatic posture, but committed to economic and political
liberalism? This newspaper hopes the answer is yes. 7
A country’s welcome rise
Is Turkey turning its back on the West?
No. But it might if Europe and America cannot come to terms with its success
The Economist October 23rd 2010 Leaders 15
F
ROM June until the end of
September, Dilma Rousse
seemed to be cruising towards
Brazil’s presidency, with a poll
lead that at one point put her al-
most 25 points ahead of her
chief opponent, José Serra. But
an election that had seemed a
soporic canter has suddenly turned into a horse race. Having
failed to win outright on October 3rd, Ms Rousse, the former
chief of sta and chosen candidate of Luiz Inácio Lula da Silva,
the hugely popular outgoing president, faces a run-o against
Mr Serra on October 31st. Several recent polls put the gap be-
tween them at only ve or six points (see page 43).
Mr Serra is lucky to have a second chance, for his campaign
has until recently been hapless. He owes his reprieve mainly
to the unexpectedly strong vote for a third candidate, Marina
Silva, who won 19.3% on October 3rd. Less happily, religious
leaders may have swayed some voters against Ms Rousse,
who once backed abortion rights. Ms Rousse may still be the
favourite to win, but Mr Serra has a spring in his step and the
election is wide open. Brazil now has a choice.
That is a good thing in itself. Ms Rousse did not deserve to
win by default just because she was Lula’s hand-picked suc-
cessor. Which candidate deserves the presidency more? Both
might be described as social democrats; both agree on the
broad outlines of economic and social policy. Neither presages
disaster for Brazil. That said, on the issues on which they dis-
agree, Mr Serra is the more persuasive of the two.
Ms Rousse and the ruling Workers’ Party (PT) want the
state to play a bigger role in the economy. They are especially
keen on that in the oil industry, but they also want to keep
lending public money to big business to create national cham-
pions. In return, in some cases, they want more inuence over
boardroom decisions. It is hard to see them putting a stop to
the inexorable growth of the public payroll, swollen by many
PTappointees, and of the tax burden required to pay for it.
The case for change at the top
Mr Serra also has faults, notably a worrying tendency to try to
micromanage everything. But his record suggests that he
would move faster to cut wasteful spending and eliminate the
scal decit, and that he would be keener to mobilise private
capital for much-needed infrastructure. Monetary policy
would no longer have to carry all the burden of keeping ina-
tion under control, allowing Brazil’s egregiously high interest
rates to fall (and helping to halt the excessive appreciation of
the real). Ms Rousse would tackle such distortions more grad-
ually, if at all. In an uncertain world that is unnecessarily risky.
For all his achievements in ghting poverty and making Brazil
a fairer place, Lula is bequeathing a country where one in two
homes lack mains sewerage and educational standards re-
main woeful. Those should be priorities for public spending.
There are two other reasons why Brazilians would do well
to favour Mr Serra. The rst is that Ms Rousse is not Lula. She
lacks his extraordinary political gifts and perhaps also his in-
nate pragmatism. By contrast, although Mr Serra may be a
poor campaigner, he has been an eective minister, mayor and
governor. Second, although no political party has a monopoly
when it comes to corruption, there are plenty of signs that the
PT has become too cosy with power. After eight years under
the PTBrazil would benet from a change at the top. 7
Brazil’s presidential election
Second round, second thoughts?
In a suddenly exciting contest, José Serra would be a better president than Dilma Rousse
A
MERICA’S mortgage lenders
are again at the centre of a
scandal. This time the cause is
not the recklessness of their
lending, but the sloppiness with
which they are dealing with the
resulting defaults. Recent revela-
tions suggest that many lenders
rode roughshod over legal niceties to push delinquent borrow-
ers out of their homes. Although banks claim the irregularities
are minor, Foreclosuregate risks becoming a quagmire. Pros-
ecutors across the country have launched investigations.
Many politicians (though to his credit not Barack Obama) have
called for a moratorium on repossessions.
None of this will help America’s moribund housing mar-
ket. Tying the process of repossession in yet more knots will
make it harder for the market to clear and for house prices to
nd a oor. Ideally, politicians ought to speed up foreclosure,
which in some states can take up to two years. Moving some-
body out of his home quickly may sound heartless; but
stretching the process out is a bad idea. Would you bother to
look after a property you were due to be expelled from?
Unfortunately, few politicians are likely to champion faster
repossessions. And even if they were to, the scale of America’s
mortgage mess would still be daunting. Around 2.5m homes
are in the process of repossession, and 11m (or nearly 25% of all
homes with mortgages) are underwater: borrowers owe
more on their mortgage than their houses are worth. Since it is
hard for such people to move home, this not only causes mis-
ery, but also clogs up America’s labour market.
Both lenders and the overall economy would be better o
if more delinquent mortgages were restructured rather than
America’s property market
Home truths
US foreclosure rate
%
2000 02 04 06 08 10
0
1
2
3
4
5
Preventing foreclosures won’t x America’s housing mess. Encouraging banks to write down mortgages might
16 Leaders The Economist October 23rd 2010
2
S
INCE the birth of the Conven-
tion on Biological Diversity
(CBD) at the Rio Earth Summit in
1992, there has been a welcome
transformation in the language
of global conservation. Policy-
makers and even some busi-
nesses have started to express a
view of nature as a store of wealthor natural capital. Talk
of ecosystem services now draws attention to the helpful
things that nature does unbidden, such as providing fresh soil
and clean water.
This approach not only has the advantage of moving con-
servation from the domain of lofty morality down to earth, re-
ecting a pragmatism more likely to support and sustain ac-
tion. It also serves to highlight the interests of the people who
have most to gain from the recognition of natural capital’s val-
ue, and the most to lose by its squandering: poor people living
close to nature in the developing world.
Another welcome development is that there have been
conservation successes. Political enlightenment and an eco-
nomic boom have led to great progress in the Amazon rainfor-
est, with Brazil’s deforestation plummeting. Indonesia’s rate
has also dropped. The possibility of halting global deforesta-
tion has become a plausible and thus worthwhile goal.
Unconventional wisdom
All this good stu, however, has little to do with the CBD, the
193 parties to which began one of their two-yearly meetings
this week in Nagoya (America is not one of them, having not
ratied the convention). The changed language of conserva-
tion owes little to the well-intentioned work of the cbd. Pro-
gress on forestry has come about largely through national ef-
forts, helped by lower demand for commodities and
reinforced by bilateral agreements to do with climate change.
And the global perspective that the CBDhas some claim to
representing can be overblown. The ecosystem services that
matter at a global level are, for the most part, those to do with
climate, and are covered in deals on deforestation. Most of the
time ecosystem services and natural capital are specic to a
particular area, country or region, and that is the level where
they ought to be supported. Donor countries, banks and con-
sortia promoting new nancial models for conservation can
provide ever more such support. The CBD is in a position to en-
courage experiment, but not much more.
The convention’s achievements, such as they are, are much
more marginal. The only protocol drawn up under its remit, in
Cartagena in 2003, seeks to avert damage by genetically mod-
ied organisms; not a front-rank threat. The convention’s strat-
egy for plant conservation has yet to deliver the rst of its aims
(a list of the world’s plants). It is now working on a way for de-
veloping countries to share in prots made from organisms
and genes that originate in their territories, and this could con-
ceivably tidy up a messy area in which negotiators at the
World Trade Organisation and the Food and Agriculture Orga-
nisation are also active. But any protocol that can be agreed
upon is unlikely to alter current practice in the area much.
Should the CBDbe scrapped? It is tempting to say yes when
it comes up with overblown, unobtainable targets, such as
stopping all extinctions anywhere, or when it entertains fool-
ish proposals, like the current Luddite idea to restrict all forms
of research exploring the possibility of geoengineering the
climate. But when it sticks to achievable, measurable targets,
such as increasing the area of nature reserves in the ocean, it
can provide a useful focus. And an occasional talking shop is
useful for donors to compare projects and see which work
best. As conservationists like to say, every niche is valuable.
But back local pragmatism, not Utopian dreams. 7
Convention on Biological Diversity
The least of God’s creatures has value
Global discussions on biodiversity are all very well, but most good conservation is done locally
foreclosed. The Obama administration, like George Bush’s
team before it, has tried schemes to encourage lenders to keep
people in their homes by reducing their monthly mortgage
payments. But these have not worked well, mainly because re-
ducing payments does little to prevent default when houses
are worth a lot less than the outstanding debt.
A better route would be to reduce the mortgage principal,
giving borrowers a bigger incentive to pay their debt. Even
though they know this would probably mean they would one
day get more money back, banks dislike this. If you let one per-
son o paying what he owes, then surely his neighbour will
want the same? Also, many homes have several claims or
liens on them, which complicate any debt reduction. And
lenders fear lawsuits from mortgage bondholders if they start
writing down loan values. These are reasonable worries. How
might government encourage a better outcome?
One extreme is to bribe banks into action with big subsi-
dies: but that would require a lot more public money which
voters are not inclined to provide. The other is to force the
banks’ hand, for instance, by changing the bankruptcy code to
allow judges to restructure mortgages in the same way as oth-
er loans. It might indeed make sense to change the law for fu-
ture mortgages, but rewriting loan terms retrospectively tram-
ples on existing contracts and property rights, and should not
be done lightly (see page 94).
Amatter of principal
So the best bet is a series of more moderate options to nudge
lenders in the right direction. Regulators should force banks to
write down the value of second liens, which are often held at
vastly inated values on their balance-sheets. Existing subsi-
dies for preventing foreclosure should be redirected towards
reducing principal. Congress could shield banks from lawsuits
that arise from a mortgage reduction, and oer favourable tax
treatment to shared appreciation mortgages, where lenders
share in the gains if houses subsequently rise in value.
Even these changes would be politically dicult. But, para-
doxically, Foreclosuregate may actually help. By shining a
spotlight on the scale of the mortgage mess, it also opens an
opportunity for a fresh start. 7
18 Leaders The Economist October 23rd 2010
T
HE mood in Britain on Octo-
ber 20th combined that of a
football cup nal and a state fu-
neral. Something electrifyingly
important yet ominous was
happening: George Osborne,
the chancellor of the exchequer,
was setting out the results of the
coalition government’s spending review, elucidating how it in-
tends to cut Britain’s huge scal decitcurrently equivalent to
10% of GDP. His statement in Parliament was only, as Winston
Churchill might have put it, the end of the beginning of the
long process of hacking back Britain’s overgrown state. Never-
theless, it was a crucial indicator of the direction in which the
government, and with it the apprehensive country, are travel-
ling. It is basically the right onewith important provisos.
The spending review raised three big and related questions.
First, do Mr Osborne’s sums add up? Second, has the govern-
ment cut Britain’s public spending in the right way and in the
right places? Finally, do its individual decisions amount to a
persuasive vision of a redesigned British state?
George pulls it o
The answer to the rst question is broadly yesin the sense
both of elementary maths and economic wisdom (see page
67). It may seem unremarkable that Mr Osborne has specied
the spending-reduction programme to match the scal goals
he set out in his budget in June. Since then, he has found addi-
tional savings in the welfare budget, so that the cuts to govern-
ment departments19% on average between now and 2015
are slightly less severe than previously advertised. But given
the scale of the spending squeeze (the most sustained in Brit-
ain in living memory), and the complexion of the government
(a coalition of Conservatives and Liberal Democrats, who un-
til recently had wildly dierent views about public spending),
it is quietly impressive that Mr Osborne, and David Cameron,
the prime minister, have pulled it o.
On balance, Mr Osborne is still right that the economic risks
of not decisively tackling the decit outweigh the risk of doing
so. All the same, the government’s bet that the private sector
will generate growth as the public sector retrenches remains
just that: a gamble. If there are clear signs of economic con-
dence declining or growth stalling, it should respondnot by
easing the spending cuts Mr Osborne outlined, but by defer-
ring some of the tax rises the government is also planning.
Many of the government’s specic decisions are sensible
too. It was right not to slash the defence budget to the point
where the country’s ability to project power would have been
permanently crippled (though it is somewhat odd that Britain
will temporarily nd itself in possession of a new aircraft-car-
rier but without the planes to put on itsee page 69). Mr Os-
borne was also right to protect capital spending as far as possi-
ble: despite its economic value, such investment is often the
rst thing that myopic cost-cutting governments sacrice.
Mr Cameron and Mr Osborne have, however, persisted in
at least one fallacy. Before the general election in May, the To-
ries pledged to protect the National Health Service from cuts.
The aim was to reassure the voters that they were not heartless
tos. That decision was mistaken: the NHSbudget grew extrav-
agantly under the previous Labour government and was as
ripe as any for pruning. The Tories have wriggled out of other
pre-election commitments, citing the exigencies of either the
country’s scal plight or the coalition; they should have done
the same with this one, which, given that health accounts for
nearly a fth of government spending, would have eased the
pressure on other parts of the budget.
Every crisis an opportunity
The answer to the nal question is mixed. Mr Osborne
stressed that, along with the government’s mantra of fair-
ness, reform was a guiding principle of the review. And there
were some further signs that the government is intent on de-
signing a more eective state, as well as a leaner one. He em-
phasised the coalition’s enthusiasm for outsourcing publicly
funded services and gave the country’s emasculated local
councils more authority over their budgets (while also slash-
ing them). A big cut to the Ministry of Justice’s funding will be
accompanied by more emphasis on preventing prisoners reof-
fending rather than merely banging more of them up: a good
example of how the state should aim to do more with less.
The government is admirably determined to cajole some of
the 5m adults who subsist on state benet in Britain into work.
On the other hand, perhaps because of the ruckus caused by
his withdrawal of child benet from high earners, Mr Osborne
shied away from further attacks on the principle of universal-
ism in the welfare system: he might, for example, have targeted
the costly perks dispensed to pensioners regardless of their
wealth. This may prove a political mistake, as it will bolster the
arguments of those who point out that the poor are set to be
squeezed most harshly. But it is wrong in principle too.
Under the previous Labour government, the state became
more of a comfort blanket than a safety net: it took on jobs and
commitments that are not properly its business. Handing out
money to rich pensioners is one of them. Even after Mr Os-
borne’s savagery the state will still consume in 2014-15 the
same share of GDP41%as it did in 2007-08. And, despite oc-
casional attempts to devolve power in line with Mr Cameron’s
Big Society, the state will still fundamentally be the same
shape, trying to do virtually all the same things.
The other big proviso is that now the government actually
has to make the cuts, not just talk about them. The public has
been assiduously softened up for scal pain; the reality may
not be quite as bad as some fear. Nevertheless, the measures
Mr Osborne described will result in almost half a million jobs
being cut from the state payroll. Millions of people will see
their welfare payments shrink; the pension age will rise more
quickly than the previous government intended; train fares
and university tuition fees will jump. There will be opposition
and outragenot just from leftish unionists and Scottish na-
tionalists but also from the Tories’ natural supporters such as
the police (whose numbers are being cut) and middle-class
parents. The real battle starts now. 7
Britain’s spending review
Ouch!
George Osborne’s austerity programme is justied, but the government should be bolder in redesigning the British state
with greater energy efficiency...
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Letters
20 The Economist October 23rd 2010
Europe’s far right
SIR Charlemagne was right
(A false prophet, October
9th) to argue that Geert Wild-
ers’ position of having one foot
in and one foot out of govern-
ment through oering external
support allows him to gain
policy concessions while not
assuming full cabinet responsi-
bility. However, it is not neces-
sarily the case that a better
strategy would be to bring
far-right leaders into the cabi-
net, thus exposing their ideas
to reality and their personal-
ities to the public gaze.
While this worked in the
cases of the Freedom Party in
Austria and the short-lived
Pim Fortuyn List in the Neth-
erlands, there are parties simi-
lar to Mr Wilders’ such as the
Northern League in Italy and
the People’s Party in Switzer-
land which have been able to
participate for most of the past
decade in coalition govern-
ments without either taming
their rhetoric or losing votes.
Moreover, they have been
able to secure important poli-
cy victories which have not
only increased their credibility,
but have also contributed to
shifting public attitudes in
their direction (immigration
being an obvious example).
The danger for moderate
parties in inviting more radical
outsiders into power is that
they oer them a platform on
which, as the Swiss and Italian
examples prove, they often
ourish rather than falter.
Dr Daniele Albertazzi
University of Birmingham
Dr Duncan McDonnell
Universities of Birmingham and
Turin
Turin
SIR Charlemagne suggested
that a better, braver strategy
to deal with a far-right poli-
tician such as Geert Wilders
would be to bring him into the
cabinet and make him foreign
minister. Such an experiment
is already under way in Israel,
where Avigdor Lieberman
from the far-right party, Yisrael
Beitenu, is currently serving as
foreign minister. His perfor-
mance in this post has en-
hanced his polling numbers
and political career, but unfor-
tunately seems to be increas-
ingly detrimental to Israel’s
diplomacy and international
relations. Perhaps the Dutch
should think carefully before
taking Charlemagne’s advice
on this matter.
Mike Fainzilber
Rehovot, Israel
Learning the law
SIR You implied California
was a state with lax gun laws
(Trekking north, October
2nd). Maybe that was so in the
19th century but today Califor-
nia has some of the most
convoluted and most restric-
tive gun laws in the United
States. The rules are so com-
plex there are books about
how to own a gun in the state
and avoid trouble with the law.
In a 480-page summary of
American gun law, California
takes up 84 pages.
Ken Obenski
Honaunau, Hawaii
Taxing sums
SIR You suggested that by
announcing plans to cut child
benet to higher-rate taxpay-
ers (Biting the hand that feeds
him, October 9th), the British
chancellor has united the
nation in opposition to the
government’s plans. Though
he was criticised in many
newspapers, he appears to
have the support of the peo-
ple. Following the announce-
ment, a poll by YouGov tested
support for the principle of
cutting child benet for house-
holds where someone earns
over £44,000, the threshold for
higher rate income tax. Eighty-
three percent of people said
they supported the policy,
with only 15% opposed. The
British public intuitively un-
derstands the absurdity of
raising taxes to pay welfare
benets to the well-o.
Michael Davies
London
SIR Taxation ought to be
based on an individual’s abili-
ty to pay, which is a result not
only of a person’s income, but
also other factors, chief among
them the number of depen-
dents they need to provide for.
In many countries the tax code
provides for tax allowances for
dependent children and/or
transferable tax allowances
between married couples. If
George Osborne has his way,
Britain will have a tax system
where an individual earning
£45,000 with dependent chil-
dren and a non-working
partner will pay exactly the
same amount of tax as a single,
childless person with the same
income. Furthermore, the hard
threshold envisaged at the
moment will mean that a
person with children earning
£44,000 will take home signi-
cantly less money if he gets a
modest pay rise. Surely this is
the kind of tax ineciency The
Economist normally rails
against?
Robin Schlinkert
London
Plug-in cars
SIR In regard to your article
(Highly charged motoring,
October 9th), transport ac-
counts for around 21% of Brit-
ish emissions, of which road
transport makes up over 90%.
If Britain is to reach its 2020
carbon-reduction targets, it is
vital it acts now. With this in
mind, I cannot see the sense in
the argument that because the
national energy supply is not
yet entirely renewable, action
on electric vehicles should be
delayed. When the process of
changing the way our electric-
ity is produced is completed, it
would be rather backwards if
vehicles were still entirely
dependent on oil and gas.
Electric vehicles have the
potential to revolutionise
world transportation. Govern-
ment investment to stimulate
demand now will lead to far
greater rewards down the line.
Neil Bentley
Director
Business Environment
Confederation of British
Industry
London
SIR You missed one role that
electric vehicles could play in
the ght against climate
change. It is true electric-vehi-
cle subsidies are an expensive
CO
2
-abatement measure and
investing in renewable energy
generation sounds more cost-
ecient. However, renewable-
energy output is usually in-
termittent and therefore relies
on some sort of energy storage.
This is where an indirect ad-
vantage of electric vehicles
comes into play. They could
provide a distributed storage
resource to balance the volatil-
ity of renewable energy.
Marina Gonzalez
Zurich
SIR Your article left out an
irony. Environmentalists gen-
erally object to battery-pow-
ered devices and for good
reason: batteries require
mined minerals, employ
manufacturing processes that
leak toxins into local ecosys-
tems and leave behind an
even-worse trail of side eects
upon disposal. Though when
it comes to the largest mass-
produced battery-powered
gadget ever createdthe elec-
tric carenvironmentalists
cannot jump from their seats
fast enough to applaud it.
Ozzie Zehner
San Francisco
Foul language
SIR Am I right in thinking
that you are becoming more
prudish? You used to have no
problem in quoting people
verbatim when they swore,
such as when you quoted
Bulgaria’s diaspora minister,
Bozhidar Dimitrov, referring to
his fucking colleagues. But
when you cited the equally
colourful Vefki Redzeposki, a
Bronx Romani, you censored
him thus: Money we spend
on candy, they save to get
foodto [expletive] live. You
then reported General David
Petraeus as telling his staers
that the president was [exple-
tive] with the wrong guy. Is
this a coincidence, or does it
signal an ominous trend to-
wards a more priggish style?
Dylan Evans
Cork, Ireland 7
Letters are welcome and should be
addressed to the Editor at
The Economist, 25 St James’s Street,
London sw1A 1hg
E-mail: letters@economist.com
Fax: 020 7839 4092
More letters are available at:
Economist.com/letters
22
The Economist October 23rd 2010
Executive Focus
23
The Economist October 23rd 2010



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Executive Focus
24
The Economist October 23rd 2010
Federal Position
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Executive Focus
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Myanmar is to hold new elections under the
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Economist.com/node/21012042
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The father of Ethiopian jazz discusses his
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Economist.com/node/21012023
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Why African history will be the history of its
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Economist.com/node/21012025
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Ailerons add weight and complexity to wings,
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Economist.com/node/17299468
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The rst German train passes through the
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I
N FRANCE workers angry about pension
reforms have blockaded fuel reneries,
causing 4,000 petrol stations to run dry.
The Netherlands’ recently elected minor-
ity government depends for survival on
support from a Muslim-baiting populist.
Economies across Europe are struggling to
cope with sluggish growth, lacerating bud-
get cuts and the after-eects of borrowing
binges. But there is an exception to the
gloomy European rule.
No big developed country has come
out of the global recession looking stron-
ger than Germany has. The economy min-
ister, Rainer Brüderle, boasts of an XL up-
swing. Exports are booming and
unemployment is expected to fall to levels
last seen in the early 1990s. The govern-
ment is a stable, though sometimes frac-
tious, coalition of three mainstream par-
ties. The shrillest protest is aimed at a huge
new railway project in Stuttgart. Amid the
truculence and turmoil around it, Ger-
many appears an oasis of tranquillity.
To many of its friends and neighbours,
though, the paragon is a disappointment.
Its sharp-elbowed behaviour during the
near-collapse of the euro earlier this year
heightened concerns about Germany’s
role in the world that have been stirring
ever since unication 20 years ago.
Speeches, seminars and scholarly articles
by nervous Germans and Germany-
watchers are a booming cottage industry. A
recent essay published by Bruegel, a Brus-
sels think-tank, explains why Germany
fell out of love with Europe. Another,
from the European Council on Foreign Re-
lations, alleges that Germany is going glo-
bal alone. Jürgen Habermas, Germany’s
most distinguished living philosopher, ac-
cuses his country of pursuing an inward-
looking national policy. How can you
not ask Germany questions about its vi-
sion of the future of Europe? wonders
Jacques Delors, who was president of the
European Commission when the Berlin
Wall fell. Even a pacic and prosperous
Germany causes international angst.
The German question never dies. In-
stead, like a u virus, it mutates. On the eve
of unication some European leaders wor-
ried that it would resume killer form.
We’ve beaten the Germans twice and
now they’re back, said Margaret Thatcher,
Britain’s prime minister. Such fears now
look comical. But even today’s mild strain
causes aches and pains, which aict dier-
ent regions in dierent ways. America’s
symptoms are mild. Central Europe seems
to have acquired immunity. After unica-
tion 85% of Poles looked upon Germany as
a threat, recalls Eugeniusz Smolar of the
Centre for International Relations in War-
saw. Now just a fth do. It is among Ger-
many’s long-standing west and south
European partners that the German ques-
tion feels debilitating, and where a danger-
ous are-up still seems a possibility. Ger-
many’s answer to the question matters not
only to them. It will shape Europe, and
therefore the world.
Germans have not forgotten that their
country was the author of the horrors of
the 1930s and 1940s but, says Renate Kocher
of Allensbach, a polling rm, they want to
draw a line under the past. That does not
mean ignoring its lessons or neglecting to
teach them to the next generation. A new
exhibition on Hitler and the Germans at
the German Historical Museum in Berlin is
drawing blockbuster crowds. But Germans
are no longer so ready to be put on the mor-
al defensive or to view the Nazi era as the
dening episode of their past. Even non-
Germans seem willing to move on. Recent
books like Germania and The German
Genius suggest that English-language
publishing may be entering a post-swasti-
ka phase. Germany still atones but now
also preaches, usually on the evils of debt,
the importance of nurturing industry and
the superiority of long-term thinking in
enterprise. Others are disposed to listen.
Everyone orients himself towards Ger-
many, says John Kornblum, a former
American ambassador.
The worries below
Yet this buoyancy is checked by equally
potent anxieties. Germany’s bestselling
book is Deutschland schat such ab
(Germany does away with itself), a
warning by a director of the Bundesbank,
since forced out of his job, that too much
child-bearing by the poor and by immi-
grants (especially Muslims), and too little
by the educated classes, dooms the coun-
try to decline. The book’s popularity has
shaken Germany. Xenophobic parties play
little role in politics, but the resentments
that feed their popularity elsewhere are
just as potent. A third of Germans think
the country is overrun by foreigners, ac-
cording to a newly published poll; a major-
ity favour sharply restricting Muslim re-
ligious practice. Over a tenth would even
welcome a Führer who would govern with
a strong handa sign that the embers of
extremism still glow.
Will Germany now take centre stage?
Brieng Germany’s role in the world
BERLIN
Its economy is booming, but its strength poses new questions
1
The Economist October 23rd 2010 27
28 Brieng Germany’s role in the world The Economist October 23rd 2010
2
1
Conservative politicians, long fearful
of being outanked on the right, are pan-
dering. Horst Seehofer, head of the Chris-
tian Social Union, the Bavarian sister party
of the ruling Christian Democratic Union
(CDU), declared this month that Germany
needs no further immigration from Turkey
or the Arab world. Germany is not an im-
migration country, he insisted, contradict-
ing a hard-won consensus among conser-
vatives. Characteristically, Angela Merkel,
the CDU chancellor, sought to placate anti-
immigrant sentiment without stooping to
populism. Multiculturalism has absolute-
ly failed, she said on October 16th, imply-
ing that immigrants would be expected to
integrate better into German society. But
she balanced this by admitting that Islam
is part of Germany.
Despite their economic strength, Ger-
mans fear the worst. They believe their
country has passed its zenith, says Mrs
Kocher, the pollster. This pessimism
shapes Germany’s dealings with the rest
of the world. Unlike most countries, Ger-
many is not driven by any great ambition,
but rather by the fear that things could fall
apart if they don’t hold on to stability, sug-
gests Mr Kornblum.
This year’s euro crisis brought out both
the apprehension and the arrogance. With
Greece’s near default, the promise that the
euro would be as stable as the Deutsch-
mark suddenly looked like the lie Ger-
mans had always suspected it to be. As the
crisis mounted Mrs Merkel delayed giving
German backing to the inevitable rescue
for wobbly euro countries. A 750 billion
($920 billion) package was eventually
agreed on after a hectic weekend of negoti-
ation in May. To Germans, this looked like
the start of the dreaded transfer union, a
bottomless commitment to subsidise
Greeks’ early retirement, x an Italian bud-
get tattered by tax evasion and clear up
after Spain’s burst property bubble. Sell
your islands, you bankrupt Greeks. And
the Acropolis while you’re at it, demand-
ed Bild, a popular tabloid. Mrs Merkel
played to the gallery by suggesting that
persistent euro sinners should be thrown
out of the group.
These unEuropean outbursts startled
not just Greeks, who brandished swastikas
in response, but Europeans generally. They
had grown up believing that the Germans
saw their own interests as inseparable
from those of their fellow Europeans. Now
they glimpsed a dierent, ugly German,
smug about his economy and untroubled
by his past. Some pundits argue that Ger-
many’s brutality to Greece during the sec-
ond world war should have tempered its
irritation with the Greeks.
The crisis has created a new pecking or-
der, at least temporarily. Germany, with its
high-competitiveness, low-debt economy,
is on top. The rest are having to adjust, in-
cluding France, traditionally a joint leader
of the European project. This is unsettling.
You get an enormous sense of German
self-righteousness, which is very dicult
to take, especially when there are solid
foundations for it, says François Heis-
bourg of the International Institute for
Strategic Studies. France, which has lagged
behind Germany in making structural re-
forms, feels its inuence waning. France
has to do its homework to be able to restore
some level of inuence in Europe, says
Jean-Pierre Jouyet, a former French minis-
ter for Europe, now head of France’s nan-
cial regulatory authority.
Whatever became of Gemütlichkeit?
Even during the golden age of European in-
tegration Germany was an awkward
partner, too big to be rst among equals
but too small to dominate, as Helmut Kohl,
the chancellor who unied Germany, put
it. It never lost sight of its own interests. As
early as 1960 France and Germany clashed
over the founding of Europe’s common ag-
ricultural policy. France regarded the
Deutschmark as an instrument of eco-
nomic terror, forcing it either to shadow
the Bundesbank’s monetary policy or to
devalue the franc. But long before the euro
arrived in 1999, the German nance minis-
ter of the day, Theo Waigel, vowed it would
bear the German hallmark.
Still, the tone changed under Mr Kohl’s
successor, Gerhard Schröder, who headed
acoalition of Social Democrats and Greens
from 1998 to 2005. He was unembarrassed
to ex Germany’s newly acquired muscles
and to employ the sort of language heard
from leaders of more nakedly nationalistic
countries. He accused Brussels of blow-
ing taxpayers’ money. He made his quar-
rel with the United States over the Iraq war
the centrepiece of his 2002 campaign for
re-electionan unprecedented aront to
Germany’s most important ally. With
Vladimir Putin’s Russia, Mr Schröder was
poodle-like. The two men agreed to build
an undersea gas pipeline from Russia to
Germany bypassing central Europe and
the Baltic states, which Poles denounced as
a second Molotov-Ribbentrop pact.
After Mr Schröder’s pugnacity, Mrs
Merkel’s consensual style looked like a re-
turn to German form. She was instrumen-
tal in ensuring passage of the Lisbon treaty,
which is supposed to help the EU cope
with its expansion to 27 members and
creates machinery for an EU foreign policy.
She repaired relations with Germany’s
eastern neighbours, reassured the United
States and pandered less to Russia.
As a Euro-builder, she soon showed,
she is not in Mr Kohl’s class. During eco-
nomic crises her rst instinct has been to
double the guard around the German trea-
sury. She backed the appointment of rela-
tive lightweights for both the EU presiden-
cy and the foreign minister’s job created by
the Lisbon treaty.
Under Merkel, Germany is no longer
an actor that supports supranational de-
velopment, says Hans Stark of the French
Institute for International Relations. The
assumption now, he says, is that individual
governments, not the European collective,
will remain the principal actors and Ger-
many has adapted to that. Germany’s
brightest business prospects do not in-
volve its slow-growing neighbours but the
charismatic economies of Asia and Latin
America. A German acceptance of Turkish
membership of the EU looks less likely
than ever.
Relations between Germany and
France, traditionally the twin motors driv-
ing European integration, are volatile. The
methodical Mrs Merkel and Nicolas Sar-
kozy, the impulsive French president, are
not natural partners. He recently quoted
Mrs Merkel as saying that Germany was
about to put in place a policy of expelling
gypsies just like France’s, which drew a
sharp denial from the chancellery. When
previous German chancellors and French
presidents clicked, their relationship cas-
caded down to other levels, says Mr Heis-
bourg, the strategist. That is totally lacking
today. Mrs Merkel and Mr Sarkozy man-
age to resolve crises as they threaten to
spin out of control. But Franco-German
ambitions for Europe have sputtered. Ger-
man standoshness toward the EU is now
1
Germany’s bounce…
Source: Economist Intelligence Unit *Forecast
GDP, % change on year earlier
8
6
4
2
0
2
4
6
8
+

2002 03 04 05 06 07 08 09 10*
France Germany Italy
Spain Greece Ireland
2
…is based on a boom
Source: IMF Direction of Trade *Brazil, Russia, India, China
Exports to BRICs*, % of total EU exports to BRICs
0
10
20
30
40
2005 06 07 08 09
Germany France Italy Britain
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30 Brieng Germany’s role in the world The Economist October 23rd 2010
2 based in law: a 2009 ruling by Germany’s
Constitutional Court allowed it to ratify
the Lisbon treaty but limited further trans-
fers of power to Brussels. Soon the court
may weigh in on the euro-zone bail-out.
Such omens suggest that the Berlin re-
public is a dierent sort of character from
its westward-leaning, Bonn-based prede-
cessor. Scholars had struck several awk-
ward coinages to describe war-chastened
Germany: it was a tamed power engaged
in attritional multilateralism. These no
longer seem apt for today’s more condent
and self-willed Germany. But its identity is
still unformed. Germany has instincts
sometimes rather than a clearly articulated
policy, says a senior EUocial. An Amer-
ican diplomat believes it is still trying to
decide what its foreign policy in the 21st
century should look like. Germany is be-
coming more normal, meaning more
willing to use its strength and to accept re-
sponsibilities that go along with it. That
looks to America like a good thing. But can
Europe aord a more normal Germany?
Europe wants some nice leadership
Germany’s most pressing European busi-
ness is to sort out the euro, the foundation
on which the European edice now rests.
Euro members promised to observe nan-
cial disciplines, which many soon outed
(including Germany, which let its budget
decit breach 3% of GDP). That, says Ger-
many, must never happen again. In Sep-
tember the European Commission pro-
posed German-inspired rules that would
limit macroeconomic imbalances such
as excessive current-account decits, in ad-
dition to budget decits and public debt.
Rule-breakers would face sanctions.
The reform of the euro will create a
more German Europe, but not quite the
economic Pax Germanica some observers
are expecting. We need German disci-
pline, says Sylvie Goulard, a French mem-
ber of the European Parliament, but with-
out growth it will be more dicult to make
this discipline acceptable. On October
18th Mrs Merkel and Mr Sarkozy struck a
deal that would weaken the sanctions re-
gime proposed by the commission (by let-
ting heads of government decide whether
to impose them). In return, France agreed
to support a debt-restructuring procedure
demanded by Germany (see Charle-
magne, page 64). In Brussels that caused
dismay. The Franco-German axis looked
stronger. But German discipline, and the
role of European institutions in enforcing
it, were weakened.
German leadership is more apparent in
other areas. It has assets available to none
of the other big euro members, including
unparalleled trade links to rising powers
(nearly half the EU’s exports to China
come from Germany) and a leader who is
taken seriously by her counterparts (David
Cameron is respected, but Britain does not
count). Germany is claiming leading posi-
tions in EU institutions: Uwe Corsepius,
Mrs Merkel’s European adviser, will be-
come secretary-general of the European
Council. Axel Weber, now head of the
Bundesbank, is favoured to become the
next president of the European Central
Bank. In European deliberations, Germany
often sets the tone. Not until the Germans
concluded that the Pakistani oods were
really grave did the EU take action (by ex-
tending trade concessions). They may well
take the lead in deciding whether to recog-
nise China as a market economy in apply-
ing international trade standards.
But, despite such examples of leader-
ship, Germany’s overall direction is ob-
scure. It is torn, intrigued by its new pos-
sibilities but painfully aware that alone it
does not count for much in the world. Its
population is already shrinking. Europe
will lose economic and demographic bulk
relative to China, India and Brazil. The EU
was virtually ignored at last year’s Copen-
hagen summit on climate change, even
though it had taken the lead in setting tar-
gets to reduce greenhouse-gas emissions.
This was an enormous shock, says Guy
Verhofstadt, a former Belgian prime minis-
ter who now leads the liberals in the Euro-
pean Parliament. It shows we need one
voice. Fear of war launched the European
project; he hopes that fear of irrelevance
will drive it forward.
Some quarters of the German estab-
lishment nod in agreement. Pressed for
Germany’s vision of Europe, Werner
Hoyer, an aide to the foreign minister, says
it is to secure Europe’s success in a global-
ised world. That means deepening eco-
nomic integration, dismantling remain-
ing barriers to the single market and
dealing with other powers through Brus-
sels, not national capitals. It is in our inter-
est to convince them that the gateway to
Europe is European institutions, says Mr
Hoyer. He thinks Europe must globalise
its foreign policy if we don’t want to be by-
standers. Whether the prosaic chancellor
shares these ambitions is unclear. She is a
pilot who does not believe in making an-
nouncements from the ight deck.
And so Germany’s partners are likely to
remain on edge. The EU needs Germany’s
leadership more than ever, but fears its pre-
eminence. Europe also needs consensus,
but will not get it unless the Germans fos-
ter it. Matters will be even worse if Ger-
many’s economic self-condence comes
across as political arrogance.
America would rather see it stand tall
The Obama administration views Ger-
many’s rise not with consternation but
with impatience. Germany is emerging as
a much more active world player, which is
a good thing, says an American diplomat.
The latest sign of that is the success of Ger-
many’s campaign this month to win a tem-
porary seat on the UN Security Council,
the rst time it has challenged rival con-
tenders. It has lately been an active ally to
the United States, pressing Serbia to accept
Kosovo’s independence and toughening
sanctions imposed on Iran. And Ger-
many’s dealings with Russia arouse less
suspicion under Mrs Merkel than they did
when Mr Schröder was chancellor. At a tri-
angular meeting in the French resort of
Deauville this week, Mrs Merkel and Mr
Sarkozy persuaded Russia’s president,
Dmitry Medvedev, to attend NATO’s forth-
coming summit and to consider joining a
European missile-defence shield.
Yet in military terms, Germany remains
a midget compared not just with America
but with Britain and France, which togeth-
er account for 70% of the EU’s military re-
search and development and 60% of its de-
ployable forces. What’s missing is
Germany leading rather than seeing what
Paris and London cook up, says a NATO
diplomat. Its military deployments in Af-
ghanistan and elsewhere are recent and
unpopular. Its body of strategic thinkers is
small. Germany’s trading relationships
bring inuence, but also inhibit its willing-
ness to join allies to ght global threats.
America and Europe are seeking slight-
ly dierent answers to questions posed by
Germany’s growing strength. Americans,
says the diplomat, hope for an outward-
looking Germany that is less conicted
about its weight in the world. Europeans,
for their part, look to Germany for leader-
ship, but want it to be tempered by tradi-
tional German self-restraint. In the eyes of
its allies there are still two Germanys. It
may have to learn to be both. 7 Military midget meets might
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Also in this section
34 New York’s governor’s race
34 Ballot measures
35 Pennsylvania’s Senate battle
36 New Mexico’s immigration election
36 Biotechnology in North Carolina
38 Infrastructure spending
38 Free internet
40 Lexington: Angry white voters
I
F THE amount spent on an election cam-
paign is any measure of its signicance,
then the three most important races in the
mid-term elections are for governorships
those of California, Florida and Texas. Ac-
cording to the National Institute on Money
in State Politics, which tracks fund-raising
for state-level races, the candidates for go-
vernor in California alone have raised al-
most $170m, not counting spending by
third parties trying to inuence the out-
come. The tally for the most expensive con-
gressional race, in contrast, is a mere $32m,
for Florida’s open Senate seat.
The battle for Congress tends to domi-
nate mid-term election coverage, especial-
ly in years like this one, when control of
both chambers is in doubt. But on Novem-
ber 2nd American voters, in addition to
choosing a fresh batch of representatives
and senators, will award 37 governorships
and 6,118 seats in state legislatures, along
with many other state and local oces.
Those races are just as nely balanced
as the congressional ones: 23 legislative
chambers are within ve seats of changing
hands, while RealClearPolitics, a website,
currently projects that 19 governorships
will switch from one party to the other.
This upheaval, Republican and Democrat-
ic strategists agree, will continue to shape
national politics long after the two-year
term of the next Congress has ended.
The governors and state legislatures
elected next month will determine how
states overcome the gaping shortfall in rev-
enue most face in the coming years. In the
process they are likely to pioneer policies
that will later be adopted at the national
level. Many of the most successful reform-
ers, in turn, will move on to federal oces,
much as Barack Obama ascended from
state senator to senator to president. In
many states the new crop of legislators
will also have a more immediate impact
on national politics, rst by redrawing con-
gressional districts to account for shifts in
population over the past ten years, and
then by putting their successful electoral
machinery at the disposal of their party’s
presidential candidate in 2012.
In the states as at the national level, the
outlook for Democrats is grim this year.
The Republicans claim that they are poised
to seize control of at least six legislative
chambers from the Democrats, and possi-
bly as many as 17. They are also projected to
make a net gain of at least ve governor-
ships. In part, this will simply reverse the
Democrats’ success in recent elections,
winning governorships or state legisla-
tures in usually reliably Republican states
such as Wyoming and Indiana.
But it also reects a swing against the
Democrats in their heartland. In no fewer
than 11 states that plumped for Mr Obama
in 2008, Republicans hope to win over leg-
islative chambers. They see the big indus-
trial states bordering the Great Lakes as
particularly promising territory: they are
aiming for red sweeps in Indiana, Michi-
gan, Ohio, Pennsylvania and Wisconsin,
meaning control of both chambers of the
state legislature and the governorship. All
of those states were won by Mr Obama in
2008, and all of them are these days con-
sidered to be swing states in presidential
elections, so the results there will doubt-
less be watched with particular fascina-
tion in the White House.
It is not unremitting gloom for the
Democrats, however. Their candidates for
governor in California and Florida both
hold narrow leads in the polls, despite the
prodigality of their millionaire opponents.
Other potential pick-ups include Hawaii,
Minnesota and Connecticut. Some party
activists see a chance of winning a major-
ity in Texas’s House of Representatives, al-
though Republicans insist that prospect is
receding along with the hopes of the
Democrats’ candidate for governor, Bill
White.
Democrats would be particularly
cheered by victories in Florida and Texas,
as they would thereby earn a say in redis-
tricting in two big and fast-growing states
where congressional boundaries are cur-
rently drawn in Republicans’ favour. By the
same token, red sweeps in states that are
likely to lose seats, such as Ohio and Michi-
gan, would allow the Republicans to en-
sure that the burden falls squarely on
Democratic incumbents. REDMAP, a Re-
publican outt that targets state-level races
because of their signicance for redistrict-
ing, reckons that the party could create as
many as 25 additional safe Republican
seatsincluding ve in Ohio aloneif it
The mid-terms
States’ ghts
For daily analysis and debate on America, visit
Economist.com/unitedstates
United States
Washington, dc
Elections for governorships and state legislatures could aect America as much as
the more famous mid-term battle for Congress
1
The Economist October 23rd 2010 33
34 United States The Economist October 23rd 2010
2
1
wins control of the right legislatures and
governorships.
The main duty of the new legislatures
and governors, however, will be to balance
the states’ budgets. Until now, the federal
government’s scal stimulus has helped to
paper over states’ decits with one-o
handouts. But most of that will end next
year, leaving states with an even bigger
hole to ll than they have faced this year or
last: $134 billion according to the Centre on
Budget and Policy Priorities, a think-tank.
Since almost all states are prohibited by
law from running decits, the result will be
either drastic spending cuts or big tax in-
creases. On the whole, Republicans favour
spending cuts, whereas Democrats are
more inclined to preserve services, even if
it means higher taxes.
Inevitably, the federal government will
end up mimicking the policies of the states
that cope best with such diculties, one of
the great strengths of a system in which 50
states are able to experiment and compete
on policies. At any rate, that is what hap-
pened in the 1990s, when the feds adopted
reforms to welfare benets rst tested in
Wisconsin, and in the past decade, when it
followed California’s lead in overhauling
car-emissions standards. Moreover, many
of the most successful legislators and go-
vernors will move on to federal politics in
time. Five of the past six presidents, for ex-
ample, held state oce earlier in their ca-
reers; four of them (Jimmy Carter, Ronald
Reagan, Bill Clinton, George Bush junior)
had served as governor. By the same token,
many candidates for the House of Repre-
sentatives have previously served in state
houses; many governors and senators
have previously held other statewide of-
ces such as attorney-general, secretary of
state, lieutenant-governor and so forth. Lo-
cal politics may be in thrall to national
trends this year, but for much of the time,
the reverse is true. 7
New York
Strange meeting
A
BROTHEL madam, an ex-Black
Panther, a teamster and a self-styled
Papa Smurf all got together for a debate
on Long Island. It sounds like the begin-
ning of a bad joke, and in a way it was. At
election time in other states, weighty
matters like government spending and
health care get debated. New York’s
gubernatorial debate on October 18th,
where seven candidates, ve of them
little-known third-party candidates, was
more of an unwieldy farce than an infor-
mative political face-o.
Over the past month support for Carl
Paladino, the surprise Republican pick,
has collapsed. His attacks on his Demo-
cratic rival, Andrew Cuomo, have been
adjudged too vicious; he has also spewed
out anti-gay sentiments, claiming there is
a homosexual agenda, where children
are being brainwashed into thinking it
is alright to be gay or to be taken to a
disgusting gay pride parade.
Yet it turns out that the man who
abhors Speedo-clad men used to trouser
rent from gay night clubs. During the
debate he managed to keep his homo-
phobia mostly to himself. Indeed, bar
wandering o the stage to go to the loo,
the normally blustering Bualo busi-
nessman was unusually uneventful.
Kristin Davis is the Manhattan mad-
am, whose only previous political experi-
ence entailed (she claims) booking prosti-
tutes for Eliot Spitzer, the former
governor who was forced to step down
because of his indulgence in call girls.
She astutely observed that if business
taxes were raised, rms would ee New
York quicker than Carl Paladino at a gay
bar. In an odd moment of seriousness,
most of the candidates agreed something
had to be done about the abysmal Met-
ropolitan Transportation Authority. But
then Ms Davis pointed out that unlike the
transit agency, her escort agency deliv-
ered on-time and reliable service.
Mr Cuomo, the attorney-general,
clearly struggled at times not to laugh.
Even so, he was the easy winner. Com-
pared with his strange opponents, he
looked and sounded like a chief exec-
utive, and his big lead over Mr Paladino
continues to widen.
New york
The would-be governors’ debate provided guaws and little else
T
HE initiatives and referendums before
voters on November 2nd range from
the big to the minute, from the long-over-
due to the bizarre. Oklahoma’s vote on
whether courts should be banned from us-
ing sharia may well be the most puzzling,
given that American jurisprudence is hard-
ly at risk of Islamic inltration and there
are virtually no Muslims in Oklahoma.
Others, in their sheer range, bespeak
America’s diversity. Voters in South Da-
kota may ban all smoking of cigarettes in
restaurants and bars on the very same day
that Californians might completely legal-
ise the smoking of joints.
That latter measure, called Proposition
19, is certainly the most controversial of the
lot. But several others could have eects
just as far-reaching if they create bellweth-
ers or test grounds for future policy in oth-
er states or Congress. This is especially true
in three areas: energy and climate-change
policy; taxation; and the workings of de-
mocracy itself.
Since a federal cap-and-trade bill made
it through the House but died in the Senate,
energy and climate change have slipped
down the list of national priorities. In Cali-
fornia, however, they have not. In 2006 the
state forged ahead with a pioneering law
called AB32 under which Californians will
have to make their cars, factories, houses
and appliances gradually more ecient, so
that the state reduces its greenhouse-gas
emissions to 1990 levels by 2020. Biparti-
san majorities in the state legislature voted
for it, and the outgoing governor, Arnold
Schwarzenegger, considers the law one of
his main achievements. Proposition 23,
however, now intends to kill it. Technically,
it will merely suspend its implementa-
tion until the state unemployment level
falls below 5.5% for a full year. But that is at
best years away; California’s unemploy-
ment now tops 12%.
Proposition 23 has become bitterly con-
troversial in part because of its supporters.
The campaign has been funded by oil com-
panies from other states, specically two
reners from Texas and an energy con-
glomerate, Koch Industries, run by two bil-
lionaire brothers from Kansas who are also
funding the tea-party movement. Their ar-
gument is that AB32 imposes unacceptable
costs on rms such as theirs and might
therefore force them to cut jobs, which is
clearly anathema in this economy.
This has led to erce resistance, with the
No campaign, co-chaired by a Republican
Ballot measures
Up to the fourth
branch
Los Angeles
Besides electing politicians, voters will
decide 155 state policies directly
The Economist October 23rd 2010 United States 35
2 stalwart of credibility, George Shultz. Ron-
ald Reagan’s secretary of state has won the
money war with donations from individ-
uals and Silicon Valley. Everybody from its
sponsors to its opponents regards Proposi-
tion 23 as a weather vane for subsequent
energy politics elsewhere. Polls suggest
that voters will reject it.
As states and cities struggle with budget
gaps and lower revenues, taxes are an even
bigger issue than usual. Some states, such
as Colorado and Indiana, have ballot mea-
sures that would cut or cap certain taxes.
Others, like Oregon and Arizona, voted
earlier this year to raise specic taxes.
But voters in the state of Washington
will make by far the most historic tax deci-
sion. Washington is one of seven states
that have no personal income tax at all. In-
stead, it relies mostly on a sales tax. Past at-
tempts to introduce a state income tax
have failed, with one famous case in the
1930s even suggesting that such an income
tax would violate the state constitution.
The latest attempt is a measure called
I-1098. It would introduce an income tax
for the richest 1.2% of tax lers, with brack-
ets that start at earnings of $200,000 for in-
dividuals or $400,000 for couples.
The issue has split Washington’s elite.
I-1098’s main sponsor is Bill Gates senior,
father of America’s richest man, who also
supports I-1098. But his friends at Micro-
soft are ghting for the other side, as are the
bosses at other iconic rms in Seattle, such
as Amazon and Nordstrom.
The main argument for a state income
tax on the rich is that it could save the
state’s schools. Opponents counter that,
once the tax exists, it will be easily extend-
ed to ensnare ever more taxpayers. Sup-
port for the measure has been shrinking to
what is now a tight race.
Votes to change votes
Three other measures in California,
though cloaked in the bewildering com-
plexity that the state seems to specialise in,
go to the heart of eective democracy and
may have wider implications. Two of
them concern gerrymandering, the repre-
hensible practice by politicians of drawing
nonsensical district boundaries to include
supporters and exclude opponents.
In 2008 Californians voted to establish
an independent commission for mapping
the districts of state legislators, a job those
politicians had been doing themselves.
This year Proposition 20 would extend
that commission’s work to congressional
districts. California’s Democratic Party is
the main opponent, although its main ar-
gumentthat legislators should continue
to draw the boundaries because they are
more accountableis hard to deliver
with a straight face.
This being California, another initiative
on the same ballot, Proposition 27, would
in essence do the exact opposite, by abol-
ishing the independent commission and
returning all redistricting power to the
state legislature. If the electorate is con-
fused enough to pass both measures (such
things have happened), the one with the
greater number of Yes votes takes eect.
Also on that California ballot is Propo-
sition 25, which might have an immediate
and dramatic eect in curing the state’s no-
torious political dysfunction. California is
one of three states (with Arkansas and
Rhode Island) that require supermajorities
in both houses of the legislature to pass a
budget, and it is the only state that simulta-
neously has the same requirement for rais-
ing taxes (which a dozen other states also
have). The combination virtually guaran-
tees gridlock; this year’s budget was 100
days late.
Proposition 25 would reduce the re-
quirement for budgets to a simple major-
ity, but keep the supermajority rule for tax
hikes. In eect, it would empower the rul-
ing Democrats to set spending priorities
(but with the same revenue pot), and there-
by also hold them responsible for those de-
cisions. If those politicians have to answer
to un-gerrymandered districts, this is the
way it should be. 7
O
NLY a few days ago, Joe Sestak, a con-
gressman and former three-star admi-
ral who is vying to become Pennsylvania’s
next senator, looked fated to be a coura-
geous loser. He is the mutineer who
brushed aside a job oer from the White
House and deed the Democratic estab-
lishment to wrest the nomination from Ar-
len Specter, the Republican who had de-
fected to the Democrats in 2009. But in the
ght against Pat Toomey, his Republican ri-
val, Mr Sestak has been trailing badly. As
little as a week ago, the polls, on average,
put the Democrat 7% behind.
By October 20th, however, the morning
before the rst televised debate between
the candidates, two new polls suddenly
put Mr Sestak narrowly ahead for the rst
time. This has been seized on in the Demo-
cratic campaign as evidence that a shrewd
decision to husband resources during the
summer and make a late advertising
splurge at the end is bearing fruit. The de-
bate itself was an ill-tempered aair, with
the two men branding each other as ex-
tremists and clashing on everything from
guns to abortion to government bail-outs.
Before this week’s poll news, the dier-
ent mood inside the two campaigns was as
palpable as the gap in the numbers. In a
converted doctors’ oce, next door to Ice
Cream World, in a drab shopping strip out-
side Allentown, Mark Harris, Mr Toomey’s
campaign manager, exuded condence.
Down the road, a Democratic campaigner,
declining to be named, found it hard to
hide his despondency. After the draining
primary, he said, the Sestak campaign had
been Spartan and unorthodox.
The political geography of Pennsylva-
nia is complicated. James Carville, Bill
Clinton’s election guru, once quipped that
it was Democratic in the east (Philadel-
phia) and the west (Pittsburgh) with Ala-
bama in between. But that was an over-
simplication, and times have changed.
Although Philly is still a Democratic
stronghold, the suburbs of the city are a
battleground. In Pittsburgh, too, the Repub-
licans claim to be making inroads in dis-
tricts where unions once turned out reli-
able Democratic voters but where many
union jobs have now vanished.
From the start, says Mr Harris, Mr Too-
mey has focused on jobs and the decit. He
claims the Republicans’ voting pool has
been swollen by independent voters and
ex-Democrats who are outraged by what
is going on in Washington. The Demo-
crats have responded by talking up their
own man’s naval backgroundhe com-
manded a battle group in the Middle East
and painting Mr Toomey, an unapologetic
economic conservative and former presi-
dent of the pro-business Club for Growth,
as a creature of Wall Street. The Republican
did work there, but it was in the 1980s, be-
fore he set up a restaurant business and
served three terms in Congress.
If Mr Sestak does hold the Keystone
State for the Democrats, the former admi-
ral could sink what little chance the Repub-
licans had of winning the Senate as well as
the House. What sweet vindication that
would be for the Democrat whose own
party tried so hard to stop him running. 7
Pat Toomey v Joe Sestak
Suspennsylvania
ALLENTOWN
A gripping conclusion to what looked
like a boring race
Sestak: still a contender
36 United States The Economist October 23rd 2010
A
N ANNUAL conference that brings to-
gether leaders from the states on both
sides of the United States-Mexico border
took place last month, but not quite as
planned. The meeting was supposed to be
held in Arizona but governors on the Mex-
ican side took umbrage at that state’s re-
cent and controversial law that cracks
down on illegal immigrants. So New Mexi-
co hosted the event instead.
The conference was watched closely in
New Mexico’s 2nd congressional district,
which stretches from the suburbs of Albu-
querque to the Mexican border. In Las
Cruces, the 2nd district’s biggest town, the
press was still absorbing the details of the
latest grisly murders in Juárez, just 45 miles
away over the border.
Although the drugs violence is virtually
all on the Mexican side, border issues are a
big concern for New Mexico’s voters at the
mid-terms. A poll in the Albuquerque Jour-
nal in September found strong opposition
in the state to a law giving drivers’ licences
to illegal immigrants. Nor is the worry lim-
ited to Anglos. Around half of New Mexi-
co’s population (and of the 2nd district’s) is
Hispanic; 67% of them object to the law
(though they also object to Arizona’s crack-
down by 48%-39%).
Steve Pearce is the Republican candi-
date in the 2nd. He recognises the emo-
tional resonance of the border issue,
though he stresses that job security is cur-
rently of far more importance to the elec-
torate. Mr Pearce held the seat between
2002 and 2008 (he ran for senator that
year, losing to Mark Udall). He would put
more resources into securing the border,
which he says aects all the district’s com-
munities, and opposes any sort of worker
amnesty, though he does not support a
policy of rounding up illegal immigrants,
whom he thinks should be treated hu-
manely. Harry Teague, who won the seat
for the Democrats in 2008, backs the pro-
posed DREAMbill in Congress that would
allow illegal immigrants who come to
America as youngsters and are of good
moral character to become residents.
Another issue in the district is energy
and the stalled cap-and-trade bill, which
Mr Teague supported but only after protec-
tions were added for small oil reneries.
The oil and gas industry dominates the
south-east corner of the district. The drive
from Hobbs to Artesia passes along miles
of nodding pumpjacks; oil trucks clog the
road, and the air is heavy with the industri-
al odour of the reneries. Mr Pearce is a tar-
get for green groups, who accuse him of fa-
vouring big oil. He has studied the
arguments for alternative energy and
thinks environmentalists are ignoring the
pragmatic aspects of the policies they push
for. He does foresee some role for wind
and solar power; but voters will not stand
for higher utility bills and uncertain sup-
ply. Mr Pearce is not too bothered by the at-
tacks on him by greens, pointing out that if
they were that eective he wouldn’t have
been elected to three terms previously.
The race is tight. A recent poll for the
Hill, a newspaper about Congress, put Mr
Pearce at 46% and Mr Teague at 42%. As this
is one of many contests where the Repub-
lican is ahead but polling under 50%, the
paper wondered whether the electoral tsu-
nami often mentioned as likely to sweep
the Democrats from power in the House
might turn out to be only a ripple. 7
New Mexico’s 2nd congressional district
An immigration
election too
HOBBS AND LAS CRUCES
The economy dominates the campaign,
but people also worry about the border
F
OR much of the early 20th century,
Winston-Salem was the biggest city in
North Carolina. Its fortunes, like those of
most of North Carolina, centred on tobac-
co and textiles: in 1940 60% of the city’s
populace worked for one of the Hanes tex-
tile companies or for R.J. Reynolds (RJR), a
tobacco company that was the city’s larg-
est employer. But that was long before
Hanes began moving much of its produc-
tion oshore, and before the Tobacco Mas-
ter Settlement Agreement (under which
the tobacco companies agreed in 1998 to
pay hundreds of billions of dollars in dam-
ages for harming people’s health), the le-
veraged buy-out of RJR by a private-equity
rm, the elimination of federal farm price
support for tobacco and decades of anti-
smoking advertising.
Today tobacco warehouses and fac-
tories still dominate Winston-Salem’s cen-
tre. The Bailey Power Plant’s twin redbrick
chimneys emblazoned with RJR TOB CO
loom over the interstate. But the plant no
longer belongs to rjr, and it is no longer in-
volved in producing tobacco: it was turned
over to the Piedmont Triad Research Park
last April, along with 38 acres (15 hectares)
of property and a cash donation of $2m. In
all, 14 buildings in the science park, repre-
senting around 1.3m square feet (121,000
square metres) of space, once belonged to
rjr.
Tobacco’s legacy to Winston-Salem is
far from being merely architectural. Be-
cause it has been such an important cash
crop for so long, it is among the most stud-
ied plants in the worldRichard Reich, the
assistant commissioner for agricultural
services in North Carolina’s Department
of Agriculture and Consumer Services,
calls it the laboratory white rat of the
plant world. Much of that study, of course,
was done by tobacco companies, and Tar-
gacept, one of the bioscience companies in
the Piedmont Triad Research Park, is
among the fruits of that labour. Spun out
from rjrin 2000, and headed by J. Donald
deBethizy, a former vice-president of R&D
at rjr, Targacept is developing a range of
drugs that target the body’s nicotinic recep-
tors to treat a range of nervous-system dis-
orders, including depression, schizophre-
nia and Alzheimer’s.
East of Winston-Salem at a research
park in Durham, a Canadian company that
genetically manipulates tobacco plants to
produce proteins used in making u vac-
cines broke ground on its rst American fa-
cility on October 1st. Medicago hopes to
have its vaccines on the market by late
2013; the company believes this method of
making vaccines will be cheaper, faster
and more eective than the egg-based
method currently in use.
In 2009 North Carolina farmers raised
177,400 acres of tobacco with a production
value of just over $745m, making it the
leading tobacco producer among Ameri-
can states; but the crop is nowhere near as
widely cultivated or as valuable as it once
was, though agriculture remains impor-
tant, providing 18% of the state’s income.
The hope is that biotech will help ll the
hole. The North Carolina Biotechnology
Centre, a government-sponsored body
working to grow the state’s biotech indus-
try, has a plan to increase the state’s agricul-
ture sector by $30 billion over the next de-
cade. Meanwhile Kentucky Bioprocessing,
a biotech company based in another to-
bacco-producing state, is pursuing re-
search similar to Medicago’s. The future of
tobacco may not all go up in smoke. 7
Biotechnology in North Carolina
After tobacco
WINSTON-SALEM
North Carolina builds on the legacy of
the golden leaf
1. Based on published benchmark results. Results as of 9/13/10. Sources: IBM press release http://www-03.ibm.com/press/us/en/pressrelease/29315.wss and eMeter press release http://www.emeter.com/2009/emeter-demonstrates-
industry%E2%80%99s-most-scalable-smart-grid-management-capability/. IBM, the IBM logo, ibm.com, Power Systems, Smarter Planet and the planet icon are trademarks of International Business Machines Corp., registered in many jurisdictions
worldwide. Other product and service names might be trademarks of IBM or other companies. A current list of IBM trademarks is available on the Web at www.ibm.com/legal/copytrade.shtml. © International Business Machines Corporation 2010.
readings for an average home for one year.
A visualization of the data from eMeter’s
They mean this meter will be read 24 times per day, instead of once per month. Giving consumers more visibility
into their energy consumption and utility companies a deeper understanding of how energy is being used. eMeter
worked with IBM and is using Power Systems

