A circus arrives in Cleveland

The dirty secret of natural gas

AIDS: down but not out

Six of the best economic ideas

JULY 23RD– 29TH 2016

Erdogan’s revenge

The coup and

the crackdown
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Contents
5 The world this week
Leaders
7 The failed coup in Turkey
Erdogan’s revenge
8 Britain’s “industrial
strategy”
Open for business?
8 The politics of Thailand
The generals who hide
behind the throne
9 Methane leaks
Tunnel vision
On the cover 10 Big economic ideas
Turkey’s president is Breakthroughs and
destroying the democracy brickbats
that Turks risked their lives
to defend: leader, page 7. Letters
Recep Tayyip Erdogan drifts
12 On Kurdistan,
away from America, NATO and
immigration, executive
the EU, pages 14-16. Plots to
pay, the passive voice,
topple leaders are becoming
China
less common. That’s a good
thing for many reasons: Free
exchange, page 58 Briefing
14 Turmoil in Turkey
Coup and counter-coup
The Economist online 15 Turkey and the world
Daily analysis and opinion to Running out of friends
supplement the print edition, plus
audio and video, and a daily chart
Economist.com Europe
E-mail: newsletters and 17 Another attack in France
Madness and terror
mobile edition
Economist.com/email 18 Russia’s Olympian drug
Print edition: available online by habit
Tamper proof
7pm London time each Thursday
Economist.com/print 19 Italy’s upstart party
Audio edition: available online The Five Star question
to download each Friday 20 Charlemagne
Economist.com/audioedition The EU v its parliaments
Britain
21 Industrial strategy
A change of gear
Volume 420 Number 8999 22 Foreign takeovers
Fear and favour
Published since September 1843
to take part in "a severe contest between 22 London buses
intelligence, which presses forward, and Parting the red sea
an unworthy, timid ignorance obstructing
our progress." 23 Bagehot
Britain’s place in a
Editorial offices in London and also:
Atlanta, Beijing, Berlin, Brussels, Cairo, Chicago, post-Brexit world
Lima, Mexico City, Moscow, Mumbai, Nairobi,
New Delhi, New York, Paris, San Francisco,
São Paulo, Seoul, Shanghai, Singapore, Tokyo,
Washington DC
The Economist July 23rd 2016 3
Middle East and Africa
24 Israel and the Arab world
The enemy of my enemies
25 Syrian refugees in Jordan
From haven to hell
25 Lebanese cronyism
Hire power
26 Agriculture
Africa’s real land grab
27 Smoking in Africa
Plains packaging Is Britain open for business?
27 Nigeria’s currency The takeover of a British
If you love it... microchip-maker belies a
cooling climate for foreign
investors: leader, page 8. The
United States new government’s mixed
signals , page 21. The evidence
28 The Republican
convention is that foreign managers
Donning the mantle improve the British firms they
acquire, page 22. Masayoshi
29 On the trail
Son sets the tone for SoftBank
Cleveland special
after the exit of Nikesh Arora,
30 Paul Ryan’s agenda
page 49
Better than what?
30 Roger Ailes
Kingmaker no more
31 Policing after Baton
Rouge
Ambushed and anguished
32 Michael Elliott
The Fab One
32 Immigration economics
Wages of Mariel
33 Lexington
Mike Pence, prime minister
Republicans in Cleveland
Confusion and division at the
The Americas
convention, page 28. Mike
34 Canada’s internal trade Pence, useful underling:
A great provincial obstacle Lexington, page 33. The
course Speaker’s policies are the best
35 Cuba’s economy a divided party has to offer,
Caribbean contagion page 30. Cleveland’s lessons
35 El Salvador on economic clusters:
Schumpeter, page 51
The price of peace
36 Bello
Lessons from a liberal
swashbuckler
Asia
37 Politics in Thailand
Twilight of the king
40 Pakistan’s “honour
killings”
Challenging a licence to kill
40 Dissent in Laos
An outpost of Stalinism Stress New research shows that
42 South Korea’s DIYers even severe stress can have an
A home-decor fad upside, page 45. How firms are
easing the strain, page 46
1 Contents continues overleaf
4 Contents The Economist July 23rd 2016

China 56 Postal Savings Bank of

China
43 Hong Kong police A red-letter IPO
Serving the law, or the
party? 57 The 1MDB affair
Thick and fast
44 The South China Sea
Xi Jinping’s agenda 58 Free exchange
The economics of coups

International
Science and technology
45 Stress
What makes us stronger 59 The 21st International
Big economic ideas What AIDS Conference AIDS Those working to defeat
46 Workplace stress Rallying the troops
economists can learn from the the disease face setbacks,
Fuss and bother
discipline’s seminal papers: 61 Data storage both epidemiological and
leader, page 10. George Atoms and the voids financial. But they are about
Akerlof’s 1970 paper, “The Business 61 Medical technology to be handed new weapons to
Market for Lemons”, is a 47 Natural gas and methane All sewn up carry on the fight, page 59
foundation stone of A dirty little secret
information economics. The
48 China’s industrial Books and arts
first in our series on seminal Subscription service
internet of things
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The great convergence including digital only or print and digital
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The country is ill-prepared for Statistics on 42 South Africa ZAR 4,670, US$285
Briefing economies, plus a closer Middle East and Africa US$285
the death of its king: leader,
page 8.The strange politics 52 Information asymmetry look at GDP forecasts
that surround the Thai royals, Secrets and agents Principal commercial offices:
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Paris, San Francisco and Singapore

Methane Even natural gas

needs to clean up its act:
leader, page 9. Its reputation
as a cleaner fuel than coal and
oil risks being sullied by
methane emissions, page 47 PEFC certified
This copy of The Economist
is printed on paper sourced
from sustainably managed
forests certified by PEFC
PEFC/04-31-1267 www.pefc.org

© 2016 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 other-
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Milano Aut. Trib. MI 272 del 13/04/88 Poste Italiane SpA - Sped Abb Post DL 353/2003 (conv. L. 27/2/2004 n.46) art 1 comma 1 DCB Milano, Dir. Resp. Domenico Tassinari

The world this week
Politics
A faction of Turkey’s armed
forces attempted a coup, but
was defeated by other military
units, police and crowds of
civilians. President Recep
Tayyip Erdogan launched a
crackdown, arresting or purg-
ing thousands of military
officers, judges, academics,
journalists and others. The
government accused Fethullah
Gulen, a Muslim cleric based
in America, of plotting the
coup (which he denied), and
sought his extradition. The EU
and America warned Mr Erdo-
gan not to crush democracy.
A Tunisian resident of France
drove a lorry through crowds
of pedestrians celebrating
Bastille Day in Nice, killing 84.
Islamic State claimed responsi-
bility, but police found no
evidence he had pledged
allegiance to the group, though
he had watched violent jiha-
dist videos. The French govern-
ment said it would extend the
country’s state of emergency.
In Germany, a 17-year-old
Afghan refugee was shot dead
by police after he attacked
passengers on a train with an
axe, injuring five people.
Pavel Sheremet, a muckraking
journalist, was killed by a car
bomb in Kiev. Working for
Ukrainska Pravda, he had
written exposés of govern-
ment corruption in Belarus,
Ukraine and Russia over sever-
al decades. Petro Poroshenko,
Ukraine’s president, called for
an EU inquiry into his death.
The effort by MPs in Britain’s
Labour Party to topple Jeremy
Corbyn as leader intensified.
To avoid splitting the anti-
Corbyn vote one challenger,
Angela Eagle, withdrew in
favour of another, Owen
Smith. However, Mr Smith
soon came under pressure
over his previous job working
for drug companies. For a
party on a mission to gain
credibility, the choice between
a candidate who shilled for
“Big Pharma”, or a leader with
rock-bottom parliamentary
support, may be a bitter pill to
swallow.
In her first week as Britain’s
prime minister, Theresa May
cruised through a crucial
parliamentary vote on the
renewal of Trident, the coun-
try’s nuclear deterrent. Trips to
Berlin and Paris followed, as
Mrs May met Germany’s
Angela Merkel and France’s
François Hollande. Convinc-
ing European heads of state of
her desire to achieve a mutual-
ly beneficial Brexit may prove
difficult. She ruled out holding
any talks this year.
Throwing his hat in the ring
The Republicans held their
convention, nominating
Donald Trump for president.
There was some mild excite-
ment when Republicans still
opposed to Mr Trump’s candi-
dacy tried to register their
protest on the convention
floor. They were drowned out
by rock music. Ted Cruz, a rival
in the primaries, was booed
off the stage when he refused
to endorse him.
Mr Trump, meanwhile, said
that if he were president,
America would come to the
aid of the Baltic states if they
were invaded by Russia, only if
they “fulfil their obligations to
us”. Mr Trump has signalled
before a lack of commitment to
the NATO alliance.
The issue of policing featured
heavily at the convention
following the latest shooting
of police by a black gunman.
Three officers were killed in
Baton Rouge, Louisiana, by a
former marine who lured
them into an ambush close to
police headquarters.
A death in the family
Pakistan arrested the brother
of a social-media star, after he
confessed to killing her for the
family’s “honour”, because
“girls are born to stay at home.”
Qandeel Baloch rose to fame
by posting cheeky, politically
controversial videos on Face-
book. Hailed by some as a
feminist, she was reviled by
conservative clerics. Her broth-
er strangled her at home.
America’s Justice Department
began proceedings to seize
assets involved in “an interna-
tional conspiracy to launder
funds” from 1MDB, Malaysia’s
state investment fund. In-
vestigators in America, Swit-
zerland and elsewhere have
been piecing together a money
trail in a suspected multi-
billion-dollar scam involving
senior politicians.
A prominent liberal-leaning
journal in China, Yanhuang
Chunqiu, stopped publication
after the dismissal of its senior
editorial staff by the state-
affiliated academy that su-
pervised it. With support from
many retired officials, the
journal had often published
articles at odds with the Com-
munist Party’s line, especially
on historical issues. President
Xi Jinping has launched a
campaign to tighten party
control over the media.
Reinforcing peace
The African Union proposed
deploying additional troops to
South Sudan after recent
clashes left hundreds of people
dead. The proposed peace-
keeping force will join the
UN’s 12,000-strong mission
already on the ground to main-
tain a tenuous peace deal
signed last year.
Meanwhile, the AU was forced
to extend the term of chairman
Nkosazana Dlamini-Zuma by
The Economist July 23rd 2016 5
six months, after a summit in
Rwanda of African leaders
failed to settle on her succes-
sor. None of the three contend-
ers was able to attain the two-
thirds majority required.
Israel’s Knesset passed a law
that will allow it to impeach
any member accused of racial
incitement or supporting
violence against the Jewish
state. Critics said the contro-
versial law was aimed at Arab
lawmakers and would harm
democracy.
Three members of the French
special forces died in Libya
when their helicopter was shot
down by an Islamist militia.
The militia claimed that French
jets bombed its positions in
response, raising the prospect
of an escalation in fighting.
A quick dash to the shops
More than 100,000 Venezue-
lans, suffering from shortages
of food and other basic goods,
crossed the border into Colom-
bia to buy them. This was the
second time Venezuela had
opened its border recently to
allow its citizens to go shop-
ping. Venezuela’s government
shut the border last year be-
cause, it said, paramilitaries
and criminals were crossing it
to enter the country.
Mexico enacted laws that
establish a long-awaited na-
tional “anti-corruption sys-
tem”, which creates indepen-
dent authorities to monitor,
investigate and punish corrup-
tion. Announcing the mea-
sures, Mexico’s president,
Enrique Peña Nieto, apol-
ogised for his role in a scandal
in 2014, in which his wife
acquired a $7m house from a
government contractor, but
said he did not break the law. 1
6 The world this week
Business
The IMF warned that Britain’s
decision in a referendum to
leave the European Union had
thrown a “spanner in the
works”, causing widespread
economic and financial
uncertainty that is still un-
folding. It slightly reduced its
expectations for global growth
this year and next, but slashed
its forecast for Britain to 1.3% for
2017, from the 2.2% it had pro-
jected in April. The fund said
the effects of Brexit would be
felt mostly in Europe (it cut its
estimate of German GDP
growth next year to 1.2%) and
that there would be a “relative-
ly muted impact elsewhere”.
China’s economy grew by
6.7% in the second quarter, the
same as in the previous three
months and a healthier pace
than many had expected given
the country’s stockmarket
crash and depreciation of the
yuan. Investment in infrastruc-
ture has surged and personal
consumption has been strong.
Strong ARM tactics
SoftBank, a multinational
telecoms company based in
Japan, agreed to buy ARM, a
British designer of smartphone
chips, for £24 billion ($32 bil-
lion). ARM’s technology is
licensed by Apple, Samsung
and others and used in virtual-
ly all phones sold around the
world. The firm is expanding
rapidly into the “internet of
things”. Masayoshi Son, Soft-
Bank’s boss, announced the
deal in London, where the
government trumpeted it as
proof that Britain was open for
business following Brexit. It is
the biggest-ever takeover of a
European tech company.
Trying to draw a line under
two years of upheaval,
PIMCO, one the world’s larg-
est bond funds, appointed
Emmanuel “Manny” Roman
as its chief executive. Mr
Roman currently heads Man
Group and is credited with
turning round the hedge-fund
group. PIMCO hopes he will
do the same when he moves to
its headquarters in Newport
Beach, California. Bill Gross, its
founder, known in the in-
dustry as “the bond king”, left
on acrimonious terms in 2014.
Assets parked in its Total
Return Fund have fallen from
almost $300 billion in April
2013 to $86 billion today.
The FBI charged HSBC’s global
head of foreign-exchange cash
trading with fraud in a curren-
cy-trading deal. The man was
arrested at JFK airport in New
York shortly before he was to
take a flight to London. Several
big banks paid fines last year in
an unrelated investigation into
the rigging of currency rates.
Disaster movie
Netflix
Net new subscribers, m
United States
2013 14 15
Source: Company reports
Netflix’s share price fell sharp-
ly after it reported that sub-
scriber growth had slowed
appreciably in the second
quarter. A net 1.7m customers
joined the video-streaming
service, half the number in the
same quarter last year. In
America Netflix has raised its
fees, which has put off sub-
scribers; nearly all its new ones
were outside the United States.
Its reliance on growth from its
international base looks set to
continue; early next year Net-
flix will stream episodes of the
new Star Trek series within a
day of their broadcast on CBS.
Lockheed Martin’s F-35 fight-
er jet, the West’s most-expen-
sive weapons programme,
helped boost its revenue in the
second quarter to $13 billion
and profit to $1 billion. The
company is still haggling with
the Pentagon over its next jet
contract, but sales have taken
off in Britain, Israel and Turkey.
Monsanto rejected a second
takeover bid, of $64 billion,
International
8
from Bayer. It said it was open
to “continued and constructive
6 conversations”.
4 billion to buy Dollar Shave
A civil lawsuit lodged in New
2
York by three states alleged
0 that Volkswagen’s chief exec-
16
utive, Matthias Müller, had
been aware in 2006 that some
of its cars did not meet emis-
sions-testing standards. The
suit does not say that Mr
Müller authorised or even
knew about the software that
was installed in cars to evade
the tests, but it is the first time
he has been named directly in
relation to the scandal. He
The Economist July 23rd 2016
worked at Audi, VW’s luxury
brand, at the time, and has
denied any involvement in the
wrongdoing.
Paul Romer was appointed
chief economist at the World
Bank, replacing Kaushik Basu,
who has held the job since
2012. Mr Romer, who currently
teaches at New York Universi-
ty, is known for his work in
endogenous growth theory
and for developing the notion
of “charter cities”, encouraging
poor countries to create urban
centres that can experiment
with economic and political
reforms. Unusually for an
academic, he is also an
entrepreneur, having created
(and sold) Aplia, a homework
website.
Smooth operator
Unilever offered a reported $1
Club, a startup that has
undercut its rivals in the
market for razors by selling its
products exclusively online,
appealing to hirsute hipsters
with a humorous viral-market-
ing campaign. Private-equity
firms were also interested in
buying Dollar Shave Club, but
Unilever’s bid beat them by a
whisker.
Other economic data and news
can be found on pages 68-69

Leaders
Erdogan’s revenge
Turkey’s president is destroying the democracy that Turks risked their lives to defend
M UCH is unknown about
the attempted military
coup in Turkey on the night of
July 15th. Why was it botched so
badly? How far up the ranks did
the conspiracy reach? Were the
putschists old-style secularists,
as their initial communiqué sug-
gested; or were they followers of an exiled Islamist cleric, Feth-
ullah Gulen, as the government claims?
But two things are clear. First, the people of Turkey showed
great bravery in coming out onto the streets to confront the sol-
diers; hundreds died (see pages 14-15). Opposition parties, no
matter how much they may despise President Recep Tayyip Er-
dogan, united to denounce the assault on democracy. Better
the flawed, Islamist-tinged strongman than the return of the
generals for the fifth time since the 1960s.
The second, more alarming conclusion is that Mr Erdogan is
fast destroying the very democracy that the people defended
with their lives. He has declared a state of emergency that will
last at least three months. About 6,000 soldiers have been ar-
rested; thousands more policemen, prosecutors and judges
have been sacked or suspended. So have academics, teachers
and civil servants, though there is little sign they had anything
to do with the coup. Secularists, Kurds and other minorities
feel intimidated by Mr Erdogan’s loyalists on the streets.
The purge is so deep and so wide—affecting at least 60,000
people—that some compare it to America’s disastrous de-
Baathification of Iraq. It goes far beyond the need to preserve
the security of the state. Mr Erdogan conflates dissent with
treachery; he is staging his own coup against Turkish plural-
ism. Unrestrained, he will lead his country to more conflict
and chaos. And that, in turn, poses a serious danger to Turkey’s
neighbours, to Europe and to the West.
One more earthquake
The failed putsch may well become the third shock to Europe’s
post-1989 order. Russia’s annexation of Crimea and invasion of
eastern Ukraine in 2014 destroyed the idea that Europe’s bor-
ders were fixed and that the cold war was over. The Brexit refer-
endum last month shattered the notion of ineluctable integra-
tion in the European Union. Now the coup attempt in Turkey,
and the reaction to it, raise troubling questions about the re-
versibility of democracy within the Western world—which
Turkey, though on its fringe, once seemed destined to join.
The turmoil is unsettling NATO, the military alliance that
underpins Europe’s democracies. Without evidence, Mr Erdo-
gan’s ministers blame America for the coup; they have de-
manded that it extradite Mr Gulen, who lives in Pennsylvania,
or risk Turkey turning its back on the West. Electricity to the
military base at Incirlik, a hub of American-led air operations
against Islamic State (IS), was cut off for a time. Were Turkey an
applicant today, it would struggle to qualify for NATO; yet the
alliance has no means to expel a member that goes bad.
With the second-largest armed forces in NATO, Turkey has
been the forward bastion of the West, first against Soviet totali-
The Economist July 23rd 2016 7
tarianism and then against the chaos of the Middle East. In the
early years of government under Mr Erdogan’s Justice and De-
velopment (AK) party, the country became the model of a
prospering, stable Muslim democracy. It sought peace with the
Kurdish minority, and the economy grew healthily thanks to
sensible reforms. The EU opened membership negotiations
with Turkey in 2005.
But since major protests in 2013 against plans to build over
Gezi Park in Istanbul, and then a corruption scandal, Mr Erdo-
gan has become ever more autocratic. His regime has jailed
journalists, eviscerated the army and cowed the judiciary, all
in the name of rooting out the “parallel state” Mr Erdogan
claims the Gulenists have built. As a cheerleader for the over-
throw of Syria’s president, Bashar al-Assad, he turned a blind
eye to the passage of jihadists through Turkey. Mr Erdogan
wants a new constitution to allow himself to become an exec-
utive president, though he hardly lacks power. He has aban-
doned all caution to achieve it, not least by letting peace talks
with the Kurds break down. Turkey now faces a double insur-
gency: by the Kurds and the jihadists.
Autocrats R Us
Handled more wisely, the failure of the coup might have been
the dying kick of Turkey’s militarists. Mr Erdogan could have
become the magnanimous unifier of a divided nation, unmuz-
zling the press, restarting peace talks with Kurds and building
lasting, independent institutions. Instead he is falling into
paranoid intolerance: more like the Arab despots he claims to
despise than the democratic statesman he might have become.
Granted, the AK party has won every election since 2002.
But Mr Erdogan’s view of democracy is distinctly majoritarian:
though only about half of Turks vote for him, he thinks he can
do what he wants. It will be principally for Turks themselves to
check their president, by peacefully resisting his power grabs
and backing his opponents at the ballot box.
Turkey’s Western friends must urge Mr Erdogan to exercise
restraint and respect the law. But what if he will not listen? Tur-
key is a vital ally in the war against IS. It controls the south-east-
ern approaches to Europe, and therefore the flow of every-
thing from natural gas to Syrian refugees. Europe cannot
change geography, but it can make itself less vulnerable, start-
ing with a proper system to control the EU’s external frontiers
and handle asylum-seekers. And although Mr Erdogan holds
many cards, he is not immune from pressure. Just before the
coup he patched up relations with Israel and Russia.
Mr Erdogan’s greatest success—the economy—has become
his weak point. Many tourists are now too frightened to visit,
so the current-account deficit will only gape wider. To stay
afloat the country needs foreign investment and loans, so it
must reassure foreigners that it is stable. With Mr Erdogan act-
ing like a vengeful sultan, that will be hard.
The repercussions of the putsch will be felt for a long time.
The coup-makers killed many fellow Turks, discredited the
army, weakened its ability to protect the frontier and fight ter-
rorists, rattled NATO and removed the restraints on an auto-
cratic president. A terrible toll for a night of power-lust. 7
8 Leaders The Economist July 23rd 2016

Britain’s “industrial strategy”

Open for business?

The takeover of a British microchip-maker belies a cooling climate for foreign investors

Foreign direct investment

Stock, 2015, $trn
T HE “Silicon Fen” of tech
firms on the outskirts of
Cambridge is less glamorous
0 2 4 6
United States than the California cluster after
Hong Kong which it is nicknamed, but it has
Britain nonetheless produced some
China
Germany
stars. The brightest of them is
ARM Holdings, whose micro-
chips power cars, drones and most of the world’s smart-
phones. This week’s announcement that ARM would be
bought by SoftBank, a Japanese tech giant, was hailed by Brit-
ain’s new government as evidence that the country is still
“open for business” following last month’s decision to leave
the European Union.
ARM’s sudden appeal to its Japanese suitor may owe some-
thing to the post-referendum slide of the pound, but the deal is
welcome nonetheless. Foreign companies play a pivotal role
in Britain’s unusually open economy, carrying out half of all
research-and-development spending as well as raising pro-
ductivity and wages in the firms they snap up (see page 22). Yet,
despite the good news about ARM, two clouds hang over Brit-
ain’s ability to attract foreign direct investment. The new gov-
ernment appears to have a more interventionist approach to
the economy, one that may put the brakes on similar deals in
the future. And Brexit may eventually mean that there are few-
er British firms worth bidding for in the first place.
After Brexit, techxit?
In her pitch to be prime minister, Theresa May sounded decid-
edly sceptical of foreign takeovers, citing past bids by food and
pharmaceuticals companies that she might have blocked. In
office, she has set up a ministry of “industrial strategy”, a
banned phrase during the Thatcher years (see page 21), and
floated the idea of expanding the list of sectors in which for-
eign takeover bids can be subjected to a “public-interest test”.
(At present this is possible only for defence, financial services
and media companies.) Mrs May seems keen to decide on a
case-by-case basis whether a deal is in Britain’s national inter-
est. That degree of meddling is not good. Foreign suitors will be
less inclined to pursue British firms if they have to win over the
prime minister, too.
The bigger worry is that the government’s main aim—with-
drawal from the EU—will dry up the supply of firms in out-
ward-facing industries such as technology. Britain’s hitherto
borderless approach to capital and labour has helped to make
it a European tech centre. By one count London has birthed
three times as many startups as Paris in the past decade.
Brexit threatens this position. The loss of “passporting”
rights, enabling firms based in Britain to provide financial ser-
vices across the EU, would hamper fintech firms. Stricter mi-
gration rules would deprive startups of valuable foreign geeks
(university dropouts such as a young Steve Jobs or Bill Gates
wouldn’t make it through the points-based migration criteria
that the government is proposing). And British universities,
the route through which many techies first end up in Britain,
are preparing to take fewer students from continental Europe.
The best “industrial strategy” would be to leave well alone.
Though the country is committed to Brexit in some form, it
should go for a variety that preserves the broadest-possible ac-
cess to European markets and puts the lightest-possible con-
trols on migration. In all but the most sensitive industries it
should let foreign companies make whatever offers they like
for British firms. At the moment the government is edging in
the opposite direction: tightening the tap for labour, backing
out of Europe’s single market and developing a taste for tinker-
ing with takeover deals. Britons may one day look back and
think that worrying about foreign firms wanting to buy their
successful companies was a nice problem to have. 7

The politics of Thailand

The generals who hide behind the throne

Thailand is ill-prepared for the death of its king

T
O THE tourists who still
flock to its beaches and gold-
en temples, Thailand seems
calm. But this is an illusion. Thai
politics are as ugly as the coun-
try is beautiful—and could soon
get uglier. The country’s beloved
king, Bhumibol Adulyadej,
whose 70th year on the throne was celebrated on June 9th, is
88 years old and gravely ill. The country is scared of what
might happen when he dies (see page 37).
Were Thailand a normal democracy with a constitutional
monarchy, the death of a king would cause national sorrow
but not political instability. Alas, it is not. Two years ago the
army seized power in a bloodless coup. An “interim” constitu-
tion grants the prime minister and junta leader, Prayuth Chan-
ocha, almost unlimited power. Because the regime is illegiti-
mate, it hides behind Thailand’s most revered institution.
Its propagandists do all they can to fizz up adulation of the
monarchy; for example, by building colossal statues of seven
Thai kings. And the regime has applied Thailand’s strict lèse-
majesté laws with ferocity, arresting people for the slightest
perceived insult to the dignity of the king, his family or even
his pet dog. Those deemed to have defamed his majesty face
up to 30 years in prison. This creates an atmosphere in which
critics of the government, too, can be bludgeoned into silence. 1
 The Economist July 23rd 2016
2 Whereas Mr Prayuth rambles self-righteously on his week-
ly television show, opposition parties are gagged and parlia-
ment stuffed with the junta’s allies. The regime has hauled crit-
ics to army bases for “attitude adjustment”. It has charged
Thailand’s former prime minister, Yingluck Shinawatra, with
neglect-in-office, and may hand her ten years in jail. The
army’s latest ploy is a new constitution, which would allow
fresh elections but keep the next government subservient to a
nominated senate and a handful of junta-stacked committees.
It hopes to win public approval for this plan in a referendum
on August 7th. Just to make sure, it has trained bureaucrats to
“explain” the charter to voters, but it forbids civilians from
campaigning against it, on pain of a ten-year prison sentence.
The generals insist that their actions have been for the good
of Thailand. Their coup in 2014 ended months of pro- and anti-
government street protests, which had turned violent. Locking
out Ms Yingluck, they hint, keeps a dodgy family out of power.
Ms Yingluck backed an amnesty bill that could have allowed
her brother, Thaksin, another former prime minister, to return
from exile in Dubai. The army had deposed him in 2006, argu-
ing that his administration was corrupt.
Indeed it was, but probably no more so than most Thai gov-
ernments. The army’s excuses for seizing power are wearing
thin. Thailand has seen a dozen successful coups since the
1930s and a new constitution on average every four years. The
army typically installs conservative governments that favour
the urban elite. That has entrenched inequality and infuriated
the rural poor. Mr Thaksin won two elections by wooing poor
voters with free public health care and subsidies for farmers.
He may have left the scene, but his supporters are still there.
The army has long defended its coups by claiming to have
the king’s support. After taking power, coup-leaders have al-
Methane leaks
Tunnel vision
Even natural gas needs to clean up its act
US methane emissions
By source, 2014
C ARBON DIOXIDE is the
main greenhouse gas emit-
ted by human activities. But it is
Natural gas Livestock
33 digestion not the only gas capable of caus-
22
ing great harm to people and the
%
Landfill planet. That point was driven
Other 20 home by the emissions scandal
25
that engulfed Volkswagen last
year. Since the 1990s policymakers in Europe had backed die-
sel as a way to reduce carbon emissions, turning a blind eye to
other ways in which the fuel might damage human health. The
VW affair drew back the veil on this trade-off. The company’s
diesel engines did indeed deliver lower carbon emissions and
better fuel economy, but at the cost of belching out noxious
pollutants capable of shortening many lives.
A similar case of tunnel vision also exists in the energy in-
dustry. To its evangelists, natural gas helps satisfy demand for
fossil fuels but causes less harm to the planet than coal and oil.
Like diesel carmakers, natural-gas producers make reduction
of carbon-dioxide emissions a big selling-point, but downplay
the effects of other gases they emit. For the car industry, the
problem is nitrogen oxides. For natural gas, it is methane, the
Leaders 9
ways trekked to the palace to receive royal assent. But if King
Bhumibol is succeeded by the crown prince, who is unpopu-
lar, the claim ofroyal approval will count for less. Elites fret that
the succession will disrupt long lines of patronage which for
generations have shovelled wealth and influence their way.
They fear that anti-government activists will seize the chance
to push for big changes in how the country is run.
Little time, much to do
With luck, the succession will pass peacefully. But securing
long-term stability will require reforms that the army may not
like. Royals should speak out against the lèse-majesté law
(which King Bhumibol has already once condemned, in 2005).
The generals must allow Thais the freedom to debate the new
constitution. A better one would be more like the 1997 charter,
so far Thailand’s best. If and when the soldiers return to bar-
racks, they will need pruning: their idle ranks include more
generals and admirals than America’s armed forces, which
serve a superpower nearly five times as populous.
Politicians must rethink, too. Thailand’s middle classes may
find Thaksinite populism abhorrent, but they have failed to
provide poorer Thais with an alternative. The Democrat Party,
the establishment’s main political outfit, has been squealing
about the generals’ stifling rule. But for years it has put off the
groundwork needed to win an election, betting instead that
friends in the army or judiciary will help it. Any lasting sol-
ution will require decentralising power to the provinces.
Untangling this mess will take years, but it is not impossi-
ble. If the junta blocks reform, allies such as America should
impose financial sanctions and travel bans on its leaders and
their cronies. Thailand needs a civilian government that is ac-
countable to voters and the law, not to the men with guns. 7
fuel’s main component.
Burning natural gas converts methane into carbon dioxide,
but in lower quantities than in alternative fuels. It emits almost
half as much carbon dioxide as coal, and almost a third less
than petrol. The problem is that lots of methane escapes into
the atmosphere without being burnt. And methane has its
own effect on the climate. Although it stays in the atmosphere
for far less time than carbon dioxide, which hangs around for
centuries, it is about 25 times more potent as a cause of global
warming (see page 47).
Methane emissions come from several sources—not least
the digestive systems of livestock such as cows. But the latest
figures show that the biggest chunk of annual methane emis-
sions in America, around a third, can be traced to the natural-
gas industry. An estimated 2.5% of the natural gas flowing
through America’s ageing energy infrastructure leaks out of
wells, pipelines and storage tanks. Often it seeps discreetly
into the air. Sometimes it leaves a more noticeable footprint—a
2015 blowout at the Aliso Canyon storage facility in Los Ange-
les produced the worst leak in American history.
Recognition of the problem is growing. This year America’s
Environmental Protection Agency (EPA) admitted that it had 1
10 Leaders
2 underestimated the extent of oil- and gas-related leakages, re-
vising them up by almost a third and ramping up regulation.
Recent use of infra-red cameras and airborne monitoring de-
vices has shown where the worst problems lie in the natural-
gas supply chain. Last month Mexico joined America and Can-
ada in their commitment to cut methane emissions from oil
and gas operations by 40-45% by 2025, compared with 2012.
The industry has been slower to acknowledge the problem.
American oil companies are reluctant to provide the public
with emission-reduction targets. They chafe against new EPA
regulations, such as those requiring them to monitor leaks at
compressor stations twice as often as in the past. Controlling
methane leaks should not be that expensive; the less gas that
escapes, the more the industry has to sell, after all. But the head
of the Railroad Commission of Texas, which regulates oil in
the state, calls them part of Barack Obama’s “war against fossil
fuels” and too costly for small producers to comply with.
Big economic ideas
Breakthroughs and brickbats
What economists can learn from the discipline’s seminal papers
I T IS easy enough to criticise
economists: too superior, too
blinkered, too often wrong. Paul
Samuelson, one of the disci-
pline’s great figures, once lam-
pooned stockmarkets for pre-
dicting nine out of the last five
recessions. Economists, in con-
trast, barely ever see downturns coming. They failed to predict
the 2007-08 financial crisis.
Yet this is not the best test of success. Much as doctors un-
derstand diseases but cannot predict when you will fall ill,
economists’ fundamental mission is not to forecast recessions
but to explain how the world works. Over the next six weeks
we will be running a series of briefs on important economic
theories that did just that—from the Nash equilibrium, a cor-
nerstone of game theory, to the Mundell-Fleming trilemma,
which lays bare the trade-offs countries face in their manage-
ment of capital flows, exchange rates and monetary policy;
from the financial-instability hypothesis of Hyman Minsky to
the insights of Samuelson and Wolfgang Stolper on trade and
wages; from John Maynard Keynes’s thinking on the fiscal
multiplier to George Akerlof’s work on information asymme-
try, the topic of this week’s article (see page 52). These break-
throughs are adverts not just for the value of economics, but
also for three other things: theory, maths and outsiders.
More than ever, economics today is an empirical discipline.
Thanks to the power of big data, economists can track consum-
er behaviour in real time or know almost precisely how much
a good teacher is worth to the lifetime income of children. But
theory remains vital. Many policy failures might have been
avoided if theoretical insights had been properly applied. The
trilemma was outlined in the 1960s, and the fiscal multiplier
dates back to the 1930s; both illuminate the current struggles of
the euro zone and the sometimes self-defeating pursuit of aus-
terity. The Nash equilibrium describes an outcome in which
everyone is doing as well as they can given the strategies of
The Economist July 23rd 2016
If even American oilmen are so dismissive of the problem,
it is hard to be hopeful for other places, like Russia, which have
even creakier natural-gas networks. Few countries monitor
methane emissions with the precision that they do carbon di-
oxide. Many developing countries have not reported energy-
related methane emissions for at least a decade, so it is impos-
sible to know whether conditions are getting better or worse.
Without good data, it is hard to set targets for reduction.
Methane bane
Natural-gas advocates have decent reason to hope the fuel will
be a bridge to a post-carbon future. Thanks to the shale-gas rev-
olution, natural gas last year rivalled coal as the main source of
electricity in America. That brings immediate climate benefits.
But the problem of methane leaks should not be downplayed.
They do not just sully the climate. They sully the good name of
natural gas. 7
others; it explains how countries compete with each other to
cut tax rates in order to lure global capital.
Nor is the body of economic theory complete. Big gaps re-
main in the understanding of financial markets, for example,
and on how best to regulate tech platforms like Facebook. The
shortfalls are particularly glaring when it comes to modern
macroeconomics. From “secular stagnation” to climate
change, the discipline needs big thinkers as well as big data.
It also needs mathematics. Paul Romer, who is heading to
the World Bank as its chief economist, has railed against
“mathiness”, the habit of using algebra to disguise ideological
positions. Economic papers are far too formulaic; models
should be a means, not an end. But the symbols do matter. The
job of economists is to impose mathematical rigour on intu-
itions about markets, economies and people. Maths was need-
ed to formalise most of the ideas in our briefs.
Thinking far and wide
In economics, as in other fields, a fresh eye can also make a big
difference. John Nash was only 21 when he set out the concept
that became known as the Nash equilibrium; Mr Akerlof had
not long completed his PhD when he wrote “The Market for
Lemons”, the paper that made his name. New ideas often meet
resistance. Mr Akerlof’s paper was rejected by several journals,
one on the ground that if it was correct, “economics would be
different”. Recognition came slowly for many of our theories:
Minsky stayed in relative obscurity until his death, gaining su-
perstar status only once the financial crisis hit.
Economists still tend to look down on outsiders. Behaviour-
al economics has broken down one silo by incorporating in-
sights from psychology. More need to disappear: like anthro-
pologists, economists should think more about how
individuals’ decision-making relates to social mores; like phys-
icists, they should study instability instead of assuming that
economies naturally self-correct. This could make the maths
trickier still. But not as hard as getting the profession to eschew
its natural insularity. 7
12
Letters
Politics in Kurdistan
It is true that the president of
the Kurdistan region, Masoud
Barzani, is in office beyond the
mandate originally agreed to
by all parties, but this is pri-
marily because of a constitu-
tional disagreement (“Dream
on hold”, July 9th). Mr Barzani
heads the Kurdistan Democrat-
ic Party and it wants popular
elections to determine who
should be president.
There is some background
to this. In June 2005 Mr Barzani
was elected president by the
Kurdish parliament for the first
time. A faction within the
Patriotic Union of Kurdistan,
which later formed a new
party, Goran, demanded that
the president should be di-
rectly elected by the people,
which is what happened in
2009. Mr Barzani received 70%
of the vote in a direct election.
Four years later, his mandate
was extended for another two
years by a majority vote in
Kurdistan’s parliament.
Subsequently, political
deadlock has developed, but
your readers were not told
why. The Kurdistan region had
drafted and agreed on, but not
issued or ratified, its constitu-
tion. Therefore its draft consti-
tution is not in force. The draft
envisaged a presidential,
French-style system, under
which the position of presi-
dent would constitutionally be
limited to two terms.
But in 2013, the very same
faction that had previously
demanded popular elections
to elect the president came up
with a new demand: the presi-
dent should be elected by the
parliament. Goran blocked the
ratification of the constitution
and has prevented the draft,
previously the subject of an
all-party agreement, from
being sent to the public for
ratification.
As such, Mr Barzani has
remained president until the
constitutional deadlock can be
resolved. Given that the Kur-
distan region is at war with
Islamic State, providing the
boots on the ground for the
coalition effort, it is the view of
many if not most in Kurdistan
that the president, as com-
mander-in-chief of the Pesh-
merga, is providing much
needed stability.
SAFEEN DIZAYEE
Spokesperson of the Kurdistan
Regional Government
Erbil
Points make prizes
The Economist argues that an
immigration points system is
wrong for Britain (“What’s the
point?”, July 9th). Our current
immigration system turns
away deserving applicants
while waving in anyone from
the EU. A points system would
treat all applicants fairly. In
2015, a big chunk of our net
migration came from the EU,
even though the EU has only
7% of the world’s population.
This imbalance arises because
we reject vast numbers of
deserving immigrants. If
you’re an Australian, merely
having a British spouse won’t
get you in, and if you’re an
Indian, a PhD and a job offer
won’t help you. Even those
who qualify for settlement are
rejected on technicalities, since
the application system is
almost impossible to pass
through without expensive
legal help.
The question is not wheth-
er immigration is good or bad;
it is whether we can improve
our immigration policy. We
cannot do so if we subscribe to
the EU’s principle of freedom
of movement.
NICOLAS GROFFMAN
Head of International
Harrison Clark Rickerbys
Cheltenham, Gloucestershire
Bagehot stated that in Britain,
political upheavals “are as
uncommon…as tornadoes”
(June 25th). He may be sur-
prised to learn that Britain
experiences more tornadoes
per square mile than any-
where else in the world.
DAVID HASSON
Edinburgh
Wage restraints
Regarding executive pay
(“Neither rigged nor fair”, June
25th) what harm would come
from limiting the pay of chief
executives to, say, 40 times that
of the average worker? Do we
honestly think there would be
a tragic exodus of managerial
talent? Such limits would help
restore workers’ faith in the
economic system, which, as
Joseph Stiglitz argued in “The
Price of Inequality”, would
increase productivity. A ratio
linked to workers’ pay would
also help bosses understand,
and even increase, the pay of
the rank and file.
PETER COLBY
San Francisco
Executive salary is a classic
agency problem for which
there is a simple regulatory fix.
Mandatory shareholding for
chief executives would force
their personal interests to align
with the companies they head.
Require them to buy shares
amounting to several times
their total remuneration for the
year and hold them for ten
years. Those CEOs who really
add value will have nothing to
worry about. The others will
lose their shirts.
SABESH SHIVASABESAN
Pretoria, South Africa
We are barraged by the left
about the unconscionable
salaries of chief executives.
The average pay of top ath-
letes, pop stars and actors is
higher, yet none of them con-
tributes to the jobs, salaries,
investment and returns to
average investors the same
way that a CEO does.
SCOTT PROCTOR
Livonia, New York
Passive attack
Johnson (July 2nd) is right that
the passive voice is widely
used in science. It gives the
false impression of objectivity.
“The addition of X caused the
mixture to ignite” sounds so
much better than “When I
added X to the mixture it blew
up.” As an undergraduate I
was marked down for writing
in the first person. But a Nobel
laureate speaking to the chem-
istry society told us, “It’s so
important to write up experi-
mental data in the first person,
because it is you that has
carried it out. Using the passive
voice implies a level of
objectivity that is simply un-
true; someone else doing the
same experiment may well
The Economist July 23rd 2016
produce a quite different result
and it is important for the
reader to be aware of this.”
DAVID SCOTT
Loughborough, Leicestershire
Active or passive? It depends
on where you wish to place
emphasis, on the actor (sub-
ject) or the one acted upon
(object). An active verb can
convey a powerful message.
The most perfect sentence ever
written is “Jesus wept.” One
subject and one active verb
conveying intense emotion.
Now the case for the passive
side. Isaiah’s mighty prophecy:
“For unto us a child is born,
unto us a son is given, and the
government shall be upon his
shoulder.” And what editor
would dare touch this: “We
hold these truths to be self-
evident, that all men are
created equal, that they are
endowed by their creator with
certain unalienable rights.”
The defence rests. Or the
case has been made by the
defence.
JIM RHODES
Norfolk, Virginia
Magic Middle Kingdom
“Lord of the Jungle” (June 18th)
dwelt on the negatives for
Shanghai Disneyland. Instead,
we should take the long view
and dare to dream that now
that the Cheesecake Factory
and Disneyland have landed
in China, can democracy be far
behind?
W.L. CHANG
Hong Kong 7
Letters are welcome and should be
addressed to the Editor at
The Economist, 25 St James’s Street,
London sw1A 1hg
E-mail: letters@economist.com
More letters are available at:
Economist.com/letters
Executive Focus 13