and IBM application and service management software to enable
utilities to manage data from over 20 million smart meters making readings every hour—or more than four times the
scale of other utilities industry benchmarks
1
. A smarter business is built on smarter software, systems and services.
Let’s build a smarter planet. ibm.com/meter
Smarter business for a Smarter Planet:
What 27,383 computations per second
mean to this energy meter.
38 United States The Economist October 23rd 2010
D
EMOCRATS, Republicans chant, are ir-
responsible big spenders. But in the
run-up to the mid-terms, the Democrats
ought to have had one example of spend-
ing at its best: investment in infrastructure.
When they passed the $787 billion stimu-
lus bill in February 2009, they promised an
historic investment in roads, bridges and
rail. It would put Americans to work quick-
ly and raise productivity in the long term, a
Keynesian kick with benets for years to
come. But this ambitious plan has had
middling results. Infrastructure is still in
need of investment; unemployment in the
construction sector was 17.2% in Septem-
ber. Barack Obama is touting a new $50 bil-
lion infrastructure proposal, but as the
mid-terms loom, it is probably too late.
The stimulus bill’s spending on infra-
structure may have been doomed to medi-
ocrity from the start. First, and most impor-
tant, a relatively small share of the bill was
actually devoted to infrastructure. Mr
Obama called the bill the largest new in-
vestment in our nation’s infrastructure
since Eisenhower built an interstate high-
way system in the 1950s. But even on the
broadest denition of the term, infrastruc-
ture got $150 billion, under a fth of the to-
tal. Just $64 billion, or 8% of the total, went
to roads, public transport, rail, bridges, avi-
ation and wastewater systems.
Second, hopes for an immediate jolt of
activity were misplaced. The bill priori-
tised shovel-ready plans. States did have
a backlog of maintenance projects, such as
repaving dilapidated roads. Nevertheless,
work moved more slowly than some
Democrats expected. By October 2009
even the fastest programmesthose under
the highway and transit headingshad
seen work begin on just $14.3 billion-worth
of projects. Spending has since quickened.
Of the money appropriated to transport,
83% has now been allocated. But it is un-
clear that the money spent has been mon-
ey spent well. The attempt to begin work
hastily meant that both good and bad pro-
jects have moved forward.
Meanwhile the bill’s most notable pro-
ject, high-speed passenger rail, threatens to
become a debacle. It is fun to imagine
trains whizzing across the heartland. But
there is no urgent need for them. Freight
companies worry that new passenger ser-
vices will simply increase congestion. Any
new rail service, meanwhile, is unlikely to
be particularly fast. The Recovery Act dedi-
cated $8 billion for high-speed trains, a
sizeable sum but not enough for any train
that is actually high-speed. Instead of be-
ing a selling point for Democrats, rail has
become an easy target for Republicans. In
Ohio, the Republican nominee for gover-
nor declares: when I’m governor, the 39-
mile-an-hour high-speed passenger train is
dead. Wisconsin’s Republican nominee
even started a website, Notrain.com.
Mr Obama’s new $50 billion infrastruc-
ture plan has promising elements, such as
a proposal for a national infrastructure
bank. But his push may be for naught:
Americans have become allergic to spend-
ing. Politicians are unlikely to rise the gas
(petrol) tax to pay for it. Janet Kavinoky,
transport director for the Chamber of
Commerce, is one of many advocates who
want a long-term transport bill. The trou-
ble is, she reckons, that most people think
the stimulus bill took care of all that. 7
Infrastructure spending
False expectations
chicago
The historic infrastructure investment
that wasn’t
Or not
Free internet
The librarian’s tale
U
SUALLY by ten in the morning at the
Erna Fergusson public library in
Albuquerque a dozen people are waiting
in line to use the computers. Shortly after
the doors opened on a weekday this
summer there was someone typing at
every screen. Two young girls dressed an
online doll together; next to them a man
in a Dallas Cowboys cap applied for a job
at a hardware chain. He’s living with his
parents for a while, he explained, and he
doesn’t like to wait to use the internet.
Almost all of America’s public librar-
ies provide free internet access. Over the
past two years, hard-hit Americans have
been economising by cancelling their
broadband contracts at home and look-
ing to public libraries to ll the gap. At the
same time, companies and government
agencies are saving money by moving
job applications and services online; so a
rush of new visitors is arriving at librar-
ies just as the local governments that
fund them run out of money.
This year three-quarters of America’s
public libraries have told the American
Library Association that public use of the
internet increased at their branches, and
roughly the same number said that they
didn’t have enough computers to meet
demand. A majority of American states
have cut funding to their libraries during
the year.
The weak economy is forcing libraries
to redene their role. Close to 70% of
America’s public libraries now say their
sta help patrons complete job applica-
tions online, and the same number oer
help with résumés. Workforce Sol-
utionsas the state of New Mexico calls
the dolerequires a weekly check-in. For
many people, long queues or long jour-
neys means it is only practical to do this
online. Lynne Fothergill, a head librarian
at Erna Fergusson, says she noticed an
increasing number of online check-ins in
early 2009; they are now a primary
function of the library’s two 15-minute
computer terminals.
Nationally, the number of libraries
reporting that they help patrons with
e-government services has risen by
almost half. As with private employers,
when state and local governments save
money by moving services online, they
actually shift some of those costs to the
point of access: for many of those most
likely to need jobs and benets, this is the
local library.
Perversely, computers are often more
expensive for public libraries than for
individuals, and harder to buy. In Albu-
querque, any city purchase over $500
requires approval by a technical review
committee. A single library desktop, with
all of the ocially necessary licences and
security and session-management pro-
grammes, costs the city a whopping
$1,800.
The best way for America to ease the
new strain on its libraries is by closing the
digital divide; companies and state agen-
cies are unlikely ever to give up the e-
ciencies they won by moving online.
Around $7 billion of 2009’s stimulus
went to expand broadband access. But
encouraging competition among Ameri-
ca’s expensive broadband providers, and
hence lower prices for consumers, might
do this more cheaply than subsidies.
Albuquerque
Too much demand for too few terminals
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.
O
NE of Barack Obama’s political problems, a popular quip
has it, is that the remote, dispassionate and professorial pres-
ident is just not very good with the humans. To that it might be
added that he does not go down at all well with one sort of hu-
man in particular: the white working-class American.
Across the country, Democratic candidates know that victory
in the imminent mid-term elections requires them not only to un-
hitch themselves from Mr Obama’s waning star but also to attack
whole chunks of the president’s agenda. This may not be the ob-
vious way for a political party to present itself for re-election, but
at the level of individual races it makes sense. In 2008 many
Democrats oated into Congress in Mr Obama’s slipstream. To-
day he has become an albatross around their necks. His own job-
approval rating has slumped below 50%. But it is lower than that
among whites and lower still among working-class whites.
If the white working class has a capital, says Henry Olsen of
the American Enterprise Institute, it is West Virginia, where more
than nine out of ten people are white and six out of ten have nev-
er gone to college. For more than half a century, the Mountain
State sent the late Robert Byrd, a Democrat, to represent it in the
Senate. Now the state’s popular governor, Joe Manchin, also a
Democrat, is hoping to take his place. But this year everything is
dierent. Despite Mr Manchin’s relentless eorts to distance him-
self from that fellow in the White House, the race is a toss-up.
No other state is quite like this: in the electorate as a whole, the
white working class adds up to perhaps 40% of the voters. But at a
time when most working-class white voters are furious at the
Democrats, the states where these voters are concentrated have
become a happy hunting ground for Republicans. Mr Olsen
thinks it no coincidence that a disproportionate number of the
Democrats’ most vulnerable House seats in the South, the north-
east and the Midwest are in districts dominated by blue-collar
whites. Democrats are struggling in the bellwether state of Ohio,
and may lose the tight Senate races not only in West Virginia but
also in Pennsylvania and Wisconsin. The revolt of this class, he
thinks, could be the dening characteristic of the election, count-
ing more even than the rise of the (also mostly white, but mostly
more auent) tea-party movement.
White working-class voters are the quicksilver of American
politics: they are hard to catch and hard to hold. The shifting loy-
alties of these Reagan Democrats (so called because the Gipper
detached them from the Democrats in the 1980s, until the wiles of
Bill Clinton wrested some of them back a decade later) have
helped to swing American elections for decades. Their votes will
matter less in the future, as their educational attainment rises and
their share of the electorate continues to fall. Minority voters,
who cast a mere 14% of voters in 1994, cast more than a quarter of
them in 2008, and this share will grow. So plenty of Democratic
forecasters from the demography-is-destiny school argue that in
the long run the Republicans are doomed unless they can win
over more blacks and Hispanics.
Between now and the long run, however, come the mid-
terms. And the prospect of a Democratic rout prompts an inevita-
ble question. Have such voters turned on the Democrats because
Mr Obama is black? His election was hailed as proof that Ameri-
ca had moved beyond race. And yet voting in the mid-terms will
be polarised by race. Most whites will pull the Republican lever.
Almost all blacks and most Hispanics will vote Democrat.
Race was a factor in 2008, and still is. Why else would blacks
alone have stuck so staunchly by their man? As for working-class
whites, they did not much care for Mr Obama even in 2008, pre-
ferring John McCain by a margin of 18%. But as Mr Obama cam-
paigned, his colour seemed to count for less.
For 20 years Stan Greenberg, a Democratic pollster, studied
the blue-collar white voters of Macomb County near Detroit. In
1984 they voted by two to one for Ronald Reagan because, Mr
Greenberg found, when such voters heard Democrats talk about
economic fairness, they saw this as code for transferring mon-
ey to blacks. Nonetheless, in 2008 Mr Obama won Macomb
County with a margin of eight points. Over the course of his cam-
paign, the proportion of Macomb voters who said they were
comfortable with the idea of Mr Obama as president rose from
40% to 60%. Having watched Mr Obama closely, Mr Greenberg
concluded, they became condent he would work for all Ameri-
cans and be the steady leader the times required.
Colour me ckle
If such voters have now changed their minds, the reason is not
that Mr Obama is blackhe was black in 2008. And for all its mo-
mentous symbolism, his election is not the most recent evidence
that America has turned the page on race. In June, in South Caro-
lina of all states, Tim Scott, a black Republican, defeated the son
of the segregationist Strom Thurmond in a primary, and is on his
way to a seat in the House. Compare that to 1983, when a disgrace-
ful number of Democrats in Chicago voted for the Republican
rather than send the black Harold Washington to city hall.
All of that has gone. The electorate may be divided by race, but
no longer mainly because of race. Some of Mr Obama’s enemies
have tried to harness pockets of bigotry by painting him in va-
rious ways as un-American. But outright racism in politics is now
beyond the pale and will probably have little to do with the com-
ing rejection of the Democrats by the white working class. A
wrecked economy and the feeling that their president is out of
touch are reason enough. It has, after all, happened before. In two
short years from 1992 to 1994, when Bill Clinton was president,
white working-class support for the Republicans soared like a
rocket from 47% to 61%. Nobody blamed that on skin colour. 7
Trouble with the humans
Working-class whites are angry with the Democrats for lots of reasons. Race is not one of them
Lexington
40 United States The Economist October 23rd 2010
Economist.com/blogs/lexington
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Also in this section
44 Chile’s copper industry
44 Media freedom in Latin America
45 Obesity in Mexico
A
FTER months in which even his fellow
party members had given him up for
lost, José Serra, the runner-up in the rst
round of Brazil’s presidential election, now
looks as if he has a slim chance. On Octo-
ber 3rd the candidate of the centrist oppo-
sition Party of Brazilian Social Democracy
(PSDB) got 33% of the vote, well behind the
47% won by Dilma Rousse of the left-
wing ruling Workers’ Party (PT). The pair
will face each other in a run-o on October
31st. Although recent polls dier widely,
some say that Ms Rousse’s lead has
shrunk to only ve or six points.
That gap barely exceeds the polls’ mar-
gin of error. And since Ms Rousse fell
short of forecasts that she would win an
outright majority in the rst round, Serra
optimists are wondering if the pollsters are
overestimating her support once again. A
race whose outcome had seemed certain
since June, when Ms Rousse passed Mr
Serra in the polls, now looks exciting.
In the two candidates’ debates since
October 3rd, an energised Mr Serra has
landed some telling blows. A few weeks
ago Ms Rousse stumbled when some reli-
gious leaders criticised her former support
for liberalising Brazil’s strict abortion laws.
Wary of alienating a conservative elector-
ate, she backtracked, rst saying that she
personally opposed the procedure and
then pledging that as president she would
Mr Anastasia, 3m more than Mr Serra got
therea big pool of potential swing voters.
The PSDB also hopes to woo the 20m
Brazilians who voted for a third candidate,
Marina Silva of the Green Party. On Octo-
ber 17th she and her party said they would
make no endorsement in the run-o, de-
spite oers from both sides of policies and
posts in return. Recent polls suggest that,
with the Greens staying neutral, Mr Serra
will win a majority of Ms Silva’s votes.
Attempts to predict the result are com-
plicated by worries about the reliability of
polls. It is hard to construct a representative
sample in a country as large, diverse and
unequal as Brazil. Pollsters may also have
failed to predict a run-o because they did
not ask whether respondents intended to
vote. In theory, that question is irrelevant
in Brazil, since voting is compulsory. In
practice, however, around a fth of the
electorate stays away.
And abortion, until recently an elector-
al problem only for Ms Rousse, is now a
wild card. On October 16th some newspa-
pers picked up claims by former students
of Mr Serra’s wife that she had mentioned
having had an abortion herself. This gos-
sip-mongering was swiftly denied by Mr
Serra’s team. But it led him to steer clear of
the subject in the following day’s debate.
How it plays on internet forums and in
evangelical sermons is anyone’s guess.
All this uncertainty has engendered
two competing political narratives. In one,
the polls are overstating Ms Rousse’s
lead. She has gained all she can from Lula’s
support, and it was not enough. Exposed
as an un-Christian ip-opper and shorn
of the momentum that came from seem-
ing inevitability, she will see her voters
melt away. Meanwhile the PSDB’s gran-
dees will swing big states to Mr Serra,
not move to ease access to abortion. That
allowed Mr Serra to describe her as inco-
herent and two-faced. Her alleged lack of
ballast also features in his campaign ads,
which show the candidates as Russian
dolls. His opens to a recital of his record as
congressman, senator, health minister, and
mayor and then governor of São Paulo, re-
vealing doll after doll. Hers is empty.
Ms Rousse’s main riposte is borrowed
from Luiz Inácio Lula da Silva, her mentor
and the current president. In 2006 he beat
the PSDB’s Geraldo Alckmin, in part by
portraying him as pro-privatisation (which
is almost as unpopular in Brazil as being
pro-choice). Mr Alckmin had trouble re-
sponding to the charge. But Mr Serra coun-
tered by accusing Ms Rousse of election-
eering and robotically obeying her
strategists. This time, it was Ms Rousse
who was left without a comeback.
The scent of victory, however faint, has
red up Mr Serra’s allies. Few PSDB candi-
dates mentioned him in their campaigns
for Congress or governorships, on the ba-
sis that reminding voters of links with the
weaker presidential contender would be
damaging. But both São Paulo and Minas
Gerais, Brazil’s two most populous states,
elected PSDB governors this year. The win-
ners, Mr Alckmin and Antônio Anastasia,
are trying to deliver their voters to Mr Ser-
ra. In Minas Gerais 6.3m people voted for
The Americas
Brazil’s presidential election
Better late than never?
São PAULO
In the race to beat Dilma Rousse, José Serra has hit his stride at last. But his nal
sprint may have come too late
1
The Economist October 23rd 2010 43
For daily analysis and debate on the Americas, visit
Economist.com/americas
44 The Americas The Economist October 23rd 2010
2
1
where they will be joined by most of Ms
Silva’s voters.
The other view is that Ms Rousse has
wobbled only because Lula stepped back
to let her take the limelight. Now that he
has corrected his mistake and returned to
her side, her support will tick up again.
And the polls, far from being wrong before
the vote, were a better guide to public opin-
ion than was the result itself. Because of
the plethora of candidates and posts,
many confused voters may have spoilt or
mis-cast their ballots. That will not happen
in the run-o, with just two presidential
candidates and fewer other races.
Even if Mr Serra is at last making a per-
suasive case, overturning a 14-point lead in
just four weeks would be like performing a
handbrake turn in a ten-tonne truck.
Which version is closer to reality will be
known only once the votes are counted. 7
D
URING last year’s election campaign,
Sebastián Piñera, who became Chile’s
president in March, often criticised Co-
delco, the country’s state-owned copper
company, for its ineciency, griping over
its stagnant output and climbing costs. Yet
it was engineers from Codelco who stood
beside him this month as the 33 miners
trapped since August 5th in the privately
owned San José copper and gold mine in
northern Chile were hoisted to safety.
Other big mining companies helped
with advice and equipment. But Mr Piñera
looked to Codelco, which runs the world’s
biggest underground copper mine in El Te-
niente, to lead the rescue operation.
Perched 2,500 metres up in the Andes
south of Santiago, El Teniente is a far cry
from the dark, crumbling warren of the
San José mine. Its 2,400km (1,500 miles) of
galleries, with their computer-equipped
oces and canteens wafting the smell of
food into the surprisingly fresh air, are me-
ticulously organised and home to some of
the world’s most advanced underground
mining technology.
Codelco’s foundations were laid in 1971,
when Salvador Allende, a socialist presi-
dent, nationalised Chile’s American-
owned mines. Although General Augusto
Pinochet toppled Allende in a coup two
years later and then instituted free-market
reforms, the dictator did not reprivatise the
mines. Instead he merged them into a sin-
gle state-owned enterprise, and required it
to hand over 10% of its export revenues to
the armed forces. Today, Codelco still
mines over a tenth of the world’s copper,
but it has seen its share of Chile’s output
dwindle from 75% in 1990 to 32% last year.
For the past decade, its production has
been stuck at around 1.6m tonnes (al-
though it reached 1.8m tonnes last year),
while more expensive inputs and over-
stang have pushed up costs. Its stagna-
tion is largely the fault of past governments
that, eager for tax revenues, short-changed
the company’s investment budget. It has
not stood stilla new mine, Gabriela Mis-
tral, opened in 2008but nor has it spent
enough to maintain production at its age-
ing mines beyond 2013. El Teniente ur-
gently needs to expand to a deeper level.
Chuquicamata, an open-pit mine in the
north, must go underground to stay viable.
We need to create a new Codelco, Mr
Piñera told The Economist. It needs funds,
new organisation and new management.
He favours its partial listing on the stock-
market, but has accepted that changing the
constitution to allow this is politically im-
possible. Instead, his government will seek
to push through other changes.
Reform of Codelco’s governance began
last year (as a condition of Chile joining
the OECD, a club of mainly rich countries).
Its board now has more independence
from the government; the directors recruit-
ed Diego Hernández, a former manager at
BHP Billiton, the world’s biggest mining
company, as the new chief executive. His
priority is to implement a proposed ve-
year $15 billion investment plan, including
a new mine and the expansion of El Te-
niente and Chuquicamata. This should
raise output to 2.1m tonnes by 2018.
Some of this capital can be borrowed.
Most analysts think that Codelco can safe-
ly double its $4.7 billion debt burden. Mr
Piñera says that Codelco can enter joint
ventures with private companies to devel-
op some of its copper reserves, which are a
third of the country’s total. The rm also
has non-mining assets (such as a stake in
an electricity rm) that could be sold. The
government plans to let Codelco retain
more of its prots (including the money it
hands over to the military). Earlier this year
Mr Piñera rebued Codelco’s request to
keep 30% of its 2009 prots of $4.1 billion,
on the grounds that the money was need-
ed for reconstruction after the earthquake
in February. But it is likely to get its way
over its 2010 prots, provided it accepts fur-
ther reforms to boost eciency.
With the price of copper back near re-
cord highs after crashing in 2008, the priv-
ate sector is poised to boost investment,
too. According to the Capital Goods Cor-
poration, a business group in Santiago,
private mining rms could invest as much
as $21 billion in Chile over the next ve
years, mainly in copper and gold projects.
On October 13th, just as the miners
were being winched up to the surface at
San José, Chile’s Congress approved a gov-
ernment proposal to raise royalties paid by
mining companies, from 4-5% today to as
high as 14%, to help pay for post-earth-
quake reconstruction. The new rates will
be phased in, and in return the govern-
ment will extend the life of tax-stability
agreements with the companies. The min-
ing lobby has grumbled. But the rms are
unlikely to stop investing. Although the
San José mine has now closed, the future
of big mining in Chile looks bright. 7
Chile’s copper industry
Reviving Codelco
el teniente
After rescuing the miners, the state
copper giant has other work to do
Copper-bottomed
Source: Cochilco
*Including Codelco’s 49%
share in El Abra mine
Chile’s copper production, tonnes, m
0
1
2
3
4
1990 95 2000 05 09
Codelco*
Private sector
R
EPORTERS are notorious for shrugging
o danger to get a good story. So when
El Diario, a newspaper in the Mexican bor-
der city of Ciudad Juárez, ran a front-page
editorial last month asking for guidelines
from drug gangs as to what it should cen-
sor, journalists around the world were
shocked. Calling the city’s mobs the de
facto authorities in this city, the article
pleaded: Gentlemenplease explain to
uswhat you would like us to publish or
stop publishingbecause the last thing
we want is for another one of our col-
leagues to fall victim to your gunshots.
Three days earlier, a trainee photographer
at the paper had been murdered.
With democracy having replaced dicta-
torship everywhere bar Cuba in Latin
America, the region’s media face few of
the menaces of the past, such as censor-
ship or the army kidnapping, torturing and
murdering journalists. But in several coun-
tries the media are nding that freedom
from state repression does not mean they
can publish what they please. Coming
out of dictatorships and the cold war, we
expected more respect for civil and human
rights, says Alejandro Aguirre of the Inter-
Media freedom in Latin America
Shooting the
messenger
Threats from criminals and
governments
The Economist October 23rd 2010 The Americas 45
2 American Press Association, an industry
body. But things have got worse. There’s a
new wave of restrictions on the media.
The biggest threat now comes from or-
ganised crime, whose attacks against jour-
nalists often have the aim of inducing self-
censorship. Mexico has become especially
dangerous. According to the Committee to
Protect Journalists (cpj), a New York-based
organisation, at least 37 media workers
have been killed or gone missing in Mexico
since 2006. Most of the crimes have taken
place along key drug-tracking routes.
Mexico’s maas have become surpris-
ingly media-conscious. In February two
gangs, the Gulf cartel and the Zetas, im-
posed a joint news blackout as they
fought each other to control Reynosa, on
the Texas border. Eight reporters who dis-
obeyed were kidnapped (at least three are
conrmed dead). Because the media re-
fused to cover the battle, the mayor’s oce
issued updates on Twitter, a micro-blog-
ging service. Other gangs have tried to use
journalists to their advantage. In July some
reporters from Televisa, Mexico’s biggest
television network, were kidnapped. They
were freed after another channel agreed to
broadcast a video accusing the govern-
ment of aiding a rival gang.
In Colombia the press suered similar
perils in the past, especially in remote
towns. According to the cpj, 51 journalists
were killed in Colombia from 1997 to 2003.
This fell to just 11between 2004 and 2010.
Whereas Colombia has got safer, Cen-
tral America has become more dangerous.
In Honduras eight journalists have been
killed this year. Some of the victims op-
posed a coup in 2009a new government
was elected in Novemberor backed peas-
ant land-reform movements. Others were
reporting on drug trackers. At least one
was accused by colleagues of trying to ex-
tort money by threatening negative cover-
age. None of the cases has been solved.
The second big threat to the media
comes from governments. With the nota-
ble exception of the post-coup regime in
Honduras last year, the principal oenders
have been populist, left-wing elected lead-
ers. When media outlets oppose such rul-
ers they often face harassment.
Hugo Chávez has closed a Venezuelan
television network, 32 radio stations and
two local television channels by refusing
to renew their licences. Gustavo Azócar, a
journalist who criticised one of Mr Chá-
vez’s political allies, was jailed for eight
months on dubious charges. Guillermo Zu-
loaga, the owner of an opposition televi-
sion network, ed the country after a judge
ordered him to be sent to a violent prison
to await trial on charges relating to his busi-
ness dealings. And media workers hand-
ing out leaets calling for freedom of the
press last year were beaten by assailants
who were never punished.
In Ecuador, the government of Rafael
Correa has increased its grip on the media.
It now controls some 20 media companies,
including two television stations seized
from fugitive bankers. Mr Correa’s suppor-
ters included in the new constitution a
measure to ban banks from owning media.
A planned government bill would place
further curbs on the media. During a police
mutiny last month all television and radio
stations were required to broadcast only
government-supplied information.
Argentina’s ruling couple, President
Cristina Fernández and her husband and
predecessor, Néstor Kirchner, are trying to
dismantle the Clarín Group, the country’s
biggest media conglomerate, after its cov-
erage of them turned negative in 2008.
Their tactics have included sending tax
agents to raid its oces; enticing Argenti-
na’s football league to break its contract
with a Clarín-owned cable channel; can-
celling the company’s licence to provide
internet service; and trying to increase
state control of the country’s sole news-
print producer. They also won passage of a
law in 2009 that would force Clarín to di-
vest key assets within a year, although the
courts have blocked enforcement of the
deadline. Separately, they have increased
the government’s advertising budget from
$16m in 2003 to $223m last year, enabling
them to buy friendly coverage from me-
dia that depend on those revenues.
Bolivia’s government recently passed a
law allowing it to close media that publish
content it deems racist. Daniel Ortega, Nic-
aragua’s president, had a critical journalist
charged with money laundering, and freed
two prisoners who had killed reporters.
There is merit to these governments’
complaint that a few private hands control
too much of the media. Yet all too often
their remedies seem aimed at preserving
that powerand shifting it to the state. 7
Obesity in Mexico
One taco too many
S
EVENTY metres (230 feet) long and
slathered with cream and cheese, the
world’s biggest enchilada was cooked up
in a suburb of Mexico City on October
17th. The 1.4-tonne lunch was certied by
Guinness World Records, then devoured.
If Mexico is not careful, Guinness may
soon award it another title. In the obesity
stakes, the United States takes the cake.
But Mexico comes a close second, and
has a higher proportion of merely over-
weight citizens than do the gringos.
Seven out of ten Mexican adults are
overweight, and three out of ten are
obese, according to a recent study by the
OECD. In Chile and Brazil, the two other
Latin American countries in the 40-
country survey, just 22% and 14% fell into
the chubbiest category.
Moreover, the problem is expanding.
In 2000 some 20% of Mexican primary-
school girls were overweight; by 2006
27% were. Diabetes is the top cause of
hospital admission after childbirth, and
the second-biggest cause of death.
Enchiladas and other greasy national
dishes are partly to blame. But foreign
junk-food is piling on more pounds.
McDonald’s fries over 8,000 tonnes of
potato a year in Mexico. The worst of-
fender, according to Antonio Villa Rome-
ro of the medical faculty at the National
Autonomous University of Mexico, is a
plague of refrescos, or zzy drinks. Seden-
tary lifestyles also contribute: Mexican
schools lack playing-elds, and teachers
say the crowded timetable (often with
two shifts a day) leaves no room for sport.
The government has launched a
national slimming campaign, led by an
army of 535 trainers who are drilling a
ve-point exercise and healthy-eating
plan into state education ocials. Within
ve years, says Cuauhtémoc Mancha,
who runs the programme, we hope to
see a new generation that drinks water
rather than refrescos and prefers fresh
meals to industrial food.
But sticking to a diet is hard. In May
the government trumpeted a ban on junk
food in schools following an April visit
by Michelle Obama. Yet pressure from
food companies has led to a minimal
blacklist, allowing the continued sale of
cakes and refrescos, says Dr Villa Romero.
The government must face down the
junk merchants and limit food ads dur-
ing children’s television programmes, he
says. If not, Mexicans only need to look
north to see what awaits them.
mexico city
Time for a national diet
Buen provecho
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Also in this section
48 China’s mued media
51 Pakistan’s political crises
51 Anglo-Indians
52 Australia’s climate change policy
52 A Mongolian mining boom
I
N ORDER to be taken seriously, some-
times thumping the table is better than
not thumping, Xi Jinping reportedly said
when he was a relatively little known pro-
vincial chief. On October 18th Mr Xi, who
is now vice-president, was anointed as
China’s leader-in-waiting. Yet earning the
respect of his fractious Communist Party,
let alone a sceptical public, will require a
lot more than table-bashing. Mr Xi’s even-
tual grip on power is by no means assured.
For years China’s Communist Party has
mulled over the idea of allowing a modi-
cum of open competition for its top job.
But on October 18th the party leadership
made clear that this time its succession ar-
rangements would leave nothing to
chance. At a secretive meeting it appointed
Vice-President Xi Jinping to a senior mili-
tary post. In the party’s coded language
this means he will begin taking over as
China’s leader in two years’ time.
It had long been assumed that Mr Xi,
who is 57, would get the top job, and that
this would be signalled by making him
vice-chairman of the party’s Central Mili-
tary Commission. President Hu Jintao was
given the same job in 1999, three years be-
fore he took over as party chief. Last year,
however, with three years to go before Mr
Hu’s expected move towards retirement
and no announcement on Mr Xi, some had
begun to wonder whether the party might
be preparing a dierent way of transfer-
now retired and doddery Mr Jiang. The
transfer of power to Mr Hu was the rst
smooth succession in communist China’s
history. The handover to Mr Xi may not be
the second.
Mr Hu also had longer to brace himself,
having joined the Politburo’s Standing
Committeethe handful of people who
run Chinaa decade before his elevation.
Mr Xi will have had only ve years there
by 2012. Mr Hu impressed Deng in the
1980s with his toughness as a party chief in
rebellious Tibet. Mr Xi might seem to have
had a cushier career, as leader of two rich
coastal regionsthe provinces of Fujian
and Zhejiangwith seven months in 2007
as party chief of Shanghai.
Mr Xi’s family background will also be
a mixed blessing. He is the son of the late
Xi Zhongxun, a veteran of the party’s early
days and a senior ocial under Deng who
was purged during the Cultural Revolu-
tion. This makes him a member of what
the Chinese sometimes call the princeling
party, a loose-knit group composed of the
ospring of the communist era’s founding
fathers and other leading ocials. Prince-
lings are liked by some party leaders be-
cause they often appear dedicated to keep-
ing the party in power. But their huge
inuence oends many others.
Mr Xi’s career has clearly beneted
from his connections. He graduated from
Beijing’s Tsinghua University in 1979 with a
degree in engineering (which most Chi-
nese leaders have). China was then emerg-
ing from the post-Mao era’s rst succession
crisis, with Deng busy nailing the political
con of Mao’s heir, Hua Guofeng. Mr Xi
landed a job as an assistant to the defence
minister, one of his father’s friends. This
soupçon of military experience has been
played up in his ocial biography, which
says he was an ocer on active service.
ring power. When the party’s 370-strong
Central Committee began a four-day an-
nual meeting at a heavily guarded Beijing
hotel on October 15th, it was far from cer-
tain that Mr Xi was about to be anointed.
But the party has stuck to tradition. The
commission, it tersely said, would be aug-
mented by the inclusion of Mr Xi.
This adds little to Mr Xi’s power (the
armed forces will remain under Mr Hu and
his generals). But it clearly signals that the
party believes that Mr Xi should replace
Mr Hu as general secretary in late 2012. Mr
Hu is not obliged to step aside then. But
since 1993 the position of party chief has
gone hand-in-hand with that of president.
Mr Hu is required to step down as presi-
dent in March 2013. There is no rule saying
when he must step down as military chief.
But precedent suggests he will also hand
this role to Mr Xi by 2014.
Mr Xi cannot aord to relax. His groom-
ing may look similar to that undergone by
Mr Hu before he began taking over in 2002,
but there are crucial dierences. For one
thing, Mr Hu’s appointment was decided
not by his predecessor, Jiang Zemin, but by
Deng Xiaoping, the political giant of the
post-Mao era, who died in 1997. Such was
Mr Deng’s authority that even ve years
after his death Mr Hu remained rmly on
track to replace Mr Jiang. Mr Xi’s career
path, by contrast, was decided by the far
less imposing Mr Hu, with input from the
Asia
China’s next leader
Xi who must be obeyed
BEIJING
China’s Communist Party anoints Xi Jinping as the country’s next leader. He will
have his work cut out
1
The Economist October 23rd 2010 47
For daily analysis and debate on Asia, visit
Economist.com/asia
54 Banyan: Indonesia’s disappointing
president
48 Asia The Economist October 23rd 2010
2 But Cheng Li of the Brookings Institu-
tion, a Washington think-tank, says Mr Xi’s
family ties proved a handicap in 1997. At a
party congress, delegates’ dislike of prince-
lings contributed to his gaining the lowest
number of votes in a (largely rigged) elec-
tion for membership of the Central Com-
mittee. In 2007 Mr Xi is said to have gained
the highest number of votes in a straw poll
conducted at the Central Party School, an
academy for top cadres, on possible candi-
dates for the Politburo. But Mr Li says Mr Xi
would not have done so well had the 400-
odd high-ranking participants been asked
who should be a member of the Politbu-
ro’s Standing Committeemuch less who
should be Mr Hu’s successor.
And these are troubled times in which
to be taking over. There are signs of serious
disagreement among China’s elite over
whether the party should change how it
rules, at least a bit, to give people more say
in who leads them. Since August the prime
minister, Wen Jiabao, has made several
comments on the importance of political
reform. Other leaders have kept conspicu-
ously silent on the issue, while conserva-
tive newspapers (including national dai-
lies in Beijing) have censored his remarks.
Rarely since the early 1990s has the party-
controlled press appeared so divided. Lib-
erals in Beijing have stepped up public de-
mands for a loosening of the party’s grip,
even as the authorities have detained dissi-
dents for celebrating the award of the No-
bel Peace Prize to Liu Xiaobo, an impris-
oned activist.
Mr Xi is among the silent ones. Some
liberals, nonetheless, are encouraged by
his father’s reformist credentials. They also
point to his record in the provinces, where
he gave strong encouragement to private
enterprise. While in Zhejiang province, Mr
Xi encouraged a team of senior researchers
from Beijing to write a six-volume work
called the Zhejiang Experience and its Im-
plication for the Development of China. It
stresses the importance of setting up party
cells in private enterprises (by the end of
2004, it boasts, almost 99% of private rms
with three or more party members had
done so). It also highlights experiments
with grassroots democracy, within the
party and local governments. Mr Xi has
apparently not done much to push this.
Oriental Outlook, a Beijing magazine, re-
ported this month that Zhejiang’s best-
known such experiments, in Wenling city,
had not taken o elsewhere because of
meagre interest among local ocials.
Mr Xi is said to be an aable man. But
there was a hint of irascibility in February
2009 when he told a group of Chinese in
Mexico that well-fed foreigners with
nothing better to do were pointing their
ngers at China. In an interview with Chi-
na’s state television network, CCTV, in No-
vember 2003, Mr Xi elaborated on the
benets of table-pounding when dealing
with aberrant ocials. If you don’t
thump the table you can’t frighten them,
he said. Most Chinese are more familiar
with the beguiling smile of his wife, Peng
Liyuan, whose syrupy folk songs made her
famous long before Mr Xi emerged.
By ocial reckoning, Mr Xi will head a
fth generation of communist leaders
(after Mao, Deng, Jiang and HuHua Guo-
feng having been too short-lived political-
ly to count). Even if the chemical engineer
Mr Xi (with a doctorate on China’s rural
economy) looks little dierent from his
predecessor (a hydraulic engineer), others
of his generation are in less of a technocrat-
ic mould. Some have studied in the West.
But this does not guarantee them popular
support in a country with a fast-growing
middle class with burgeoning aspirations.
I nearly spilt water all down my shirt.
Are you trying to give me a fright? replied
Mr Xi in 2002 when asked by a reporter
whether he was a leader to watch out for.
He has good reason to be nervous. 7
A
T A gathering of intellectuals in Beijing,
Xin Ziling, an author and former de-
fence ocial, posed an interesting ques-
tion. How would Marx have coped with
the restrictions on civil liberties evident in
China today? He would have needed gov-
ernment permission to publish his Com-
munist Manifesto, and this would have
been refused. You say our capitalist sys-
tem will disappear! Mr Xin imagined
priggish 19th-century English censors ex-
claiming. You can’t say that!
Freedom of speech and the press are en-
shrined in China’s constitution. But in real-
ity there is only so much that people can
say or write without getting into trouble.
The occasion for the gathering at which Mr
Xin spoke was the recent release from jail
of Xie Chaoping, a former prosecutor and
journalist who had written and published
a book about the forced relocation of hun-
dreds of thousands of people during the
construction of a massive dam on the Yel-
low River in the 1950s. He had been de-
tained for nearly a month by local ocials
in Shaanxi province who disapproved of
his writings. The manager of his printing
company was also detained. The case at-
tracted great publicity, with many activists
and intellectuals agitating for the two
men’s release.
Mr Xin was one of two dozen retired of-
cials, academics and Communist Party
elders who, citing Mr Xie’s case and others,
argued recently for greater press freedom
in a signed open letter to the leadership of
the National People’s Congress (NPC), Chi-
na’s parliament. The mismatch between
the right to freedom of the press, loftily as-
serted in the constitution, and the restric-
tions that are crudely enforced in practice,
the group wrote, amounts to a form of
false democracy that has become a
scandalous mark on the history of world
democracy.
This is not the rst attempt to expand
press freedom in China. During a period of
relative political liberalisation in the late
1980s, NPC members spoke openly about
the need for a liberal press law. But that
movement was doomed by the govern-
ment’s anxious, brutish response to the
Tiananmen Square demonstrations of
1989. The censor’s pen is still much in evi-
dence. None of China’s thousands of
newspapers and periodicals escapes it.
And although ocials pay occasional lip
service to the fourth estate’s important su-
pervisory role as a check against corrup-
tion and other abuses, they also dene its
primary role as a prop to social stability.
It is not only dissidents who nd their
voices mued. The open letter to parlia-
ment also complained that recent support
for political reform expressed by Wen Jia-
bao, the prime minister, in speeches at the
United Nations and elsewhere, had been
scrubbed from the Chinese media.
Yet many activists are optimistic that
liberal change is coming. Dai Qing, a prom-
inent dissident pundit, notes that activists
are nding it easier to raise money for their
causes at home. They no longer have to
rely on money from people like George So-
ros, she says. She is also impressed by the
diverse backgrounds of those pushing for
a press law: they include young journal-
ists, seasoned party members and ocials,
and even one or two military men. 7
China’s mued media
Gagging to be free
BEIJINg
Momentum builds for a freer press
Hot o the censor’s desk
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The Economist October 23rd 2010 Asia 51
Anglo-Indians
Some corner of a foreign eld
D
RESSED in a oral tea-dress, at a
retirement home for Anglo-Indians
in Kolkata, Rita McDonald, who is 85, is a
poignant reminder of Britain’s two-
century rule over the Indian subcon-
tinent. Like many Anglo-Indians, mem-
bers of a Eurasian community spawned
during the Raj, she eats bacon and eggs
for breakfast, speaks precise English and,
though she has lived all her life in India,
knows little Hindi or Bengali. Yet her
home, hung with yellowing photographs
of Queen Elizabeth and the late Diana,
Princess of Wales, is thick with tales of
poverty and loss.
Recent decades have been tough on
Anglo-Indians, who are dened by the
constitution as Indian citizens of Euro-
pean paternal ancestry. Many can date
that ancestry to the 18th- and early 19th-
centuries, when British employees of the
East India Company tended to come to
India without wives, and found local
women to ll the gap. Such intermingling
became less common after the great
mutiny of 1857. Yet its legacy, a class of
educated, English-speaking and loyal
Eurasians, was crucial to British rule.
Anglo-Indians manned the customs,
telephone exchanges and railways. Mim-
icking the grander seclusion of their
British masters, they lived apart in pur-
pose-built railway towns, disdaining
their Indian colleagues. All the Indians
wanted to be Anglo-Indian, said Mal-
colm Booth, an 83-year-old ocer of the
All India Anglo-Indian Association.
But after the British quit India in 1947
the Anglos lost their privileges. They are
still guaranteed two seats in India’s par-
liament, yet public funding for their
schools was stopped in 1961. Few could
compete in India’s new, non-discrim-
inatory job market. Many left for Britain,
Australia and Canada. The Anglo-Indian
population fell from perhaps 500,000 in
1947 to fewer than 150,000 today.
Those who remain fear for their cul-
ture. Their youngsters, like many in
India’s urban middle-class, are marrying
outside the community. They speak
Hindi and prefer kul to spotted dick. Yet
many are also thriving, thanks to rising
demand for Anglophones from India’s
booming services rms. Brightening, Mrs
McDonald remarks that all of her grand-
children remaining in India have found
good jobs in call centres. They’re good,
call centres, she says. Many people
have found jobs there.
KOLKATA
Better times beckon for India’s Anglo-Indians
E
VEN by Pakistani standards, this has
been a bad week. Politically motivated
battles erupted in Karachi, the country’s
biggest city, on October 16th and raged for
several days, leaving over 70 dead. The vio-
lence threatens to bring down the govern-
ment of Sindh province, a coalition led by
the Pakistan Peoples Party (PPP), which
presides over Karachi. It could also desta-
bilise the central government of President
Asif Zardari, another PPP-led coalition.
Karachi often sees bloodletting. The
city of 18m is beset by land-grabbers and
narco-warlords and by sectarian, ethnic
and political feuding, or all three com-
bined. This bout arose ahead of a by-elec-
tion necessitated by the murder of a lead-
ing provincial lawmaker, a member of the
Muttahida Qaumi Movement (MQM). Fol-
lowers of the MQM, a party dedicated to
Karachi’s Urdu-speaking muhajir commu-
nity, were in the thick of the killing. So
were those of its main rival, the Awami Na-
tional Party (ANP), which is dedicated to
Pushtuns. Both are allies of the PPP in Is-
lamabad; its supporters were also in arms.
It seems there is no government in Ka-
rachi, said the MQM’s leader, Altaf Hus-
sain, who lives in exile in London. The
MQM has threatened to quit the federal
government, which could reduce it to a
parliamentary minority. That would also
suggest that the country’s powerful gener-
als, from whom Mr Hussain has often tak-
en orders, had run out of patience with Mr
Zardari’s dysfunctional administrationat
a time of multiple crises, including high in-
ation, a Taliban insurgency and devastat-
ing ooding that has left over 6m surviving
on food aid.
And on October 15th Pakistan’s belea-
guered president suered another assault.
At a dramatic midnight conclave, the coun-
try’s Supreme Court judges gave credence
to rumours that Mr Zardari planned to sack
them and vowed to defy him. The judges,
who have claimed great powers during Mr
Zardari’s two-year rule, have been trying
to reopen a money-laundering case
against the president. His main opponent,
Nawaz Sharif, a two-time former prime
minister and supporter of the judges, piled
in by calling for the government to fall.