The Economist July 23rd 2016

14
Briefing Turmoil in Turkey
After the coup, the counter-coup
ANKARA, GAZIANTEP AND ISTANBUL
The failed putsch was the bloodiest Turkey has seen; the backlash is as worrying
T HE brutality of the soldiers’ power-
grab still horrifies many Turks. Each
day brings fresh footage and stories of
what took place during the long, bloody
night between July 15th and 16th: one mo-
bile-phone video shows a group of by-
standers near the presidential palace in
Ankara overwhelmed by the blast of an air
strike; another captures a man diving to
the ground between the tracks of a tank to
avoid being crushed, rising to his feet, then
falling again to save himself from another
one; a third records soldiers shooting
down unarmed protesters.
Stories are told of how the rebels kid-
napped their commanders. The chief of
general staff, General Hulusi Akar, was told
by his aides to sign a declaration of martial
law. When he refused, they tightened a belt
around his neck, but he would not yield.
He survived the ordeal.
This was hardly the first time that Turk-
ish soldiers had tried to seize power.
Forged in military revolt, modern Turkey
has seen the generals topple four govern-
ments since the 1960s, sometimes ruling di-
rectly, sometimes indirectly (see chart on
next page). Even when civilians have been
in charge, the army has lurked in the back-
ground as the self-appointed guardian of
secularism against Islamists and other rad-
icals. The latest putsch was the bloodiest
yet: more than 230 people died, among
them 145 civilians who had taken to the
streets to confront the rebellious soldiers.
The government’s backlash has been
harsh, too. “This uprising is a gift from God
to us because this will be a reason to
cleanse our army,” declared Recep Tayyip
Erdogan, Turkey’s Islamist-tinted presi-
dent, a few hours after he triumphantly re-
turned to Istanbul to reclaim the country.
He proved as good as his word. On July
20th the government declared a state of
emergency for at least three months.
Roughly 6,000 servicemen have been ar-
rested, among them about 100 generals
and admirals. Nearly 8,000 policemen
have been sacked; almost 3,000 judges
and prosecutors have been suspended or
detained. University academics, teachers
and civil servants—including some 250
from the prime minister’s office—have
been pushed out.
Altogether more than 60,000 people
have been purged for suspected links to
Fethullah Gulen, a Muslim cleric exiled in
America. His movement emphasises edu-
cation; but his devotees are accused of in-
filtrating the government and fomenting
the coup. Mr Gulen was for years an ally of
Mr Erdogan, never more so than when Gu-
lenist prosecutors were busy purging the
military “deep state” on charges of foment-
The Economist July 23rd 2016
Also in this section
15 The strongman runs out of friends
ing a putsch. But when they started digging
into corruption in Mr Erdogan’s entourage,
the Gulenists were treated as a “parallel
state” to be extirpated. The defeat of the lat-
est coup seems to have opened the way for
Mr Erdogan’s counter-coup.
Mehmet Simsek, the deputy prime
minister, declares reassuringly: “Some of
these measures might seem like a whole-
sale purge, but they are aimed at minimis-
ing the aftershocks after the earthquake.”
Turkey’s Western allies are pleading for re-
straint (see next story).
The identity of the plotters, and their
motives, remain murky. They had impres-
sive resources at their disposal: F-16 fighter-
jets, aerial refuelling tankers, helicopter
gunships and transporters, and tanks.
Units took over parts of Istanbul and Anka-
ra, but commandos missed capturing Mr
Erdogan at an Aegean resort by less than an
hour. The rebels bombed the police and in-
telligence-service headquarters in Ankara,
but did not knock them out.
Face time with Erdogan
Crucially, an air strike on the Turksat satel-
lite broadcast station in Ankara failed to
put it out of service. This meant that, even
though the coup-makers took over the
state broadcaster, private television net-
works continued to operate freely. The 1
 The Economist July 23rd 2016
2 turning-point came when Mr Erdogan,
hitherto a critic of internet activism, called
a television station with his phone’s video
app to urge followers to take to the streets.
As crowds surrounded pockets of rebel
soldiers, the coup began to collapse. One
Turkish ex-officer said it was madness to
stage a coup at ten in the evening when the
streets were still crowded. “Coups have to
be carried out when everyone is asleep, so
they wake up and it’s all over.”
So badly was the coup botched, and so
well has it played into Mr Erdogan’s hands,
that many of his opponents now think it
was choreographed by the government all
along. A more likely explanation is that it
was a desperate, almost suicidal attempt to
preclude an expected wave of arrests and
demotions in the army this summer. Offi-
cials in Ankara acknowledge they had a list
of officers suspected of plotting the coup
but failed to nip it in the bud. “The network
had been mapped as part of an investiga-
tion that, to be frank, did not consider an
actual coup very likely,” says one.
Turks’ sacrifice in defence of their insti-
tutions—not just supporters of the ruling
Justice and Development (AK) party but
also of the opposition—offered Mr Erdogan
a perfect opportunity to heal a country be-
set by growing terrorist violence and politi-
cal divisions over his autocratic manner.
The entire parliamentary opposition and
what was left of the free media, which Mr
Erdogan despises, denounced the plotters.
“There was some level of dialogue, a level
of solidarity we have not seen in years,
something that could have been built on,”
says Nigar Goksel of the International Cri-
sis Group, a think-tank. Instead Mr Erdogan
has squandered the opportunity, prefer-
ring to expunge his enemies, real or imag-
ined, and extend his power.
Every night, crowds of distinctly Islam-
ic flavour gather in town squares to hold
vigils and deter any other would-be
putschists. In the southern city of Gazian-
tep, where during the coup the governor
blockaded the local army base with lorries
and other vehicles, loudspeakers broad-
cast music reflecting the lurches of Turkey’s
modern history: the drumbeat of Otto-
man-era Janissaries, the national anthem
of the ardently secular Kemalists and Is-
lamic mantras set to techno beats. “Yallah.
Bismillah. Allahu akbar,” intones the
crowd. Many give the four-finger salute
first used by Islamists in Egypt after the
army overthrew their elected president.
Crowds hold up effigies of Mr Gulen.
One banner in Taksim Square in Istanbul
called him “Satan’s dog”, proclaiming: “We
will hang you and your dogs with your
own leashes.” Mr Erdogan says he may in-
deed reinstate the death penalty. He has
resurrected a project to build a mosque in
Istanbul’s Taksim Square and convert a
nearby park into a replica of an Ottoman
barracks—a plan that sparked mass prot-
Turkey’s tumult
GDP per person
% change on previous year
MILITARY RULE CIVILIAN GOV’T
US-led coalition against Iraq launches air strikes from Turkish bases
1950 55 60 65 70
Coup Turkey applies for full membership of the EEC
“Soft” coup
Failed coup
Sources: The Conference Board; United Nations; press reports; The Economist
ests, violently suppressed, in 2013.
The longer Mr Erdogan whips up his al-
liance of Islamists and nationalists the
greater the danger of ethnic and sectarian
violence—including against secularists, lib-
erals, Alevis and Kurds. In the south-east-
ern city of Diyarbakir, a Kurdish strong-
hold, activists are bracing for a round-up.
“I’m waiting for the knock on the door,”
says one Kurdish journalist after AK activ-
ists blacklisted her on social media.
Another concern is that Turkey’s securi-
ty forces are being dangerously hollowed
out by the purges at a time when they are
confronted by the twin menaces of Kurd-
ish and jihadist attacks. “We would not
have such losses to the officer corps if we
had fought a conventional war for eight
years,” says Haldun Solmazturk, a former
brigadier-general.
Turkey and the world
Running out of friends
BRUSSELS, CAIRO AND ISTANBUL
Recep Tayyip Erdogan drifts away from America, NATO and the EU
O VER the decades Turkey’s relations
with America, its principal military
ally, have withstood coups, skirmishes
with Greece (a fellow NATO ally) and the
invasion of Cyprus in 1974. Of late, how-
ever, the friendship has grown testier, par-
ticularly over the civil war in Syria and the
American-led campaign against Islamic
State (IS). With the failed coup, ties are
close to openly hostile.
One Turkish minister, Suleyman Soylu,
claimed (with no evidence) that America
was behind the putsch. Pro-government
media teemed with conspiracy theories. In
Yeni Safak, a daily newspaper, Aydin Unal,
Briefing Turmoil in Turkey 15
Erdogan elected president
Recep Tayyip Erdogan becomes prime minister
Turkey denies use of territory for US invasion of Iraq
12
AK party wins
general elections
8
4
+
0
–
4
8
75 80 85 90 95 2000 05 10 16
EU membership
Turkey enters EU customs union negotiations launched
EU agrees on a deal with Turkey to restrict flow of refugees into Europe
As with previous challenges to his rule,
the coup attempt has left Mr Erdogan stron-
ger, or at least more autocratic. For years, he
suspected an unholy alliance of foreign
and domestic foes of conspiring to topple
him. Now that he has survived a real coup,
Mr Erdogan may give free rein to his au-
thoritarian instincts and seek new execu-
tive powers.
How far will he go? Some are not stick-
ing around to find out. The day after the
coup attempt, a newly wed couple swept
incongruously into a restaurant near Tak-
sim Square, alarmed and elated in equal
measure. They had decided to go ahead
with their wedding despite the previous
night’s gunfire, explosions and roar of
fighter jets. But they were fed up: in a few
days they would be leaving for Germany.
They were not expecting to come back. 7
an MP from President Recep Tayyip Erdo-
gan’s Justice and Development (AK) party,
even suggested that American army offi-
cers disguised as Turkish ones had taken
part in the fighting. For a time the govern-
ment cut off electricity to Incirlik air base,
from which America conducts air raids
against IS. Some of the planes that took
part in the failed coup were said to have
been stationed there; the Turkish com-
mander of the base was arrested.
A more contentious issue is the pres-
ence in America of Fethullah Gulen, the
head of an Islamist movement that was
once allied with Mr Erdogan but has be- 1
16 Briefing Turmoil in Turkey
2 come his nemesis. Turkey wants Mr Gulen
extradited (he denies involvement in the
coup, and denounces it). If America insists
on evidence to satisfy its courts—beyond a
four-volume dossier provided by Turkey—
“even questioning our friendship may be
brought to the agenda here,” warned Binali
Yildirim, the prime minister.
The reaction from America has been
just as blunt: it is Turkey that is endangering
ties with America and the West. “Public in-
sinuations or claims about any role by the
United States in the failed coup attempt are
utterly false and harmful to our bilateral re-
lations,” said John Kerry, America’s secre-
tary of state. In other remarks, he warned
Mr Erdogan against using the coup as an ex-
cuse to clamp down on his opponents. A
wide-ranging purge, he said, “would be a
great challenge to his relationship to Eu-
rope, to NATO and to all of us.”
Were Turkey applying for NATO mem-
bership today, it would have little chance
of success. Under the terms of NATO’s
“membership action plan”, applicants are
required “to have stable democratic sys-
tems, pursue the peaceful settlement of
territorial and ethnic disputes, have good
relations with their neighbours, show
commitment to the rule of law and human
rights, establish democratic and civilian
control of their armed forces, and have a
market economy.” As things stand, Turkey
only ticks the last box. The Washington
treaty, which established NATO in 1949, al-
lows for a member to leave after giving 12
months’ notice, but there is no provision
for expelling one.
America’s defence secretary, Ash Car-
ter, makes no secret of his distaste for Mr Er-
dogan. He was infuriated by Turkey’s refus-
al to allow American aircraft to strike IS
from Incirlik until this time last year. If the
base again becomes a bargaining chip,
calls from Congress to abandon it for an-
other one elsewhere will grow louder.
In recent months tensions have run
high over America’s de facto alliance with
the Syrian Kurdish militia known as the
People’s Protection Units (YPG). It is regard-
ed by America as the most effective ground
force against IS in Syria; but it is seen by Tur-
key as closely related, if not identical, to the
Kurdistan Workers’ Party (PKK), which has
resumed its decades-long insurgency for
autonomy inside Turkey.
Several American pundits ask whether
Turkey is still a reliable ally. Among their
reasons for doubting it are Mr Erdogan’s
disregard for democratic liberties, his self-
harming Syria policy and his penchant for
stirring up the AK party’s religious base
with crude anti-American rhetoric.
Turkey’s relations with the EU, by far its
largest trading partner, have been no less
fraught. In March, in exchange for Turkish
efforts to reduce the flow of refugees and
other migrants to Greece, the EU made sev-
eral promises. It agreed to revive Turkey’s
Lost in interpretation
stalled accession bid, accelerate the aboli-
tion of short-term visas for Turkish tourists
and businessmen, and fund Turkish efforts
to support refugees. The deal was heavily
criticised, in part because it relied on the
EU designating Turkey a “safe country” for
refugees. Now its first two elements, at
least, may be in jeopardy.
Mr Erdogan would be wise not to create
more enemies than he already has. For this
reason, some EU officials believe he will
honour the migrant deal. Moreover, Mr Er-
dogan no longer enjoys the leverage he did
last autumn, when thousands of refugees
were crossing from Turkey to Greece every
day. The western Balkan route that most
migrants followed on their way to Europe’s
heart is now closed, and word has spread
quickly. Even with the full co-operation of
the Turkish gendarmerie and coastguard,
migrants would have little reason to try
their luck in Greece, for they could not easi-
Big ally, big problem
Military personnel
Selected NATO countries, 2015, m
0 0.1 0.2 0.3 0.4 0.5
1.3 41
United States
Turkey
France
Italy
Germany
Britain
Greece
Poland
Canada
Netherlands
Belgium
Per 10,000
Denmark population
Source: NATO
The Economist July 23rd 2016
ly go farther.
Under the terms of the deal most arriv-
als in Greece were supposed to be returned
to Turkey to have their asylum claims pro-
cessed. But asylum adjudicators in Greece
often refuse to send migrants back. The un-
folding chaos in Turkey presents them with
a fresh argument not to deport anyone.
The groaning camps on Greek islands hold
around 9,000 asylum-seekers, and are
swelling daily.
Moreover, Turkey may be less willing to
accept returns if it does not win visa-free
access to the EU’s Schengen passport-free
zone. European officials had hoped for a
breakthrough in the autumn, but Euro-
pean governments (and the European Par-
liament) that must sign off on the visa deal
will be less minded to overlook Mr Erdo-
gan’s excesses.
The accession process, which has never
been easy, is also on the rocks. At a summit
this week EU foreign ministers declared
firmly that Mr Erdogan’s threatened re-
introduction of the death penalty would
kill Turkey’s candidacy. Germany, the most
important advocate of the migrant pact,
was particularly tough. A spokesman for
Angela Merkel, the chancellor, condemned
the “revolting scenes of caprice and re-
venge” against Turkish soldiers; Mr Erdo-
gan’s subsequent purges of judges raised
“profound and worrisome questions”.
The challenge for Europe is to find a
way to argue that Mr Erdogan remains a
credible partner in managing migration
without tempering its criticism of his
growing authoritarianism. Some worry
that the next wave of asylum-seekers to Eu-
rope will be Turkish citizens.
The upheaval in Turkey matters to the
Arab world, where Mr Erdogan has played
an influential role. Mainstream Syrian re-
bel groups, squeezed around Aleppo, fear
abandonment by Turkey. Newspapers in
Egypt—a country run by Abdel-Fattah al-
Sisi, a general who seized power in a coup
and has been bitterly at odds with Mr Erdo-
gan over his support for the Muslim Broth-
erhood—ran hopeful headlines announc-
ing that the Turkish president had been
overthrown. With no hint of irony, they
now denounce his crackdown.
Can allies persuade Mr Erdogan to
54
change course? Intriguingly, just before the
32 coup attempt he acted to end two dip-
30 lomatic rows. In June he struck a deal with
Israel to normalise relations, which had
22
broken down in 2010 after Israeli forces
25 killed nine Turkish citizens trying to breach
97 a naval blockade of Gaza. Mr Erdogan also
27 apologised to Russia for shooting down a
Russian fighter jet in November when it
18
briefly entered Turkish airspace (hence the
24 nervousness of Syrian rebels). But neither
27 Israel nor Russia can substitute for Turkey’s
28 military ties with America, or its economic
ones with Europe. Whether Mr Erdogan re-
alises that is another matter. 7

Europe
Another attack in France
Madness and terror
NICE
When a truck is a weapon of mass murder
T HE spots where the bodies fell are now
marked by makeshift memorials along
the palm-fringed beachfront. Some are
ringed by pebbles. Most feature candles,
stems of white flowers and teddy bears.
Ten children were among the 84 killed on
July 14th, when a 31-year-old Tunisian citi-
zen ploughed a 19-tonne truck into Bastille
Day crowds. A football lies among the me-
mentos left where a 13-year-old French boy,
Mehdi, was killed. His aunt died a step
away. “I just hope this won’t be turned
against us,” says a grieving family member,
whose origins are in Morocco. “We grew
up in France; we come from here too.”
This was the third mass terrorist attack
in 18 months, and the bloodiest on French
soil since the Paris attacks last November.
The proudest emblems of French life have
been targeted: freedom of expression
(Charlie Hebdo) and religion (a Jewish su-
permarket), as well as the security forces,
in January 2015; sport, music and pave-
ment cafés, in November 2015. Now, terror
has struck seaside festivities for the coun-
try’s national day at one of its most famous
resorts, favoured by Hemingway and Fitz-
gerald, and painted by Matisse and Dufy.
Mohamed Lahouaiej Bouhlel, a deliv-
ery-driver born in Tunisia but living in
Nice, drove his rented lorry for 1.7 kilo-
metres (1.1 miles) over a promenade closed
off for the city’s annual fireworks display,
where some 30,000 spectators had gath-
ered. He rammed the vehicle into the
crowds, driving on and off the walkway
used daily by joggers and cyclists, crushing
bodies as he went. The carnage stopped
only after he was shot dead by the police. A
third of the dead were Muslims.
President François Hollande immedi-
ately called the attack “terrorist” in nature.
Mr Lahouaiej Bouhlel’s rampage, though,
is a reminder of how the definition of Is-
lamist terror has evolved. He showed a
“certain interest” in radical Islamist move-
ments, said François Molins, the Paris pub-
lic prosecutor, and videos of decapitation
were found on his computer. Islamic State
(IS) claimed he was one of its “soldiers”.
But Mr Lahouaiej Bouhlel also ate pork,
did not go to the mosque, and had an “un-
bridled sex life”, said Mr Molins. No direct
evidence of his allegiance to IS has yet
been found.
Those who study radicalisation in
France say that this profile is not uncom-
mon. Deep religiosity rarely plays a part in
the swing towards political jihad. Nor does
IS need to issue direct orders. It “inspires
this terrorist spirit”, said Jean-Yves Le
Drian, the defence minister. In 2014 Abou
Mohammed Al-Adnani, an IS spokesman,
urged jihadists not to worry if they could
not blow themselves up or shoot a gun:
smash the skull of a “French or American
infidel” with a stone, stab him with a knife,
or “run him over with a car”.
The Economist July 23rd 2016 17
Also in this section
18 Russia’s Olympian drug habit
19 Italy’s upstart party
20 Charlemagne: National parliaments
and the EU
For daily analysis and debate on Europe, visit
Economist.com/europe
It is not unusual for radicalisation to
take place quickly, particularly among the
violent or unstable. A loner, unknown to
intelligence services, Mr Lahouaiej Bouh-
lel was given a suspended prison sentence
earlier this year for violence. He grew a “re-
ligious” beard just eight days before the at-
tack, said Mr Molins. “This is not an anom-
aly,” says Hugo Micheron, a researcher on
French jihadists: “There are different routes
into jihadism today, and I’ve seen several
cases of radicalisation taking place within
a couple of weeks.”
Nice may be best known as a swish tou-
rist destination. But behind the old town’s
Belle-Epoque façade, the high-rise neigh-
bourhoods that spread up the ravines be-
yond the city have become one of the most
intractable centres of Islamist radicalism
outside the Paris region. At least 55 resi-
dents of Nice and other towns in the de-
partment of Alpes-Maritimes, which cov-
ers the Côte d’Azur, have left for jihad in
Syria or Iraq, including 11 members of one
family. In part this is the work of a vigorous
local French recruiter, known as Omar
Omsen, or Omar Diaby. He was thought to
have been killed in Syria last year, but
seems to have faked his own death.
Côte de jihad
A local early-warning unit set up by Alpes-
Maritimes in 2014 to counter radicalisation
has so far received 600 alerts. Fully 37 indi-
viduals from the department have been ex-
pelled from France, and 15 others prevent-
ed from leaving the country. Five
underground prayer houses suspected of
preaching violent Islamism have been
closed down. Moderate Muslim leaders
fear that the latest attack will deepen dis-
trust. A striking 36% of Nice voters backed
the far-right National Front at the most re-
cent elections. “The Muslim community is 1
18 Europe
2 doubly attacked,” says Boubekeur Bekri,
rector of the Al-Forqane mosque, which
lies near the brutalist tower blocks of Ari-
ane, a banlieue of Nice: “By Daesh [IS]—and
by those who are playing Daesh’s game by
dividing Muslims.”
The Nice attacks are sorely testing
France’s ability to withstand a permanent
terrorist threat. Manuel Valls, the prime
minister, has told the French to “live with
terrorism”. Mr Hollande announced fresh
air strikes on Syria. Parliament has voted to
extend the state of emergency, conceived
last November as a temporary response,
for a further six months. Yet such measures
may be more about managing public anxi-
ety than fighting terrorism. Hours before
the Nice attack, Mr Hollande had an-
nounced that he would not renew the state
of emergency. Of nearly 3,600 house raids
carried out under its provisions, only five
have led to a terrorism-linked judicial in-
vestigation.
Last year, the French reacted to terror
mostly with defiance and unity. In Novem-
Russia’s Olympian drug habit
Tamper proof
MOSCOW
An investigation gives Moscow a gold medal for cheating
W HEN Grigory Rodchenkov, the erst-
while director of Russia’s anti-dop-
ing lab, confessed that he had helped run a
state-directed doping programme during
the 2014 Sochi Winter Olympics, his story
sounded fanciful. He said he had served
athletes steroid-spiked cocktails mixed
with cognac and vermouth, while Russia’s
secret police, the Federal Security Service
(FSB), had cracked the supposedly fool-
proof urine-sample bottles used in inter-
national competition. The sports ministry,
Mr Rodchenkov claimed, fed lab officials
lists of athletes to be protected; their drug-
laced samples were swapped for clean
ones through a hole in the wall of the Sochi
testing facility.
The World Anti-Doping Agency
(WADA) dispatched a team to investigate.
This week, the results came back positive:
Mr Rodchenkov’s story was true. The re-
port, the latest in a string of WADA investi-
gations of Russian sport, details a co-ordi-
nated government-run doping effort. Since
2011 the Moscow anti-doping laboratory, in
concert with the sports ministry, had used
a technique called “the disappearing posi-
tive” to cover up for dirty athletes; the FSB
helped cook up a more sophisticated sam-
ple-swapping plan for the Sochi games.
The cheating touched at least 30 sports,
tainting Russia’s triumphant haul of 33
ber parliamentarians of all political col-
ours spontaneously sang the national an-
them after Mr Hollande’s speech
announcing a “war on jihadist terrorism”.
Today, however, there is increasing French
anger at the failure of their government to
keep people safe. After a minute’s silence
this week, Mr Valls was booed by crowds
in Nice. Only 33% told a poll they have con-
fidence in the government’s counter-terro-
rism strategy.
Opposition politicians on the centre-
right have turned on the government too.
“If all measures had been taken, this drama
would not have happened,” claimed Alain
Juppé, a former prime minister and presi-
dential hopeful for the 2017 election. Argu-
ably there could be more robust blockades
around crowded public events, Israeli-
style. But France is already on maximum
alert, and has stretched its armed forces by
putting 10,000 soldiers on patrol on the
streets. The cruel reality is that if terrorists
can turn lorries into weapons, it is impossi-
ble to keep everyone safe. 7
medals in Sochi and calling into question
the results of the 2013 track and field World
Championships and the 2013 World Uni-
versity Games, both held in Russia. Rich-
ard McLaren, a Canadian lawyer who led
the inquiry, says his initial scepticism of Mr
Rodchenkov’s claims proved unwarrant-
ed: “Now I know it did happen.”
Taking the piss
The Economist July 23rd 2016
The evidence leaves no doubt. Investiga-
tors found signs of tampering on preserved
samples from Russian athletes in Sochi. One
man accredited as a “sewer engineer” at the
Sochi games turned out to be a Russian intel-
ligence officer, Evgeny Blokhin, who helped
Mr Rodchenkov swap out the samples. In e-
mails, Russian sports officials referred to Mr
Rodchenkov’s cocktail by the nickname “the
Duchess”. The report refutes Russian claims
that doping was the fault of a few bad ap-
ples. Senior Russian sports officials, includ-
ing a deputy minister and an anti-doping ad-
viser, played key roles in managing the
cover-up, dictating which athletes should be
protected.
The International Olympic Committee
(IOC) called the Russian programme a
“shocking and unprecedented attack on the
integrity of sport”. Russia’s track and field
federation has already been banned from
the Olympic Games in Rio de Janeiro, due to
start on August 5th. As The Economist went
to press, the IOC was meeting to decide
whether to bar the rest of the Russian team
too. The committee said it would balance
the need to punish Russia against the right to
compete of individual athletes who might
not have used drugs.
Hoping to salvage his country’s chances,
Vladimir Putin promised to suspend the offi-
cials named in the report. Yet rather than
apologising, he called the allegations part of
an American-led conspiracy to “make sport
an instrument for geopolitical pressure”.
And he promised to stand by his embattled
minister of sport, Vitaly Mutko, a longtime
ally stretching back to their days together in
St Petersburg’s city hall. The Olympic move-
ment, he warned, “could find itself on the
brink of division”. If so, it is hard to imagine
who will side with a country that drugged
its athletes and lied about it. Unlike bottles
of tainted urine, this scandal cannot be
made to disappear. 7
 The Economist July 23rd 2016
Italy’s upstart party
The Five Star question
TURIN
The new party has a clear path to victory, but fuzzy notions of what to do if it wins
R OSARIO SCAVO remembers when
80% ofthe inhabitants ofBorgo Vittoria
worked directly or indirectly for the Fiat car
company. “It was a city within the city,” he
says of the firm, to which he gave 33 years
of his life. In those days, it went without
saying that this working-class district of Tu-
rin, where the gleaming Alps are obscured
by dismal apartment blocks, voted for the
left. Once it was the Socialists or Commu-
nists, more recently the Democratic Party
(PD) of Prime Minister Matteo Renzi.
Much of Fiat’s production has since left
Italy for cheaper locations. Today, Borgo
Vittoria is a lifeless place. A jeweller’s shop
bears the melancholy sign “I Buy Gold”.
(Not much though, says an assistant:
“Those who wanted to sell have already
sold.”) As for Mr Scavo, the energetic 62-
year-old has already been a pensioner for
five years. He gives €300 a month to his
university-educated daughter, who has
been unable to find any job better than
part-time health and social work.
Such grim economic prospects are one
reason why, at local elections last month,
the Torinese ended 23 years of centre-left
government and chucked out their PD
mayor, Piero Fassino. Mr Fassino had car-
ried on his predecessors’ project of devel-
oping Turin as a tourism destination, but
little of that money reached the city’s
fringes. In the run-off election, most voters
in Borgo Vittoria backed Mr Fassino’s rival,
Chiara Appendino (pictured), of the up-
start Five Star Movement (M5S). With M5S
riding high in the polls (see chart), the PD is
growing worried that what happened in
Turin could happen in the rest of Italy, too.
Ms Appendino is a 32-year-old graduate
of Milan’s Bocconi University, the business
school of the northern Italian bourgeoisie.
That makes her an odd champion for
working-class frustration. But M5S, which
was launched in 2009 as an internet-based
political insurgency by Beppe Grillo, a co-
median, has much to offer such voters. It
demands a referendum on membership of
the euro, which it blames for Italy’s eco-
nomic ills. It promises a minimum income
for all citizens, whether they work or not.
Its candidates hammer relentlessly on the
theme of onestà (honesty), a powerful ral-
lying cry in Italy’s dirty political culture.
And it has tried to engage disaffected vot-
ers by soliciting their ideas. Ms Appendino
ran on a platform of16 planks developed in
concert with open-access citizens’ groups.
But M5S’s biggest advantage is its ability
to appeal to the right as well as the left. Ms
Appendino beat Mr Fassino in Turin’s run-
off by winning over the voters who had
backed right-wing parties in the opening
round. In the European Parliament, M5S’s
deputies sit with those of the UK Indepen-
dence Party and Germany’s anti-immi-
grant Alternativ für Deutschland. M5S’s
Eurosceptic tendencies and Mr Grillo’s
hostility to immigration appeal to many
on the right.
This makes the party highly effective in
two-round elections. Thanks to an elector-
Europe 19
al law passed on Mr Renzi’s watch, Italy
now has a two-round system not just at
local, but at national level. The prime min-
ister is focused on winning a referendum
this autumn to alter the constitution so that
the next government has a free hand for its
entire term. If he loses, he says he will re-
sign, pitching Italy into a government cri-
sis. But for his party an even greater danger
is that he could win the referendum—and
then lose to M5S in the next election.
Heads we win, tails we win the run-off
M5S is woefully unprepared to govern. Its
left- and right-wing impulses are in ten-
sion, but, says Marco Ricolfi, a social scien-
tist at the University of Turin, the left-wing
side predominates. Last year Mr Grillo
tried to get his MPs to vote against decrimi-
nalising illegal immigration; he was
thwarted by a grassroots mutiny. In Turin,
the party is aligned with the sometimes
violent resistance by environmentalists to
a high-speed rail link through the Alps to
France. Ms Appendino’s governing pro-
gramme vows to promote veganism. The
right-wing voters who back it as a protest
may not like such policies if it wins.
Worse, the movement’s efforts to solicit
citizen input, however laudable, have left
its platform a hotchpotch of ingenuous-
ness, cynicism and ambiguity. Its foreign
policies are suffused with anti-American-
ism. One of its leading members wants to
involve leftist Latin American govern-
ments in Middle East peace talks. Another
returned from Russia to declare that Vladi-
mir Putin should be considered an ally and
sanctions should be dropped, since they
hurt Italy’s food and furniture exports. On
economics, M5S’s main policy is to de-
mand a referendum on the euro. This may
be unconstitutional; in any case, M5S will
not say whether it wants out or in.
Coherent or not, these policies are pop-
ular. An average of recent polls puts the
movement less than a percentage point be-
hind the PD. In a run-off between the two,
polls find, M5S would win. Italy may well
end up granting its government more pow-
er, only to elect a party that has no idea
how to use it. 7
Star power
Voting intention in Italian elections, %
Two-week moving average of polls
40
Democratic Party
30
Five Star
Movement
20
Northern League
10
Forza Italia
0
JF M A M J J A S O N D J F M A M JJ
2015 2016
Source: Press reports
20 Europe
Charlemagne Parliament plot
Giving more voice to national legislatures will not enhance the EU’s legitimacy
I N FOOTBALL two yellow cards are enough to get a player sent
off. But in the European Union three may pass with nary a
word. Under the EU’s “yellow card” system, if one-third of the un-
ion’s national parliaments think that a proposed law tampers
with matters better handled nationally, they can force the Euro-
pean Commission to reconsider it. Before this year parliaments
had issued two yellow cards, once against a law limiting workers’
right to strike and once against establishing an EU-wide prosecu-
tor’s office. The commission rejected the card both times (though
it withdrew the strike law for other reasons).
This week the commission made it a hat-trick. In March, ten
central and eastern European countries (plus Denmark) yellow-
carded a directive that would force firms that post employees to
work in other EU countries to match local pay and conditions,
rather than simply paying the minimum wage. The easterners
said this undermined their ability to set wages themselves, and
would kill jobs. But on July 20th Marianne Thyssen, the employ-
ment commissioner, said the directive would remain unchanged.
The easterners, already annoyed offwith the commission over its
plans to redistribute refugees around the EU, are now fuming.
So are some who want a greater EU role for national parlia-
ments. For in the aftermath of Brexit the EU is undergoing one of
its periodic fits ofsoul-searching. Whatever popular legitimacy is,
the EU plainly lacks it. The European Parliament has utterly failed
to capture the imagination of European voters. Turnout for its
elections has steadily decreased even as it has accrued powers.
And it is far too cosy with the commission it supposedly holds to
account. National parliaments are reckoned to have a greater feel
for the weft and warp of citizens’ political preferences. Perhaps
one remedy for Euro-blues is to hand them more influence.
David Cameron thought so. In the renegotiation of Britain’s
EU status that preceded his doomed referendum, the former
prime minister won agreement for a “red card” procedure under
which groups of parliaments could block legislative proposals.
Research suggested the procedure would rarely, if ever, be used,
and some analysts mused that vetoes were a rather blunt way of
involving parliaments (under EU rules governments may already
stop laws in their tracks). We will never know; Mr Cameron’s deal
died with his premiership when Britain elected to leave the EU.
The Economist July 23rd 2016
Does the raspberry the commission has blown at the latest
yellow card suggest that the whole enterprise is pointless? Per-
haps. But Ms Thyssen had no easy option. Several western Euro-
pean states, notably France, were hopping mad at the easterners
for posting lower-paid workers to their countries, even though
such employees represent just 0.7% of the EU labour force. These
days such thinking holds sway in a commission fretful about the
rise of anti-globalisation populists, like Marine Le Pen in France.
“We have to act according to the general interest of Europe,” says
Pierre Moscovici, the (French) economics commissioner. “If you
have total freedom for posted workers, you’re dead.”
In any case, the national parliaments have just won their big-
gest battle yet. Earlier this month the commission’s president,
Jean-Claude Juncker, bowed to trade-wary governments and
agreed to send a mooted EU-Canada deal to national parliaments
for approval, even though lawyers had said ratification could be
limited to the European Parliament. That could delay or even
scupper the agreement. And it sets a precedent which could be
bad news for TTIP, an EU-America deal that leftist MPs in coun-
tries like Germany and Austria have built careers opposing. A fu-
ture Britain-EU agreement might face the same fate.
It is easy to romanticise national parliaments. But they also
suffer from the distrust of political elites that is spreading across
the democratic world. The Eurobarometer survey consistently
finds that European citizens trust the EU more than their own par-
liaments (by 40% to 31%, in 2015). This helps explain Europe’s ma-
nia for referendums, which pose a greater threat to parliaments
than anything the EU may do. One irony of the Brexit vote is that
it was held to safeguard British parliamentary sovereignty, but
the majority of MPs would have voted to remain in the EU.
No doubt legislatures could do a better job of examining their
governments’ EU positions. Many national MPs need a crash
course in the procedures of the EU, and could start by paying
more attention to what their party colleagues do in the European
Parliament. The British House of Lords, perhaps surprisingly, is
sometimes held up as a model of EU expertise and scrutiny. Nor-
dic parliaments do a good job of telling their ministers what deals
they are allowed to make in Brussels, though this does not seem
to have made their voters any less Eurosceptical.
Make parliaments great again
The real test comes when the EU interferes in matters that parlia-
ments care about—euro-zone bail-outs, for example, which are
funded from the national treasuries which parliaments oversee.
Each Bundestag vote on Greece is monitored closely across the
EU; never before have so many non-Germans known so much
about the views of deputies from Mecklenburg-Vorpommern. In
2011 all Europe held its breath as 150 Slovak MPs debated whether
to support a euro-zone fund. As leaders negotiating late-night
deals in Brussels well know, parliaments can insert themselves ef-
fectively into European debates when they care to.
The question is what this actually accomplishes for the EU.
When the Bundestag demands tough bail-out terms for Greece,
Germans may feel empowered—but Greeks feel trapped. Pre-
scriptive agreements imposed on bailed-out countries do more to
damage the EU’s legitimacy than any yellow cards can remedy. It
is unclear why a Europe of feuding parliaments will be more pop-
ular or harmonious than the current one. Expect to hear more
about the role of parliaments as the EU desperately seeks new
sources of legitimacy. Do not expect it to help much. 7

Britain
The government’s “industrial strategy”
A change of gear
The new prime minister signals a more hands-on approach to business
I F MAKING the gaffe-prone Boris Johnson
foreign secretary was Theresa May’s
most eyebrow-raising cabinet appoint-
ment, probably her most visible policy
pronouncement since taking office on July
13th has been to signal the return of an “in-
dustrial strategy”.
Merely to mention the phrase in Con-
servative Party circles has amounted to
heresy since the days when Margaret
Thatcher was prime minister. She made it a
test of ideological purity to reject the mud-
dled state-interventionism of her prede-
cessors, both Labour and Tory; there was
to be no return to the disastrous meddling
in, or nationalisation of, companies like
British Leyland under the Iron Lady. Yet
Mrs May has broken the taboo. She made a
“proper industrial strategy” part of her
pitch to be party leader in a speech in Bir-
mingham on July 11th. And now in Down-
ing Street she has created a new ministry
with the phrase at the top of the bill: the
Department for Business, Energy and In-
dustrial Strategy, headed by Greg Clarke.
Although the details are yet to be
fleshed out, Mrs May gave some indication
of what it might entail in her Birmingham
speech: raising productivity, a commit-
ment to infrastructure projects (such as the
north-south HS2 railway), more house-
building and a regional policy that will
“help not one or even two of our great re-
gional cities but every single one of
them”—perhaps a dig at the previous gov-
ernment’s championing of Manchester,
Birmingham’s great rival.
Such a strategy will also involve help-
ing particular sectors of the economy, an
approach which, its proponents insist, is
quite different from the now-unfashion-
able 1970s policy of “picking winners”.
This suggests a degree of continuity with
David Cameron’s coalition government of
2010-15 when Sir Vince Cable, the Liberal
Democrat business secretary, spoke enthu-
siastically of industrial strategies and sin-
gled out 11 industries with which the gov-
ernment would build long-term
“partnerships”, including carmaking and
aerospace. Both of these businesses, for in-
stance, benefited from public investment
in a networkof“Catapult” research and de-
velopment centres.
People like Michael Hawes, the head of
the Society of Motor Manufacturers and
Traders, therefore welcome Mrs May’s
more overt commitment to an industrial
strategy. Free-market types, however, are
more worried. Mark Littlewood, head of
the Institute of Economic Affairs, a think-
tank, argues that although the new policy
remains “murky”, adopting even a limited
industrial strategy could tempt the govern-
ment into going further by propping up
loss-making industries such as steel—espe-
cially once Britain leaves the EU and is no
longer bound by European rules against
state aid. He hopes that the new strategy
might be more rhetorical than meaningful.
The Economist July 23rd 2016 21
Also in this section
22 The pros and cons of foreign buy-outs
22 Pedestrianising Oxford Street
23 Bagehot: Britain’s place in a
post-Brexit world
For daily analysis and debate on Britain, visit
Economist.com/britain
A first test of this came quickly. On July
18th it was announced that the Cambridge-
based tech company ARM Holdings was to
be sold to Japan’s SoftBank for £24 billion
($32 billion). If the deal goes through it will
be the largest-ever Asian investment in
Britain. Mrs May had vowed to defend
“important” sectors ofthe British economy
against foreign takeovers in her Birming-
ham speech. Yet the government enthusi-
astically welcomed the sale of the home-
grown chipmaker.
In a nod to the new approach, it was
stressed that the prime minister had spo-
ken personally to the head of SoftBank,
who assured her that ARM’s headquarters
would stay in Cambridge and the number
of jobs there would double over the next
five years. Future takeovers would be as-
sessed on a “case-by-case” basis, the gov-
ernment said. In practice this may mean in-
creasing the number of sectors in which a
public-interest test is applied—currently
limited to defence, financial services and
the media—to include other industries.
This compromise was designed to appease
both free-marketeers (who nonetheless
saw it as meddlesome) and intervention-
ists (who still complained that Mrs May
had let ARM slip out of British hands).
The temptation to tinker
The ARM deal notwithstanding, the gov-
ernment is likely to spend more time trying
to keep investment in Britain than fending
it off. Business is still nervous about Brexit.
Britain’s booming auto and aerospace in-
dustries, for example, are very exposed to
the EU, which bought 57% of Britain’s car
exports last year. To avoid a draining away
of investment to other countries, the gov-
ernment may be in a mood to grant conces-
sions elsewhere. Mr Hawes says his indus-
try will lobby for lower energy prices and
business rates as Brexit looms. It is believed 1
22 Britain
2 that, in order to ensure that a big invest-
ment programme went ahead, Mr Camer-
on’s government had already talked to one
carmaker after the referendum about how
it could help the company to mitigate the
effects of paying EU tariffs if Britain had to
leave the single market.
The new business secretary, Mr Clarke,
has a reputation as a pragmatist rather
than a radical. The “industrial strategy” so
far seems mild enough. Yet with the popu-
lar mood souring towards globalisation,
and the government keen to occupy the
political centre-ground abandoned by La-
bour, many Tories will be on the lookout
for signs of mission creep on industrial
strategy. Well-intentioned interventions
could quickly become counter-productive.
And as the economy deteriorates, the calls
for intervention will grow louder. 7
Foreign takeovers
Fear and favour
The evidence is that foreign managers
improve the British firms they acquire
F OREIGN acquisitions have a bad repu-
tation in Britain. Before Kraft, an Ameri-
can food-processing firm, swallowed Cad-
bury, a British confectioner, in 2010 it
pledged not to outsource work abroad. Just
days after the deal was done, it reneged.
Small wonder, then, that the probable
takeover of ARM Holdings, a Cambridge-
based tech company, by SoftBank, a Japa-
nese one, has people worried.
Britain welcomes monied foreigners
with open arms. Its stock of inward foreign
direct investment is bigger than that ofany-
where but America and Hong Kong. In the
past decade overseas investors have
splurged £500 billion ($835 billion) to ac-
quire nearly 2,000 British firms, almost
three times the amount spent by British in-
vestors on acquisitions within Britain.
Foreign buy-outs increase demand for
British assets and thus raise the pound’s
value, making exporters less competitive.
And foreign owners are popularly suspect-
ed of having a “home bias”, making deci-
sions which benefit their country rather
than Britain. ARM’s founder, Hermann
Hauser, lamented to the BBC that “what
comes next for technology will not be de-
cided in Britain any more, but in Japan.”
But the case against foreign investors
does not stand up. A dear pound hardly
helps exporters, but weak productivity is a
bigger problem (in the manufacturing sec-
tor it is lower now than in 2011). And for-
eign owners seem to improve the situa-
tion. Economists reckon that about half the
productivity gap between Britain and
London buses
Parting the red sea
The new mayor plans to pedestrianise Europe’s busiest shopping street
I N 1963 the author of “Traffic in Towns”, a
book commissioned by the Ministry of
Transport, cursed Oxford Street as a
“travesty of conditions as they ought to
be in a great capital city”. Things have
only deteriorated since then. Shoppers
breathe in the highest levels of nitrogen
dioxide in Britain as they navigate a road
that is among the capital’s most danger-
ous. Those who cram into Oxford Street’s
crowded buses quickly realise it would
have been faster to walk.
They may soon have to. Sadiq Khan,
London’s new mayor, has promised to
pedestrianise Oxford Street by 2020 (it is
already off-limits to private cars most of
the time). The capital’s transport au-
thority has previously warned that mak-
ing big changes to the street is “neither
deliverable nor desirable”. Built on a
Roman road, it is one of London’s few
east-west arteries. At peak times 250
buses an hour trundle along it, five times
the number on Fifth Avenue in New York.
Powerful, posh residents’ groups such
as the Marylebone Association will
lobby against diverting buses down
quieter streets. Mr Khan may not mind:
the people of Marylebone High Street
already preferred his Conservative rival
by two votes to one in the last election.
But Westminster City Council, which is
more beholden to local residents, will
have to approve any changes.
A cull of bus routes is overdue, reck-
America is down to bad management. A
paper by Nick Bloom of Stanford Universi-
ty and others shows that the David Brents
can learn from the Jack Welches: when
they take over British firms, American mul-
tinationals bring better technology and
practices, lifting productivity by up to 10%.
These benefits are easiest to grasp in
heavy industry, where measuring output is
straightforward. A study by Simon Collin-
son, now of Birmingham University,
looked at British Steel Strip Products,
which formed an alliance with Japan’s
Nippon Steel in the early 1990s. Japanese
management practices had a clear impact:
within a few years the percentage of steel
rejected because it was too rusty declined
from 2-3% to less than 0.5%.
As well as cutting down on tea-breaks
and making factory lines sleeker, foreign-
owned firms, which make up 1% of Brit-
ain’s businesses, appear to spend more on
R&D than comparable British firms. That
boosts productivity and thus wages: a
study by the OECD found that in Britain
The Economist July 23rd 2016
ons Alexander Jan of Arup, an engineer-
ing firm. Twenty-one different routes go
down Oxford Street, some following the
paths of horse-drawn predecessors. The
crush developed in the early 1900s, when
private companies competed for fares.
Things will get busier in 2018 when Cross-
rail, a new east-west trainline, adds as
many as 150,000 daily visitors to the
half-a-million Oxford Street already gets.
A “hopper” fare will soon allow pas-
sengers to switch buses without charge,
as they can on the Underground. If they
resent having to hop around Oxford
Street, its fresher air might cheer them up.
Transport of delight
wages in foreign-owned companies were
about 5% higher than they would have
been were the firm under British owner-
ship. Altogether, foreign-owned business-
es account for halfofBritish R&D spending.
Overseas owners also shake up supply
chains, says Mr Collinson. One paper
found that a ten-percentage-point increase
in foreign presence in a British industry
raised the total factor productivity (which
captures the efficiency with which capital
and labour are used) of that industry’s do-
mestic producers by about 0.5%.
No one celebrates when higher produc-
tivity arises from laying off workers, and
foreign takeovers are, indeed, associated
with job losses. But this is a feature of ac-
quisitions in general, not of foreign ones in
particular. Restricting buy-outs in order to
protect jobs would ultimately depress liv-
ing standards by keeping workers in ineffi-
cient companies. It is not always easy be-
ing at the mercy of global markets, but on
balance Britain benefits from being open to
foreign buyers. 7
 The Economist July 23rd 2016
Bagehot In the map room with Theresa May
The outlines of Britain’s post-Brexit place in the world begin to emerge
I F EVER you find yourself at a dinner party with British estab-
lishment types, ask them about the Foreign and Common-
wealth Office (FCO). Jokes about gin-swilling, oikophobe globe-
trotters in linen suits will spill forth. The more chauvinistic may
tut about that diplomat’s disease: “going native”, or sympathising
more with foreigners than with folk back home. To sound clever,
someone will decree that every prime minister since Thatcher
has been his or her “own foreign secretary” (as if Churchill and
Eden were remembered today for their education policies) and
that the FCO these days is just a venue for formalities.
This image riles diplomats, and rightly. The essence of the
grandest department on Whitehall is not that it deals with the
world outside Britain. Practically every government body does
that: the business department frets about foreign takeovers, the
Ministry of Defence is hardwired into NATO, 10 Downing Street
co-ordinates big summits. The point of the FCO is to go beyond
the transactional focus of these branches, of fleeting political
moods and fads, of narrow, immediate readings of the national
interest. Its embassies are a nervous system conveying informa-
tion, cultivating influence and generally providing a strategy for
the country’s global role that transcends the next photo opportu-
nity or crisis. Its goal is an influential Britain in an orderly world.
Or, as Ernest Bevin, the post-war foreign secretary, put it: the pres-
ervation of every Briton’s ability to “take a ticket at Victoria Sta-
tion and go anywhere I damn well please!”
It is in this context that the sudden and brutal humiliation of
the FCO following Britain’s vote for Brexit should be understood.
The swingeing budget cuts and departmental turf wars of recent
years have been tough enough. But none of this compares with
the indignities visited upon it in recent weeks.
Most colourful among them is Theresa May’s appointment of
Boris Johnson as foreign secretary. The former mayor of London,
who campaigned for Brexit, is affable and intelligent. But he is
also unscrupulous and unserious. In Brussels he is loathed for his
myth-making about the EU and for comparing the union to the
Third Reich. German news readers struggled to stifle laughter
when they read out the news of his promotion on July 14th. In
Washington the reaction was no better: five days later the new
foreign secretary grinned his way sheepishly through a press con-
Britain 23
ference as American journalists read from his litany of undiplo-
matic remarks. In 2007 he compared Hillary Clinton to a sadistic
mental health nurse, for example; the following year he de-
scribed Africans as “piccaninnies” with “watermelon smiles”.
What possessed Mrs May? It seems the prime minister wants
to pack Mr Johnson off to parts foreign, welcoming him back in
London only to help her, a Remainer before the referendum, to
sell an eventual Brexit deal with the EU to Eurosceptics. That is
dismal. It treats the FCO, a giant national asset, as a tool of domes-
tic political management and thus suggests a drastic downgrade
of Britain’s ambitions on the world stage.
So too does the prime minister’s creation of two new depart-
ments: one for Brexit and one for international trade. The former,
in particular, will be composed from chunks of the FCO, includ-
ing some of its brightest staff. Both are led by uncompromising
Eurosceptics, David Davis and Liam Fox, who seem determined
to nab further turf from the (in their eyes) all-too internationalist
diplomats. Thus the FCO will now have to share facilities—like
Chevening, the foreign secretary’s country retreat—and battle for
influence with two rival outfits programmed to see other coun-
tries less as partners than as negotiating opponents.
A hint of what is to come came on July 20th, when Mrs May
travelled to Berlin to meet Angela Merkel. The prime minister re-
ceived military honours and exchanged warm words with her
German counterpart. Yet insiders detected a shift. For all the talk
of co-operation on Turkey and the refugee crisis, in the German
capital Britain is now seen less as a solution than a problem. As
one local diplomat put it to Bagehot: “Here Britain now means
Brexit.” For the foreseeable future, then, the country’s scope to
play the expansive, agenda-setting role for which the FCO is de-
signed is limited. Brexit talks will drain energy from other fields.
The fragmentation of Britain’s diplomatic arsenal will Balkanise
policymaking. Doors will close which once were open. Mark
Leonard, the director of the European Council on Foreign Rela-
tions, reckons the country could end up as “a bit player in support
of policies developed in Berlin, DC and other places.”
The new Westphalianism
Too gloomy, say some, pointing to Britain’s ongoing NATO mem-
bership, UN Security Council seat, Commonwealth links and
economic and military heft. These things matter, of course. But
quitting the EU denies Britain opportunities to make the most of
them (consider its leadership, alongside France and Germany, in
the Iran nuclear talks). The country’s temperamental and institu-
tional tilt in a more zero-sum, nation-state-centric, sovereignty-
first direction makes its existing strengths less valuable: a less
open and collaborative ally to its friends. Mr Leonard calls this
“strategic shrinkage on steroids”. He sees Britain taking a more
craven stance towards economic powers like China and Russia,
whose cash might help it plug the economic gap left by Brexit.
Not everything about this is preordained. Perhaps Mrs May
can play off her three sort-of foreign secretaries against each oth-
er. Abroad she has opportunities to shore up some of Britain’s in-
fluence, says Brendan Simms, a historian of the country’s place in
Europe: by striving to remain a useful ally to Germany, by ampli-
fying Britain’s voice on defence and security matters (it is still a
major player in NATO’s defences in the Baltics, for example) and
by throwing herself into debates about the future integration of
continental Europe. Britain’s stature in the world is shrinking. By
how much is up to its leaders. 7
24
Middle East and Africa
Israel and the Arab world
The enemy of my enemies
CAIRO AND JERUSALEM
As Arab states warm to Israel, the Palestinians feel neglected
E GYPT’S ambassador to Israel was in Tel
Aviv for less than a month before he
was called backto Cairo in November 2012.
His government, then led by Muhammad
Morsi of the Muslim Brotherhood, was in-
censed over Israel’s bombing of the Gaza
Strip, which is controlled by Hamas, a
Brotherhood affiliate. Mr Morsi also sum-
moned Israel’s ambassador in Cairo,
where a year earlier protesters had
stormed the Israeli embassy.
What a difference a few years make. In
February Egypt’s current president, Abdel-
Fattah al-Sisi, who toppled Mr Morsi in a
coup, sent a new ambassador to Israel, the
first since 2012. Mr Sisi has closed Egypt’s
border with Gaza, to great Palestinian dis-
may, and vilified Hamas. To complete the
turnabout, there are now rumours that
Binyamin Netanyahu, Israel’s prime minis-
ter, will soon visit Mr Sisi in Egypt.
Israel’s warmer relations with Egypt are
a sign of a broader rapprochement with
the Arab world. Mr Netanyahu may be
stretching things when he says that Arab
leaders now see the Jewish state as an ally,
but their priorities, such as countering Iran
and combating Islamic terrorism, are in-
creasingly aligned. The shift has left the
Palestinians, whose fate once topped the
Arab agenda, feeling abandoned.
A different sense of betrayal has helped
to bring the Israelis and Arabs closer. Ba-
rack Obama’s eagerness to pull America
backfrom the Middle East, and his dealings
with Iran, resulting in a nuclear accord
signed last year, alarmed Israel and the
Arab states in equal measure. Both sides
fear Iran will cheat on the deal and use the
economic benefits to support proxies fo-
menting chaos in Iraq, Syria and Yemen.
So, quietly, Israel and the Gulf states have
begun to co-operate over security. “We
have the same understanding of the re-
gion,” said Tzipi Livni, a former Israeli for-
eign minister, in January.
Après Morsi, le déluge
According to the Israeli officials, co-opera-
tion with Egypt and Jordan, with which Is-
rael has signed peace treaties, is even bet-
ter. In April the Israeli army’s deputy chief
of staff spoke of an “unprecedented” level
of intelligence-sharing between the coun-
tries. Israeli drones have been allowed to
fire on insurgents in Sinai, where fighters
loyal to Islamic State (IS) have tormented
the Egyptian army. Since taking office in
2014, not only has Mr Sisi closed Egypt’s
border with Gaza, he has flooded the
smuggling tunnels beneath it in order to
stop the flow of weapons. “The Egyptians
now are more anti-Hamas than even we
are,” says a senior Israeli officer. “They’re
actually pressing too hard now on Gaza.”
Yet Egypt, hoping to re-establish its in-
fluence in the region, is trying to revive
moribund peace talks between the Israelis
The Economist July 23rd 2016
Also in this section
25 Trapping Syrian refugees in Jordan
25 Backscratching in Beirut
26 Africa’s real land grab
27 Sub-Saharan smokers
27 Nigeria’s half-floating currency
For daily analysis and debate on the Middle East
and Africa, visit
Economist.com/world/middle-east-africa
and Palestinians. To that end Mr Sisi sent
his foreign minister to Israel on July 10th,
the first such visit in nearly a decade. Mr
Netanyahu has hailed the effort, if only to
head off a French-led peace initiative that
he fears will attempt to force an agreement
on Israel. A senior Israeli diplomat says
there is little actual hope for a renewal of
serious talks.
The Palestinian Authority (PA), which
rules the West Bank under Israel’s eye, has
also welcomed Egypt’s efforts. Hamas,
which is left out of Egypt’s plans, has
stayed mostly silent for fear of aggravating
Mr Sisi. But some Palestinians worry that
Arab states are letting Israel upend the
Arab Peace Initiative, which calls for it to
withdraw from the West Bank and Gaza
and agree to a “just settlement” for Pales-
tinian refugees in return for recognition of
Israel. “Israel wants normalisation and po-
litical ties with the Arab states, and to
achieve this without solving the Israeli-Pal-
estinian conflict,” says Elias Zananiri of the
Palestine Liberation Organisation, the
movement once led by Yasser Arafat.
This has contributed to a more general
sense of unease among the Palestinians.
Officials in other parts of the Arab world
talk more about Iran’s meddling, the wars
in Syria, Iraq and Yemen, and their own
domestic economic and political troubles.
Such issues seem more pressing to their
people. And besides, many Arabs are re-
signed to the stalemate in the peace pro-
cess. Mr Netanyahu appears intransigent;
Palestinian leaders are seen as divided, in-
effective and corrupt.
Mahmoud Abbas, the Palestinian presi-
dent, still makes the rounds in Arab capi-
tals—and foreign leaders still profess their
support. But the Palestinians are aware of
their diminished status. In a recent poll 78%
of them said their cause was no longer the 1
 The Economist July 23rd 2016
2 top Arab priority, and 59% accused Arab
states of allying themselves with Israel
against Iran. The amount of aid flowing
from Arab countries to the PA has fallen by
well over half in recent years. Funds from
the West have also declined.
The public in some Arab countries may
have softened its animus towards the Jew-
ish state. An Israeli polling organisation
has reported that only 18% of Saudis see it
as their country’s main threat. But the Pal-
estinian issue can still excite passion. In
Egypt, for example, a member of parlia-
ment was hit with a shoe and expelled by
his colleagues after meeting the Israeli am-
bassador in February. The Israeli flag is still
burned at protests in the region.
What really stirs Arab emotions are
scenes of Israelis killing Palestinians. Vio-
lence over the past year has left dozens of
Israelis and more than 200 Palestinians
dead. Most Palestinians, according to polls,
back a return to an armed intifada (upris-
ing). With the Arab world focused else-
where, America in the throes of a presiden-
tial race and progress towards a two-state
solution halted, they may see no other way
to capture the world’s attention. 7
Syrian refugees in Jordan
From haven to hell
MAFRAQ
Thousands of Syrians are trapped on
the border with Jordan
T HE hospitality of the Jordanian govern-
ment reached its limits on June 21st,
when a terrorist attack on the last entry
point from Syria into Jordan killed seven
Jordanian soldiers. The authorities
slammed the border shut, and King Abdul-
lah said that Jordan would respond “with
an iron fist against anyone who tries to
tamper with its security and borders”.
The closure has turned a desperate situ-
ation into a humanitarian black hole. Ac-
cording to the UN, more than 70,000 peo-
ple are now stranded in a harsh no-man’s
land-between Jordan and Syria, known as
the berm (see map). No one knows the ex-
act numbers in the settlements, nor indeed
what life is like there, since the attack has
stopped aid flowing in and information
flowing out.
Before aid agencies were shut out re-
ports and video footage suggested a hostile
refuge. Mice and disease roam amid the
sprawl of dusty tents. In May an NGO re-
ported that women were using nappies to
avoid defecating in the open, and that
mothers were covering their newborn ba-
bies’ faces to protect them from rat bites.
In the blistering heat and without
shade, water or greenery, the inhabitants
depend on help from outside. But since
June 21st the Jordanian government has
blocked anything other than water from
passing through. That means that for a
month no food or medical services from
the Jordanian side have reached the peo-
ple stuck there. At first even the water did
not get through to the berm, as people
within refused it in the absence of food.
Aid workers are racing to negotiate bet-
ter access. By July 20th the UN’s World
Food Programme had a provisional agree-
ment to send food in, but had been unable
to get final Jordanian approval. Even this
would buy it time only to explore other op-
tions, none of which looks good. Trucking
in help through Syria would mean travel-
ling through territory held by the hostage-
beheaders of Islamic State. Dropping it
from the sky would require permission
from the Syrian, Russian, American and
Jordanian governments, as well as being
hugely expensive.
The people there will need to move. Be-
fore the attackJordan’s government had of-
fered to fly them to wherever will take
them, but so far no country has offered to. It
closed other crossing points from Syria to
reduce the influx of refugees, not expecting
the fighting to push so many towards this
passage of last resort. The aid on offer, and
the hope of entry into Jordan, drew yet
more in. Meanwhile the lawless vacuum
has been a magnet for militias.
There are no easy exits. A return to Syria
is too unsafe for most, though a very few
may be going back. But last month’s attack
made entry into Jordan much harder. The
country’s authorities want to preserve its
status as a haven in a region on fire and re-
assure citizens already disgruntled by the
refugee influx.
The Jordanian government has an eco-
nomic motive, too, for sealing off the settle-
ments; it has long exploited its geography
to squeeze goodies from worried foreign-
ers. On July 20th, for example, details of
TURKEY
Mediterranean Sea
Aleppo
Idlib
Latakia
Khmeimim
(Russian airbase)
Tartus Hama
Homs
N
O
Beirut
AN
B
LE
Damascus
ISRAEL
Hadalatt
Deraa
Mafraq
JORDAN
Amman Azraq
Syrian areas of control, July 15th 2016
Syrian government
Jabhat al-Nusra
Source: Institute for the Study of War
Middle East and Africa 25
preferential access for Jordan’s exports to
the EU were announced, in exchange for
expanding Syrians’ right to work in Jordan.
The situation at the berm reminds for-
eign governments and agencies that Jor-
dan has already taken in 660,000 regis-
tered refugees, putting huge pressure on its
infrastructure and services. Even before
the attack, Azraq camp, which had been re-
ceiving people from the berm, was nearly
full. In Mafraq, where half the residents are
Syrian refugees, rubbish piles up too fast
for collectors to keep up. And donors have
fallen short of their promises. With half of
the year gone, only a third of the aid prom-
ised to Jordan at February’s conference in
London has come through. 7
Lebanese cronyism
Hire power
BEIRUT
Political connections create jobs in
Lebanon, but only for some
W HEN a visitor starts emphasising the
historical links between their fam-
ilies, Carlos Edde, a Lebanese politician,
knows where the conversation is headed.
Twenty minutes in, the visitor’s tone of
voice shifts: “I’ve come to see you because I
need a favour.” In Lebanon politicians find
employment for their constituents in ex-
change for votes. Three quarters of univer-
sity students surveyed by the Lebanese
Centre for Policy Studies thought political
connections were important to find jobs;
20% said that they had used them.
These days Mr Edde says that he never
does more than forward a CV to one of his
business contacts, without any pressure to
hire. Anecdotal evidence suggests other
politicians push harder (and win more
votes—Mr Edde’s party has no MPs). Quan-
tifying the damage caused by such string-
pulling is tough.
A new working paper by Ishac Diwan
E u ph
Raqqa ra at Paris Sciences et Lettres, a university, and
te
Jamal Haidar of Harvard University, has a
s
go. Using administrative data on every reg-
S Y R I A Deir
al-Zor istered company in Lebanon between
2005 and 2010, they painstakingly map
links between the people registered as the
Palmyra
owners or officers of companies and lists
of politicians. In this way they hope to
IRAQ identify the firms that make political hires.
Rukbann
Ber
m 100 km They identify 497 companies, covering
about 16% of the formal labour force.
They find politically connected firms in
industries such as banking, media, energy,
health and water, which tend to have a
Refugee settlement cosy relationship with the state. Similar
Islamic State Other rebel methods applied to Tunisia and Egypt find
Kurds Mixed the political tentacles reach much wider.
SAUDI The authors suggest that the difference is 1
ARABIA
26 Middle East and Africa
2 because Lebanon’s state is weakened by
divisions that date back to its civil war. Its
politicians are not powerful enough to
make big decisions that would create eco-
nomic spoils—such as erecting trade barri-
ers to protect local firms—so it has fewer fa-
vours to offer firms in exchange for hiring
the dimwitted cousin of a donor.
The economists find strong hints that
political connections drive hiring. In 2009,
an election year, politically connected
firms hired 14,500 extra people, compared
with 8,000 in normal years. Meanwhile
unconnected firms hired just 4,000 com-
pared with their average of 6,000 a year.
Those with political connections create a
third more jobs each year than unconnect-
ed firms in the same sector.
Politically connected firms pay higher
wages on average yet produce less per per-
son. In other words, the authors think that
these companies are over-hiring to please
their political contacts. Yasser Akkaoui, the
editor-in-chief of Executive, a Lebanese
business magazine, agrees, but explains
that the companies would not hire so
many unnecessary staff that they go out of
business. Politicians, for their part, have an
interest in the companies’ survival. They
also have the power to keep them not
merely alive but thriving. Rami Rajah, who
works for a textbook company, says that
“people who deal with the government
grow, while people who don’t are just
scrambling for the scraps.”
All this hurts consumers, unconnected
firms and economic efficiency. But there
may be a silver lining. Carving up the
spoils may distract politicians from carv-
ing up each other. And in a state as fragile
as Lebanon, that is important. 7
City slickers on the farm
Africa’s real land
grab
MOROGORO
Never mind foreign interlopers. African
urbanites are scooping up more land
A FTER half an hour poking around Mar-
tin Shem’s farm, Paul Kavishe is im-
pressed, even a little jealous. “He has done
well,” says Mr Kavishe. “He’s a real farm-
er!” This is strange praise, not because Mr
Shem’s dairy, maize and mango-growing
operation on the outskirts of Morogoro is
not admirable, but because both men have
had university careers. For middle-class
Tanzanians, though, a successful farmer
trumps a successful academic.
“Every Tanzanian is a farmer,” explains
Ali Aboud, another professor who has
moved into agriculture. He cultivates
about 20 hectares of rice paddy; in the past
three years a businessman from Dar es Sa-
My other car is a Porsche
laam and another city-dweller have
bought big farms near his fields. These men
are part of a quiet, hard-to-track but mo-
mentous change in Africa, which has pro-
found consequences for the continent’s
most important industry.
Surveys show that most farms in sub-
Saharan Africa are smaller than two hect-
ares. But that is the wrong way of measur-
ing agriculture, says Thomas Jayne of
Michigan State University. Look at land
rather than farms, he says, and it is clear
that a fairly small number of farmers now
own a large portion. The fastest growth is
among the middle class. In Ghana, 38% of
agrarian land is occupied by farms of be-
tween five and 100 hectares; in Zambia,
52% is. In both of those countries, and also
in Kenya and Malawi, medium-sized farms
collectively take up more land than larger
ones, whether those are owned by rich
Africans or the foreign investors who are
often accused of “grabbing” land.
Mr Jayne and other researchers find
that in Kenya, Malawi and Zambia (though
not in Ghana) most medium-sized farms
were not built by successful smallholders
but bought by urbanites. In Tanzania,
where about one-third of the population is
urban, city-dwellers are thought to own
33% of the farmland, up from just 12% a de-
cade ago. Typically, the new farmers are
middle-aged public-sector workers. The
popular obsession with foreign land grabs
is wrong-headed, says Isaac Minde of So-
koine University of Agriculture in Moro-
goro. If there is a land grab in Africa, it is
being done by African urbanites.
City-dwellers are going into farming
partly because legal reforms have made
buying land easier and ownership a little
more secure. Another reason is that urban
growth is making crops and meat more
valuable. Still another is the weakness of
African manufacturing, which means city-
dwellers lack good places to invest their
cash. Most important of all, public-sector
jobs seldom pay enough to sustain an
upper-middle-class lifestyle. Mr Kavishe,
who grows maize and keeps several thou-
sand laying hens, is surprised to be asked
whether he earns more than he did as a
university administrator. Of course the
The Economist July 23rd 2016
chickens are more lucrative.
Urban farmers often bring new ideas
and technology to the places where they
settle. Raphael Laizer, a government offi-
cial who moved into farming, remembers
paying smallholders to plant maize on his
fields, insisting on precise distances be-
tween seeds. Soon the smallholders were
planting their own fields the same way. Mr
Aboud, the rice farmer, introduced his
neighbours to mechanised seed drills (“for
the first two years everyone just looked
on”) and to a high-yielding hybrid seed
known as SARO 5. Urban farmers’ tractors
are hired by smallholders to process maize
or plough the fields.
The new arrivals tend to be highly liter-
ate, legally savvy and assertive. That cuts
their neighbours both ways. When it
comes to procuring public goods, their
bullishness is a boon. Some of Morogoro’s
urban farmers are harrying local authori-
ties to invest in irrigation schemes, which
would boost overall productivity. Mr Kav-
ishe even tried to persuade the Finnish
government to chip in.
But the high-powered interlopers can
be unpopular, especially in crowded rural
districts. In addition to his farm near Moro-
goro, Mr Shem owns a large cattle ranch
upon which smaller farmers have en-
croached, leading to court cases and what
he calls “psychological warfare”. Much of
Africa is moving away from communal
land ownership towards the individual
kind, but only gradually, leaving a lot of
room for confusion and fights.
Tanzania’s urban farmers also have one
foot in the old Africa and another foot in
the new one. They are mostly the children
of farmers and found it easy to return to the
family line. Yet these men are not quite fol-
lowing their parents. They have bought lit-
tle if any land in their ancestral villages,
and do not expect to return there (“you go
back when you are buried,” says Mr
Aboud). Instead they farm close to the cit-
ies where they made their careers. Several
predict that their children will have no in-
terest in farming. They are a transitional
generation. In a strange way, the rush to ac-
quire farmland shows that Africa is be-
coming properly urban. 7
 The Economist July 23rd 2016
Smoking
Plains packaging
Young Africans are lighting up at an
alarming rate
I N 2002 British American Tobacco (BAT), a
big cigarette manufacturer, shuttled a
temporary cinema around six Nigerian cit-
ies in what it called the “Rothmans Experi-
ence It Cinema Tour”. The company
screened “Ocean’s Eleven”, “The Matrix”
and other blockbusters for crowds of Nige-
rians, excited by the foreign concepts of
high quality sound and a wide screen. To
those who came to watch Brad Pitt gobble
hamburgers and Keanu Reaves swallow
red pills, BAT gave free packs of Rothmans
cigarettes.
The tobacco industry’s desperation to
recruit African smokers has only intensi-
fied since. In most countries the percentage
of the population that smokes cigarettes
has shrunk since 2000. Most of the excep-
tions are in Africa.
According to data collected by the
World Health Organisation (WHO), smok-
ing rates have increased in only 27 coun-
tries over the past 15 years; 17 are in Africa.
Congo-Brazzaville has witnessed the most
staggering spike: 22% of its people admitted
to smoking regularly in 2015, up from 6% in
2000 (see chart). Nearly half of Congolese
men now light up. The share of smokers in
Cameroon more than doubled in the same
period as well, from 7% to 22%.
Africa’s low rates of smoking in the re-
cent past were largely because of poverty
and limited advertising, says Hana Ross, a
researcher at the University of Cape Town.
But companies have caught on: in Zimba-
bwe recent advertisements cheerfully
boasted: “Not British. Not American. Zim-
babwe’s Finest Cigarettes”.
Happily between 1999 and 2010, the
share of sub-Saharan Africans living in ex-
treme poverty fell from 58% to 48%. Over
the same period, the continent’s total pop-
ulation rose from 767m to over 1 billion.
The smoke is spreading
Population aged over 15 years who smoke, %
Selected countries
2000 2015
0 5 10 15 20 25
Lesotho
Mali
Nigeria
Cameroon
Congo
Source: World Bank
The UN projects that Africa will account
for more than half of the world’s popula-
tion growth over the next 35 years. These
predictions tantalise tobacco companies as
smoking rates decline in places such as
China, Russia and America.
“Tobacco companies are very good at
finding market opportunities where there
are not only potential smokers, but also
weak regulations. Africa is in that sweet
spot,” says Michael Eriksen, of Georgia
State University. Granted, some African
countries have recently tightened tobacco-
control laws. In May Uganda banned
smoking in public places—a move Ghana
made in 2012. Mr Eriksen says such policies
discourage smoking but they can also be
difficult to enforce. Additionally, excise tax-
es in Africa are too low. Nigeria taxes ciga-
rettes at only 20% of the retail price, far less
than the WHO benchmark of 75%.
Particularly worrying is a rise in the
number of young people smoking. Al-
though African men smoke less than those
in other developing regions, that is not the
case with boys (some 9% of African boys
smoke compared with 8% in the Middle
East and 6% in the Western Pacific). At this
rate Africa will face a greater public health
crisis than anywhere else in the world. 7
Nigeria’s currency
If you love it...
LAGOS
A new “floating” exchange rate was
fixed. But that may be changing
S OMETIMES the worst is not bad
enough. Or such is the case for Nigeria’s
currency, which nosedived by 30% when
the central bank first removed its peg to the
dollar on June 20th. The naira is now this
year’s poorest-performing currency in
Africa. Internationally, only the currencies
ofVenezuela and tiny Suriname have fared
worse. Yet were it truly free, it would be
weaker still.
In fact, the naira’s free float seems to
have lasted exactly a day. Since its sharp
drop on the first day of its devaluation, the
currency has more or less flatlined at about
282 per dollar (see chart). This is rather odd
given the pent-up demand for dollars after
the central bank governor, Godwin Eme-
30 fiele, restricted the supply in a bid to de-
fend the currency at its old peg of199 to the
dollar. Many analysts expected it to plum-
met as low as 350 when businesses hoo-
vered up a backlog exceeding $4 billion.
Bankers say this stability came about
after the central bank sold dollars and trad-
ers were bullied by it to keep to an unoffi-
cial peg. “If you want to sell or buy higher
than the managed peg, life will be made
Middle East and Africa 27
difficult,” says the former CEO of a bank.
So why did the central bank ignore its
own policy on allowing a float? The most
plausible explanation is that Mr Emefiele
has been kowtowing to President Muham-
madu Buhari, who fears a weak currency.
But these sorts of flip-flops hardly reassure
foreign investors, whose dollars Nigeria
desperately needs to fill a gaping trade def-
icit. Nor do they encourage Nigerian ex-
porters to repatriate foreign exchange,
since they still expect a further fall in the
value of the local currency.
Starved of an inflow of fresh dollars,
the new interbank market on which the
naira trades has been painfully thin: little
more than $50m in foreign exchange
changes hands there daily, according to Re-
naissance Capital, an investment bank. (By
contrast foreign exchange flows in South
Africa are worth billions of dollars a day.) It
reckons that about 90% of Nigeria’s flow
comes from the central bank, which
should be stepping away from the market.
Its reserves have fallen to $26.3 billion:
barely enough for six months’ imports.
Yet there is reason for hope. By happy
coincidence, the naira began to slide again
in mid-July after the governor took an ear-
bashing from foreign investors over his
manipulation of the exchange rate (which
he denies). By the time The Economist went
to press it had reached 295 to the dollar, its
lowest ever official rate. This is still about
20% stronger than on the black market—
which is surely a more accurate representa-
tion of the naira’s worth.
The central bank’s policy of defending
the naira has been disastrous, creating
shortages of products such as milk and fuel
and bringing factories to a standstill for
want of imported inputs. The economy
contracted by 0.4% in the first quarter of
this year thanks to cheap oil and monetary
mismanagement. The IMF expects GDP to
shrink1.8% this year.
Worse still, inflation hit 16.5% in June—
the highest rate in almost 11 years. With a
weaker currency, it might surpass 20% by
Christmas, calculates Chris Becker of In-
vestec, a South African bank. Whatever
happens, Nigerians will hurt more yet. 7
Floating like a stone
Nigerian Naira against the $, inverted scale
100
Official rate
200
300
Unofficial rate
400
500
2014 15 16
Sources: Thomson Reuters; AbokiFX
28
United States
The Republican convention
Donning the mantle
CLEVELAND
Amid chaos and rancour, Donald Trump was confirmed as the Republican nominee
I N THE run-up to the Republican National
Convention, held in Cleveland between
July 18th and 21st, Donald Trump lamented
that its predecessor, in 2012, was “the single
most boring convention I’ve ever seen”. As
the party’s prospective nominee, he
planned to prevent a repeat of that tedium,
mainly by injecting “some show-biz” into
the proceedings. On the evidence of the
convention’s first three days, Mr Trump tri-
umphed. The convention was one of
America’s strangest and most compelling
political set-pieces in decades. This was
notwithstanding the C-grade celebrities,
including a star of the reality television
show “Duck Dynasty”, a golfer and a mar-
tial-arts impresario, whom Mr Trump
wheeled out to praise him.
Proceedings at the Quicken Loans Are-
na plunged between perplexing inanity (to
which the celebrities did contribute),
shambles, and sometimes rowdy conflict
among the almost 2,500 Republican dele-
gates gathered to nominate Mr Trump. Lit-
tle went according to plan. Entertainment
aside, Mr Trump needed three things from
the convention. He needed to impose a
measure of unity on his divided party. He
needed to project a sense that he is quali-
fied to be president—which almost 60% of
Americans doubt. And he needed to ap-
pear more likeable—especially to the third
of Republican voters who dislike him. On
these criteria, the convention looks to have
been a crashing failure.
The degree to which Mr Trump’s popu-
list takeover of the Republican Party has
rent it is hard to exaggerate. The party’s past
two nominees, John McCain and Mitt
Romney, refused to come to Cleveland. So
did the past two Republican presidents, the
Georges Bush, and their son and brother,
Jeb Bush, a humiliated former opponent of
Mr Trump’s who says he is mulling voting
for the Libertarian Party. John Kasich, an-
other vanquished rival, also gave the con-
vention a miss—though, as the governor of
Ohio, he was responsible for arranging its
ample security. A dozen notable congress-
men also stayed away, especially those,
such as Senator Mark Kirk of Illinois and
Mr McCain, in Arizona, who face daunting
re-election battles which Mr Trump’s
name on the ballot will probably make
harder.
No wonder Mr Trump needed reality
television stars to speak for him. Among
elected Republicans, Chris Christie and
Scott Walker, the governors of New Jersey
and Wisconsin, were the only heavy-
weight speakers prepared to give him a ful-
some endorsement. The Speaker of the
House of Representatives, Paul Ryan, who
was chairing the convention, gave a
speech, notionally in support ofMr Trump,
in which he referred to him only twice—
and both times in the same breath as his
running-mate, Governor Mike Pence of In-
The Economist July 23rd 2016
Also in this section
29 On the trail: Cleveland special
30 Paul Ryan’s agenda
30 Roger Ailes’s demise
31 Policing after Baton Rouge
32 Michael Elliott
32 The economics of the Mariel boatlift
33 Lexington: Mike Pence
For daily analysis and debate on America, visit
Economist.com/unitedstates
Economist.com/blogs/democracyinamerica
diana, whose caustic conservatism Mr
Ryan approves of more. That was one
more mention than Senator Ted Cruz, a
distant runner-up in the primaries and tal-
ented orator, afforded Mr Trump.
In a theatrical performance—delivered
in a prime-time viewing slot on Day
Three—Mr Cruz first congratulated the ty-
coon on his victory, then delivered a virtu-
oso argument for freedom and the consti-
tution, conservative orthodoxies in which
Mr Trump has little interest. “We deserve
leaders who stand for principle,” said Mr
Cruz, to, initially, thunderous acclaim from
a crowd grateful, at last, for a revivifying
dose of conservative dogma. “Please, don’t
stay home in November,” Mr Cruz contin-
ued: “Stand, and speak, and vote your con-
science, vote for candidates up and down
the ticket who you trust to defend our free-
dom and to be faithful to the constitution.”
But then it dawned on the crowd that Mr
Cruz had not named Mr Trump because he
did not mean him. He had just punked the
convention. As many Trump supporters
began to boo, members of the Trump cam-
paign rushed around the delegates, alleg-
edly trying to whip up more dissent. To de-
flect attention from the wrecking-job afoot
onstage, Mr Trump entered the arena and
stood waving generally, with a waxen half-
smile, like a senile dictator. By the time Mr
Cruz finished, there was pandemonium;
his wife Heidi, assailed by livid Trump sup-
porters jeering “Goldman Sachs!” (the cap-
italist outfit for which she works), had to be
escorted outside by bodyguards.
Many delegates were also unhappy
with their party’s choice. The opening day
of the convention saw a last-ditch effort by
some anti-Trump holdouts to express their
dissent by forcing a disapproving vote on
Mr Trump’s rules for the convention; they
were drowned out by a burst of aggressive 1
 The Economist July 23rd 2016
2 whipping and loud rock music. The 721 de-
legates who voted against Mr Trump’s
nomination the next day, during the offi-
cial tallying of his support, nonetheless
made up the Republicans’ biggest dissen-
ting vote since 1976, when Gerald Ford
sealed his defeat of Ronald Reagan on the
floor of the convention. Even many of Mr
Trump’s loyal delegates seemed a bit half-
hearted in their support; asked whether
his champion was a Republican or a con-
servative, a delegate from North Carolina
responded: “No, not yet.”
Even so, as the disapproving response
to Mr Cruz suggested, most delegates were
prepared to backMr Trump, whatever their
misgivings about his disapproval of free
trade and thuggish style, in order to wrest
power from the Democrats; 90% of Repub-
lican voters say the same. Yet anyone look-
ing to this convention for evidence that Mr
Trump has the wherewithal to perform
that feat must be disappointed. It was mud-
dle-headed and disorganised, reflecting a
campaign effort that appears amateurish,
underfunded and insufficient.
On the trail
Cleveland special
The joker
“I’ll let you know how I feel about it after
it happens.”
Donald Trump fails to squash rumours that
even if he wins the election, he may yet
walk away from the presidency. New York
Times
Another brick...
“We build 95-storey buildings with bath-
rooms, that’s tough construction…Walls
don’t have bathrooms.”
Trump resumes his favourite project.
Sopan Deb, Twitter
Trump Airlines?
“She was asked…Little bit difficult be-
cause of, you know, it’s a long ways
away.”
Sarah Palin did not make the trip from
Alaska to Ohio. Washington Examiner
Freudian slip
“You can’t always get what you want.”
Mr Trump’s unfortunate choice of music,
by the Rolling Stones, before officially
introducing Mike Pence as his vice-presi-
dential pick
Deep throat
“What is the T doing to that P?”
John Dingell, a Democratic congressman, is
bemused by the suggestive Trump-Pence
campaign logo (above)
The programme was a mess; the con-
vention’s expected breakout star, Senator
Joni Ernst of Iowa, ended Day One speak-
ing to a near-empty arena. Then a more
embarrassing scandal erupted. It emerged
that a moving tribute to Mr Trump by his
Slovenian-born wife, Melania, contained
passages lifted from Michelle Obama’s ad-
dress to the 2008 Democratic Convention.
Paul Manafort, Mr Trump’s campaign
chief, denied this was plagiarism; Mr
Christie said it was no big deal. By the time
the Trump campaign admitted that Mrs
Trump’s wife had plagiarised the wife of
the man he declares unfit to be president,
the kerfuffle had dominated TV coverage
of the convention for a day. It made those
around Mr Trump, a self-declared straight-
shooter and problem-solver, appear pho-
ney and incompetent. It made a mockery
of his own ambition to show a softer side
to his unloved character.
As The Economist went to press, Mr
Trump had a chance to turn things around
in his closing speech. It is the most impor-
tant part of any convention and, given his
Tourist attraction
“Home of10,000 lakes, home of Spam
and home of the late, great Prince.”
The Minnesota delegation casts its vote
Humblebrag
“I think I am, actually humble. I think I’m
much more humble than you would
understand.”
Mr Trump’s first joint interview with Mr
Pence was focused mostly on himself. CBS
News
“It was a Trump tour de force. Also, Mike
Pence was there.” Washington Post
Sad emoji
“I’m worried that I will be the last Repub-
lican president.”
Former President George W. Bush, report-
edly speaking to a reunion of former staff
in April. Politico
A good lickin’
“I will utilise my 55 years of law enforce-
ment. I don’t have a gun, but I have a
tongue.”
Sheriff Joe Arpaio of Arizona objects to the
anti-Trump delegates. Time
Keep Calm
“It’s exciting. I think you can feel we’re
resigned to this.”
A visitor to the convention is overcome by
emotion
United States 29
charisma and his campaign’s reliance on it,
that may be especially true for Mr Trump.
Even so, the most enduring moment of this
convention may prove to be from Day
Two. It was supposed to be dedicated to
the economy; “Make America work again”
was its theme. Yet, in the absence of almost
any talk onstage of jobs, business or Mr
Trump’s economic plans, such as they are,
the crowd began chanting a more appro-
priate slogan: “Lock her up! Lock her up!”
Hatred of Hillary Clinton, whom Mr
Trump says is undeserving of her liberty,
never mind the presidency, was the leitmo-
tif in Cleveland. The word “Hillary” was
spoken disdainfully onstage that day more
often than “Trump” or “America”, and four
times more often than “economy”. Almost
all Mr Trump’s headline speakers joined
the attack on his Democratic rival. The
grieving mother of one of the four Ameri-
cans killed by militants in Benghazi in 2012
blamed Mrs Clinton for their deaths—an al-
legation rubbished by nine official investi-
gations so far. Scott Baio, a television actor
in 1980s sitcoms, defended a tweet in
which he labelled Mrs Clinton a “cunt”.
Ben Carson, another former opponent of
Mr Trump’s, suggested a possible link be-
tween the former First Lady and Satanism.
The Republicans, their convention has
confirmed, are irredeemably divided be-
hind an unloved candidate whose plat-
form and organisation appear unfit for the
coming campaign. Rallying in detestation
of his opponent is their only hope.
They are fortunate she presents such a
juicy target. Mrs Clinton is almost as dis-
liked as Mr Trump, which is why, despite
his poor ratings, he remains within touch-
ing distance of her. An historically hateful
campaign looks inevitable. The question,
which the first post-convention polls may
begin to answer, is which of the two will
that hurt most? 7
Bigger, not better
30 United States The Economist July 23rd 2016

Roger Ailes

Kingmaker no more
NEW YORK
A media master disappears

“I WANT to elect the next president,”

Roger Ailes once told staffers at Fox
News. It was no idle ambition. Mr Ailes,
the pre-eminent master of the dark arts of
politics and television in America, had
been helping Republicans get elected
president since Richard Nixon. This
week, with the Republican Party nomi-
nating another candidate he helped to
create, the kingmaker himself is being
dethroned. Rupert Murdoch and his sons
Lachlan and James, who control 21st
Century Fox, appear ready to oust the
76-year-old chief of Fox News after a
career spanning more than 50 years.
It is a sudden and ignominious down-
Paul Ryan’s agenda fall, the sort Mr Ailes would have put on
the air nonstop if the subject had been
Better than what? one of his enemies. His network’s motto
was, and is, “fair and balanced”, a shot at
the perceived liberal bias of his compet-
itors. Mr Ailes’s brand of angry, conspira-
cy-driven political news and opinion set
CLEVELAND
Fox News apart, from the coverage of real
The Speaker’s policies are the best a
scandals, including the impeachment of
divided party has to offer
Bill Clinton, to imagined or overcooked
presaged a historic presidential run.
Few felt they could challenge Mr
Ailes. It was only in the last year that
weaknesses began to emerge. Mr Trump
boycotted the network over his percep-
tion of mistreatment by Ms Kelly; eventu-
ally they made up. Then on July 6th
Gretchen Carlson, a former presenter on
the channel, filed a lawsuit alleging
sexual harassment. Other women
emerged, including in reporting by Gabri-
el Sherman, a journalist who wrote an
unflattering biography of Mr Ailes. On
July 19th Mr Sherman reported that Ms
Kelly too had spoken of being harassed
by Mr Ailes a decade ago.
The theme of the allegations, which
Mr Ailes denies, was that women would
get ahead if they did what he asked. For
years he seemed to hold such power. Mr
Sherman wrote that Mr Obama greeted
the media titan at the White House with
the line, “I see the most powerful man in
the world is here.” No longer.