Mr Zardari is plainly in trouble. A dis-
credited gure, linked to the corruption
that ourished under his murdered wife,
Benazir Bhutto, he has never seemed t to
lead his crisis-ridden country. Even in the
PPP, which accepted Mr Zardari as its
leader in the panic-stricken wake of Ms
Bhutto 2007 death, many despise him.
And the generals are believed to consider
him a corrupt and incompetent fool who
should be banished.
Yet they stay their hand, fearing Mr Sha-
rif would be worse. A leader of Punjab,
Pakistan’s richest and most populous
province, he dared to sack two army chiefs
while in powerwhich inspired the sec-
ond of them, Pervez Musharraf, to launch a
coup against him. Having since suered
imprisonment and a long exile, Mr Sharif
wants revenge. Mr Musharraf is also now
exiled to London, yet Mr Sharif continues
to demand he be prosecuted for treason.
The current army chief, General Ashfaq
Kayani, a former Musharraf loyalist, could
never allow that. So Pakistan’s painful and
unstable status quo persists. 7
Pakistan’s political crises
Abiggish dust-up
in Karachi
lahore
Street battles in Pakistan’s biggest city
reect national politics
52 Asia The Economist October 23rd 2010
E
VER since she was elected prime minis-
ter six weeks ago, Julia Gillard has been
under pressure to restore the ruling Labor
Party’s credibility on climate change. Rely-
ing on coal to generate about 80% of its
electricity makes Australia one of the big-
gest greenhouse-gas emitters per head. La-
bor’s decision to abandon an earlier
pledge for a European-style emissions-
trading scheme (ETS) cost it seats at an elec-
tion in August. Ironically it also left Ms Gil-
lard relying on support from the Australian
Greens to form a minority government.
Ms Gillard has now ditched a much-
lampooned election promise to establish a
citizens’ assembly to discuss climate
change. Instead, she has appointed a
multiparty parliamentary committee to
decide how Australia should make its
worst carbon polluters pay. A report this
week by the Climate Institute, a Sydney-
based think-tank, suggests how hard that
will be: comparing Australia with ve of its
main trading partners, only South Korea
has done less to factor the cost of carbon
emissions into its electricity prices.
The Greens are claiming credit for Ms
Gillard’s new climate concern. Some also
detected their inuence when she an-
nounced on October 18th a more moderate
approach to another divisive election is-
sue: the increasing numbers of asylum-
seekers arriving in Australia by boat. Those
with children will no longer be incarcerat-
ed, but allowed to live freely while their
claims are assessed. The Greens have long
called for such a change; Ms Gillard
claimed it as her party’s idea.
The climate committee must decide by
late 2011 the best way to put a price on
greenhouse-gas emissions: an ETS, a car-
bon tax or a hybrid of both. The Greens
have two representatives on it, including
Bob Brown, their leader. Tony Windsor
and Rob Oakeshott, two independents
whose price for supporting Ms Gillard in-
cluded a revival of climate-change action,
are also on the committee. Only the oppo-
sition Liberal-National coalition is absent.
Its leader, Tony Abbott, rejected Ms Gil-
lard’s invitation to join. He has previously
dismissed climate science as crap and
the mooted mitigation measures as just a
great big tax. Yet this populism has left
him looking suddenly rather isolated.
To help it think through the economic
impact of a carbon tax, or similar measure,
the government is consulting many of the
country’s top businessmenincluding for-
mer allies of Mr Abbott. This is encourag-
ing, but the task of greening Australia is
huge. According to the Climate Institute,
Australia is the G20 country that is worst-
prepared to compete in a low-carbon econ-
omy. Its report compares the additional
costs imposed on electricity producers in
six countries by anti-warming strategies,
including carbon taxes, emission-trading
schemes and clean-energy subsidies.
In Australia, such measures represent-
ed an eective carbon tax of $1.70 per
tonnea gure 17 times lower than in Brit-
ain and eight times lower than in China,
on the basis of a perhaps-generous inter-
pretation of China’s eorts to make its
coal-red power stations more ecient.
Only South Korea’s hidden carbon price of
70 cents was lower. One of the report’s au-
thors, Cameron Hepburn, reckons that
China will almost certainly adopt a na-
tional ETS or some alternative measure be-
fore Australia does. 7
Australia’s climate-change policy
Greening Oz
sydney
The government considers a carbon tax
M
ONGOLIANS were until recently
wont to describe themselves as beg-
gars sitting on a huge pile of gold. The
country has vast but largely untapped
mineral deposits. Until recently wages
were low and jobs scarce. Shoppers in
Ulan Bator, the capital, were not spoilt for
choiceunless they were in the market for
dried meat, vegetables or furry hats.
But with the recent launch of several
big mining projects, a transformation
looms. It will present the government with
a dierent set of problems: how to manage
a promised economic boom without dev-
astating the environment or destabilising
either the economy or the nation’s edg-
ling democracy.
Few doubt that the boom is coming.
The IMF foresees a double-digit annual-
growth rate for years to come; and a qua-
drupling of GDP per headcurrently a
measly $2,000by 2018. Two mines in
Mongolia’s southern Gobi region are ex-
pected to provide much of the new wealth.
One, called Oyu Tolgoi, which was given
the green light last year, will tap an estimat-
ed 40m tonnes of copper and also gold.
The other is an existing coal mine, Tavan
Tolgoi, to which new capacity has been
added, including road and rail links to its
main customer, China (surprise, surprise).
The government will be a big benecia-
ry of the boom: it owns a third of Oyu Tol-
goi (a Canadian rm, Ivanhoe, owns the
rest). Yet the country’s president, Tsakhia-
giin Elbegdorj, considers it potentially dan-
gerous. If we get much more income and
much more prot in a bad system with bad
governance, I think Mongolia is in trou-
ble, he says.
Mongolian politics is already based on
patronage, with politicians invariably of-
fering cash and other goodies for votes.
Swollen government coers could exag-
gerate these bad habits. Corruption could
also thriveas it did in the 1990s, on the
back of a hasty privatisation of state-
owned businesses soon after the country
emerged from the Soviet Union’s shadow
and introduced democracy. Indeed, the in-
volvement of many senior ocials in min-
ing makes this likely. And even virtuous
public spending may push up ination.
An economy hooked on a handful of
commodities is also vulnerable to price
shocks. A new scal stability law has been
adopted, setting indices for commodity
prices for budgeting purposes. When
prices go above the index, excess revenue
will be stored in a stability fund. If prices
fall, the government can tap the fund to
cover its costs.
Other precautions are being taken.
New anti-corruption legislation has been
passed. And Mr Elbegdorj vows to help
boost investments in non-mining sectors,
including tourism, nance and outsourc-
ing. He says that mining’s contribution to
output should shrink from 70%, its current
level, to around 20% within two decades.
That sounds unlikely. Yet there is hope
that Mongolia’s current leaders, who are
better educated than their predecessors,
do at least understand the dilemmas in-
volved in managing the coming riches and
the rising expectations they will bring. It’s
a question of whether we become Nigeria
or Chile, says a senior government advis-
er, in a country accelerating away from its
sleepy nomadic past. 7
Mongolia’s mining boom
Nomads no more
ulan bator
Asteppe-land struggles with new
riches
Gouging the grasslands
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B
EFORE last year’s elections in Indonesia, supporters of the in-
cumbent president, Susilo Bambang Yudhoyono, predicted
that victory would lead to a markedly dierent second term for
their champion. A mild-mannered ditherer, he would emerge tri-
umphant and transformed, as a bold and decisive reformer: Su-
per-SBY! Sure enough, his Democrat Party became the largest in
parliament and Mr Yudhoyono was re-elected in a landslide. But,
as Indonesia marked the rst anniversary of his second inaugu-
ration on October 20th, sbY2 was looking very much like SBY1.
Indeed, in some ways it looks worse. Even some of Mr Yud-
hoyono’s fans admit to being disappointed.
That might seem harsh. Under his presidency, Indonesia has
become a success story. In November Barack Obama will return
to Indonesia, his childhood home and the country that has more
Muslims than any other, to pay his respects to a ourishing de-
mocracy and bastion of tolerance. Protests marked this week’s
anniversary with calls for Mr Yudhoyono to resign. But opinion
polls suggest that he remains a popular president, though his
once sky-high approval ratings have fallen. Even some environ-
mentalists, traditional thorns in the esh of Indonesian govern-
ments, like him: Mr Yudhoyono having declared a two-year mo-
ratorium on large-scale clearance of the country’s rainforests
from January 2011.
More broadly, Indonesia’s global stature is rising. The public -
nances are sound and the economy has sailed through the nan-
cial crisis. Among G20 economies, only China and India grew
faster than the 4.5% Indonesia achieved last year. In 2010 the rate
is likely to be close to 6%. That would have seemed almost un-
imaginable 12 years ago, when the economy collapsed and Indo-
nesia’s longstanding dictator, Suharto, fell.
Yet it is not churlish to look for more. Indonesia is underper-
forming. A recent strategic assessment by the Kennedy School
of Government at Harvard University concluded that it is losing
ground to its neighbours. Its resilience during the global down-
turn was in part caused by its skipping the pre-crisis trade boom.
Its recovery has been pulled along by Chinese hunger for com-
moditiesnotably coal and palm oil. With its wealth of re-
sources, and young population, Indonesia should achieve re-
spectable rates of growth for decades. But respectability will not
create enough jobs, let alone secure Indonesia’s aim of becoming
an advanced and self-reliant nation by 2025.
Many development indicators are bad. In terms of GDP per
person, for example, Indonesia is much richer than Vietnam. Yet
an Indonesian mother is over three times more likely to die in
childbirth than a Vietnamese mother. And her child is nearly
three times more likely to die before the age of ve.
An important step the government could take to improve
things would be to spend less on wasteful subsidieswhich ac-
count for at least half of its discretionary spending (which ex-
cludes interest payments, for example)and more on infrastruc-
ture, education and health. Mr Yudhoyono’s previous nance
minister, Sri Mulyani Indrawati, made a start on this. But she has
since left to join the World Bank, apparently sacriced in the in-
terests of coalition politics after a ti with Aburizal Bakrie, a lead-
ing businessman, party leader and former cabinet member.
Rather than use his party’s parliamentary numbers to push
through reform, Mr Yudhoyono has stuck with a timid consensus
style, building a bigger, weaker six-party coalition than he needs.
Four of his smaller coalition partners have Islamic roots. To foster
some Islamic credentials of his own, perhaps, the president has
seemed disappointingly slow to stand up for greater religious tol-
erance. His government seems especially reluctant to stamp out
violence by the Islamic Defenders’ Front, or FPI, a group of
thugs with religious pretensions and a record of bloody intimida-
tion against Christians, Muslims of the Ahmadiyah sect and oth-
ers. And allegations of brutality by the security forces against se-
cessionists in Papuabacked by a gruesome video this week that
appeared to show suspects being torturedsuggest that the army
has not shed the bad habits it developed in East Timor and Aceh.
No senior member of the armed forces, in which Mr Yudhoyono
was once a general, has been convicted for abuses carried out un-
der Suharto or since.
Meanwhile, the president is jeopardising one of his most pop-
ular traits: hard-earned credentials as a warrior against corrup-
tion. Some of the big sh netted in his rst term by a feared anti-
corruption commission, the KPK, have been freed early. They in-
clude the father of Mr Yudhoyono’s daughter-in-law. Accounts of
a VIP’s life in an Indonesian jail anyway make it sound more like
a four-star hotel chain than a chain-gang. Worse, no action has
been taken against those in the police and the attorney-general’s
oce found to have fabricated evidence last year in a witch-hunt
against KPK ocials. The president seems sincere in his abhor-
rence of corruption, but unwilling to take on vested interests
threatened by the anti-graft drive.
Saving graces
Still, Mr Yudhoyono has two big things going for him. First, he
may be a Suharto-era general, but he is no Suharto-style dictator.
Rather, he practises what the Harvard report calls collusive de-
mocracy, preferring co-option and consensus to competition.
Second, he stands far above any potential successor. As bellicose
rival politicians rattled their kris in a recent shing row with Ma-
laysia, he was statesmanlike and calm. Assessing his presidency
this week the Jakarta Post, a liberal English-language newspaper,
expressed a hope for better things in the four years he has left in
oce. But for now, the Post’s disappointed verdict on his tenure is
about right: The president who didn’t mess it up. 7
SBY’s feet of clay
Supposed to come into his own in his second term, Indonesia’s president is looking even less like his own man
Banyan
Economist.com/blogs/banyan
54 Asia The Economist October 23rd 2010
Also in this section
58 Ethiopia swoons over China
58 South African graft probe scuttled
60 Bloggers in the Middle East
60 A Jewish settlement in trouble
T
HE e-mail from Nigeria claimed to
come from an aide to the president and
touted a business opportunity with poten-
tially vast returns. But unlike similar-
sounding messages from Nigerian princes
and nance ministersknown in Nigeria
as 419 scams after a section of the penal
codethis one seemed genuine.
President Goodluck Jonathan, who ear-
ly next year will stand in an election that
could split his party and spark violent prot-
ests, has asked investors to participate in a
grandiose privatisation programme meant
to raise $35 billion over ten years. He wants
to og state power-generation and distri-
bution companies, and put the grid under
private management.
The scheme may be hisand his coun-
try’sbest hope of salvation from chronic
power cuts. At a prayer meeting on Octo-
ber 4th Mr Jonathan was reading a biblical
passage in front of many of the country’s
elite when the grid failed and his micro-
phone cut out. He walked o in a hu.
Ordinary Nigerians are angry too. The
power supply, they say, is epileptic. Nige-
ria is a big oil exporter, but its people get
only a few hours of electricity a day. The
entire populationaround 150mis said to
use as much grid power as the area around
Narita airport in Tokyo. South Africans
consume 55 times more energy per head,
and Americans 100 times more.
The problem is not new. Nigeria’s pow-
er supply has been stagnant for 30 years.
During the tumultuous 1990s there was no
investment despite surging demand. Since
then, generation capacity has risen by half
but distribution is so dysfunctional that ac-
tual supply has remained at. One result is
a laughably small manufacturing sector,
about 4% of GDP.
There have been reform attempts in the
past. The Power Holding Company of Ni-
geria (PHCN), the monopoly supplier, is
known to consumers as Please Have Can-
dle Nearby. Five years ago it replaced the
National Electric Power Authority (NEPA),
nicknamed Never Expect Power Again.
Mischarging and other sins continued. I
just got a bill for the last four months but
had no lights for three, says a doctor 20
miles (32km) outside the capital, Abuja.
To survive, many Nigerians have their
own power plants, creating the world’s
highest concentration of small-scale gener-
ators. Two-thirds of all electricity is pro-
duced in basements and backyards, at a
cost of $13 billion a year. Generator mer-
chants say the government is their best cli-
ent. Some have set up steel plants to keep
up with demand. One has 3,000 workers
assembling the grunting machines.
All this could change if the privatisation
scheme succeeds. It aims to raise $3.5 bil-
lion a year and boost the power supply 13-
fold over a decade. The government is of-
fering to guarantee some bank loans and
may cap the interest at 7%. At a recent con-
ference in Abuja Mr Jonathan wooed hun-
dreds of investors, including executives
from Goldman Sachs and General Electric.
Other African leaders are watching
closely, sensing that this may prove to be a
test bed for the continent. Some, though
not all (see next story), are asking what al-
ternatives there are to growing depen-
dence on Chinese investment. Like most of
its neighbours, Nigeria is making big infra-
structure deals with China. In May, it inked
a $23 billion Chinese oil renery project.
But Mr Jonathan acknowledges that Chi-
na’s interest in Africa is no panacea. The
case for privatisation will get a boost if he
can keep the lights on at home.
There are reasons to be optimistic. The
programme has a sound legal basis. It fol-
lows a conventional privatisation model.
Its pricing scheme seems transparent. That
has reassured investors. They also wel-
come the easy access to local-currency
loans in Nigeria, one of Africa’s most de-
veloped capital markets. And they like the
country’s strong GDP growth, expected to
top 7% this year.
Yet there is still plenty to worry about.
Supplying new power stations with gas is
a headache, as is recruiting competent
sta. But it is the politics of privatisation
that investors fear most. There will be plen-
ty of losers, many with vocal lobbies.
Trade unions are protesting against sta
cuts, although the president has set aside
money for compensation. Consumers fear
steep price hikes. The fuel maa that sup-
plies generator owners is up in arms.
Even more worrying, the corrupt state
bureaucracy is drooling in anticipation.
The inux of billions of dollars will create
long queues at the trough. Observers warn
of the rascality of Nigerian ocials.
The president says he will work hard to
make his privatisation plan work. To con-
vince investors, he has appointed himself
electricity minister and scheduled weekly
Electricity in Nigeria
Let there be light
Middle East and Africa
ABUJA
The president is launching Africa’s most ambitious privatisation scheme shortly
before facing a tight election
1
The Economist October 23rd 2010 57
For daily analysis and debate on the Middle East
and Africa, visit
Economist.com/middleeast
Economist .com/africa
58 Middle East and Africa The Economist October 23rd 2010
2 power summits (11am on Tuesdays). He
has also surrounded himself with men fa-
miliar to potential investors. The central
bank governor and the nance minister
are career bankers with experience
abroad. He calls them his war cabinet, al-
though they have limited inuence.
The strongest pitch the government
could make would be its own re-election.
Voting is due early next year and for the
rst time in recent history the outcome is
uncertain. The president’s partydomi-
nant since the end of military rule 11 years
agocannot agree on a nominee. The los-
ers in a forthcoming primary may break
away. One-party rule could end.
As the election campaign picks up pace,
the president’s focus is likely to drift and
electricity may return to the back burner.
Or perhaps it already has. At the two-day
conference in Abuja, Mr Jonathan failed to
show up for the second day. Apparently, he
was lured away to another meeting by his
wife, Dame Patience, who is one of his
closest advisers.
For now, privatisation is wobbling
along and some deals may be done. But
consumers will have to wait until next
year before they can even think about
turning o their generators. Good luck and
patience will both be needed. 7
T
HE release of Ethiopia’s best-known
political prisoner, Birtukan Mideksa,
seems to have been calculated to distract
attention from a reshue of the ruling
Ethiopian People’s Revolutionary Demo-
cratic Front (EPRDF). The prime minister,
Meles Zenawi, has replaced several long-
serving ministers with younger men. He
now faces little opposition either inside or
outside the party. Speaking in New York
last month, Mr Meles said that Ms Mideksa
had begged for a pardon after only a few
weeks in prison. In fact, she has spent
most of the past ve years behind bars, on
trumped-up charges. She was more or less
abandoned by Western governments keen
to curry favour with Mr Meles. As a nal
humiliation, the government forced Ms
Mideksa, as a condition of her release, to
apologise in writing for deceiving the
Ethiopian people.
The EPRDF won all but two of the 547
parliamentary seats in a general election in
May. So much for its promotion of plural-
ity. Government supporters point to wider
ethnic diversity within the party, with sup-
port said to be growing among the Am-
haras and Oromos, two ethnic groups. But
the security apparatus remains in the
hands of Mr Meles’s Tigrayan minority. Mr
Meles has been in power since 1991. Ethio-
pia has no term limits, but he says he will
step down in 2015.
Mr Meles’s contempt for what he calls
the neoliberalism of the West is as plain
as his admiration for generous and de-
pendable China. Chinese Communist
Party ocials were feted at a recent EPRDF
conference. Hailemariam Desalegn, the
new foreign minister and deputy prime
minister, has been conspicuous in urging
Ethiopia to follow China’s model.
Mr Meles argues that the free market
has cost Africa decades of development.
By siding with China, this will never hap-
pen again. The Europeans and Americans
nd this galling, since they continue to pay
for many of Ethiopia’s hospitals and
schools, as well as handing out free food.
But trade between Ethiopia and China is
increasingly what matters. It was worth
$800m in the rst six months of this year,
up by 27% on last year.
China has invested $2.5 billion in Ethio-
pia, mostly in infrastructure. Mr Meles
wants China to take a lead in building a
new railway network. He has also prom-
ised to use Chinese loans to build a contro-
versial dam on the Omo River in the south.
And China has decided to lend Ethiopia
$234m so that nine vessels are built in Chi-
nese shipyards for the Ethiopian Shipping
Line, which operates out of Djibouti.
Mr Meles’s ambitious plans to pep up
his country of 85m people do not include a
stock exchange. Enterprise, skills, and con-
nectivity are years behind neighbouring
Kenya. But Mr Meles is shrewd. He hopes
Ethiopia’s massive trade decit will nar-
row as his country’s new factories export
goods under preferential trade terms. Last
year exports to China rose by 140%. 7
Ethiopia and China
Looking east
ADDIS ABABA
Meles Zenawi’s new best pal
The prime minister is my Facebook friend
B
IGWIGS from the ruling African Na-
tional Congress (ANC) have got what
they wanted. A ten-year investigation into
a dodgy $5 billion arms deal has been
closed. Only two people were brought to
book in South Africa’s biggest corruption
scandal. One of them was Schabir Shaik,
President Jacob Zuma’s former nancial
adviser, sentenced in 2005 to 15 years in jail
for soliciting a bribe from a French com-
pany for Mr Zuma, then deputy president.
Corruption charges against Mr Zuma him-
self were dropped last year on a legal tech-
nicality, just weeks before elections that
swept him into the presidency.
The whole saga does little to inspire
condence in Mr Zuma’s vaunted cam-
paign to stamp out corruption. In a recent
study of 200 leading South African compa-
nies by Deloitte, an international consul-
tancy, corruption was cited as their biggest
concern. In another study by the World
Bank, one-third of South African rms said
they expected to make gifts to secure a
government contract. A paper submitted
to the ANC’s national council in Septem-
ber admits the party is racked by bribery.
Every day some new scandal seems to
emerge. It is dicult to judge whether this
is a sign of the cancer spreading, or wheth-
er it is the result of serious action being tak-
en at last. In the past, such things tended to
be swept under the carpet, with the erring
ocial getting o with a mere slap on the
wrist. But since Mr Zuma came to power,
an extraordinary array of senior civil ser-
vants, as well as thousands of lesser min-
ions, have been sacked, prosecuted and
even convicted for their self-enriching she-
nanigans. Among them is Jackie Selebi,
South Africa’s former police chief and erst-
while head of Interpol, jailed in August for
15 years for taking bribes from South Afri-
ca’s criminal underworld.
Despite a clutch of anti-graft measures
brought in by Mr Zuma, the suspicion re-
mains that those at the very top will con-
tinue to escape sanction. This was rein-
forced by the scuttling of the arms-deal
investigation by the Hawks, a special po-
lice unit that replaced the much-feted Scor-
pions last year. The latter had shown no
hesitation in going after political leaders,
including Mr Zuma himself. Hence, many
suspect, its early demise. It had been
hoped that the Hawks, which has taken on
many of the former Scorpions investiga-
tors, might come to show the same zeal,
but it has failed at its rst big hurdle. 7
Corruption in South Africa
Brothers in arms
Johannesburg
An embarrassing graft probe is scuttled
60 Middle East and Africa The Economist October 23rd 2010
Israel and Palestine
We built this city on rock’n’roll
F
OR over 20 years Ariel was Israel’s
fastest-growing settlement, changing
from a campsite on a rocky outcrop in
1978 into the rst Jewish city in the Israeli-
occupied West Bank. But over the past
decade, Ariel has stagnated, adding a
mere 100 housing units. Three other
settlements closer to Israel proper, in-
cluding two that were puny ultra-ortho-
dox villages when Ariel boomed, have
swelled to twice its size.
For mediators committed to reviving
the wobbly peace process, this paralysis
is a rare piece of good news. Ariel, says
Ron Nachman, the city’s founder and
mayor, was intended to undermine the
viability of a Palestinian state. It sits on
top of a mountain ridge whose eastern
edge reaches 23km (14 miles) into the
West Bank, in essence cutting it in two.
Previous Israeli leaders contemplating
retreat close to the original 1967 border
helped to check Ariel’s growth. But Isra-
el’s current prime minister, Binyamin
Netanyahu, promised to improve the
settlement’s fortunes when he was still in
opposition. He visited it more than any
other settlement, and soon after taking
power, he went there to plant a tree.
Whether this attempted revival will
work is unclear. Mr Nachman always
wanted his city to be the West Bank’s Tel
Aviv, full of secular people. Immigrants
from the former Soviet Union, only
moderately religious, make up half the
population, but their birth rates are low.
To boost numbers he has recruited thou-
sands of students from the coastal plains,
turning fanatical garrisons into bourgeois
dorms. But most students move on be-
fore they have families.
That leaves settlement leaders urging
an ailing Mr Nachman to abandon his
secular dream and welcome ideological
rather than economic settlers. Not only
are they more committed to populating
the West Bank, but they breed faster.
For now, Mr Nachman continues to
spurn the ultra-orthodox Jews who have
peopled much larger settlements. But
seemingly holding his nose, he has wel-
comed religious Anglos, or English-
speaking Jewish immigrants, including a
South African rabbi. He has also made
room for some of the religious settlers
Israel moved from Gaza when it pulled
out in 2005. But if it is to survive, Ariel
will have to swallow its pride and admit
less tolerant and exible folk. Not such
great news after all.
ARIEL
Secular Jewish settlers in the West Bank want fun but face hard times
A
MONTH ago a court in Iran sentenced
Hossein Derakhshan, an Iranian-Ca-
nadian, to almost 20 years in jail, the lon-
gest sentence ever handed down to a blog-
ger. The charges were murky. He was
convicted of co-operating with hostile
states and insulting Islam. Often hailed as
Iran’s blogfather, he published a do-it-
yourself guide to blogging in Persian earli-
er this decade that helped to prompt an ex-
plosion of activity. Today there may be as
many as 75,000 Persian blogs.
A harsh critic of Iran’s rulers for many
years, Mr Derakhshan boasted on his blog
of making a trip to Israel, probably the
source of the charge of collaborating with
Iran’s enemies. But more recently he had
begun to defend the government of Presi-
dent Mahmoud Ahmadinejad. He
brushed o concerns that he could be ar-
rested because of his earlier views. But on
his return to Iran in November 2008 the
authorities nabbed him.
Iran is far from alone in locking up blog-
gers. Governments across the Middle East
are increasingly twitchy about their citi-
zens’ online activities. As internet use in
the region has soaredup 19-fold since
2000, compared with a vefold rise in the
rest of the world, according to Internet
World Stats, which monitors global inter-
net usageso the number jailed for what
they do on the web has shot up too.
According to Reporters Without Bor-
ders, a Paris-based watchdog, at least 17
netizens are in jail across the Middle East:
eight in Iran and the rest in Bahrain, Egypt,
Morocco, Saudi Arabia, Syria and the Un-
ited Arab Emirates. China may be the big-
gest online represser, but the Middle East is
not far behind.
Earlier this month, Syrian ocials con-
rmed that in December 2009 Tal al-Mal-
lohi, a 19-year-old student, was arrested,
accused of spying. She has been held with-
out charge for nine months. Many believe
her blog is to blame. Earlier this year a Leb-
anese blogger, Khodor Salameh, was inter-
rogated after writing a post lampooning
Michel Sleiman, the country’s president.
Egypt is little better. Two of its police-
men are accused of beating to death a
young man, Muhammad Khaled Said, out-
side an internet café in Alexandria in June
after he posted an online video incriminat-
ing the police in a drug deal. The incident
provoked angry protests online and in the
streets. Another Egyptian blogger, Abdel
Kareem Nabil Suleiman, was arrested in
November 2006 for blog posts criticising
senior clerics and the government. He has
been in detention ever since. Bahrain is get-
ting edgy too. Ali Abdulemam, the monar-
chy’s best-known blogger, was jailed last
month, accused of disseminating false in-
formation on his internet forum.
Governments are not only applying ex-
isting laws ercely but also trying to come
up with new ones. A new electronic media
law in Saudi Arabia will require all online
news sites to register. Bloggers will be en-
couraged to do so as well. A rare bit of good
news for bloggers is that Jordan’s govern-
ment has withdrawn some repressive ele-
ments of a proposed temporary law on
cyber crimes that would have allowed the
government to punish those whose posts
upset the authorities. The change of stance
came after a urry of online protests.
The authorities are getting better at ex-
ploiting the internet themselves. After the
big demonstrations in Iran last year, they
circulated pictures of protesters online for
members of the public to identify. In May
this year, Ebrahim Jabari, a Revolutionary
Guard commander, conrmed that the re-
gime had set up a cyber-army to crack
down on destructive online networks.
His unit has since hacked into dozens of
sites and is thought to be responsible for
the arrests of hundreds of Iranians.
Western governments as well as hu-
man-rights campaigners are watching the
fate of bloggers closely. In January Hillary
Clinton, the American secretary of state,
expressed support for internet freedom.
More recently Bernard Kouchner, France’s
foreign minister, said: We must support
cyber-dissidents in the same way that we
supported political dissidents. 7
Bloggers in the Middle East
Don’t be too
cheeky
Governments in the Middle East are
cracking down on bloggers
Anchors aweigh
A special report on Turkey
l
October 23rd 2010
8 million teachers trained.
Countless classrooms reinvented.
The Intel
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Teach program helps educators worldwide bring problem solving,
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Learn more at intel.com/inside.
The Economist October 23rd 2010 A special report on Turkey 3
Turkey has made astonishing progress in the past decade, says John
Peet. But how will it fare if the IMF and the EU are not there to keep it
on the straight and narrow?
ment-grade credit rating, ination is in sin-
gle gures and the government has been
able to dump the IMF.
The political situation has also greatly
improved. After nearly eight years of sin-
gle-party rule by Recep Tayyip Erdogan’s
Justice and Development (AK) party, the
army has been largely tamed. With exqui-
site timing, Mr Erdogan won a referendum
on constitutional changes to increase his
control of the army and judiciary on Sep-
tember 12th, the anniversary of a 1980 mil-
itary coup. The AK government has
pushed through an impressive array of po-
litical and economic reforms. One reward
was the formal opening in October 2005 of
negotiations for EUmembership.
Pillar of the international community
These changes have not gone unnoticed.
Turkey is now a vocal member of the G20
club of important economies. It held a tem-
porary seat on the United Nations Security
Council in 2009-10. It is knocking on the
door of the BRICs club of emerging giants.
Some forecasts suggest that during the next
decade it will grow faster than any country
bar India and China. Others predict it
could become the world’s tenth-biggest
economy by 2050.
That is partly because of Turkey’s fa-
vourable demographic outlook. The aver-
age age of its 72m people is only 29, against
over 40 in the EU. By 2050 its population
will have risen to almost 100m. If by then
Turkey has managed to get into the EU, it
Anchors aweigh
I
T CAN take decades to change the image
of a country. Yet Turkey has managed the
trick in less than one. Ten years ago it was a
basket-case. Its economy was both sclerot-
ic and erratic, its banks were bust, and in-
ation was dizzyingly high. It was forever
calling in the International Monetary Fund
for help (Turkey has run up some 18 IMF
programmes, a near-record). Politics was
also worryingly unstable. Even though the
country was an established democracy, a
string of weak and short-lived coalition
governments alternated with the occa-
sional coup staged by a powerful army.
As a member of NATO that was for
many years on the front-line of the cold
war, Turkey was at least a reliable ally of
the West. But its regional inuence in 2000
was almost as feeble as its economy. The
Turks insisted that they wanted to join the
European Union, but they had made al-
most no progress. Just over a decade ago
they were humiliatingly overtaken in the
race to be EUcandidates by the ex-commu-
nist countries of eastern Europe.
Yet ten years on Turkey stands trans-
formed. The economy suered badly in
the global recession of 2009, but over the
previous ve years it had been unusually
vigorous, and it has bounced back so
quickly that this year it is likely to grow
faster than those of almost all other Euro-
pean countries. Turkey has largely escaped
the Mediterranean sickness that has taken
hold in Greece, Spain, Portugal and even It-
aly. It is on the verge of acquiring an invest-
An audio interview with the author is at
Economist.com/audiovideo/specialreports
A list of sources is at
Economist.com/specialreports
Doing it by the book
The economy has had a big boost from much
sounder management. Page 5
The Davutoglu eect
All change for foreign policy. Page 6
Afading European dream
Will Turkey ever join the EU? Page 8
Immovable object
Cyprus remains a stumbling-block. Page 10
Balance of power
A mildly Islamist government ghts it out
with the generals. Page 11
All Turks together?
Turkey is overcentralised and treats minor-
ities badly. Page 13
Silk road to riches
Gaziantep’s rise and rise. Page 14
In it for the long haul
But a liberal democracy ready to join the EU
is still the best bet. Page 16
Also in this section
Acknowledgments
This special report draws on the insights and opinions of
people more knowledgeable than its author, many of
whom are not quoted by name in the text. The author
would like to thank, in particular: in London, Ahmet
Akarli; in Istanbul, Mensur Akgun, Cengiz Aktar, Ibrahim
Betil, Mehmet Ali Birand, Umit Boyner, Cengiz Candar,
Suzan Sabanci Dincer, Aydin Dogan, Tayyibe Gulek, Ayhan
Kaya, Joost Langedijk, John McCarthy, Fatma Melek, Soli
Ozel and Lord John Scott; in Ankara, Ali Babacan, Egemen
Bagis, Utku Cakirozer, Semih Idiz, Kemal Kilicdaroglu,
Davide Lombardo, Diego Mellado, Murat Mercan, David
Reddaway, Lale Sariibrahimoglu and Mehmet Simsek; in
Batman, Diyarbakir and Gaziantep, Sahismail
Bedirhanoglu, Serif Camci, Serkan Duzelli, Asim Guzelbey,
Diren Keser, Taner Nakiboglu, Sezgin Tanrikulu and Ahmet
Turhan.
1
4 A special report on Turkey The Economist October 23rd 2010
2 will be its most populous member, far
ahead of Germany, which will have a mere
70m people.
But there is more to Turkey than a our-
ishing economy and a young population.
Whereas ten years ago it seemed a periph-
eral country, now it has become a pivotal
one. Its geographical position, wedged be-
tween the European landmass, Russia and
the Middle East, has given it a new strategic
importance, especially in the energy-pipe-
line business. And its newly assertive for-
eign policy is making it count not just in
neighbouring countries but as far aeld as
China and Africa.
Turkey has an especially signicant
place in the Muslim world. Thanks to the
legacy of Ataturk, it is a rare example
among Muslim countries of a functioning
secular democracy. Compared with much
of the Arab world, it has been hugely suc-
cessful in economic, diplomatic and mili-
tary terms. A Turk currently serves as secre-
tary-general of the Organisation of the
Islamic Conference. And since his coun-
try’s diplomatic spat with Israel earlier this
year Mr Erdogan has become a hero to the
Arab street. Many Arabs compare him fa-
vourably with their own gerontocratic
(and undemocratic) rulers.
Trouble spots
In short, Turkey matters today in a way that
few would have thought possible a decade
ago. Indeed, in some ways it counts for
more than when the Ottoman empire was
crumbling a century ago and Turkey was
widely known as the sick man of Eu-
rope. And yet there are persistent blem-
ishes on its seemingly bright prospects.
One is the Kurdish question, of which
more later. As it happens, the AK govern-
ment has done more than almost any of its
predecessors to give a better deal to Tur-
key’s Kurds, who make up 14% of the pop-
ulation, most of them living in the coun-
try’s poor south-east. But Kurdish PKK
guerrillas stepped up their terrorist cam-
paign earlier this year and the precarious
ceasere that is now in force may not last.
A second is that the economy, for all its
recent strength, is still a work in progress.
Ination is not wholly defeated, the cur-
rent-account decit is large and Turkey’s
competitiveness in manufacturing is a
matter for concern. Worst of all, unem-
ployment is distressingly high, especially
in the east and south-east and among
women and the young. These failings will
be analysed in more detail in the next sec-
tion of this report.
A rapidly growing country inevitably
has social problems to contend with as
well. On the UN Development Pro-
gramme’s human-development index, a
general measure of wellbeing, Turkey
comes below Russia, Albania and Roma-
nia. Despite some excellent universities
and hospitals, the quality of education and
health care is patchy and uneven. More-
over, corruption is a huge problem. The
corruption rankings of Transparency Inter-
national, a Berlin-based lobby group, put
Turkey behind South Africa and on a par
with Cuba.
And then there is Turkish politics. The
AKgovernment has done well since it took
oce in 2002. The party dislikes labels, yet
the term mildly Islamist suits it, as does
conservative. Mr Erdogan himself likens
AK to a European Christian Democratic
party. There is no longer a serious danger
of a military coup. But despite his victory
in September’s referendum, Mr Erdogan
faces a tricky election next summer. His au-
thoritarian streak has attracted much criti-
cism, and the main opposition party has
begun to revitalise itself under a new
leader. The AK party may yet win another
majority, but there is also a chance that it
will fall short and Turkey could nd itself
with a coalition government for the rst
time since 2002.
Turkey’s experience of the past few de-
cades suggests that the country needs rm
external anchors to stop it drifting into
dangerous waters. It has depended on two
in particular. The rst is the IMF: whenever
the economy has veered o course, the
IMF has been called in to drag it back. The
most dramatic instance came after the cri-
sis of 2001, when Kemal Dervis took over
as nance minister and, with the help of
the IMF, devised the scal and monetary
framework that was largely responsible for
the country’s subsequent success.
The second and even weightier anchor
has been the lure of EU membership.
Whereas the IMF has steered only Turkey’s
macroeconomic policy, the EU has been
the catalyst for an entire programme of so-
cial and economic reforms. Even before
membership talks began in October 2005,
the EU was able to persuade Turkey to
adopt a wide-ranging liberal, free-market
and democratic agenda.
The problem with both anchors is that
over the past ve years their pull has got
much weaker. A healthier economy and
stronger public nances have enabled Tur-
key to jettison its IMF programme (though
some ministers tried to keep it). In the
run-up to a possibly tight election next
year, this may make it easy for the govern-
ment to oer irresponsible scal induce-
ments that could jeopardise the long-term
health of the public nances.
Even more disturbing is the loss of EU
inuence. Few people, either in Brussels or
in Ankara, any longer believe that Turkish
membership will come about in the fore-
seeable future. The negotiations have pro-
gressed agonisingly slowly. Over half the
chapters in the accession talks are now
blocked, many because of an unresolved
dispute over Cyprus. Political leaders as
well as voters in France, Germany, Austria
and the Netherlands have made it clear
that they do not want Turkey in the EU.
So it is not surprising that many Turks
consider that the EUanchor has lost its pur-
chase. The country’s political leaders these
days speak less and less about their EUas-
pirations. Why should Turkey implement
dicult reforms to meet European stan-
dards, some ask plaintively, if EUmember-
ship will not be forthcoming in return? In-
deed, why continue on the path of
free-market liberal democracy at all?
That is the kernel of Turkey’s diculties
today. So long as it could rely on the IMF’s
tutelage and had a real hope of EU mem-
bership, its course was xed. But with the
IMF gone and the EUreceding over the ho-
rizon, Turkey needs new anchors. The best
place to start looking is the economyfor
without continuing economic success, not
much else will go right. 7
The Economist October 23rd 2010 A special report on Turkey 5
1
C
ONTRARY to popular belief, countries
do learn from nancial crises. After a
wretched 1990s Turkey suered an eco-
nomic meltdown in 2000-01. GDP shrank
by almost 6%, the lira collapsed, most of
the banks had to be rescued and the IMF
was called in (again). Since the cost of res-
cuing the banks amounted to almost one-
third of GDP, the public debt shot up from
around 38% to 74% of national income. The
experience was painful, but at least it left
Turkey better prepared than other coun-
tries when the next crisis struck seven
years later.
That was largely thanks to Mr Dervis, a
World Bank economist who became Tur-
key’s nance minister in March 2001. Be-
sides rescuing the banks, he devised a new
framework for Turkish monetary and scal
policy. When the AK party came to power
in November 2002, much of the hard work
of repairing Turkey’s battered economy
had already been done. Sensibly enough,
the new nance minister, Ali Babacan,
continued with these policies.
The results have been spectacular. In
the 1990s Turkey’s GDP grew by an annual
average of just 4%. In 2002-08 that rose to
an average of about 6% before the reces-
sion hit in 2009 (see chart 1). Ination, run-
ning at an average of 75% a year in the
1990s, is down to 9% today. The public debt
is back below 50% of GDP. The banks have
been transformed. Suzan Sabanci Dincer,
chairman of the biggest, Akbank, notes
that tough regulation after the 2000-01 cri-
sis lifted the capital ratio to a dizzying 19%
and pushed down the loan-leverage ratio
to below the EU’s or America’s. The num-
ber of banks has fallen from 79 to 49.
When the OECD published a report on
the Turkish economy in September, its sec-
retary-general, Ángel Gurría, said that Tur-
key would be the organisation’s fastest-
growing member this year and likened its
performance to that of the emerging-mar-
ket BRICs. Some economists suggest that
over the next seven years Turkey’s growth
will match or exceed that of any other big
country except China and India.
The markets have taken note of Tur-
key’s rapid growth and prudent economic
and nancial management. When the lat-
est crisis hit Europe, credit-default swap
spreads rose sharply for countries such as
Greece, Hungary, Portugal and Spain, yet
they barely budged for Turkey. Indeed, this
summer Turkey was able to boast a CDS
spread below that of Italy, a G7 economy
(see chart 2). Turkey is now on the verge of
achieving an investment-grade rating for
the rst time. Foreign investors have begun
to see it as a good thing. In the 1990s foreign
direct investment was running at less than
$1 billion a year, but ten years later, before
the crisis briey sent it back down again, it
was closer to $20 billion.
Anatolian tigers
Turkish entrepreneurs have responded
splendidly to the new opportunities
created by a stronger economy. Curiously
for a place that has such industrious peo-
ple, Turkey does not have an especially
good record in business. In Ottoman times
the Armenians, Greeks and Jews were re-
sponsible for most of the country’s com-
merce. Proud Turks either served in the
army or farmed. But that has changed.
These days Turkish rms are leading
lights in many manufacturing industries,
notably in construction, furniture, textiles,
food-processing and carmaking. Unlike -
nance, which has largely stayed in Istan-
bul, such businesses have tended to devel-
op most in fast-growing Anatolian cities
such as Bursa, Kayseri and Konya. Their
bosses help to form a backbone of support
for the AKparty.
Umit Boyner, head of TUSIAD, the
Turkish employers’ federation, stresses the
country’s strong nancial sector and its big
exporters of textiles, cars and in agribusi-
ness. John McCarthy at ING, a Dutch bank,
suggests that foreign investment has made
all of Turkish business more competitive.
Turkey is now the world’s biggest cement
exporter and second-biggest jewellery ex-
porter. Its construction order book is sur-
passed only by China’s. It is Europe’s lead-
ing maker of televisions and DVD players
and its third-biggest maker of motor vehi-
cles. English-speakers may laugh at rms
with names such as Koc and Arcelik, but
Turkish multinationals like Enka construc-
tion, Turkcell, Calik Holding and, yes, Koc
are growing fast. So is Turkish Airlines.
Find a building site anywhere in the for-
mer Soviet Union or across the Middle
East, and you will nd Turkish suppliers
and companiesand Turkish workers, too.
Yet not everything is blooming in Tur-
key’s economic garden. The dumping of
the IMF programme in 2009 left scal poli-
cy adrift. Mehmet Simsek, the nance min-
ister, wanted to retain the IMF at the time,
but Mr Babacan, who is now deputy prime
minister, points out that none of Turkey’s
previous IMF programmes was ever com-
pleted (even Mr Dervis’s was interrupted
by the 2002 election). He suggests that it is
better for Turkey to be directly responsible
for its own scal strategy. Mr Simsek has
drawn up medium-term scal rules that
aim to bring the budget decit back below
3% of GDP within the next two years, but
the nance ministry has delayed their im-
Doing it by the book
The economy has had a big boost from much sounder management
1
Downs and ups
Source: OECD *Forecast
GDP and consumer prices
% change on previous year
6
3
0
3
6
9
12
0
20
40
60
80
100
120
+