F OR all the Republican Party’s problems,

it does not want for policy. Donald
Trump has several clear-if-crazy promises:
build a wall on the Mexican border, sus-
pend Muslim immigration and renegotiate
trade deals. To coincide with the conven-
tion, the party, as usual, released an official
policy platform. And since early June Paul
Ryan, the Speaker of the House of Repre-
sentatives, has been penning six papers
laying out what he calls “A Better Way”.
The problem for the Republicans is that
these multiple plans frequently contradict
one another.
It is no secret that Mr Ryan does not sup-
port Mr Trump’s trade- and immigrant-
bashing populism. These areas have been
left out of Mr Ryan’s agenda, to limit dis-
cord. But lapses in the Speaker’s restraint
threaten the truce. At an event on July 18th
he described Mr Trump as “not my kind of
conservative”. In his speech the next day
the Speaker barely mentioned Mr Trump,
and said that his presidency would only
provide a “chance” of a better way.
Mr Ryan also seems to have gone quiet
on fiscal policy. For most of Barack
Obama’s presidency, congressional Re-
publicans have warned of the dangers of
government debt. The Speaker still refers
to a supposed “debt crisis”, but his eco-
nomic policy papers barely mention it.
Two things probably account for this shift.
The first is that the deficit has fallen from
10% of GDP in 2009 to 2.5% in 2015. The sec-
ond is Mr Trump’s fiscal abandon.
ones, like Hillary Clinton’s failings over
Benghazi.
Viewers ate it up. Mr Ailes, the son of a
factory worker, instinctively knew how
to appeal to white, working-class voters
disaffected, as he was himself, with
liberal elites and political correctness. In
six years he built Fox News from a joke
when it began, in 1996, into the number-
one powerhouse in cable, eventually
collecting profits of more than $1 billion a
year. Along the way he helped redefine
American right-wing politics, and created
its media stars in Bill O’Reilly, Sean Han-
nity and, more recently, Megyn Kelly.
He also helped mould Mr Trump into
a nasty populist. In 2011 Mr Trump was
one of the loudest cheerleaders for Fox
News’s questioning of Barack Obama’s
birthplace. Though this seemed insane
outside the Fox News bubble of hype, it Thriving on conspiracy
For a Republican to call for both bal- modest by comparison. (The Speaker
anced budgets and big tax cuts is not novel. would, for instance, cut the top rate of in-
But Mr Trump has taken that inconsistency come tax from 39.6% to 33%, compared
to new heights. His tax plan would, even with 25% under Mr Trump’s current plan.)
after its growth-boosting effects, cost $10 Aligning the two plans will require more
trillion (about three times the total tax take than merely adjusting rates, however. So
in 2015) over a decade, according to the Tax far, Mr Trump has ignored two key pillars
Foundation, a think-tank. Yet he also of tax reform which the Speaker supports.
claims, impossibly, that this largesse The first is to pay for lower rates, in part, by
would not cause the national debt to rise. broadening the tax base; Mr Trump’s plan,
On July 20th two of Mr Trump’s advis- if anything, makes the tax base narrower.
ers said he would soon update his tax plan The second is to redefine the corporation
and bring it closer to Mr Ryan’s, which is tax so as to encourage investment. 1
 The Economist July 23rd 2016
The forgotten issue
US budget deficit CBO baseline
As % of GDP Trump’s tax plan*
0 energy regulations, and the Department of
–
2 Labour’s penchant for rule-making. Per-
4
6 from the Dodd-Frank Act of 2010.
8 It is surprising, then, that the party’s offi-
10
F O R E C A S T
12
201516 17 18 19 20 21 22 23 24 25 26
Sources: Congressional *Assuming no change
Budget Office; Tax Policy Centre in economic growth
2 It is not yet known how pricey Mr
Trump’s new plan will be. For now, Mr
Ryan has banished his fiscal hawkery to
his health-care plan, in which he promises
to curb rising spending on Medicare (gov-
ernment health insurance for the elderly).
Yet Mr Trump has promised faithfully to
protect Medicare.
Is there anything the two men agree on?
Policing after Baton Rouge
Ambushed and anguished
NEW YORK
The thin blue line is on edge after a new spate of shootings
W HEN police officers hear on their ra-
dios that a 10-13 or an 11-99 is in pro-
gress, they drop what they are doing and
go. A 10-13 means an officer needs assis-
tance. An 11-99 means an officer is under at-
tack, and all nearby units must respond.
Such an event happened in Baton
Rouge, Louisiana on July 17th, when three
officers were killed in an ambush. Accord-
ing to the city’s police chief, they were “tar-
geted and assassinated” with military pre-
cision. Given the timing, the killer, Gavin
Long, a black ex-serviceman, may have
been enraged by the killings of unarmed
black men by police in Baton Rouge and
Minnesota—as was the black man who, on
July 7th, shot dead five officers in Dallas.
In the wake of these shootings, several
police departments have changed tactics.
In Boston and New York City officers have
been ordered to work only in pairs. In New
Orleans officers must respond in two pa-
trol cars, instead of the usual one. One for-
mer cop speculates that, in future, officers
responding to a call may park a block away
and avoid using the front entrance, to
avoid being ambushed.
After riots in 2014 in Ferguson, Missou-
ri, where an unarmed black man had been
shot by a white police officer, many depart-
ments tried to get closer to their communi-
The need for deregulation may be one. Re-
publicans lament the Affordable Care Act’s
new rules for the health-care industry, the
Environmental Protection Agency’s clean-
haps most vocally, they object to the end-
less new financial regulations resulting
cial platform supports reinstating the
Glass-Steagall Act of 1933, which forcibly
separated commercial and investment
banking. This would be a dramatic regula-
tory incursion by any measure. The plat-
form is also noteworthy for its astringent
language on gay marriage, transgender
rights and pornography.
In short, Republican policymaking is di-
vided between a populist presidential can-
didate, a sober but unconvincing Speaker,
and a base which cares most about stern
social conservatism and immigration. Mr
Ryan’s ideas are the best on offer. They may
prevail if the party wins in November. But
it is far from certain. 7
ties. Police walked the streets rather than
using patrol cars, getting to know shop-
owners and residents nearly as well as the
criminals. But trust between the police and
citizens, particularly blacks, has badly bro-
ken down. Anti-cop rhetoric is pervasive.
Camera phones mean more scrutiny. And
there are more than 300m guns around.
One move towards reconciliation, at least
United States 31
Navigating through a crowd in a state
with open-carry gun laws is a nightmare.
Forty-five states now have them. In Dallas,
during the protest at which the five officers
were killed, as many as 30 people were car-
rying rifles. Although the number of police
murdered in the line of duty is much lower
than in the 1970s, when the average was127
a year, this year has seen a jump. According
to the National Law Enforcement Officers
Memorial Fund, 32 officers have been shot
dead so far this year. Over the same period
last year, 18 were.
In response to Black Lives Matter, some
serving and retired officers have created
Blue Lives Matter, a pro-police movement.
According to the New York Post, Blue-Lives-
Matter badges sold out at this week’s Re-
publican convention. In May Louisiana be-
came the first state to pass a Blue Lives Mat-
ter bill, which treats attacks on the police as
hate crimes. Similar bills are afoot in other
states, including Wisconsin and Florida.
Some departments are becoming better
at dealing with explosive situations. Even
smaller outfits, like Florida’s Palm Beach
Gardens force, with just 100 officers, are
spending money to improve the way po-
lice go about their jobs. A 10,000-square-
foot tactical training centre, opening in the
autumn, will teach officers to use words,
not force, to defuse dangerous moments.
In a classic example of the method, in No-
vember a man brandishing a knife in Cam-
den, New Jersey was arrested without inci-
dent. Police followed him at a distance,
encouraging him to drop the knife.
Camden was once one of America’s
most dangerous cities. Crime there has
reached record lows—homicides fell by
52% between 2012 and 2015—largely be-
cause of community policing. Handcuffs
and firearms are now considered tools of
last resort. As Camden’s police chief re-
marked not long ago, “Nothing builds trust
like human contact.” 7
32 United States The Economist July 23rd 2016

Michael Elliott behind him. “In Covent Garden, Sir, in mu-
sic, in arts, in advertising. That’s our MIT.”
The Fab One The sweeping view was something
Mike produced with gusto, not just at The
Economist, but at Newsweek and Time too,
for he had senior roles at all three. Here he
was the founding author of both the Bage-
hot column on British politics and the Lex-
One of Liverpool’s finest exports to
ington one on America (named after the
America died on July14th, aged 65
first skirmish in America’s war of indepen-
communism, “America now is not self-
confident, not sure of its greatness. It feels
the pressure ofthe outside world on its vio-
late shores, and it fears a debilitating frag-
mentation within them.” The words still
ring true 25 years on.
Presciently, too, Mike grasped in 1992
the political gifts of a young governor from
Arkansas. And he had an eye for the sort of
detail that could elude others. Setting off to

A ROUND the time that Michael Elliott,

then a Britain correspondent at this
newspaper, was steeped in an analysis of
London’s revival—published in January
1986—Prince Charles came for lunch at The
Economist. Where, the prince asked the
journalists, were Britain’s entrepreneurial
industries of the kind America nurtured at
MIT? “There,” said Mike, with a sweep of
his arm towards the panorama of London
Immigration economics
Wages of Mariel
The effect of the boatlift is re-evaluated
dence, where the British drew first blood
before being harried back to Boston).
In America Mike found his spiritual
home. No one cared about a Scouse accent
and, in contrast to Britain, blatant ambition
was admired. The big ideas poured forth.
“No offence intended, but what is the
point of the Senate?” began a typical Lex-
ington column. A special report in 1991
probed why, despite the collapse of
take the pulse of the heartland after the Re-
publican convention that year, he wrote:
“Between Tulsa, Oklahoma and Rapid
City, South Dakota, The Economist’s corre-
spondent was unable to find a copy of
Playboy openly displayed for sale.”
Having explained America to the
world, he went on to explain the world to
America. As editor of Newsweek and
Time’s international editions, he splendid-
ly interpreted everything from the geopoli-
tics of football to the consequences of
Asia’s rise. In all this, three things helped
him. First, his family, who kept his feet on
the ground. Second, a quick mind: he
wrote with speed and panache, after stroll-
ing round leisurely with a big cigar before-
hand. And, third, a winning personality:

I T CAN be hard to work out the net

impact of immigration on wages, espe-
cially in cities with bustling economies.
The only way to try to tease out causality
from coincidence is by hunting for a
“natural experiment”: a historical event
that is something like the randomised
controlled tests scientists would conduct
in a lab. For immigration, one such useful
event is the Mariel boatlift of1980.
For all its woes now, Cuba was an
even tougher place 36 years ago for dis-
sidents and economic strivers. Fidel
Castro’s government persecuted citizens
for their political beliefs, and barred most
Cubans from emigrating. But in April
1980 Mr Castro decided that tensions in
his country had grown too severe, and
opened an escape valve. He declared that
any Cubans who wanted to leave were
free to go, provided that they left by the
port of Mariel. Some 125,000 Cubans
took up his offer that year, most of them
Sinking
Weekly earnings* of high-school dropouts
United States, men aged 25-59, 2014 $
MARIEL BOATLIFT
Rest of the United States
Miami
1973 80 85 90 95
Source: George Borjas *Three-year moving average
heading for Miami.
As the newcomers arrived, Miami’s
workforce grew by 55,000, or 8%, almost
gregarious, fun, big-hearted. That made
him a natural networker, as well as a gener-
ous mentor to young journalists.
at once. The marielitos were mostly low- For the past five years he was president
skilled: around 60% lacked high-school and CEO of ONE, an anti-poverty advoca-
degrees, and just 10% were college gradu- cy organisation co-founded by the rock star
ates. In theory, a supply shock of this Bono. It was a perfect place for his hobnob-
magnitude might have been expected to bing and high ideas. And it gave him a new
depress the wages of workers already in mission: after explaining the world, it was
Miami, particularly the poorly-educated, time to change it.
at least in the short run. But the empirical Time, sadly, was not on Mike’s side. Two
evidence has been mixed. In 1990 David days before his death from cancer, ONE
Card, an economist now at the Universi- held a dinner in his honour. In homage to
ty of California, Berkeley, looked at the his Liverpudlian roots, Beatles references
bottom quartile of workers in Miami and abounded. Bono adapted “When I’m 64”
concluded that the Mariel boatlift had to “Now I’m 65”. But never mind the Fab
had “virtually no effect” on the wages of Four: here was a Fab One, who with an ex-
low-skilled non-Cubans. He also found pansive gesture and a few phrases could
no evidence of increased unemploy- sum up not just London, but the world. 7
ment. His paper was highly influential.
Twenty-six years later, Mariel is in the
policy spotlight once again. A forth-
coming paper by George Borjas, an econ-
omist at Harvard, revisits the boatlift and
contradicts Mr Card’s conclusion. By
using a slightly different definition of
low-skilled worker—high-school dro-
pouts—he found that their wages fell
400
precipitously after the influx of labour in
1980, both in absolute terms (see chart)
and relative to other workers in Miami. A
300
similar decline could be observed after
1995, after a second wave of immigration
200
from Cuba.
It remains hard to generalise from
100 either set of results. Mr Card’s study
suggested that reality may not agree with
0 researchers’ intuitions; Mr Borjas’s paper
2002
shows that empirical results may depend
on exactly where researchers look.
Big Idea brewing
 The Economist July 23rd 2016
Lexington At his majesty’s pleasure
Mike Pence is no saviour for a divided Republican Party
C ONSERVATIVE principles “work every time you put them
into practice”, Governor Mike Pence of Indiana told the Re-
publican National Convention in Cleveland in his first big speech
as Donald Trump’s vice-presidential running-mate. Mr Pence
cited as proof his home state’s balanced budget, lowered taxes
and sharply trimmed public workforce. A strait-laced, silver-
haired former altar boy, he waved hello to his mother and to his
wife of 31 years, and promised that Mr Trump would bring “no-
nonsense leadership” to Washington. The crowd was so relieved
that spontaneous chants of “We like Mike” broke out.
Mr Pence was introduced by his former colleague from Con-
gress, the Speaker of the House of Representatives, Paul Ryan.
Back in 2012 Mr Ryan reassured anxious conservatives as Mitt
Romney’s vice-presidential sidekick. Mr Ryan called Mr Pence a
“Reagan conservative through and through”, who could be
trusted as a pro-growth, anti-abortion defence hawk from “the
heart of the conservative movement and the heart of America”.
Others go further. Cleveland buzzed with talk of Mr Pence as
vice-president-cum-CEO, who might wield sweeping delegated
powers over foreign and domestic policy. Conservatives have
been encouraged in thinking by such Machiavellian figures as
Paul Manafort, the Trump campaign chairman, who told the Huf-
fington Post, a website, in May that the putative president wanted
an “experienced” vice-president to do bits of the job that do not
appeal to him, leaving Mr Trump a “chairman of the board”.
Mr Ryan played up the idea of the general election as a team
effort, telling the convention that the best end for a year of “sur-
prises” would be America voting for a “conservative governing
majority”. The Republican majority leader in the Senate, Mitch
McConnell of Kentucky, asked delegates to imagine a President
Trump signing bills placed on his desk by a Republican Congress,
and naming stern conservatives to the Supreme Court.
For their part, several delegates in the hall cooed over Mr
Trump’s snappily dressed, perfectly coiffed children, as they de-
clared their love for and pride in their father. In an unusually feu-
dal touch, the convention in Cleveland heard speeches from sev-
eral Trump employees, including the manager of his Virginia
wine estates. This vision of a leader surrounded by handsome
children and loyal counsellors had its fans. A woman delegate
United States 33
from New York, eyes wide in delight, predicted that a President
Trump would surround himself with the “very, very, best peo-
ple”, including the “best generals”, to keep the country safe.
Enough of these delusions. Start with a gulf of ideology. Such
figures as Mr Pence and Mr Ryan, with their record of backing
free-trade pacts and their wonkish talkofbalanced budgets, limit-
ed government and a global, outward-facing America, are de-
scribing ways to make their country more competitive. Boil Mr
Trump’s platform down to its essence, and he is offering to shield
his angry, unhappy supporters from global competition, whether
by beating it back with protectionism, trade wars and a fortified
border, or by an “America First” foreign policy that would hand in
America’s badge as a global policeman. As if to prove the point,
on the day of Mr Pence’s speech Mr Trump told the New York
Times that, should Russia menace such NATO allies as the Baltic
republics, he would weigh whether they had “fulfilled their obli-
gations to us” before acting.
Listen to some in Cleveland, and “chairman of the board”
hardly describes the role they have in mind for Mr Trump. With
their word-pictures of Reaganesque bills being sent for the Trump
signature, and their fawning praise for the Trump clan, some are
describing a sort of elected monarchy, complete with princelings,
in which important decisions are guided or taken by a Prime Min-
ister Pence from the ruling Republican Party.
No such institution exists in America’s constitution, born of a
revolution against a king. The most influential vice-presidents
wield power only at the pleasure of the president. By the end of
the second term of George W. Bush, even Dick Cheney was a
much reduced figure. Moreover, much of a president’s political
power derives from the unrivalled personal clout that comes
with election by more than 60m voters: a mandate that explains
why presidents enjoy honeymoon periods when they are first
elected. The mandate ofCongress is sometimes fresher, after mid-
term elections, but it is never as weighty.
In as much as mandates are built on promises to do things, Mr
Trump pledges to enact policies that repudiate much of what
men such as Mr Pence and Mr Ryan stand for. Republican unity,
such as it is, is currently built on what the party is against. Almost
every speech in Cleveland attacked Hillary Clinton, the pre-
sumptive Democratic nominee, whose name was enough to
prompt repeated chants from delegates of “Lock her up”. But for
feuding wings of the Republican Party, having a common enemy
is not the same as seeking the same governing mandate.
Trump Rex
Mr Pence may not even broaden Mr Trump’s base much. He
shores up the Christian conservative vote, but by taking positions
liable to put off other groups vital to Republicans in national elec-
tions, such as college-educated whites or married suburban
women. As governor of Indiana he signed, then tweaked, a law
that appeared to allow religious business owners to refuse ser-
vice to gay couples, as well as a far-reaching bill (since held up by
lawsuits) banning doctors from performing abortions on such
grounds as a diagnosis of Down’s syndrome.
In febrile times, it is hard to begrudge Republicans cheering a
stolid midwesterner for whom “no-nonsense” is a compliment.
But nonsense is what has propelled Mr Trump this far. He needs a
running-mate who will not overshadow him, and who will give
Reagan-loving conservatives an excuse to embrace him, not con-
trol him. Hence Mr Pence. 7
34
The Americas
Canada’s internal trade
The great provincial obstacle course
OTTAWA
The country is far from being a single market. That may be about to change
L AST year Don Dean, a logistics expert, set
out to solve a mystery: why were oil
and mining firms in Alberta buying heavy
equipment from Asia, landing it in United
States ports and bringing it in by motorway
rather than using suppliers in Ontario? The
answer, he discovered, is bureaucracy. Lor-
ries carrying heavy loads in Canada need
permits from each provincial government,
municipality and utility company along
the route. Ontario can take 27 weeks to is-
sue one, says Mr Dean, who works for Pro-
log Canada, a consultancy. The journey on
American roads requires just one licence.
Canada’s constitution of1867 mandates
the free flow of commerce across the coun-
try. But leaders of the ten provinces and
three territories have spent 149 years in-
venting creative ways to favour local firms
or issuing regulations that unintentionally
snarl trade through sheer complexity.
Some are mere nuisances: lambs’ heads
are thrown out by federally licensed
slaughterhouses but given back to the
farmer for sale in some provinces (they are
a delicacy in some cultures). Other impedi-
ments loom larger. Canada lacks a single
securities regulator; production of milk
must be matched to local consumption;
the sale of alcohol is reserved for provin-
cial monopolies. Twelve regional regula-
tors license engineers. Canada’s internal
market for goods and services is less inte-
grated than that of the EU, concluded Ali-
cia Hinarejos, of the University of Cam-
bridge, in a study in 2012.
No one knows how much this costs in
lower productivity from lost economies of
At home abroad
Canada’s provincial exports as % of GDP, 2014
Largest economies
International Inter-provincial
0 10 20 30 40
Ontario
Alberta
Quebec
British Columbia
Saskatchewan
Source: Statistics Canada
scale. In a recent report, “Tear Down These
Walls”, the Senate’s banking committee
guessed that the economy loses C$130 bil-
lion ($99 billion) a year from internal barri-
ers, which is among the higher estimates. A
more reliable answer will come later this
year when EY, an accounting and consult-
ing firm, completes work on an index of
barriers and their costs that was commis-
sioned by the federal government in 2014.
Internal obstacles are one reason that
provinces trade more with foreign coun-
tries than with each other; another is the
American market next door (see chart).
Earlier attempts to dismantle barriers have
been half-hearted. An Agreement on Inter-
nal Trade reached in 1994 eliminated spe-
cific obstacles but did not sweep most
away. Provinces often ignored it. Quebec
protected its dairy farmers by insisting that
margarine could not be the same colour as
The Economist July 23rd 2016
Also in this section
35 Cuba’s ailing economy
35 War crimes in El Salvador
36 Bello: Lessons from a liberal
swashbuckler
butter; Alberta, which makes butter-col-
oured spread from canola, protested for
years (before winning its case). Fines of up
to C$5m, introduced in 2009, improved
compliance. The agreement has been ex-
tended to cover some aspects of labour
mobility, but large gaps remain.
Unlike the EU, Canada has left the de-
molition of internal trade barriers to politi-
cians rather than the courts. Canada’s Su-
preme Court, reluctant to interfere in
provincial affairs, has ruled narrowly in
trade cases on whether a province was act-
ing within its constitutional powers rather
than on broader issues of internal free
50 trade. That has spared Canada EU-style
complaints about rules on banana curva-
ture imposed from afar by bureaucrats. But
it has also allowed the national market to
remain a patchwork. The federal govern-
ment, which has jurisdiction over inter-
provincial commerce, has sermonised on
freer trade but not enforced it.
Two recent events have changed the
mood. The first is the conclusion in Febru-
ary of negotiations on a free-trade agree-
ment between Canada and the EU (CETA).
Under the proposed deal, Canada would
offer European firms broader access (for ex-
ample, in public procurement) than prov-
inces give to each other’s companies. This
showed that Canada’s internal obstacles
are “a bit ridiculous”, said Tom Marshall, a
former premier of Newfoundland and
Labrador. After Britain’s vote to leave the
EU, CETA is likely to fall apart, but its sham-
ing effect lingers.
A bigger spur to reform is a decision by a
court in New Brunswick in April to dismiss
charges against a man who bought cheap
beer and spirits in neighbouring Quebec to
guzzle at home. The judge took a more ex-
pansive view of his powers than earlier
precedent-setters have done. “The fathers
of confederation wanted to implement
free trade as between the provinces of the
newly formed Canada,” he wrote. New
Brunswick’s liquor laws thus violate the 1
 The Economist July 23rd 2016
2 constitution. The province has appealed;
the case may reach the Supreme Court.
Before that happens the provinces may
take action. On July 8th their trade minis-
ters decided to revise the internal-trade
agreement. The “positive list” of deregu-
lated sectors will be replaced by a “nega-
tive list”, a limited number of sectors ex-
empt from free trade. A new mechanism
will be created to harmonise provincial
regulations. Provinces are to offer each oth-
er the same access Canada does to coun-
tries with which it has trade deals. Brad Du-
guid, Ontario’s minister responsible for
trade, calls the agreement “unprecedent-
ed”. As The Economist went to press, pro-
vincial premiers were expected to ratify it.
Yet resistance to the Canadian single
market remains strong. Alberta lobbied to
reserve for local firms a big share of con-
tracts to rebuild Fort McMurray, the centre
of its oil industry, which was burnt down
by wildfires this year. Deregulation of
trade in liquor, dairy products, poultry and
eggs has been left until later. Provincial
protectionism is not dead yet. 7
Cuba’s economy
Caribbean
contagion
HAVANA
Venezuela’s pneumonia infects the
communist island
Q UEUES at petrol stations. Sweltering
offices. Unlit streets. Conditions in
Cuba’s capital remind its residents of
the “special period” in the 1990s caused by
the collapse of the Soviet Union. Today, the
benefactor in trouble is Venezuela.
For the past15 years Venezuela has been
shipping oil to Cuba, which in turn sends
thousands of doctors and other profes-
sionals to Venezuela. The swap is lucrative
for the communist-controlled island,
which pays doctors a paltry few hundred
dollars a month. It gets more oil than it
Haircuts all round in Havana
needs, and sells the surplus. That makes
Cuba perhaps the only importer that pref-
ers high oil prices. Venezuelan support is
thought to be worth 12-20% of Cuba’s GDP.
Recently, the arrangement has wob-
bled. Low prices have slashed Cuba’s profit
from the resale of oil. Venezuela, whose
oil-dependent economy is shrinking, is
sending less of the stuff. Figures from
PDVSA, Venezuela’s state oil company, sug-
gest that it shipped 40% less crude oil to
Cuba in the first quarter of 2016 than it did
during the same period last year. Austerity,
though less savage than in the 1990s, is
back. Cuba’s cautious economic liberalisa-
tion may suffer.
On July 8th Marino Murillo, the econ-
omy minister, warned the legislature that
Cuba would lower its energy consump-
tion by 28% in the second half of this year
and cut all imports by15%. The government
has ordered state institutions to reduce
their energy consumption dramatically.
Television producers have been told to film
outdoors to save the expense of studio
lighting. Foreign businesses, some of
which have not been paid by their govern-
ment customers since last November, are
being asked to wait still longer, though the
government is negotiating to restructure
sovereign debt on which it had defaulted.
It has cut off the supply of diesel to driv-
ers of state-owned taxis and told them to
look for other work for the next few
months. “It’s entirely illogical,” says Hec-
tor, a driver. Tourism has surged since the
United States loosened travel restrictions
in 2014, which will partially offset the loss
of Venezuelan aid. The cost of fuel is mi-
nuscule compared with the fares Hector’s
American passengers pay.
A week after Mr Murillo, the govern-
ment’s leading economic reformer, issued
his warning to the legislature he was re-
lieved of his ministerial duties, though he
remains in the Politburo. His replacement
as economy minister, Ricardo Cabrisas, is
seen as a competent veteran.
The crisis seems to have slowed re-
forms of Cuba’s socialist economy, which
were never rapid. Raúl Castro, who took
The Americas 35
over as president from his brother, Fidel, in
2008, has since allowed entrepreneurs to
start small businesses, cut the state work-
force by 11% and opened a free-trade zone
for foreign firms at the port of Mariel. But
Cuba still operates a price-distorting dual-
currency system. Small businesses cannot
buy from wholesalers or import products
directly. Many foreign investments in such
areas as sugar and tourism, which would
bring in billions of dollars, are stuck in the
planning stages. Venezuela’s lurgy should
sharpen Cuba’s eagerness for the remedy
of reform. It seems to be dulling it. 7
El Salvador
Reconsidering the
price of peace
SAN SALVADOR
The striking down of an amnesty law
rattles the establishment
W ARPLANES flew over the capital. Ex-
guerrillas waving red protest ban-
ners thronged the streets. On July 13th El
Salvador’s supreme court struck down an
amnesty law that had helped secure peace
after 12 years of civil war. The law enacted
in 1993 is unconstitutional, the court said,
because it prevents victims of atrocities
from seeking justice. But many Salvador-
eans fear that justice will come at the ex-
pense of political stability.
Amnesty for crimes committed by both
sides in the war, in which more than
75,000 people died, is almost the only
point of agreement between the main po-
litical forces, the right-wing ARENA party
and the left-wing FMLN. A “general amnes-
ty” was the only way to move the conflict
from the battlefield to the ballot box, says
Mauricio Ernesto Vargas, a retired general
who represented the military in the peace
talks. Today’s elected leaders, heirs to the
left-wing guerrillas who waged war
against the state, are equally nervous. The
court’s decision threatens “the fragile coex-
istence in our society”, said the president,
Salvador Sánchez Cerén, a former guerrilla
commander. He later backtracked.
Human-rights advocates insist that
peace never depended on impunity for the
worst crimes. The agreements signed in
Mexico in 1992 provided for a UN-appoint-
ed “truth commission” to investigate
“grave acts of violence”, an idea copied by
other countries trying to overcome de-
cades of conflict, including South Africa. A
National Reconciliation Law enacted that
year granted amnesty for most war crimes
but said that perpetrators of atrocities
should be prosecuted. That law is unaffect-
ed by the court’s decision.
Its target is the more sweeping amnesty
law passed a year later, after the truth com- 1
36 The Americas
2 mission issued a report accusing leaders
from both sides of participating in massa-
cres, assassinations, torture and other
atrocities. That law violates both the con-
stitution and human-rights treaties by de-
claring an “unrestricted, absolute and un-
conditional” amnesty, the court said. The
government must investigate and punish
“the material and intellectual authors of
human-rights crimes”, which may include
El Salvador’s most prominent politicians. It
must also make reparations to victims.
Though politicians are alarmed, the ruling
“puts El Salvador on the path to reconcilia-
tion”, contends David Morales, the coun-
Bello Lessons from a liberal swashbuckler
Francisco de Miranda and the betrayal of liberty in Venezuela
E VEN by the standards of an extraordi-
nary age, it was a remarkable life. Fran-
cisco de Miranda, who was born in Vene-
zuela in 1750 and died in a Spanish prison
200 years ago this month, was a soldier,
statesman, student of military affairs and
philosophy, womaniser and bon vivant.
Above all, he was a peerless networker
and self-appointed leader in the cause of
independence for South America from
Spanish rule. The populist rulers of pre-
sent-day Venezuela claim Miranda as a
forebear, but his hurly-burly life is a re-
buke to their illiberalism.
He met everyone who was anyone in
the Atlantic world in the age of revolu-
tion: Washington, Jefferson and Hamil-
ton; Tom Paine and Lafayette; Pitt and
Wellington; Napoleon and Catherine the
Great of Russia; Joseph Haydn and Ed-
ward Gibbon; Jeremy Bentham and Lady
Hester Stanhope. He counted several of
them as friends and protectors. A man of
the Enlightenment, he could converse in
five languages as well as read Latin and
Greek. His library of 6,000 books in the
house in Fitzrovia, London, that was the
closest he came to a home was one of the
largest ofthe age. He was, as Karen Racine,
a recent biographer, puts it, “an interna-
tional celebrity, a must-have guest at any
liberal host’s dinner party”.
As an officer in the Spanish army he
fought in Morocco and in Florida against
the British during the American war of in-
dependence. Slighted and mistrusted, he
turned against Spain. The rest of his life
became a quest for the liberation of South
America, in which his main resources
were charm, intelligent conversation and
an unshakable self-importance. A tireless
traveller and acute observer, he roamed
across the United States and western Eu-
rope, and on to Greece, Turkey and Russia.
Catherine, infatuated by the handsome
try’s human-rights ombudsman. He
hopes that justice will heal the “open
wounds” of victims’ families and help end
a culture of impunity, one reason for the
country’s horrific murder rate.
That thesis will be tested only if El Sal-
vador’s prosecutors now pursue suspected
war criminals. The decision falls to Dou-
glas Meléndez, the attorney-general, who
has shown an independent streak, for ex-
ample by charging corrupt mayors in both
parties. So far, he has not made it clear that
he intends to prosecute war criminals.
The supreme court’s ruling is a sign that
El Salvador’s judiciary is eager to assert its
South American, made him a count; the
claims of excitable biographers that they
were lovers lack evidence.
In 1792 Miranda turned up in revolu-
tionary France. He was appointed a mar-
shal in the army. He acquitted himself well
in battles against the Austrian-Prussian co-
alition (his name is inscribed on the Arc de
Triomphe in Paris) before falling victim to
intrigue. Twice imprisoned during the Ter-
ror, he escaped the guillotine thanks to his
popularity and sangfroid.
Fittingly for a man whom Napoleon
judged a “saner” Don Quixote, at the age of
55 Miranda set sail with just three ships
and some 180 freshly recruited New York-
ers to liberate his homeland from Spain.
The expedition failed. Back in London, he
was persuaded by the young Simón Bolí-
var to try again. After Venezuela declared
independence in 1811, Miranda was put in
charge of the patriot forces. But he was old
and, after 40 years abroad, ignorant of lo-
cal realities; he was forced to negotiate
peace. In one of history’s great betrayals,
Bolívar, who had played a big role in the
defeat, handed his fallen hero over to the
Spaniards. It would be the younger man
The Economist July 23rd 2016
independence of both political parties. If
Mr Meléndez takes up its invitation to pros-
ecute civil-war-era crimes, that separation
of powers will become more pronounced.
El Salvador’s decision will be watched by
other countries trying to settle longstand-
ing conflicts, including Colombia, which is
poised to end a 52-year war with the FARC,
a left-wing guerrilla group. A belated pur-
suit of justice would force Salvadoreans to
relive the horrors of the 1980s and remind
them of the bloody origins of the main po-
litical parties. Some will ask whether am-
nesty and impunity were too high a price
to pay for peace. 7
who became the great liberator of north-
ern South America.
Most revolutions disdain the past. Not
so those in Latin America (which often
claim to have fought a second imperial-
ism, that of the United States). That is es-
pecially true of Hugo Chávez’s “Bolivar-
ian revolution”, which used oil wealth
(now dried up) to build an elected auto-
cracy and a state-controlled economy
(now in ruins). Perhaps because the Un-
ited States never dominated Venezuela as
it did Cuba, or because he came to power
via a failed military coup and then an
election, not a popular uprising, Chávez
constantly sought to link himself to his
country’s independence leaders. At the
national pantheon in Caracas on July
14th, Nicolás Maduro, Chávez’s chosen
successor, marked the bicentenary of Mi-
randa’s death by declaring him (rightly) to
be “a universal Venezuelan” and (myste-
riously of a soldier) “admiral-in-chief of
the nation”. If Miranda were alive today,
“he would be a chavista,” opined a leader
of the ruling party.
Like hell. True, Miranda was an anti-
imperialist and he believed in continental
solidarity against Spain. But he was a life-
long admirer of the United States and (es-
pecially) Britain. His political philosophy
was moderate liberalism. Personal expe-
rience gave him a particular horror of Ja-
cobin extremism. In a pamphlet pub-
lished in France criticising the Terror,
Miranda “recommended that the various
branches of government be kept separate,
each charged with oversight of the oth-
ers”, as Ms Racine writes. For Venezuela, a
country whose president this month
granted the army sweeping power over
food production and distribution, who ig-
nores the opposition-controlled parlia-
ment and whose courts bow to the execu-
tive, that remains sound advice.

Asia
Politics in Thailand
Twilight of the king
After the ailing monarch goes, what next?
T O THE casual observer the country is
calm and orderly. And reverential:
adorning a sweet-seller’s stall in a buzzing
market in Bangkok, Thailand’s capital, are
a dozen laminated pictures of the 88-year-
old King Bhumibol Adulyadej who, on the
throne since 1946, is the world’s longest-
reigning monarch, indeed the only king
most Thais have ever known. During his
reign Thailand has become one of the rich-
est big countries in South-East Asia, a
manufacturing hub and a magnet for tour-
ists. Bhumibol’s picture is everywhere, in-
cluding in millions of homes. As for the ail-
ing king himself, who lies in a hospital just
opposite the sweet-seller’s stall—he has not
been seen for months. The palace rarely
breaks its silence. But in June and again this
month doctors said they had drained fluid
from his brain.
Whether it comes in weeks or years, the
king’s passing will be more than a mile-
stone. His death may set loose centrifugal
forces that a coup in 2014 sought to contain,
but seems destined in the long run only to
aggravate. Below the surface, Thailand is
deeply fractured. And so the army-en-
forced calm accompanying the king’s twi-
light is fragile. Not least of the problems is
that his successor, the crown prince, Maha
Vajiralongkorn, is deeply unpopular. After
Bhumibol’s death the country, a crucial
ally of America’s in South-East Asia, risks
descending further into civil strife and eco-
nomic dislocation, as an elite around the
palace resists popular calls for a greater say
in politics and a more equitable sharing of
wealth. At that point, all bets about Thai-
land’s stability and prosperity may be off.
When the junta ousted the elected gov-
ernment of Yingluck Shinawatra two years
ago, it was the second army-backed coup in
a decade, and the most recent of several
during the king’s reign. This time the army
appears to be digging in. The junta, under
the self-declared prime minister, Prayuth
Chan-ocha, has forbidden politics and cen-
sored the press. Even criticism of an illiber-
al draft constitution that the generals hope
to ram through in a popular referendum on
August 7th is banned. Critics of the junta,
including journalists, activists and a few
politicians, have been hauled in for “atti-
tude adjustment” sessions.
Notably, the junta has made draconian
Less majesty
Thailand, total number of people detained
under lèse-majesté laws
COUP D'ETAT
2014 15
Source: Internet Dialogue on Law Reform
The Economist July 23rd 2016 37
Also in this section
40 Pakistan’s “honour killings”
40 Dissent in Laos
42 South Korea’s DIYers
For daily analysis and debate on Asia, visit
Economist.com/asia
use of Thailand’s law on lèse-majesté,
which provides for long prison terms for
anyone deemed to have spoken ill of the
king, queen or heir-apparent. Facing grow-
ing anti-establishment sentiment in the
provinces among people who feel that an
urban alliance has conspired to disenfran-
chise them, the authorities have presided
over a big rise in the law’s use over the past
decade, with imprisonments rising sharp-
ly after the 2014 coup (see chart).
More than 50 people spent some time
in jail in June for lèse-majesté; they includ-
ed Thais accused of defaming the royals in
a student play, scribbling on toilet walls
and speaking unguardedly in a taxi. Mili-
tary courts have handed out staggering
sentences: last year two Thais convicted of
posting anti-monarchy messages on Face-
book received jail terms of 28 and 30 years.
Any Thai may report an instance of lèse-
majesté, and the authorities invariably act,
scared that going soft on suspects might it-
self be a crime. Hardliners argue that even
criticising the law or the long sentences is
an offence. (Though the king himself did so
in 2005, complaining that: “If you say that
the king cannot be criticised, it suggests
that the king is not human.”)
A big part of the generals’ project is to
eradicate any lingering influence of Thak-
sin Shinawatra, a populist politician (and
elder brother of Ms Yingluck) now in self-
imposed exile, but who has been the big-
gest factor in politics for most of the past
60
decade and a half. Though the traditional
50 elites abhor him, his parties have won ev-
40 ery election they have been allowed to
contest since 2001. His movement is loose-
30
ly associated with the “red-shirt” activists
20 who have sometimes congregated in sup-
10 port of the Shinawatras (and who are
themselves opposed by “yellow-clad” roy-
0 alist protesters, mostly drawn from the
16
middle and upper classes).
A police officer turned tycoon, Mr Thak- 1
38 Asia
2 sin took advantage of a liberal constitution
adopted in 1997 in the wake of the Asian fi-
nancial crisis. He transformed a system of
retail, local vote-buying into a machine
that spread patronage more broadly. Help-
ing him were billions of dollars earned
from his telecoms and media businesses,
built on government concessions. His par-
ties draw support especially from Thai-
land’s neglected north and north-east.
There was much to object to about Mr
Thaksin’s time as prime minister between
2001and his ouster by the generals in 2006.
Berlusconi-like, he blurred the line be-
tween politics, media and business. And
the bloody vigilante justice he dealt to al-
leged drug-runners and to government op-
ponents in the Muslim and often strife-
torn south of the country was appalling.
But the generals’ squabble with him is part
of a broader tension, which has pitted a
Bangkok-centred establishment against
poorer Thais, many in the countryside.
For all Mr Thaksin’s flaws, he recog-
nised the plight of the less well-off and
shaped a politics that appealed to them.
His first government introduced free
health care and increased subsidies to rice
farmers. That, in 2005, helped him become
the first elected Thai prime minister to
complete a term in office. Yet the business
and political establishment around the
royal court pushed back. Bangkok bigwigs,
hardly clean themselves, complained
about corruption and cronyism. They ac-
cused Mr Thaksin of pouring cash into
crowd-pleasing schemes to tighten his grip
on power. They warned that rural give-
aways would bust the budget. But, above
all, they worried that he appeared to be set-
ting up a network of patronage and eco-
nomic power to rival their own. Their roy-
al-sanctioned network was—and
remains—huge, and ill-understood. Yet it is
the chief obstacle to the modernisation
that Thailand needs for long-term stability.
The importance of royal patronage to
Bangkok’s elites helps explain why rever-
ence for the king is so obsessively enforced.
Yet neither that reverence, nor its enforce-
ment, were self-evident necessities to the
reformers who, in 1932, replaced a long line
of absolutist kings with a constitutional
monarchy. Nor were they deemed so in
1946, when the current king ascended the
throne as a young, American-born son of a
commoner. Soon, however, struggles be-
tween civilian and military factions had
halted progress towards democracy. Palace
advisers and military-led governments
sought to shape the Bhumibol reign, and
the behaviour of the man himself.
The royal role
Seeking legitimacy—and, as wars raged in
Indo-China, a bulwark against commu-
nists—generals who had come out on top
by the late 1950s sought to turn the monar-
chy into a nationalist symbol. With army
help (and American financial backing), the
palace clawed back esteem and wealth.
Elevating the king’s prestige has made it
easier for Thailand’s armed forces to paint
the politicians they have routinely ousted
as petty and ignoble. And it has allowed
the palace to become a political actor in its
own right. Its power has fluctuated. It re-
mains opaque and the subject of debate.
One analysis describes Thailand’s monar-
chy not as a person, nor even really an in-
stitution, but as a network centred on royal
advisers in the privy council (appointed by
the king) and encompassing royalists
whom they can promote through the
army, bureaucracy and judiciary. Though
interests differ and sometimes conflict,
many benefit from the whiff of authority
which proximity to the palace endows.
LAOS
Chiang Mai
18
7 9
MY
NORTH
AN
11
5 rential hierarchy is fantasy. No matter: the
MA
NORTH-EAST
R
T H A I L A N D
44
Bangkok
17
75
6 CAMBODIA
CENTRAL
26
17
14 BANGKOK
7 10
SOUTHERN
Songkhla
200 km
MALAYSIA
In times of crisis, the palace has occa-
sionally acted as a final arbiter—as in May
1992, when the king was seen to call an end
to bloody battles between pro-democracy
demonstrators and an army-led govern-
ment, whose prime minister then stepped
down. More often the palace is seen to en-
dorse military takeovers. No coup is con-
sidered successful until its leaders are
granted some sort of royal audience.
Less obvious but equally important, a
near-divine figurehead is convenient for
blessing the sometimes dodgy business ac-
tivities of palace elites and the army. It is
desirable, too, for the elites to have a mon-
arch who is a source of patronage and
power in his own right. The monarchy be-
stows honours, for instance, in return for
donations to royal charities and good
causes. Such things are valuable: indeed,
the courts imprison people deemed to
have feigned royal links for personal gain.
The Economist July 23rd 2016
And though the economy has liberal-
ised considerably since the Asian financial
crisis, government concessions, public
works and special policy deals still pro-
duce vast fortunes for palace-linked busi-
nesses. Serhat Ünaldi, the German author
of a recent book about the monarchy, notes
that some royally connected businesses
outperform peers simply because con-
sumers consider them more prestigious.
Follow the money
When the king was healthier, cameras
would film him trekking around poor parts
of the country, inspecting royally spon-
sored development projects and meeting
subjects. For decades he presided over ev-
ery public university’s graduation cere-
mony. But over this foundation grew a
thick layer of myth. Courtiers reinstated ar-
chaic traditions, such as a requirement that
commoners prostrate themselves before
VIET- royals. Royal pageants with spiritual over-
NAM
tones became more frequent. A royal phi-
losophy was devised, of the “sufficiency
34
economy”. Its vision of development
based on harmonious rural life and a defe-
generals who ousted Mr Thaksin in 2006
accused him of flouting the notion of the
sufficiency economy—ie, the king’s will.
In the zero-sum calculations of the
court, Mr Thaksin’s own network threat-
ened to supplant that of the monarchy.
And the stakes were huge. The palace con-
trols billions through its stewardship of the
Crown Property Bureau (CPB), a firm that
manages the royal family’s properties and
investments. Its holdings include chunks
Thailand’s regional
share of: of Siam Commercial Bank, one of Thai-
2012, % of total land’s largest banks; Siam Cement, its big-
General public gest industrial conglomerate; and the Kem-
expediture
pinski hotel group. It owns swathes of
GDP
land, including several square miles of
Population
Source: World Bank
Bangkok. Its finances are outside the gov-
ernment budget, and opaque. A study in
2015 guessed that it was worth about $44
billion. That may be an underestimate.
The CPB’s board is appointed by the
palace (though by tradition the finance
minister holds a seat). It is not required to
pay tax, and in principle its income is the
king’s to spend. The CPB’s cash pays a big
chunk of the monarchy’s household ex-
penses; it is also used for provincial devel-
opments that have done much to burnish
the palace’s prestige. Some of its business
in Bangkok looks charitable, too. All but a
sliver of its property there is leased cheap-
ly—and sometimes to palace cronies.
The risk that the succession will disrupt
or divert patronage is one reason for jitters
in Bangkok. The CPB’s holdings amount to
an “insane” amount of money, says a local
businessman. “People kill for much less.”
The 63-year-old crown prince, Vajira-
longkorn (pictured on next page), is spoilt
and demanding, and—to put it mildly—
widely loathed. Three times divorced, he 1
 The Economist July 23rd 2016
2 spends a lot of time abroad, often in Ger-
many. In 2007 leaked video footage
showed him and his then-consort, who
was wearing nothing but a G-string and
heels, holding a lavish royal party. The
only guest appeared to be Foo Foo, his poo-
dle, which before dying in 2015 enjoyed the
rank of air chief marshal. One of the
prince’s more generous critics calls him “a
loose cannon”.
What once especially troubled the
elites was a rumoured friendship between
the crown prince and Mr Thaksin, who
upon his election in 2001is said to have giv-
en Vajiralongkorn a luxury car. The estab-
lishment worried that, when crowned, the
prince, unpopular at court and among the
middle classes, might align himself with
Mr Thaksin’s populist movement. That
could grant Thaksinites access to the
crown’s wealth, and end up locking the old
elites out of power. This may have been a
key factor behind the army coups against
Mr Thaksin and his sister.
For years it was rumoured that palace
insiders might interfere with the succes-
sion in order to elevate Vajiralongkorn’s
more admired sister, Princess Sirindhorn,
to the throne (Thailand has never had a
reigning queen). But this gossip has recent-
ly died down. The junta has shown clear
support for Vajiralongkorn, whose reputa-
tion it is buffing with a lavish publicity
campaign. It has also involved the prince
in jolly public events such as two huge
charity bike rides. It may have come to
some kind of accommodation with him,
or simply decided that interfering with the
succession will only cause more trouble.
Born unequal still
Some observers now suggest that the suc-
cession will prove less disruptive than
many had feared. There is even talk that
King Bhumibol might abdicate before he
dies, in order to help smooth the transition.
Certainly, vague worries in Bangkok that
“red-shirts” could use the occasion for anti-
establishment protests are likely to prove
overblown. Might Bangkok’s elites, less
worried that a royal transition would
threaten their privileges, countenance the
shifts needed to heal the country’s rifts,
starting with a huge economic divide?
They certainly ought to. More and more
Thais are aware of their country’s stark in-
equalities. Yes, rapid growth has lifted tens
of millions from poverty and the curse of
subsistence farming. Many from outlying
regions have found work in the booming
capital or have moved abroad. Yet inequal-
ity remains high compared with similarly
developed countries. One analysis finds
that a tenth of Thailand’s landowners own
nearly two-thirds of its titled land. A fifth of
rural Thais remain unbanked.
National governments have long over-
looked such disparities, committing the
bulk of resources to the capital region, even
though incomes there are five to seven
times higher than in Thailand’s poorer
parts. A three-year study reported by the
World Bank in 2012 found that three-quar-
ters of all public expenditure was lavished
on Bangkok and adjacent provinces, even
though the capital region had only 17% of
the population of 67m (see map on previ-
ous page). Spending per head on education
was four to five times higher in Bangkok
than elsewhere, and on health, 12 times
higher. But instead of devising policies to
deal with such inequalities, the junta has
been cracking down particularly hard on
opposition in the rural north and north-
east, the largest and poorest regions. One
opponent recalls being taken away blind-
folded and detained for seven days.
An obstacle to sounder policy is Thai-
land’s extreme centralisation. Neighbour-
ing Indonesia, after the fall of Suharto, its
last dictator, undertook radical decentrali-
sation, which has helped entrench democ-
racy. Yet even during periods of democratic
rule, Thailand’s provincial governors have
been appointed by the central government
rather than elected locally. That means re-
gions lack champions—and the stakes in
national politics are raised. Under the
army, which sees itself as the guardian of a
unitary state, regional autonomy seems
unimaginable. Historically, civilian and
military governments alike have played
down, not celebrated, Thailand’s provin-
cial dialects and patchwork of ethnicities.
It is all storing up trouble for later. Some
Thais seem persuaded that eradicating the
last lingering influence of Mr Thaksin and
his family will help heal social and eco-
nomic divisions. The establishment inti-
mates that the so-called “good people”—
soldiers and selfless bureaucrats—are the
only ones who can be trusted to lead the
country. Yet such thinking is holding back
the development of democratic institu-
tions that might have kept Mr Thaksin in
check. The generals have not banished the
Vajiralongkorn: uncrowned and unloved
Asia 39
dissatisfaction caused by the instability
and low growth that followed Mr Thak-
sin’s defenestration. “The junta’s attention
is nowhere near where a normal govern-
ment’s ought to be,” says an analyst famil-
iar with the north-east.
Continuity bordering on stasis looks
likely to be the watchword. Portraits of
King Bhumibol will not disappear any
time soon. Indeed, one Thai observer
thinks his veneration will extend long be-
yond his death and mourning period. Yet
the eventual dissipation of Bhumibol’s
charisma, and his moral and sacred au-
thority, mean that the palace’s authority
seems bound to dwindle. A new genera-
tion of royal advisers could come to realise
that the monarchy’s survival would be
best secured through a more defined kind
of constitutionalism. The palace might at-
tempt to speak out more plainly against the
most egregious abuses of the lèse-majesté
law (rumours have swirled that a large
number of pardons may be granted soon).
Unsteady as you go
A palace less tolerant of authoritarianism
would be an improvement. But it is only
the most optimistic scenario. A grimmer
one sees the army using the royal transi-
tion as an excuse to impose even greater
limits on political activity and free
speech—becoming ever more at odds with
civilians whose taste for bowing and
scraping before the monarchy can only
fade. Observers who once thought that the
generals’ only priority was to act as an es-
cort to the succession now detect nostalgia
for the days when military government
was the norm; it looks keen to pull Thai-
land’s strings for years to come. That
would probably mean many more policies
designed to smother, rather than solve,
Thailand’s problems—such as the suspen-
sion oflocal elections, which are seen to fo-
ment discord. All this would doubtless
drag out the country’s economic slump.
Things would get only more volatile
should the next king choose to pull enthu-
siastically on all the levers that have
passed to the palace under Bhumibol—ele-
vating henchmen and pursuing vendettas,
for instance. It is not clear how far emi-
nences who have thrived under Bhumi-
bol’s reign would tolerate a sovereign they
consider actively damaging to their inter-
ests: were he, for example, to appear overly
chummy with factions linked to Mr Thak-
sin (or, worse, appear to favour his return).
Yet efforts to restrain him would risk an-
gering “red-shirt” activists who in recent
years have rallied to defend Mr Thaksin
and his sister, and more broadly their own
democratic rights. They might perceive an-
other effort by the establishment to stifle
change they feel is overdue. All is quiet
now. But the elements of post-Bhumibol
turmoil in Thailand are all there, should
events conspire to arrange them so.  7
40 Asia
Crimes against women
Can the licence to
kill be revoked?
ISLAMABAD
“Honour killings” can be stopped only
by scrapping religiously inspired laws
F EW Pakistanis have broken taboos as
gleefully as Qandeel Baloch, a social-
media star who used the internet to titillate
and scandalise her fellow citizens. The 26-
year-old (pictured with her iPhone), whose
real name was Fauzia Azeem, twerked on
camera, posted suggestive selfies and
mocked the mullahs who police the social
boundaries of a Muslim-majority nation
that has become more religiously conser-
vative over the years. It was too much for
many, including her brother, who stran-
gled Ms Baloch after drugging her to sleep.
Waseem Azeem proudly admitted his
crime: “She was bringing disrepute to our
family’s honour.” He has been arrested on
suspicion of murder. Ms Baloch’s funeral
(pictured) was held on July 17th.
So-called “honour killings” are rarely so
sensational. But nor are they rare. The Hu-
man Rights Commission of Pakistan tal-
lied 1,096 female victims of them last year.
Many go unreported to the police. Cases in
the past three months include a 19-year-old
girl burned to cinders for refusing a mar-
riage proposal; a 16-year-old girl who met a
similar fate for helping a friend elope; and
an 18-year-old killed by her mother for mar-
rying a man from a different ethnic group
against her family’s will.
Such atrocities are widely accepted. At a
recent screening of “A Girl in the River”, an
acclaimed documentary about honour
killing, male students at a leading universi-
ty applauded an interview with a man
who was unrepentant about trying to kill
his daughter for entering a “love marriage”.
The problem is rooted in tribal and cul-
tural traditions at odds with young women
She mocked the mullahs. She died
in a growing middle class who increasing-
ly wish to choose their own husbands. Of-
ten such killings will be agreed beforehand
at a gathering of local men.
Pakistan’s mullahs are united in declar-
ing that Islam condemns such murders.
But this clerical consensus frays when it
comes to the sharia-inspired laws of qisas
(retribution) and diyat (blood money) that
enable men to get away with it. Introduced
in 1990, the laws allow the heirs of murder
victims to decide whether killers should
suffer qisas or be pardoned, sometimes
having paid diyat. Since most honour kill-
ings are premeditated conspiracies involv-
ing entire families, charges are often
dropped even before the case goes to court.
Mr Azeem, however, may not dodge
punishment. His distraught father vowed
not to forgive the killer of a daughter who
was financially supporting the family. And
the local police have taken the unusual
step of bringing the case themselves. But
rights activists say that is no guarantee
against a court later agreeing to a forgive-
ness deal. Families come under immense
pressure to pardon honour-killers.
Pakistan’s clerical establishment is loth
to endorse change. A bill in 2004 to reform
the law was “severely mutilated”, says the
Aurat Foundation, a human-rights group.
Reforms proposed in 2015 that would make
honour-killers serve at least seven years in
jail, even if pardoned, have gone nowhere.
But there is now an encouraging sign: a
private member’s bill to make such crimes
“non-compoundable”, meaning that fam-
ilies would no longer be able to forgive
each other, is expected to be presented to
parliament for debate within weeks. It had
long languished in limbo, even after Na-
waz Sharif, the prime minister, vowed in
January to crack down on honour killings
after “A Girl in the River” was nominated
for an Oscar, which it then won. Now the
government appears to be backing it.
But Mr Sharif has been beset by corrup-
tion allegations, by disputes with the army
and by open-heart surgery. While the lead-
The Economist July 23rd 2016
ing clerical party, the Jamiat Ulema-e-Is-
lami (JUI), has only 13 seats, Mr Sharif val-
ues its support at a shaky time and may be
wary of pushing through a new law.
The bill’s sponsors think the JUI may be
persuaded that honour killings are an
abuse of sharia concepts that were intend-
ed to resolve tribal wars, not to provide
cover to murderers. But the mullahs may
still balk if they believe reform is part of a
“Western agenda” epitomised for many by
the outrageous Ms Baloch. 7
Dissent in Laos
Radio silence
VIENTIANE
As Barack Obama prepares for his first
visit to Laos, its civil society struggles
A HIGHLIGHT of Ounkeo Souksavanh’s
years as a radio host in Vientiane, the
capital of Laos, came in late 2011 when he
hosted an episode of Wao Kao (“News
Talk”) on land disputes in the south of the
country. Near the end of the programme,
Mr Ounkeo says, a listener called in and
criticised the son of a Politburo member
for allegedly grabbing land from farmers
for a property-development project. In
mid-2012 the Lao government appeared to
show sympathy with such complaints: it
said it would suspend the granting of per-
mits to take over farmland for rubber plan-
tations, a big cause of farmers’ gripes.
But there was no on-air celebration. The
government had shut down the radio pro-
gramme, one of the country’s only public
outlets for grievance. In December 2012
Sombath Somphone, a campaigner for
farmers’ rights who had publicly chal-
lenged the granting of rural land-use con-
cessions to businesses, was stopped at a
police post and put into the back of a pick-
up truck. He has not been heard from since.
His supporters put up notices about his dis-
appearance, like the one pictured on the
next page. Officials told them to stop. Mr
Ounkeo felt that he was in danger, too. He
eventually left for America. He now works
there for Radio Free Asia, a station funded
by America’s Congress.
Foreign ministers from the ten-country
Association of Southeast Asian Nations
(ASEAN) are due to meet in Vientiane on
July 24th for talks on regional issues. One
delegate is Aung San Suu Kyi from Myan-
mar, which has recently taken a big step
away from the authoritarianism that once
gripped it. Mr Ounkeo describes Miss Suu
Kyi as an “icon of democracy”. He says she
is an inspiration to young people and intel-
lectuals in Laos.
But Mr Ounkeo and observers in Vien-
tiane say there is little chance that Myan- 1
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42 Asia
Sombath is missing
2 mar’s opening will be replicated soon in
Laos, which resembles Myanmar in its dar-
kest days. It has no free press and dissent is
rare and dangerous. NGOs must be ap-
proved by the government, which is led by
the communist Lao People’s Revolution-
ary Party (LPRP), the only one allowed by
law. They are often strangled by red tape.
There has been a notable chill since Mr
Sombath’s disappearance. Most local civil-
society organisations have government
links and stick to non-controversial initia-
tives in areas such as health and education
(Mr Sombath’s Participatory Development
Training Centre is a rare exception). In May
three people who wrote anti-government
posts on Facebook were shown on state
television in prison garb, confessing their
crimes. Their fate is unclear, yet the mes-
sage is obvious. “It’s an unreconstructed
Stalinist dictatorship,” says Phil Robertson
of Human Rights Watch, an NGO.
When Western diplomats raise the case
of Mr Sombath’s disappearance, Lao offi-
cials say that they, too, do not know where
he is. They insist that the government is
constitutionally bound to protect the civil
rights of its citizens. In December officials
even took part in a conference hosted by
the United Nations Development Pro-
gramme to discuss human rights (deli-
cately) with foreign experts and civil-soci-
ety members. But the government also
says it prizes the stability that Laos has en-
joyed since 1975, when the LPRP seized
power with backing from North Vietnam.
This hints at what it really thinks: that civil
liberties must be kept in check.
Western countries, however, are not
likely to put the kind of pressure on Laos
that they once did on Myanmar. They are
eager to court friendship with ASEAN (of
which Laos is chairman this year), partly as
a counterbalance to Chinese power in the
region. In September Barack Obama is due
to become the first sitting US president to
visit Laos, where he will attend an ASEAN
summit. That will put the impoverished
country of 7m people under a spotlight,
South Korea’s DIYers
Bangsta style
SEOUL
Television shows on interior design are bringing down the house
A WIFE and daughter arrive home to
find their living room transformed.
Behind a partition, Daddy is sitting in a
soundproof cubicle, strumming his
guitar. He offers his stunned wife a drink
at his new bar, and gleefully shows off his
table-football skills. He is the star of a
recent episode of “Macho House”, a new
television show that creates dream
spaces for South Korean men.
The programme is more of a gag show
than one on thoughtful redesign. But it
taps into a growing desire among South
Koreans to rearrange their private living
spaces. At first sight that is surprising for a
nation that spends more hours at office
desks than any other among rich coun-
tries. Yet in a recent poll by Macromill
Embrain, a local market researcher, over
half said they had spent more time at
home in the past year due to “growing
social anxieties”. Amid an economic
slump, city-dwelling South Koreans are
seeking solace in their cramped flats.
They want time there to be “very special,
almost festive”, says Soh Yoon-young, an
architect and author.
Jipbang—“house broadcasts” that
often weave tips on design makeovers
with advice for unhappy occupants—
promote a new approach to domestic
wellbeing. “Let Me Beautify Your Home”,
which started airing in the spring, is a
spin-off of “Let Me In”, a controversial
series that offered radical plastic surgery
as a cure for misery. The new show tailors
interior designs to a family’s problems:
an uncommunicative teen, or a retired
father who lacks authority. It suggests, for
example, new partitions to create pri-
vacy—or to force all family members to
pass through a shared living space in
order to get to their bedrooms. In “Old
House, New House”, two teams of ex-
perts compete to revamp a celebrity’s
house, recreated in a studio. In “My
Room’s Dignity”, DIY geeks offer tips on
how to spruce up dingy studios.
but human rights are expected to be a side
issue at best. America needs the support of
China-leaning Laos in its efforts to forge a
regional consensus on how to deal with
China’s assertiveness in the South China
Sea. Laos is littered with unexploded
American bombs that were dropped dur-
ing the Vietnam war. Mr Obama will try to
win hearts and minds by announcing
more funding to help clear them up.
Regional civil-society leaders normally
convene what they call a “People’s Forum”
The Economist July 23rd 2016
Clutter is a big theme. Designers pride
themselves on ideas for storing things,
such as under sofas. They regularly sug-
gest ways of creating what for some is
their first experience of a room dedicated
just to accommodating a Western-style
bed. In urban apartments, rooms are
commonly multifunctional: a bedroom
might, once a sleeping mattress is rolled
up, turn into a tea-room by day.
Oddly, given the state of the economy,
sales at Hanssem, a home-furnishings
store, rose by nearly a third last year
compared with 2014. DIY shoppers col-
lect tips from internet forums and online
“housewarmings” on social-media sites
such as Instagram. These involve the
sharing of snaps of renovated flats: in
South Korea people “bangstagram”, after
the word for “room”.
Ms Soh says some are mimicking the
modern designs of South Korea’s vibrant
cafés. These are popular places to social-
ise in a country where few people feel
confident enough to invite others into
their homes. As more homeowners gain
pride in their slick interiors, they may feel
readier to spend less time sipping latte
and more hanging out with friends in
their own alluring lounges.
alongside ASEAN summits. There will be
no such gathering in Vientiane. Mr Robert-
son says Lao civil-society leaders have told
counterparts elsewhere that their govern-
ment will not allow certain topics to be dis-
cussed in Laos. These include gay rights,
the building of controversial dams on the
Mekong River and the case of Mr Sombath.
So the People’s Forum will instead be held
in Timor-Leste, 2,400 miles (3,900km)
away. Even there, Laotians expect their
government will keep a close watch. 7

China
Hong Kong police
The force is with who?
HONG KONG
Falling public trust in the territory’s police bodes ill
H ONG KONG had long been renowned
for the peacefulness of its protests and
the tact with which police normally han-
dled them. So it was a shock to the territory
when, in 2014, police at first responded ag-
gressively to pro-democracy unrest that
began with large-scale demonstrations
and continued with weeks of sit-ins on
roads. The protesters’ means of defence
against the pepper spray and tear gas gave
its name to the movement: the Umbrella
Revolution. It ended peacefully, but the
damage had been done. Growing public
mistrust of a vital institution was added to
longstanding anxiety about China’s politi-
cal influence in the territory. This does not
augur well for Hong Kong’s stability.
For a long period under British colonial
rule, Hong Kong’s police were widely re-
viled for their corruption; during violent
anti-British unrest in the 1960s leftist radi-
cals were rounded up even for peaceful
protest. But the force’s image began to
change in the 1970s: a new anti-graft body,
the Independent Commission Against
Corruption (ICAC), purged its ranks. Public
trust in the police helped ensure a smooth
transfer from British to Chinese rule in 1997.
Hong Kong’s police did little more than
change their cap badges (some of its British
officers stayed in place, a curious sight on
the streets of a Chinese territory); the law
remained essentially the same. Even after
anti-government demonstrations in 2003,
far larger than the ones in 2014, the police
continued to be held in high esteem.
Rule of law is what made Hong Kong
such a great centre of international busi-
ness, and what continues to distinguish it
from the Chinese mainland. Hong Kong is
still one of the safest cities in the world. In
2015 its crime rate fell to a 43-year low, with
fewer offences per person even than fam-
ously law-abiding Tokyo. But there is a
growing perception that the 33,000-strong
force is becoming politicised. It still largely
operates by rules bequeathed by the Brit-
ish. Yet officers work for a government that
ultimately answers to the Chinese Com-
munist Party in Beijing, even though it has
been granted a “high degree of autonomy”
by the central authorities. On the main-
land, the most important role of the police
is political: to keep the party in power.
The thin red line
China’s critics in Hong Kong point to what
they see as examples of a similar impera-
tive swaying the territory’s police. In 2002
several followers of Falun Gong, a Chinese
spiritual movement which the Commu-
nist Party regards as a serious threat to its
rule, were convicted for obstruction after
meditating outside the central govern-
ment’s liaison office in Hong Kong. The rul-
ing was later overturned; a judge deemed
that no obstruction had been caused.
When Li Keqiang, now China’s prime min-
ister and then one rank below, visited
Hong Kong in 2011 police shielded him
The Economist July 23rd 2016 43
Also in this section
44 Xi’s control of nationalism
For daily analysis and debate on China, visit
Economist.com/china
from seeing protesters. The tactic was re-
peated this year when Zhang Dejiang, a
member of the Politburo’s Standing Com-
mittee and head of China’s rubber-stamp
parliament, went to the territory.
Public satisfaction with the force slowly
fell after 2007, according to a poll by the
University of Hong Kong. After the protests
in 2014 it plummeted to less than 21%,
down from nearly 75% when Chinese rule
resumed. It has since recovered slightly.
The fall was partly the result of police vio-
lence against protesters during the Umbrel-
la movement (police also reportedly stood
by as thugs attacked demonstrators). Na-
than Law Kwun-chung, who was a student
leader of the movement and now heads a
new political party, Demosisto, describes
front-line police as “like monsters beating
us, you could see nothing in their eyes.”
(Their use of pepper spray and tear gas on
protesters was very rare.) On July 21st Mr
Law was convicted of inciting demonstra-
tors to gather, and two fellow protesters
were found guilty of unlawful assembly—
the first criminal convictions of student
leaders of the unrest in 2014.
Among the units patrolling the demon-
strations was one normally assigned to
fighting Triad gangsters; police from this
group were allegedly among seven officers
who were filmed beating a demonstrator,
Ken Tsang (pictured, escorted by officers),
with his hands tied behind his back. It did
not help the force’s image that it took the
police a year to lay charges against the offi-
cers allegedly responsible (their trial has
been adjourned until October).
Qualms about the force’s quality ex-
tend beyond their handling of demonstra-
tors. Some people accuse the police of fail-
ing to attach due importance to the
disappearance of five Hong Kong booksell-
ers who many believe were seized by
mainland agents because they dealt in sa- 1
44 China
2 lacious works about Chinese politicians.
One was apparently snatched from Hong
Kong itself and another from Thailand; the
others were visiting the mainland. (All but
the one who disappeared from Thailand
have since returned; he is thought to re-
main in the custody of mainland police.)
The investigation of the disappearances
was handed to the missing persons unit,
and was not taken up by the far stronger
anti-Triad one, which deals with most
cross-border crime and liaises often with
mainland agents.
The neutrality of the ICAC has also
been questioned this month following the
reassignment of its chief investigator after
only a year in office (she subsequently re-
signed). Though officially she was replaced
for not being up to the job, some commen-
tators suggest that her real shortcoming
was refusing to mute an ongoing investiga-
tion into a HK$50m ($6.5m) payment to
Hong Kong’s chief executive, Leung Chun-
ying. His office has denied Mr Leung was
involved in any wrongdoing.
The South China Sea
My nationalism, and don’t you forget it
BEIJING
Xi Jinping tries to contain public fury over the South China Sea
C HINA is smarting. A tribunal in The
Hague ruled on July12th that its claims
to most of the South China Sea had no ba-
sis in international law. In the days since,
China’s government has shown no sign of
wanting to dig itself out of a diplomatic
hole—or any sign that it thinks it is in one.
Officials had two opportunities to be
emollient and passed them both up. The
first came when discussing bilateral talks
with the Philippines, which had brought
the case. Before the verdict the Philippines’
new president, Rodrigo Duterte, had said
“let’s talk.” But according to his foreign
minister, Perfecto Yasay, China demanded
the talks take place without reference to the
tribunal’s ruling. When Mr Yasay said no,
the Chinese side muttered that “we might
be headed for a confrontation.” China also
continued to block Philippine fishermen
from their traditional grounds.
The other chance to step backcame dur-
ing a visit to Beijing by the chief of Ameri-
ca’s navy, Admiral John Richardson. His
opposite number, Wu Shengli, did not miss
the opportunity to miss an opportunity.
“We will never stop our construction on
the Nansha [Spratly] islands half way, no
matter what country or person applies
pressure,” he said, referring to China’s con-
troversial building of harbours and run-
ways on disputed outcrops in the South
Suspicions abound in Hong Kong that
the party’s tentacles are spreading. One of
the booksellers, Lam Wing-kee, says he has
been followed by strangers since his return
to Hong Kong. Some pro-Umbrella publi-
cations have reported cyber-attacks or ha-
rassment. On July 14th Hong Kong’s gov-
ernment ruled that candidates for
September’s elections to the territory’s leg-
islature must sign a declaration acknowl-
edging that Hong Kong is an “inalienable
part” of China, a response to a small but
growing call for independence for Hong
Kong. Several groups say they will not sign.
The malaise is helping to nurture a gen-
eration of protesters who are more pre-
pared to confront the police—and cops, in
turn, who expect to be targets of crowd vio-
lence. In February police used batons and
pepper spray and fired two warning shots
into the air in Mongkok district during a
crackdown on unlicensed street hawkers
that snowballed into a riot—China blamed
it on “separatists”. The erosion of public
trust increases the risk of such turmoil. 7
China Sea. At least they were talking.
Bellicosity from the brass is the order of
the day. According to Reuters, another Chi-
nese admiral, Sun Jianguo, told a forum in
Beijing that “freedom of navigation” by
American warships in the South China
Sea, designed to ensure sea lanes stay
open, could “play out in a disastrous way”.
A vice-chairman of the Central Military
Commission, the Communist Party body
Playing chicken with the party
The Economist July 23rd 2016
that controls the armed forces, talked
about beefing up combat preparedness
during an inspection tour in the southern
province of Guangdong. And so on.
More worrying than words were the ac-
tions. The maritime authority of Hainan,
an island province off Guangdong, said it
was closing an area in the South China Sea
for three days while naval exercises took
place. Xinhua, an official news agency, said
China had recently dispatched a combat
air patrol, consisting of H-6K bombers and
fighters, over the South China Sea. China
has been talking about setting up an Air
Defence Identification Zone in the area, re-
quiring incoming aircraft to identify them-
selves to its authorities. The air patrols
could help China implement one. John
Kerry, America’s secretary of state, has
called the idea of such a zone “provocative
and destabilising”.
Two things are clear. One is that stub-
born nationalism is a strong feature of Chi-
na’s foreign policy. The other is that Xi Jin-
ping—China’s president, Communist Party
leader and commander-in-chief—is deter-
mined to control it, just he is to dominate
all aspects of China’s politics. State media
have dismissed the tribunal as an Ameri-
can puppet, but Mr Xi does not want
anti-US fervour to disrupt his diplomacy.
China’s navy is still taking part in biennial
naval drills called RIMPAC, hosted by
America and joined by more than 20 other
countries, that are under way off Hawaii. It
appears to relish the prestige.
After the verdict, China’s social media
started to call on people to boycott ba-
nanas from the Philippines and American
brands such as iPhones and KFC, a fast-
food chain. But the last thing Mr Xi wants
are public demonstrations. (In the past cen-
tury, patriotic protests have had a habit of
turning against the government in China.)
So this week, Xinhua and People’s Daily, a
party newspaper, started criticising the “ir-
rational patriotism” of social media. A pic-
ture (left) that circulated on social media of
a protest outside a KFC outlet was deleted
by censors. If there is one thing more im-
portant than Chinese nationalism, it
seems, it is party control.
That was borne out on July 17th when
the Chinese National Academy of Arts
forced the closure of one of China’s most
important and few remaining liberal mag-
azines, Yanhuang Chunqiu. The decision to
close it was remarkable because Mr Xi’s
late father, Xi Zhongxun, was one of its
most important fans. The closure was in-
conceivable without the younger Mr Xi’s
say-so. The magazine won its spurs by
challenging the party’s account of events
ranging from the Communist takeover of
China in 1949 to the Cultural Revolution of
the 1960s and 1970s. But nothing may now
challenge the official version—as the gov-
ernment’s angry defence of its “historical”
claims in the South China Sea shows. 7

International
Stress
What makes us stronger
New research shows that even severe stress can have an upside
F OR centuries physicists have used the
word stress to describe force applied to
materials. It was not until the 1930s that
Hans Selye, a Hungarian-born endocrinol-
ogist, began using it of live beings. Selye in-
jected rats with cow hormones, exposed
them to extreme temperatures and partial-
ly severed their spinal cords to prove that
all these sorts of maltreatment affected the
rodents in the same ways: they lost muscle
tone, developed stomach ulcers and suf-
fered immune-system failure. He used the
word for both the abuse of the rats and the
health effects. Later on, it started to be used
for psychological suffering as well.
Today, the Oxford English Dictionary
defines stress as “a state of mental or emo-
tional strain or tension resulting from ad-
verse or demanding circumstances”. The
causes vary enormously: one person may
be stressed by exams but happily swim
with Great White sharks. Another may
have to take sedatives before flying, but
adore speaking to a crowd. This makes
stress hard to measure. Proxies, such as the
Negative Experience Index produced by
Gallup, a pollster, suggest the world is
growing more pessimistic, which may in-
dicate increasing stress levels. Other sur-
veys confirm what is perhaps obvious:
stress is universal.
The American Psychological Associa-
tion (APA) suggests that, at least in Ameri-
ca, the most common causes are to do with
money, work and family. Women report
being more stressed than men and are
twice as likely to be diagnosed with anxi-
ety disorders. Studies on rats indicate that
sex hormones such as oestrogen and pro-
gesterone may play a part; so may the dou-
ble burden of family and work. Men may
also be more likely to conceal their distress.
Black and Hispanic Americans, as well as
poor people and parents, also report high-
er levels of stress. In 2015 half of Americans
starting university reported being stressed
most or all of the time.
Young people have long reported more
stress than old people, says Mary Mc-
Naughton-Cassill of the University of Tex-
as at San Antonio. But she believes today’s
youth are more overwhelmed than ever
before. Globalisation means rapid change
in the workplace, and firms increasingly
expect employees to be constantly con-
nected. The mass media flood us with bad
news while creating unattainable aspira-
tions, she adds: “you have to look like a
movie star, stay informed about politics,
take care of the kids and hold down a job.”
Social media, which may lower stress
when used to strengthen connections with
friends, have been associated with higher
stress when they deliver news of friends’
travails, such as divorces and accidents.
Many studies have shown that stress
has similar effects on humans as on Selye’s
rats. It has been linked to high blood pres-
sure, headaches, stomach upset and in-
somnia. According to the APA, chronic
The Economist July 23rd 2016 45
Also in this section
46 Keeping calm at work
stress can “ravage” the immune system
and increase unhealthy behaviours, such
as drinking and smoking, that raise the
risks of diabetes and cardiovascular dis-
eases. A recent study by Bruce McEwen, a
neuroscientist at Rockefeller University,
showed that exposing rats to stress for just
three weeks changed their brain architec-
ture. Forcing his rats to swim, among other
unpleasant tasks, shrank the dendrites in
their amygdalae, the parts of the brain that
control emotional responses, decision-
making and memory. Though reversible,
such changes in humans increase the risk
of anxiety disorders and depression.
Snapping point
Late in his career Selye came to distinguish
between “eustress”, or the good stress
caused by positive experiences, such as
falling in love, and distress, the bad sort.
Other scientists extended the original
physics metaphor: just as many materials
can withstand stress until a certain point, it
was thought that humans could cope with
stress if it did not become too severe. In-
deed, the idea took hold that moderate
stress might be a good thing. In 1979 Peter
Nixon, a consultant at Charing Cross Hos-
pital in London, described a “human func-
tion curve”: a moderate amount of stress,
such as a deadline or race, was now under-
stood as not just harmless, but beneficial.
But above a certain threshold humans, like
metal bars, would break.
Now a new body of research is chal-
lenging that notion. Some scientists posit
that what matters is not just the level of
stress, or even its type, but how it is thought
about. The same stress, perceived differ-
ently, can trigger different physical re-
sponses, with differing consequences in
turn for both performance and health.
Recognising that stress can be benefi-
cial seems to help in two main ways. Peo- 1
46 International
2 ple who have a more positive view of
stress are more likely to behave in a con-
structive way: a study by Alia Crum of
Stanford University’s Mind and Body Lab
and others found that students who be-
lieved stress enhances performance were
more likely to ask for detailed feedback
after an uncomfortable public-speaking
exercise. And seeing stressors as chal-
lenges rather than threats invites physio-
logical responses that improve thinking
and cause less physical wear and tear.
Humans can respond to stress in sever-
al different ways. The best-known is the
“fight or flight” response, which evolved as
a response to sudden danger. The heart
rate increases; the veins constrict to limit
the bleeding that might follow a brawl and
send more blood to the muscles; and the
brain focuses on the big picture, with de-
tails blurred.
In less extreme situations, the body and
brain should react somewhat differently.
When people perceive they are being chal-
lenged rather than threatened, the heart
still beats faster and adrenalin still surges,
but the brain is sharper and the body re-
leases a different mix of stress hormones,
which aid in recovery and learning. The
blood vessels remain more open and the
immune system reacts differently, too.
Sometimes, though, the wrong response is
triggered, and people sitting exams, giving
a speech or pitching a business plan react
as if to a sudden threat, with negative con-
sequences for both their performance and
their long-term health.
Ms Crum believes that attitudes and be-
liefs shape the physical response to stress.
In 2013 she subjected student volunteers to
fake job interviews. Beforehand, they were
shown one of two videos. The first ex-
tolled the way stress can improve perfor-
mance and forge social connections; the
second emphasised its dangers. In the fake
interviews, the participants were subject-
ed to biting criticism. When Ms Crum took
saliva samples at the end of the study, she
found that those who watched the upbeat
video had released more DHEA, a hor-
mone associated with brain growth.
In an earlier study Ms Crum and Shawn
Achor, the author of “The Happiness Ad-
vantage”, visited UBS, an investment bank,
at the height of the financial crisis in 2008.
They split around 400 bankers into three
groups. The first watched a video that rein-
forced notions of stress as toxic, the second
watched one highlighting that stress could
enhance performance and the third
watched no clip at all. A week later the sec-
ond group reported greater focus, higher
engagement and fewer health problems
than before; the other two groups reported
no changes.
Other scientists have shown that recog-
nising the benefits of stress can cause mea-
surable improvements in performance. In
one experiment Jeremy Jamieson, a psy-
chology professor at the University of
Rochester, gathered college students pre-
paring for the Graduate Record Examina-
tion (GRE), an entrance test for postgradu-
ate courses. He collected saliva from each
of the students to measure their baseline
stress response and divided them into two
groups. One group was told that stress dur-
ing practice exams was natural and can
boost performance; the other got no such
pep talk. The students who received the
mindset intervention went on to score
higher on a GRE practice test than those
who did not. When Mr Jamieson collected
their saliva after the exam, it suggested his
intervention had not soothed their nerves:
they were at least as stressed as those in the
control group. A few months later the stu-
dents reported their scores on the real GRE
exam: those who had been taught to see
stress as positive still scored better.
“Google images of stress and you’ll see
a guy with his head on fire. We’ve internal-
ised that idea,” says Mr Achor. He instead
compares stress to going to the gym. You
only get stronger if you push yourself be-
yond what feels easy, but afterwards you
need to recover. The analogy suggests that
stress at work may be performance-en-
hancing, but should be followed by rest,
whether that means not checking e-mails
on weekends, taking more holiday or go-
ing for a stroll in the middle of the day.
The well-tempered mind
Kelly McGonigal, a psychologist at Stan-
ford University and the author of “The Up-
side of Stress”, helps people rethink stress
by telling them that it is what we feel when
something we care about is at stake. She
asks them to make two lists: of things that
stress them; and of things that matter to
them. “People realise that if they eliminat-
ed all stress their lives would not have
much meaning,” she says. “We need to
give up the fantasy that you can have
everything you want without stress.”
By changing how their bodies process
stress and how they behave, such refram-
ing may help people live healthier lives. In
2012 a group of scientists in America
looked back at the 1998 National Health In-
terview Survey, which included questions
about how much stress the 30,000 partici-
pants had experienced in the previous
year, and whether they believed stress
harmed their health. Next, they pored over
mortality records to find out which respon-
dents had died. They found that those who
both reported high stress and believed it
was harming their health had a 43% higher
risk of premature death. Those who report-
ed high stress but did not believe it was
hurting them were less likely to die early
than those who reported little stress.
The study shows correlation, not causa-
tion. But since much stress is unavoidable,
working out how to harness it may be wis-
er than fruitless attempts to banish it. 7
The Economist July 23rd 2016
Workplace stress
Fuss and bother
How firms are easing the strain
T HE cost of stress is staggering. In
Britain, 43% of all working days lost
due to ill-health are because of stress-
related conditions. Across Europe the
share is even higher. One recent paper in
America estimated that work-related
stress—which excludes that experienced
by the unemployed, students and those
working in the home—accounted for
between $125 billion and $190 billion in
health-care costs annually.
Governments and firms are starting
to pay attention. Last year Japan—which
has a word (karoshi) to describe death
from overwork—flirted with the idea of
forcing employees to take more of the
vacation to which they are entitled.
France recently passed a law giving
workers the “right to disconnect”, which
obliges firms with more than 50 staff to
draw up rules for handling out-of-hours
work e-mails. Google has nap pods in its
headquarters; employees can also at-
tend meditation and mindfulness class-
es. The New York offices of Knewton, an
education-technology company, boast
ping-pong tables and a large terrace for
“knerds” in need of a break.
Travellers at Los Angeles Internation-
al Airport are greeted by dogs from the
airport’s Pets Unstressing Passengers
(PUP) programme. On Fridays at Yale
Medical School, angsty students can visit
Finn the Therapy Dog, whose ancestry
includes terrier and poodle. The Univer-
sity of Minnesota has a similar scheme
with a range of animals, including
Woodstock, a lushly feathered chicken
(pictured). Petting animals is known to
lower blood pressure and cholesterol.
No feathers flying