1990 95 2000 05 10*
GDP Consumer prices
2
Confidence limits
Source: Bloomberg *Credit-default swap
Five-year CDS* spreads, percentage points
2009 2010
0
2
4
6
8
10
12
Greece Ireland Hungary
Italy Turkey
6 A special report on Turkey The Economist October 23rd 2010
2
1
plementation until some time next year
after the election.
Turkey suers from two other bug-
bears: ination and a large current-account
decit. Mr Simsek claims that today’s 9%
ination rate is in large part due to tempo-
rary factors that will fall away next year.
The current-account decit is more worry-
ing because it suggests that competitive-
ness is steadily eroding. Mr Simsek ac-
knowledges a shortfall in domestic
savings that will be hard to correct. But on
Turkey’s bond rating he remains bullish:
Turkey is the largest convergence story in
this time-zone, and maybe in the world.
Even so the government needs to get
more serious about deregulation and
structural reform. As the OECDreport says,
higher employment and productivity
growth will not be possible without pro-
found regulatory reform. In 2010 Turkey
came 73rd out of 183 countries in the World
Bank’s annual ease of doing business
rankings. Within the OECD, it comes last or
second-last for restrictive product-market
regulation, excessive state control and bar-
riers to entrepreneurship.
All this shows up in perhaps Turkey’s
most serious economic problem: chronic
unemployment (see chart 3). Mr Babacan
talks up the creation of 1.5m new jobs in the
shadow of the world recession during
2009-10. Unemployment has fallen sharp-
ly this year, but it still stands above 10%,
and among the young, the unskilled and in
the east it is much higher. Women are vast-
ly underused: among those of working age
only 26% are in employment, down from
34% in the late 1980s, leaving a large gap be-
tween male and female employment
rates. This cannot be entirely explained by
cultural factors in a mainly Muslim coun-
try. After all, Turkey has quite a few women
in senior positions in businesssuch as
TUSIAD’s Ms Boyner.
Polls show that unemployment is a big
worry for Turks. A Eurobarometer poll in
October 2009 found 63% saying it was the
most important issue facing the country.
Mr Babacan and Mr Simsek have respond-
ed with a new employment strategy. But
the labour market is too rigid: minimum
wages are too high and do not allow
enough regional variation, and temporary
labour contracts are discouraged. One con-
sequence is a large black economy, which
also keeps the tax take low.
Cheap isn’t cheerful
Further ahead loom potentially troubling
structural weaknesses. Much of Turkey’s
recent success has rested on relatively low
labour costs, compared with a higher-cost
European market. Yet as the country has al-
ready found with textiles, there is almost
always another source that can oer even
lower labour costs. China and India have
become big threats to much of Turkey’s
low-skilled industry.
Both government and industry recog-
nise that the best way forward is to move
upmarket. Strenuous eorts have been
made to improve schools and universities
and promote high technology. The results
are already in evidence. In 1990 only 15% of
Turkey’s exports were in medium- or high-
tech sectors, according to Fatma Melek,
chief economist at Akbank. Today, the g-
ure is almost 40%. Yet Turkey spends only
0.7% of its GDP on research and develop-
ment, compared with an OECDaverage of
2.3%. And with almost a quarter of the
workforce in agriculture, overall produc-
tivity remains low.
Another challenge is to nd fresh mar-
kets. Traditionally Turkey has relied mainly
on the West, especially Germany and the
rest of Europe. But although the EU is still
Turkey’s biggest market by far, its share is
falling. In 2002 it took 56% of Turkish ex-
ports; this year the gure will drop below
50%. At the same time the share of exports
going to the Middle East has doubled, from
9% to 18%. Exports to Iran and Syria togeth-
er are now worth more than exports to the
United States.
The importance of this shift goes far be-
yond the economic gains of access to more
diversied markets. As Turkish business-
men fan out across the Middle East and re-
new contacts in the old Turkic world
(which stretches from Turkey through
Azerbaijan, Turkmenistan and as far as
Xinjiang in China), they are helping to un-
derpin a stronger presence in a region that
Turkey largely ignored for many years.
That reects a signicant shift in Turkish
foreign policyone with which some in
the West are far from comfortable. 7
3
Too little work
Source: Turkstat *June 2010
Unemployment rates, %
5
7
9
11
13
15
1990 95 2000 05 10*
Men
Women
T
URKISH foreign policy used to be sim-
ple. Ever since Ataturk dragged the
country into the modern world by driving
out the sultan, adopting the Latin alphabet
and abolishing the Muslim caliphate, the
country has leant westwards. Since the
second world war that has meant joining
NATO (in 1952), backing the West against
the Soviet Union and aspiring to join the
European project. Like America, Turkey
was also consistently pro-Israel.
It largely ignored the rest of its region,
which includes most of the countries that
were once part of the Ottoman empire. In
his book The New Turkish Republic, Gra-
ham Fuller, a former CIA analyst and aca-
demic, recalls telling a Turkish friend that
he was a Middle East expert, only to be
asked, so why are you in Turkey? In simi-
lar vein, Turkish diplomats would tell their
Western friends that we live in a bad
neighbourhood and that the Turk’s only
friend is another Turk.
Over the past few years all this has
changed. Rather than feeling sorry for it-
self over its rough surroundings and lack
of friends, Turkey has a new policy of zero
problems with the neighbours. It is no
longer carping at Armenia over its allega-
tions of genocide in 1915 or reproaching the
Arab world for its British-supported stab
in the back in 1917-18. Instead it is cultivat-
ing new friendships in the region, oering
The Davutoglu eect
All change for foreign policy
The Economist October 23rd 2010 A special report on Turkey 7
2
1
trade, aid and visa-free travel. And far from
backing Israel militarily and diplomati-
cally, Turkey has become a leading critic.
The man largely responsible for engi-
neering this dramatic shift is Ahmet Davu-
toglu, Turkey’s foreign minister since 2009.
Before that he was an international-rela-
tions adviser to Mr Erdogan. In 2001, before
the AKgovernment came to power, Mr Da-
vutoglu published a book, Strategic
Depth, that set out a new policy of en-
gagement with the region. He rejects accu-
sations that he is neo-Ottoman, yet his
doctrine certainly involves rebuilding ties
round the former Ottoman empire.
Mr Davutoglu is an engaging, bookish
character with a formidable knowledge of
history. He thinks that Turkey made a mis-
take by ignoring its backyard for so long,
and he is convinced that its new strategy of
asserting its interests, both in the region
and in the world, makes his country more,
not less, attractive to the West. Nothing in-
furiates him more than articles in Western
publications suggesting that Turkey has
tilted east, or even claiming that we have
lost Turkey. Who is we? he asks. After
all, Turkey maintains NATO’s biggest army
after America’s; it is committed in Afghani-
stan and other trouble spots; and it is nego-
tiating to join the EU. As Mr Davutoglu
puts it, Turkey is not an issue; it is an ac-
tor. His country now matters more than
ever to Europe and the West, he claims.
Certainly Mr Davutoglu’s new policy in
the region is paying dividends. In Iraq, for
instance, Turkey has strong commercial
and diplomatic interests. At one time the
Kurdish region of northern Iraq was a big
headache, but now Turkey is playing a lead
role in stabilising the placeand winning
co-operation from both the region and
Baghdad against the PKK. Its relations with
Syria, for many years a problem country
for the West, are ourishing as never be-
fore. It has even sought to forge closer dip-
lomatic ties with the still more proble-
matic Islamic republic of Iran, much to
America’s annoyance.
Turkey is also active again in its old
stamping-ground in the Balkans, especial-
ly in Bosnia and Kosovo. Greek-Turkish re-
lations, which improved markedly even
before the AK party came to power in
2002, remain broadly harmonious, al-
though Cyprus is still a point of friction.
The country is also paying more attention
to Africa; it has opened or is planning to
open 12 new embassies there.
The Turks have even made a partial at-
tempt at reconciliation with Armenia, a
process begun when President Abdullah
Gul visited Yerevan in late 2008 to attend a
football match. After the visit the two sides
signed bilateral protocols to normalise re-
lations and reopen the land border, closed
during Armenia’s war with Azerbaijan
over Nagorno-Karabakh in the early 1990s.
But thanks mainly to Mr Erdogan’s insis-
tence on linking the protocols to progress
on the Nagorno-Karabakh dispute, the pro-
tocols have yet to be ratied.
Turkey has also made the most of being
an energy corridor between east and west.
As a substantial energy importer with a
fast-growing commercial relationship
with Russia, it has a direct interest in the
matter. But a decade of confrontation over
oil and, especially, gas between Russia and
the West has taught all sides to value Tur-
key as a buer. Oil and gas pipelines al-
ready snake across Turkey from Azerbaijan
via Georgia. And the Turks have signed up
to the ambitious Nabucco gas-pipeline
project, intended to bypass Russiathough
plenty of Russians ask where the gas for
Nabucco will come from. Energy diplo-
macy often comes to naught, but it will be
hard to ignore Turkey in any future deals.
Mr Babacan, the deputy prime minis-
ter, says it is right for Turkey to have a sense
of global responsibility. He and Mr Davu-
toglu also like to tell their European coun-
terparts that, by playing a more active role
in its region, including in the Balkans, Tur-
key is demonstrating how valuable it
would be as a member of the EU.
Yet Mr Davutoglu and Mr Babacan are
being somewhat disingenuous. Certainly
Turkey’s inuence in its region allows it to
lay claim to being an interesting and poten-
tially useful partner. But as it has also
found, the Middle East is such a complex
place that its policy of zero problems with
the neighbours cannot be sustained all of
the time. Nor is it easy to maintain a friend-
ly dialogue both with the West and with
the West’s enemies.
Freelance diplomacy
Iran is a prime example. Since it is a neigh-
bour, a big oil and gas producer and an in-
creasingly signicant trade partner, the
Turks have strong reasons to seek better re-
lations with it. That is one reason why,
along with the Brazilians, the Turks tried
their own freelance nuclear diplomacy
with Iran earlier this year. It is also why
they are naturally averse to tougher trade
sanctions against Iran, let alone any sug-
gestion of war.
Yet Iranian nuclear diplomacy is both
delicate and endishly complicated. The
Turkish-Brazilian plan, when it emerged,
seemed softer on Iran than any put for-
ward by Western negotiators. When, soon
afterwards, a resolution to tighten sanc-
tions came before the UNSecurity Council
in June, Turkey decided to vote against it to
keep its dialogue with Iran going (though
Mr Davutoglu claims to have used his dip-
lomatic inuence to persuade Lebanon to
abstain and Bosnia to vote in favour). Not
surprisingly, the Americans were furious.
Israel is an even better illustration of
the problems inherent in Turkey’s new for-
eign policy. In May a Turkish-led civilian
otilla led by the Mavi Marmara attempt-
ed to break the Israeli blockade of Gaza.
Gaza has been an especially sore point in
Turkey ever since Israel’s invasion in Janu-
ary 2009not least because the Turks were
deep into shuttle diplomacy to open peace
talks between Syria and Israel just when
the attack on Gaza began. Shortly after-
wards Mr Erdogan walked o a platform
he was sharing with the Israeli president,
Shimon Peres, at the World Economic Fo-
rum in Davos, shouting that Israel certain-
ly knew how to kill people.
When the Israeli army intercepted the
Turkish otilla in international waters, its
soldiers were surprised to be physically at-
tacked on the Mavi Marmara. They retaliat-
ed by opening re, killing eight Turkish citi-
zens and one man who held joint Turkish
and American citizenship. The Turks were
outraged. Mr Davutoglu says this is the rst
time in the history of Ataturk’s republic
that unarmed civilians have been killed by
the armed forces of another country. Mr Er-
Love thy neighbour, says Davutoglu
8 A special report on Turkey The Economist October 23rd 2010
2
1
dogan and Mr Davutoglu demanded a UN-
led inquiry and an Israeli apology. In Sep-
tember the UN human-rights council duly
criticised Israel, but the Israelis rejected its
ndings and have refused to apologise. Mr
Davutoglu insists that relations with Israel
can never be the same again.
Yet this will come at a cost. The Israelis
are not popular with many people these
days, but they still have friends in Wash-
ington, DC. By making Gaza a centrepiece
of its foreign policy and even more by
openly sympathising with Hamas, which
runs Gaza, Turkey has gained new friends
in the Arab world but alienated allies in
the West. Indeed, it was the Mavi Marmara
incident and the Turkish response to it that
led to an outpouring of comments that the
West was losing Turkey. There could be
more serious consequences. For instance,
America’s Congress is now more likely to
adopt a resolution condemning the Arme-
nian genocide of 1915 which is put forward
every year but which the Turks have so far
managed to prevent going through.
The mercurial Mr Erdogan does not
make it any easier for Turkey to conduct a
coherent foreign policy, as demonstrated
by the Davos incident and by his torpedo-
ing of the Armenian deal. In 2004-05 he
twice came close to jeopardising Turkey’s
chances of opening membership negotia-
tions with the EU. Semih Idiz, a journalist
with Milliyet newspaper, jokes of Turkish
foreign policy: Davutoglu makes, Erdogan
breaks and Gul picks up the pieces.
Turkish public opinion adds another
layer of complication. Ordinary Turks now
have a strikingly low opinion of America.
In 2000, according to the Pew Global Atti-
tudes Project, some 52% of Turks thought
well of America, a smaller share than in
Germany and Britain but about the same
as in Spain. The Iraq war changed this, es-
pecially after the Turkish parliament voted
in March 2003 not to let the Americans
move troops across Turkey for a possible
second front. By 2007, thanks mainly to the
war, less than 10% of Turks had a favour-
able opinion of America. That gure has
ticked up since Barack Obama became
president, but it is still lower than in the rest
of Europe. A recent survey by the German
Marshall Fund found that approval ratings
for Mr Obama too have fallen sharply,
from 50% in 2009 to 28% this year.
In Europe, Turkey’s new foreign policy
has often gone down no better than in
America. Mr Davutoglu and his colleagues
argue that Turkey’s diplomatic ventures in
its region and elsewhere, like its crucial
role in energy and its military prowess, un-
derline how useful Turkey could be as a
member of the EU. But that is not how op-
ponents of Turkish membership see it.
Those opponents were cheered both by
Turkey’s bungling in Iran and by the Mavi
Marmara incident. In their view, these
events prove that Turkey is too ready to
wander o the West’s reservation and
pander to Islamist extremistsand not at
all ready for solidarity with the EU’s com-
mon foreign policy. The EU, they argue,
cannot accommodate an aspiring global
player with interests so dierent from Eu-
rope’s, especially one so big. That argu-
ment has grown more resonant as Turkey’s
membership negotiations have stalled. 7
T
URKEY’S involvement with the Euro-
pean project has a long and chequered
history. The country expressed interest in a
link with the original six-strong European
Economic Community as far back as 1959,
the rst non-member to do so. In 1963 it
signed an association agreement with the
EEC. Walter Hallstein, a German Christian
Democrat who was the rst president of
the European Commission, hailed this as
explicit recognition that Turkey is a part of
Europe. Sadly that view is not shared by
many in his party today.
The Turks did not formally seek mem-
bership until 1987, when the ebullient Tur-
gut Ozal, a modernising prime minister
and European enthusiast, submitted an ap-
plication even though he had been
warned o doing so. The European Com-
mission advised against it in 1989. Turkey’s
dreadful 1990s put paid to any idea of re-
viving it quickly. Instead a later prime min-
ister, Tansu Ciller, negotiated a customs un-
ion with the EU that took eect in 1996,
securing unfettered access to the European
single market for the rst time.
By then the newly liberated countries
of eastern Europe were also queuing up to
join. At an EU summit in December 1997
European leaders decided to invite no few-
er than ten countries from eastern Europe,
plus Cyprus and Malta, to open member-
ship negotiations. Turkey was left out.
Turkish generals started to mutter that they
might have done better in Brussels if they
had joined the Warsaw Pact, not NATO.
European leaders made amends two
years later by declaring that Turkey is a
candidate state destined to join the union
on the basis of the same criteria as applied
to other candidate states. When the AK
government took power in 2002 it pro-
claimed its goal of EU accession, just as its
predecessor had done. And it passed
enough reforms to persuade EU leaders
unanimously to agree to begin member-
ship talks in October 2005.
Keep your promises
Sadly, despite diplomats’ doctrine of pacta
sunt servanda (treaties and promises
should be kept), that has proved the high
point of Turkey’s European dream. In Ger-
many the Christian Democrat Angela Mer-
kel was about to replace the Social Demo-
crat Gerhard Schröder as chancellor. Less
than two years later Nicolas Sarkozy took
over from Jacques Chirac as French presi-
dent. Mrs Merkel has long opposed Turkish
EU membership, advocating a privileged
partnership instead. Mr Sarkozy has con-
sistently opposed Turkish entry on princi-
ple. Public opinion in Austria, the Nether-
lands and some other countries has
become more hostile.
Three things have made matters worse
for Turkey’s EU aspirations. The rst is Cy-
prus, which joined the EU along with the
east Europeans in May 2004. As a prelude,
the then UNsecretary-general, Ko Annan,
tried one last time to reach a deal on unify-
ing the divided island. But although the
Turkish-Cypriots overwhelmingly said yes
to the deal in a referendum, the Greek-Cyp-
riots even more overwhelmingly said no.
As a consequence the (Greek-Cypriot) re-
public joined the EUas the legitimate gov-
ernment with the acquis communautaire
of EU legislation, suspended for the (Turk-
ish-Cypriot) north. Cyprus is now the big-
gest single obstacle to Turkey’s EUhopes.
A fading European dream
Will Turkey ever join the EU?
The Economist October 23rd 2010 A special report on Turkey 9
2
1
The second problem has been domestic
political upheaval as the secular establish-
ment and military top brass have battled
against the AK government. A series of
coup threats, conspiracies and constitu-
tional court cases have created the impres-
sion of a country in political turmoil, help-
ing to stoke European opposition to Turk-
ish membership.
Third was the economic crisis that be-
gan in 2008 and hit Europe especially hard
in 2009. Recession and rising unemploy-
ment have put paid to most thoughts of
further EUenlargement. As it is, the deteri-
orating economy, the recent troubles of the
euro zone and a backlash against immigra-
tion from the east have all lent force to
widespread complaints that the central
and eastern European countries were let
into the EUtoo early.
Chapters of accidents
Turkey’s membership negotiations have
all but ground to a halt. Of the 35 chap-
ters into which the talks are divided, as
many as 18 are blocked by the EU as a
whole, by Cyprus or by France. They in-
clude areas where Turkey might be expect-
ed to have a lot to oer, such as external re-
lations and energy. Only one chapter, on
science, has been closed. So far this year
just one new chapter, on food-safety stan-
dards, has been opened. Next year it may
prove impossible to open any at all.
Not surprisingly, the Turks are getting
fed up. According to the Pew Global Atti-
tudes Survey, back in 2005 some 68% of
Turks favoured joining the EU, with 27%
against. Now the numbers are 54% in fa-
vour and 40% against. Eurobarometer
polls show similar results. In September a
German Marshall Fund survey found that,
whereas in 2004 some 73% of Turks
thought joining the EU would be a good
thing, in 2010 only 38% did (see chart 4).
Both Egemen Bagis, the Turks’ chief
European negotiator, and Stefan Fule, the
enlargement commissioner in Brussels,
gamely insist that the talks are proceeding
normally. Mr Bagis trots out two lines that
have become familiar to observers. The
rst is that the process is more important
than the end-result. The AK government
says it is making reforms for their own
sake, not just to satisfy Brussels.
That is sensible. Most things a country
has to do to qualify to open membership
talks and then to join are desirable in them-
selves (it would be a sad comment on the
EUif they were not). When the new mem-
bers from central and eastern Europe
joined, the biggest reforms were those in-
troduced before accession. Afterwards the
EUloses much of its leverage.
Yet even if the journey is the most im-
portant thing, it is harder to persuade the
Turks to undertake it if they believe they
will never reach their destination. Why
should businessmen welcome the open-
ing up of Turkey’s public-procurement
market to more competition from Euro-
pean companies, for example, if they are
not sure that they will one day be reward-
ed with membership?
Mr Bagis’s second line is that every
day that passes Europe needs Turkey more
and Turkey needs Europe less. In the same
vein, Mr Davutoglu likes to argue that his
visionary foreign policy is making Turkey
ever more valuable to the EU. Once again,
there is something in this. A rapidly grow-
ing Turkey that acquires greater economic,
military and diplomatic clout ought to be a
bigger prize for the Europeans to catch. But
the argument can still be taken too far, in
two respects.
The rst is that, despite the rhetoric,
joining the EU does not really involve any
negotiation at all. An applicant country is
simply required to adopt and implement
all 160,000-odd pages of the European ac-
quis. To assert that the EU needs Turkey
more than the other way round sets the
wrong tone, making it sound as though the
supplicant is Brussels, not Ankara.
Second, an enterprising foreign policy
of the sort that Mr Davutoglu is pursuing
can jar with the EU’s own policy. This is not
just a matter of saying no to sanctions
against Iran or uttering tirades against Isra-
el. The Turkish goal of visa-free access for
almost all its neighbours could easily con-
tradict the EU’s own plans for tighter bor-
der controls. No wonder some in Berlin,
Paris and even Brussels maintain that Tur-
key is too wilful and unreliable ever to sit
comfortably inside the EU.
Can anything be done to get Turkey’s
EU aspirations back on track? No country
has ever begun entry negotiations without
eventually being oered full membership,
but plenty have encountered big problems
on the way. Britain’s application was twice
vetoed by France’s Charles de Gaulle in the
1960s. Spain took nine years to get in. Nor-
way was twice oered membership, only
for voters to turn it down in referendums.
The best way to promote Turkey’s
membership now would be to resolve the
Cyprus problem, but the prospects of that
look shaky (see box on next page). It is also
possible that, after the Turkish election
next June, a new constitution and a re-
newed enthusiasm for reform may inject
fresh life into the negotiations. The rising
possibility that Mr Sarkozy will lose the
presidential election in France in 2012 is
also a good omen for Turkey.
But it may not be enough just to sit and
wait. Hence another idea, suggested by
Heather Grabbe of the Open Society Insti-
tute in Brussels, among others: to incorpo-
rate Turkey into the EU’s foreign and securi-
Erdogan in search of ever closer union
4
Falling out of love
Source: German Marshall Fund/
Transatlantic Trends
*EU7 to 2006,
EU11 from 2007
Do you agree that Turkey joining
the EU would be a good thing? %
0
20
40
60
80
2004 05 06 07 08 09 10
Turkey
EU*
10 A special report on Turkey The Economist October 23rd 2010
2 ty policy now, without waiting for it to be-
come a full member. This would make the
country more familiar with the give-and-
take of nding a common position and
bolster the EU’s security. Turkey has a pres-
ence in places like Iran and Syria where the
EU’s inuence is weak. Mr Davutoglu
might be reluctant to trammel his dream of
an independent foreign policy. But the
Turks might accept a strategic dialogue so
long as it supplemented rather than sup-
planted its membership talks.
Another idea, promoted by Cengiz Ak-
tar, a seasoned Turkish foreign-policy com-
mentator, is to set a target date by which
the negotiations should be wrapped up
and membership achieved. He has sug-
gested 2023, the centenary year of the
founding of Ataturk’s republic. It is su-
ciently far o to be tolerable to opponents
of early Turkish accession, but close
enough to encourage doubters within Tur-
key. Yet setting a date would make a dier-
ence only if people really believed in it,
and the precedents are not encouraging.
The EUguaranteed entry in 2007 on a xed
timetable to Bulgaria and Romania. Both
countries joined before they were really
ready, and the results have been messy.
Other suggestions include agreeing
now that Turkey will never enjoy free
movement of labour in the EU, to reassure
European workers fearful of hordes of
Turks stealing their jobs; or limiting Tur-
key’s voting weight in the EU’s institutions
to stop it becoming the most powerful sin-
gle country. But all of these would look like
a form of second-class membership,
which would be hard for the Turks to ac-
cept. In the end there may be no alternative
to plodding on with the membership ne-
gotiations and just hoping for a change in
the climate on both sides. Nobody has any
reason to stop the talks now.
Yet this poses problems of its own. One
is how to keep the negotiators on both
sides busy. When they run out of chapters
to open and discuss, what will they do?
And even if something can be found to oc-
cupy them, there is a second and bigger
problem: how to sustain the Turks’ interest
in joining. Much will depend on what hap-
pens next in Turkish politics, now at an
unusually critical moment. 7
C
YPRUS bedevils Turkey’s hopes of
joining the European Union. The pro-
blem dates almost as far back as the leas-
ing of the island to Britain after the 1878
Congress of Berlin. In 1960 Cyprus won its
independence and became a federal state
that, in theory, respected the rights of both
Greek- and Turkish-Cypriots (respectively
80% and 20% of Cyprus’s 1m-odd people).
But as early as 1964 the Turkish-Cypriots
were driven into enclaves by the majority
Greek-Cypriots.
In July 1974 a coup against the Greek-
Cypriot leader, Archbishop Makarios,
brought in a regime set on enosis, or union
with Greece. Turkey invaded northern Cy-
prus in the same month. After a brief cam-
paign the Turks captured over a third of
the island, driving out or killing the Greek-
Cypriots. A ceasere line turned into a
UN-patrolled green line. Nicosia is Eu-
rope’s last divided capital.
There have since been six rounds of
UN-sponsored talks on unifying the is-
land. Until 2003 they foundered on the
opposition of the obdurate Turkish-Cypri-
ot leader, Rauf Denktash, who openly pre-
ferred the idea of an independent north
and in 1983 proclaimed the Turkish Repub-
lic of North Cyprus, which was recog-
nised only by Turkey. The most serious ef-
fort at a settlement came in 2003-04.
Partly because the obstacle to unity had
always been Mr Denktash, but mainly be-
cause Greece threatened to block EU en-
largement to eastern Europe, the EUdecid-
ed in 2000 that it would admit Cyprus as a
member even if the island remained di-
vided. With Mr Denktash sidelined and a
new government in Ankara, the time
seemed ripe for a new eort by the UN
secretary-general, Ko Annan.
But the eort was doomed by the un-
conditional promise to the Greek-Cypri-
ots of EU membership. When the Annan
plan for unication was set out in early
2004, that promise allowed the Greek-
Cypriot leader, Tassos Papadopoulos, to
urge voters to reject it. In April 2004 some
65% of Turkish-Cypriots, lobbied from An-
kara, voted in favour, but 76% of Greek-
Cypriots said no. A week later Cyprus
joined the EU, with the acquis communau-
taire suspended in the north.
When Turkey opened its membership
talks with the EU in 2005, Cyprus
promptly became a big issue. As mem-
bers, both Greece and Cyprus have a veto.
Also, Turkey’s customs union with the EU
was due to be extended to all new EU
members, including Cyprus. But the Turks
have refused to allow Cypriot vessels ac-
cess to their ports and airports because
the Greek-Cypriots are blocking an EU
promise, made after the referendums in
2004, to allow direct trade with the north.
In 2008 Mr Papadopoulos was ousted
by a more moderate president, Demetris
Christoas. By chance Mr Christoas was
an old trade-union comrade of the Turk-
ish-Cypriot leader, Mehmet Ali Talat.
Their friendship encouraged another
round of talks. But Turkish-Cypriot voters
failed to re-elect Mr Talat in April 2010. In-
stead they chose Dervish Eroglu, an oppo-
nent of the Annan plan for unication
who barely knows Mr Christoas.
The settlement talks might yet get a
push from the European Parliament,
which hopes to revive a regulation that
would allow direct trade with the north.
Under the Lisbon treaty, this can be adopt-
ed by majorities that circumvent a Cypri-
ot veto. Yet it has only a small chance of
passing. The odds on a settlement seem
equally slim, even though Mr Eroglu and
Mr Christoas are still meeting. There is
now talk of permanent partition. But if
the Cyprus problem remains unsolved
Turkey has little hope of joining the EU.
Cyprus remains a
stumbling-block
Immovable object
The Economist October 23rd 2010 A special report on Turkey 11
1
T
URKEY’S politics used to be as quirky
and colourful as the country itself. Par-
ties would be formed and as quickly disap-
pear, politicians would suddenly be
banned, coalitions of all shapes and sizes
would be triedand every so often the
army would kick out an errant govern-
ment. But all this changed after Turkey’s
economic crisis of 2001.
In the election of November 2002 just
two parties were returned to Turkey’s
grand assembly, or parliament; all others
failed to reach the 10% threshold below
which they win no seats. Mr Erdogan’s
mildly Islamist Justice and Development
(AK) party got 34% of the vote and Ata-
turk’s old Republican People’s Party (CHP),
led by Deniz Baykal, took 19%. It was
enough for AK to form a single-party gov-
ernment that has been in power ever since.
Mr Erdogan has been the dominant ac-
tor on the Turkish political stage for almost
a decade. Once an aspiring professional
footballer, he became a highly successful
mayor of Istanbul in 1994. He was then a
member of Necmettin Erbakan’s Welfare
Party, an avowedly Islamist outt. Mr Erb-
akan’s government was pushed out by the
army after the so-called soft coup of 1997.
Mr Erdogan himself was briey jailed in
1999 for the oence of reading an Islamist
part of a poem in public. This conviction at
rst stopped him taking up his parliamen-
tary seat in 2002, so Abdullah Gul served
as prime minister until March 2003.
There is thus little doubt about Mr Erdo-
gan’s Islamist credentials. His democratic
ones are less clear. He once called democ-
racy a train from which to disembark on
reaching one’s destination. In oce as
prime minister he has displayed an au-
thoritarian streak. He dislikes opposition
and is intolerant of criticism. He has a rep-
utation for keeping lists and remembering
the names of his enemies, especially in the
mediaand of harassing them.
Yet he and his colleagues learnt from
their experience with Mr Erbakan and the
army in the 1990s. They broke with Wel-
fare and set up the AK party in 2001, in
many ways more of a moderate conserva-
tive party than a religious one. True, it has
roots in earlier Islamist parties and also
links with the powerful Fethullah Gulen
movement, led by a Muslim cleric now
based in America. But AK still came to
power on a moderate platform, promising
to press for EU accession and to push
through liberalising constitutional and
economic reforms.
This was not enough to reconcile the
secularist opposition or the army to Mr Er-
dogan’s government. Both have treated AK
with deep suspicion from the outset. They
were not impressed when the government
completed the economic turnaround be-
gun by its predecessor. Nor did they soften
when it enacted enough reforms to win
the much-coveted opening of EUmember-
ship talks in October 2005. Nor yet were
they interested in the rst serious eort by
any government to talk to the Kurds. To the
AK’s opponents, what really mattered was
to safeguard the secularist tradition of Ata-
turk from Islamic fundamentalism.
One early ashpoint was the treatment
of graduates of imam hatip religious
schools. Another was a proposal by the
government to make adultery a crime,
which was dropped soon after being put
forward in order to appease the EU. But the
most explosiveand symbolicissue of all
has been the Muslim veil or headscarf,
worn by the wives of both Mr Erdogan and
Mr Gul, who became foreign minister in
March 2003. The row over the veil came to
a head, as it were, in 2007.
Veils of ignorance
As in ercely secular France, the headscarf
is banned in state institutions, which in
Turkey’s case may include universities.
The AK party’s supporters were (and re-
main) keen to lift this ban as the numbers
of women sporting the veil in public goes
up (although there is some evidence that
the total number wearing it is declining).
Yet the government has been hesitant,
mindful of opposition from both the army
and the constitutional court.
What brought the issue to a crunch was
the end of the term of oce of the Turkish
president, Ahmet Sezer, who was a strong-
ly secular former judge. In the spring of
2007 Mr Erdogan announced that his can-
didate to succeed Mr Sezer was none other
than Mr Gul. The army, under a newish
chief of sta, reacted forcefully. In April
2007, in what became known as the e-
coup, it posted a message on its website
threatening to step in to prevent the ap-
pointment of a president whose wife wore
the headscarf. Soon afterwards, at the urg-
ing of Mr Baykal’s CHP, the constitutional
court issued a thoroughly dubious ruling
invalidating a parliamentary vote in fa-
vour of Mr Gul’s candidacy.
Mr Erdogan responded by calling an
early election in July 2007. AK won a con-
vincing victory, with almost 47% of the
vote against the CHP’s 21% (although its
parliamentary majority shrank because
Devlet Bahceli’s far-right Nationalist Ac-
tion Party, or MHP, also jumped the 10%
hurdle). Armed with his new majority, Mr
Erdogan got his way. Mr Gul became presi-
dent in late August. The government also
promised to change the rules so that in fu-
Balance of power
Amildly Islamist government ghts it out with the generals
Veiled up and ready to go
12 A special report on Turkey The Economist October 23rd 2010
2
1
ture the president would be elected by the
voters, not by parliament. That has led
many to predict that Mr Erdogan himself
might run for the job in 2012.
But though the army was chastened,
the government’s troubles were not over
once Mr Gul was installed in the Cankaya
palace. An act to permit the headscarf in
universities was overturned by the consti-
tutional court. Next, prosecutors called on
the same court to ban the AK party and
several named political leaders, including
Mr Erdogan and Mr Gul, for pursuing
overtly anti-secular activities. In late July
2008 the court ruled against a ban, but by
only a single vote. (In December 2009 it
banned the main Kurdish political party.)
And still the argument went on. Earlier
this year the AK government drew up
more constitutional reforms, including
provisions to subject the army to greater ci-
vilian control and give parliament more
say in judicial appointments. After failing
to win enough support in parliament, the
government dropped some plans, notably
those to make it harder to ban political par-
ties. But it put those curbing the army, in-
cluding provisions allowing leaders of mil-
itary coups to be put on trial and allowing
the government to appoint constitutional
court judges, to a referendum on Septem-
ber 12th this year, which it won by a major-
ity of 58% to 42%.
The AKgovernment has thus won most
of its battles with the secularist establish-
ment and the army. But its long-drawn-out
war has still had two highly damaging con-
sequences. One was to distract the govern-
ment. The pace of reform was much quick-
er between 2002 and 2005, when Turkey’s
EU membership negotiations began, than
since, which is one reason why the talks
have dragged. Worse, the lack of progress
in the talks has led many Turks to give up
on the EUdream altogether.
The second eect was to increase Mr Er-
dogan’s autocratic instincts. One might
have hoped he would soften after almost a
decade in oce, but he has not. Many jour-
nalists complain that the political atmo-
sphere makes it unwise to criticise the AK
party in general and Mr Erdogan in partic-
ular. Some practise self-censorship. Before
the September referendum Mr Erdogan
threatened to destroy TUSIAD, the em-
ployers’ federation, for not advocating a
yes vote. It has become especially hard to
try to expose or even discuss the corrup-
tion to be found within the AKparty.
A prime example concerns the coun-
try’s biggest media conglomerate, the Do-
gan group. Until 2006 Dogan, which con-
trols two big newspapers, Milliyet and
Hurriyet, as well as several television sta-
tions, had few diculties with the AK gov-
ernment. But in 2007 it fell out with Mr Er-
dogan over stories linking party bigwigs to
the diversion of money from a German-
based charity. After more unfavourable ar-
ticles appeared, the group suddenly found
itself the object of an unusually vigorous
tax inspection, involving as many as 16-18
tax audits in one year, says an insider.
The Dogan aair is too complex for out-
siders to grasp in detail. Tax demands have
been made and negotiated down, but the
amounts have risen. At one point in 2009
the group faced a bill as big as $4 billion,
reminiscent of Russia’s treatment of the
Yukos oil company. Dogan has since mend-
ed some fences with the government, shut
down a TV programme and sacked a few
columnists, so a truce may prevail. The -
nance minister, Mehmet Simsek, insists
that the tax authorities have acted inde-
pendently. Aydin Dogan, the main owner,
notes that his media interests, a small part
of the group, have proved the most trou-
blesome. In its 2009 progress report, the
European Commission heavily criticised
the government over Dogan.
Turkey’s second big political-conspira-
cy theory is juicier still. It comes under the
label Ergenekon, the name for a series of
charges levelled by prosecutors against va-
rious generals and other high-ranking o-
cers. These brass hats are alleged to have
plotted several coups, including one code-
named Sledgehammer, complete with
detailed plans for the deployment of jet
ghters and tanks. Many alleged leaders
languish in prison awaiting trial.
Nobody familiar with Turkey’s post-
war history would lightly dismiss allega-
tions that a coup was in the making. In 1960
the army overthrew the government of
Adnan Menderes, whom the generals pro-
ceeded to hang. There was another coup in
1971, and yet another in 1980. After that the
army rewrote the constitution, which with
a few amendments remains in force. The
most recent soft coup was in 1997.
There is some evidence of a conspiracy
in the Ergenekon case. Yet there is also rea-
son to believe that over-zealous prosecu-
tors have pushed things too far. Some of
the charges have been dropped and some
suspects released. Dani Rodrik, a Harvard
economist whose father-in-law is one of
the generals involved, is not alone in be-
lieving that many of the charges are fabri-
cated and that the Gulenists and the AK
party have exploited the case to settle old
scores. The truth about Ergenekon may (or
may not) emerge in court but it leaves a bad
smell all round.
Enter Gandhi
What of the opposition? The news is
mixed. In May the charismatic but ineec-
tual Mr Baykal was dumped as the CHP
leader after a sex scandal, to be replaced by
Kemal Kilicdaroglu, known as Gandhi for
his ascetic lifestyle. Mr Kilicdaroglu has
promised to revitalise Ataturk’s party. Sev-
eral defectors from the CHP who were fed
up with Mr Baykal and in some cases had
even started new parties have since re-
Kilicdaroglu to the rescue?
The Economist October 23rd 2010 A special report on Turkey 13
2
1
M
OST Turkish schoolchildren take part
in a weekly ag ceremony during
which they recite a patriotic chant ending,
Happy is he who calls himself a Turk.
The old Ottoman empire was a patchwork
quilt of dierent nationalities and reli-
gions, but Ataturk’s Turkey was intolerant
of non-Turks, even though the Lausanne
treaty of 1923 recognised the existence of
Armenians, Greeks and Jews. In his book
on eastern Turkey, Rebel Land, Christo-
pher de Bellaigue recalls going with a Kurd-
ish friend to meet a local governor. When
he tentatively tries to ask about the treat-
ment of minorities, the governor brusque-
ly interrupts to say that we have no mi-
norities in Turkey.
In reality Turkey today is a multi-ethnic,
multifaith society. Some 99% of the popu-
lation are Muslim, most of them Sunni. But
a minority, perhaps 10-15%, are Alevi, a hu-
manist branch of Shia Islam. Turkey also
has deep regional divides and exceptional
inequality among regions (income per
head around Istanbul is almost ten times
as high as in the poorest eastern prov-
inces). It also has some 14m Kurds, who are
Sunni Muslims but ethnically and linguis-
tically distinct from Turks. Perhaps 3m of
them live in Istanbul, which in that sense is
the world’s biggest Kurdish city. But most
are in the poor south-east, where they
make up 85-90% of the population.
I see no Kurds
The Kurdish question is a festering sore in
Turkey. That is in part because successive
Turkish governments, egged on by the
army, have refused to recognise the Kurds’
existence. Article 166 of the constitution,
which remains in force, declares baldly
that the inhabitants of Turkey are Turks.
For many years Kurds went under the de-
rogatory label mountain Turks. Not only
was Kurdish culture suppressed, but so
was the language. It was banned in educa-
tion, in broadcasting and even in parlia-
ment. In the 1990s, Leyla Zana, a newly
elected Kurdish member, was tried and
jailed after uttering a few words of Kurdish
in parliament.
As in so many countries that have sup-
pressed their minorities, a backlash was in-
evitable. It came in the form of the Kurdis-
tan Workers’ Party (PKK), founded by the
charismatic Abdullah Ocalan in 1978.
Helped for many years by Syria, the PKK
has since 1984 waged a long and violent
campaign against the Turkish army and
state. It has also committed terrorist atroc-
ities, especially but not only in the south-
east. The PKKis classied as a terrorist orga-
nisation in both Europe and America.
The army’s crackdown in response has
been even more violent. Troops and tanks
have spread out across the region. Fighter
aircraft have bombed suspected guerrilla
bases, including some in northern Iraq and
Syria. Thousands of suspects have been
killed or jailed. A system of village guards
was set up, supposedly to ght the PKKbut
as often to intimidate the locals. At the
height of the campaign entire villages
were depopulated and 1m people herded
into cities.
The grisly details of human-rights
abuses, torture and extra-judicial killings
in Diyarbakir, Batman, Van and elsewhere
have been extensively documented by
brave human-rights lawyers and cam-
paigners. The death toll over the PKK’s 26-
All Turks together?
Turkey is overcentralised and treats minorities badly
turned to the fold. But the new leader still
needs more political experience, and be-
cause he fought hard for a no vote in the
referendum he has lost some face.
It is a plus that Mr Kilicdaroglu is an
Alevi, a member of a liberal Shia Muslim
sect. He also has both Kurdish and Arme-
nian forebears. Much to his credit, and un-
like rather too many AK members, he
stands above the usual corruption of Turk-
ish politics. His political instincts seem
sound. He is strongly pro-EU, calling it a
civilisational project. He also insists that
we are completely opposed to military in-
tervention in politics: the soldiers should
remain in their barracks.
Mr Kilicdaroglu expresses proper con-
cerns about the autocratic rule of Mr Erdo-
gan’s AKparty. He accuses the government
of limiting freedom and criticises the
treatment of Dogan and the Ergenekon
case. He claims that the AK party disguises
its religious agenda by switching the focus
to secularism as a problem in itself. In for-
eign policy he frets about the risk of Turkey
moving away from the West.
The trouble is that his party (over which
he may not have total control) remains too
hostile to reform. Its decision to ght for a
no vote in September’s referendum proved
to be a mistake, not so much because the
proposals being put to the vote have in-
creased democratic control over the army
and the higher judiciary but more because
the AK won by such a convincing margin.
The CHP ercely resists political conces-
sions to the Kurds. Mr Kilicdaroglu insists,
not entirely persuasively, that the roots of
the Kurdish problem are economic, not cul-
tural or political (though he is open to the
idea of negotiations with the PKK). His
party’s vote is very low in the south-east.
Next year’s permutations
What will next summer’s election bring?
The polls suggest that AK will once again
be the biggest party, with at least 38-40%.
But that is down from 2007, and despite the
referendum debacle the CHP could go up
to 30%. The main Kurdish Peace and De-
mocracy Party (BDP) seems certain to win
seats. Much will then depend on whether
the nationalist MHP can again get above
the 10% threshold (which Mr Kilicdaroglu,
among others, would like to see lowered).
After the referendum, when many of its
supporters backed the AK, this looked less
likely. But it could still happen, especially if
PKK violence is resumedand that might
deny the AKa majority.
That would make the task of amending
the 1982 constitution trickier, although it
might at least force the AK party to do it on
a bipartisan basis. Mr Kilicdaroglu insists
that he would never go into coalition with
AK. It would be hard, though perhaps not
impossible, for any party to work with the
MHP, which espouses disturbingly nation-
alist views. A more intriguing possibility is
a pact between AKand the BDP, which has
taken over from its banned predecessor
and which successfully led a campaign in
the south-east to boycott the September
referendum. Whether such a link could
ever work depends mainly on how much
progress can be made towards solving the
Kurdish problem. Sadly at the moment
there is not enough. 7
14 A special report on Turkey The Economist October 23rd 2010
2
1
A
NATOLIA’S success stories are usually
about such places as Kayseri and Ko-
nya. Ankara too has mushroomed out of
nothing, to a point where its population is
bigger than that of any other European
capital except London, Moscow and Paris.
But there are also unsung heroes in the
south and east. One such is Gaziantep,
which with a population of some 1.35m is
the country’s sixth-largest city. Its proud
(AK) mayor, Asim Guzelbey, likes to call it
the rising star of Turkey.
Until recently, Gaziantep (Antep for
short) was a sleepy, poor provincial town.
Asmattering of tourists were drawn by its
fortress, its ancient history, the Roman
mosaics of Zeugma, the Euphrates river, a
few old Armenian churches and houses
and its traditional produce of pistachios,
hazelnuts and what it claims to be the
world’s best baklava (a sticky pastry). Ap-
propriately enough, Antep was the home
town one of Turkey’s earliest tourism
ministers, the CHP’s Ali Ilsan Gogus, who
began the development of Turkey’s Medi-
terranean coastline in the 1960s.
But in the past few years Antep has
blossomed. Dotted around the city are
factories making carpets, shoes, plastic
packaging, white goods and much else.
Mr Guzelbey says the region now pro-
duces $4 billion-worth of annual exports
which he claims support 100,000 new
jobs in four big industrial estates. Unem-
ployment is down to 9-10%, less than the
national average and far below the level
in the more predominantly Kurdish
south-eastern region of Turkey.
Mr Guzelbey naturally attributes
much of Antep’s success to his own
party’s eorts. When he took oce in
2004 the city was heavily indebted, tran-
sport links were poor and there was al-
most no foreign investment. All that has
changed. The airport is heaving with visi-
tors from abroad and the roads are vastly
improved. Managers at Royal Carpets, a
big local producer, concede that the AK
government has been helpful, oering tax
cuts, trade promotionand, perhaps most
importantly, visa liberalisation.
The secret of the region’s new strength
lies in its ancient links with Syria and Iraq.
Antep is on the old silk road that leads to
Aleppo. Partly thanks to the abolition of
visa requirements for Syrians, cross-bor-
der trade is booming. According to Mr Gu-
zelbey, over half the region’s exports now
go to Iraq, Syria or elsewhere in the Mid-
dle East and only a quarter to Europe. That
helped exports from Antep rise by 6% in
value in 2009, whereas those from Turkey
as a whole fell by 20%.
Antep’s new links with the Arab world
recall its own history. Besides being on the
silk road, it is famous mainly for its heroic
ten-month resistance against a siege by
French forces in 1921. Although the city
eventually capitulated, the nascent Turk-
ish parliament awarded it the honoric
prex Gazi, warrior of the faith. In its
mix of Muslim piety and hard-headed
business nous, Gaziantep speaks volumes
about modern Anatoliaand Turkey.
Gaziantep’s rise and rise Silk road to riches
Now where are those baklavas?
year-old insurgency has reached 40,000,
most of them Kurds. That is more than ten
times the number killed during the IRA
campaign in Northern Ireland.
Even government ocials concede that
the Kurdish problem cannot be solved by
force alone. The PKK was weakened by the
capture and imprisonment of Mr Ocalan
in 1999 (he is now held on an island near Is-
tanbul). The level of violence has declined
somewhat, and the PKK has periodically
declared ceaseres (one is in force now).
Yet the organisation is not defeated, and
the autonomy won by the Kurdish region
of northern Iraq will inevitably give it sus-
tenance. The Kurds’ grievances which the
PKKhas exploited remain unsettled.
That is not entirely for want of trying.
Successive governments have poured re-
sources into the region, believing that the
problem is caused partly by the south-
east’s backwardness and poverty. The
south-eastern Anatolia project (GAP) is the
most ambitious and expensive infrastruc-
ture project Turkey has ever undertaken; in
the 1990s it represented some 5-8% of all in-
vestment in the country. It aimed to im-
prove agriculture and provide water and
electricity to poor south-eastern villages
around the Tigris and Euphrates rivers. Its
The Economist October 23rd 2010 A special report on Turkey 15
2 network of dams has boosted farm pro-
ductivity and raised living standards
across the region.
Some parts of the east and south-east
have also joined in the wider Anatolian
economic boom of the past two decades.
The city of Gaziantep, in particular, has fol-
lowed the better-known example of Kay-
seri into manufacturing. In recent years
Gaziantep and much of the surrounding
region have also beneted greatly from
growing trade with Syria and Iraq (see box,
previous page). Yet poor education and in-
frastructure, a deeply conservative Muslim
culture and the violence of the PKKcontin-
ue to discourage investment.
The AK government has tried harder
than any predecessor to make amends.
Soon after it came to power, it allowed the
rst ever Kurdish-language television
broadcasts. Mr Erdogan has paid several
visits to Diyarbakir, the Kurds’ unocial
capital. In 2005 he went so far as to admit
to past mistakes, apologise for Turkey’s
mistreatment of the Kurds and recognise
their legitimate aspirations. He was re-
warded with a strong showing for the AK
party in the 2007 election, when it won
more votes in the region than the main
Kurdish party. More recently the govern-
ment has worked hard to reach an accom-
modation with the Kurds of northern Iraq.
Yet any Turkish government, no matter
how strong, is constrained by two power-
ful forces: the army and the nationalists.
The army resists concessions to the Kurds
because it does not want to seem soft on
terrorism. Conspiracy theorists also point
to evidence of a deep state that prolongs
the ght against thePKKby staging terrorist
acts itself. Nationalists, meanwhile, fret
that gestures to meet demands for greater
autonomy will inevitably lead to the
break-up of Turkey. Both opposition par-
ties, especially the far-right MHP, have
ercely resisted openings towards the
Kurds, which is one reason why they win
so few votes in the south-east.
Yet in ts and starts, and under pressure
from the EU, Mr Erdogan has persisted
with his overtures. In mid-2009 his gov-
ernment launched an initiative it called
the Kurdish opening, later renamed the
democratic opening (and labelled by a lo-
cal AK ocial as the national unity and
brotherhood project). The same year saw
the start of the rst state-owned 24-hour
Kurdish-language TV station. And in a
blaze of publicity, the government gave an
amnesty to a clutch of disarmed PKK ght-
ers based in northern Iraq, allowing them
to return home unmolested.
Sadly, this particular move backred.
Instead of returning quietly home, the PKK
men triumphantly paraded in uniform
through the streets of Diyarbakir. Turkish
nationalists and the army were indignant.
The government withdrew a promise to let
more ghters returnand the PKKresumed
battle. It was widely noted that, on the
same day that the nine Turkish civilians
killed aboard the Mavi Marmara were giv-
en huge media coverage, six soldiers lost
their lives to the PKKin the south.
Devolution, devolution
Hard as it may be, more will have to be
done to assuage Kurdish feelings. Turkey
needs to stop the common practice in the
south-east of arresting and jailing elected
mayors for allegedly expressing PKK sym-
pathies. As part of a new constitution
promised by Mr Erdogan after the next
election, article 166 about the inhabitants
of Turkey being Turks could be dropped.
Allowing Kurdish-language teaching in
schools would also be a good idea, but it is
controversial. The governor of Batman, for
example, expresses cautious support for it,
but the governor of Diyarbakir is against.
Yet steps like these will be needed if Turkey
is ever to get into the EU. And the 1923 Lau-
sanne treaty states clearly that no restric-
tions shall be imposed on the free useof
any language.
Turkey’s regional problems go beyond
the Kurdish question. Thanks to Ataturk,
the country is excessively centralised. The
governors of all 81 Turkish provinces are
appointed by the government in Ankara.
Over time most have become AK men.
Education is still largely run from the cen-
tre, on the traditional French model. Given
the country’s size and diversity, that may
not be the most sensible approach. Turkey
now badly needs a debate on more devo-
lution of power to democratically elected
local bodies.
What about the army and the national-
ists? Mr Erdogan and the AK may now be
well placed to call their blu. By winning
the referendum on constitutional changes
in mid-September by such a wide margin,
the AK government has shown the weak-
ness of the nationalist opposition, espe-
cially the MHP. This, and the promise of a
new constitution next year, may create an
opportunity for imaginative gestures. That
the main Kurdish party, the BDP, persuad-
ed so many Kurds to boycott the referen-
dum serves to show again that neither it,
nor the PKK, can be ignored.
BDP ocials in Diyarbakir dismiss the
so-called Kurdish opening as rubbish. The
party is wary in part because its predeces-
sor, the DTP, was banned by the constitu-
tional court in 2009. But its success over
the referendum boycott reects its continu-
ing appeal to Kurdish voters. It will win its
usual clutch of seats in next year’s election.
If AK fails to get a majority, it could do
worse than seek a deal (if not a formal co-
alition) in exchange for BDP support.
That would, however, require conces-
sions such as Kurdish-language education,
more power for local mayors and reining
in the army. British experience in Northern
Ireland also suggests that the AK govern-
ment may yet have to talk to Mr Ocalan di-
rect. Sezgin Tanrikulu, a lawyer with the
Human Rights Foundation in Diyarbakir,
declares portentously that Turkey is near
the last exit with the Kurds. But if Mr Er-
dogan is bold enough to seize the moment,
he could yet crown his premiership with a
peace settlement in the south-east. 7
Ready to bring out the guns again?
16 A special report on Turkey The Economist October 23rd 2010
Future special reports
Smart systems November 6th 2010
Japan November 20th 2010
Security in Asia December 4th 2010
Global leaders January 22nd 2011
Property February 12th 2011
I
T HAS become a joke for The Economist to
say that a country is at a crossroads, yet
for Turkey it happens to be spot on. The
next year or two will be critical to where
the country is going.
The economy is in better shape than at
any time since the second world war. At its
current breathtaking growth rate Turkey is
catching up fast with the poorer countries
of continental Europe. The political judg-
ment is less straightforward. The AK gov-
ernment under Mr Erdogan has done more
than any since Ataturk to reform Turkey. It
has pushed through many political and le-
gal reforms. It has taken big steps towards
resolving the Kurdish question. If it is re-
elected next year, AKwill make an overdue
start on rewriting the constitution drawn
up after the 1980 military coup.
Yet this is also where the doubts start to
creep in. The secular establishment’s con-
cern about Mr Erdogan and the AK party
has always been that behind the reassur-
ing mildly Islamist label lie deeper fun-
damentalist ambitions. People in the cafés
of Istanbul fret that, if the veil were al-
lowed in state institutions, the next stop
would be Iran. Yet although many in AK,
including Mr Erdogan, are doubtless pious,
Turkey is surely too democratic, pluralist
and, well, modern for this to be a serious
danger. The lesson of the past decade is
that the secularists have cried wolf too of-
tenand as a result have lost most of their
battles with AK.
It is the condition of Turkey’s democra-
cy that is more worrying. The AK leader-
ship, especially Mr Erdogan, has proved
highly partisan and intolerant of criticism.
That has turned Turkey into a deeply divid-
ed country. The results of the September
referendum were revealing: a big yes in
most of Anatolia (save in the Kurdish re-
gion) but a rm no in large parts of Istan-
bul, Izmir and the west. To overcome such
divisions when it comes to drawing up a
new constitution, Mr Erdogan needs to
nd a way of working with the opposition,
but he shows no signs of doing this. Turkey
has long lacked a credible opposition, but
the new CHPleader, Mr Kilicdaroglu, could
yet come to ll that gap.
A longish period of one-party rule has
also fostered a culture that tolerates cor-
ruption at the heart of the government.
The party’s leaders may be clean, but
many of those around them are not. An-
other problem is Mr Erdogan’s autocratic
manner, which risks trammelling free de-
bate in the media. Critics who sometimes
liken him to Russia’s Vladimir Putin have
got it wrong, but many journalists in Istan-
bul and Ankara now feel that they cannot
say or write what they think.
Turkey is not the only European coun-
try to suer from corruption, autocratic
leadership or fears about a free press. But
because there are already so many vocal
opponents of its aspirations to join the EU,
its membership hopes are damaged every
time that there is a fresh outburst of criti-
cism from Brussels of another bout of po-
litical turmoil at home.
Keep persevering
Plenty of Turks, including some in AK, are
starting to say that it does not matter. The
EU is not going to admit Turkey anyway,
they argue, so why should they care what
the Europeans think? Yet in truth, although
Turkey has developed new relationships
in the Middle East and even with Russia, as
a liberal market democracy it has no real
alternative to Europe. Its hopes of joining
the EUmay not be realised for many years,
but Turkey will not be the rst country that
has had trouble getting in: Britain took 12
years and Spain nine.
Besides, Turkey needs to keep on mo-
dernising for its own sake, not just to
please the Brussels bureaucracy. So long as
it keeps on track, it will continue both to
thrive and to matterand an EUthat wants
to remain relevant will nd it increasingly
hard to keep Turkey out. 7
In it for the long haul
But a liberal democracy ready to join the EU is still the best bet
What would Ataturk say?
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Also in this section
62 The end for Zapatero?
62 Portugal’s pain
63 Moscow’s new mayor
63 Poland and Lithuania
64 Charlemagne: The treat of treaties
T
HE strike-weary French have grown
used to a day’s worth of infrequent
trains, absent teachers, undelivered post
and unprinted newspapers. This is the rou-
tine whenever unions hold a one-day
strike, as they did (again) on October 19th,
against the raising of the legal minimum
retirement age from 60 to 62 years. But the
petrol shortages, blockaded oil depots and
schools, jammed roads, burnt cars and
sporadic violence this week were of a
quite dierent order. The shift from organ-
ised protest towards disorganised rebel-
lion has put Mr Sarkozy’s determination
not to back down to its stiest test yet.
The routine protests this week were
mostly peaceful, even festive. Anywhere
between 1.1m and 3.5m took to the streets,
including leaders of the opposition Social-
ists, for the sixth day of protests this au-
tumn against pension reform. This ap-
proached the previous week’s record
turnout, although the strike rate dipped:
from 40% to 30% at the national railway,
from 19% to 12% among civil servants, and
from 18% to 15% at EDF, the energy utility.
But it was not marching protesters or
striking train drivers who shifted the atmo-
sphere so abruptly this week. It was the
spreading petrol shortages, combined with
improvised guerrilla protests: lorry drivers
blocking roads in Operation snail, lycée
students shutting down schools, protesters
invading railway tracks and airports and
vandals looking for trouble.
let the country be paralysed by block-
ades or unrest. Nor, he said, would he back
down on reform, because it was his duty
to guarantee pensions for future genera-
tions. The pension bill has already been
passed by the lower house, and voting in
the upper house, although delayed this
week, should conclude soon. The govern-
ment is hoping that the French will tire of
protesting, and that support for the strikes
will ebb. Above all, schools break up on
October 22nd for a ten-day half-termand
French unions like their holidays too much
to disrupt them with strikes.
Yet if they give up, the unions stand to
lose credibility. National leaders, such as
Bernard Thibault, of the communist-
backed Confédération Générale du Travail,
France’s most powerful union, are under
pressure from their grass-roots not to cave
in. Union bosses were due to meet on Oc-
tober 21st to decide what to do once the up-
per house votes. Some argue that protests
should continue. The two chambers still
need to vote on a nal version of the bill,
probably next week, before it becomes law.
In 2006 student-led protests against la-
bour-market reforms forced the govern-
ment of the day to retreat, even after the
bill had been signed into law.
The diculty for Mr Sarkozy is that
pension reform has become a touchstone
for general grievances. He and Mr Fillon
have tried to explain the need for France to
preserve benets for tomorrow’s pension-
ers by lengthening working life. He has giv-
en some ground to the unions over the de-
tail of the reform. But he is unpopular and
distrusted. And he is linked in the popular
mind with wealth and big business, an im-
age reinforced by recent blunders in his
ministerial team: cigars charged to ex-
penses, a private jet hired by a minister,
conicts of interest tied to Liliane Betten-
court, the billionaire heiress to the L’Oréal
This week workers at all 12 of France’s
reneries were on strike and many oil de-
pots were blocked, disrupting petrol sup-
plies and prompting motorists into panic-
buying. The government’s initial insis-
tence that there were no petrol shortages
was shown to be absurd, as drivers toured
from station to station in search of fuel, or
joined lengthy queues. Jean-Louis Borloo,
the environment minister and aspirant
prime minister if François Fillon is re-
placed, nally admitted that almost a third
of the country’s 13,000 petrol stations had
run out of fuel. Mr Sarkozy ordered the po-
lice to lift blockades of oil depots and en-
sure the resumption of distribution.
At the same time, 379 lycées were dis-
rupted or closed on October 19th by prot-
esting school pupils, who in France have
their own unions. Although not directly
touched by pension reform, many pupils
seem to think that, if 60-year-olds work for
two years longer, they will have to wait
two more years before they can inherit
their jobs. More worrying than economic
illiteracy, lycée protests are often used by
casseurs, or vandals, as cover for trouble-
making. In Lyon 1,300 casseurs, half of
them under 18, rioted in the historic centre,
torching and overturning vehicles, looting
shops and smashing up bus shelters. A
courthouse in Nanterre, west of Paris, was
vandalised. In Le Mans, a junior high
school was burned to a cinder.
Mr Sarkozy declared that he would not
France’s protests
Where the streets have no shame
For daily analysis and debate on Europe, visit
Economist.com/europe
Europe
Paris
The protests against the government’s proposed pension reform turn ugly
1
The Economist October 23rd 2010 61
62 Europe The Economist October 23rd 2010
2
1
empire. By contrasting the plight of work-
ers facing two extra years of toil with the
high life of the elite, the left has shameless-
ly whipped up a feeling of injustice about
what is, in reality, a rather timid reform.
The turmoil beamed out on French tele-
vision screens this week could yet begin to
turn public opinion, which has so far most-
ly backed the protests. Although 67% of re-
spondents to one poll this week said they
supported the routine strikes and demon-
strations, 54% were against the blockade of
oil reneries. The government is looking
for an oer to make to the unions, unrelat-
ed to pension reform, that would allow
them to save face. But if the rebellion fails
to die down, Mr Sarkozy will be in a tight
cornerand his plan to reshue the gov-
ernment after pension reform is done will
have to be put o even longer. 7
Portugal’s public nances
The apology of Sócrates
S
PANISH matadors kill bulls in the ring;
the Portuguese put them down after
the ght. When the Greek debt crisis
threatened to engulf Iberia in May, Spain
went in for the kill, slashing spending
and freezing pensions. The more mea-
sured approach of José Sócrates, Portu-
gal’s prime minister, involved limiting
wage cuts to politicians and senior civil
servants, increasing value-added tax and
postponing big infrastructure projects.
Spain’s quick moves helped it escape the
storm. But Portugal’s borrowing costs
soared to a euro-era record in September.
Now Mr Sócrates has been forced to
accept his mistake with a new austerity
package at least as tough as Spain’s.
Mr Sócrates’s measures, now before
parliament as part of his minority gov-
ernment’s 2011budget proposals, have
reassured investors that Portugal can
meet its target of cutting the budget def-
icit from 9.4% of GDP in 2009 to 4.6% next
year (see chart). Described as brutal by
the unions, which have called a one-day
national strike for November, the bill will
cut public-sector wages by 5%, increase
VAT again, freeze state pensions and
chop welfare payments.
The opposition Social Democrats,
who have enough seats to defeat the
government, want fewer tax rises and
more spending cuts. A messy compro-
mise is likely in the next few weeks. But
Mr Sócrates’s main challenge is how to
return the economy to growth. That a
recession will follow the scal tightening
seems obvious to all except the govern-
ment, which projects 0.2% growth in 2011,
after about 1% this year. Barclays Capital
expects the economy to contract by 1.1%
next year.
Yet it was in the name of growth that
Mr Sócrates doggedly resisted more
drastic measures until the bond markets
forced his hand. He argues that, unlike
some other troubled euro-zone coun-
tries, Portugal suered neither a housing
nor a banking crisis. Greece, Ireland and
Spain all have bigger decits and lower
growth. To keep government borrowing
costs manageable, however, he has been
forced to take an axe to the decit.
Painful austerity is an essential condi-
tion for lasting growth, but it is not
enough on its own. According to the
OECD, the only way for Portugal to im-
prove competitiveness, reduce its debt
burden and full its growth potential is
through structural reforms: tackling the
inexible labour market, improving the
schools and boosting the eciency of the
legal system. Portugal may at last have
bowed to the markets but there are plen-
ty more battles to come.
Lisbon
Austerity belatedly comes to Portugal
Portugal’s pain
Sources: European Commission;
Portuguese finance ministry
*Finance ministry
forecast
10.0
7.5
5.0
2.5
0
2.5
+

2005 06 07 08 09 10* 11*
GDP, % change on year earlier
Budget deficit, as % of GDP
C
AN things get any worse for José Luis
Rodríguez Zapatero, Spain’s belea-
guered prime minister? Probably not. Aus-
terity measures, labour reform and strikes
have taken their toll: opinion polls show
support for his Socialist Party plummeting
to 29%, while unemployment, at over 20%,
remains twice the euro-zone average.
Speculation is rife over who will succeed
Mr Zapatero as party leader, and whether
he will step down before or after the next
general election, due in 2012.
Hoping to secure his survival for the
next 18 months, on October 20th Mr Zapa-
tero unveiled a cabinet reshue. Out went
Miguel Ángel Moratinos, the long-serving
foreign minister, to be replaced by Trinidad
Jiménez, the health minister and a favour-
ite of Mr Zapatero’s. Two ministries were
scrapped entirely. Alfredo Pérez Rubal-
caba, the veteran interior minister, adds
the jobs of deputy prime minister and gov-
ernment spokesman to his portfolio.
A few days earlier Mr Zapatero had
sealed a pact with the Basque Nationalist
Party (PNV) to ensure the passage of his mi-
nority government’s budget. Mr Zapa-
tero’s boosters said the deal would help
keep the prime minister in his job until
2012. Iñigo Urkullu, the PNV’s leader, gave
no guarantee, but said that Mr Zapatero
should reach the nishing line. In return,
his party has won further transfers of pow-
er and money to the already highly de-
volved Basque regional government.
The reshue and the pact will free the
Socialists to focus on a number of electoral
contests to comeand to decide whether
Mr Zapatero is the man to lead them into
battle. The prospect of a series of heavy
losses in regional elections over the next
eight months, starting with Catalonia on
November 28th, has started to concentrate
minds within the party.
In early October Mr Zapatero suered
his rst big internal party defeat. In a prim-
ary election to choose a candidate to lead
the Socialists into elections for the Madrid
parliament next May, Tomás Gómez, the
party’s leader in the capital, beat Ms Jimé-
nez. This led to calls for change. We are
heading towards electoral disaster if we do
not change tack, said José María Barreda,
the Socialists’ leader in the region of Cas-
tile La Mancha. Carme Chacón, the de-
fence minister, chose this moment to state
that Spain was ready for its rst woman
prime minister, sparking debate about
whether she was pitching for the job.
The question now is not whether Mr
Zapatero will go, but when. Will he lead
the party to electoral defeat in 2012 and fall
on his sword afterwards, or will he stand
down just before, recognising that only a
fresh Socialist leader can stop a severe
drubbing by the conservative People’s
Party? The PP’s lead in some polls has risen
to 14 points, enough to give it an absolute
majority in parliament. Mr Zapatero has
said, privately, that he will make the deci-
sion next year, according to El País.
Who might come next? Ms Chacón
would certainly present a dierent face. A
39-year-old, she would represent both a
new generation and a gender revolution.
Spanish politics
Zapatero’s
endgame
Madrid
Spain’s prime minister is on the way
out. The only question is when
The Economist October 23rd 2010 Europe 63
2
Poland and Lithuania
Narcissistic dierences
S
HARED history, culture and worries
about neighbours should make Po-
land and Lithuania friends. NATO’s new
contingency plans involve Polish soldiers
defending Lithuania from a (theoretical)
Russian attack. The two countries need
each other on everything from energy
security (building a new nuclear power
station) to transport links. Yet their rela-
tions are among the iciest in the Euro-
pean Union. Poland’s foreign minister,
Radek Sikorski, will not visit Lithuania
until local Poles are allowed to write their
names in ocial documents using Polish
letters: w, and
Poland cites broken promises and
unfairness. Its Lithuanian minority can
spell their names as they like. Lithuanian
grammar and orthography are no hard-
ship for the deceased Viljamas ekspyras,
or Vinstonas er ilis (as Lithuanians call
William Shakespeare and Winston Chur-
chill), but annoying for humble folk who
have the hassle of a passport that does
not match their other documents.
The argument may seem trivial but
the gulf is deep. The countries see history
dierently (and themselves as its princi-
pal victims). Poland fondly recalls the
two countries’ union 440 years ago.
Lithuanians (once a superpower, now
outnumbered ten to one by Poland) think
it brought linguistic and cultural decline.
Lithuanian politicians complain that
Poland has not apologised for forcibly
polonising the occupied Vilnius region
in the interwar years (Poles argue that
they rightfully ruled a Polish city). Accept-
ing a polonised alphabet or bilingual
street signs under pressure from Warsaw
would mean a surrender to bullying.
Lithuanians also think Poland may be
stoking the row to create a pretext for
betrayal: selling the Polish-owned and
loss-making Mazeikiai oil renery, Lithu-
ania’s biggest industrial asset, to Russia.
Poles retort that they bought it for politi-
cal reasons, to help Lithuania survive a
Russian squeeze on energy supplies.
Now they wish they hadn’t.
Arow about spelling freezes relations between Poland and Lithuania
She made headlines on her rst day in of-
ce by inspecting troops when seven
months’ pregnant. Other potential candi-
dates include Mr Rubalcaba and Eduardo
Madina, a 34-year-old rising star.
Meanwhile, Spain continues its snail-
paced recovery. Few people outside the
government expect growth above 1% next
year. The IMF predicts that unemployment
will remain the highest in the euro zone for
at least ve years. The devastated housing
market has further to fall, and 20% of mort-
gage-holders could nd themselves in neg-
ative equity, according to Standard &
Poor’s, a credit-rating agency.
Spain’s recovery, in other words, will at
best be faintly apparent by the time voters
reach the polling booths early in 2012. That
will be a good time to sweep out the old
and bring in the new. But will anyone else
want to lead Spain’s Socialists into what
looks like certain defeat? 7
I
T IS more than a bureaucratic reshue.
The sacking of Yuri Luzhkov, the mayor
of Moscow for 18 years, and the Kremlin’s
decision to replace him with Sergei Sobya-
nin, is a change of political formation. Mr
Luzhkhov, one of the last autonomous re-
gional barons in Russia, was a relic of the
1990s. Although he backed Vladimir Putin
for the presidency in 2000 and remained
loyal, in exchange for retaining economic
control over Moscow, he was his own man.
He behaved like an elected mayor even
after Mr Putin scrapped elections for re-
gional mayors and governors in 2004.
Mr Sobyanin, by contrast, is a gure of
the 2000s. Reserved and inscrutable, he
could not be more dierent from his extro-
vert predecessor. As head of the oil-rich Ty-
umen province, Mr Sobyanin was among
the rst governors to support Mr Putin’s
abolition of regional elections. His ap-
pointment signies the return of Moscow
to the Kremlin’s lap, says Olga Kryshtanov-
skaya, a sociologist and member of Mr Pu-
tin’s United Russia party.
Like many capital cities, Moscow is an
anomaly. It accounts for roughly 10% of
Russia’s population and a quarter of na-
tional economic outputcomparable to
the oil and gas industry. Until Mr Luzh-
kov’s sacking, the city represented the last
bastion of regionalism outside the Krem-
lin’s control. Mr Sobyanin’s appointment
irons out this kink. The change was execut-
ed by Dmitry Medvedev, Russia’s presi-
dent, but it reects Mr Putin’s choice.
Mr Putin has every reason to have con-
dence in Mr Sobyanin. After he became
president, he used Mr Sobyanin, a member
of the upper house of parliament, to help
him get rid of Yury Skuratov, Russia’s rene-
gade prosecutor-general. In 2005 Mr Putin
made Mr Sobyanin chief of the presiden-
tial administration. When he then decided
that Mr Medvedev should succeed him as
president in 2008, Mr Sobyanin was en-
trusted with running the campaign. After
Mr Putin became prime minister, Mr So-
byanin was appointed his deputy.
Unlike so much of the ruling elite, Mr
Sobyanin does not come from St Peters-
burg (he is a native of Siberia) and has no
background in the security services. And
although he has worked closely with the
country’s big oil companies, he is not part
of the oil lobby. Rather, he is a man of the
system and its values, the most important
of which is the supremacy of the state and
its representatives. Extending and en-
trenching this notion will be his purpose.
As a member of the politburo of United
Russia, Mr Sobyanin will ensure the
party’s overwhelming victory in next
year’s parliamentary elections. If Mr Putin
decides to take back the presidency in 2012,
as seems increasingly likely, Mr Sobyanin
will help make it happen.
But being part of the system does not
mean Mr Sobyanin will be a bad mayor.
He has a reputation for eciency. Unlike
his predecessor, he is free of the taint of cor-
ruption scandals. As governor of Tyumen
he persuaded some oil companies to regis-
ter their headquarters there and pay taxes
into the local budget, which made the re-
gion one of Russia’s wealthiest.
As mayor of Moscow, where much of
the oil money settles, Mr Sobyanin will
need to make the city work. If he improves
its eciency, sorts out its notorious trac
and curbs petty corruption he will provide
a valuable service to Muscovites as well as
to the Kremlin. The danger for Mr Putin is
that, if his man fails, the citizens’ ire will ex-
tend all the way to the top. 7
Moscow’s new mayor
Agraduate of the
school of Putin
Moscow
Unlike his predecessor, the new mayor
of Moscow is a man of his time
Guess what I’m thinking
I
T WAS supposed to be a nal act. The Lisbon treaty, successor to
the ill-fated European Union constitution, which in turn fol-
lowed the Maastricht, Amsterdam and Nice treaties, would
create a permanent club rulebook. We expect no change in the
foreseeable future, European leaders declared in December
2007. Freed from its internal wrangling, the EUwould be able to
turn outward and face the real world. Instead, the real world
threw up the euro-zone debt crisis. And less than a year after the
Lisbon treaty came into force, the EU is talking of a new treaty.
Brussels’s favourite game has been restarted by President Nic-
olas Sarkozy of France and the German chancellor, Angela Mer-
kel. At their summit in the French resort of Deauville (where they
also met Russia’s Dmitry Medvedev) this week, they declared
that, in order to deal with future debt crises, it is necessary to re-
vise the treaty. What fun. Remember the French and Dutch re-
jection of the constitution? How the Irish had to vote twice to ap-
prove the slimmed-down Lisbon treaty? The thrill of the Czechs
keeping Europe guessing until the 11th hour? Let’s do it all again.
This time, in the face of economic crisis and budget cuts, it will be
even more exciting to run the gauntlet of parliaments, constitu-
tional courts and angry votersand all in the name of imposing
still greater scal rigour in future.
The idea of reopening the treaties had seemed merely to be a
preposterous German obsession. Berlin was demanding that
spendthrift countries in breach of the euro zone’s scal limits
(decits at 3% of GDP and public debt at 60% of GDP) be threat-
ened with losing their EU voting rights. Last month the European
Commission focused instead on measures that could be imple-
mented under existing treaties. It proposed intensied monitor-
ing of countries’ budgets and economic imbalances, plus a sys-
tem of escalating warnings and sanctions that would be
imposed semi-automatically: sinning countries would be pun-
ished unless nance ministers voted by a qualied (weighted)
majority to stop the proposed sanctions.
These proposals were largely inspired by the austere Ger-
mans. At the start of a meeting of European nance ministers in
Luxembourg on October 18th the French predictably criticised
the notion of automaticity, which they said removed too much
political discretion. To the astonishment of those in the room, the
German deputy nance minister, Jörg Asmussen, agreed. Fiscal
hawks fumed about German betrayal. Led by the Dutch, they
fought a rearguard action to preserve something of the semi-
automatic weapon. What deal did Germany cut with France?
Part of the answer came that evening from Deauville: France
changed its mind and now supported a new treaty. Yet critics see
this as a bad bargain. Germany has surrendered feasible sanc-
tions for the promise of a treaty that may never pass. Few govern-
ments, or their voters, will vote to disenfranchise themselves. Yet
more than just amending voting rights, Germany’s real goal is to
create a permanent means of restructuring the debts of bust
countries and a bail-out fund that is treaty-based.
On this point Germany will make itself heard. Without its
deep pockets there would have been no 110 billion ($145 billion)
rescue of Greece and no 750 billion bail-out fund to help others.
These measures are hailed as evidence that the EU can act deci-
sively in a crisis. Many want them made permanent. But Ger-
many refuses to extend them beyond 2013 without some system
to deal with insolvent states.
Germany’s well-being is bound up with the fate of the euro; it
saved Greece partly to help itself. But without strict conditions on
proigate states and the imposition of losses on reckless credi-
tors, all are taking a free ride on Germany. Some say that a formal
debt-restructuring system will raise the cost of borrowing and
frighten skittish markets. But even France recognises that Ger-
many has a case. The odds are that others will, grudgingly, agree.
All will want only a limited treaty change, perhaps one that
applies only in the euro zone. But past experience suggests that
such keyhole surgery may prove impossible. The European Par-
liament will want more power. Ireland will almost certainly have
to put any new treaty to a referendum. As it imposes ever harsher
budget cuts, Brian Cowen’s government can only dread the pros-
pect. Eurosceptics in Britain may seize the moment to call for a re-
patriation of powers from Brussels. Britain wants a stable euro
zone, but is torn. It does not want to be bound by the EU’s scal
rules, but nor does it want a more tightly integrated euro zone
leading to a two-speed Europe. And any institutional wrangling
over Europe can only upset the coalition’s delicate balance. No-
body knows how Vaclav Klaus, the Eurosceptic Czech president,
might react.
Why the rush?
Many wonder why Mrs Merkel wants to tread into such a mine-
eld. Perhaps, after the unpopular Greek bail-out, she needs to
show she can hold spendthrift states to account. A more impor-
tant reason is that Germany’s constitutional court is concerned
about German-nanced bail-outs, so a lawyer-proof system is
needed. Many thought it would be best to wait for bond markets
to calm down before tinkering with the rules. But others say that
if treaty amendment is needed, it is best to get on with it. A new
text would best be negotiated before the 2012 French presidential
election, and ratied before Germany’s 2013 election.
Don’t count on this being the nal word, either. The European
construction is a half-built project. The EU’s members are part-
integrated and part-sovereign, and the contradictions cause inev-
itable upheavals. Brussels’s instinctive response to the threat of
disintegration is further integration. Europe may not be in a state
of permanent revolution, but it is in permanent renegotiation. 7
The treat of treaties
Why the European Union is talking yet again of renegotiating its rulebook
Charlemagne
64 Europe The Economist October 23rd 2010
Economist.com/blogs/charlemagne
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Featuring original illustrations by The Economist’s
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Also in this section
68 The enemies of austerity
69 The strategic defence review
70 Bagehot: Austerity Britain’s global
ambitions
F
EW announcements have been awaited
with such foreboding. A drumroll of
leaks and horror stories over the summer
created a grim build-up to George Os-
borne’s second big day as chancellor of the
exchequer: the moment when he would
reveal where the spending cuts set out in
his June budget would be made. Perhaps
unsurprisingly, the actual occasion on Oc-
tober 20th was somewhat less dramatic
than billedthe House of Commons was
quite muted as MPs listened to the chancel-
lor’s statementyet it will still prove cru-
cial for the futures of both the coalition
government and the country.
Mr Osborne stuck to his guns about the
overall scale and pace of scal retrench-
ment in the four years to 2014-15, the nal
year of this parliament. He insisted that
this harsh medicine was vital to cut Brit-
ain’s bloated budget decit, expected to be
10% of GDP this year. True, the chancellor
added some £2 billion ($3.2 billion) a year
to capital budgets. But no one can seriously
suggest he has gone soft by aiming for total
cuts of £81 billion rather than the previous-
ly announced £83 billion by 2014-15.
The government has already taken a
rst small step towards that saving by strip-
ping £5 billion out of this year’s spending.
These were the early cuts criticised during
the general-election campaign by Labour
and, then, the Liberal Democrats, now the
Conservatives’ coalition partners. But
spending is beyond the chancellor’s con-
trol: debt interest is rising from £43 billion
this year to £63 billion by 2014-15 as a result
of the surge in government borrowing.
Mr Osborne had two main places to
look for savings. The rst was the welfare
budget, which makes up nearly 30% of all
spending. Second, the departments re-
sponsible for the public services, which
make up around 55% of the total. The more
he could nd in welfare, the less the
squeeze would be for the public services.
In June the chancellor announced £11
billion of welfare savings (by 2014-15), mak-
ing it clear that he wanted to nd more. In
the event he came up with an extra £7 bil-
lion. These will come mainly from making
working-age benets for poorer house-
holds stingier. The Treasury has left un-
touched the nearly £4 billion spent annual-
ly on perks for people over 60 regardless of
their income, who receive winter-fuel pay-
ments and free bus travel. But the single
biggest cut will come from the controver-
sial removal of child benet from families
with a higher-rate taxpayer from 2013. The
chancellor now reckons this will save £2.5
billion a year, a lot more than the gure of
£1billion (which looked strangely low) that
he gave at the Tory party conference on Oc-
tober 4th.
He was also able to nd another £3.5 bil-
lion of savings outside the departmental
budgets. Half of this will come from rais-
ing the contribution rates of employees
into public-sector pension schemes, as
Lord Hutton, a former Labour minister, re-
cently recommended. The Treasury reck-
ons that this will save £1.8 billion by
2014-15. In a move that has infuriated retail-
ers it will raise another £1 billion by keep-
ing (rather than recycling) revenues raised
by a scheme to reduce carbon emissions
through greater energy eciency.
those savings were tokenistic compared
with the much bigger reductions that must
be imposed in the next four years. Mr Os-
borne’s task was to show how the govern-
ment will make them.
In one sense, that job looks less forbid-
ding than the sound and fury suggests. In
cash terms, total spending will be 6% high-
er in 2014-15 than this year. But that does
not take ination into account: in real
terms it will be 3% lower. Moreover, some
Britain
Cutting back the state
Day of the long knives
The government has specied its spending cuts. Now it must implement them
Winner and losers
Sources: HM Treasury; The Economist
Departmental Expenditure Limits
Real % change between 2010-11 and 2014-15
80 60 40 20 0 20 40 + –
International
Development
NHS
Defence
Education
Transport
Home Office
Justice
Local government
grants
Business, Innovation
and Skills
Environment, food
and rural affairs
Communities
1
The Economist October 23rd 2010 67
68 Britain The Economist October 23rd 2010
2
1
By making these additional savings, Mr
Osborne was able to soften the blow on
departmental budgetsbut they are still
taking a big hit. The cash devoted to the
public servicesthe departmental expen-
diture limitswill have to drop by 11% in
real terms by 2014-15 (see chart above).
That pain will fall unevenly. The small-
ish international-development budget
will carry on rising sharply, because of the
pledge to spend 0.7% of national income
on overseas aid from 2013. More important,
the commitment to ring-fence the huge
NHS budget (second only to the welfare
bill) from real reductions has meant a
much bigger squeeze for other depart-
ments (see chart on previous page).
Some of those have got o more lightly
than others. After a ferocious battle, de-
fence will be cut by 7.5%. The education de-
partment (which does not cover university
funding) will be cut by 11%, mainly through
a hefty reduction in its capital spending; its
current expenditure will fall in real terms
by only 3.4%. Mr Osborne made much of
the fact that the schools budget for 5-16-
year-olds, including a new pupil pre-
mium for disadvantaged children worth
£2.5 billion by 2014-15, would rise in real
termsby 0.1% a year.
On the other hand the Home Oce, re-
sponsible for policing, and the Ministry of
Justice, in charge of prisons, each suer a
25% cut by the end of the parliament. The
environment department gets an even big-
ger cut of 30%. Most notable of all, the De-
partment for Communities and Local Gov-
ernment will have its budget sliced by
two-thirds. Grants to local authorities
themselves will fall by 27%.
Tragedy or happy ending?
Despite the suspense ahead of the review,
and the bitter struggles involved in setting
these budgets, it constituted only the rst
act of the cuts drama. Whether or not that
turns into a tragedy depends upon much
else besides dry spending totals. The co-
alition says the Labour government got
less than it should have done for the mon-
ey it poured into the public services. The
hope now is that tight budgets will galva-
nise genuine improvements in eciency
that make the cuts less painful.
One obvious way to reduce costs is to
keep pay down. The government has al-
ready announced a two-year pay freeze for
public-sector sta. State employers could
carry on in this spirit after that, pointing
out that the more pay can be kept down,
the fewer the job losses. But job losses
there will be, amounting to probably
about half a million (out of a workforce of
some 6m) by the end of the parliament.
The government is right that too little
was achieved in the way of real reform of
the public services under Labour. Its new
remedy of dispensing with top-down tar-
gets and delegating control may unleash
innovation in the way that services are
provided, although some in local authori-
ties will no doubt grumble that the sudden
enthusiasm for greater local autonomy co-
incides with slashed budgets. The worry is
that the result will instead be tackier public
services and a meaner welfare state. 7
Painful remedy
Sources: HM Treasury; The Economist
Government spending in real terms, 2010-11=100
336
85
90
95
100
2010 11 12
Financial years beginning April
13 14
Departmental
Expenditure Limits
674
£bn
Total spending
P
ERHAPS the hardest job in Parliament
is responding to the chancellor of the
exchequer’s set-piece events. The opposi-
tion spokesman must deliver a spontane-
ous riposte based on a quick reading of a
newly published (and highly technical)
document produced by his opponent.
As it turned out, Alan Johnson did a
manful job denouncing George Osborne’s
spending cuts as a threat to economic re-
covery and low-to-middle earners. La-
bour’s shadow chancellor is also evolving
his own plan, focusing on growth and a
more even balance between spending cuts
and tax rises than the government’s.
But as the mutinous streets of France
and Greece suggest, resistance to the cuts
will not be conned to parliamentary high
politics. Indeed, trade unions held a rally
against the government’s plans on the eve
of the spending review (Ed Miliband, the
Labour Party’s leader, who once said he
would be there, stayed away to avoid more
Conservative cries of Red Ed).
In the coalition of those opposed to the
austerity plan, union bosses stand tall.
Among the most militant are Mark Ser-
wotkahead of the Public and Commer-
cial Services union, which looks after civil
servantsand Bob Crow, who runs the
Rail, Maritime and Transport union. Even
the bigger unions such as Unite are more
left-wing than their equivalents were a de-
cade ago. Still, the power wielded by un-
ions can be exaggerated. Compared with
the era of industrial chaos in the 1970s and
1980s, they have fewer members and more
legal restrictions on their capacity to strike.
There is also a reluctance among union of-
cials to make life dicult for Mr Miliband:
having relied on union votes to win the
leadership of his party, he would be em-
barrassed should strikes infuriate voters.
Other opponents of the cuts who are
perceived to be on the left may also strug-
gle to land hits on the government, as vot-
ers could dismiss their grievances as all too
predictable. Campaigners for the poor
have plenty to complain about. Cuts to
housing benet and social housing could,
at a time of high private rents, lead to more
homelessness. But the public cite the wel-
fare budget as the one they would most
like to see reduced, along with foreign aid.
The Arts Council and other victims of cuts
in cultural spending will win scant sympa-
thy. And although opponents in the Celtic
nations, such as Alex Salmond, Scotland’s
nationalist rst minister, will trash the To-
ries and the Liberal Democrats as brutal
ogres, English voters will not be listening.
On recent evidence, the opponents Mr
Osborne should most fear are those who
are hard to paint as part of a broad Labour-
leaning left that had it good for a decade.
Senior military gures havewith the help
of Liam Fox, the defence secretaryman-
aged to make the budgetary settlement for
the armed forces more generous than once
seemed likely (see next story and Bagehot).
They remain angry, though, at the cutbacks
they will have to make, especially those to
the navy.
Police chiefs will also be hard to face
down. The Home Oce is among those
departments bearing the brunt of the cuts,
and police pay is being looked at in a sepa-
rate review. The police cannot strike but
they are tenacious resisters of reform.
Then there are the councillors, executives
The enemies of austerity
Coalition of the
unwilling
The forces ranged against the
government’s spending cuts
N
O STRATEGIC shrinkage, David
Cameron claimed when he re-
vealed the conclusions of the Strategic De-
fence and Security Review on October
19th. Others, particularly those in the
armed forces told they must make do with
much less cash, might beg to dier. The
cuts to the defence budget7.5% in real
terms over the next four yearswere not as
swingeing as was once feared. But thanks
in part to the £38 billion- ($60 billion)
worth of unfunded defence commitments
bequeathed by the previous Labour gov-
ernment, the squeeze will still feel tight.
Even Mr Cameron was forced to
admit that the need to deal with
Britain’s scal decit meant that
in future Britain’s expedition-
ary-warfare ambitions would
be more modest than in the re-
cent past. With an unspoken
dig at Tony Blair, he said Britain’s
armed forces would be deployed
only where key UK national interests are
at stakewhere we have a viable exit strat-
egy; and where justiable under interna-
tional law. However, even with his limit-
ed appetite for derring-do, Mr Cameron
could not stomach the consequences for
Britain’s inuence of the much deeper cuts
wanted by the Treasurynor risk losing for
ever military capabilities that may be
needed 20 years from now.
The result is that the pain has been
evenly spread across the services. British
combat troops are expected to stay in Af-
ghanistan until 2015 (Mr Cameron insists
that they will have all the support they
need), but during that period army man-
power will fall to 95,500 from 102,500. The
army will also lose nearly half of its tanks
and about a third of its biggest artillery
guns (most of which are still, anachronisti-
cally, in Germany), but will in other ways
be better equipped and more mobile. It
will be able to keep a 7,000-strong brigade
permanently in the eld, compared with
the 9,500 soldiers now in Afghanistan, and
deliver an intervention force of 30,000, a
third less than went to Iraq in 2003.
The navy and the air force will also see
manpower reductions of about 5,000
each, while 25,000 will be cut from the
Ministry of Defence’s bloated civilian pay-
roll. The navy’s already stretched destroyer
and frigate eet will be cut from 23 to 19; but
it will get seven new Astute-class nuclear-
powered attack submarinesand its two
new 65,000-tonne aircraft-carriers.
The carrier decisions are odd if under-
standable. Cancelling the order for one or
both would perversely have cost more
than completing them. But the rst new
carrier will only deploy helicopters and
will be held in reserve when the second ar-
rives in 2020. It might even be sold, or, if it
were practicable, shared with the French.
The second carrier will now be given a cat-
apult, enabling it to host French and Amer-
ican planes and allowing the purchase of a
cheaper, better version of the Joint Strike
Fighter (JSF) than the short take-o and
vertical landing kind previously ordered.
Meanwhile, given the new carriers’
dominance of the future defence budget, it
seems odd that the navy’s agship Ark
Royal and its Harrier jump jets are to be
quickly taken out of service, leaving a gap
of a decade before its carrier strike capaci-
ty is regenerated. Mr Cameron says the
Harriers are going because the Tornado, a
conventional ground-attack aircraft, has
been reprieved as it is deemed to be more
useful in Afghanistan. By 2020, the air
force will have just two types of fast jet
ghter and strike versions of the Euro-
ghter Typhoon and the JSF.
The announcement on Britain’s Trident
nuclear deterrent is more explicable. By
keeping the existing eet of four ballistic-
missile submarines going for a bit longer
the oldest of them will now not come out
of service until 2028the ultimate deci-
sion to replace them will be postponed un-
til 2016, saving a useful £1.2 billion. Some
will suspect that the main reason for delay
is to pander to the Liberal Democrats, who
are generally much less keen on maintain-
ing the deterrent than their Conservative
coalition partners.
The review’s assessment of future
threats will actually mean more money
for a few things. Britain’s special forces,
which are much-valued by the Ameri-
cans, will get better kit, while £650m
has been earmarked to beef up de-
fences against cyber-attacks. With
international terrorism still
identied as the most imme-
diate threat to the country,
the intelligence and security
services, which have seen
their budgets tripled in recent
years, will only have to make
small eciency savings.
While there is plenty for critics of this
hasty, nancially driven review to snipe at,
the government had little room for
manoeuvre and has made a reasonable st
of a rotten job. Britain will still have the
fourth-biggest defence budget in the world
and be one of the few NATO countries to
meet the alliance’s target for defence
spending of 2% of GDP. As Hillary Clinton,
the American secretary of state, recog-
nised, Britain remains the most capable
partner for our forces as we seek to miti-
gate the shared threats of the 21st Century.
There is also scope for making less go fur-
ther by intensifying the defence relation-
ship with allies, especially the French.
Critically, Mr Cameron expects defence
spending to start growing again in real
terms after 2015. Britain may not be quite
so gung-ho about throwing itself into ev-
ery scrap going as it has been, but this re-
view should be seen more as a tactical re-
treat than a surrender. 7
The strategic defence review
Aretreat, but not a rout
Britain’s armed forces survive (just about) to
ght another day
The Economist October 23rd 2010 Britain 69
2 and bureaucrats that make up local gov-
ernment. The cuts in this area are fero-
cious; anger will be felt by Tory and Lib
Dem councils, not just Labour ones.
As he surveys the forces ranged against
him, the chancellor may console himself
that overall popular opinionmore pow-
erful than any particular interest groupis
not overwhelmingly negative (at least, not
yet). A YouGov poll on October 18th found
that 60% of voters regard the cuts as un-
avoidable, and 48% blame Labour for
them. They also seem braced for the im-
pact; 49% expect public services to get a lit-
tle worse as a result of the cuts, and 35% ex-
pect them to get much worse. Months of
bleak talk from ministers has girded voters
for the pain to come. The anti-cuts co-
alitiongenerals, constables and allwill
be much less stoical. 7
F
OR God’s sake, act like Britain! That, diplomatic telegrams
record, was the reaction of America’s secretary of state,
Dean Rusk, when told in 1968 that a cash-strapped British govern-
ment was pulling military forces from the Persian Gulf and
South-East Asiaor more simply, quitting the world east of
Suez. In vain his visitor, Britain’s foreign secretary George
Brown, rehearsed the domestic pressures weighing on his La-
bour administration. In a reply unearthed by W. Taylor Fain, a for-
eign-policy historian, Rusk raged that he could not believe that
free aspirins and false teeth were more important than Britain’s
role in the world.
The American’s disbelief rings slightly false. Britain had just
suered a sterling devaluation. Like others in western Europe, it
had slashed post-war defence spending to pay for a burgeoning
welfare state. And yet with his appeal to some primal sense of
British duty, Rusk was onto something too. By 1968 pacism and
post-colonial guilt were potent forces across much of western Eu-
rope. In contrast, Britain’s Labour leaders felt miserable about
their forced retreat from global inuence. Fleeing to the British
embassy in Washington to cable London, Brown felt thoroughly
sick with myself. His Britain was a nation that wanted butter,
but guns too.
Four decades on, the cash-strapped government led by David
Cameron is taking a bet that Britain still feels that way. Even as the
coalition government this week outlined the most painful spend-
ing cuts Britain has faced in decades, it went to great lengths to
avoid confronting the British public with a direct choice between
aspirin and aircraft carriers. The National Health Service has seen
its budget ring-fenced, as a (very expensive) token of the co-
alition’s essential kindliness. But welfare spending is being
squeezed. At the same time, Mr Cameron took personal charge of
eorts to convince voters thateven after 7.5% cuts to defence
spending over the next four yearsBritain would still be able to
project power and inuence in a rapidly changing world.
The prime minister unveiled a package of defence cuts on Oc-
tober 19th, a day before his chancellor of the exchequer, George
Osborne, announced those aecting the other government de-
partments. The three armed services would shrink, Mr Cameron
conceded (so that Britain would no longer be able to deploy
forces of the size seen in Iraq and Afghanistan, a largely sceptical
press noted). But, he assured the House of Commons, Britain
would remain one of a very few powers able to deploy a bri-
gade-sized force anywhere on earth, indenitely.
Above all, the prime minister attacked the previous Labour
government (with reason) for leaving behind a wildly overspent
defence budget, complete with unbreakable contracts for two air-
craft carriers, one of which the country cannot aord to equip
with warplanes. What he did not do was suggest that money
saved on defence might be used to oset cuts on civilian spend-
ing. In short, guns and butter were kept rmly separate.
There are several reasons for this. Defence spending is particu-
larly precious to Conservative voters. A Tory prime minister can
ill aord public rows with men in uniform. Defence spending is
qualitatively dierent: decisions taken today aect national secu-
rity for decades to come. Whereas defence is an elite preoccupa-
tion in many European countries, in Britain it is the general public
that is keen on hard power. Earlier this year, Chatham House, a
think-tank, commissioned twin polls of the general public and a
group of elite opinion formers. Asked to name assets that best
served Britain globally, elite respondents named the BBC and
British culture. Two-thirds said ethics should at times trump the
national interest in British foreign policy. The public put the
armed forces joint rst with the BBC, called for Britain to remain a
great power andby a narrow majorityput national interests
ahead of values.
Actually, there are early signs that Mr Cameron’s foreign-poli-
cy doctrine combines hard and soft power. A National Security
Strategy made public on October 18th hailed Britain’s military
and intelligence services, but also vowed an intense focus on
trade promotion. Britain should play to its strengths, it suggested:
it was an open, outward-facing hub for the English-speaking
world and nancial markets, a second home to the restless global
elite, a member of the European Union, the Commonwealth, the
G8 and the G20 and a permanent member of the United Nations
Security Council. Though its spooks should never work with tor-
turers, Britain had to work with countries that did not share its
values or standards of criminal justice, the strategy declared. In
the interests of national security, Britain might not always in-
dulge in public condemnation of such partners.
Insular, or just broke?
So, beneath the bombast, is this a new east of Suez moment?
The British public does not want one, but it cannot be ruled out,
says a senior ocial. Mr Cameron’s big vulnerability is that the
full consequences of his cuts will take years to emerge. When it
comes to less muscular forms of inuence, the Foreign Oce is
taking a 26% cut over four years. The BBC World Service will see
its Foreign Oce funding withdrawn, falling under the general
BBCbudget: this might harm that global broadcaster.
To some outsiders, Britain’s obsession with global inuence
may appear tiresome. But a surly, protectionist Britain would be
worse. The fear in ocial Washington, four decades ago, was that
Britain was becoming a Little England, walking away from the
wider world and leaving America to grapple with its own isola-
tionist temptations. That fear was overblown in 1968: Britain was
broke, rather than determined to shun the world. Mr Cameron
seems to think the same is true today. Wish him luck. 7
Austerity Britain’s global ambitions
David Cameron and George Osborne gamble that Britain wants both guns and butter
Bagehot
70 Britain The Economist October 23rd 2010
Economist.com/blogs/bagehot
72 Running hospitals better
73 New Roman Catholic cardinals
73 Archiving the web
W
E WORSHIP an awesome God in
the blue states, declared Barack
Obama in the speech that made him a star,
and we don’t like federal agents poking
around in our libraries in the red states.
Six years after his address to his party’s na-
tional convention in 2004, the idea of Mr
Obama as a post-partisan gure, an eort-
less uniter of Democrats and Republicans,
looks droll.
But his failure to transcend party poli-
tics does not mean it was not canny to try.
In America, Europe and elsewhere, the era
of tight aliation to political parties is
over. Successful politicians surmount
party allegiances, rather than entrench
them. In America, the 50-50 nation is
more like a 30-30-30 nation; last month, a
Pew survey found that independents at
37% outnumbered either Democrats or Re-
publicans. Such inbetweeners tend to nd
partisanship on the airwaves and in Con-
gress repellent, strengthening their convic-
tions further.
As old allegiances fade, third parties are
doing better. In Germany, a recent poll puts
the Greens, formerly a fringe party, ahead
of the once impregnable Social Democrats.
In Britain’s 1951 general election, 97% of all
voters chose Labour or the Conservatives.
In last May’s election, just 65% did. Party
membership is declining tooby 40% in 13
European democracies between the late
1970s and late 1990s, according to one
study. In Britain the three big parties com-
bined have under 500,000 members; in
the 1950s, with a smaller population, their
total was over 4m. And the members that
remain are less active.
Explanations abound. In many indus-
trial democracies, working-class voters
chose left-wing parties out of self-interest.
Other voters, fearing the power of organ-
ised labour, voted the other way. But when
most people count themselves as middle-
class, such tribal ties wane. In countries
where the ideological gap between parties
has narrowed, their brands may no longer
be useful labels for busy or ignorant voters.
Accustomed to choice as consumers, vot-
ers increasingly pick policies rather than
signing up to comprehensive world views.
Single-issue groups have thrived. Britain’s
National Trust, a heritage organisation,
raised its membership from 250,000 in 1971
to 3.7m now.
Political scientists disagree over the
causes of the parties’ decline. But a more
pressing question is its eects. The decline
of partisanship could signal a less tribal,
more educated electorate. But research on
36 countries by Professor Paul Whiteley of
the University of Essex shows a strong cor-
relation between political partisanship
and good public administration. A rise of
ten percentage points in partisanship goes
along with an increase of one notch in the
World Bank’s good-governance table
(which assesses countries on a ve-point
index). A strong party base may help poli-
ticians to push through unpopular but nec-
essary reforms. A weak one means that fol-
lowers ee when the going gets tough.
Consumer choice may mean dodging
responsibility. California’s referendums al-
low voters to engage with politics issue by
Political parties
The party’s (largely) over
International
Political parties’ membership is withering. That’s bad news for governments, but
not necessarily for democracy
I see it my way
Source: Pew Research Centre, Gallup
US political-party identification, % replying:
0
10
20
30
40
50
1960 65 70 75 80 85 90 95 2000 05 10
Democrat
Republican
Independent
1
The Economist October 23rd 2010 71
Also in this section
72 International The Economist October 23rd 2010
2 issue. The state’s dysfunctional nances
and politics are a poor advertisement for
that. Less partisanship can also mean more
political volatility as big old parties nd it
harder to win outright. The Westminster
model of parliamentary democracy and
majoritarian voting should produce strong
single-party rule. But the most recent elec-
tions in the ve main countries that use it
(Australia, Britain, Canada, India and New
Zealand) have produced hung parlia-
ments. Four have coalition governments.
The parties’ eorts to reverse this have
had little success. As Conservative leader a
decade ago (he is now foreign secretary),
William Hague proclaimed a target of a
million-strong membership. It is now less
than 200,000. A better solution may be to
give members real power within the party.
Maurice Duverger, a French academic, dis-
tinguished in 1951 between cadre parties,
where power is held at the very top, and
mass parties, where the grassroots de-
cide policy and elect bigwigs. Most politi-
cal parties in the West oer inuence to
outsiders who donate money, not to their
members who donate time.
The decline of partisanship is prompt-
ing some innovations. Some Americans fa-
vour the idea of top two primary elec-
tions in which any registered voter can
take part, and choose two candidates, re-
gardless of party, to contest an election.
The victors could be two Democrats or two
Republicans. The system is already in ef-
fect in Washington state and was recently
approved in California. It could help cross-
party and moderate candidates. But it faces
a sti legal challenge.
Other eorts seek to turn independent
politiciansoften seen as cranks and ama-
teursinto eective candidates. In Britain,
outts such as Independent Network and
the Jury Team oer training and support to
independents. Brian Ahearne, director of
the Independent Network, says that Brit-
ain’s most recent general election saw the
biggest number of independents standing
for election since 1885, when records be-
gan, and almost twice as many as stood in
2005. They received over 144,000 votes,
against a mere 10,000 in 1987.
Politicians like to have it both ways.
Vote for my Daddy, quavers Ben Lange’s
toddler daughter, in a spot for his candida-
cy in an Iowan congressional race.
Grouped with his family on a sunny mid-
western hillside, Mr Lange gives a wide
berth to party politics. This isn’t about Re-
publican/Democrat, is his cutesy patter.
But another campaign video on his web-
site is bombastic and combative, showing
grainy footage of political foes, with a sin-
ister musical soundtrack. The old system
may be broken. But it is not dead yet. 7
Party lines
Source: “Is the party over?”, by Paul Whiteley.
Party Politics, September 2010
Political-party membership/affiliation
Self-identified, 2004, % of population
0 5 10 15 20 25 30
Uruguay
Austria
Canada
Mexico
Britain
Netherlands
Brazil
Japan
Germany
South Korea
Chile
Russia
Poland
M
EASURING good health, in patients
and hospitals alike, is one thing. Find-
ing the causes is harder. Medical profes-
sionals in Britain know that Hammer-
smith Hospital in west London, for
example, is one of the best in the country
Tony Blair received treatment there for his
irregular heartbeat and it is one of only a
handful of places to which London ambu-
lance crews take people with suspected
heart attacks. From America to Sweden,
the best hospitals in a rich country outper-
form the rest. But how?
Stephen Dorgan of McKinsey, a consul-
tancy, and John Van Reenen of the London
School of Economics have tried to answer
this. They studied almost 1,200 hospitals in
America, Britain, Canada, France, Ger-
many, Italy and Sweden, using techniques
more commonly applied to identify excel-
lence in manufacturing industry.
The hospitals with the best manage-
ment practices (analysed as if they made
things rather than curing people) also
ranked best on a standardised measure of
medical success: death rates among emer-
gency patients experiencing heart attacks.
That score works across countries and cul-
tures, and has unambiguous results.
The researchers found ve characteris-
tics associated with the management of
successful hospitals. One was competi-
tionor at least the perception of having
competitors. Hospital managers who
named more than ten institutions that they
competed with scored more highly on
their management practice than those
who saw fewer alternatives for their pa-
tients to choose from.
Having lots of small providers vying for
patients will not on its own raise stan-
dards. The researchers also found that big-
ger is better when it came to good manage-
ment. Hospitals employing 1,500 or more
sta are better run than those employing
more than 500, which, in turn, outperform
those with more than 100 sta. Hospitals
with less than 100 people working in them
are particularly badly managed. Private
ownership is another factor helping hospi-
tals score more highly.
Only in Italy must hospital managers
have clinical degrees. That seems a good
rule: institutions that employ clinically
qualied sta in management score better
than those that do not. Overall, Britain per-
forms badly by this measure: in Sweden,
93% of hospital managers are former doc-
tors, nurses or other clinical sta. In Ameri-
ca, Canada and Germany, the proportion is
71-74%. In France it is 64%, and in Britain
just 58%. Good sta also need the freedom
to exercise their own judgment: managers
with the most autonomy fare best.
That may be a signpost for improve-
ment. Hammersmith Hospital is one of
ve such institutions run by Imperial Col-
lege, London. Stephen Smith, who is re-
sponsible for the hospitals, is also principal
of the faculty of medicine. In America,
Johns Hopkins is not merely a highly rated
university based in Baltimore, but its medi-
cal arm also runs a hospital of high repute.
Big, professional, autonomous, mostly in-
dependent and ferociously competitive:
elite universities seem to oer all ve im-
portant characteristics for saving lives. 7
Health-care management
Five simple rules for running a rst-class hospital
How to save lives
An early process-optimisation benchmark
budget, to save the web. The British Library
is still seeking one.
So national libraries have decided to
split the task. Each has taken responsibility
for the digital works in its national top-lev-
el domain (web-address suxes such as
.uk or .fr). In countries with larger do-
mains, such as Britain and America, cura-
tors cannot hope to save everything. They
are concentrating on material of national
interest, such as elections, news sites and
citizen journalism or innovative uses of
the web.
The daily death of countless websites
has brought a new sense of urgencyand
forced libraries to adapt culturally as well.
Past practice was to tag every new docu-
ment as it arrived. Now precision must be
sacriced to scale and speed. The task start-
ed before standards, goals or budgets are
set. And they may yet change. Just like
many websites, libraries will be stuck in
what is known as permanent beta. 7
I
N THE digital realm, things seem always
to happen the wrong way round. Where-
as Google has hurried to scan books into
its digital catalogue, a group of national li-
braries has begun saving what the online
giant leaves behind. For although search
engines such as Google index the web,
they do not archive it. Many websites just
disappear when their owner runs out of
money or interest. Adam Farquhar, in
charge of digital projects for the British Li-
brary, points out that the world has in
some ways a better record of the beginning
of the 20th century than of the beginning
of the 21st.
In 1996 Brewster Kahle, a computer sci-
entist and internet entrepreneur, founded
the Internet Archive, a non-prot organisa-
tion dedicated to preserving websites. He
also began gently harassing national li-
braries to worry about preserving the web.
They started to pay attention when several
elections produced interesting material
that never touched paper.
In 2003 eleven national libraries and
the Internet Archive launched a project to
preserve born-digital information: the
kind that has never existed as anything but
digitally. Called the International Internet
Preservation Consortium (IIPC), it now in-
cludes 39 large institutional libraries. But
the task is impossible. One reason is the
sheer amount of data on the web. The
groups have already collected several peta-
bytes of data (a petabyte can hold roughly
10 trillion copies of this article).
Another issue is ensuring that the data
is stored in a format that makes it available
in centuries to come. Ancient manuscripts
are still readable. But much digital media
from the past is readable only on a handful
of fragile and antique machines, if at all.
The IIPC has set a single format, making it
more likely that future historians will be
able to nd a machine to read the data. But
a single solution cannot capture all con-
tent. Web publishers increasingly serve up
content-rich pages based on complex data
sets. Audio and video programmes based
on proprietary formats such as Windows
Media Player are another challenge. What
happens if Microsoft is bankrupt and for-
gotten in 2210?
The biggest problem, for now, is money.
The British Library estimates that it costs
half as much to store a digital document as
it does a physical one. But there are a lot
more digital ones. America’s Library of
Congress enjoys a specic mandate, and
Archiving the web
Born digital
National libraries start to preserve the web, but cannot save everything
The library of the future
The Economist October 23rd 2010 International 73
New Roman Catholic cardinals
Unbendable
W
HEN John Paul II, the rst non-
Italian ponti since 1523, was elect-
ed in 1978 it was seen as a sign that the
church was belatedly making good its
claim to be catholic, or universal. Italians
were unconvinced; some called the reign
of the former Karol Wojtyla the Polish
exception. But when a German was
named to succeed him, it seemed even to
many Italians that their grip on the
papacy had been broken.
On October 20th Pope Benedict XVI
seemed to assuage Italian gloom. He
announced the names of 24 new cardi-
nals, including 20 below the age of 80
who will thus get the right to vote in a
papal election. Eight of the cardinal-
electors are from Italy. Once they receive
their red hats on November 20th, some
25 of the 120 voting cardinals will be
Italians; it looks highly possible that one
of them will be chosen to succeed the
83-year-old Benedict.
That may have advantages: John Paul
neglected the papal administration, the
Curia, which badly needs modernising.
Benedict has tried twice to simplify the
Curia but been thwarted each time. A
local with a feeling for Italian culture
might outwit the foot-draggers.
Still, Benedict’s appointments look
anachronistic. Only seven of his new
cardinals come from Latin America,
Africa or Asia. Between them, according
to the church’s own data, those regions
account for some two-thirds of baptised
Catholics. The new men will at least be
electors, though. And one, Laurent Mon-
sengwo Pasinya, from Congo, has been
called papabile, a potential pope.
But while elevating some Italians
from rather modest roles, Benedict
passed over the Archbishop of Rio de
Janeiro who cares for more than 3.5m
souls. In the United States, too, this
week’s news may cause confusion. The
two new American cardinals are at
opposite ends of a spectrum: Raymond
Burke called for pro-abortion politicians
to be denied communion while Donald
Wuerl rejected that line.
In ignoring some important prelates,
Benedict has kept to the unwritten rule
that diocesan archbishops do not be-
come cardinals if their predecessors are
still voting red-hats. That norm dished
the hopes of English Catholics that their
archbishop, Vincent Nichols, would get a
cardinal’s hat after the successful papal
visit to Britain. Benedict did not get
where he is today by bending rules.
Vatican City
Italian prelates return in force
Also in this section
76 Privatising Coal India
76 Daimler’s innovation unit
77 Proting from sexism in South Korea
77 A Franco-German train ti
78 Drug rms and biosimilars
81 Luxury is back
81 A global ranking of shoplifters
82 Schumpeter: Companies aren’t
charities
H
ISTORY bus still wax poetic about
the brutal patent battles a century ago
between the Wright brothers and Glenn
Curtiss, another aviation pioneer. The cur-
rent smart-phone patent war does not
quite have the same romance, but it could
be as important.
Hardly a week passes without a new
case. Motorola sued Apple this month,
having itself been sued by Microsoft a few
days earlier. Since 2006 the number of mo-
bile-phone-related patent complaints has
increased by 20% annually, according to
Lex Machina, a rm that keeps a database
of intellectual-property spats in America.
Most suits were led by patent owners
who hail from another industry, such as
Kodak (a rm from a bygone era that now
makes printers), or by patent trolls (rms
that buy patents not in order to make pro-
ducts, but to sue others for allegedly in-
fringing them). But in recent months the
makers of handsets and related software
themselves have become much more liti-
gious, reports Joshua Walker, the boss of
Lex Machina.
This orgy for lawyers is partly a result of
the explosion of the market for smart-