Business
Methane leaks
A dirty little secret
Natural gas’s reputation as a cleaner fuel than coal and oil risks being sullied by
methane emissions
M ETHANE is invisible to the naked eye
and does not make for good televi-
sion. So when about 100,000 tonnes bil-
lowed out of a natural-gas system in Aliso
Canyon, Los Angeles, over 112 days last
winter (pictured in infra-red above), it
drew relatively little media attention—
even though it forced the evacuation of
thousands of homes and the plume was
big enough to be detectable from space.
Compare that with coverage of the Deep-
water Horizon oil spill in 2010, which was
the top item of news for weeks in America,
much of it focused on the environmental
impact on the Gulf coast.
Unsurprisingly, many oil and gas com-
panies would prefer methane leaks to re-
main out of the public eye, even though
their industry now surpasses cow burps as
a source of emissions (see chart). Methane
is the predominant constituent of natural
gas, a fuel that energy companies are em-
bracing over oil and coal as a “bridge” to a
post-carbon future and which has been
given a new lease on life by America’s
shale revolution. When burned, it emits
about half as much carbon dioxide as coal
and far less sulphur, soot and other pollut-
ants. But greenhouse gases insulate the
Earth in different ways. Carbon dioxide
stays in the atmosphere for more than 500
years; methane just for 12. But the latter is
about 25 times more potent.
The American Petroleum Institute
(API), a lobby group, says America is in
“good shape” thanks to natural gas. As it
has over time rivalled coal as the main
source of power generation, it has helped
lower emissions of the main source of glo-
bal warming. The institute cites data show-
ing that the amount of methane that leaks
out ofnatural-gas wells and pipelines criss-
crossing America has fallen over the past
quarter of a century. “Let’s not get unrea-
sonably concerned about [methane], be-
cause the industry has been addressing it,”
says the API’s Erik Milito.
Yet even environmentalists who ac-
knowledge a preference for natural gas
over coal believe methane leaks could be
its fatal flaw. The Environmental Defence
Fund (EDF), an American NGO that works
with industry to reduce methane emis-
sions, has in recent years deployed
Spewing bad data
US methane emissions by source, 2014, %
0 10 20 30
Natural gas
& petroleum
Livestock
digestion
Landfills
Coal mining
Manure
management
Other
Source: EPA
The Economist July 23rd 2016 47
Also in this section
48 China’s industrial internet of things
49 SoftBank and ARM
49 The Ultimate Fighting Championship
50 American company earnings
50 The rise of gendered products
51 Schumpeter: Silicon Valley 1.0
For daily coverage of business, visit
Economist.com/business-finance
infra-red cameras along energy firms’ pipe-
lines and beside thousands of oil and gas
wells, as well as airborne monitoring kit to
gather data. The results suggest methane
leaks are significantly higher than had
been previously understood.
EDF has found that a disproportionate
amount of fugitive emissions from the oil
and gas infrastructure comes from a few
“super-emitting” sites. In rare cases, like
Aliso Canyon, they can take months to
plug. More often the culprits may be well-
side storage tanks with faulty valves,
which may be fixable just with a wrench,
but while left unattended billow methane
into the air.
Recently, the Environmental Protection
Agency (EPA), an American regulator, has
introduced its first regulations specifically
aimed at capping methane emissions, ac-
knowledging it has underestimated the
problem. It has lifted its estimate of the
amount of methane that leaked out of the
natural-gas and oil supply chain in Ameri-
ca in 2013 by about 30%—a massive revi-
sion. Steve Hamburg, EDF’s chief scientist,
says that still leaves out the “fat-tail” super-
emissions. He reckons about 2-2.5% of the
gas flowing through the American supply
chain leaks out, in total.
Get much higher, and that would en-
danger the argument that natural gas is
over all time periods cleaner than coal.
And if natural gas emerges as a rival to pet-
40
rol as a transport fuel, as European compa-
nies such as Royal Dutch Shell strongly
hope, such levels would erode the net cli-
mate benefit altogether, Mr Hamburg says.
“Switching from coal to gas is always ad-
vantageous to the climate over the long
term, but the short-term benefits depend
on minimising methane emissions,” he
says. He has experience ofmethane’s effect
at his cabin in the White Mountains of
New Hampshire, where global warming 1
48 Business The Economist July 23rd 2016

2 means that trees now grow in places he
would never have thought possible.
Oil and gas producers acknowledge it is
in their interest to curb leaks; it gives them
more natural gas to sell. They say they are
stepping up monitoring efforts, and have
increased the use of “green completions”
at shale wells to capture methane emitted
at the end of the fracking process, rather
than flaring it at the well head. Big Euro-
pean companies appear to take the reputa-
tional risk seriously. “The industry realises
it needs to get its act together,” says one ex-
ecutive. BP, for instance, has designed a gas
project in Oman that should be leak-free.
Italy’s ENI has set publicly available targets
for cutting methane emissions.
Some state-owned oil giants, such as
Saudi Aramco and Mexico’s Pemex, have
joined global efforts to reduce methane
emissions. But many reckon firms in Rus-
sia, Angola and Nigeria would show up as
big emitters if reliable data were collected.
A report last year by the Rhodium Group, a
research firm, said large producers such as
Iraq, Angola and Libya had never reported
methane-emissions numbers to the UN.
Without good global data, it will be impos-
sible to get the problem in hand. 7
The industrial internet of things
The great
convergence
SHANGHAI
China aims to lead the world in
connecting the factory
Machine language
Device-to-device connections, m
2014 2020 forecast
0 100 200 300 400
China
United
States
Japan
Brazil
India
Source: GSMA
including many of the sensors and other
electronic devices that would form the
backbone of such a network. Moreover,
the government is keen to upgrade the
country’s manufacturing base.
There are already more things connect-
ed to each other in China than in any coun-
try, with the numbers set to skyrocket fur-
ther (see chart). IDC, a research firm,
forecasts that the overall market for IoT kit
of various forms in China will rise from
$193 billion last year to $361 billion in 2020.
Accenture, a consultancy, reckons embrac-
ing IoT in manufacturing could add up to
$736 billion to China’s GDP by 2030.
GE’s new centre (it will soon open a
similar one in Paris to tap into the Euro-
pean market) is part ofits efforts to get firms
to use Predix, its proprietary software for
the industrial IoT. The American company
had already signed up China Eastern Air-
lines and China Telecom, two big state-
owned enterprises, and this week Huawei,
a Chinese telecoms-equipment giant, also
works in “Chinese conditions”. By that he
means places where workers are low-
skilled, conditions are dirty and operators
often push equipment to its limits.
That points to another sort of local ad-
vantage. Foreign firms might have fancier
kit, but locals know how to make things
cheap and cheerful. Huawei’s push into
the IoT got a boost in June when a new pro-
tocol it helped to develop, known as “nar-
row band IoT”, was approved as a global
standard. The new protocol works with de-
vices that require inexpensive sensors that
use little energy.
Still, there are three potential snags to
China’s IoT ambitions. Firms, squeezed by
both a weak local and global economy,
may not be able to afford to connect their
machines to the cloud. Sany’s Mr He, how-
ever, reckons the downturn will be good
for stronger firms as their low-end compet-
itors will be forced out.
Secondly, Chinese factories are less
technologically advanced than those in
America or Europe, so moving to advanced
computer-controlled production and auto-
mation could be daunting for some.
Finally there are standards. Despite the
new narrow band IoT protocol, there is a
lack of overall global standardisation, such
as the common GSM protocol that allowed
Europe to leapfrog others in mobile tele-
phony. Jagdish Rebello of IHS, a consultan-
cy, argues that a push from Chinese regula-
tors, combined with the country’s massive
home market, could lead to domestic stan-
dards dominating the global market. Firms
elsewhere, and in a variety of different in-
dustries from cars to robotics and cloud
computing, will have other ideas. Con-
sumers, meanwhile, will continue to wait

T HE “internet of things” (IoT) is much

hyped. For a decade, a world in which
household appliances, packaged goods,
came on board as a partner. GE is not alone
in seeing China as a potential hotbed ofthe
industrial IOT. Siemens, a German rival,
for the refrigerator that can contact the
supermarket to restock itself. 7

clothes, medical devices and much more
besides would be connected to the inter-
net via smart chips and capable of sensing
and sharing information has been just
around the corner. Progress remains slow
in the consumer market, despite a few hit
products, such as the Fitbit, an activity
tracker that connects to smartphones. An
industrial form of the IoT, however, may
come to fruition much faster.
As the world’s biggest manufacturing
power, China is well placed to lead this
transition. Which is why this week GE, the
world’s biggest industrial company,
opened what it calls a “digital foundry” in
Shanghai. The centre will help Chinese
companies develop and commercialise
products for the industrial internet of
things, which involves factory machines
and industrial goods communicating with
each other and their surroundings. It will
probably be a much bigger market than the
one for consumers. China has millions of
factories with billions of machines and it
also makes most of the world’s electronics,
held an event in Beijing earlier this month
to trumpet its own technology. HP, Honey-
well and Cisco, all big American technol-
ogy firms, are also rushing in.
Sany side up
Chinese firms, however, have their own
plans. China Mobile, the largest mobile-
phone firm, has established its version of a
digital foundry: a “cellular IoT open lab”. Li
Yue, the company’s chief executive,
dreams that he could earn 100 billion yuan
($15 billion) from the IoT with as many as
five billion devices connected by 2020.
Chinese firms also have local knowl-
edge. Sany, which makes construction
equipment, started connecting machines
on its factory floor in 2008. It then put sen-
sors on its diggers and cranes to monitor
them in real-time to improve operating effi-
ciency. The company has invested in data
analytics and artificial intelligence. He
Dongdong, who leads those efforts, brags
that unlike foreign multinationals his firm
knows how to make affordable kit that
 The Economist July 23rd 2016
SoftBank and ARM
Everything under
the Son
Masayoshi Son sets the tone for
SoftBank after the exit of his successor
A S A student, the 58-year-old founder of
SoftBank, a Japanese telecoms firm, re-
solved to dream up one computer-related
business idea a day. When Masayoshi Son
saw, at that time, a picture of a new Intel
chip in a science magazine, he cut it out and
kept it with him for years. So it fits that his
biggest acquisition should be in semicon-
ductors. On July 18th he said SoftBank
would buy ARM Holdings, a British com-
pany that designs processing chips, for £24
billion ($32 billion).
After Nikesh Arora, a former Google
executive whom Mr Son named as his suc-
cessor only a year ago, abruptly left Soft-
Bank in June, investors had anticipated a
shift in strategy. Mr Arora invested over $3
billion in a smattering of global startups.
Mr Son had seemed to refocus on paying
down his firm’s massive net debt, which
reached over $80 billion at the end of
March, a ratio of four times gross operating
profits. Sprint, its struggling American tele-
coms subsidiary, which it bought for $39
billion in 2013, accounts for about $30 bil-
lion of that debt. SoftBank agreed to sell
some assets, including a stake in Alibaba, a
Chinese e-commerce giant.
But investors who know Mr Son’s auda-
cious ways had been totting up the sums to
hazard a guess on his next big deal, says an
analyst in Tokyo. Mr Son has topped up
¥2.3 trillion ($21.7 billion) of cash with a
bridge loan of ¥1 trillion to buy ARM.
Set up in 1990 in Cambridge, ARM is ob-
scure yet fantastically important: the chips
in over 95% of all smartphones sold last
year are based on its designs, which it li-
censes to hardware makers including Ap-
ple and Samsung of South Korea, earning a
royalty for each chip its customers sell. Last
year they sold 15 billion ARM-based chips,
an increase of 25% from 2014, and more
than double the 6 billion sold in 2010.
ARM is now trying to get into designing
chips for giant servers, as Intel does. Its
model means that, as more of its designs
are sold—and as a single chip contains ever
more of its processors—royalties should
grow. But slowing smartphone sales
means it needs to move into other areas,
such as cars and machinery. In 2013 it
bought Sensinode, a software provider for
the “internet of things”, which adds sen-
sors and web connections to everyday ob-
jects from toasters to tractors. In South Ko-
rea, ARM-based sensors in fish tanks signal
nutrient levels to farmers by text message.
The British firm’s high market share and
steady cashflow appeals to SoftBank, as
tightening regulation in Japan could
squeeze profits from its smartphone cus-
tomers. The big question is how long-term
a view it will take with ARM. Ifit is tempted
to jack up its royalties—currently just 1-2%
of the chip’s selling price—that might upset
chipmaker clients. For now, though, Mr
Son says he wants to support ARM in “ag-
gressive” investments in technology and
engineers; he will start by doubling its
headcount in Britain within five years.
That suggests he will support it to become
a big player in the internet of things. Mr
Son is showing his seriousness on this, ar-
gues Oliver Matthew of CLSA, a stockbro-
ker. One of Mr Son’s more restrained fore-
casts about the future of technology is that
by 2040, everyone will own 1,000 devices
each connected to the internet.
Big, visionary bets are his stock-in-
trade. But the premium he is paying for
ARM—over 40 times its forecast earnings
for 2017—has once again alarmed investors.
So far, SoftBank’s domestic acquisitions
have worked well but the record overseas
is patchy. Its shares plunged by a tenth on
July 19th. Sprint’s shares plummeted too:
many worry that ARM will distract Mr Son
from reviving it. And “how will they fund
ARM’s future development if Sprint fails?”
asks one longtime SoftBank watcher.
Mr Son says he can invest in ARM be-
cause he is confident he can turn Sprint
around. He has taken on more vertiginous
levels of debt in the past when he bought
Vodafone’s Japanese subsidiary in 2006,
and paid off the debt early. Mana Nakazora
of BNP Paribas doubts SoftBank will make
any more big buys for two or three years,
and expects it to focus now on improving
its balance-sheet. That was the theory after
his last huge investment, in Sprint, too. 7
Niche media
Fight club
What the value of a martial-arts
promoter says about the media
B LOODIED bone visibly juts out of his
ring finger but Josh Emmett keeps on
fighting. At the Ultimate Fighting Champi-
onship (UFC), broken bones need not stop
the spectacle. Violence sells. And in the
case of the UFC, a mixed martial-arts
league, it sells for $4 billion—the largest sale
of a single sports organisation in history.
For Lorenzo and Frank Fertitta, who
bought UFC for just $2m in 2001, this
month’s deal is a thumping victory. Back
then, mixed martial arts (a free-for-all of
boxing, ju-jitsu, wrestling and other disci-
plines) was banned in New York state and
Business 49
Their tweets are punchy too
branded “human cockfighting” by Senator
John McCain. Now, the UFC dominates the
field. It claims to be in 1.1 billion homes in
156 countries and to be the world’s largest
pay-per-view event provider. It has a
$100m annual contract with the Fox ca-
ble-TV network in America and boasts a
growing digital-streaming platform.
The new owners are a group led by
WME-IMG, an American talent agency.
Their executives are thought to be bullish
on the future of UFC’s $10 a month digital-
streaming platform, Fight Pass, and future
opportunities in Asia. The two may go to-
gether. Digital streaming will be central to
winning new fans and earning fees from
new viewers in China and many other
new markets, says Dan Singer of McKinsey,
a consulting firm.
Still, $4 billion for a bit offisticuffs might
seem rich. This year Comcast bought a
whole film studio for $3.8 billion. But the
deal signals three trends in sport and me-
dia. Live sports are commanding ever-
higher premiums for broadcast rights, as
networks fear losing viewers’ attention to
the internet and smartphones. Second,
UFC’s rise as a social-media phenomenon
shows that it pays to be savvier in this area
than other media firms. UFC even gave bo-
nuses to fighters making creative use of
Twitter and now has 46m followers across
social-media platforms. Lastly, owners
and marketers of content are also becom-
ing distributors of it, creating more oppor-
tunities to turn athletes into mainstream
celebrities.
The only real headache for WME-IMG is
that fighters are demanding more. Kajan
Johnson, a lower-level UFC fighter, claims
his pay has left him “struggling to eat”. Six
former combatants are seeking class-
action status for a lawsuit that alleges the
UFC has restricted competition for fighters
by buying up rival leagues. Athletes and
owners alike want more bums on seats.
But a (fist-free) tussle over who benefits
most from them may ensue. 7
50 Business
Corporate earnings
Of populism and
profits
NEW YORK
Investors may be too sanguine
I F YOU look at the headlines, geopolitical
risk is at record highs, with populism and
strife in Europe, a coup attempt in Turkey, a
tense election in America, the threat of ter-
rorism, and tensions in the South China
Sea. Peer at a stock-price screen, however,
and everything seems fine. This month the
S&P 500 index of big American firms
roared to a new high. Benjamin Graham, a
famous investor, described America’s
stockmarket as a manic depressive. But
now it appears to be one of the planet’s
last, incorrigible optimists.
Investors are convinced that the out-
look for corporate profits has improved.
For the past four quarters, earnings-per-
share for the S&P 500 have been falling by
about 12% compared with the prior year
(see chart). That has reflected the strong
dollar, which crimps the value of foreign
income, together with a slump at energy
and commodity firms. Coca-Cola’s global
sales have risen in local-currency terms
but declined in dollars; ExxonMobil’s pro-
fits have fallen by four-fifths compared
with two years ago.
Yet now markets believe these pro-
blems are going away. The dollar and the
oil price have stabilised and the domestic
economy seems to be in a Goldilocks situa-
tion for profits—not too hot, not too cold. It
is growing just strongly enough to keep de-
mand for products moving along. But
wages, or labour costs, so far this year have
been rising at an annual rate of only 2-3%.
So America Inc can be slothful but highly
profitable. In addition, firms are using high
earnings to pay for share buy-backs, which
have been running at $165 billion a quarter,
and which help to prop up share prices.
A majority of analysts still expect pro-
fits to dip for the second quarter but then to
rise, and strongly by the end of this year.
Just how sensible is this expectation? One
objection is that a tightening labour market
may mean that wage pressures rise at last.
Just a 5% rise in wages would, all else being
equal, lower profits by about 15%. Yet this is
not what the Federal Reserve expects, nor
the bond market, which is pricing in a long
period of low inflation and interest rates.
A still bigger risk, but one that is harder
to quantify, is the longer-term effect of a
fraught political climate upon corporate
profits. Firms have earnings and cashflow
at unusually elevated levels relative to
GDP, while the share of output going to
workers is depressed. Both sides of the
presidential campaign have hit out at big
Consumer products
His and hers
Companies hungry for profits are playing the gender card
“G ENTLEMEN, it’s time for us to be
done with women’s cleaning
products,” suggests the website for Hero
Clean, a line of American products
aimed at men that Elizabeth Sweet, a
professor at the University of California,
Davis, came upon while shopping in
California. “No more pastel bottles with
puppies, babies and dewy meadows.”
Only a tiny group of products merit
distinction by gender. “Anything meant
for your genitals,” says another gender
expert, Lisa Wade of Occidental College.
Yet needlessly gendered items are prolif-
erating. Q-TIPS now offers “men’s ulti-
mate” cotton swabs for men whose
earwax would overwhelm ladylike
swabs. A firm in California called Daisy
Rock hawks hot pink sparkle-coated “girl
guitars” to women. Banana Boat, a sun-
screen brand, sells black bottles of sun
lotion to men who can’t touch its less
masculine orange packaging.
There has been a huge shift towards
gendered marketing since the 1950s when
even beauty products were often gender-
neutral, says Ms Sweet. One theory is that
because men and women are increasing-
ly doing the same things, such as attend-
ing the same universities, doing the same
jobs and household duties, marketers see
a chance to appeal to an older instinct, for
differentiation.
Some firms are even trying to charge
firms, which many people feel are benefit-
ing from an economy tilted in their favour.
How might such sentiment translate
into lower profits? Hillary Clinton has
promised to put pressure on drugs pricing
(14% of all profits in America are earned by
health-care firms). Her party has also
promised a tougher approach on competi-
tion policy, which could hurt technology
Mood swings
S&P 500 earnings per share, $
Trailing 12 months
120
100
80
60
40
20
0 its rank-and-file staff would see their pay
1988 90 95 2000 05 10 16
Source: S&P Dow Indices
The Economist July 23rd 2016
women more for the same products. A
2015 study in New York city found that
women’s products cost more two-fifths
of the time. But many of the new gen-
dered products are for men. Powerful
Yogurt, a food company, has begun pro-
ducing high-protein yogurt in black tubs.
Mammoth Supply, a New Zealand-based
producer of bottled iced-coffee, urges
men to embrace their new domesticised
reality. “Don’t just clear the leaves: elim-
inate them. Don’t just do the chores:
annihilate them.” Bulldog Skincare ped-
dles moisturisers “built for men”.
Other firms are treading more careful-
ly. Following complaints about gender-
based signs last year, Target, an American
retailer, removed mentions of it from the
kids’ bedding and toy sections. Some
firms, such as Johnson & Johnson, a
health-care firm, via its Clean & Clear
brand, are even embracing transgender
themes in their marketing.
Many consumers are resisting the
gender card. Reviews on the Amazon
page of Bic for Her pens, which are like
any other pen except pink and purple, are
sarcastic. One reviewer told how his
wife, attempting to use his man-key-
board, faints until he revives her with
smelling salts. Men may be from Mars
and women from Venus, but both seem
to agree that when it comes to pens,
everyone can share.
firms with large market shares. Donald
Trump might pursue a protectionist agen-
da that would be painful for big firms that
operate abroad or that rely on imported in-
puts (about two-fifths of S&P 500 sales are
made abroad). Both parties could seek to
crack down on generous tax breaks for off-
shore profits.
Yet investors are shrugging off such con-
cerns, perhaps reckoning campaign prom-
ises will be quietly forgotten. For example,
analysts expect pharmaceutical firms’
earnings-per-share almost to double by
2018. It may be wishful thinking. The bank-
ing sector was the first industry in America
to be hit hard by a populist backlash, and it
is unlikely to be the last. Its earnings were
hammered—banks’ return on equity has
halved over the past decade. It is no coinci-
dence that the chief executive now doing
most to head off popular discontent hails
from banking. Last week Jamie Dimon of
JPMorgan Chase announced that 18,000 of
rise from $10 an hour to $12-17. He may not
be the last to make such gestures. 7
 The Economist July 23rd 2016
Schumpeter Silicon Valley 1.0
Cleveland can teach valuable lessons about the rise and fall of economic clusters
W HEN the Republican Party decided to hold its national con-
vention in Cleveland back in July 2014 no one dreamed that
Donald Trump would be the party’s presidential nominee. Yet
the city and the man are oddly suited. It is hard to think of a city
that better illustrates Mr Trump’s campaign theme of making
America great again. For Cleveland is a city that has clearly fallen
from greatness. It is also hard to name a city that better illustrates
the fears of Mr Trump’s critics. It is clear that the politics of anger
and resentment have done nothing but hasten its decline.
Cleveland was the Silicon Valley ofthe second industrial revo-
lution. John D. Rockefeller founded Standard Oil Company there
in 1870. Steel barons built mills along the Cuyahoga River and
Lake Erie, drawn both by the supply of iron ore and by excellent
transport links to the east coast. Immigrants came in their thou-
sands. Charles Brush pioneered electric lighting there; Sidney
Short and fellow inventors came out with electric street cars. By
1900 Cleveland was so successful, leading in patent registration
and venture capital, that it opened a stock exchange.
The city was also home to one of America’s greatest political
machines, put together by a local boy, Mark Hanna, an iron-and-
steel magnate turned political Svengali, and his front-man, Wil-
liam McKinley, from nearby in Ohio. McKinley won the presiden-
cy in 1896 on a platform of nationalism, protectionism and (qual-
ified) isolationism, and his party held the presidency for all but
eight years until 1932. (Karl Rove, George W. Bush’s own Svengali,
modelled himself on Hanna, and wrote a biography of McKinley,
though Mr Bush’s unpopularity and Mr Trump’s rise suggest that
he was less successful than his role model.)
The relics of Cleveland’s greatness can still be seen every-
where. The city boasts one of America’s greatest orchestras. The
Lake View Cemetery contains the bones of Rockefeller and those
of America’s 20th president, James Garfield. The suburbs are dot-
ted with the palaces of former industrial barons. But they only
serve to remind you of how far the place has fallen. Cleveland
embodies all the classic signs of rust-belt decline. The centre often
looks barren. Crime and begging are a problem. The population
has fallen from 900,000 in the 1950s to less than 400,000 today.
Economists from Alfred Marshall on have dwelt on the self-re-
inforcing characteristics of successful clusters. They can protect
Business 51
their pre-eminence by producing distinctive cultures (Marshall
said that there was something “in the air” in Sheffield that was
conducive to steelmaking) and by attracting talent and money.
And they can entrench themselves by investing in robust institu-
tions like universities. The most prominent example of a success-
ful cluster today is Silicon Valley. But there are plenty of others:
the City of London in England or the car industry in Stuttgart.
Cleveland is a reminder that decline can be as self-sustaining
as success. There are three reasons why clusters fail. One is that
they over-specialise in products that are later improved else-
where. Sheffield stuck to steelmaking even as others learned to
make it better and cheaper. A second is that they complacently
fail to upgrade their productivity. Detroit succumbed to Japanese
carmakers in the 1970s and 1980s because it thought more about
providing its cars with ornate fins (and its workers with gold-plat-
ed benefits) than it did about their performance. The third is that
they suffer from an external shock from which they fail to recover,
as could be the case with the City of London in the wake of Brexit.
Naomi Lamoreaux, an economic historian at Yale University,
says Cleveland falls into the third category. It led in a wide variety
of industries into the 1920s, including cars, chemicals, paints and
varnishes, machine tools and electrical machinery as well as iron
and steel. It spent money on R&D. But then came a series of exter-
nal shocks. The Depression destroyed the local financial institu-
tions that had supported Cleveland’s start-ups. Regulations
adopted in its wake gave New York’s banks such a competitive ad-
vantage that local capital markets withered. The federal govern-
ment’s wartime policy of dispersing manufacturing industry
eroded the city’s industrial base.
Fanning the flames of hate
Cleveland’s decline became self-reinforcing. Firms downsized,
closed or relocated. The inner city fell prey to crime and dysfunc-
tion. The white middle-class moved to suburbia. Politicians re-
sponded not with pragmatic ideas for reform but by whipping up
anger and resentment, which only hastened white- and busi-
ness-flight. Dennis Kucinich, the mayor in 1977-79, who much lat-
er ran for president, refused to privatise the electric utility and, in
1978, took the city into bankruptcy. A once-proud city was
mocked as “the mistake on the lake”. To cap it all, Cleveland paid
the price for its earlier successes: by 1969 the Cuyahoga River was
so polluted that it caught fire, an event that is still celebrated in
one of its local brews, Burning River Pale Ale.
The city’s story is also a warning that rebuilding clusters is
fiendishly hard. It has had some success by focusing on education
and medicine, though not as much as its fellow rust-belt city, Pitts-
burgh. The Cleveland Clinic is one of America’s great medical in-
stitutions. The city’s record with various mega-projects is mixed.
In the early 1990s it spent over $300m on a sports complex for its
baseball team, the Indians, and its basketball team, the Cavaliers.
But downtown can still feel like a ghost town at night. More re-
cently the city fathers have built lofts and bicycle paths to attract
millennials. But then so has every other city in the country.
Perhaps the most important lesson from Cleveland is that the
likelihood that you’re going to remain a top cluster for ever is
small. Even if you diversify your risks and invest in your future, as
Cleveland clearly did, some unforeseen event might knock you
for six. And reversing decline is harder than capitalising on suc-
cess. Success is a delicate flower that can easily be killed. Failure is
a weed that it is almost impossible to exterminate. 7
52
Economics brief Six big ideas
Information asymmetry
Secrets and agents
George Akerlof’s 1970 paper, “The Market for Lemons”, is a foundation stone of
information economics. The first in our series on seminal economic ideas
I N 2007 the state of Washington intro-
duced a new rule aimed at making the la-
bour market fairer: firms were banned
from checking job applicants’ credit scores.
Campaigners celebrated the new law as a
step towards equality—an applicant with a
low credit score is much more likely to be
poor, black or young. Since then, ten other
states have followed suit. But when Robert
Clifford and Daniel Shoag, two econo-
mists, recently studied the bans, they
found that the laws left blacks and the
young with fewer jobs, not more.
Before 1970, economists would not
have found much in their discipline to help
them mull this puzzle. Indeed, they did not
think very hard about the role of informa-
tion at all. In the labour market, for exam-
ple, the textbooks mostly assumed that
employers know the productivity of their
workers—or potential workers—and,
thanks to competition, pay them for exact-
ly the value of what they produce.
You might think that research upending
that conclusion would immediately be cel-
ebrated as an important breakthrough. Yet
when, in the late 1960s, George Akerlof
wrote “The Market for Lemons”, which did
just that, and later won its author a Nobel
In this series
1 Akerlof’s market for lemons
2 Minsky’s financial cycle
3 The Stolper-Samuelson theorem
4 The Keynesian multiplier
5 The Nash equilibrium
6 The Mundell-Fleming trilemma
prize, the paper was rejected by three lead-
ing journals. At the time, Mr Akerlof was
an assistant professor at the University of
California, Berkeley; he had only complet-
ed his PhD, at MIT, in 1966. Perhaps as a re-
sult, the American Economic Review
thought his paper’s insights trivial. The Re-
view of Economic Studies agreed. The Jour-
nal of Political Economy had almost the op-
posite concern: it could not stomach the
paper’s implications. Mr Akerlof, now an
emeritus professor at Berkeley and mar-
ried to Janet Yellen, the chairman of the
Federal Reserve, recalls the editor’s com-
plaint: “If this is correct, economics would
be different.”
The Economist July 23rd 2016
In a way, the editors were all right. Mr
Akerlof’s idea, eventually published in the
Quarterly Journal of Economics in 1970, was
at once simple and revolutionary. Suppose
buyers in the used-car market value good
cars—“peaches”—at $1,000, and sellers at
slightly less. A malfunctioning used car—a
“lemon”—is worth only $500 to buyers
(and, again, slightly less to sellers). If buy-
ers can tell lemons and peaches apart,
trade in both will flourish. In reality, buyers
might struggle to tell the difference:
scratches can be touched up, engine pro-
blems left undisclosed, even odometers
tampered with.
To account for the risk that a car is a lem-
on, buyers cut their offers. They might be
willing to pay, say, $750 for a car they per-
ceive as having an even chance of being a
lemon or a peach. But dealers who know
for sure they have a peach will reject such
an offer. As a result, the buyers face “ad-
verse selection”: the only sellers who will
be prepared to accept $750 will be those
who know they are offloading a lemon.
Smart buyers can foresee this problem.
Knowing they will only ever be sold a lem-
on, they offer only $500. Sellers of lemons
end up with the same price as they would
have done were there no ambiguity. But
peaches stay in the garage. This is a tragedy:
there are buyers who would happily pay
the asking-price for a peach, if only they
could be sure of the car’s quality. This “in-
formation asymmetry” between buyers
and sellers kills the market.
Is it really true that you can win a Nobel
prize just for observing that some people in
markets know more than others? That was
the question one journalist asked of Mi-
chael Spence, who, along with Mr Akerlof
and Joseph Stiglitz, was a joint recipient of
the 2001 Nobel award for their work on in-
formation asymmetry. His incredulity was
understandable. The lemons paper was
not even an accurate description of the
used-car market: clearly not every used car
sold is a dud. And insurers had long recog-
nised that their customers might be the
best judges of what risks they faced, and
that those keenest to buy insurance were
probably the riskiest bets.
Yet the idea was new to mainstream
economists, who quickly realised that it
made many of their models redundant.
Further breakthroughs soon followed, as
researchers examined how the asymme-
try problem could be solved. Mr Spence’s
flagship contribution was a 1973 paper
called “Job Market Signalling” that looked
at the labour market. Employers may strug-
gle to tell which job candidates are best. Mr
Spence showed that top workers might sig-
nal their talents to firms by collecting
gongs, like college degrees. Crucially, this
only works if the signal is credible: if low-
productivity workers found it easy to get a
degree, then they could masquerade as 1
 The Economist July 23rd 2016
2 clever types.
This idea turns conventional wisdom
on its head. Education is usually thought to
benefit society by making workers more
productive. If it is merely a signal of talent,
the returns to investment in education
flow to the students, who earn a higher
wage at the expense of the less able, and
perhaps to universities, but not to society
at large. One disciple of the idea, Bryan Ca-
plan of George Mason University, is cur-
rently penning a book entitled “The Case
Against Education”. (Mr Spence himself re-
grets that others took his theory as a literal
description of the world.)
Signalling helps explain what hap-
pened when Washington and those other
states stopped firms from obtaining job-ap-
plicants’ credit scores. Credit history is a
credible signal: it is hard to fake, and, pre-
sumably, those with good credit scores are
more likely to make good employees than
those who default on their debts. Messrs
Clifford and Shoag found that when firms
could no longer access credit scores, they
put more weight on other signals, like edu-
cation and experience. Because these are
rarer among disadvantaged groups, it be-
came harder, not easier, for them to con-
vince employers of their worth.
Signalling explains all kinds of behav-
iour. Firms pay dividends to their share-
holders, who must pay income tax on the
payouts. Surely it would be better if they
retained their earnings, boosting their
share prices, and thus delivering their
shareholders lightly taxed capital gains?
Signalling solves the mystery: paying a div-
idend is a sign of strength, showing that a
firm feels no need to hoard cash. By the
same token, why might a restaurant delib-
erately locate in an area with high rents? It
signals to potential customers that it be-
lieves its good food will bring it success.
Signalling is not the only way to over-
come the lemons problem. In a 1976 paper
Mr Stiglitz and Michael Rothschild, anoth-
er economist, showed how insurers might
“screen” their customers. The essence of
screening is to offer deals which would
only ever attract one type of punter.
Suppose a car insurer faces two differ-
ent types of customer, high-risk and low-
risk. They cannot tell these groups apart;
only the customer knows whether he is a
safe driver. Messrs Rothschild and Stiglitz
showed that, in a competitive market, in-
surers cannot profitably offer the same
deal to both groups. If they did, the premi-
ums of safe drivers would subsidise
payouts to reckless ones. A rival could offer
a deal with slightly lower premiums, and
slightly less coverage, which would peel
away only safe drivers because risky ones
prefer to stay fully insured. The firm, left
only with bad risks, would make a loss.
(Some worried a related problem would
afflict Obamacare, which forbids Ameri-
can health insurers from discriminating
against customers who are already unwell:
if the resulting high premiums were to de-
ter healthy, young customers from signing
up, firms might have to raise premiums fur-
ther, driving more healthy customers away
in a so-called “death spiral”.)
The car insurer must offer two deals,
making sure that each attracts only the cus-
tomers it is designed for. The trick is to offer
one pricey full-insurance deal, and an al-
ternative cheap option with a sizeable de-
ductible. Risky drivers will balk at the de-
ductible, knowing that there is a good
chance they will end up paying it when
they claim. They will forkout for expensive
coverage instead. Safe drivers will tolerate
the high deductible and pay a lower price
for what coverage they do get.
This is not a particularly happy resolu-
tion of the problem. Good drivers are stuck
with high deductibles—just as in Spence’s
model of education, highly productive
workers must fork out for an education in
order to prove their worth. Yet screening is
in play almost every time a firm offers its
customers a menu of options.
Airlines, for instance, want to milk rich
customers with higher prices, without
driving away poorer ones. If they knew the
depth of each customer’s pockets in ad-
vance, they could offer only first-class tick-
ets to the wealthy, and better-value tickets
to everyone else. But because they must of-
fer everyone the same options, they must
nudge those who can afford it towards the
pricier ticket. That means deliberately
making the standard cabin uncomfortable,
to ensure that the only people who slum it
are those with slimmer wallets.
Hazard undercuts Eden
Adverse selection has a cousin. Insurers
have long known that people who buy in-
surance are more likely to take risks. Some-
one with home insurance will check their
smoke alarms less often; health insurance
encourages unhealthy eating and drinking.
Economists first cottoned on to this phe-
nomenon of “moral hazard” when Ken-
Economics brief 53
neth Arrow wrote about it in 1963.
Moral hazard occurs when incentives
go haywire. The old economics, noted Mr
Stiglitz in his Nobel-prize lecture, paid con-
siderable lip-service to incentives, but had
remarkably little to say about them. In a
completely transparent world, you need
not worry about incentivising someone,
because you can use a contract to specify
their behaviour precisely. It is when infor-
mation is asymmetric and you cannot ob-
serve what they are doing (is your trades-
man using cheap parts? Is your employee
slacking?) that you must worry about en-
suring that interests are aligned.
Such scenarios pose what are known as
“principal-agent” problems. How can a
principal (like a manager) get an agent (like
an employee) to behave how he wants,
when he cannot monitor them all the
time? The simplest way to make sure that
an employee works hard is to give him
some or all of the profit. Hairdressers, for
instance, will often rent a spot in a salon
and keep their takings for themselves.
But hard work does not always guaran-
tee success: a star analyst at a consulting
firm, for example, might do stellar work
pitching for a project that nonetheless goes
to a rival. So, another option is to pay “effi-
ciency wages”. Mr Stiglitz and Carl Sha-
piro, another economist, showed that
firms might pay premium wages to make
employees value their jobs more highly.
This, in turn, would make them less likely
to shirk their responsibilities, because they
would lose more if they were caught and
got fired. That insight helps to explain a
fundamental puzzle in economics: when
workers are unemployed but want jobs,
why don’t wages fall until someone is will-
ing to hire them? An answer is that above-
market wages act as a carrot, the resulting
unemployment, a stick.
And this reveals an even deeper point.
Before Mr Akerlof and the other pioneers
of information economics came along, the
discipline assumed that in competitive
markets, prices reflect marginal costs:
charge above cost, and a competitor will
undercut you. But in a world of informa-
tion asymmetry, “good behaviour is dri-
ven by earning a surplus over what one
could get elsewhere,” according to Mr Sti-
glitz. The wage must be higher than what a
worker can get in another job, for them to
want to avoid the sack; and firms must find
it painful to lose customers when their pro-
duct is shoddy, if they are to invest in quali-
ty. In markets with imperfect information,
price cannot equal marginal cost.
The concept of information asymme-
try, then, truly changed the discipline.
Nearly 50 years after the lemons paper was
rejected three times, its insights remain of
crucial relevance to economists, and to
economic policy. Just ask any young, black
Washingtonian with a good credit score
who wants to find a job. 7
54
Finance and economics
African banks
Subprime savannah
LAGOS and NAIROBI
Trouble is stalking many of Africa’s banks
A FRICA’S financial firms can claim many
innovations, from M-Pesa, a pioneer-
ing Kenyan mobile-money service, to the
life insurance for people with HIV offered
by All Life, a South African firm. To these
can be added the first social-media bank
run. Chase Bank Kenya, the country’s 11th-
largest (unrelated to America’s JPMorgan
Chase), was taken over by regulators in
April after word of its impending collapse
spread on Twitter and WhatsApp, spurring
panicked withdrawals.
The run highlighted the risks facing
banks in a region that is seen by many in-
vestors as one of the industry’s final fron-
tiers. Whereas banks in many rich coun-
tries have produced disappointing profits
since the financial crisis of 2008, African
ones had until recently been reporting stel-
lar growth and juicy returns. Those in Gha-
na were expanding their loan books at a
breathtaking pace of more than 30% a year.
Banks in Mozambique, Zambia and Mala-
wi were not too far behind. And most were
making good money, too.
Moody’s, a rating agency, reckons that
average return on equity (a standard mea-
sure of profitability) ranged from 20-25% in
many African countries, making their
banks well over twice as profitable as
American ones and four or five times more
profitable than Europe’s limping lenders.
Yet in many parts of sub-Saharan Africa
these mouthwatering profits are turning
into losses as a result of falling commodity
prices, slowing economies and, in some
cases, weak regulation.
Nigeria, Africa’s biggest economy,
seems on the brink of its second banking
crisis in less than a decade. On July 4th the
central bank dismissed the management
of Skye Bank, the country’s eighth-biggest
lender by assets, amid concerns that it had
failed to keep thick enough buffers of capi-
tal to absorb losses on its bad debts. Its
share price has plunged by about a quarter
since the move. The shares of other Nigeri-
an banks are also sinking.
The central bank insists that “there is…
no need for panic withdrawals from any
bank.” Yet Skye’s managerial maelstrom
harks back ominously to 2009, when the
Africa rising
Non-performing loans as % of total loans
Angola
Ghana
Africa*
Kenya
Congo Nigeria
2010 11 12 13 14 15
Sources: IMF; *Excluding South Africa,
Central banks; Congo 2015, unweighted average
†Latest official estimate
Moody’s
The Economist July 23rd 2016
Also in this section
55 Buttonwood: Ageing and debt
56 The Big Mac index
56 Postal Savings Bank of China
57 Another twist in the 1MDB affair
58 Free exchange: The economics of
coups
For daily analysis and debate on economics, visit
Economist.com/economics
global financial crisis caused several of Ni-
geria’s bigger banks to collapse. Back then
the central bank replaced the bosses of
eight institutions. A state-backed agency
known as Amcon was established to swal-
low up bad loans; the sickliest outfits were
either nationalised or sold to other banks.
Today’s sticky issue is oil. During the fi-
nancial crisis the price of oil slumped only
briefly before recovering strongly. Nigerian
banks subsequently lent billions to local
businessmen to help them buy oil and gas
wells. These loans, about 25% of the coun-
try’s total, seemed quite safe until the oil
price began dropping in mid-2014; it is now
less than half what it was then. Militancy
in the oil-pumping Niger Delta has only
made matters worse.
Afren, an exploration company, went
bust last year. Oando, a leading local oil
producer, admits “significant doubt” about
its ability to repay loans. “The interest is
racking up,” says Kola Karim of Shoreline
Energy, another local producer, which had
to turn off its taps after bandits bombed a
pipeline in February. And even firms that
are not in the oil business may struggle to
service their debts thanks to the econ-
omy’s broader malaise: the IMF reckons it
will shrink by 1.8% this year.
First Bank, Nigeria’s second-largest by
20 assets, says that 18% of its loans are non-
performing. It may be suffering more than
†
most, since more than 40% of its loans
15
went to oil and gas producers. The central
†
bank says that bad debts in the banking
10 system as a whole have doubled in the
past six months, to 10%. Emmanuel Assiak
5 of Africa Capital Alliance, a private-equity
firm, thinks the figure is really in the low
0
teens. “A lot of people are saying this is not
16 2009. Well it’s worse,” says Ronak Gadhia
of Exotix, an investment bank. “Back then,
they didn’t have the exposure to oil.”
Banks are also under pressure else- 1
 The Economist July 23rd 2016
2 where in the region, often for similar rea-
sons. In Ghana non-performing loans
have jumped to more than 16% of the total
after slumping commodity prices and a
plunging currency forced the central bank
to ramp up interest rates. It raised them by
five percentage points, to 26%, a level at
which almost all borrowers will struggle.
Zimbabwean banks hold lots of govern-
ment bonds that will probably never be re-
paid. They have only staved off runs by
limiting withdrawals.
In Kenya, however, banks face a differ-
ent set of stresses. Weak regulation, exacer-
bated by the proliferation ofsmall banks, is
Buttonwood Vanishing workers
Can the debt-fuelled model of growth cope with ageing populations?
T HE world is about to experience
something not seen since the Black
Death in the 14th century—lots of coun-
tries with shrinking populations. Already,
there are around 25 countries with falling
headcounts; by the last quarter ofthis cen-
tury, projections by the United Nations
suggests there may be more than 100.
Such a shift seems certain to have a big
economic impact, but there is plenty of
debate about what that impact might be.
After the Black Death a shortage of labour
eventually led to a sustained rise in real
wages. If that trend were repeated, it
would come as a big shift after a pro-
longed period of sluggish wage growth,
something that has fuelled political dis-
content across the rich world.
A new report on the demographic out-
look by Berenberg, a German bank, focus-
es on one important measure: the depen-
dency ratio. This compares the number of
children and the elderly with people of
working age (those aged 15-64). The higher
the dependency ratio, the greater the bur-
den on the workforce. In the world’s big-
gest economies, America apart, the work-
force is set to shrink significantly (see
chart).
In many developed countries, the de-
pendency ratio rose after the second
world war (thanks to the baby boom), fell
in the late 1960s and 1970s as the boomers
entered the workforce, and has recently
started rising again. That history makes it
possible to analyse how economies per-
formed during periods of both falling and
rising ratios. Berenberg based its analysis
on ten rich countries: America, Australia,
Britain, France, Germany, Italy, Japan,
Spain, Sweden and Switzerland.
The housing market seems an obvious
place to start. You would expect a growing
workforce to push house prices higher, as
wage-earners seek more space for their
taking a toll. Three banks have been placed
into receivership in less than a year by Pat-
rick Njoroge, the respected governor of the
Central Bank of Kenya, as a series of ruin-
ous insider-lending scams have come to
light. Mr Njoroge alleges that the managing
director of one bank siphoned off 38 bil-
lion Kenya shillings ($335m) via 20 shell
companies over 13 years . The full scale of
the heist was discovered a few days after
his funeral. At Chase Bank, the victim of
the social-media run, directors had signed
off on some 8 billion shillings in loans to
themselves.
Mr Njoroge seems determined to clean
Who will fill the jobs?
Working-age population*
2015=100
FO R E C A S T
United
Japan States
European
Union
China
1950 75 2000 25 50 75
Source: United Nations Population Division
families. Sure enough, the authors find
that, since 1960, the median increase in real
house prices when the dependency ratio
was decreasing (ie, when there were rela-
tively more workers) was 2.7% a year. How-
ever, when the dependency ratio was in-
creasing (ie, relatively fewer workers), real
house prices fell by 0.2% a year.
Similarly, as you might expect, real GDP
per person tends to grow faster (2.6%) in
years when the dependency ratio is falling
than in years when it is rising (1.9%). Having
more workers makes it easier for the econ-
omy to grow. Inflation also tends to be
higher (4.1%) in years when the depen-
dency ratio is falling and lower (2.7%) when
the ratio is increasing.
That points to a problem. In recent de-
cades, the developed world has seen a big
surge in total debt-to-GDP ratios in both the
private and public sectors. People tend to
take on debt for two reasons: to maintain
their consumption or to buy an asset (for
individuals, often a home). This requires a
belief on the part of the debtor (and the
lender) that, at a minimum, their future in-
comes and asset prices will not both fall by
a lot, so the money can be paid back.
Finance and economics 55
up Kenya’s banking system. But elsewhere
in Africa regulators still seem willing to
turn a blind eye to problems. Forcing banks
to admit to rising bad debts could lead to
painful collapses and to strained public fi-
nances if governments have to step in with
bail-outs. But ignoring them might be even
worse in the long run. As it is, businesses in
Africa struggle to obtain enough capital to
grow: despite rapid loan growth, most Afri-
can countries still have low banking pene-
tration. Allowing zombie banks to limp on,
too weakened by bad loans to make any
new ones, would only worsen Africa’s
desperate shortage of credit. 7
In a world of sluggish growth, low in-
flation and stagnant house prices, debts
become much harder to pay off. Indeed,
that has pretty much been the picture
120 since the financial crisis in 2008: debt has
been shuffled around a bit (from the priv-
100 ate sector to the government) but total
debt-to-GDP ratios have not fallen.
80
The show has been kept on the road by
60 big reductions in interest rates, which
have enabled most borrowers to keep ser-
40 vicing their debts. And demography sug-
gests that the era of low interest rates is set
20 to continue. Berenberg finds that, since
2100
1960, real interest rates have tended to rise
*Aged 15-64
when the dependency ratio is decreasing
and fall when the ratio is rising (as it is
now forecast to do).
Low rates are in part a deliberate poli-
cy by central banks to stimulate the econ-
omy by encouraging people and compa-
nies to borrow. But as workers age, they
are less likely to want to take on debt. And
if an ageing workforce means slower
growth, companies won’t want to bor-
row to invest. So the policy may not work.
Indeed, the Berenberg study found that
since 1960, private-sector debt rose almost
three times as fast, relative to GDP, in
years when the dependency ratio was de-
creasing than when it was increasing.
The big question is whether economic
growth and rising debt levels go hand-in-
hand, or whether the former can continue
without the latter. If it can’t, the future
could be very challenging indeed. To gen-
erate growth in our ageing world may re-
quire a big improvement in productivity,
or a sharp jump in labour-force participa-
tion among older workers. To date, the
signs on productivity are not encouraging
and elderly employment ratios have a lot
further to go.
Economist.com/blogs/buttonwood
56 Finance and economics
The Big Mac index
Patty-purchasing
parity
HONG KONG
The size of the world
economy—measured in burgers
I N THE mall below a McDonald’s restau-
rant in Hong Kong, excitable children
pose for photos next to a statue of the
chain’s clownish mascot, Ronald, who
lounges on a bench, one yellow glove
raised in welcome. He fronts a display of
other promotional decor, including a soft
drink the size of a man and a box of fries
that looms even larger. A video chronicles
the chain’s 41 years in Hong Kong, which
have been full of menu twists and tweaks:
sausage McMuffins, shake-shake fries,
chicken McNuggets, salads. At the restau-
rant upstairs, touchscreen menus now al-
low choosy customers to build their own
burger, adding exotica like grilled champi-
gnon, herb aioli and sliced jalapeños or
even (heresy!) subtracting the bun.
Innovation and differentiation—the cre-
ation of things new and singular—are a
boon to economic progress and the bane
of economic measurement. It would be
much easier to compare economies across
borders and time if goods remained much
the same, wherever and whenever they
were made. Fortunately, amid all the cre-
ativity and complexity, the Big Mac re-
The Big Mac index
Local currency under(-)/over(+) valuation
against the dollar, July 2016, %
Forecast GDP in 2016
in Big Macs*, bn
60 40 20 – 0 + 20 40
Switzerland
Norway
Sweden
United States† nil
Brazil
France
Germany
Britain
Turkey
Japan
China‡
Hong Kong
India§
Indonesia
South Africa
Malaysia
World** na
*GDP divided by Big Mac price, in local currency †Average
of four cities ‡Average of five cities §Maharaja Mac
**Based on 59 countries accounting for 94% of world GDP
Sources: McDonald’s; IMF; The Economist
Interactive: Compare global currencies over time
with our Big Mac index at Economist.com/bigmac
mains something of a constant. It varies
rather little from country to country or year
to year. Its consistency is part of its appeal
to customers. It is also why it appeals to
us—as a handy benchmark for judging the
strength of currencies and even the size of
economies.
To calculate our Big Mac index, we col-
lect the price of the burger (with bun, of
course) in 59 countries accounting for 94%
of the planet’s output. (In India, we substi-
tute the Maharaja Mac, which is made
with chicken rather than beef.) It turns out
that some of these burgers are much
cheaper than others in dollar terms. In
America, a Big Mac costs $5.04 on average.
In Hong Kong, by comparison, the same
burger costs the equivalent of $2.50 or so.
There are many potential reasons why
Hong Kong’s Big Macs are cheaper than
America’s. But one is that Hong Kong’s cur-
rency is undervalued.
The Big Mac index thus provides a sim-
ple gut-check for judging the competitive-
ness of currencies. It compares each coun-
try’s exchange rate with a hypothetical
alternative: the rate that would equalise
the price of a Big Mac around the world. In
Hong Kong, where the Big Mac costs 19.20
Hong Kong dollars, that hypothetical ex-
change rate would be 3.81 Hong Kong dol-
lars to the greenback. The real, market ex-
change rate is much weaker: it takes 7.75
Hong Kong dollars to buy one of the Amer-
ican sort. According to the Big Mac index,
then, the Hong Kong dollar is heavily un-
dervalued—by more than half.
Hong Kong is not alone. Judging by the
price of burgers, most currencies are un-
dervalued against the dollar. The euro
looks 17% too cheap. The yen is underva-
lued by about 30%. Big Macs also lookstrik-
ingly cheap in many emerging economies,
including South Africa (58%) and Malaysia
(61%). In fact, only three currencies look
99 overvalued by this measure: Sweden
68 (overvalued by 4%), Norway (9%) and Swit-
97 zerland (31%).
3,682 If most currencies are “too” cheap
409 against the dollar, it follows that the dollar
541 itself must be too expensive. The Big Mac
824
index suggests it has climbed a whopping
56% above fair value on a trade-weighted
644
basis. Does this mean we should expect a
214
dollar crash? No. There are fundamental
1,369
economic reasons why exchange rates
3,931
tend to look cheap in developing coun-
131 tries—in particular, poor productivity in
941 both tradable sectors (eg, manufacturing)
407 and non-tradable ones (eg, services). As
142 productivity in manufacturing improves
158 in emerging markets, factory wages will
19,235 rise, putting upward pressure on wages
and prices elsewhere in the economy, even
in fast-food chains. That will make their
burgers dearer, narrowing the gap with
America.
In a more sophisticated version of the
Big Mac index, we have taken these funda-
The Economist July 23rd 2016
mentals into account. The adjusted index
looks at whether a currency is cheap or ex-
pensive compared with what you would
expect given the country’s level of devel-
opment. By this measure, the dollar is still
overvalued, but by a much smaller margin:
roughly 11% on a trade-weighted basis.
The Big Mac index also provides a fun
gauge of the size of national economies, a
matter of great debate and controversy. If a
country spent its entire annual income on
Big Macs, how many burgers could it buy?
America’s GDP is forecast to be over $18.5
trillion this year, according to the IMF. That
translates into almost 3.7 trillion burgers at
a little over five bucks apiece. America thus
accounts for a big share of the world total,
which will amount to over 19.2 trillion in
2016, by our calculations, based on IMF
forecasts (see chart).
Can any other economy rival the home
of the hamburger? China’s GDP will be a
little over 73 trillion yuan this year, says the
IMF, or less than $11.4 trillion. But in China,
a Big Mac costs only 18.6 yuan. So its GDP is
equivalent to over 3.9 trillion burgers, over
5% more than the American total. Indeed,
by this measure, China overtook America
back in 2013. At market exchange rates,
America’s economy is still far bigger than
China’s. But at patty-purchasing parity,
their positions have been flipped. 7
Postal Savings Bank of China
A red-letter IPO
Shanghai
A creaky, bloated bank will be this
year’s star share listing
F
EW companies are able to go public
with a valuation of more than $50 bil-
lion less than a decade after their founding.
This rarefied group, which mainly consists
of tech darlings, is about to admit a surpris-
ing new member: a large, lumbering Chi-
nese bank. Postal Savings Bank of China,
established in 2007, is on course for an ini-
tial public offering (IPO) this year that is ex-
pected to be the world’s biggest for nearly
two years. Its pitch to prospective investors
is also unusual. Far from boasting about
how well it is run, it instead emphasises
the advantages of scale—which it has so far
squandered—to imply that it has vast un-
tapped potential.
Describing Postal Savings Bank as a
startup is something of a misnomer. When
it launched nine years ago, it was a spin-off
from the Chinese postal service, which
had doubled as a quasi-bank for 20 years.
As a way of bringing finance to rural areas,
the government set up windows at post of-
fices for locals to deposit their savings, a
model that lots of other countries had pre- 1
 The Economist July 23rd 2016
Not exactly Silicon Valley
2 viously followed.
In many small villages in China, the
postal bank is still the only trustworthy
savings institution around. It also provides
a remittance network for tens of millions
of migrant labourers, letting them send
their incomes from far-flung factories back
to their families. As of the end of March,
Postal Savings Bank had 40,057 outlets na-
tionwide, covering 98.9% of counties, more
than any other bank in China. It also had
505m retail customers, more than one in
every three citizens.
But it does not do much beyond offer-
ing a safe place for customers to put their
money. It used to place almost all its assets
with the central bank, and so earned a
measly profit. The government’s decision
to incorporate it as a stand-alone entity in
2007 was the first big step towards improv-
ing its performance, opening the door for it
to lend more. It still has a long way to go.
Last year its return on assets was just 0.51%,
less than half the national average for com-
mercial banks of 1.1%. Corporate gover-
nance has also been weak. Tao Liming,
head of Postal Savings Bank at its launch,
was arrested in 2012 for corruption. He
died in custody last month.
Some big investors think it can turn it-
self round. Last year the bank sold a 17%
stake to a consortium that includes UBS, a
Swiss bank, and Canada’s biggest pension
fund. Its listing, which is likely to take place
in September, could bring in as much as $10
billion, boosting its depleted capital cush-
ion. It clearly has room to grow. Its loan-to-
deposit ratio of 39% is some 30 percentage
points lower than its peers’. Low-yielding
government bonds still eat up a big share
of its assets. It has also yet to take real ad-
vantage of its vast client base to sell other fi-
nancial products, such as insurance.
Yet making the transition to full-fledged
The 1MDB affair
Thick and fast
SINGAPORE
America applies to seize assets linked to a Malaysian state investment firm
H AVING smouldered for more than a
year, international investigations
into 1MDB—a Malaysian state investment
firm at the heart of a sprawling financial
scandal—are now burning fiercely. On
July 20th America’s Justice Department
began proceedings to seize more than $1
billion of assets, which it alleged had
been purchased with funds siphoned out
of the firm. It is the largest single action
the department has ever launched.
The goodies concerned include luxu-
ry properties, artworks by Van Gogh and
Monet, and a jet, according to court fil-
ings. Authorities say 1MDB’s money was
also spent on gambling and used to make
the “Wolf of Wall Street”, a film about a
high-living swindler starring Leonardo
DiCaprio. It was made by a production
company co-founded by Riza Aziz, the
stepson of Malaysia’s prime minister,
Najib Razak. (A spokesman for the firm,
Red Granite Pictures, said neither it nor
Mr Riza had done anything wrong.)
Mr Riza is among several people the
Justice Department claims are “relevant”
to its case. So is Low Taek Jho, a Malay-
sian tycoon who helped to set up 1MDB,
and two former officials at an Abu Dhabi
state firm with which 1MDB did business.
Also listed in the complaint (but not
named) are four employees of1MDB and
a high-ranking Malaysian government
official who is described as a relative of
Mr Riza and for the moment known only
as “Malaysian Official 1”.
1MDB was launched in 2009, the year
Mr Najib became prime minister. It was
supposed to bring investment to Malay-
sia by forging partnerships with foreign
firms. But by 2014 it was struggling to
service debts of more than $11 billion.
Questions about it multiplied last year
commercial bank will be hard. Under-per-
formance tends to be baked into the DNA
of postal banks, if privatisations in other
countries are anything to judge by. The
bank has a responsibility to serve isolated
rural communities; it cannot simply cut
branches, says Dong Ximiao of the Chon-
gyang Institute for Financial Studies at Ren-
min University.
Moreover, at the same time as Postal
Savings Bank stays yoked to a bricks-and-
mortar model, technological change is
sweeping through the financial system.
Mobile banking is increasingly popular.
Payment apps owned by Tencent and Ali-
baba, two internet giants, already have at
least 500m users between them. Most are
Finance and economics 57
when it was discovered that around
$700m had entered Mr Najib’s bank
accounts shortly before a close election
in 2013. (Mr Najib says the money was
not related to 1MDB, but was a perfectly
legal, personal donation from a Saudi
royal, much of which has been returned.
Malaysia’s attorney-general agrees.)
The Justice Department says the
assets it is seeking to recover are associat-
ed with “an international conspiracy to
launder funds misappropriated” from
1MDB. Its filing alleges that between 2009
and 2015 more than $3.5 billion belonging
to the firm may have been pinched by
“high-level officials of1MDB and their
associates”. The complaint provides
extensive detail on the deals in question,
which it divides into three “phases”,
beginning in 2009, 2012 and 2013.
The proceedings now starting in
America relate only to the seizure of
assets, and do not amount to criminal
charges against the individuals alleged to
be involved. In the meantime several
cases are advancing elsewhere. In May
the Swiss financial regulator fined BSI, a
private bank which handled some of
1MDB’s money, and launched proceed-
ings against two of its former employees.
On July 21st authorities in Singapore
said that they had seized or frozen assets
worth S$240m ($175m), half of it belong-
ing to Mr Low or his family, as part of an
ongoing probe into transactions linked to
1MDB. The local financial regulator also
announced that it would be taking action
against three big banks—DBS, UBS and
Standard Chartered—for “lapses and
weaknesses” in their efforts to prevent
money-laundering. With investigations
underway in half a dozen countries,
expect to hear much more.
in cities for now, not in the rural heartland
of Postal Savings Bank, but it is only a mat-
ter of time before the technology spreads
farther.
Optimists think the tech groups will
work with the bank, not against it. Tencent
and Ant Financial, Alibaba’s payments af-
filiate, were among the group of investors
in Postal Savings Bank last year. Its physical
presence could help them build deeper re-
lationships with customers. But a more
cynical view is that the tech giants were
fulfilling their own political duty, currying
favour with the government by supporting
a state-owned bank whose business mod-
el, though important to China’s rural past,
will be less relevant to its urban future. 7
58 Finance and economics
Free exchange Putsch and pull
Plots to topple leaders are becoming less common. That’s a good thing for many reasons
T HE attempt last week to overthrow Recep Tayyip Erdogan,
Turkey’s president, was at once surprising and familiar. Few
had thought that the armed forces, however disgruntled, would
dare to remove an elected leader who enjoys widespread sup-
port. But it was only a short while ago that Turkey suffered a coup
every ten years or so, on average. The same can be said for coups
around the world. They are almost always unexpected: by their
nature, they aim to catch the government unawares. Yet they oc-
cur often enough. The past three years have seen successful coups
in Egypt and Thailand, along with several botched attempts in
other countries.
This regularity has yielded a body of research about the
causes and consequences of coups, with much of it focused on
their economic dimensions. There are no iron laws. Each coup is
unique, laced through with political and social complexities.
Still, there are certain patterns.
Start with the basic numbers. Jonathan Powell and Clayton
Thyne of the University of Kentucky have built a data set of all
coup attempts between 1950 and 2010. By their count, there were
457. Over that time, plotters had almost exactly even odds. Of all
the bids to topple leaders, 227, or 49.7%, were successful; 230, or
50.3%, failed. But the figures have changed in recent years. Plotters
appear to have honed their craft, scoring a nearly 70% success rate
after 2003.
One possibility is that, as in any industry, best practice has
spread. (There are suggestions that “Coup d’État: A Practical
Handbook”, a study published by Edward Luttwak, has helped
would-be putschists.) The basic steps—detain key leaders, take
over major media outlets, control traffic arteries—are well
known. In this respect, the bungling of the Turkish coup was al-
most as surprising as the fact that it was attempted in the first
place. Yet Turkey also showed that technology is challenging es-
tablished formulas. Mr Erdogan harnessed social media to rally
crowds of supporters and used video-streaming to conduct a live
interview with a TV station.
Coups have also become less common over the years. Their
heyday was the mid-1960s, when nearly 15 took place every year.
In the 2000s that fell to less than five a year. The Turkish coup was
the first attempted this year. There are many possible explana-
tions for the decline in coups, but one is economic: the world has
become richer. Looking at a sample of121 countries, John Londre-
gan and Keith Poole, then of Carnegie Mellon University, con-
An affront to prosperity too
Effects of a successful coup
Cumulative change in growth in GDP per person, percentage points
Maximum
Autocracies
Minimum
Maximum
Democracies
Minimum
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Years after coup
Source: Erik Meyersson
The Economist July 23rd 2016
cluded in 1990 that coups were 21 times more likely to occur in the
poorest than in the wealthiest. Using another group of countries,
Paul Collier and Anke Hoeffler of Oxford University found in
2007 that the risk of coups fell by about 27% as the level of income
per person doubled.
By the same token, growth rates matter. Raising it by one per-
centage point reduces the probability of coups by 4.4%. The corol-
lary is, of course, that slower growth raises the risk. There is no
automatic threshold. Just look at North Korea or Zimbabwe,
where the economies have been disastrous for years without sol-
diers defenestrating their leaders. But it is axiomatic that so long
as an economy is thriving, coups are far less likely. In the case of
Turkey most attention has been placed, rightly, on the army’s dis-
comfort with Mr Erdogan’s tightening grip and his embrace of Is-
lam in a once fiercely secular state. Yet it is also noteworthy that
growth over the past decade has disappointed and that reform-
ists have been sidelined in recent months.
Coup de graphs
What happens to growth after a putsch? One opinion occasional-
ly voiced is that coups might be helpful, allowing no-nonsense
leaders to dispense with endless politicking and push through
smart policies. That view was heard in Egypt in 2013, and again in
Thailand in 2014. But this is unlikely, according to Erik Meyersson
of the Stockholm Institute of Transitional Economics, who has
looked at hundreds of failed and successful coups. Failed coups
have little discernible impact on a country’s growth; after short-
term volatility, it quickly returns to its previous trend. Successful
coups, however, do have a real impact—but only in previously
democratic countries. In such places, coups lower the growth of
income per person by as much as 1.3% a year over a decade (see
chart). As a result, incomes eventually end up more than a tenth
lower in post-coup democracies. In countries with autocratic rul-
ers, in contrast, coups make little difference in the long run.
Coups are also associated with a range of other economic pa-
thologies, particularly in democracies. There is a reduction in so-
cial spending, perhaps because the elite that toppled the previous
leaders now seek to enrich themselves and their cronies. Finan-
cial stability also tends to deteriorate as governments rack up
greater debts. Impaired legitimacy makes it harder to collect tax-
es, and the confidence of foreign investors seeps away.
Mr Meyersson’s explanation of why democracies fare so
much worse is simple: coups are much more of a wrenching
change for them. In authoritarian countries, with no mechanism
for transferring power, coups are part of the natural order of
things. In democracies—even imperfect ones such as Thailand or
nascent ones such as Egypt—coups represent a fundamental rup-
20 ture, altering the course of their development.
From this standpoint, the failure of Turkey’s coup bodes well
10 for the economy. Whatever illusion of stability the generals might
+ have offered, the economic costs would have been severe (to say
0 nothing of the anger that would have welled up in society). Yet
– Turkey may be one case where the effects of a failed coup are
10 much the same as those ofa successful one. This is not shaping up
to be a victory for Turkish democracy. Rather than reinforcing Tur-
20
key’s democratic institutions, Mr Erdogan is purging his enemies,
30 real and perceived, and entrenching his own rule. Putsches can
come in many forms. 7
Economist.com/blogs/freeexchange