phones. IDC, a market-research rm, ex-
pects that 270m smart-phones will be sold
this year: 55% more than in 2009. It has be-
come worthwhile to defend one’s intellec-
tual property, says Richard Windsor of
Nomura, an investment bank.
Yet there is more than this going on.
Smart-phones are not just another type of
handset, but fully-edged computers,
which come loaded with software and
double as digital cameras and portable en-
tertainment centres. They combine tech-
nologies from dierent industries, most of
them patented. Given such complexity,
sorting out who owns what requires time
and a phalanx of lawyers.
The convergence of dierent industries
has also led to a culture clash. When it
comes to intellectual property, mobile-
phone rms have mostly operated like a
club. They jointly develop new technical
standards: for example, for a new genera-
tion of wireless networks. They then li-
cense or swap the patents essential to
this standard under fair and reasonable
conditions.
Of apps and scraps
Not being used to such a collectivist set-up,
Apple refused to pay up, which triggered
the rst big legal skirmish over smart-
phones. A year ago Nokia lobbed a lawsuit
at Apple, alleging that its American rival’s
iPhone infringes on a number of its essen-
tial patents. A couple of months later, Ap-
ple returned the favour, alleging that Nokia
had copied some iPhone features. Since
then both sides have upped the ante by l-
ing additional complaints.
Lending ferocity to this legal reght is
the fact that competition in the smart-
phone market is not merely about individ-
ual products, but entire platforms and op-
erating systems (see chart on next page).
These are the infrastructures that allow
other rms to develop applications, or
apps, for these devices. Should any one
rm gain an important lead, it might dom-
inate the industry for decadesjust as Mi-
crosoft has dominated the market for per-
sonal-computer (PC) software.
Yet there is a dierence between the
smart-phone war and the earlier one over
PCs. There is a new type of player: rms
with open-source platforms. Google, for
instance, which makes its money from ad-
vertisements, does not charge for Android
(its operating system for smart-phones)
and lets others modify the software. This
makes life hard for vendors of proprietary
platforms, such as Apple and Microsoft.
This explains another set of closely
watched lawsuits. In March Apple sued
HTC, a Taiwanese maker of smart-phones,
which responded in kind a couple of
months later. Earlier this month it was Mi-
crosoft’s turn to le a lawsuit against Moto-
rola, which is likely to retaliate soon. And
Oracle, a maker of business software, has
sued Google directly, albeit over a dierent
issue, concerning how Android uses Java, a
programming language.
Some expect Apple and Microsoft to
sue Google. Yet this is unlikely, because the
online giant will be hard to pin down.
Google does not earn any money with An-
droid, which makes it dicult to calculate
any potential damage awards and patent
royalties.
The frenzy of smart-phone litigation
could last for years. The combatants have
deep pockets and much to lose. Google is
bounding ahead: Android now runs 32%
of smart-phones sold in America, whereas
Apple’s iPhone has only 25% of the market
and the BlackBerry has 26%, according to
Nielsen, another market research rm.
Similarly, Nokia, which has already lost
ground to Apple, cannot aord to see its in-
tellectual property devalued. Should No-
Smart-phone lawsuits
The great patent battle
For daily analysis and debate on business and
our weekly Money talks podcast, visit
Economist.com/business-nance
Business
Nasty legal spats between tech giants may be here to stay
1
The Economist October 23rd 2010 75
76 Business The Economist October 23rd 2010
2
1
kia prevail, Apple may be slapped with $1
billion or so in licensing fees, estimates
Christopher White of Bristol York, an in-
vestment bank.
If the market for computing tablets
(which are essentially oversized smart-
phones) takes o as expected, there will be
even more lawsuits. Apple is set to sell
some 15m iPads by the end of the year.
Gartner, a market-research rm, predicts
that the overall tablet market will reach
nearly 55m units in 2011.
Eventually, even lawsuits must come to
an end. How much harm they will cause
remains to be seen. If Apple wins against
HTC, that would be bad news for upstart
handset rms. Until a few years ago, htc
only made devices for others, but now it
has become a brand of its own.
Litigation may also make smart-phones
dearer. Mr White of Bristol York estimates
that device makers already have to pay roy-
alties for 200-300 patents for a typical
smart-phone. Patent costs are 15-20% of its
selling price, or about half of what the
hardware components cost. If 50 people
[each] want 2% of a device’s value, we have
a problem, says Josh Lerner, a professor at
Harvard Business School.
Finally, there is a danger that the current
intensity of litigation will become normal.
Pessimists predict an everlasting patent
war, much as the wider information-tech-
nology industry seems permanently em-
broiled in antitrust action. The Wright
brothers’ legal skirmishes were put to rest
only by the outbreak of the rst world war.
With luck, the smart-phone patent battles
will end more quietly. 7
Who’s suing whom
Sources: Bristol York; company reports; The Economist
Smart-phone industry, October 2010
C
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Software
Settled Expected
lawsuit
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(iPhone)
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Phone)
(Android)
G
RABBING hot coals is usually a stupid
thing to do. But investors who scram-
bled to buy shares in Coal India, a big state-
run rm, thought their ngers safe enough.
India’s biggest-ever initial public oering
(IPO) was oversubscribed on its second
day, October 19th. By selling 10% of its
shares, the government raised about 150
billion rupees ($3.5 billion). The world’s
largest coal producer, which extracted
more than 430m tonnes last year, is one of
India’s ten biggest rms by market value.
Local newspapers crowed that India was
now in the IPObig league.
Nearly everyone seems happy. The gov-
ernment has a trainload of cash. Neither
unions nor demagogues made much fuss.
Reform-minded ocials may take this as a
green light to carry on quietly privatising
other state-run enterprises, albeit slowly.
And a few more Indians are now retail in-
vestors, encouraged by a small discount on
the share price.
Coal India’s prospects should also be
bright. India’s accelerating economy is rav-
enously short of energy. With renewable
fuels barely a icker, the country will rely
for decades on burning mountains of car-
bon. Coal India accounts for more than
80% of domestic production and controls
18 billion tonnes of reserves, most of In-
dia’s proven total. To expand, it plans to
buy foreign mines and import more coal: it
has set aside $1.2 billion for an overseas
shopping trip, which may include pits in
America, Australia and Indonesia.
However, the partially privatised Coal
India could be much more productive. The
rm used to be a sponge to soak up surplus
east Indian labour. Its workforce has been
cut by roughly a quarter in the past decade,
but still numbers 400,000.
The rm relies heavily on vast open-
cast mines but is running short of appro-
priate places to dig (at least without anta-
gonising gun-toting Naxalite rebels, who
plague swathes of eastern India). It is also
failing to extract coal from deeper seams.
The coal it produces is mostly poor in qual-
ity and rich in ash; it should be washed be-
fore shipping to make it more ecient, but
is not. India’s overloaded railways struggle
to deliver enough coal to power stations.
Government planners, rather than a mar-
ket, allocate supplies and set prices and
wages. As a result, coal that is nearly the
world’s cheapest when dug up is nearly
the priciest when it reaches a furnace.
This creaky system struggles to deliver
the half-a-billion tonnes of coal that Indi-
ans demand each year. If that demand
eventually triples, as some predict, Coal In-
dia may not cope. Reformers hope that
private investment will bring sharper scru-
tiny and better management. A better idea
would have been to break Coal India’s
quasi-monopoly and let rival rms vie to
deliver coal cheaply. That was politically
impossible, however. Greens may cheer,
but many of the 400m Indians who lack
electricity today will be left in the dark for
longer than necessary. 7
Privatising Coal India
Powering the tiger
Delhi
India’s creaking coal industry
celebrates the country’s biggest IPO
Clean coal? What’s that?
I
T WAS July 4th 2007 and Jérôme Guillen
had spent America’s independence day
climbing Mount Hood in Oregon. Back at
his car, he found a voice-mail message:
Dieter Zetsche, the head of Daimler, want-
ed to meet him urgently. When the French-
man, then in charge of the design of a new
American truck for the German carmaker,
saw his boss, he was asked his thoughts on
setting up an innovation unit to generate
additional growth. A few days later he was
given the job.
The meeting came at an important time
for Daimler, which had just extracted itself
from a disastrous merger with Chrysler
that had sapped its creativity and dam-
aged its Mercedes-Benz brand. Before long,
recession would add to its troubles. But ad-
versity made the company more willing to
Daimler’s innovation unit
Thinking outside
the car
Stuttgart
After its disastrous American foray,
Daimler is thinking more radically
The Economist October 23rd 2010 Business 77
2
1
embrace some of the odder ideas that Mr
Guillen and his team came up withespe-
cially those that ran against the longstand-
ing conventional wisdom that the way for
carmakers to grow is to encourage people
to buy more cars.
Two of the ideas are designed to make it
easier for people to live without owning
cars. Although the concept of hiring a car
by the quarter-hour is not new, in most car-
sharing schemes the vehicle must be re-
served for a set amount of time and re-
turned to its starting point. Daimler’s
Car2Go scheme, however, allows people
to pick up cars on a whim, use them for as
long as they need to and drop them o
wherever it is convenient. It relies on so-
phisticated software to match cars and
drivers, even when hiring details are not
known in advance. Car2Go is being tested
in Ulm, a southern German town, and in
Austin, Texas. Daimler is also using the
idea as the basis for a bid to supply 3,000
electric cars for a sharing scheme in Paris.
The second idea looks something like a
cross between Facebook, an internet dat-
ing site and a discount-ight broker.
Car2gether matches people wanting to
hitch a ride with drivers going the same
way. In time it will allow cashless pay-
ments for the journeys, from which Daim-
ler will take a small cut. Mr Guillen de-
scribes this as broking empty seats.
These ideas seem more San Francisco
than Stuttgart. But others seem to come
straight from a business consultant’s play-
book, a nod perhaps to the years Mr Guil-
len spent working as a turnaround special-
ist at McKinsey. One such idea is to allow
existing Mercedes-Benz customers to hire
demonstration models from showrooms.
This may appeal to those who need a
roomier car for a weekend trip or a sporty
one to impress the opposite sex.
To get approval, each project has to
demonstrate that it will tap at least 100m
($140m) a year in revenue from a market
worth at least 1billion, and promise high-
er prot margins than usual. Some 25 pro-
jects are in the works, says Mr Guillen.
Such promises may seem extravagant,
yet ve years ago Daimler set the wildly
optimistic target of earning a 10% gross
margin for Mercedes-Benz cars. That target
was suspended during the nancial crisis,
but in the second quarter of this year the
company came within a whisker of
achieving it. Next year, it may beat it com-
fortably. More important, perhaps, than
the success of any individual project is that
Mr Guillen and his team are prepared to
think outside the car no matter how
threatening their ideas may seem. 7
Gender arbitrage in South Korea
Proting from sexism
D
O YOU know you have to give
everything to become a TVan-
nouncer? These words cost Kang Yong-
seok, a member of South Korea’s parlia-
ment, his membership of the ruling
Grand National Party in July. His insinua-
tion that a woman must sleep her way to
the top to work in television embarrassed
his colleagues and set o a national
debate about sexism.
Working women in South Korea earn
63% of what men do. Not all of this is the
result of discrimination, but some must
be. South Korean women face social
pressure to quit when they have children,
making it hard to stay on the career fast
track. Many large companies have no
women at all in senior jobs.
This creates an obvious opportunity.
If female talent is undervalued, it should
be plentiful and relatively cheap. Firms
that hire more women should reap a
competitive advantage. And indeed,
there is evidence that one type of em-
ployer is doing just that.
Jordan Siegel of Harvard Business
School reports that foreign multination-
als are recruiting large numbers of edu-
cated Korean women. In South Korea,
lifting the proportion of a rm’s manag-
ers who are female by ten percentage
points raises its return on assets by one
percentage point, Mr Siegel estimates.
South Korea is the ideal environment
for gender arbitrage. The workplace may
be sexist, but the education system is
extremely meritocratic. Lots of brainy
female graduates enter the job market
each year. In time their careers are
eclipsed by those of men of no greater
ability. This makes them poachable.
Goldman Sachs, an American invest-
ment bank, has more women than men
in its oce in Seoul.
Only 60% of female South Korean
graduates aged between 25 and 64 are in
workmaking educated South Korean
women the most underemployed in
OECDcountries. That may change, how-
ever. Marriage and fertility rates have
plunged. There were 10.6 marriages per
1,000 people in 1980, but only 6.2 last
year. South Korean women have an
average of only 1.15 children, one of the
lowest rates anywhere. That has trou-
bling implications for the country, but
should help women in the workplace.
Firms will have to use all the talent they
can nd. If they don’t, their rivals will.
Seoul
If South Korean rms won’t make use of female talent, foreigners will
Another joyful day at the oce
O
N DECEMBER 7th 1835 the Adler, a
steam engine built by a British father
and son, George and Robert Stephenson,
pued its way between Nuremberg and
Fürth in Bavaria, marking the birth of the
German railway system. On October 19th,
a century and three-quarters later, the Ger-
mans repaid the compliment. Deutsche
Bahn’s sleek high-speed train, the ICE 3,
slid into London’s St Pancras station, the
rst German train to pass through the
Channel tunnel, which links Britain to con-
tinental Europe.
By happenstance the event coincided
with a royal row brewing between the
French and, it seems, almost everyone else
keen on liberalising rail travel through the
tunnel. Barely a mile away, as the Germans
celebrated, Alstom, a French company,
sought an injunction from Britain’s High
Court against the award of a contract to its
German rival Siemens, one of the makers
of the ICE 3.
Earlier this month Eurostar, the opera-
tor of passenger trains through the tunnel,
named Siemens as its preferred bidder to
build ten new high-speed trains. Alstom,
which has supplied all Eurostar trains to
date, cried foul. It claims the tender was in-
valid because it made assumptions about
changes to safety regulations while they
are still under discussion. Dominique Bus-
sereau, the French secretary of state for
transport, backed up the Alstom claim,
saying the tender process was null and
void. Alstom needed to le for an injunc-
A Franco-German train ti
Ils ne passeront
pas
Trains under the Channel cause a storm
78 Business The Economist October 23rd 2010
2
tion before the contract with Siemens is
signed on October 25th, say company
sources.
The safety issue centres on whether
trains of recent design, which have power
sources distributed along their length, are
as safe as those with power sources con-
centrated at their ends. The Intergovern-
mental Commission (IGC), which governs
safety in the tunnel, considered the ques-
tion last year and concluded that trains
with distributed power would be accept-
able so long as they were equipped to iso-
late a re anywhere along their length. The
IGCasked Eurotunnel, which operates the
tunnel, to work out detailed rules to take
this into account. Eurotunnel expects to
draw up the rules by the end of the year.
Alstom says that it raised concerns
months ago that inviting bids for trains
with distributed power before these rules
were claried was jumping the gun. The
company nevertheless submitted a bid in
a tendering process which it now argues is
illegal. Eurostar is not prepared to change
its decision, which company sources say is
the right one for our customers. The
state-owned French railway, SNCF, which
owns 55% of Eurostar, has not commented.
Deutsche Bahn is not involved in the
row, but its ICE trains work on distributed
power. Amusingly, because of the still un-
changed regulations, the visiting ICE 3 was
propelled through the tunnel by two other
locomotives, one at each end.
The train was also subjected to a rigor-
ous safety exercise in the tunnel. Hundreds
of people were evacuated from its two
200-metre sections in the space of 20 min-
utes, to take refuge in a central service tun-
nel. The maximum time allowed for such
an evacuation is 90 minutes. Last Decem-
ber, when an Alstom Eurostar train had to
be evacuated because of engine failure, it
took 35 minutes.
Since January, the operation of interna-
tional passenger rail services has been lib-
eralised throughout the European Union.
By 2013 Deutsche Bahn plans to run one
that whizzes from London to Cologne in
four hours, and to Frankfurt in ve. Com-
petitors sense that Alstom’s concerns are
more about commerce than safety. 7
From London to Frankfurt in time for lunch
G
ENERIC drugs are the scourge of the
pharmaceutical industry. So it is ironic
that the next great opportunity for tradi-
tional drugs rms is to do to the biotech-
nology interlopers exactly what the gener-
ics rms have done to them: shred their
prot margins with cheaper copies.
This battle is foreshadowed in a deal
announced on October 18th by Pzer, the
world’s biggest pharmaceutical rm. It will
work with Biocon, India’s largest biotech
company, to bring biosimilar insulin
treatments to market. Biosimilars are ge-
neric impersonations (although not identi-
cal copies) of biotech drugs. And as if to re-
mind the world that new ideas don’t all
come from America, it is the Indian rm
that will design and manufacture the origi-
nal drugs; Pzer will only market them.
This is part of a new strategy to become
a one-stop shop for biosimilars, explains
David Simmons of Pzer. Biosimilars are a
hot new area. Although biotech-based
drugs account for only a fth or so of glo-
bal drugs sales they are projected to grow
at double-digit rates as sales of many con-
ventional drugs decline, especially with a
large number of patent expirations com-
ing. Add the fact that many biotech drugs
produce enormous protssome treat-
ments cost $100,000 or more per year
and it is easy to see why the sector looks
like a juicy target for generic assault.
Yet some traditional generics rms are
piling in too. Sales of biosimilars at San-
doz, a generics arm of Novartis, a Swiss
drugs giant, reached $118m in 2009. Je
George, Sandoz’s boss, says they leapt 72%
during the rst half of 2010. William Marth
of Israel’s Teva, the world’s biggest gener-
ics rm, insists that biosimilars are a natu-
ral segue for his company and predicts
that sales will reach $800m by 2015. Cipla,
an Indian generics maker, and China’s De-
sano Pharma are also getting into the biosi-
milars business.
Generics rms will do better with biosi-
milars than they have with conventional
generic drugs, insists Viren Mehta, an in-
dustry expert. Sandoz’s Mr George says the
leading generics rms have access to better
technologies now and have made doctors
and patients comfortable with using
copies of drugs. However, he acknowl-
edges one potential snag: complexity.
The science involved in making biosi-
milars is much more complicated than that
in making ordinary generics, says Andrew
Pasternak of Bain & Company, a consultan-
cy. A typical generic drug may cost a few
million dollars to develop, he estimates,
but a biosimilar version could cost per-
haps $100m-150m. And because biosimi-
lars are not exact copies, many countries
may not allow them to be automatically
substituted for the pricier originals, as ge-
neric drugs often are in some countries.
This complexity hands the advantage
to the old pharmaceutical giants. Kiran Ma-
zumdar-Shaw, head of Biocon, says the
easy substitution that generics rms en-
joy at the pharmacy does not work with
complex biosimilarswhich require a doc-
tor’s approval to dispense.
The big drugs companies will benet
from that because they have marketing
machines and large technical sales forces
to persuade doctors to prescribe a drug. Mi-
chael Kamarck of Merck, an American
drugs rm which moved into biosimilars
in 2008, thinks the barriers to entry are so
great that only a handful of rms will be
able to pull it o.
Yet the outcome may not be so simple.
As the Pzer deal with Biocon suggests,
both sides may need partners. That is be-
cause there is an obstacle to biosimilars
even more formidable than cost: lawsuits.
Biosimilars threaten incumbent biotech
rms such as Amgen and Genentech (now
part of Roche, a Swiss drugs giant), which
have billions of dollars of sales at risk, ar-
gues Mr Pasternak. Big biotech will ght
hard to defend its patch, he predicts. 7
Pharmaceuticals
Attack of the
biosimilars
New york
Biotechnology drugs are the next target
for cheaper versions
airfrance.com/us
BUSINESS CLASS: a comfortable lie-flat seat,
a relaxing and peaceful atmosphere,
fine cuisine and French wines on long-haul flights
MAKING THE SKY THE BEST PLACE ON EARTH.
The Economist October 23rd 2010 Business 81
Shoplifting
Five-ngered discounts
I
NDIANS with money love to shop.
Annoyingly for retailers, so do Indians
without money. A new survey of retail-
ers in 42 countries by Britain’s Centre for
Retail Research found the highest level of
shrinkage (losses from shoplifting, theft
by workers and accounting errors) in
India. Goods worth 2.72% of sales went
walkabout. In Taiwan, the best perform-
er, only 0.87% did.
This is not because India is a nation of
tea leaves. It is because Indian shops
have not yet learned how to protect their
stock. Fifteen years ago Taiwanese shops
had one of the worst rates of shrinkage in
the world, but they took measures to
improve it. Joshua Bameld, the author
of the survey, says he is condent that
India can do the same.
Globally, shrinkage cost retailers $107
billion in the year to June. This was 5.6%
less than the previous year, but still the
equivalent of 1.36% of sales. In America,
light-ngered employees are a bigger
problem than thieving shoppers. In
Europe, it is the other way around. World-
wide, crooked sta have better opportu-
nities to steal than ordinary shoppers. Per
incident, they pinch ten times more.
When it comes to thwarting thieves,
shop-owners are on their own. In most
countries the criminal justice system has
all but given up trying to punish shoplift-
ers. Even in Britain, which is not shy of
locking people up, only 5,000-10,000 of
the roughly 450,000 who are arrested
every year go to jail, and then for an
average of 2.2 months. So retailers install
CCTV cameras, attach so-called electron-
ic article surveillance tags to their wares,
train their sta to spot thieves and screen
workers for criminal records before
hiring them. This year retailers spent
$26.8 billion, or 0.34% of sales, on pre-
venting theft.
Some dismiss shoplifting simply as a
cost of doing business. Yet it can be seri-
ous. Some shoplifters work in organised
gangs. Some turn violent when interrupt-
ed. Some, especially those who are
hooked on drugs, are persistent and
prolic. And all impose a cost on honest
shoppers. Theft inates the average
family’s annual shopping bill by $186.
Shops can thwart thieves, but it costs money
Light fingers in India
Source: Centre for Retail Research *Year ending June
Retail losses, 2010*, as % of sales
0 1 2 3
India
Brazil
South Africa
United States
France
Britain
Germany
Taiwan
2.2
2.3
0.7
39.3
5.8
6.6
6.1
0.6 Total loss, $bn
Shoplifting Employee theft
Supplier/vendor fraud Internal error
I
N THE dark days of the recession peo-
ple didn’t want to show the bling,
says Alisa Moussaie, owner and manag-
ing director of Moussaie, a London jewel-
lery shop. Some of her wealthy customers
bought diamonds or other gems as an in-
vestment during the nancial crisis, since
paper assets seemed so dodgy at the time.
Rather than aunting their purchases be-
fore recession-pinched passers-by, how-
ever, they asked for plain white shopping
bags. As the global economy mends, such
restraint is wearing o. Yet even the luxury
industry’s boosters did not expect such a
cork-popping recovery.
On October 14th Moët Hennessy Louis
Vuitton (LVMH), the world’s biggest luxu-
ry-goods company by sales, reported a 14%
increase in sales in the rst nine months of
the year, after correcting for such factors as
currency uctuation. Burberry, a British
clothing rm, also reported double-digit
sales growth in the six months to the end
of the September. On October 28th, PPR, a
French retail and luxury group, is expected
to report strong results.
The strength of the recovery was a sur-
prise, says Claudia D’Arpizio, a luxury-
goods expert in the Milan oce of Bain &
Company, a consultancy. Big brands such
as Louis Vuitton and Hermès are the main
winners. With their deep pockets, they
were able to continue to open new shops
and invest in the business during the crisis.
Luxury has always been a cyclical in-
dustry, but in the past decade it has soared
and plunged like a well-dressed bungee-
jumper. The early 2000s were grim: terro-
rist attacks in America, a global outbreak of
SARS and the war in Iraq all tempered peo-
ple’s appetites for international travel and
frivolous purchases. From 2004 to 2007,
however, luxury shoppers worked them-
selves into a frenzy of indulgence. Then, as
the nancial crisis bit, they stopped. Last
year the global luxury market shrank by
8%. But the luxury recovery that began to-
wards the end of 2009 has now gathered
momentum. Bain predicts 10% growth for
this year.
Pockets of condence in America help.
Luxury sales there slumped by 18% last
year. This year shoppers are feeling less
shy about showing o, and department
stores are gleefully stocking up with pretty
stu for the holiday season.
The mood in China is even blingier.
Luxury sales grew 20% even during the in-
dustry’s annus horribilis last year and are
forecast to boom by an astounding 30%
this year. In ve years China, which al-
ready accounts for a tenth of global de-
mand for luxury goods, is predicted to be
the third-largest market for them.
The boom has caught some rms with
their elegant trousers down. Despite na-
tionwide strikes in France, Louis Vuitton, a
peddler of posh handbags, does not have
sucient stock to cater to the sudden in-
crease in demand. Anxious to save enough
goodies for Christmas, the company is
closing its agship shop on the Champs-
Elysées in Paris earlier each day and raising
its prices in the euro zone.
Yet the good times for luxury rms will
probably not last. Next year Bain predicts
that growth will slow to 3-5%. The strength
of the euro will hurt the top rms, which
are disproportionately Italian or French
and often lovingly hand-craft their pro-
ducts within the euro area. Tax increases in
Europe will make the rich feel poorer and
less inclined to splash out. Consumer con-
dence is crucial. If people feel glum, they
don’t buy baubles. 7
Luxury goods
Bling is back
Asurprising recovery in luxury goods
S
TEVE COOGAN, a British comedian, once told a joke about
David Beckham, a footballer who is unlikely to win a Nobel
prize for physics: They say, ‘Oh, David Beckhamhe’s not very
clever.’ Yeah. They don’t say, ‘Stephen Hawkingshit at football.’
Successful corporations are like Mr Beckham. Both excel at one
thing: in Mr Beckham’s case, kicking a ball; in the corporations’
case, making prots. They may also be reasonably adept at other
things, such as modelling sunglasses or forming task forces to
solve environmental problems. But their chief contribution to
society comes from their area of specialisation.
Ann Bernstein, the head of a South African think-tank called
the Centre for Development and Enterprise, thinks that advo-
cates of corporate social responsibility (CSR) tend to miss this
point. In her new book, The Case for Business in Developing
Economies, she stresses the ways companies benet society
simply by going about their normal business. In a free and com-
petitive market, rms prot by selling goods or services to willing
customers. To stay in business, they must oer lower prices or
higher quality than their competitors. Those that fail disappear.
Those that succeed spread prosperity. Shareholders receive divi-
dends. Employees earn wages. Suppliers win contracts. Ordinary
people gain access to luxuries that would have made Cecil
Rhodes gasp, such as television, air-conditioning and antibiotics.
These are not new arguments, but Ms Bernstein makes them
fresh by writing from an African perspective. Citizens of rich
countries often fret about the occasional harm that corporations
do, yet take for granted the prosperity they create. People in devel-
oping countries do not have that luxury.
In South Africa, where more than a third of the workforce is
jobless, the problem is not that corporations are unethical but
that there are not enough of them. One reason is that South Afri-
ca’s leaders blithely heap social responsibilities on corporate
shoulders. Strict environmental laws cause long delays in build-
ing homes. This is nice for endangered butteries, but tough for
South Africans who live in shacks. Such laws also slow the con-
struction of power plants, contributing to the rolling blackouts
that crippled South Africa in 2008. South African labour laws
make it hard to re workers, which deters companies from hiring
them in the rst place. And a programme of Black Economic Em-
powerment, which pressures rms to transfer shares to blacks,
has made a few well-connected people rich while discouraging
investment. Ms Bernstein ducks this last topic, which is highly
sensitive in her home country.
Sometimes the pressure on business to solve social problems
comes, not from governments, but from non-governmental orga-
nisations (NGOs). Ms Bernstein cites the example of a pipeline
that Exxon built in Chad. The giant oil rm spent six years trying
to gure out the best way to comply with the Equator princi-
ples, an ambitious set of goals for avoiding harm to nature and
indigenous people. Exxon strained every sinew to preserve goril-
las’ habitat and compensate displaced villagers. Yet NGOs still
mounted a furious campaign condemning it. Many reasonable
companies must surely have concludedthat investment in
poor countries is not worth the eort, sighs Ms Bernstein.
Anti-corporate activists sometimes claim that big companies
are mightier than governments. This is absurd. Governments can
pass laws, raise taxes and declare war. Companies have virtually
no powers of coercion. If people do not voluntarily buy their pro-
ducts, they go bankrupt. Business is thus extremely sensitive to
public opinion. This is often a good thing. Ms Bernstein cites the
example of white-owned shops in South Africa under apartheid.
When black shoppers started boycotting them, it was remark-
able how rapidly most white shop owners were prepared to
ditch racist practices. Yet companies can also be bullied into do-
ing the wrong thing. When multinationals bow to pressure from
campaigners against sweatshops and sever links with suppli-
ers in poor countries, the workers who previously stitched shoes
for export may end up scavenging from rubbish heaps.
Accountable to all means accountable to none
Advocates of CSR argue that rms should pursue the triple bot-
tom line: not only prots, but also environmental protection
and social justice. This notion, if taken seriously, is incompre-
hensible, says Ms Bernstein. Prots are easy to measure. The
many and often conicting demands of a local community are
not. A business that is accountable to all is in eect accountable to
no one, says Ms Bernstein.
She does not take the absolutist view that companies should
strive only to maximise prots while obeying the rules. In poor
countries, the rules are often unclear. Multinationals will face
choices where what is locally acceptable would be criminal back
home. Obviously, they should err on the side of rectitude, but it is
far from obvious where to draw the line. In the most benighted
areas they will sometimes build roads and schools to keep the lo-
cals friendly. They will brag about such acts, but they are simply a
cost of doing business, not an instance of corporate altruism.
Ms Bernstein glosses over the innovative work a few compa-
nies have done in integrating csr into their strategy, and she is
better at identifying problems than oering solutions. She urges
businesses to defend capitalism as energetically as they promote
their own products. She thinks companies should provide incen-
tives for market-oriented journalism, lms and even novels.
Good luck with that. Businesses strenuously lobby for particular
favours from government, and chambers of commerce campaign
for lighter regulation. But the companies that are so brilliant at
selling the fruits of capitalismfrom iPads to medicineare sel-
dom much good at popularising the system that yields them. 7
Companies aren’t charities
In poor countries the problem is not that businesses are unethical but that there are too few of them
Schumpeter
Economist.com/blogs/schumpeter
82 Business The Economist October 23rd 2010
I
N JANUARY 2007 Creative Artists Agen-
cy (CAA), which manages George Cloo-
ney, Julia Roberts, Brad Pitt and other lm-
industry luminaries, opened its new of-
ces on Avenue of the Stars in Century
City, Los Angeles. As famous actors and di-
rectors le into the marble-lined entrance
to strike lucrative lm contracts, even more
serious money is being made upstairs.
The 12th oor is occupied by Ares,
which has $37 billion of funds invested in
private equity, high-yield bonds and other
corporate debt. One oor down is Canyon
Partners, an alternative-investment rm
that manages $18 billion. The CAA build-
ing is also home to Imperial Capital, a bou-
tique investment bank. All three rms can
trace their origins to Drexel Burnham Lam-
bert, an investment bank that collapsed
into bankruptcy in 1990, fatally wounded
by an insider-trading scandal.
Twenty years ago next month Michael
Milken, Drexel’s most talented and best-
paid nancier, who was based in Los Ange-
les, was sentenced to ten years in prison
after pleading guilty to six counts of securi-
ties fraud. His sentence was later commut-
ed and he was released in 1992 after serv-
ing 22 months. He was also forced to pay
much of the huge bonuses he earned at
Drexel in nes and settlements.
It is rare even in Hollywood to nd a
star that rose and fell so quickly. For much
of the 1980s Drexel was the hottest rm in
investment banking, thanks to its domi-
nance of the market for high-yield cor-
porate bonds, of which Mr Milken was
king. These bonds were known as junk
because they were ranked below invest-
ment grade by ratings agencies. Drexel
used its muscle in high-yield bond trading,
which Mr Milken had built up in the 1970s,
to push into other areas of investment
banking such as mergers and acquisitions
and underwriting. By 1986 Drexel, which in
its long history had not previously threat-
ened to join the nancial elite, was Wall
Street’s most protable rm.
But Drexel slumped under the weight
of legal battles and the $650m ne it agreed
on with the American government to set-
tle an investigation of alleged securities
fraud. When Mr Milken was forced out at
the end of 1988, the rm lost its biggest
source of revenue. His acumen was missed
all the more as the junk-bond market start-
ed to implode at the end of that decade.
Rising interest rates, defaults on bonds that
had been issued too readily in the go-go
years and new regulations that forced trou-
bled savings-and-loans to unload their
high-yield holdings all conspired to drive
junk-bond prices down. This seemed only
to validate claims that the junk-bond mar-
ket was a Ponzi scheme perpetuated by Mr
Milken’s tight control of it.
Those claims turned out to be false.
Drexel has left three enduring legacies: a
junk-bond market that has grown at least
sevenfold since the rm’s demise; the rms
and industries, from gambling to cable
television, that owed their rapid expan-
sion to the investment bank’s junk bonds;
and the inuence of the Drexel diaspora,
the young MBA graduates who worked in
the 1980s under Mr Milken, on the nance
industry in Los Angeles and elsewhere.
Bust to boom
In 1990 the outstanding stock of junk
bonds (estimated by subtracting redemp-
tions from new registered issues since
1970) was about $150 billion. Now the total
is over $1 trillion. Around two-fths of all
outstanding corporate bonds in America
are rated as speculative, or below invest-
ment grade (BB+ or lower), according to
Dealogic, a nancial-data rm. Even bet-
ter-class bonds are not as pukka as they
once were: much of the non-junk issued
since 1992 has been rated BBB-, the lowest
investment grade.
Like all other credit, the junk-bond mar-
ket was badly damaged during the reces-
sion. But it has bounced back, just as it did
in the early 1990s and early 2000s. This
year new issuance has surged: with
around $200 billion raised in America al-
ready, the total for 2010 is sure to be a record
(see chart 1 on the next page). The revival is
in part driven by a renewed search for
yield by investors disappointed with the
Stars of the junkyard
Brieng Drexel Burnham Lambert’s legacy
LOS ANGELES
Twenty years after Michael Milken’s junk-bond rm came crashing down, the
nancial revolution that it fostered lives on
1
The Economist October 23rd 2010 83
84 Brieng Drexel Burnham Lambert’s legacy The Economist October 23rd 2010
2
1
poor returns on cash or Treasuries: the in-
terest premium they demand for holding
junk has tumbled (see chart 2).
The reopening of the junk-bond market
has also aorded medium-sized rms ac-
cess to credit again. The businesses that
have tapped the market are a cross-section
of corporate America: airlines, clothing
manufacturers and retailers, health-care
providers, drug rms, restaurant chains,
oil-exploration rms and semiconductor
manufacturers. Some of the new issuance
is by rms looking to lock in long-term -
nancing on good terms.
The market’s revival has been helped
by fewer defaults on high-yield bonds. The
default rate on junk bonds stayed above
8% for 14 months in 2009-10, according to
CreditSights, a research rm. That com-
pares with 20 months in the previous two
recessions.
Junk bonds, once despised, are now
mainstream. Milken and Drexel took
high-yield bonds from a cottage industry
to one of the cornerstones of the nancial
industry, says Howard Marks, one of Mr
Milken’s early customers and now chair-
man of Oaktree, a Los Angeles rm that
manages around $75 billion in funds,
much of it in high-yield bonds and related
investments.
Catch a falling star
In the 1970s the market for such bonds was
tiny. It comprised fallen angels, the secu-
rities of former investment-grade compa-
nies that had fallen on hard times, which
changed hands infrequently and at big dis-
counts to face value. While a student at
Berkeley in the late 1960s, Mr Milken came
across empirical support for his hunch that
a portfolio of these high-yield bonds
would outperform an investment-grade
portfolio, even taking into account the
higher likelihood of default. He found it in
a study by Braddock Hickman, a central
banker and student of corporate nance,
which showed that even during the De-
pression there was a high rate of return on
non-investment-grade bonds. The interest-
rate spread over supposedly safer bonds
was more than enough compensation for
the higher expected losses.
When Mr Milken began to trade junk
bonds at Drexel from the early 1970s, his
pitch to his growing band of clients and fol-
lowers was always the same: junk was a
better bet than investment-grade bonds,
which had only one way to go: down.
High-yield bonds proved to be resilient in
the mid-1970s recession. Such was the
meltdown in nancial markets that in 1974,
when the value of equities fell by half,
some bonds could be purchased for the
price of their coupon. Yet remarkably few
junk bonds went bad and investors
achieved high rates of return.
This set the stage for the opening of a
sizeable market for new junk issues in 1977.
From then on fallen angels would be
traded alongside ascending angels: the
bonds of rms whose prospects were bet-
ter than their lowly status suggested. Inter-
est rates were volatile and rms wanted to
x their cost of capital. They were wary of
relying on banks, which had cut lines of
credit to rms at the nadir of the recession
to preserve their capital.
In April that year Drexel underwrote its
rst junk-bond issue when it raised $30m
for Texas International, a small oil-explora-
tion company. Other issues followed that
year but other investment banks initially
took a larger share of this new market. That
lead did not last (see chart 3 on the next
page). Mr Milken’s preaching of the high-
yield gospel secured him a loyal and grow-
ing customer base, mostly among insurers
and thrifts, with an insatiable demand for
low-grade securities. He helped his cus-
tomers make money. If they did well, they
came back for more and in time they built
their businesses on the supply of securities
from Drexel.
The key to their loyalty was Mr Mil-
ken’s commitment to buy or sell on de-
mand the bonds that Drexel had under-
written: he thus oered them a liquid
market and a way out of investments they
no longer wanted. That liquidity attracted
mutual funds into the junk arena. Mr Mil-
ken’s skill as a marketmaker was rooted in
his knowledge of the bonds issued (which
allowed him to price them accurately) and
his extraordinary recollection of his cli-
ents’ holdings (which helped him nd new
buyers for junk that others wanted to un-
load). And he stuck around when other
banks retreated from the junk market dur-
ing the early 1980s recession.
This fresh junk became an important
weapon for the corporate raiders and le-
veraged-buy-out (LBO) rms that came to
prominence in the 1980s. Drexel’s ability
quickly to raise hundreds of millions of
dollars in mezzanine debt (so called be-
cause it ranks between secure bank loans
and at-risk equity in the capital structure)
made the threat of buy-outs credible and
forced many big companies to slim costs
and increase returns to shareholders to
stave o the threat of takeover.
Drexel found much of the mezzanine -
nancing in 1989 for the $25 billion purchase
by Kohlberg Kravis Roberts, a buy-out rm,
of RJRNabisco, a cigarette-and-biscuit con-
glomerate. It was an example of both
Drexel’s daring and the muscle the rm
had at its peak. We sat around and said if
every one of our existing customers buys
the maximum amount they have ever
bought of one issue, we could get $3 bil-
lion, says Dana Messina, once a high-
yield salesman at Drexel, now the chief ex-
ecutive of Steinway Musical Instruments.
Drexel comfortably raised $6 billion to -
nance the deal.
Fertilised by junk
Junk-bond issues also oered a new way
for many small but growing rms, which
had been starved of capital by stodgy com-
mercial banks and sniy investment
banks, to nance themselves. The bread-
and-butter business was catering to guys
like Craig McCaw or Steve Wynn or John
Malone or Ted Turner, says Mr Messina.
These entrepreneurs saw the growth
potential in their respective industries. Mr
McCaw was head of McCaw Cellular
Communications, an early entrant to the
mobile-phone business, which had 2m
subscribers by the time AT&T bought it in
1994 for $11.5 billion. Drexel also funded Bill
McGowan’s MCI, the rm which success-
fully challenged AT&T’s xed-line tele-
phone monopoly. Drexel nanced Mr
Wynn’s Golden Nugget casino in Atlantic
City and the Mirage in Las Vegas, replete
with a fake volcano. His rm now owns
several luxury hotels in Las Vegas, a city
whose rapid growth owed much to high-
yield nance. Mr Malone’s Tele-Commu-
nications Inc became the biggest cable-TV
rm in the world. Its growth was nanced
by Drexel-issued junk. Mr Turner pioneer-
ed 24-hour news television at CNN, a chan-
nel powered by junk. Rupert Murdoch was
another media client.
None of the rms we nanced were
pure start-ups, says Ken Moelis, who
worked in Drexel’s corporate-nance team
in Los Angeles and who started Moelis &
1
BBooming
Source: JPMorgan * Year to date
US junk-bond gross issuance, $bn
0
50
100
150
200
77 80 85 90 95 2000 05 10*
2
The thirst for a return
Source: Standard & Poor’s
US speculative-grade bonds, yield spread over
US Treasuries, percentage points
2004 05 06 07 08 09 10
0
5
10
15
20
The Economist October 23rd 2010 Brieng Drexel Burnham Lambert’s legacy 85
2 Co, an investment bank, in 2007. Rather
Drexel found money for small rms which
had enough cashow to meet interest pay-
ments to grow bigger. Some industries
were not well-suited for debt nance: the
mobile-phone business did not generate
much upfront cash and cable-TVrms had
big start-up costs before subscription rev-
enue owed. One solution was to over-
fund rms, to raise more capital than they
needed so that they could make their ini-
tial interest payments. Another trick was to
use zero-coupon bonds, on which interest
payments are deferred until the principal
comes due.
Not all Drexel’s corporate customers
were thrilled with the price extracted for
this service. Some felt that Drexel cut too
good a deal for itself and for Mr Milken’s
loyal junk-bond investors. Drexel’s fees on
junk issues were 3-4%; less than 1% was typ-
ical for investment-grade bonds. Drexel’s
bankers often demanded equity warrants
for themselves and their buyers to sweeten
the deal.
Yet lopsided pricing is a feature of two-
sided markets, in which one side benets
if there are lots of customers on the other
side. For instance, clubs that act as match-
makers for lonely hearts often levy higher
charges on men than on women, judging
that single men will be keener to join clubs
with lots of female members. In a similar
way, Drexel was able to charge an enviable
fee for access to a scarce investor base.
Most rms were willing to pay. For a lot of
issuers, it wasn’t the cost of money. It was
the cost of not having it, says Kyle Kirk-
land, who was one of the last MBA gradu-
ates hired by Drexel’s Beverly Hills oce in
the 1980s.
The desire to maintain Mr Milken’s
hold on high-yield marketmaking may ex-
plain why Drexel’s bankers were loth to
share deals with other investment banks.
If competitors issued lots of junk bonds,
that would undermine Mr Milken’s sense
of who held what bonds and make control
of the market harder. The rm gloried in
thwarting rivals and in stealing business
from under the noses of a Wall Street
elite it viewed as snooty and indolent.
The rm had plenty of enemies who
welcomed its downfall. The rm’s ability
swiftly to raise vast sums for LBOs struck
fear into the heart of corporate America.
The job losses that often followed a junk--
nanced buy-out, as hitherto inecient
rms were sweated for cash, created a lot
of political fury. (That far more jobs were
created by the small rms that Drexel -
nanced than were lost in LBOs is often
overlooked.) Junk bonds, junk people
was the sneer from Wall Streeters who
loathed the upstart bank. Drexel’s retort,
that its rivals would prefer to sell invest-
ment-grade bonds on their ratings, rather
than put in the hours of analysis needed to
hawk junk, was hardly endearing. Drexel
also provided a useful scapegoat for the
savings-and-loan crisis, because some
thrifts were keen buyers of junk bonds.
Yet unloved as it was, Drexel changed
the face of corporate nance and of Wall
Street. These days with rms, such as
Google and Apple, everyone takes dyna-
mism for granted, says Mr Moelis. But
Mike Milken started out in the 1970s when
capitalism was struggling. In those days,
there was very little innovation. Along
comes Drexel, a rm with a visionary pur-
pose, and suddenly you could get capital.
Before 1977, when new junk-bond issues
took o, says Mr Marks, non-investment-
grade bonds were thought of as bad in-
vestments, at any price. Nowadays a bad
credit can be considered a prudent invest-
ment if it is available at the right price.
Drexel’s third legacy is in the mark it left
on the nance industry, particularly in Los
Angeles. That Drexel’s most protable divi-
sion was based so far from its headquar-
ters in New York is largely down to the acci-
dent of Mr Milken’s birth. Born and raised
in the San Fernando Valley, Mr Milken re-
turned to Los Angeles in 1978 (taking 20 or
so traders with him) to be closer to his fam-
ily. Since he was the main source of the
rm’s prots at the time, his masters could
scarcely refuse him.
Descendants of Drexel
With Mr Milken at its centre, Drexel’s Bev-
erly Hills operation became a magnet for
the best business-school graduates in the
late 1980s. That cohort of nanciers is still
active. Many of them stayed in Los Angeles
after Drexel folded. Almost all have now
moved to the asset-management side of
the business, although the sell-side skills
they developed at Drexel are useful in
bringing in money to manage or in arrang-
ing outside co-nancing for private-equity
deals. Los Angeles no longer has a big
money centre bank or a big broker. What
stayed was an innovative strain of Drexel-
style next-stage nance. Local nanciers
say they are free of the herd mentality that
can take hold in New York. The weather
and the quality of life help too: rms say
they nd it harder to recruit, but easier to
retain, good sta.
Some Drexel alumni are found today in
New York. Rich Handler, a junk-bond
trader in Drexel’s Los Angeles oce,
moved with 35 or so colleagues to Jeeries,
a local investment bank; they took their
knowledge of high-yield bonds and inves-
tors with them. Mr Handler is now Jeer-
ies’s chief executive but the bank has long
outgrown its Los Angeles and high-yield
roots. In 1990 it had 400 employees. It now
has around 3,000, of whom 200 are based
in Los Angeles: the headquarters these
days are in New York. Another alumnus is
Leon Black, founder of Apollo, a corporate-
credit rm with $55 billion under manage-
ment. Apollo is based in New York, where
Mr Black also spent his Drexel years.
Drexel’s nanciers were not altruists;
they were dealmakers. But in their search
for prot they also brought about a democ-
ratisation of credit. Firms that previously
had to rely on conservative banks or ex-
pensive equity were given access to xed-
interest funds in capital markets by the in-
vestors that Mr Milken and his junk-bond
traders had cultivated. This was a boon to
the American economy: limiting capital to
investment-grade rms limits economic
progress. If a rm can pay the rate for its
risk, it should get the money it needs.
Los Angeles is perhaps a curious home
for a group of nanciers with such a focus
on high-yield credit. The Hollywood busi-
ness model is a search for a blockbuster
that will pay for all the turkeys. High-yield
bond investment is a dierent art: the trick
is to avoid the losers; then the winners will
take care of themselves. 7
3
Milken honey
Sources: JPMorgan; The Economist
Drexel Burnham Lambert’s share of
US junk-bond issuance, %
0
20
40
60
80
0
20
40
60
80
1977 79 81 83 85 87 89
Volume Value
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Also in this section
88 Europe’s new rules for hedge funds
88 China’s latest ve-year plan
89 Buttonwood: Energy and economics
90 Global house prices
90 AIA, a taxpayer’s lament
92 BNP Paribas’s reective approach
94 Economics focus: Negative equity
W
HEN Terra Firma, a European priv-
ate-equity rm, was considering
buying EMI Group, a big music company, it
referred to the potential deal by the code
name Project Dice. If only Terra Firma
could roll again. EMI, which it bought in
May 2007 for £4 billion ($6.3 billion), is con-
sidered one of the worst buys ever. The
company, whose artists include Robbie
Williams (pictured) and Lily Allen, is
worth an estimated £1.8 billion.
Guy Hands, the founder of Terra Firma,
is not one to suer silently. Last year he
sued Citigroup, the bank that advised on
and nanced the EMI deal; the trial began
in New York this week. Mr Hands alleges
that David Wormsley, an investment bank-
er at Citigroup, tricked him into paying
more for EMI by saying that a rival private-
equity rm was still planning to bid for it
even though the other rm had dropped
out. Citigroup denies the charge, saying
that Mr Hands is a sophisticated investor
who made a poor decision.
So far during the trial, both sides have
tried to portray their clients as sympathetic
characters. When Mr Hands took the stand
on October 19th he recounted that his
mother had been a nursery-school teach-
er, and that as a child he had been diag-
Citi have a lot at stake in the case. Terra Fir-
ma needs money to help prop up EMI and
its own business. Although the buy-out
rm has not specied how much it is seek-
ing in damages, some estimate that it is
hoping for as much as £5.3 billion. If Terra
Firma loses it may have no other choice
but to hand EMI over to Citi. A loss for Citi,
meanwhile, would be a big blow to its rep-
utation as an honest broker for its clients. It
could also set an unhappy precedent for
other lenders: how many buy-out rms
that regret the high prices they paid during
the boom might come forward to sue the
banks that led them on?
As Terra Firma and Citi spar over the de-
tails of the past, however, others in the in-
dustry prefer to talk about the future. It’s
incredible how far and how fast we’ve
come back, says Adam Sokolo of the -
nancial-sponsors group at Jeeries, an in-
vestment bank. Deal activity is on the rise.
So far this year there have been nearly $147
billion-worth of deals, up by 118% from the
same time last year though far below peak
levels. The number of deals is up, too.
Buy-out rms are also returning to
some of their more controversial practices.
Take dividend recapitalisations, in which
private-equity rms put more debt into a
company and take out equity to pay them-
selves and investors (see chart). Ratings
agencies do not look favourably on divi-
dend recapitalisations. They can endanger
weak companies and rms in cyclical in-
dustries, which do not have stable cash-
ow to pay down the additional debt. But
private-equity rms are anxious to return
money to their prot-starved investors
and take some cash for themselves too,
nosed with dyslexia, a learning disorder,
and dyspraxia, a motor disorder. (He chose
not to highlight the fact that he has taken
up residence in Guernsey so he can avoid
Britain’s high taxes.) It is unclear, however,
whether the nine jurors will see much hu-
manity on either side. The jury includes a
doorman and a caseworker for a Catholic
charity. They are far removed from the
world of leveraged nance.
The trial has laid bare the wounds that
buy-out rms and banks still nurse after
the nancial crisis. Both Terra Firma and
Terra Firma and Citigroup
Take that
Finance and economics
new york
Are private-equity rms able to escape their past?
Back from the debt
Source: Standard & Poor’s
*Earnings before interest, taxation, depreciation and
amortisation

Companies with an EBITDA
over $50m

Year to date
0
2
4
6
8
0
4
8
12
16
2003 04 05 06 07 08 09 10

Debt-to-EBITDA* ratio
of leveraged buy-outs

Portfolio-company
dividends paid out to
private-equity firms, $bn
1
The Economist October 23rd 2010 87
For daily analysis and debate on economics, visit
sSStoreMmags.com
88 Finance and economics The Economist October 23rd 2010
2
1
after a barren few years. So far this year
private-equity rms have paid themselves
$9.1billion in dividends, up from $700m in
all of 2009.
This revival is only possible because the
credit markets have become more robust.
A rapid recovery in the nancing market
has helped fuel private-equity transac-
tions. The high-yield debt market, which
helped nance a wave of leveraged buy-
outs in the 1980s (see page 83), is back, fu-
elled by investor appetite for yield. So far
this year around $300 billion in such debt
has been issued, a record, according to
Dealogic, a research rm.
That has enabled buy-out rms to start
dialling back the amount of equity they
put into portfolio companies. For large cor-
porate buy-outs in the third quarter of this
year, the equity contribution was around
38%, down from nearly 47% in 2009. Be-
tween bank debt and high-yield debt, debt
levels are back to the high end of normal-
ised levels for buy-out transactions, says
Scott Sperling, co-president of THL, a priv-
ate-equity rm. That has led some to pred-
ict that a $10 billion private-equity deal,
which has not been seen in years, might
soon be possible. The largest deal so far
this year was Colony Capital’s $6.7 billion
purchase of Inmobiliaria Colonial, a Span-
ish property rm.
The private-equity industry may be re-
gaining some of its bravado but it has not
gone back to its glory days. Much of the re-
vival in deal activity reects a build-up in
the capital that rms hold. Preqin, a re-
search rm, estimates that buy-out rms
have around $456 billion in unspent capi-
tal or dry powder. They need to put this
money to work before the investment per-
iod for their funds is supposed to end.
That has driven up prices. In the third
quarter the average purchase-price multi-
ple for a large buy-out was 9.1 times earn-
ings before interest, taxes, depreciation
and amortisation (EDITDA), higher than in
2006. Usually during the early stage of a re-
covery private-equity rms are able to buy
companies at cheaper prices, leading to
greater prots on those investments later.
That may not be true this time.
A sustained rebound for private equity
will depend on rms’ ability to raise new
funds. Those that have had very public
embarrassments may nd it more dicult
to attract fresh capital. Mr Hands knows
this, which is why he is ghting to clear his
rm’s reputation in court. But the past
weighs on others in the industry, too. 7
Alternative investments in Europe
Goalless draw
A
PATIENT leaving the dentist will
insist, through painfully gritted teeth,
that they feel just ne, thanks, lest the
drill comes out again. Hedge funds and
private-equity rms are also mouthing a
quiet thanks, can we go now? over
rules to govern them agreed on by Euro-
pean nance ministers on October 19th.
The rules, which still need to be ap-
proved by the European Parliament,
come after 18 months of squabbling that
pitted the industry against lawmakers,
and Europe’s economic liberals against
its anti-market wing. The result is a rela-
tively bloodless compromise. Although
hedge funds and private-equity rms
played almost no part in causing the
nancial crisis, politicians in places like
Berlin and Paris can claim to be reining in
speculators. The industry can point to
the fact that the new rules are not nearly
as heavy-handed as those rst proposed
or under debate just six months ago.
Subject to agreement by the European
Parliament the rules will impose a num-
ber of constraints on the industry. Under
the auspices of the European Securities
and Markets Authority, a new Paris-
based body, regulators will be able, for
instance, to limit how much hedge funds
and private-equity rms can borrow if it
appears that risk is building up in the
nancial system. Hedge funds will also
have to disclose more information about
their holdings; private-equity rms will
have to release information on the -
nances of the companies they own.
In return for greater scrutiny fund
managersincluding, after a longer
transition period, those from outside the
European Unionwill be able to acquire
a passport to operate more easily
across all EUcountries. Earlier drafts of
the rules had suggested that non-EU
funds would have to get permission from
each of the countries they wanted to
enter. This issue was pivotal, not just
because the earlier versions risked alien-
ating America by discriminating against
its large hedge-fund industry, but also
because it could have restricted the
choices of European investors.
There are still gaps in the rules to be
eshed out. But the big rows should be
over. I’m not convinced [what] we’ve
been through was the best process, or
that it achieved what it set out to, says
Vincent Neate of KPMG, an accounting
rm. Nevertheless I breathe a sigh of
relief that we’ve reached this point.
Berlin
Along tussle over rules for hedge funds and private equity draws to a close
S
IX million tonnes of cement; 5m tonnes
of pig iron; 4.12m tonnes of steelChi-
na’s rst ve-year plan, formulated with
Soviet help, was a resounding success. Chi-
na surpassed all of these targets by 1957, the
plan’s nal year. Will China’s 12th plan,
spanning 2011 to 2015, fare as well? The full
blueprint will not be released until next
spring. But a communiqué on October 18th
oered a few early glimpses of its contents.
The new plan looks set to pick up
where the previous one left o. That is not
as conservative as it sounds, because the
11th plan (2006-10) was daring in concep-
tion, if not always in implementation. By
2006, of course, the share of GDPgoverned
by Soviet-style central planning had
shrunk dramatically. The 11th plan even
dropped the term, replacing the word ji-
hua, used to describe previous plans, with
the term guihua, suggesting a long-range
programme or strategy.
The 11th plan also introduced a distinc-
tion between hard targets (for energy e-
ciency, pollution and population) that o-
cials were obliged to meet, and more
indicative targets (for growth, employ-
ment and other things) that the economy
was expected to meet of its own accord.
And it replaced the single-minded pursuit
of growth with all-round development,
hoping to contain pollution and arrest
widening economic inequalities.
China’s leaders still count on relatively
rapid growth to keep the social peace.
Their last plan envisaged annual growth of
7.5%. That proved hugely bearish. In fact,
GDPhas grown by over 10% a year on aver-
age since 2006 (see chart). It expanded by
only 9.6% in the year to the third quarter,
according to gures released this week. But
it is already showing signs of quickening
China’s economy
Anew epic
HONG KONG
China’s new ve-year plan is at odds
with itself
A plan for all seasons
Sources: CEIC; national statistics
China’s GDP, % increase on previous year
GROWTH TARGETS
2001 02 03 04 05 06 07 08 09 10
0
4
8
12
16
The Economist October 23rd 2010 Finance and economics 89
2
M
ANY factors were responsible for
the industrial revolution. But the
use of fossil fuels was clearly vital in driv-
ing a step change in rates of economic and
population growth. So the current rise in
the cost of extracting such fuels should be
the subject of considerable concern.
Until the 18th century mankind’s out-
put had been restricted by the amount of
physical force that humans (and domesti-
cated animals) could exert and by the
amount of wood that people could chop
down. Fossil fuels delivered a massive
productivity boost.
In a recent article for the Cato Institute,
Matt Ridley, a former journalist at The
Economist, argues for the importance of
coal in allowing the industrial revolution
to be sustained. Fossil fuels were the
only power source that did not show di-
minishing returns, he writes. In sharp
contrast to wood, water and wind, the
more you mined them the cheaper they
became. A further advantage was that
coal supplies were so large. By 1830, Mr
Ridley estimates, Britain was consuming
coal with an annual energy output equiv-
alent to 15m acres of forest, about three
times the size of Wales.
In the 20th century oil replaced coal as
the cheap fuel of choice. It has had an
enormous impact, most noticeably in
transport. Think about how much of your
daily activity depends on energythe
commute to work, the heating and light-
ing for home and oce, the steel and
bricks needed to construct both proper-
ties, the transport costs involved in deliv-
ering your food to supermarkets (and the
energy used to cook it), and so on.
It was only natural for mankind to ex-
ploit the cheapest energy sources rst,
such as easy-to-extract oil reserves under
Saudi Arabia. The problem now is not
that the world is running out of energy
but that the new sources of energy are
more expensive to exploit.
The key ratio is energy return on ener-
gy invested. Analysis by Tim Morgan at
Tullett Prebon, a broker, estimates that oil
discovered in the 1970s delivered around
30 units of energy for every unit invested.
By itself this was well down on the returns
from oil discovered in the 1930s, which
were nearer 100-to-1. Current oil and gas
nds, such as undersea reserves, may oer
a return between 16-to-1and 20-to-1. The re-
turn on sources such as tar sands and bio-
fuels like ethanol are in the single digits.
Tar sands and biofuels represent only a
small part of global energy use. Neverthe-
less, to the extent that conventional
sources of energy production are declin-
ing, the high marginal cost of new sources
of energy will slowly drive up the average
cost. Andrew Lees of UBS, writing in The
Gathering Storm, a new book, argues that
the global ratio of energy return on energy
invested is around 20, corresponding to en-
ergy’s 4-5% share of global GDP. Mr Lees
thinks the ratio might fall to ve over the
next decade, implying that energy’s share
of GDP could quadruple. That is probably
too extreme a forecast. Nevertheless, the
direction of change seems clear. If the
world were a giant company, its return on
capital would be falling.
The rst big oil crisis was in the 1970s
when the OPEC export embargo was fol-
lowed by stagation. By the 1990s, with
oil down at $10 a barrel, the economic im-
pact of fuel costs tended to be down-
played. Developed economies had
moved from being manufacturing-based
to being service-based, it was argued: the
volume of GDP produced for a given unit
of energy had accordingly increased. Yet
the surge in the crude price to $147 a barrel
in July 2008 undoubtedly played its part
in exacerbating the recent recession, act-
ing as a tax on Western consumers at a
time when condence was already low.
That rise in energy prices was driven
by demand, however. A surge propelled
by the costs of extraction would be a neg-
ative productivity shock for the global
economy. That would be a particular pro-
blem for Europe, which is also facing sig-
nicant demographic pressures. There
will be a decline in the number of people
of working age (15-64) in France, Italy and
Germany over the next decade. If there
are fewer workers, GDP growth will de-
pend on productivity improvements.
It is possible that some new source of
cheap and abundant energy might be de-
velopedthe cost of solar panels could be
reduced substantially, for instance. The
same high energy prices that might crimp
economic activity would have the eect
of stimulating investment in alternative-
energy sources. But there could still be an
uncomfortably long period in which the
world has to cope with higher energy
costs. That is a headwind the global econ-
omy could do without.
Engine trouble Buttonwood
A rise in the cost of extracting energy will hit productivity
Economist.com/blogs/buttonwood
again, prompting the central bank on Octo-
ber 19th to lift interest rates, by 0.25 percent-
age points, for the rst time since 2007.
Thanks to its irrepressible growth, Chi-
na’s national income is bigger than its
planners expected. But it is not distributed
as they would like. In their communiqué,
party leaders promised to give more of the
pie to wage-earners. That would help more
harmonious labour relations, which
were rattled by strikes and suicides over
the summer, and also boost consumption,
which accounted for 35.1% of GDP last year
compared with about 50% in South Korea
at a similar stage of development.
Promoting consumption has been a
goal of China’s leaders since 2004. In the
years since, it has fallen as a share of GDP.
It may be that China’s modern, strategic
planning is falling foul of the remnants of
old-fashioned, central planning. The kind
of heavy industries promoted in China’s
rst ve-year plan, for example, still enjoy
tremendous privileges. They are domin-
ated by state-owned enterprises, which
can count on cheap loans and energy from
China’s state-owned banks and utilities.
According to the European Union
Chamber of Commerce in China, the
weight of these industries in China’s econ-
omy almost tripled between 2003 and
2008. China’s leaders now worry about
overcapacity in a number of sectors, from
steel, cement and aluminium to crushed
soyabeans. Because heavy industry is cap-
ital-intensive, it creates few jobs, which is
one reason why wages have not kept pace
with GDP. Heavy industry also tends to be
dirty and thirsty, jeopardising China’s in-
creasingly stringent environmental targets.
In carrying out the last plan, the communi-
qué said, China’s leaders had composed a
new epic. But in the rapid expansion of
heavy industry, China’s 11th-plan period
was alarmingly reminiscent of its rst. 7
90 Finance and economics The Economist October 23rd 2010
1
T
HIS time last year, The Economist’s sur-
vey of global house prices was a sea of
negative numbers. That was then. Of the
20 markets tracked in our latest survey,
only four still posted year-on-year declines
and only Ireland’s property catastrophe
has worsened. (America’s FHFA index,
which excludes houses that are nanced
with large mortgages, was also down, but
the country’s Case-Shiller national and
ten-city indices rose modestly.)
Asia’s price rises lead the way, as they
did when the data were last published in
July. Singapore, Hong Kong and Australia
boast the gaudiest year-on-year price in-
creases, even if the rate of appreciation is
down a bit from the summer. House prices
in China rose by 9.1% in the year to Septem-
ber, compared with a 12.4% rise in May.
That is still too fast for the government,
which unexpectedly raised interest rates
on October 19th and has outlined more
measures to cool the market in recent
weeks, including higher down-payment
requirements and the introduction of a
property tax in some cities.
Our analysis of fair value in housing,
which is based on comparing the current
ratio of house prices to rents with its long-
run average, suggests that China has less to
worry about than the likes of Australia,
which is again the most overvalued of the
markets we track. That makes it all the
more surprising that Australia’s central
bank opted not to increase its benchmark
interest rate this month.
Europe shows a familiar split between
core countries and peripheral ones. Ire-
land, Spain and Italy continue to suer
year-on-year price declines; German and
French homes have shown big gains in val-
ue over the past year, a particular turna-
round for France since our
previous round-up. The Brit-
ish housing sector’s talent for
defying gravity may be on
the wane. The pace of annual
appreciation in the country’s
property market has slowed
over the summer. British
housing is still overvalued
outright falls may loom.
America’s housing mar-
ket, almost alone among
those which experienced a
big bubble, is more or less
fairly valued at this point, at
least according to price-to-
rent ratios. But price rises may
not last for long. Earlier gains
were driven by substantial re-
ward programmes and gov-
ernment subsidies, many of
which have now lapsed.
America’s overhang of hous-
ing inventory may get worse
if concerns over lenders’ fore-
closure processes jam up
sales. The temptation for the
country’s 11m underwater
borrowers to walk away is
another threat (see Econom-
ics Focus). And being at or be-
low fair value is no guarantee
of a bounce in prices: Japa-
nese housing fell by 4% in the
year to the end of the rst
quarter, despite being stuck
far below its long-run price-
to-rents ratio. 7
Global house prices
Floor to ceiling
Our latest round-up shows that prices are on the rise in most markets
The Economist house-price indicators
Sources: ABSA; ESRI; Hypoport; Japan Real Estate
Institute; Nationwide; Nomisma; NVM; FHFA;
Quotable Value; Stadim; Swiss National Bank;
Standard & Poor’s; Thomson Reuters;
government offices; The Economist
*Or most recent available figure

Against long-run average
of price-to-rents ratio,
latest available rents data
% change