Science and technology
The 21st International AIDS Conference
Rallying the troops
Durban
AIDS workers face setbacks, both epidemiological and financial. But they are about
to be handed new weapons to carry on the fight
V ETERANS of the war on AIDS wear the
medal stamped “Durban” with pride. It
was in that city, in 2000, that the most effec-
tive of the International AIDS Conferences
was held. The field’s bigwigs agreed that
everything possible should be done to
make the antiretroviral (ARV) drugs that
had been invented a few years earlier
available to all who needed them, and be-
gan to create the institutions that would
distribute them.
In retrospect, it sounds an obvious
thing to do. But in those days ARVs were
costly, and ways of getting them to people
in poor countries nearly non-existent. The
ramp-up therefore took time, and deaths
from AIDS continued to rise. According to
UNAIDS, the United Nations agency
charged with combating the disease, they
peaked at 2m a year in 2005. Since then,
though, they have almost halved, to
around 1.1m a year. That is fewer than the
1.5m who die from viral hepatitis, a fact that
would have astonished the delegates to
Durban in 2000.
No good deed, however, goes unpun-
ished. In the poorest countries, which are
often those with the biggest problem, ARV
programmes still depend on foreign subsi-
dies. But as the perception of crisis has
passed, political attention has wandered.
Correction: In last week’s article on fMRI scanning
(“Computer says: oops”) we quoted the lead author of
the paper in question as saying that as many as 3,000
fMRI papers could “simply be wrong”. That should have
read “could be affected”. Sorry.
A report published on July 15th by the Kai-
ser Family Foundation, an American chari-
ty, in conjunction with UNAIDS, showed
that in 2015, for only the second time since
2002, international aid for AIDS was down
(see chart). That made for a gloomy back-
drop to the AIDS conference’s return to
Durban. But it also gave urgency to its two
main themes—prevention and cure.
We interrupt this transmission...
AIDS is costly to fight because ARVs only
suppress HIV’s reproduction; they do not
eradicate it from someone’s body. Those
infected are therefore on the drugs for life.
This means preventing transmission is cru-
cial not only for humanitarian reasons, but
also for financial ones. As the number of
infected people rises, so does the bill for
treating them. Moreover, unlike death
rates, rates ofnew infection seem, after sev-
eral years of falling, to have levelled off. A
recent study published in the Lancet said
they have not fallen for the past five years
(see chart on next page). Another, from UN-
AIDS and based on different data, suggest-
ed recent drops were caused solely by fall-
ing rates of transmission between mothers
and their children, rather than the adult-to-
adult sort.
One change since 2000 is that preven-
tion has become a scientific endeavour.
Then, the best advice was sexual fidelity
and condoms. It is still good advice, but
other options are now available. Circumci-
sion is one example. Research suggests that
The Economist July 23rd 2016 59
Also in this section
61 Atomic data storage
61 Smarter sutures
For daily analysis and debate on science and
technology, visit
Economist.com/science
parting with his foreskin reduces a man’s
risk of getting infected by up to 60%, be-
cause the foreskin is rich in the sorts of cells
in which HIV reproduces. Prophylactic cir-
cumcision has become an established
medical procedure in many African coun-
tries. But levelling the playing field be-
tween the sexes requires techniques that
women can use, too. Linda-Gail Bekker,
the incoming president of the Internation-
al AIDS Society, which organises the AIDS
conferences, thinks two such technologies
are imminent. One is available to both
sexes, while the other is in the hands of
women alone.
The universal sort is called oral pre-ex-
posure prophylaxis (PrEP). Oral PrEP,
which involves taking an antiviral drug
combination called Truvada in anticipa-
tion of risky intercourse, was in the air at
the last AIDS conference, held in 2014.
Now, although it has so far been licensed in
only about half a dozen countries, it is tak-
ing off. UNAIDS estimates 60,000 people
around the world are on oral PrEP. Gilead
Sciences, Truvada’s makers, reckon that be-
tween 2012, when America approved oral
PrEP, and the end of 2015, 80,000 people in
America alone had used it at some point. 1
Waning interest?
International HIV assistance from donor
countries, constant 2014 $bn
9
6
3
0
2002 05 10 15
Source: Kaiser Family Foundation
60 Science and technology
2 UNAIDS sees an opportunity here—per-
haps one as big as that offered by ARVs in
2000. Michel Sidibé, the agency’s boss,
reckons that if oral PrEP is focused on those
facing the highest risk, such as prostitutes,
the rate of new infections would start fall-
ing again. UNAIDS, which loves targets,
suggests aiming to have 3m people on oral
PrEP by 2020. That sounds ambitious. But
ifthe UNAIDS figure for current users is cor-
rect, a little more than doubling the num-
ber every year would get there.
The second technique involves silicone
rings laced with a drug called dapivirine.
These rings, developed under the aegis of
the International Partnership for Microbi-
cides (IPM), another charity, sit at the top of
the vagina, slowly releasing a pharmaco-
logical payload designed to stop the repro-
duction of any viruses that do find homes
in the vaginal wall. At the moment, they
last a month, but a three-month version is
under development.
Two trials which reported earlier this
year—one in South Africa and Uganda, and
the other in those places plus Malawi and
Zimbabwe—suggest the rings work. Fol-
low-up data released at the conference
confirm this. A ring’s efficacy is, unsurpris-
ingly, related to how much a woman actu-
ally uses it. But for the most diligent it re-
duced the risk of becoming infected by
75%, compared with control volunteers
who did not use such a ring at all. More
studies have just been launched, and if all
goes well the IPM hopes governments will
start approving the rings by 2018.
The best form of prevention, though,
would be a vaccine. Here the news is less
good. Researchers have been hunting for a
vaccine almost since HIV was first discov-
ered, in 1983. The closest they have come
was a trial in Thailand in 2009. That vac-
cine had an efficacy of 31%, which was too
low to license it for general use.
Undeterred, Dr Bekker has run a small
trial to prove the safety of a new version of
the Thai vaccine, adapted to combat the
strain of HIV most common in South Afri-
ca and also given a better adjuvant—a
booster chemical that promotes a vac-
cine’s efficacy. The results came out in May
and signalled the all-clear for a larger trial,
with 5,400 participants, that will begin in
November. If the tweaked vaccine has an
efficacy of 50% or more, then it is likely to
become the first actually approved for use.
Don’t mention the “C” word
The search for a full-on cure for AIDS is as
long-standing as the search for a vaccine
and has proved, so far, equally futile. In-
deed, the “C” word is now going out of
fashion. Many researchers prefer to talk of
“remission”, as cancer doctors do. By that
they mean some treatment, possibly need-
ing to be repeated every few months, that
lets patients stop taking ARVs.
The problem faced by all attempts at ei-
Down but not out
Number of new HIV infections worldwide, m
High
Estimate
Low
1980 85 90 95 2000 05 10 15
Source: The Lancet
ther a cure or remission is that HIV hides
away in certain inactive body cells by inte-
grating its genes into the host cell’s chromo-
somes. Until such a cell starts translating
those genes into new viruses, the infection
remains invisible both to ARVs and to the
immune system. For decades, researchers
have been trying to flush HIV out of its hid-
ing places by activating these cells and
then eliminating them—a strategy called
“shock and kill”. But shock and kill has, so
far, yielded no treatment. So other ap-
proaches are coming to the fore.
One is to abandon the idea of waiting
for the virus to come out and instead go in
and get it. That is the method adopted by
Monique Nijhuis of the University Medi-
cal Centre Utrecht, in the Netherlands. She
uses CRISPR-Cas9, a potent new gene-edit-
ing technique, to hunt down and eliminate
DNA sequences found in HIV but not the
human genome, thus wrecking the viral
genes inside their host chromosomes.
Dr Nijhuis’s technique works well in
cell cultures, though it has yet to be tested
in animals, let alone people. But another
approach is starting, tentatively, to be so
tested. This encourages the immune sys-
tem to attack infected cells (including those
where HIV is latent) more aggressively.
AIDS and cancer are different sorts of
diseases, but they share an important fea-
ture. Both are able to outwit the immune
system. This suggests to some that the way
to deal with them is to give the immune
system a bit of help. In the case of AIDS one
approach is to try bolstering it, by injection,
with extra antibodies known to have at
least some effect on HIV. Individually,
these do little good. But Anthony Fauci,
head of America’s National Institute of Al-
lergy and Infectious Diseases, and one of
AIDS research’s oldest hands, suggested
that they might be used, as ARVs are, in
combinations of three or four that attack
different parts of the virus.
Another way the immune system
might be boosted—and one that is already
employed to treat cancer—is to use drugs
The Economist July 23rd 2016
called checkpoint inhibitors. To stop im-
mune responses getting out of hand, and
harming the person they are supposed to
protect, evolution has created various mo-
3.5 lecular “checkpoints” that slow things
down. A checkpoint inhibitor neutralises
3.0 one of these, speeding things up again.
Testing such drugs on those infected
2.5
with HIV is not as simple as it sounds. Dis-
2.0 inhibiting the immune system is risky. It
could end up damaging healthy cells. Peo-
1.5 ple whose HIV is controlled by ARVs are
not in immediate danger, so it would be
1.0
unethical to put them at such risk. But this
0.5 does not stop doctors using inhibitors to
treat cancer patients who also happen to
0 be HIV-infected, since the primary pur-
pose is clinical, not experimental. And, as
Olivier Lambotte of the Hôpital Bicêtre,
just outside Paris, told the meeting, that is
precisely what is happening, in three small
trials which began this year.
Sadly, even if one or more of these ap-
proaches does work, it will be a long time
before it makes a dent in the epidemic.
Hence the worry about the slackening of
funding in the face of growing numbers of
infected—let alone aspirations to offer
ARVs to at least 90% of those so diagnosed
and to roll out oral PrEP. But, huff and puff
as people may, there is unlikely to be much
more money in the immediate future.
Things will therefore have to change.
David Wilson, who directs the World
Bank’s AIDS programme, has several ideas
to cope with belt-tightening. One is better
targeting of existing cash, for example by
identifying HIV hotspots within countries.
That, in turn, means collecting better data.
Such an approach would reap huge re-
wards, he argues, reducing budgets by
20-40%. And he thinks the worst-hit coun-
tries should do more to help themselves,
and could raise more money if they put
their minds to it—though they cannot yet
be expected to do everything.
These are good ideas, and should be
pushed. But Dr Wilson also reckons that
there needs to be a move away from the
feeling that AIDS is exceptional, and thus
requires an exceptional response. In the
past, it certainly did. But, he says, HIV is
now familiar enough that its treatment can
be integrated ever more closely into rou-
tine health care, to the benefit of both.
That may be premature, for AIDS does
remain exceptional. Its association in the
public mind with prostitutes, drug users
and gay men (in many places where AIDS
is rampant, homosexual acts are illegal)
means treating it as just another disease is
still a long way off. At the same time, and
despite the lack of money and the plateau-
ing of infection rates, the progress that has
been made since 2000 against something
unknown to medical science 36 years ago
is impressive. With the new tools now
available, and with but a little more will-
power, AIDS can surely be beaten. 7
 The Economist July 23rd 2016
Data storage
Atoms and the
voids
Individual atoms offer ultra-dense
information storage
W HAT if “we can arrange the atoms
the way we want; the very atoms, all
the way down”? So asked the physicist
Richard Feynman in an influential 1959 lec-
ture called “There’s Plenty of Room at the
Bottom”. This manipulation would mean
that information, like text, could be written
using atoms themselves. Feynman predict-
ed that the entire “Encyclopædia Britan-
nica” could be written on the head of a pin.
Three decades later, a group of scien-
tists at IBM managed exactly that. They
were able to write the firm’s name using 35
xenon atoms resting on a sheet of nickel—
the first demonstration of precise atomic
placement. Individual atoms, though, tend
to jiggle around. They jiggle less at lower
temperatures, so to keep the atoms in
place, the researchers cooled them to
-269oC, just 4oC above absolute zero, the
coldest temperature physically possible.
This was so costly that writing more than
three letters did not make sense.
Now a team of researchers led by Sand-
er Otte at Delft University ofTechnology, in
the Netherlands, have done better, poten-
tially paving the way for large-scale storage
at the atomic level. Instead of three letters,
they managed to store an entire paragraph
of text (about 1 kilobyte of data). And the
memory they used proved stable, in later
experiments, at temperatures of -196oC.
That may not sound particularly balmy,
but it can be achieved with liquid-nitrogen
cooling, which is much cheaper than the
liquid helium used by IBM.
The team stored their information not
by writing letters with atoms, as IBM did,
but in a binary code. They covered a sheet
of copper with chlorine atoms, a process in
There is indeed plenty of room at the bottom
which the chlorine atoms naturally form a
lattice above the copper. But the team used
only enough chlorine to cover five-sixths
of the copper surface. The lattice therefore
contained plenty of “vacancies”—spaces in
which chlorine atoms could be present,
but were not. Thanks to the bonds be-
tween the atoms, the lattice proved to be
much more stable than the lone atoms
used by IBM.
The team used pairs of one atom and
one vacancy each to encode bits of infor-
mation. They were able to write and re-
write the memory by sliding the atom
within each pair back and forth. To do this,
they used the probe of a scanning tunnell-
ing microscope (STM), the same device
IBM had used in their experiment 26 years
earlier. Eight bits were arranged together to
form one byte, which is enough to encode
a single letter in the standard computer
scheme used to represent text.
The pockmarked lattice was stable
enough that the team was able to build
1,016 atomic bytes in an area that measured
just 96 nanometres by126 (an HIV virus, for
comparison, is about 120nm across). That
works out to an information density of 78
trillion bits per square centimetre, which is
hundreds of times better than the current
state of the art for computer hard drives.
The high density achieved by this kind
of atomic storage could—some day—ex-
pand the memory capacity of phones,
computers and data centres. But two fur-
ther problems must be solved. It would
help if the atoms could be made stable at
room temperature. And, for now at least,
the process is achingly slow. Dr Otte re-
ports read and write speeds of 1-2 minutes
per 64 bits. He reckons he could boost
those speeds drastically, to about a million
bits per second. But that is still thousands
of times slower than modern hard drives.
Still, it is an impressive illustration of
the advancing state of the art. And what
did Dr Otte choose to inscribe on his atom-
ic tablet? Naturally, two paragraphs of
Feynman’s speech. Apparently, we can ar-
range the atoms the way we want. 7
Science and technology 61
Medical technology
All sewn up
Turning surgical sutures into sensors
W EARABLE and implantable medi-
cal gadgets are a promising tech-
nology. By continuously collecting infor-
mation from patients they make it easier
to diagnose and treat whatever the pro-
blem may be. But most of the sensors in
such devices have to lie flat against the
body. That limits what they can do.
Now a team of researchers are trying
to use one of humanity’s oldest technol-
ogies to do better. As they report in Mi-
crosystems & Nanoengineering, Sameer
Sonkusale at Tufts University, in Mas-
sachusetts, and his colleagues, propose
to turn threads, of the sort spun to make
clothes, into sensors.
Thread has many advantages. It is
cheap, flexible and mostly tolerated by
human bodies. Most pertinently, doctors
have plenty of experience, via the prac-
tice of suturing, of sewing it into bodily
tissues. Doing that with smart thread
would allow a more detailed overview
of what is happening than any skin-
mounted sensor could.
Turning yarn into sensors requires
clever chemistry. Electrodes for recording
mechanical or chemical activity can be
created by covering the threads with
conductive ink. Sensors designed to
measure physical strain—useful in mon-
itoring wound healing—can be made by
coating stretchy fibres with carbon nano-
tubes and silicone. The electrical resis-
tance of those fibres changes as they are
placed under strain. By running a small
electric current through the thread, Dr
Sonkusale and his team can, therefore,
measure the forces surrounding it. A
related technique can be used to make
sensors sensitive to acidity.
Another useful property of some
fibres is wicking, in which liquids travel
along the fibre via a bit of physics called
capillary action. The researchers found
that specially treated cotton made a
good wick for the interstitial fluid that
surrounds most tissues. A smart suture
could siphon tiny amounts of that fluid
to sensors elsewhere, allowing doctors
to keep a continuous and unintrusive
eye on their patient’s biochemistry.
So far Dr Sonkusale and his team
have tested their technology only in
rodents. But it seems to work as expect-
ed. One possibility for human trials
might be in diabetic patients, who must
keep a close eye on any wounds they
suffer, as they often resist healing. That
can lead to amputations. A few choice
stitches could save a limb.
62
Books and arts
Chinese politics
The people’s pope
Two books explore the meaning of Xi Jinping
T HERE are few political questions to
which the answer will have greater
bearing on the lives of such a large number
of people in the coming years as this: what
sort of leader is Xi Jinping? Since Mr Xi
emerged in 2010 as heir-apparent to the
general-secretaryship of the Chinese Com-
munist Party, and tookon the job two years
later, the question has exercised the minds
of analysts even more than is normal
when someone new takes over in China.
As recently as the mid-2000s, Mr Xi was
still little-known. His glamorous folk-sing-
ing wife was far more famous. The some-
what liberal leanings (by the party’s highly
illiberal standards) of Mr Xi’s late father, a
party grandee, provided one of the few
available clues. It has proved highly mis-
leading. Mr Xi has presided over the tough-
est crackdown on dissent in years.
One way of understanding China’s
leader is suggested by the title of a new
book: “CEO, China”. Yet as the author, Ker-
ry Brown, a veteran British China-watcher,
makes clear, Mr Xi is far more than merely
the chief executive of a colossal economy.
He compares Mr Xi’s role to that of the
pope: “The general secretary, armed with
doctrinal infallibility, like the pope, is a
rule-giver, spiritual nurturer and voice of
doctrinal purity and correctness,” he
writes. Pope Francis, he notes, is battling to
instil a renewed sense of mission into a
Catholic church “that has lost touch with
CEO, China: The Rise of Xi Jinping. By
Kerry Brown. I.B. Tauris; 262 pages; $28
and £20
Chinese Politics in the Era of Xi Jinping.
By Willy Wo-Lap Lam. Routledge; 323
pages; $52.95 and £34.99
its spiritual roots, tarnished its legitimacy
and become consumed by material pow-
er”. This, he says, is “eerily similar” to Mr
Xi’s struggle to revamp his party.
It is somewhat easier, however, to un-
derstand how the pope wants to reform
the church than it is to make out how Mr Xi
intends to change the party, and his coun-
try. He says that market forces should play
a decisive role, but does that mean he
wants to topple state-owned enterprises
from the commanding heights of the econ-
omy? His wish to purge the party of the
egregious corruption that has permeated it
at every level seems evident: his campaign
against graft has been the most sustained
and wide-ranging of any waged by a
Chinese leader since the party seized
power in 1949. But does he want to intro-
duce checks and balances that would
make it harder for corruption to take root?
He stresses the importance of rule of law,
but does he mean that courts should oper-
ate independently from the party, even in
cases that involve challenges to the party’s
The Economist July 23rd 2016
Also in this section
63 Vietnam, a history
64 Murder in South Africa
64 Charlotte Wood’s fiction
65 Diane Arbus’s photography
For daily analysis and debate on books, arts and
culture, visit
Economist.com/culture
rule? Many observers have lost hope that
the answers to any of these questions
might be affirmative.
Willy Wo-Lap Lam, another experi-
enced China-watcher based in Hong Kong,
appears to have little doubt. His richly de-
tailed book, “Chinese Politics in the Era of
Xi Jinping”, describes Mr Xi as more “a dis-
ciple of Mao” than of Deng Xiaoping, the
leader who began opening China to the
outside world in the late 1970s. Mr Lam
says Mr Xi has no interest in political or
ideological liberalisation, having “learned
the lessons” of the vicissitudes experi-
enced by party liberals such as his father,
who was imprisoned by Mao. Mr Xi has
“totally ruled out” any option other than
orthodox socialism, he writes.
But so great is the secrecy surrounding
the highest echelons of power in China
that it is impossible to know for sure. Mr
Lam’s book came out in 2015 and covers
less than two years of Mr Xi’s rule. Notably
it does not extend as far as a meeting of the
party’s Central Committee in October
2014, which emphasised the importance
of the rule of law and the state constitu-
tion—an unusual focus of interest at such a
gathering, and an intriguing one given the
Chinese leader’s seeming disdain for both.
Mr Xi may in the end turn out to be
more of a reformer than his frequent hard-
line rhetoric, his hammering of civil soci-
ety and his tiptoeing round all-powerful
state firms may suggest. A dwindling band
of optimists pin their hopes on a crucial
party congress late next year, at which Mr
Xi will preside over sweeping leadership
changes and set out the party’s goals for
the remaining five years of his rule (assum-
ing he accepts the norm of a ten-year limit
on the general-secretaryship). Having
placed more of his allies in key positions,
Mr Xi may begin to do what he has said he 1
 The Economist July 23rd 2016 Books and arts 63