Latest Q3 2009
1997- Under(-)/
on a year earlier 2010* over(+) valued

Singapore 23.1 -11.0 18 19.2
Hong Kong 20.6 3.2 -6 58.1
Australia 18.4 6.6 220 63.2
China 9.1 1.9 na 18.1
Sweden 8.9 1.4 173 41.5
Belgium 6.5 -2.9 157 21.6
France 6.0 -7.9 141 42.5
Germany 4.8 -4.4 na -12.9
Switzerland 4.5 4.1 33 -6.4
Canada 4.5 -3.8 70 23.9
Netherlands 4.2 -6.8 92 23.6
United States 4.1 -10.6 102 4.6
(Case-Shiller ten-city index)
United States 3.6 -8.6 65 -2.1
(Case-Shiller national index)
Denmark 3.4 -12.2 98 19.4
New Zealand 3.4 1.1 108 20.2
Britain 3.0 -3.0 181 32.0
South Africa 2.9 -0.2 421 na
Italy -2.8 -3.8 94 10.5
Spain -3.4 -8.3 157 47.6
Japan -4.0 -4.0 -37 -34.6
United States (FHFA) -4.9 -4.0 70 10.6
Ireland -17.0 -13.8 129 13.2
Interactive: To compare countries’ housing data over time, now
including price-to-rent ratios, visit: Economist.com/houseprices
H
AVING twice botched the sale of AIA,
AIG’s valuable Asian life-insurance
arm, America’s Treasury was not about to
screw up a third time. It was intent on of-
oading AIAbefore the mid-term elections
on November 2nd, and the company’s ini-
tial public oering (IPO) met with huge de-
mand this week. The buyers have more to
celebrate than the sellers.
A prospectus for the deal was released
in Hong Kong on October 18th with an
unusually narrow price range of HK$18.38-
19.68 ($2.40-2.50) per share. The top end of
this range was agreed on with a small
group of cornerstone investors who
committed themselves to buying large
numbers of shares. These investors, which
include Kuwait’s sovereign-wealth fund
and a couple of Hong Kong tycoons, had
no illusions about the pressure the seller
was under and were in no mood to be gen-
erous. The result was a tight cap on the
price, regardless of demand.
The appetite for AIAshares was indeed
voracious. Buyers apparently included
Chinese state-controlled entities which
did not want the publicity of cornerstone
status. The Asian order book was closed al-
most as soon as it opened. Faced with such
high demand, the oering could have been
pulled and resubmitted at a higher price,
which would have raised billions of dol-
lars more for the taxpayers who footed the
bill for AIG’s bail-out. But delay would also
have pushed the listing beyond the elec-
tion date, depriving the American admin-
istration of useful evidence that it is clean-
ing up after the crisis.
Other things being equal, a post-oer-
ing leap in the share price would prove that
AIA had been sold cheaply. To mute this
embarrassing possibility a novel provision
in the prospectus allows the amount of
shares issued to be expanded not once,
which is common, but twice. This could
hike the size of the oering by 38%, dump-
ing an extra HK$43.8 billion-worth of secu-
rities on the market. (AIG must retain a
stake of just over 30% for at least a year.)
New investors have more to cheer. The
company’s valuation is likely to be well
under 15 times earnings for a company
with strong growth potential (China Life
has a price-earnings ratio of 24). AIA has a
uniquely broad exposure to Asia’s grow-
ing markets, much of which was acquired
decades ago. The end of AIG’s control
stops damaging uncertainty over aia’s fu-
ture, which has caused market share to fall
The AIA oering
Bailing out
Hong Kong
American taxpayers should not cheer
the sale of AIG’s Asian arm too loudly
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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.
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92 Finance and economics The Economist October 23rd 2010
2
B
AUDOUIN PROT has an unusual habit
for a chief executive. A talkative man,
the boss of BNPParibas occasionally forces
himself to pause before answering a ques-
tion. The delay can be unnervingly long.
He grimaces. He leans back. He scribbles
notes to himself, as if wrestling with the
ner points of semiotics. As you wait you
wonder how many bad ideas have zzled
out in these self-enforced moments of re-
ection. Perhaps Mr Prot’s pauses are one
of the secrets of BNP Paribas’s success.
In 1999, when BNP bought Paribas after
an epic takeover battle, it crowned itself a
European champion even though about
60% of its activity was in France. Today the
title is deserved. The bank is Europe’s
third-largest by market value and, mea-
sured by its borrowing costs, one of the
very safest. Less than 40% of its business is
now in France. Like Spain’s Santander and
Italy’s UniCredit it runs retail operations
across the continent (a position boosted by
the purchase of bits of Fortis, a failed Bel-
gian bank, in 2009). Unlike them it is also
big in asset management, private banking
and investment banking.
Success partly reects what the bank
didn’t do. Although acquisitive, it avoided
big deals before the crash. It owns a sub-
scale retail operation in America but did
not go on a subprime bender. It specialises
in derivatives yet avoided losing billions
on credit-default swaps. Mr Prot’s explana-
tion for these dodged bullets is not his hab-
it of reection, or luck, but professional
management. He keeps a reassuringly
tatty list of the telephone numbers of the
top 100 managers in his wallet. The bank is
mainly run by a tight-knit group of veter-
ans from the original takeover. The execu-
tive suite looks like the set of a costume
drama but the top brass still gather there
and banterthe nearest you can get to a
water-cooler moment in a building in
which Napoleon Bonaparte got married.
The most important thing these manag-
ers did not do was allow the rm to be
dominated by its investment bank. Com-
mercial and investment banking contrib-
uted almost half of the combined rm’s
gross prots in 1999. Today its contribution
is about a third. Like Santander, HSBC and
JPMorgan Chase, BNP Paribas has a cadre
of executives under instructions not to go
native when they are posted to its divi-
sions. I don’t believe in an autonomous
commercial and investment bank separate
from the rm, says Alain Papiasse, who
runs the unit and until 2009 led the bank’s
asset-management and insurance arm.
That may help explain why the invest-
ment bank was restrained. Although it irt-
ed with danger (a 2007 presentation boasts
of its expertise in exotic credit derivatives),
it took little market riskby, for example,
holding securities. That also means it will
be hit relatively lightly by the new Basel 3
capital rules.
BNP Paribas has bought quite a few re-
tail banks since 1999. Mr Prot says that
keeping the rm evenly balanced was not
an explicit strategy but was in the back of
managers’ minds. When the investment
bank grew really fast, between 2003 and
2007, BNP Paribas bought BNL in Italy for
9 billion ($10.8 billion). It overpaid but the
integration of BNL is regarded internally as
a success. That condence helped BNP Pa-
ribas to pick up bits of Fortis in 2009 at an
attractive price, bringing a big retail pres-
ence in Belgium and Luxembourg. It also
bulked up its asset-management and priv-
ate-banking arms, run by Jacques d’Estais
(who used to head the investment bank).
How BNP grows now is a bit of a con-
cern. Three-quarters of revenue come from
rich economies in continental Europe (al-
though Mr Prot reckons these banking
markets may grow faster than over-indebt-
ed America, Britain or Spain). The bank
has a decent presence in Turkey and north
Africa but now that lending without rais-
ing deposits is frowned upon, the expan-
sion there will be more branch-based than
beforewhich takes time. Derivatives, the
investment bank’s old rocket-fuel, which
supplied 70% of its revenue growth be-
tween 2003 and 2006, are maturing, partly
because of more regulation.
One priority is to squeeze more from
the enlarged group. Mr d’Estais says he can
cross-sell more savings products in the
bank’s newer branches. In Italy there has
been a huge dierence made, like night
and day, since the acquisition in 2006. At
the corporate and investment bank Mr Pa-
piasse jokes that he could have 200 math-
ematicians calculate a precise answer,
but reckons 5-10% of client revenues are
from cross-selling with the rest of the
group and that this could double. Having
jumped up the European league tables in
xed income, the investment bank is now
expanding in equities and in Asia. The rm
overall is keen to sell more services to its
big base of corporate customers, for exam-
ple in cash management and trade nance.
All this might seem a little pedestrian
for one of the winners of the crisis. Mr Prot,
chief executive since 2003, will probably
become chairman in a couple of years, re-
placing Michel Pébereau. These two veter-
ans could yet unbottle the animal spirits
that won Paribas a decade ago. There is the
odd hint of hubristhe bank suers from
an inated view of its capital and funding
position, which is reasonable rather than
outstanding.
Yet the overall impression is of disci-
pline. BNP Paribas was recently outbid by
Santander for a Polish bank. When Mr Prot
warns of the dangers of a market psychol-
ogy of complete risk aversion, he sounds
concerned, not gung-ho. BNP Paribas’s re-
cent history is not about being brilliantly
contrarianexpanding in downturns and
retrenching in booms. Instead it is a story
of consistent, tightly managed expansion
and risk-taking. Tempered by the ability to
stop, and for a moment, think. 7
BNP Paribas
Stop. Think. Act
PARIS
The secret of a French bank’s success
A real old Prot
in some places and opportunities to be
passed over in others, notably Vietnam.
An aborted eort by the Treasury to sell
AIAto Prudential, a rival British insurer, re-
sulted in the transfer of condential data.
Management was this week peppered
with questions about the low productivity
of AIA’s agents. Their answerthat results
can only get bettermay well be true.
AIAwill also end up with a better West-
ern-style governance structure. Equity will
be spread among minority shareholders, a
rarity in Asia. Big investments in the IPOby
several Asian sovereign-wealth funds
should give their governments an incen-
tive to boost AIA’s market access in their
countries. That is particularly relevant in
China, where AIA has for years been bot-
tled up in a small handful of cities. The
American government did not much bene-
t AIA; ties to Asian governments might. 7
A
MERICA’S south-west may be a very dry place but nowhere
else in the country are more homeowners under water,
owing more on their mortgages than their homes are worth. In
cities like Phoenix and Las Vegas prices have fallen by up to 50%
from their peak; more than half the mortgages in Arizona and Ne-
vada are in negative equity (see map). Yet the problem is national.
One in four American borrowers are under water. Over 4m
households owe at least twice as much as their home is worth.
Such inundations have nasty eects. Homeowners that are re-
luctant to default but unable to sell at a loss are left stuck where
they are. This throws sand in the gears of America’s famously u-
id labour market. A recent IMF paper attributes 0.5 to 1.25 percent-
age points of America’s unemployment rate to this factor. De-
faults may be an even bigger problem. Job losses will often push
underwater borrowers into default since a sale isn’t a realistic op-
tion. And as the crisis has dragged on, more Americans have de-
faulted voluntarily. Estimates from 2009 suggest that 26% of de-
faults were strategic in nature; where equity has fallen below
50% of the loan’s value, around half of defaults are strategic.
The resulting foreclosures cause lots of damage. Underwater
borrowers who sell their home typically get a price 13% below the
mortgage value. When homes are foreclosed upon and sold by
lenders, the discount rises to 35%, largely because the property is
not being maintained. This steep drop in price harms other
homeowners. The values of neighbouring houses are pushed
down, forcing other borrowers deeper under water.
Since lenders bear the brunt of the higher losses that foreclo-
sure entails, their general reluctance to modify the balance of
mortgage loans is puzzling. If mortgages could be written down
to a value above the likely foreclosure sale price, that would gen-
erate benets for both creditor and borrower. Yet a report earlier
this year into the government’s foreclosure-prevention pro-
gramme showed that principal was forgiven in only 2% of cases.
So what is preventing a better outcome?
Loan servicers, which manage loans on behalf of investors in
mortgage-backed securities, may fear lawsuits alleging that bor-
rowers have been treated too generously. Writing down loan val-
ues often aects more than one lendersecond, third and even
fourth mortgages were common during the housing boom.
Banks are wary of moral hazard: if word spreads, borrowers with
the ability to pay their mortgage may deliberately miss payments
in order to get their loans adjusted.
This last problem can be addressed by changing borrowers’
incentives to default. Contingent write-downs are one example:
loans would be written down in increments over three years, but
only if the borrower stayed current on payments. Another is a
shared appreciation scheme in which principal reductions are
combined with an equity stake for lenders. Equity gains from
subsequent price increases would be split between homeowners
and lenders upon sale of the home.
Whether such ideas would prompt many more write-downs
is unclear. They do not address the problem of multiple claims on
the same underlying assets, for instance: that would probably re-
quire banks holding junior liens to take a more realistic view of
their value and write them down. They also bump up against the
complexities of modifying securitised loans. John Geanakoplos,
an economist at Yale, proposes that this problem be addressed by
adopting legislation that strips the responsibility for modica-
tions from servicers and hands it to blind government-appoint-
ed trustees who would make decisions without knowledge of
the loans’ status. Mr Geanakoplos reckons this would address the
incentive problems and legal issues faced by servicers, which of-
ten have duciary duties to holders of mortgage securities.
A measure called lien-stripping, or, more commonly, cram-
down, oers another way around the securitisation bottleneck.
This would tweak the existing bankruptcy provision known as
Chapter 13 to allow judges to write down the value of a primary
mortgage. Cramdown is already allowed for other forms of con-
sumer debt, such as mortgages on holiday homes. Research ex-
amining the impact of cramdown on agricultural loans found
that banks usually got more than foreclosure value on reorgan-
ised loans, and that interest rates scarcely rose. At the same time
the possibility of a principal write-down in bankruptcy made
banks more willing to negotiate reductions pre-emptively.
Submerged acquisitions
Eric Posner and Luigi Zingales of the University of Chicago have
proposed a plan whereby an underwater homeowner living in a
postcode area which has suered a certain level of price decline
gets the right to approach a judge and begin negotiating a write-
down. The pain of bankruptcy should deter opportunists; judges
would foreclose on those who cannot aord even a smaller mort-
gage. The big drawback is that this would damage creditors’
rights. To make the outcome fairer for lenders Messrs Posner and
Zingales propose a shared-appreciation scheme.
More ambitious still is the right to rent programme advocat-
ed by, among others, Dean Baker of the Centre for Economic and
Policy Research. Mr Baker would give defaulting borrowers the
option to rent their homes at market rates. The bank would ob-
tain the whole of the equity stake in the house; with rental in-
come still owing in, sale of the property could be delayed until
markets were healthier. Critics point out that property manage-
ment is not a core skill of banks, but the job could be outsourced.
There is another way. In the 1990s Mexico cleaned up its debt
crisis by oering large government subsidies, of up to 60% of a
loan’s book value, to help pay down borrowers’ debts. Such a
programme would not come cheapAmerica has some $766 bil-
lion in negative-equity debtbut it would have the distinct ad-
vantage of simplicity. The unfortunate truth is that there are no
nice options left. Large-scale voluntary write-downs look unlike-
lythey surely would have happened by now. That leaves a
choice between twisting lenders’ arms, throwing public money
at the issue, or letting the waters close over people’s heads. 7
Drowning or waiving
The policy options for alleviating America’s huge negative-equity problem
Economics focus
94 Finance and economics The Economist October 23rd 2010
Also in this section
98 Crime prediction
98 A better water lter
99 How the leopard got his spots
R
OBOTS are getting smarter and more
agile all the time. They disarm bombs,
y combat missions, put together compli-
cated machines, even play football. Why,
then, one might ask, are they nowhere to
be seen, beyond war zones, factories and
technology fairs? One reason is that they
themselves cannot see very well. And peo-
ple are understandably wary of purblind
contraptions bumping into them willy-nil-
ly in the street or at home.
All that a camera-equipped computer
sees is lots of picture elements, or pixels.
A pixel is merely a number reecting how
much light has hit a particular part of a sen-
sor. The challenge has been to devise algo-
rithms that can interpret such numbers as
scenes composed of dierent objects in
space. This comes naturally to people and,
barring certain optical illusions, takes no
time at all as well as precious little con-
scious eort. Yet emulating this feat in
computers has proved tough.
In natural vision, after an image is
formed in the retina it is sent to an area at
the back of the brain, called the visual cor-
tex, for processing. The rst nerve cells it
passes through react only to simple stimu-
li, such as edges slanting at particular an-
gles. They re up other cells, further into
the visual cortex, which react to simple
combinations of edges, such as corners.
Cells in each subsequent area discern ever
more complex features, with those at the
top of the hierarchy responding to general
categories like animals and faces, and to
entire scenes comprising assorted objects.
All this takes less than a tenth of a second.
The outline of this process has been
known for years and in the late 1980s Yann
LeCun, now at New York University, pio-
neered an approach to computer vision
that tries to mimic the hierarchical way the
visual cortex is wired. He has been tweak-
ing his convolutional neural networks
(ConvNets) ever since.
Seeing is believing
A ConvNet begins by swiping a number of
software lters, each several pixels across,
over the image, pixel by pixel. Like the
brain’s primary visual cortex, these lters
look for simple features such as edges. The
upshot is a set of feature maps, one for
each lter, showing which patches of the
original image contain the sought-after ele-
ment. A series of transformations is then
performed on each map in order to en-
hance it and improve the contrast. Next,
the maps are swiped again, but this time
rather than stopping at each pixel, the lter
takes a snapshot every few pixels. That
produces a new set of maps of lower reso-
lution. These highlight the salient features
while reining in computing power. The
whole process is then repeated, with sever-
al hundred lters probing for more elabo-
rate shapes rather than just a few scouring
for simple ones. The resulting array of fea-
ture maps is run through one nal set of l-
ters. These classify objects into general cat-
egories, such as pedestrians or cars.
Many state-of-the-art computer-vision
systems work along similar lines. The
uniqueness of ConvNets lies in where
they get their lters. Traditionally, these
were simply plugged in one by one, in a la-
borious manual process that required an
expert human eye to tell the machine what
features to look for, in future, at each level.
That made systems which relied on them
good at spotting narrow classes of objects
but inept at discerning anything else.
Dr LeCun’s articial visual cortex, by
contrast, lights on the appropriate lters
automatically as it is taught to distinguish
the dierent types of object. When an im-
age is fed into the unprimed system and
processed, the chances are it will not, at
rst, be assigned to the right category. But,
shown the correct answer, the system can
work its way back, modifying its own pa-
rameters so that the next time it sees a simi-
lar image it will respond appropriately.
After enough trial runs, typically 10,000 or
more, it makes a decent st of recognising
that class of objects in unlabelled images.
This still requires human input, though.
The next stage is unsupervised learning,
in which instruction is entirely absent. In-
stead, the system is shown lots of pictures
without being told what they depict. It
knows it is on to a promising lter when
the output image resembles the input. In a
computing sense, resemblance is gauged
by the extent to which the input image can
be recreated from the lower-resolution
output. When it can, the lters the system
had used to get there are retained.
In a tribute to nature’s nous, the lowest-
level lters arrived at in this unaided pro-
cess are edge-seeking ones, just as in the
brain. The top-level lters are sensitive to
all manner of complex shapes. Cal-
tech-101, a database routinely used for vi-
Computer vision
Eye robot
For daily analysis and debate on science and
technology, visit
Economist.com/science
Science and technology
Poor eyesight remains one of the main obstacles to letting robots loose among
humans. But it is improving, in part by aping natural vision
1
The Economist October 23rd 2010 97
98 Science and technology The Economist October 23rd 2010
2
1
sion research, consists of some 10,000
standardised images of 101 types of just
such complex shapes, including faces, cars
and watches. When a ConvNet with unsu-
pervised pre-training is shown the images
from this database it can learn to recognise
the categories more than 70% of the time.
This is just below what top-scoring hand-
engineered systems are capable ofand
those tend to be much slower.
This approach (which Georey Hinton
of the University of Toronto, a doyen of the
eld, has dubbed deep learning) need
not be conned to computer-vision. In the-
ory, it ought to work for any hierarchical
system: language processing, for example.
In that case individual sounds would be
low-level features akin to edges, whereas
the meanings of conversations would cor-
respond to elaborate scenes.
For now, though, ConvNet has proved
its mettle in the visual domain. Google has
been using it to blot out faces and licence
plates in its Streetview application. It has
also come to the attention of DARPA, the
research arm of America’s Defence De-
partment. This agency provided Dr LeCun
and his team with a small roving robot
which, equipped with their system,
learned to detect large obstacles from afar
and correct its path accordinglya pro-
blem that lesser machines often, as it were,
trip over. The scooter-sized robot was also
rather good at not running into the re-
searchers. In a seless act of scientic brav-
ery, they strode condently in front of it as
it rode towards them at a brisk walking
pace, only to see it stop in its tracks and re-
verse. Such machines may not quite yet be
ready to walk the streets alongside people,
but the day they can is surely not far o. 7
Policing
The aftershocks of crime
An idea borrowed from seismology may help to predict criminal activity
L
OS ANGELES is one of the most under-
policed cities in America. With a mere
26 ocers for every 10,000 residents
(Chicago, by comparison, has 46), the Los
Angeles Police Department (LAPD) needs
all the help it can get.
That help may be at hand, with a
modication of technology used to
predict another type of threat that the
city is prone to: the aftershocks from
earthquakes. Big earthquakes are unpre-
dictable. Once they have happened,
however, they are usually followed
by further tremors, and the pattern
of these is tractable.
George Mohler, a mathemati-
cian at Santa Clara University, in
California, thinks something
similar is true of crimes. There is
often a pattern of aftercrimes in
the wake of an initial one. The
similarity with earthquakes
intrigued him and he won-
dered if the mathematical
formulas that seismologists
employ to predict after-
shocks were applicable to
aftercrimes, too.
To test this idea, he and
a team of researchers
from the University of
California, Los Angeles,
adapted a computer
program used by seismol-
ogists to calculate the likeli-
hood of aftershocks. They
then seeded it with actual LAPDdata on
2,803 residential burglaries that occurred
in an 18km-by-18km region of the San
Fernando valley, one of the city’s largest
districts, during 2004. Using the seismo-
logical algorithms, the computer calculat-
ed which city blocks were likely to expe-
rience the highest number of burglaries
the next day, and thus which 5% of
homes within the area were at particular
risk of being broken into. In one test the
program accurately identied a high-risk
portion of the city in which, had it
been adequately patrolled, police
could have prevented a quar-
ter of the burglaries that
took place in the whole area
that day.
In addition to modelling
burglary, Dr Mohler exam-
ined three gang rivalries in
Los Angeles, using data
from 1999 to 2002, and
discovered that similar
patterns emerge from
gang violence as retali-
ations typically occur
within daysand
metresof an initial
attack. That, too,
should help police
deploy their limited
resources more
eectively. RoboCop
move over, then. Com-
puterCop is coming.
M
ORE than a billion people lack clean
waterand in most cases the lack is
just of cleanliness, rather than of the water
itself. The result is disease, particularly
diarrhoea. This kills millions of children a
year and stunts the growth of millions
more. Better water lters, then, could save
many lives and improve many others, and
Yi Cui of Stanford University thinks he has
come up with one.
Traditional lters work by forcing water
through pores to weed out bacteria. That
needs power, as well as frequent changes
of the lter element as the pores ll up
with bugs. Dr Cui’s lter, though, does not
screen the bacteria out. It kills them.
The lter element he and his team have
designed is a mesh of tiny carbon cylin-
ders, known as nanotubes, and silver
wires laid on top of a thin strip of cotton
cloth. Silver is well known to kill bacteria,
so Dr Cui conjectured that forcing bugs to
pass close to the metal without actually
trapping them might lead to their destruc-
tion. He also suspected that running an
electric current through the silver might
help the process, because electrical elds
have the ability to break down the mem-
branes that surround bacterial cells.
Though silver is a good conductor, carbon
is cheaper, and the nanotubes provide the
extra electrical conductivity needed.
To make their new lter, the team rst
dipped strips of woven cotton into ink
Clean water
Silver threads of
life
Awater lter that kills bacteria, rather
than just removing them
Correction: In SpaceShipTwo (October 16th) we said
that the latest NASA authorisation bill paved the way for
an unmanned mission to an asteroid. That should, of
course, have been a manned mission. Several
asteroids have already been visited by robot spaceships,
and NASA’s Dawn craft is currently on its way to two
others, Ceres and Vesta, which are the largest of them all.
The Economist October 23rd 2010 Science and technology 99
2 containing nanotubes. They then used pi-
pettes to drop the silver wires, which were
suspended in methanol, on to the surface
of the strips.
Once dried, the new lters were ready
to try. To do that Dr Cui connected them to
a battery and ran water containing E. coli, a
common bacterial contaminant of water,
through them. A few drops of the ltered
water from each experimental run were
then scattered on an incubation plate to
see what was left to grow.
As they report in the latest edition of
Nano Letters, Dr Cui and his team found
that when the lter was operated at -20
volts it killed 89% of the bacteria and that at
+20 volts it killed 77%. At zero volts, most of
the bacteria survived. In a follow-up ex-
periment, in which contaminated water
was run through three of the new lters in
sequence, 98% of the bacteria were killed.
Using silver this way might sound ex-
pensive, but it is not. The amount involved
is minuscule, as is the quantity of electric-
ity needed to keep the lter charged (a
small solar panel would be sucient to
supply it). And the lter itself would be ex-
pected to last indenitely.
The next test, then, is to see if the new
device kills the full range of dangerous bac-
teria found in polluted water. If it does
then potable water, one of the necessities
of life, may become easier for many people
to obtain. 7
H
OW the leopard got his spots is, fam-
ously, the subject of one of Rudyard
Kipling’s Just So Stories. Kipling suggest-
ed they were handprints made by the leop-
ard’s human friend. More plausibly, he had
an explanation for what the spots are for:
to break up the animal’s shape when it is
hiding in the dappled light of the forest.
These days, the human-handprint the-
ory of the leopard’s spots has fallen out of
favour. Instead, a more prosaic idea has
gained ground, based on what is known as
reaction-diusion pattern formation, in
which chemicals that trigger the dieren-
tiation of cells in an embryo interact with
one another to produce patterns that are
then reected in the fates of nearby cells.
But that, too, has its diculties. Just how
much a process like this can be shaped by
natural selection is unclear.
Reaction-diusion patterns (which can
be created in a laboratory using standard
reagents) are simple and deterministic.
That simple reactions of this sort some-
times result in cryptic patterns could be a
coincidence. Nevertheless, the details of
the patterns produced vary, according to
things like how rapidly the chemicals dif-
fuse. That could be selected. Dierent cats
do, indeed, have dierent patterns. So re-
searchers at the University of Bristol, led
by William Allen, have been deconstruct-
ing these patterns, trying to match the ele-
ments to cats’ habits and habitats, and thus
show whether the patterns are evolving.
They published their results this week in
the Proceedings of the Royal Society.
The reaction-diusion process can be
mimicked by a computer, and the pro-
gram’s parameters manipulated to pro-
duce patterns matching those of cat coats.
That, the researchers hoped, might help il-
luminate what is going on. They trawled
the world wide web for pictures of wild
cats, found the best six for each of 37 spe-
cies, and roped in a group of human volun-
teers to choose which of the program’s out-
puts were most similar to real coats.
The patterns produced had ve param-
eters: how plain they were, how irregular,
how complex, how big the spots were and
whether the pattern had a perceptible di-
rection to it. The volunteers’ judgments
about which articial patterns best
matched which natural ones were almost
perfectly consistent. That allowed Mr Al-
len to assess which parameters contribute
to each species’s pattern, and thus which
are correlated with behaviour.
The biggest distinctionno surprise,
but nice to conrmis that spotted cats are
forest cats and plain ones prefer open
countryside. In that, Kipling was right. An
analysis based on the relationship be-
tween the species, though, shows that evo-
lutionary lines can swap from spots to no
spots, and vice versa, as the habitat dic-
tates. Moreover, the more a species prefers
the forest, the more irregular the pattern it
sports, and the more complex. (Size and di-
rection have no eect.) Even among forest-
dwellers there are dierences. Those that
tend to spend their time actually in trees, as
opposed to wandering around on the
ground between them, have more irregu-
lar and complex patterns. And, crucially,
there is no relationship between a cat’s pat-
tern and how sociable it is. That knocks on
the head an alternative explanation for
coat patterns, namely that spots are some
form of signal between animals of the
same species.
Mr Allen and his colleagues made one
other observation. Some species of cat reg-
ularly produce melanic formsthe so-
called black panther (actually a melanic
jaguar) being the most familiar.
The data seem to rule out one obvious
explanation for melanism: the idea that
black cats, with their unusual appearance,
have more success hunting because their
prey are not keeping an eye out for preda-
tors that look like them. Melanic forms,
though, are particularly prevalent in spe-
cies with complicated livesthose that in-
habit a range of habitats, are active both
day and night, and move between the
ground and the trees. What advantage mel-
anism brings in these circumstances is ob-
scure. One for Kipling, perhaps. How the
jaguar got his melanocytes. 7
Evolution and coat colour
Well spotted
The reason why some cats are plain and others are patterned
Peekaboo
Also in this section
102 A life of George Washington
102 A guide to the Caucasus
103 Mahmoud Darwish’s journal
103 In defence of weeds
104 John Baldessari’s retrospective
104 New lm: Hereafter
P
ETER GODWIN’S latest book is the
most powerful indictment of Robert
Mugabe’s regime yet written, marking out
the author as one of the sharpest observ-
ers of modern Africa. He is tough but sym-
pathetic, aghast at the horror yet still hope-
ful that Africa’s resilient, long-suering
people will somehow win through against
the gangsters led by Mr Mugabe who re-
fuse to give up power.
The Fear is the last in a trilogy that be-
gan with Mukiwa: A White Boy in Africa,
a touching tale of Mr Godwin’s rural up-
bringing as a doctor’s son whose attitudes
are transformed by the guerrilla war, in
which he serves as a policeman compelled
to ght against his will in Ian Smith’s
white-supremacist war against Mr Mu-
gabe. His next book, When a Crocodile
Eats the Sun, described the economic col-
lapse of Zimbabwe after 2000 (when the
campaign to dispossess white-owned
farms began in earnest) through the prism
of his father’s impoverishment, turmoil,
decline and death.
Mr Godwin’s new book covers the elec-
tion period in 2008. It shows what hap-
pened in the months following the rst
round of the presidential election when
Mr Mugabe and his Zanu-PF party thugs,
aided by the army and police, unleashed a
campaign of terror against those suspected
of backing the victorious opposition
Movement for Democratic Change (MDC),
forcing its leader, Morgan Tsvangirai, to
withdraw from the presidential run-o.
Mr Godwin demolishes any idea that
Mr Mugabe’s campaign was just a bit of
electoral hanky-panky assisted by some
local Zanu-PF enthusiasts going over the
top. In relentless, shocking detail, he chron-
icles the wide scale and systematic nature
of the barbarity inicted on the MDC and
the national trauma that resulted. The
book is also a devastating indictment of
the 15-country Southern African Develop-
ment Community and especially of South
Africa, its leading member, for failing to ad-
mit what happened in its bizarre determi-
nation to keep Mr Mugabe on his throne.
The most telling aspect of The Fear is
Mr Godwin’s description of how blacks
and a clutch of whites came together to op-
pose the tyranny. Roy Bennett, the deputy
agriculture minister-designate in the un-
happy government of national unity that
was eventually formed, emerges as a true
hero. A white Zimbabwean in a black con-
stituency, Mr Bennett was elected by a
landslide. But for that very reason he is still
prevented by Mr Mugabe from taking up
his appointment. Instead he was beaten
up and imprisoned on spurious charges
and is now in hiding in fear for his life. In a
string of ne cameos, Mr Godwin moving-
ly portrays Mr Bennett, Mr Tsvangirai and a
host of other brave Zimbabweans.
Zimbabwe and its predecessor, Rhode-
sia (correctly Southern Rhodesia until Mr
Smith compressed the name), have pro-
duced a crop of ne writing. As a novel of
race and the eect that the harsh colonial
experience had on both oppressor and op-
pressed, Doris Lessing’s The Grass is Sing-
ing, published in 1950, is still unlikely to be
bettered. But more recent oerings, most of
them memoirs rather than ction, have
drawn from a deep well of the no-less-tor-
menting post-colonial experience. For in-
stance, Alexandra Fuller’s Don’t Let’s Go
to the Dogs Tonight, published in 2002,
was rightly hailed as a masterpiece of nos-
talgic yet subtle reminiscence.
More recently still, Douglas Rogers’s
The Last Resort is a delightful tale of his
ageing parents’ valiant eorts to keep their
hotel going in Zimbabwe’s eastern high-
lands, at one point turning a blind eye as it
became a brothel, amid every kind of
Zanu-PF chicanery to conscate it. Like Mr
Godwin, Mr Rogers shows how, in many
instances, whites and blacks, with remark-
able humour and compassion for each
other, have buried their old racial animos-
ities in a common struggle for survival.
Mr Rogers’s tale is less angry and less
polemical than Mr Godwin’s but in its gen-
tle way it is just as revealing. If onlythey
both seem to sayMr Mugabe and his vile
acolytes could be removed, a core of coura-
geous and decent Zimbabweans is still
ready to rescue the country. 7
Books and arts
Zimbabwe
Battered yet resilient
Robert Mugabe’s gangsters have ransacked a country; they have also prompted
some wonderful books
The Fear: The Last Days of Robert
Mugabe. By Peter Godwin. Picador; 353
pages; £18.99. To be published in America
by Little, Brown in March 2011 as The
Fear: Robert Mugabe and the Martyrdom of
Zimbabwe; $26.99
The Last Resort: A Memoir of Mischief
and Mayhem on a Family Farm in Africa.
By Douglas Rogers. Three Rivers Press;
336 pages; $14. Short Books; £9.99
The Economist October 23rd 2010 101
Prospero, our online blog on books, arts and
culture appears every day. For analysis and
debate, visit
Economist.com/culture
102 Books and arts The Economist October 23rd 2010
1
H
E WAS an unlikely revolutionary. Born
on the fringe of the Virginian planter
aristocracy, George Washington became a
grandee by marriage, proprietor of thou-
sands of acres and master of hundreds of
slaves. He shared the tastes of his English
contemporaries: Madeira, his coat of arms
and fox-hunting. He was as punctilious
about his honour, as ne a horseman and
as deep in debt as any of them.
He was also the father of his country
and the chief articer of its independence.
The Founding FathersJeerson, Adams,
Madison, Hamilton, Franklinhave en-
joyed a quasi-religious reverence in the
United States to which there are few paral-
lels in any other society. Floating above
that circle of demigods is Washington, his
name revered in a manner that almost
transcends the limitations of a properly re-
publican apotheosis.
As a result, the Founding Fathers have
been protected until recently by a school of
biography that barely escaped from hagi-
ography. It was perhaps the revelation (or
conrmation) of Jeerson’s amours with
his slave Sally Hemings, and more broadly
the changed attitude of Americans to race,
that freed them from the waxworks in
which they had been imprisoned. A new
generation of biographers can present
them with understanding as well as rever-
ence, as great men rather than marble sta-
tuary. Ron Chernow’s Washington joins
this school. He has done justice to the solid
esh, the human frailty and the dental mis-
eries of his subjectand also to his im-
mense historical importance.
Mr Chernow examines with an under-
standing but unblinking eye Washington’s
confused attitude to slaves and slavery. He
always intended to manumit those of his
slaves who were his own to free (as op-
posed to the dower slaves from his wife’s
estate) and he did free them in his will. Yet
so long as he had them, he was a stern
though fair owner. To the modern mind, it
is inconceivable that the master of 317 hu-
man beings could proclaim, as he did to a
white employee, I never did, nor ever
shall, wish to retain any person in my em-
ploy contrary to their inclinations. It is a
reminder that in certain ways the Fathers’
minds were dierent.
This is a magnicently fair, full-scale
biography. Its judgments are lapidary. Mr
Chernow concedes that Washington’s
military triumphs had been neither fre-
quent nor epic in scale. He had lost more
battles than he had won. His achieve-
ment was to keep the Continental army in
being, and so make victory possible.
If he was rst in war, as was said in his
funeral oration, he was also rst in peace.
Washington’s catalogue of accomplish-
ments as president was breathtaking. He
virtually invented the executive branch of
the new government, its institutions, its
mechanisms and above all its spirit. He
showed a disbelieving world that republi-
can government could prosper without
being spineless or disorderly or reverting
to authoritarian rule.
His last years in oce were tainted by
the vicious quarrelling between Jeer-
son’s Republicans, friends of revolution-
ary France, and Hamilton’s allegedly
quasi-monarchist and pro-British Federal-
ists. But Washington was in his lifetime, as
he has remained, rst in the hearts of his
countrymen. He gained and kept that
placebecause for all his moral grandeur, he
never forgot that he was merely the ser-
vant of the people. 7
George Washington
First among equals
Washington: A Life. By Ron Chernow.
Penguin Press; 904 pages; $40. To be
published in Britain by Allen Lane in
December; £30
Supreme, but of another time
T
HE area between the Black Sea and the
Caspian is beautiful, fertile, mountain-
ousand much fought over, most recently
in August 2008 when Russia and Georgia
went to war. This was no surprise: tension
over the Russian-backed enclaves of Ab-
khazia and South Ossetia had been high
for months. Yet, as Thomas de Waal notes,
all wars in the Caucasus are about the past
as well as the present. To understand the
region, one must know its history.
Mr de Waal, a former journalist (and
one-time contributor to The Economist)
now at the Carnegie Endowment for Inter-
national Peace in Washington, DC, is an ex-
pert on the region, especially on Azerbai-
jan and Armenia, and on Chechnya, the
subjects of two previous books. It is a pity
that he has not found space in his latest
book to include Chechnya and the north
Caucasus which remain Russia’s most
dangerous and unstable regions. But as a
clear, brief guide to the countries of the
south Caucasus, it would be hard to do bet-
ter than this book.
The author covers the general history
of the area only briey, yet even here he
nds some nuggets (the Caucasus boasts
the world’s highest density of languages;
Azerbaijan was in 1900 the world’s biggest
oil producer). But the story really takes o
after the Russian revolution in 1917, when
the three trans-Caucasian republics en-
joyed a brief independence. With recent
events in mind, it is fascinating to learn that
Menshevik Georgia waged a brutal war to
absorb Abkhazia and South Ossetia in 1918.
In the end, though, the Red Army regained
control and the three republics became
part of the Soviet Union.
That Stalin was a Georgian did not save
the region from his brutality. Yet the experi-
The Caucasus
Playground for
war
The Caucasus: An Introduction. By Thomas
de Waal. Oxford University Press; 259 pages;
$18.95 and £12.99
The Economist October 23rd 2010 Books and arts 103
2 ence of the Caucasus under the Soviet Un-
ion was not as bad as most, as they largely
skipped the second world war and later
became a favourite playground of the elite.
Oddly, all three of the most recent Russian
foreign ministers have connections with
the Georgian capital, Tbilisi (the mother of
the incumbent, Sergei Lavrov, was an Ar-
menian from there). Sadly, that has not
made Russia any friendlier to Georgia.
It was the break-up of the Soviet Union
in the 1990s that produced many of today’s
problems. An outbreak of nationalism, fo-
mented by some of the intelligentsia, led to
war both inside Georgia and between Ar-
menia and Azerbaijan. The upshot was to-
day’s so-called frozen conicts in Abkha-
zia, South Ossetia and Nagorno-Karabakh.
It is a term Mr de Waal rightly deprecates:
soldiers are often killed on the front-line in
Karabakh, and the 2008 war showed how
fast a frozen conict can come to the boil.
What stands out from Mr de Waal’s ac-
count is the negligence of the West. In the
1990s Russia was given a free hand in over-
seeing ceaseres and providing peace-
keepers, despite being an interested party.
Ten years later the West went nuts over
Mikheil Saakashvili’s rose revolution in
Georgia and talked of admitting his coun-
try into NATO, only to fail to come to Mr
Saakashvili’s aid when he overreached,
triggering the disastrous 2008 war. The
West remains uncertain what to do. Talk of
NATO expansion has stopped; nobody in
Brussels holds out even a prospect of EU
membership to these struggling republics.
Perhaps their best bet is to learn from a
long history of outside interference and
look after themselves. Here Mr de Waal is
slightly unfair on Mr Saakashvili, in partic-
ular. As the war showed, he is headstrong
and autocratic. But he has modernised and
reformed Georgia, shaking o the rem-
nants of the Soviet legacy. If Armenia and
Azerbaijan could follow suit, the Caucasus
could yet prospersurely the best hope for
resolving its entrenched conicts. 7
A
MONG the punishments meted out to
Adam and Eve for eating from the tree
of knowledge are some persistent weeds.
Thorns and thistles are to grow on their
lands, and, by extension, in all crop elds,
lawns and herbaceous borders. Harsh
stuyet it could have been worse. Adam
and Eve might have been cursed with
ground elder.
Weeds are often described as plants in
the wrong place. In fact, explains Richard
Mabey in this delightful and casually
learned book, they are in precisely the
right place for themselves: next to us.
Weeds love cultivated gardens, tilled elds
and other unnatural landscapes. Bind-
weed is more commonly found in railway
sidings than in woods or nature reserves.
Japanese knotgrass has taken over Eng-
land’s suburbs but seems unable to pene-
trate its pristine natural parts.
Indeed, nature’s spivs depend on us.
In the early 19th century Oxford ragwort
escaped from the botanical garden where
it had been interned. It spread slowly from
college to college before arriving at the rail-
way station, whence it zoomed up and
down the land in the trains’ slipstreams.
Danish scurvy-grass has discovered a taste
for motorway verges; the spectacular giant
hogweed spreads outward from formal
gardens along rivers.
One of the book’s incidental pleasures
is to remind the reader that there are worse
weeds than those found in the garden.
Tumbleweed seeds, for example, can ger-
minate in 36 minutes. Kudzu, a vine that
has rampaged across the American south,
can grow one inch per hour. The roots of
ground elder have been discovered 30 feet
underground. Quack grass poisons the
maize amid which it often grows, in order
to inhibit its growth.
Other weeds come in and out of fash-
ion: consistency is not a strong point in
people’s attitudes to plants. Hellebore, a
currently modish owering plant, was re-
garded as a weed as late as the 1970s. Your
correspondent once lived next door to a
couple who had trailed bindweed up a
trellis, believing it to be a delightfully vigor-
ous kind of morning glory.
Which, of course, it is. Mr Mabey would
like us to view weeds more benignly, or at
least with greater curiosity. He claims to do
so himself. Unable to identify one plant
growing on his doorstep, he leaves it alone
and lets it grow: it turns out to be a giant
hogweed. For a while he was a member of
a kind of weed fringe group whose mem-
bers sought out exotic specimens on rub-
bish tips, then took them home and loving-
ly nurtured them to see what they turned
into. Only in England. 7
Weeds
Shards of green
Weeds: How Vagabond Plants Gatecrashed
Civilisation and Changed the Way We Think
About Nature. By Richard Mabey. Prole;
324 pages; £15.99. To be published in
America by Ecco in July 2011; $25.99
Mahmoud Darwish’s journal
Sad prophet
M
AHMOUD DARWISH is the Pales-
tinian poet laureate. His verses
chronicle the Palestinians’ anguish at the
loss of their land. His rhythms tattoo
their angry heartache. After his death in
2008, he was buried in Ramallah, a nal
return to the land that was his life, his
cause and his identity.
He wrote Journal of an Ordinary
Grief in 1973 but this is its rst translation
into English. The rst of three semi-auto-
biographical prose works (the second,
Memory for Forgetfulness, was pub-
lished in English in 1995; the third, In the
Presence of Absence, will come out next
year), it recounts the poet’s house arrest,
his run-ins with Israeli interrogators and
various spells in jail. Darwish’s voice,
drifting between his own and that of his
people, searches endlessly for what it
cannot nd.
Ibrahim Muhawi’s limpid translation
captures the longing, the ache of exile.
When Darwish and his family left their
village in 1948, they expected to return
soon. The painful realisation of their loss
comes gradually. The trees that are the
ribs of childhood have been left be-
hind. Palestine has become a homeland
dened by those who occupy it, a place
that is a dream in its actuality, and an
actuality in its dream. Occupied though
it may be, it is a paradise that is subject
to being regained. Despite everything, it
is attainable.
Some question the Palestinians’ all-
consuming attachment to their land.
Darwish answers them simply: ‘Can the
land be so holy?’ For the Palestinians, the
answer is yes. He regrets that they have
produced no Jeremiah, no one who can
walk around in our streets and in our
failings, one who can scourge us and
lament us. Perhaps it was hard for him
to see how well he did that himself.
Journal of an Ordinary Grief. By Mahmoud
Darwish. Archipelago Books; 177 pages; $16
104 Books and arts The Economist October 23rd 2010
New lm
Dancing with death
G
OING strong at 80, Clint Eastwood
ventures into supernatural territory
with his direction of Hereafter, a grip-
ping rendering of Peter Morgan’s screen-
play about three disparate people who
all live in the shadow of death. The three
are George Lonegan (Matt Damon), a
famous San Francisco psychic who has
taken a job in a factory to escape his gift
of communing with the dead; Marie
LeLay (Cécile de France), a popular
French television journalist; and Marcus
and Jason (played by Frankie and George
McClaren), identical twins who live in a
poor London district where they struggle
to conceal their mother’s heroin addic-
tion from child-welfare workers.
At the beginning of the lm Marie, on
holiday in South-East Asia, has a near-
death experience during the 2004 Asian
tsunami. Unable to return to her former
life, she takes a leave of absence and ends
up writing about the scientic evidence
for an afterlife (You’d better publish it in
England or America, counsels her scep-
tical French boss). Marcus’s brother dies
in a car accident and he goes looking for a
psychic who can communicate with the
dead, encountering a series of dotty
frauds until he happens on George’s old
website and realises that this guy could
be the real thing.
The characters are obsessed with
death but Hereafter sets out to be pop-
ular entertainment on a big canvas, ex-
amining the workings of destiny in the
lives of its people. Lonely George, whose
supernatural gift has wrecked his
chances with a giggly beauty he meets at
an Italian cookery class, goes to sleep
listening to Charles Dickens’s audio
books. Indeed, Dickens turns out to be
the improbable thread that will bring all
three characters to the London Book Fair,
where Sir Derek Jacobi is reading from
Little Dorritand the lm evokes Dick-
ens’s universe: ghosts, orphans and all.
Although the lm pays brief visits to
the Great Beyond, Mr Eastwood’s eye for
detail (like a Che Guevara sticker on a
locker in George’s factory which is pre-
paring to lay o 30% of its workers) is
comfortingly everyday. Moreover, Mr
Morgan’s melodramatic web catches
more bits of contemporary reality than
do most docudramas. For those who
don’t mind two-hanky nales it is a
grand evening out.
Clint Eastwood’s latest lm Hereafter is released this week in America and
comes to Europe in January. Go and see it, if you can
H
E HAS inuenced generations of art-
ists but John Baldessari’s own celebri-
ty came relatively late. A physically impos-
ing 79-year-old, he seemed slightly
uncomfortable at a press conference at the
Metropolitan Museum, where a travelling
retrospective of his work has just opened
for its nal stop. Asked to distil his art for
the many who have not heard of him, he
responded cheerfully that it was not the
job of an artist to spoon-feed viewers but
to make them feel intelligent.
For decades Mr Baldessari has made art
that challenges convention. Though his
work is heavily conceptual, it is not de-
signed to alienateand is often very funny.
In the wake of abstract expressionism,
when painting was all, Mr Baldessari was
investigating what it meant to make a
painting, what the rules were, and how far
he could stretch them. In the 1960s he
created a series of works that featured
mostly text on canvas, painted by sign pro-
fessionals. One, in black letters on canvas,
reads PURE BEAUTY (also the name of
this retrospective). The words sit there like
a taunt, a question, a declaration.
I do not believe in screwing the bour-
geoisie, Mr Baldessari explained in an in-
terview. The irony in his work is not de-
signed to reveal what is vacant in art, or
what is silly about those who buy it. He
just wants people to question what they
are looking at. He pokes fun at the art es-
tablishment, but he lets viewers in on the
joke. Art, he says, supplies spiritual nour-
ishment. Asked if a show at the Met sat
uncomfortably with his subversive streak,
Mr Baldessari did not miss a beat: I would
be happy to hang in a broom closet at the
Met. It’s a huge honour.
The exhibition spans nearly half a cen-
tury and ranges widely. Fewer works are
being shown at the Met than in its earlier
stops in London, Barcelona and Los Ange-
les. But the nearly 120 pieces include early
paintings, video self-portraits, photo-text
pieces and grand-scale collages of found
images. One room features a series of
paintings that Mr Baldessari commis-
sioned from amateur artists, each with a
hand pointing at something (a reference to
criticism of conceptual art as just pointing
at things). Later rooms display his wall-
sized arrangements of lm stills from the
late 1980s, full of dreamlike juxtapositions
and faces blotted out by his distinctive cir-
cle marks.
Mr Baldessari attributes some of his ex-
perimentation to having grown up in Na-
tional City, California, a suburb just north
of the Mexican border and well beyond
the reach of any art scene. He was cultural-
ly isolated, but also free from the pressures
of rejection. I was trying to nd out what
was irreducibly art. His boldest early
work was his Cremation Project in 1970,
when he ceremonially burned nearly all
the paintings he had made between 1953
and 1966. I really think it’s my best piece to
date, he wrote of it at the time.
He supported himself by teaching,
mainly at the progressive California Insti-
tute of the Arts in Valencia. He earned a
reputation for being a revolutionary and
generous teacher who inspired students to
renounce painting and view art as some-
thing that happens in the brain. Artists are
indebted to him, said Marla Prather, who
organised the show at the Met. He taught
countless people how to make art from the
ordinary stu of life. Now the man him-
self is nally getting his due. 7
John Baldessari
So what is this thing called art?
New York
Apioneering conceptual artist is on show at New York’s Metropolitan Museum of
Art until January 9th
A joker in search of spiritual nourishment
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M
ATHEMATICS is a curious subject.
Though often classed as one, it is not
really a science. That scientists use it to de-
scribe their interpretation of reality is not
quite the same thing. Nor, though, is it an
artnot, at any rate, in the modern mean-
ing of that word. The aesthetics of the sub-
ject, which any mathematician will tell
you are the driving force behind his pas-
sion, are not obvious to the senses in the
way that those of a painting, a symphony
or a play are. Yet Benoît Mandelbrot’s ce-
lebrity beyond the academy is largely due
to art in its modern, sensuous, sense. For
the set to which he gave his name, when
computed, drawn on a complex plane and
suitably tinted, appealed greatly to the
sensesas a million posters, greetings
cards and T-shirts, bought by people who
had not the faintest idea what it was, attest.
The Mandelbrot set is a collection of
points in the complex-number plane. The
formula for calculating these numbers is
z
n+1
= z
n
2
+ c, where c is a complex number
and n (representing the digits 1 to innity)
counts the number of times the calcula-
tion has been performed. Z starts as any
number you like, and changes with each
calculation, the value of z
n+1
being used as
z
n
the next time round. Sometimes the val-
ue of z remains nite, no matter how large
n gets. In that case, c is part of the Mandel-
this plane that do not lie on either axis.
The invention of complex numbers
was a watershed in mathematics. It also
marked the moment when maths began to
slip away from being part of the armamen-
tarium of any educated person and to-
wards the dizzyingly abstruse eld it has
become today. But a fractal is something a
ten-year-old child might hit on.
What is the length of a country’s coast-
line? Any encyclopedia will give you a g-
ure. Yet stand by the sea and watch the ir-
regularity of its edge, and you begin to
doubt. It is not just a matter of tide and
waves. Even measuring the boundary of a
static body of water is no mean feat. The
closer you look, the more irregular the line.
That, at bottom, is what describes a fractal.
When you magnify it, it rushes away from
you and becomes a simulacrum of its larg-
er self, eventually innitely long.
Dr Mandelbrot asked himself the coast-
line question, and answered it in 1967, in an
essay called How long is the coast of Brit-
ain?. In 1975 he invented the word fractal
to describe his discoveries. Extending frac-
tals into the plane of complex numbers fol-
lowed in 1979. But the breakthrough that
made them famous was the ability of com-
puters to plot them in a way that is easy on
the eye. Thus were launched the posters,
the cards and the T-shirts.
Before all this Dr Mandelbrot worked in
the obscurity that modern mathemati-
cians have resigned themselves to. He had
followed, albeit belatedly, a path familiar
to Jewish intellectuals driven from eastern
Europe by the rise of the Nazis. His family
ed Poland for France before the second
world war and, though they stayed there
for the duration, the young Benoît after-
wards oscillated between France and the
United States before settling for America in
1958. Once there, he worked for IBM.
Among other things, he modelled electri-
cal noise. Which, it turns out, is fractal. That
it was the transmogrication of his formu-
la by computers which brought him fame
is thus appropriate.
Game, set and match?
For a time, fractals seemed the answer to
everything: the shape of clouds, the
growth of organisms, even why the night
sky is dark. Then the world lost interest.
Perhaps it should not have. For among
Dr Mandelbrot’s beliefs was a conviction
that nancial-market movements, too,
have fractal forms, rather than the familiar
bell shapes of normal distribution that
Gauss also described. If Dr Mandelbrot’s
belief was correct, trading models based
on Gauss’s distribution are wrong.
That markets are not Gaussian has now
been accepted. Dr Mandelbrot’s interpre-
tation, however, has not. Even if it had
been, the bankers might not have noticed.
They preferred algorithms to geometry. 7
brot set. Sometimes z shoots o to innity.
In that case, c is not part of the set. The
boundary between the two is the swirling
fractal line that so appeals to the eye, and
the colours of the points outside the set in-
dicate how long the calculation takes to
start shooting o to innity.
Fractal. Complex-number plane. Lewis
Carroll, no mean mathematician himself,
asked Alice to believe as many as six im-
possible things before breakfast. These
could easily have been two of them.
First, then, the complex plane. This is
the space on which all numbers, real, imag-
inary and combinations of the two, can be
plotted. A real number is the familiar sort
from normal arithmetic. An imaginary
one is a multiple of the square root of -1.
Mathematicians struggled for centuries
with the question of what, multiplied by it-
self, gives the answer -1before one of them,
Leonhard Euler, suggested that the best
way to deal with the problem was to in-
vent a new symbol (he chose i ) and live
with the consequences. It works. And, as
Euler’s successor, Carl Friedrich Gauss,
was to discover, if you plot real numbers
on one axis of a graph and imaginary ones
on the other, you create a plane that repre-
sents both sorts of numbers. Complex
numbers, which have a real and an imagi-
nary part added together, are the points on
Obituary
Benoît Mandelbrot, father of fractal geometry, died on October 14th, aged 85
Benoît Mandelbrot
106 The Economist October 23rd 2010
107
The Economist October 23rd 2010
Courses
108
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Courses
109
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Courses
110
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Courses
111
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Courses
112
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Courses
113
The Economist October 23rd 2010
Appointments Announcements
114
The Economist October 23rd 2010
JOBS THAT MAKE A DIFFERENCE
USAID has undertaken an unprecedented
staffing increase in Afghanistan in order to
fulfill their mission of promoting democracy,
rule of law, and sustainable economic and
social development that is responsive to the
Afghan citizens’ needs. MSI is proud to partner
with USAID on this recruiting effort, and is
looking for skilled development professionals
for positions throughout the country.
These positions offer a competitive salary
and benefits package, including substantial
uplifts for post differential and danger pay. All
positions are unaccompanied and require US
Citizenship. Technical areas include:
Agriculture * Development * Economic Growth
Education * Engineering * Governance * Health
For more information, and to apply, please
visit:
www.JobsThatMakeADifference.com
The Dept. of Agricultural, Food, and Resource Economics at
Michigan State University is seeking
4 assistant professors
(tenure system, 9 month appointments).
The positions in Agricultural Economics, Food Industry Management,
Global Agri-Food Systems, and International Development include
an assignment of typically teaching courses in the graduate and/or
undergraduate programs. The holders of these positions will also
be expected to publish research results in professional outlets.
Full details and application information are available at
http://aec.msu.edu/facposition/index.htm
MSU is an affirmative-action, equal-opportunity employer.
MSU is committed to achieving excellence through cultural diversity.
The university actively encourages applications and/or nominations of
women, persons of color, veterans & persons with disabilities.
Rio Tinto is a leading international mining group headquartered in the UK. Rio Tinto's business is finding, mining, and processing
mineral resources. Major products are aluminium, copper, diamonds, energy (coal and uranium), gold, industrial minerals (borax,
titanium dioxide, salt, talc) and iron ore.
Rio Tinto has a large economic exposure to future energy and carbon prices, which are subject to significant uncertainty due to
climate change and security concerns. The Energy and Climate Strategy team was formed in 2008 with a mandate to build support
for government action and identify energy and greenhouse gas emission reduction opportunities. An excellent opportunity is now
available for an Analyst to work in the global Energy and Climate Strategy team based in London.
You will be responsible for:
• Developing high quality analysis of climate change related issues and their effects on the business. This will include assessing
the effects of emissions constraints on international energy markets.
• Contributing to the development of, and advocacy for, greenhouse gas emissions policy options which drive change but avoid
market and product distortions.
• Maintaining and developing, in collaboration with colleagues, Rio’s proprietary model of carbon prices based on an understanding
of global policy trends.
The requirements:
• Strong quantitative and modelling skills, including a good degree in a numerate discipline.
• Excellent verbal and written communication skills are required as well as high levels of accuracy and attention to detail.
• You must be confident liaising with all levels of individuals including leading academics, experts within industry associations as
well as internal Rio Tinto teams.
• A genuine interest in, and knowledge of, climate change policy.
• A knowledge of energy economics and energy markets, especially the power sector, would be advantageous.
• Self motivated, you will be able to work with minimal supervision. It is imperative that you are highly organised and able to
prioritise your workload.
• Strong IT skills are a must including MS Office applications; particularly Excel.
Candidates to apply via www.riotinto.com and search for LON0005D.
Analyst – Energy and Climate Strategy
Appointments
115
The Economist October 23rd 2010
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bethhuber@economist.com
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Business & Personal Fellowships
Tenders
116
The Economist October 23rd 2010
Tenders
Hotels
Source: STR Global
Revenue per available room, Jan-Sept 2010
% change on a year earlier
10 0 10 20 30 40 50 60 70 + –
Shanghai
Hong Kong
Johannesburg
Mexico City
New York
Sydney
Rio de Janeiro
London
Berlin
Paris
Madrid
Tokyo
Los Angeles
Mumbai
Dubai
Occupancy rate,
% change on
a year earlier
36.2
12.7
-0.2
20.1
6.6
9.2
5.9
3.0
2.7
4.0
12.7
9.8
6.5
6.8
3.8
During the nancial crisis, hotels fell on
hard times as both business and holiday
travel contracted. But in the rst nine
months of 2010 hoteliers had a much
better time of things. Their revenue per
available room increased, compared with
the same period in 2009, in all but a
handful of markets. In Asia, where the
pace of growth has been blistering, hotels
too are thriving. Revenues in Shanghai are
up by more than 60%, helped by a 36%
increase in occupancy rates. Northern
European cities such as Berlin and London
are part of the rising tide. But even places
with weaker recoveries, such as Tokyo and
Madrid, have enjoyed a slight rise in
revenues. Although room rates there are
stagnant, occupancy levels are rising.
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 +5.4 Sep +1.1 Sep –1.3 +1.6 9.6 Sep
Japan +2.4 Q2 +1.5 +2.9 +1.2 +15.4 Aug –0.9 Aug –2.2 –0.9 5.1 Aug
China +9.6 Q3 na +9.9 +8.6 +13.3 Sep +3.6 Sep –0.8 +3.0 9.6 2009
Britain +1.7 Q2 +4.7 +1.5 +1.8 +4.2 Aug +3.1 Sep
§
+1.1 +3.0 7.7 Aug
††
Canada +3.4 Q2 +2.0 +3.0 +2.6 +8.2 Jul +1.7 Aug –0.8 +1.7 8.0 Sep
Euro area +1.9 Q2 +3.9 +1.5 +1.3 +7.9 Aug +1.8 Sep –0.3 +1.5 10.1 Aug
Austria +2.3 Q2 +5.1 +1.3 +1.4 +6.8 Jul +1.8 Sep +0.2 +1.5 4.3 Aug
Belgium +2.4 Q2 +3.7 +1.7 +1.5 +5.9 Jul +2.9 Sep –1.2 +2.0 12.7 Aug
‡‡
France +1.7 Q2 +2.8 +1.6 +1.4 +3.2 Aug +1.6 Sep –0.4 +1.7 10.1 Aug
Germany +4.1 Q2 +9.0 +3.3 +1.9 +11.0 Aug +1.2 Aug nil +1.1 7.5 Sep
Greece –3.7 Q2 –6.8 –3.9 –3.5 –2.1 Aug +5.6 Sep +0.7 +4.5 12.0 Jul
Italy +1.3 Q2 +1.8 +1.0 +1.0 +9.5 Aug +1.6 Sep +0.2 +1.6 8.2 Aug
Netherlands +2.2 Q2 +4.0 +1.8 +1.5 +7.0 Aug +1.6 Sep +0.4 +1.2 5.3 Aug
††
Spain –0.1 Q2 +0.7 –0.3 +0.4 +3.2 Aug +2.1 Sep –1.0 +1.6 20.5 Aug
Czech Republic +2.4 Q2 +3.8 +1.4 +2.0 +12.9 Aug +2.0 Sep nil +1.6 8.5 Sep
Denmark +3.7 Q2 +7.1 +1.8 +1.8 –0.7 Aug +2.6 Sep +0.8 +2.1 4.1 Aug
Hungary +1.0 Q2 +0.1 +0.3 +2.5 +14.9 Aug +3.8 Sep +4.9 +4.5 11.0 Aug
††
Norway +0.6 Q2 –1.9 +1.0 +1.3 –13.0 Aug +1.7 Sep +1.2 +2.4 3.3 Jul
§§
Poland +3.5 Q2 na +3.4 +3.8 +11.8 Sep +2.5 Sep +3.4 +2.4 11.3 Aug
‡‡
Russia +4.5 Q2 na +4.2 +4.0 +6.2 Sep +7.0 Sep +10.7 +6.7 6.6 Sep
‡‡
Sweden +4.6 Q2 +8.0 +4.0 +2.8 +9.7 Aug +1.4 Sep –1.6 +1.2 7.8 Sep
‡‡
Switzerland +3.4 Q2 +3.5 +2.7 +1.9 +7.8 Q2 +0.3 Sep –0.9 +0.8 3.7 Sep
Turkey +10.3 Q2 na +6.5 +4.4 +11.0 Aug +9.2 Sep +5.3 +8.7 10.6 Jul
‡‡
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 Sep
††
India +8.8 Q2 na +8.4 +8.6 +5.6 Aug +9.9 Aug +11.7 +11.7 10.7 2009
Indonesia +6.2 Q2 na +5.9 +6.0 +2.5 Aug +5.8 Sep +2.8 +5.3 7.4 Feb
Malaysia +8.9 Q2 na +6.8 +4.2 +4.0 Aug +2.1 Aug –2.4 +1.8 3.3 Jul
Pakistan +4.1 2010** na +4.4 +3.2 –3.6 Aug +15.7 Sep +10.1 +13.4 5.5 Jul
Singapore +10.3 Q3 –19.8 +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 3.7 Sep
Taiwan +12.5 Q2 +7.2 +9.0 +3.2 +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 +8.3 +5.1 +5.9 Aug +11.1 Sep*** +6.2 +10.7 7.9 Q2
‡‡
Brazil +8.8 Q2 +5.1 +7.5 +4.5 +8.9 Aug +4.7 Sep +4.3 +4.9 6.7 Aug
‡‡
Chile +6.5 Q2 +18.4 +4.8 +5.7 +6.9 Aug +1.9 Sep –1.1 +1.7 8.3 Aug
††‡‡
Colombia +4.5 Q2 +3.9 +4.4 +4.2 +4.4 Aug +2.3 Sep +3.2 +2.3 11.2 Aug
‡‡
Mexico +7.6 Q2 +13.5 +4.7 +3.0 +8.1 Aug +3.7 Sep +4.9 +4.1 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 +5.2 +4.4 Q1 +10.9 Aug +9.0 +12.8 9.0 Q2
‡‡
Israel +4.8 Q2 +4.6 +3.7 +3.4 +19.7 Jul +2.4 Sep +2.8 +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 +5.3 Aug +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 4.6 in September. **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
Oct 12th Oct 19th* month year
Dollar index
All items 252.5 251.3 +6.1 +25.9
Food 243.6 240.8 +3.1 +18.6
Industrials
All 264.0 264.7 +9.7 +35.5
Nfa

250.5 252.8 +12.1 +61.4
Metals 271.5 271.3 +8.6 +25.3
Sterling index
All items 242.6 242.3 +4.8 +31.6
Euro index
All items 168.8 168.5 +1.0 +36.4
Gold
$ per oz 1,347.25 1,343.50 +5.3 +26.3
West Texas Intermediate
$ per barrel 81.83 79.53 +8.9 +1.3
*Provisional

Non-food agriculturals.
Industrial production in America fell by
0.2% in September, the rst decline in more
than a year. Consumer prices were un-
changed in September from the previous
month, leaving them 1.1% higher than a year
earlier. Figures from the housing market
were a little cheerier. New housing starts
edged up by 0.3% in September, a third
successive monthly increase. The National
Association of Home Builders index of opti-
mism rose from 13 in September to 16 in
October, its highest level since June.
China’s central bank unexpectedly raised its
benchmark deposit and lending rates by 0.25
percentage points, to 2.5% and 5.56%
respectively, on October 19th. China’s GDP
rose by 9.6% in the year to the third quarter,
slower than the 10.3% rate recorded in the
second quarter. Consumer-price ination
edged up from 3.5% to 3.6% in September.
Industrial production rose by 13.3% in the
year to September.
Britain’s public-sector net borrowing was
£73.5 billion in the six months to September,
once the cost of aid to the nancial sector is
excluded. That was just £3.9 billion lower
than the same period a year earlier.
One member of the Bank of England’s nine-
strong monetary-policy committee voted to
increase the bank’s main interest rate from
0.5% to 0.75%, according to the minutes of
its October meeting. Another favoured
easing policy by increasing the size of the
bank’s asset-purchase programme. The
minutes hinted that the remaining members
were leaning towards the latter policy.
Overview
Indicators for more countries, as well as
additional series, can be found at
Economist.com/indicators
Economic and nancial indicators
The Economist October 23rd 2010 117
Stockmarkets
Sources: MSCI;
Thomson Reuters
*Based on previous 12-month earnings

Excluding Japan
Price-to-earnings ratios*
September 2010
0 5 10 15 20 25
Denmark
Australia
Canada
Japan
China
Asia

Britain
Developed markets
Latin America
Emerging markets
United States
France
Germany
Italy
Spain
Price index, Oct 19th 2010,
% change on a year earlier
22.4
-3.7
6.5
-7.1
9.3
12.0
7.5
3.3
5.5
12.4
6.2
0.3
7.0
-12.4
-9.3
When investors assess stockmarkets, they
often fall back on the price-earnings
ratio, which compares share prices with
prots. But a sharp recession, by causing
prots to plunge, can make the ratio look
high just when prots are about to
rebound. A cyclically adjusted ratio is a
better test. The chart shows prices
compared with the most recent annual
prots for leading countries and regions.
Developed markets trade on a p/e of 15,
around the middle of the historic range.
Expensive-looking Australia and Canada
are resource-rich and beneting from high
commodity prices. Struggling Spain looks
the cheapest. Japan, 20 years after the
bursting of its bubble, is still more
expensive than the average.
Markets
% change on
Dec 31st 2009
Index one in local in $
Oct 20th week currency terms
United States (DJIA) 11,108.0 +0.1 +6.5 +6.5
United States (S&P 500) 1,178.2 nil +5.7 +5.7
United States (NAScomp) 2,457.4 +0.7 +8.3 +8.3
Japan (Nikkei 225) 9,381.6 –0.2 –11.0 +1.2
Japan (Topix) 823.7 +0.1 –9.2 +3.3
China (SSEA) 3,147.9 +5.0 –8.4 –6.2
China (SSEB, $ terms) 278.7 +1.7 +7.8 +10.4
Britain (FTSE 100) 5,728.9 –0.3 +5.8 +3.8
Canada (S&P TSX) 12,649.9 –0.2 +7.7 +12.7
Euro area (FTSE Euro 100) 899.8 +0.3 –1.7 –4.3
Euro area (DJ STOXX 50) 2,851.5 +0.4 –3.8 –6.4
Austria (ATX) 2,680.0 –0.4 +7.4 +4.5
Belgium (Bel 20) 2,669.3 nil +6.3 +3.4
France (CAC 40) 3,828.2 nil –2.7 –5.4
Germany (DAX)* 6,524.6 +1.4 +9.5 +6.6
Greece (Athex Comp) 1,589.2 +0.5 –27.6 –29.6
Italy (FTSE/MIB) 21,425.8 +1.3 –7.8 –10.3
Netherlands (AEX) 339.7 –0.6 +1.3 –1.4
Spain (Madrid SE) 1,122.2 +0.3 –9.6 –12.1
Czech Republic (PX) 1,131.7 –1.8 +1.3 +6.4
Denmark (OMXCB) 393.1 –1.3 +24.5 +20.9
Hungary (BUX) 23,628.2 –0.1 +11.3 +7.3
Norway (OSEAX) 437.5 –0.2 +4.1 +3.7
Poland (WIG) 45,384.5 –1.9 +13.5 +15.5
Russia (RTS, $ terms) 1,556.7 –2.0 +7.0 +7.8
Sweden (OMXS30) 1,098.9 –0.5 +15.5 +24.3
Switzerland (SMI) 6,477.2 +0.3 –1.0 +6.7
Turkey (ISE) 69,364.5 –1.1 +31.3 +39.8
Australia (All Ord.) 4,694.5 +0.1 –3.9 +6.1
Hong Kong (Hang Seng) 23,556.5 +0.4 +7.7 +7.6
India (BSE) 19,872.2 –3.9 +13.8 +18.9
Indonesia (JSX) 3,579.0 –0.9 +41.2 +48.7
Malaysia (KLSE) 1,486.8 –0.7 +16.8 +29.3
Pakistan (KSE) 10,486.0 +0.9 +11.7 +9.6
Singapore (STI) 3,179.2 –0.7 +9.7 +18.3
South Korea (KOSPI) 1,870.4 –0.3 +11.2 +15.5
Taiwan (TWI) 8,124.6 +0.2 –0.8 +2.9
Thailand (SET) 988.1 –0.5 +34.5 +50.0
Argentina (MERV) 2,809.4 +2.9 +21.1 +16.4
Brazil (BVSP) 70,404.6 –1.8 +2.6 +8.0
Chile (IGPA) 22,260.7 –0.5 +33.9 +42.6
Colombia (IGBC) 15,576.7 –0.5 +34.3 +53.0
Mexico (IPC) 34,880.5 +0.2 +8.6 +14.5
Venezuela (IBC) 66,928.7 +0.9 +21.5 na
Egypt (Case 30) 6,733.5 –2.4 +8.5 +4.3
Israel (TA-100) 1,160.8 +0.3 +9.0 +15.0
Saudi Arabia (Tadawul) 6,230.2 –1.1 +1.8 +1.8
South Africa (JSE AS) 30,080.5 –0.6 +8.7 +17.6
Europe (FTSEurofirst 300) 1,086.5 nil +3.9 +1.1
World, dev’d (MSCI) 1,221.9 nil +4.6 +4.6
Emerging markets (MSCI) 1,101.3 –1.5 +11.3 +11.3
World, all (MSCI) 315.7 –0.2 +5.4 +5.4
World bonds (Citigroup) 904.5 nil +8.9 +8.9
EMBI+ (JPMorgan) 570.4 –1.1 +15.7 +15.7
Hedge funds (HFRX)

1,187.3 -0.1 +2.6 +2.6
Volatility, US (VIX) 19.8 19.1 21.7 (levels)
CDSs, Eur (iTRAXX)

86.5 +5.1 +23.6 +20.2
CDSs, N Am (CDX)

102.3 +4.4 –5.9 –5.9
Carbon trading (EU ETS) ¤ 15.2 –3.0 +19.7 +16.4
*Total return index.

Oct 19th.

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 20th year ago 2010

latest bonds, latest
United States –621.4 Aug –430.9 Q2 –3.3 – – –9.0 0.25 2.47
Japan +86.8 Aug +180.9 Aug +3.3 80.9 91.1 –7.6 0.17 0.88
China +182.9 Sep +289.1 Q2 +4.9 6.65 6.83 –2.2 2.73 3.02
Britain –140.8 Aug –34.5 Q2 –1.7 0.63 0.60 –10.1 0.80 3.09
Canada –5.1 Aug –41.1 Q2 –2.5 1.02 1.04 –4.6 0.88 2.87
Euro area +16.4 Aug –67.7 Aug –0.5 0.72 0.67 –6.4 1.02 2.41
Austria –4.9 Jul +8.7 Q1 +1.5 0.72 0.67 –5.1 1.01 2.85
Belgium +19.8 Jul +1.7 Jun +0.3 0.72 0.67 –5.7 1.02 3.31
France –67.2 Aug –51.3 Aug –2.0 0.72 0.67 –7.9 1.01 2.77
Germany +208.2 Aug +177.8 Aug +5.2 0.72 0.67 –3.7 1.01 2.44
Greece –42.0 Jul –37.0 Jul –6.2 0.72 0.67 –9.5 1.01 9.01
Italy –24.4 Aug –73.5 Aug –3.0 0.72 0.67 –5.0 1.01 3.75
Netherlands +51.0 Aug +42.5 Q2 +6.1 0.72 0.67 –5.7 1.01 2.65
Spain –73.7 Jul –74.8 Jul –4.6 0.72 0.67 –9.6 1.01 4.06
Czech Republic +7.5 Aug –3.7 Aug –3.2 17.6 17.2 –5.4 1.20 3.45
Denmark +14.5 Aug +14.2 Aug +3.3 5.34 4.96 –5.2 1.22 2.55
Hungary +7.0 Aug +1.1 Q2 –0.3 197 176 –3.9 5.35 7.08
Norway +47.2 Sep +54.9 Q2 +14.3 5.84 5.54 9.4 2.52 3.09
Poland –5.0 Aug –12.0 Aug –2.7 2.83 2.78 –3.2 3.83 5.58
Russia +151.6 Aug +77.0 Q3 +4.3 30.7 29.1 –4.8 7.75 5.26
Sweden +8.0 Aug +29.2 Q2 +6.6 6.67 6.85 –1.5 1.39 2.68
Switzerland +19.8 Sep +78.7 Q2 +10.7 0.96 1.01 –0.4 0.17 1.43
Turkey –57.3 Aug –33.6 Aug –5.4 1.42 1.46 –4.2 7.68 3.44

Australia +2.5 Aug –49.5 Q2 –2.6 1.01 1.08 –2.4 4.78 5.11
Hong Kong –41.7 Aug +12.5 Q2 +8.3 7.76 7.75 3.0 0.32 1.86
India –121.8 Aug –47.7 Q2 –1.7 44.3 46.5 –5.5 6.56 8.24
Indonesia +20.1 Aug +9.7 Q2 +1.5 8,933 9,420 –1.5 6.82 3.89

Malaysia +35.8 Aug +29.2 Q2 +14.7 3.12 3.38 –5.3 2.94 2.57

Pakistan –15.9 Sep –3.5 Q2 –1.5 86.0 83.3 –6.3 12.88 8.71

Singapore +35.9 Sep +37.0 Q2 +18.1 1.30 1.39 –0.7 0.44 1.82
South Korea +40.5 Sep +34.2 Aug +3.2 1,127 1,179 –1.8 2.66 4.02
Taiwan +13.9 Sep +40.4 Q2 +9.3 30.9 32.4 –1.8 1.00 1.04
Thailand +11.5 Aug +12.6 Aug +3.9 29.9 33.4 –2.2 1.90 2.69
Argentina +13.9 Aug +8.0 Q2 +1.9 3.96 3.82 –1.3 12.44 na
Brazil +16.9 Sep –45.8 Aug –2.7 1.68 1.74 –2.3 10.66 6.16

Chile +14.0 Sep +3.2 Q2 +0.5 485 541 –2.1 3.24 1.78

Colombia +1.0 Jul –6.1 Q2 –2.1 1,813 1,907 –3.6 3.44 3.74

Mexico –2.3 Aug –5.2 Q2 –1.5 12.4 12.9 –2.5 4.03 5.93
Venezuela +31.1 Q2 +20.1 Q2 +10.9 5.30 na –3.2 14.59 6.55

Egypt –25.1 Q2 –4.3 Q2 +0.1 5.76 5.47 –7.9 8.82 5.10

Israel –5.6 Aug +8.0 Q2 +2.7 3.62 3.69 –3.9 1.85 3.42
Saudi Arabia +105.2 2009 +22.8 2009 +11.6 3.75 3.75 2.7 0.73 na
South Africa –1.3 Aug –10.9 Q2 –5.0 6.92 7.38 –7.3 5.88 7.87
*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
118 Economic and nancial indicators The Economist October 23rd 2010
Follow Ali and Bono on louisvuittonjourneys.com
Profits from the bag, as well as Ali and Bono's fee benefit Conservation Cotton Initiative Uganda.
Ali and Bono wear Edun; Ali carries the Louis Vuitton/Edun collaborative bag.
Every journey began in Africa.

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