2 wants to do: let market forces hold sway

and put “power in a cage” of impartial law.
In his crisp and provocative account,
Mr Brown suggests that analysts may be
wrong to set much store by Mr Xi’s individ-
ual will. “The party is the power in China,”
he writes. Mr Xi is “only powerful through
it, operating within the limits it sets. On
this basis, he is no Mao.” The party be-
lieves in the creation of a “strong, rich, sta-
ble” and respected country, says Mr
Brown. The emotional power of this goal is
what confers power upon Mr Xi (who de-
scribes it as the “Chinese dream”); unlike
Mao, he cannot enforce discipline through
terror or repression, the author argues. Mr
Xi, he says, is a “servant” of the party’s am-
bition to restore China to the greatness it
once enjoyed. It could “easily go badly” for
him if sufficient numbers of his colleagues
were to decide that he is taking the country
in the wrong direction.
If Mr Brown is right, this may explain
why Mr Xi, for all his seeming strength,
appears to vacillate. Making China a
respected global power will require the Spiritual nature
development of a more attractive political
system. But Mr Xi is transfixed by a fear of enough exoticism to give bragging rights at Vietnam into Imperial China in around
unrest, and so clamps down ruthlessly on university and just enough tourist infra- 110BC. Chinese administrators waxed lyri-
dissent. He acknowledges that making structure to make travelling reasonably cal about the Red river area’s benefits as a
China rich and strong will require tough comfortable. Investors appreciate its cheap trading post. Over the millennium of Chi-
economic reforms. But these may trigger labour, long coastline, numerous ports and nese rule, what Mr Goscha calls a “Sino-
strikes and protests as state firms are closed pro-business policies—all assets that will Viet or Sinitic elite” emerged; not until the
or slimmed down, so he errs repeatedly on grow increasingly important as Chinese 20th century did quoc ngu, as Vietnam’s
the side of caution. Failure to reform may labour costs rise. contemporary Latinate alphabet is known,
eventually cause even greater instability, But Vietnam, today, is not the front- displace the Chinese and indigenous char-
many analysts believe. But if Mr Xi agrees runner in any of those categories: China acter-based language as the standard writ-
with them, he appears to think that on his still draws more investment, Thailand ten script. The Chinese influence on Viet-
watch, at least, repression will ensure that more tourists and the ongoing Iraq fiasco nam still persists, notably in the Mahayana
the party is obeyed. Given that the main more opprobrium. Ask the average West- Buddhism which today is practised by
mission entrusted to him by the party is erner to name a great Vietnamese artist, many ethnic Vietnamese, and in Viet-
an impossible one—keeping a one-party musician or writer—or a politician not nam’s distinctly Confucian political and
dictatorship in place for ever—he has few named Ho Chi Minh—and you would education systems. But Ngo Quyen routed
good options. 7 probably get a blank stare in response. the Chinese in 939AD, renaming the terri-
French politicians and writers in the 19th tory Dai Viet, or “Greater Viet”.
and 20th centuries saw Vietnam as a land Dai Viet rulers then embarked on a
South-East Asian history first to subjugate and then to administer. grandiose imperial expansion; indeed, one
Contemporary Western historians all too of the signal achievements of Mr Goscha’s
Striving for unity often see it simply as a victim of colonial- work is the attention he pays to pre-Euro-
ism: a country to be pitied and ennobled, pean South-East Asian imperialism. The
and with which greater powers had their French were just one of many groups to
way, rather than as a polity that has done conquer and colonise the territory known
what any other polity does: make the best today as Vietnam. They may not even have
of suboptimal situations. been the most successful. The Dai Viet
Vietnam: A New History. By Christopher
Christopher Goscha’s thorough and used military might and Confucianist
Goscha. Basic Books; 524 pages; $35. Allen
thoughtful new history of Vietnam coun- statecraft and administration to push the
Lane; £30
ters these simple portrayals with large and Viet empire southward, in order to “re-

W HAT do people think of when they

see the word Vietnam? In America
the name conjures images of a brutal,
grinding military loss which, until Presi-
dent George W. Bush’s ill-fated decision to
invade Iraq in 2003, made American lead-
ers rightly hesitant to engage in wars of
choice for ideological reasons. For young
Europeans Vietnam has become an essen-
tial stop on the circuit of backpacking
around Asia, offering pleasant weather,
cheap accommodation, great food and just
welcome doses of complexity. The area
known today as Vietnam, he convincingly
argues, was not just a blank mass awaiting
modernity and the French (not necessarily
in that order). Numerous political entities
battled for influence, particularly in the fer-
tile region along the Red river, which runs
from Kunming (today in the southern
Chinese province of Yunnan) into the Gulf
of Tonkin, which sits between northern
Vietnam and Hainan.
The Han Dynasty subsumed northern
spectfully bring the Mandate of Heaven,
and do the work of striking and killing
those cruel people”. They then did what
kings around the world had done: they in-
vented a mythical past to justify their con-
quests. Viet generals known as the Nguyen
pressed even farther southward, bringing
their state with them. In the early 19th cen-
tury Viet emperors declared themselves
rulers over a unified (if fractious) state that
included parts of modern-day Vietnam,
Laos and Cambodia. 1
64 Books and arts The Economist July 23rd 2016

2 Thus when the French established their

first colonial base of Cochin-China in 1862,
they did not build a state so much as layer a
French veneer onto an already functioning
one. The Nguyens’ extensive land-registry
records made it easy to collect property tax-
es; the French also drew revenue from state
monopolies on alcohol, gambling, opium
and rice production. Much as the British
did in their South Asian possessions, the
French adroitly exploited local grievances,
propped up pliable rulers and developed
an ethnic-Vietnamese colonial elite—all, of
course, with the threat of violence in the
A T THE start of this unsettling novel by
background. The French conquest of Indo-
china was driven less by a civilising mis-
sion than by mercantile interests, particu-
larly rubber, rice and coffee, all made into
profitable exports by “cheap, mainly eth-
nic Viet sweat”.
After the first world war, anti-French
pressure grew until Ho Chi Minh, whom
Mr Goscha depicts less as a communist
ideologue than as a crafty statesman,
declared independence on September 2nd
1945. Decades of war followed. Today
Vietnam, like China, has a booming econ-
omy, and remains communist in name
only. The ruling party, as Mr Goscha notes
in his shrewd final chapter, has subtly shift-
ed its raison d’être “from defending ‘class
struggle’ and ‘proletarian international-
ism’ to promoting economic prosperity
and inclusive nationalism for all social
groups”. Ho would understand. He might
even approve. 7
South Africa
Time of death
We Are Not Such Things. By Justine van der
Leun. Spiegel & Grau; 544 pages; $28. Fourth
Estate; £14.99
Australian fiction
The way of the world
The Natural Way of Things. By Charlotte mal self; Verla, whose “crime” was sleep-
Wood. Europa; 208 pages; $17. Allen & ing with a cabinet minister, realises that
Unwin; £12.99 even her education and privilege will not
protect her. Their groping towards mutual
Charlotte Wood, who was born in
New South Wales in 1965, two Australian
understanding is the novel’s heart: “Yo-
landa and Verla hold themselves apart,
for survival. This is their bond.”
women awake drugged and imprisoned, The most chilling aspect of Ms Wood’s
wearing “bizarre olden-day costume”. premise is its plausibility. Nowadays,
Soon the full horror of Ms Wood’s con- women who denounce sexism are rou-
temporary fable becomes clear. Yolanda tinely attacked on social media; the
and Verla, along with eight others, have novel’s more savage forms of punish-
been made to disappear, victims of a ment logically extend the ways in which
conspiracy to silence women who in- they can be bullied and silenced. The
convenience powerful men. very absence of the corporate captors
A haunting parable of contemporary makes the horror worse. No one will
misogyny, “The Natural Way of Things”, come; no one cares. The sly and devastat-
which earlier this year won the Stella ing ending makes the point: Ladies, you
prize for fiction by Australian women, is have been warned.
“The Handmaid’s Tale” for our age of
sensational media and reality television.
Like Margaret Atwood’s dark vision of
religious dictatorship, it is a preview of
what could happen to women who rock
the boat, resisting predation or asserting
their own sexual freedom.
This is a tale of captivity, with all its
tedium and desperation. Yet the remote
desert prison, surrounded by dark bush
and a vast bowl of sky, provides a kind of
solace. Trapped alongside the minions of
the faceless corporation that has spirited
them away, the women and their captors
struggle to survive. The “natural way of
things” refers not just to male domina-
tion but to deeper, more sustaining bonds
between humans and nature.
Like the surreal prison itself, Ms
Wood’s writing is direct and spare, yet
capable of bursting with unexpected
beauty. Kookaburras “dazzled the dark-
ness with their horrible noise”; Verla is

I N AUGUST 1993, a little less than a year

before the end of apartheid, South Africa
was on edge. Political violence was claim-
ing close to 100 lives a week, even as nego-
tiators were guiding the country into post-
apartheid democracy. Most of these kill-
ings took place in the townships, densely
packed areas to which black people were
confined by the laws of the time.
Yet occasionally violence spilled over,
igniting fears among the country’s white
population, which still controlled the
police and army, that ending racial rule
would lead not to the “rainbow nation”
promised by Nelson Mandela but to out-
right racial war. Few killings ignited such
fears as that of Amy Biehl, a young Ameri-
can student who was a Fulbright scholar
and an anti-apartheid activist. Biehl died
after she unwittingly drove into a protest in
“mesmerised by pairs of seed pods nes-
tled at the base of a grass tree: hot orange,
bevelled, testicular”. A rabbit trap is “a
drooping bouquet of rusted steel”. Yo-
landa, scarred by gang rape, becomes a
hunter, driven ever deeper into her ani-
a township on the outskirts of Cape Town.
A large crowd of angry young men chant-
ing “One settler, one bullet”, surrounded
her car and pelted it with stones. When she
ran from the vehicle her attackers chased
her through the streets, cornered her and
killed her.
Because of Biehl’s skin colour, national-
ity and idealism, her death attracted the
world’s attention in a way that the daily
toll of black deaths had not, and came to
represent the senselessness of political
violence in South Africa. Yet her killing
came to stand for much more, too. Four
men were convicted of her murder after a
contentious trial in which they alleged
they had been tortured into confessing. In
1997, after the men had applied for amnes-
ty to the Truth and Reconciliation Com-
mission, Biehl’s parents supported their
claim, becoming in turn powerful symbols
of South Africa’s attempts to put its violent
past behind it. Embracing those who had
killed their daughter, Biehl’s parents 1
 The Economist July 23rd 2016
2 employed two of those convicted through
a foundation established in her memory.
Yet much of this narrative is challenged
in a deeply researched and thought-pro-
voking book, “We Are Not Such Things”,
by Justine van der Leun, an American writ-
er who spent years tracking down most of
those involved. Her somewhat wordy
writing—part whodunnit and part travel-
ogue—weaves together the accounts of
policemen, prosecutors and those convict-
ed with some penetrating insights.
Guided by, among others, a former lib-
eration fighter who found Buddhism in
prison, the author tugs at the threads of the
official account. She finds that one of
South Africa’s most celebrated examples
of reconciliation has not put to rest the
country’s painful past for either victims or
perpetrators of violence. Among those she
meets are the other two men who were
convicted, discovering that they were
afterwards embittered that they too were
not hired by the Amy Biehl Foundation, an
institution that they feel they helped create
through killing the American student.
Her most puzzling discovery relates to
Easy Nofemela, who was found guilty of
the murder and subsequently granted am-
nesty and hired by the foundation. Yet the
author finds evidence suggesting he was
not even at the scene of the crime. This is
an engaging take on a murder that might
have derailed democracy. 7
American photography
Exposed
NEW YORK
A new show at the Met traces the short,
hard life of a visual master
W HEN Diane Arbus (she pronounced
it Deeyan) died in 1971, she joined a
pantheon of distraught, creative women,
including Sylvia Plath, Marilyn Monroe,
Judy Garland, Janis Joplin, Frida Kahlo and
Kay Sage, who all died prematurely. Like
Mark Rothko a year before, she slit her
wrists and overdosed on pills. Arbus’s sui-
cide increased public awareness of her
work, but it masked her delight at trying to
capture quite what it means to be human.
Arbus started in 1946 as a stylist, work-
ing in close partnership with her husband
Allan, photographing fashion advertise-
ments for Russek’s, her father’s Fifth
Avenue department store. Later the
Arbuses branched out into editorial
photography for fashion magazines. Their
work, mostly done in their studio with
large-format cameras, was competent, but
lacked both the clarity and the composi-
tional fireworks of a Richard Avedon or an
Irving Penn.
Shuttered up...
Burned out after a decade of styling
ideas for Christmas presents and reversible
bunny-fur jackets, Arbus left to do her own
thing, quipping later that she preferred to
photograph people in their own clothes.
She grew up in a family ofrich fashion mer-
chants, but had no use for fashion herself.
One biographer insists that she preferred
not to use make-up or deodorant. What
she always wore was a camera: her shield,
licence and admission ticket into strangers’
homes and lives.
A new show at the Metropolitan Muse-
um ofArt’s Breuer gallery has been hung to
allow the visitor to focus carefully on each
photograph. Jeff Rosenheim, the free-
wheeling curator, presents the works with-
out any thematic or chronological consis-
tency, which means one has to focus on
each print and develop one’s own narra-
tive, seeking out what in every picture
appealed to Arbus.
A useful approach is to note how
the photographer’s technique, approach
and subject matter developed. The earlier
pictures were taken with hand-held cam-
eras with 35mm film and available light.
The camera was held at eye level, and
promoted direct eye-to-eye contact.
In late 1956 and over the next two years,
Arbus took classes with Lisette Model,
known for her close-up, biting street carica-
tures. She pushed Arbus towards a more
crisp, close-in and confrontational ap-
proach. By 1962, eschewing her earlier
grainy style and looking for more defini-
tion, Arbus began using a Rolleiflex twin-
lens reflex camera with a larger square film
format. It was held at waist-level, looking
up to her subjects. Her images, sometimes
made using a tripod and flash, became
sharper and more tightly composed.
Early on, Arbus staked out places with a
Books and arts 65
lot of people. Her initial pictures were sim-
ple, passing encounters. Often her subject
would be confused about why she wanted
to photograph them. Their querulous, hos-
tile or annoyed faces recur in her work
from the late 1950s. Arbus had a taste for
whimsy—a night view of a drive-in screen
showing a projected image of a bright sun
shining through the clouds, or quirky film
props, such as rocks on wheels, stored in a
back lot at Disneyland.
Arbus was 38 before she saw herself as
a professional. She moved from depicting
random incidents with strangers to seek-
ing out visually interesting human tribes—
twins and triplets, midgets, circus perform-
ers, nudists, the blind, transvestites, freaks
and the mentally ill—by entering their
worlds. Jack Dracula, a legendary tattoo
man (pictured below), was a favourite sub-
ject. She used her considerable intelli-
gence, charm and an intense interest in
others to get the poses she wanted. Her pic-
tures, taken in bedrooms and backstage
dressing rooms, are evidence of her ability
to gain trust and acceptance from those
whom society might find repellent, and
who in turn distrusted society themselves.
While risqué at the time, her choice of
subjects was not without precedent. Near-
ly a century before, Edgar Degas had paint-
ed inhabitants of his own demimonde:
prostitutes, ballet dancers, jockeys, chan-
teuses. As with the early Impressionists
Arbus’s work was met initially with disap-
proval; at her first show spit had to be
wiped every day off the pictures. In this
age of ever-present selfies, the novelty of
street photography has faded, as has the
shock value of tattoos, piercings, cross-
dressing and gender reassignment. View-
ers today are more open to Arbus’s
images—and far less likely to spit. 7
...vamping for the camera
66 Courses Announcements

The Economist July 23rd 2016

Tenders 67

EXPRESSION OF INTEREST (EOI)

CASH BASED TRANSFERS
The United Nations World Food Programme (WFP) is the
world’s largest humanitarian agency fighting hunger
worldwide. Each year, on average, WFP feeds more than
80 million people in more than 80 countries. In addition
to distributing food, WFP also assists its beneficiaries
through Cash Based Transfers (CBT). Examples of CBT
include physical cash, mobile money, and electronic
vouchers. In 2015, WFP CBT reached 10 million beneficiaries in 54
countries with a budget of USD 1.5 billion, continuing the upward
trend of market based approaches within WFP’s operations.
WFP intends to identify qualified organizations capable of providing
WFP with comprehensive CBT solutions (including but not limited to
payment services, mobile money, e-cards/vouchers, and payment
aggregation) to fulfil WFP’s beneficiary needs in diverse CBT contexts.
The solutions should meet WFP’s guiding principles including beneficiary
centricity, cost efficiency, effectiveness, scalability, reliability, security,
flexibility, transparency, auditing facility, and implementation speed.
This EOI’s in-scope countries are (others may be added at a later stage):
List one: Cook Islands, Fiji, Kiribati, Republic of Marshall Islands,
Federated States of Micronesia, Nauru, Niue, Palau, Papua New Guinea,
Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu.
List two: Afghanistan, Bangladesh, Bhutan, Cambodia, India, Indonesia,
Iran, DPR Korea, Lao PDR, Malaysia, Maldives, Mongolia, Myanmar,
Nepal, Pakistan, Philippines, Singapore, Sri Lanka, Timor-Leste, and
Vietnam.
WFP hereby invites interested organizations to obtain the related Request
for Information (RFI) documentation by writing to rbb.rfi@wfp.org and
return the completed RFI questionnaire to WFP no later than 23:59
GMT on 21 August 2016. The RFI results will be evaluated by WFP and
organizations meeting WFP’s criteria may be invited to participate in a
future competitive tender (at WFP’s sole discretion).
[WFP reference TH16NF01-RFI]

Publications
Nasty, Brutish and Short
A funny and moving
new memoir on life
overseas
Invitation for Expressions of Interest
Available now on Amazon!
Pre-qualification of candidates for full investment
Business & Personal management services and / or distribution services for:
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Readers are recommended
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The Economist July 23rd 2016

68 The Economist July 23rd 2016
Economic and financial indicators
Economic data
% change on year ago Budget Interest
Industrial Current-account balance balance rates, %
Economic data product
Gross domestic production Consumer prices Unemployment latest 12 % of GDP % of GDP 10-year gov't Currency units, per $
latest qtr* 2016† latest latest 2016† rate, % months, $bn 2016† 2016† bonds, latest Jul 20th year ago
United States +2.1 Q1 +1.1 +1.8 -0.7 Jun +1.0 Jun +1.4 4.9 Jun -473.1 Q1 -2.6 -2.9 1.55 - -
China
Statistics
+6.7 Q2
on 42 economies, +6.2
+7.4 +6.6
plusJuna +1.9 Jun +2.0 4.1 Q2§ +284.7 Q1 +2.8 -3.5 2.67§§ 6.68 6.21
Japan closer+0.1 look
Q1 at +1.9
GDP forecasts
+0.5 -0.4 May -0.4 May -0.1 3.2 May +158.7 May +3.4 -5.0 -0.22 107 124
Britain +2.0 Q1 +1.8 +1.5 +1.4 May +0.5 Jun +0.7 4.9 Apr†† -161.9 Q1 -5.0 -4.0 0.98 0.76 0.64
Canada +1.1 Q1 +2.4 +1.4 +0.9 Apr +1.5 May +1.6 6.8 Jun -47.6 Q1 -3.1 -2.5 1.12 1.30 1.30
Euro area +1.7 Q1 +2.2 +1.5 +0.5 May +0.1 Jun +0.3 10.1 May +392.0 May +3.0 -1.9 -0.01 0.91 0.92
Austria +1.6 Q1 -0.7 +1.3 +2.4 Apr +0.6 Jun +1.1 6.1 May +10.5 Q1 +2.3 -1.6 0.20 0.91 0.92
Belgium +1.5 Q1 +0.9 +1.3 +2.3 Apr +2.2 Jun +1.6 8.4 May +6.5 Mar +1.2 -2.8 0.24 0.91 0.92
France +1.3 Q1 +2.6 +1.4 +0.5 May +0.2 Jun +0.3 9.9 May -20.9 May‡ -0.5 -3.3 0.21 0.91 0.92
Germany +1.6 Q1 +2.7 +1.5 -0.4 May +0.3 Jun +0.4 6.1 Jun +305.9 May +8.1 +0.6 -0.01 0.91 0.92
Greece -1.3 Q1 -1.9 -0.6 +2.9 May -0.7 Jun -0.2 23.3 Apr +1.3 Apr -0.2 -4.6 8.04 0.91 0.92
Italy +1.0 Q1 +1.0 +0.9 -0.6 May -0.4 Jun +0.1 11.5 May +47.7 May +2.1 -2.6 1.25 0.91 0.92
Netherlands +1.5 Q1 +1.8 +1.5 +1.1 May nil Jun +0.4 7.6 May +62.0 Q1 +9.9 -1.5 0.09 0.91 0.92
Spain +3.4 Q1 +3.1 +2.8 +4.0 May -0.8 Jun -0.4 19.8 May +20.4 Apr +1.3 -4.3 1.19 0.91 0.92
Czech Republic +2.7 Q1 +1.6 +2.3 +8.6 May +0.1 Jun +0.5 5.2 Jun§ +2.7 Q1 +1.1 -0.6 0.39 24.6 24.9
Denmark -0.1 Q1 +2.7 +1.1 +6.2 May +0.3 Jun +0.8 4.3 May +17.5 May +6.5 -2.8 0.15 6.76 6.87
Norway +0.7 Q1 +4.0 +1.0 -0.1 May +3.7 Jun +3.1 4.6 Apr‡‡ +29.3 Q1 +7.0 +3.0 0.96 8.49 8.17
Poland +2.5 Q1 -0.4 +3.3 +6.0 Jun -0.8 Jun -0.6 8.8 Jun§ -2.7 May -0.9 -2.9 2.93 3.97 3.78
Russia -1.2 Q1 na -0.8 +1.8 Jun +7.5 Jun +7.2 5.4 Jun§ +38.4 Q2 +3.4 -4.1 8.51 63.4 57.1
Sweden +4.2 Q1 +2.0 +3.5 +1.7 May +1.0 Jun +1.0 7.6 May§ +28.2 Q1 +5.6 -0.4 0.17 8.59 8.63
Switzerland +0.7 Q1 +0.4 +1.0 +1.0 Q1 -0.4 Jun -0.5 3.3 Jun +71.9 Q1 +9.0 +0.2 -0.55 0.99 0.96
Turkey +4.8 Q1 na +3.4 +7.0 May +7.6 Jun +7.5 9.3 Apr§ -27.2 May -4.7 -1.7 10.13 3.04 2.65
Australia +3.1 Q1 +4.3 +2.7 +4.8 Q1 +1.3 Q1 +1.4 5.8 Jun -62.3 Q1 -4.3 -2.2 1.92 1.34 1.35
Hong Kong +0.8 Q1 -1.8 +1.5 -0.3 Q1 +2.6 May +2.6 3.4 Jun‡‡ +11.9 Q1 +3.0 nil 1.02 7.76 7.75
India +7.9 Q1 +9.6 +7.5 +1.2 May +5.8 Jun +5.3 4.9 2013 -22.1 Q1 -1.2 -3.8 7.27 67.2 63.5
Indonesia +4.9 Q1 na +5.0 +7.5 May +3.5 Jun +4.0 5.5 Q1§ -18.2 Q1 -2.4 -2.1 6.96 13,113 13,345
Malaysia +4.2 Q1 na +4.3 +2.7 May +1.6 Jun +2.2 3.5 Apr§ +7.0 Q1 +2.7 -3.4 3.58 4.03 3.81
Pakistan +5.7 2016** na +5.7 -1.5 May +3.2 Jun +3.7 5.9 2015 -2.5 Q1 -0.8 -4.6 8.03††† 105 102
Philippines +6.9 Q1 +4.5 +5.8 -1.2 May +1.9 Jun +1.8 6.1 Q2§ +6.7 Mar +3.1 -0.8 4.10 47.1 45.3
Singapore +2.2 Q2 +0.8 +1.4 +0.9 May -1.6 May -0.8 1.9 Q1 +54.8 Q1 +19.5 +0.7 1.75 1.36 1.37
South Korea +2.8 Q1 +2.1 +2.5 +4.3 May +0.8 Jun +1.2 3.6 Jun§ +105.2 May +7.3 -1.1 1.42 1,141 1,148
Taiwan -0.7 Q1 +3.1 +0.5 +1.9 May +0.9 Jun +1.1 4.0 May +74.8 Q1 +13.3 -1.0 0.68 32.0 31.1
Thailand +3.2 Q1 +3.8 +2.8 +2.6 May +0.4 Jun +0.2 1.2 May§ +40.1 Q1 +7.1 -2.6 2.03 35.0 34.1
Argentina +0.5 Q1 -2.7 -0.9 -2.5 Oct — *** — 5.9 Q3§ -15.0 Q1 -2.3 -4.4 na 14.9 9.15
Brazil -5.4 Q1 -1.1 -3.5 -7.7 May +8.8 Jun +8.5 11.2 May§ -29.5 May -1.0 -8.1 11.82 3.24 3.19
Chile +2.0 Q1 +5.3 +1.6 -2.0 May +4.2 Jun +3.9 6.8 May§‡‡ -4.7 Q1 -2.3 -2.5 4.39 651 645
Colombia +2.5 Q1 +0.6 +2.2 +4.5 May +8.6 Jun +7.7 8.8 May§ -16.9 Q1 -6.0 -2.6 7.72 2,929 2,749
Mexico +2.6 Q1 +3.3 +2.3 +0.4 May +2.5 Jun +2.9 4.0 May -30.5 Q1 -2.9 -3.0 5.95 18.5 15.9
Venezuela -8.8 Q4~ -8.4 -13.9 na na +495 7.3 Apr§ -17.8 Q3~ -3.1 -24.3 11.73 9.99 6.31
Egypt +6.7 Q1 na +3.0 -15.8 May +14.0 Jun +12.1 12.7 Q1§ -18.3 Q1 -6.6 -11.5 na 8.88 7.83
Israel +2.1 Q1 +1.7 +2.2 +0.8 May -0.8 Jun -0.5 4.8 May +14.7 Q1 +4.0 -2.5 1.69 3.86 3.82
Saudi Arabia +3.5 2015 na +0.9 na +4.1 May +4.7 5.6 2015 -59.5 Q1 -8.6 -13.1 na 3.75 3.75
South Africa -0.2 Q1 -1.2 +0.4 +3.8 May +6.3 Jun +6.4 26.7 Q1§ -13.4 Q1 -4.2 -3.3 8.80 14.3 12.3
Source: Haver Analytics. *% change on previous quarter, annual rate. †The Economist poll or Economist Intelligence Unit estimate/forecast. §Not seasonally adjusted. ‡New series. ~2014 **Year ending June. ††Latest
3 months. ‡‡3-month moving average. §§5-year yield. ***Official number not yet proved to be reliable; The State Street PriceStats Inflation Index, June 36.96%; year ago 26.70% †††Dollar-denominated bonds.
 The Economist July 23rd 2016 Economic and financial indicators 69

Markets
% change on GDP forecasts for 2016
GDP, % change on a year earlier
Dec 31st 2015 The IMF has cut its forecast for world
Month forecast made: April 2016 July 2016
Index one in local in $ economic growth in 2016 for the fourth
Markets Jul 20th week currency terms time in a row; it now expects GDP to in- 4 2 – 0 + 2 4 6 8
United States (DJIA) 18,595.0 +1.2 +6.7 +6.7
China (SSEA) 3,169.6 -1.1 -14.4 -16.8
crease by a mere 3.1%. The Brexit vote in India
Japan (Nikkei 225) 16,681.9 +2.8 -12.4 -1.2 Britain explains some of the drop, al- China
Britain (FTSE 100) 6,729.0 +0.9 +7.8 -3.6 though it may have only a muted impact World
Canada (S&P TSX) 14,533.6 +0.3 +11.7 +19.1 on non-European economies. Growth in
United States
Euro area (FTSE Euro 100) 1,006.9 +1.4 -8.0 -6.8 the euro area has been revised upwards,
Euro area (EURO STOXX 50) 2,966.9 +1.4 -9.2 -8.0 thanks to unexpectedly strong first- Britain
Austria (ATX) 2,222.3 +4.0 -7.3 -6.0 quarter GDP growth, but it would have Germany
Belgium (Bel 20) 3,431.3 +1.2 -7.3 -6.0 been even higher were it not for Brexit. Euro area
France (CAC 40) 4,379.8 +1.0 -5.5 -4.3 China’s GDP may also expand at a faster
Germany (DAX)* 10,142.0 +2.1 -5.6 -4.3 Italy
pace, albeit still within its target of
Greece (Athex Comp) 569.7 +1.8 -9.8 -8.5 Japan
Italy (FTSE/MIB) 16,763.8 +1.4 -21.7 -20.7
6.5-7%. A forecast of slower growth in
Netherlands (AEX) 452.2 +1.7 +2.3 +3.7 Japan is partly due to the yen’s recent Russia
Spain (Madrid SE) 862.2 +1.3 -10.7 -9.5 appreciation. Nigeria’s economy is now Nigeria
Czech Republic (PX) 882.1 +6.8 -7.8 -6.5 expected to contract as a result of lower Brazil
Denmark (OMXCB) 877.5 +0.8 -3.2 -1.6 oil receipts and power-supply problems.
Source: IMF
Hungary (BUX) 27,573.5 +1.4 +15.3 +17.4
Norway (OSEAX) 689.4 +0.6 +6.2 +10.7
Poland (WIG) 46,504.8 +3.3 +0.1 -0.3 Other markets The Economist commodity-price index
Russia (RTS, $ terms) 946.7 -0.6 +8.6 +25.1 % change on 2005=100
Other markets % change on
Sweden (OMXS30) 1,386.6 +2.2 -4.2 -6.0 Dec 31st 2015 The Economist commodity-price indexone
one
Switzerland (SMI) 8,197.4 +0.7 -7.0 -5.6 Index one in local in $ Jul 12th Jul 19th* month year
Turkey (BIST) 74,902.8 -7.9 +4.4 +0.2 Jul 20th week currency terms Dollar Index
Australia (All Ord.) 5,565.9 +1.7 +4.1 +7.0 United States (S&P 500) 2,173.0 +1.0 +6.3 +6.3 All Items 139.6 138.8 -1.0 -2.2
Hong Kong (Hang Seng) 21,882.5 +2.6 -0.1 -0.2 United States (NAScomp) 5,089.9 +1.7 +1.6 +1.6
India (BSE) 27,915.9 +0.4 +6.9 +5.2 Food 162.8 159.4 -5.3 -3.5
China (SSEB, $ terms) 351.4 -0.6 -15.2 -17.6
Indonesia (JSX) 5,242.8 +2.1 +14.1 +20.0 Japan (Topix) 1,330.8 +2.3 -14.0 -3.1 Industrials
Malaysia (KLSE) 1,669.6 +0.6 -1.4 +5.2 Europe (FTSEurofirst 300) 1,345.1 +1.4 -6.4 -5.2 All 115.5 117.5 +5.8 -0.4
Pakistan (KSE) 39,098.8 +0.1 +19.1 +19.0 World, dev'd (MSCI) 1,707.3 +0.8 +2.7 +2.7 Nfa† 122.9 125.9 +5.0 +5.7
Singapore (STI) 2,945.7 +1.2 +2.2 +6.8 Emerging markets (MSCI) 870.8 +1.7 +9.6 +9.6 Metals 112.3 113.9 +6.2 -3.1
South Korea (KOSPI) 2,015.5 +0.5 +2.8 +5.6 World, all (MSCI) 412.8 +0.9 +3.4 +3.4 Sterling Index
Taiwan (TWI) 9,007.7 +1.7 +8.0 +10.8 World bonds (Citigroup) 948.7 -1.5 +9.1 +9.1
Thailand (SET) 1,510.0 +2.2 +17.2 +20.7 All items 192.6 192.2 +10.6 +15.8
EMBI+ (JPMorgan) 798.6 -0.7 +13.4 +13.4
Argentina (MERV) 15,931.8 +5.2 +36.5 +18.3 Hedge funds (HFRX) 1,177.3§ +0.2 +0.3 +0.3 Euro Index
Brazil (BVSP) 56,578.1 +3.6 +30.5 +59.3 Volatility, US (VIX) 11.8 +13.0 +18.2 (levels) All items 148.8 156.8 +1.3 -2.9
Chile (IGPA) 20,273.3 +1.3 +11.7 +21.5 CDSs, Eur (iTRAXX)† 69.5 -3.8 -9.9 -8.7 Gold
Colombia (IGBC) 9,930.3 +1.0 +16.2 +25.9 CDSs, N Am (CDX)† 70.0 -1.6 -20.8 -20.8 $ per oz 1,342.4 1,330.7 +4.7 +20.1
Mexico (IPC) 47,505.3 +2.7 +10.5 +3.0 Carbon trading (EU ETS) € 4.7 -2.1 -43.4 -42.7 West Texas Intermediate
Venezuela (IBC) 12,497.8 +3.4 -14.3 na Sources: Markit; Thomson Reuters. *Total return index.
Egypt (Case 30) 7,503.4 -0.7 +7.1 -5.6 †Credit-default-swap spreads, basis points. §July 19th. $ per barrel 46.8 44.7 -8.9 -11.5
Sources: Bloomberg; CME Group; Cotlook; Darmenn & Curl; FT; ICCO;
Israel (TA-100) 1,279.2 +1.3 -2.7 -1.9
Indicators for more countries and additional ICO; ISO; Live Rice Index; LME; NZ Wool Services; Thompson Lloyd &
Saudi Arabia (Tadawul) 6,630.6 -0.9 -4.1 -4.0 Ewart; Thomson Reuters; Urner Barry; WSJ. *Provisional
South Africa (JSE AS) 52,837.9 nil +4.2 +13.2 series, go to: Economist.com/indicators †Non-food agriculturals.
70
Obituary Johnny Barnes and Datta Phuge
Clothed with happiness
Johnny Barnes, Bermuda’s “greeter”, and Datta Phuge, “the Gold Man of Pune”,
died on July 9th and 14th respectively, aged 93 and 48
I N THE city of Pune in Maharashstra, in
2012, Datta Phuge conceived a desire to
display something no one else had. Some-
thing, that is, made of pure gold. As foun-
der-floater of the Vakratunda Chit Fund, a
slightly slippery credit society, he had any
amount of gold in his possession or on his
body: rings, bracelets, coins, mobile phone.
He was in the habit of wearing 7kg of it a
day, here and there. He had given a heap to
his wife Seema, who began to find it a little
boring to wear. But since gold was his pas-
sion and his chief way of showing how
happy and fortunate he was, he wanted to
flaunt it still more.
After chatting it over with his friends at
Ranka Jewellers, he ordered a shirt made
almost wholly of gold. It comprised
100,000 spangles and 14,000 gold flowers
fixed to white velvet cloth, so that it could
be folded away like any other shirt. Acces-
sories were provided, also of 22-carat gold:
necklaces, cuffs and a belt. Altogether, the
outfit weighed 9.5kg. It took 15 craftsmen
from West Bengal, working 16-hour days,
more than two weeks to create it. And it
cost 1.27 crore rupees, or $250,000.
Almost 13,000km away, across two
oceans in Bermuda, Johnny Barnes in 1986
also decided to put on a prodigal display.
He would stand at the Crow Lane round-
about in Hamilton, where most of the
rush-hour traffic came past, and tell each
passing motorist how sweet life was and
how much he loved them. His days had
long overflowed with happiness, in his gar-
den and in his jobs as a railway electrician
and a bus-driver, where he had taken up
the habit of waving and smiling to anyone
who passed as he ate his lunchtime sand-
wiches. He had lavished joy on his wife
Belvina, “covering her with honey”, as he
put it. But there was plenty left over.
For 30 years he went to the roundabout
every weekday morning. He would rise at
around 3am, walk two miles to his post,
stay for six hours shouting “I love you!”,
smiling and blowing kisses, and then walk
home again. He was there in the heat, his
wide-brimmed straw hat keeping off the
sun, and there in the rain with his umbrel-
la. Only storms deterred him and eventu-
ally, the creakings of old age. Over the
years, he transmitted his radiant happiness
to drivers hundreds of thousands of times.
Both Mr Barnes and Mr Phuge were tak-
en for madmen at the start; but they justi-
fied themselves partly by the ambient cul-
ture. In India, Mr Phuge explained,
everyone loved gold, and in Maharashtra
they loved it even more. Politicians went
laden with it and, as a man of political am-
bition himself, he hoped the shirt might get
him noticed nationally. That was why he
The Economist July 23rd 2016
wore it not just to functions or events, but
also when going casually around the
town, causing a small sensation. For Mr
Barnes, his extravagant love of Hamilton’s
commuters came partly from Bermudans’
habit of saying “Good morning” anyway,
partly from his genuine joy in the life God
had blessed him with, and partly from the
switching his mother had given him when
he failed, as a child, to greet an old lady. Ev-
ery day ever since, he had tried to spread
happiness to as many people as possible.
Fame came rapidly. Mr Barnes was
hailed as an icon of Bermuda, and in 1998 a
statue of him was put up near the round-
about. Tourists from Africa and America
came to be photographed with him and to
buy his dollar postcards; he once waved to
the Queen of England. Mr Phuge was on all
the Marathi TV channels modelling his
shirt, but also had BBC reporters and Cana-
dians lining up at his front door; they were,
his wife said, “even more sought-after than
royals”. Both men were credited with pow-
ers to make gold, or happiness, increase.
Mr Barnes, a Seventh-Day Adventist, often
prayed with his visitors beside the road,
and his rare absences were taken as bad
omens. Mr Phuge (who always wore with
his shirt a giant “Om” in crystals on a thick
chain of gold) was believed to have the Mi-
das touch, and was asked to bless houses.
Both men hugely enjoyed the attention.
There were naysayers, of course. Those
who were not so lucky, or in a bad mood,
resented these continuous demonstra-
tions of good fortune. Gentle Mr Barnes
was condemned as a traffic hazard, and
once had a bucket of water thrown over
him. Mr Phuge was more justifiably at-
tacked as a shady money-lender, parading
in his gold while local farmers starved—
and indeed while he, too, was deep in debt.
When he strolled out in his shirt his heavi-
ly armed “boys” went too, to protect him.
Drawing the moral
On the night of July 14th, on his way to a
party—but not, apparently, in the shirt—he
was stoned to death by “friends” to whom
he owed money. Nothing could have been
further from the peaceful death of Johnny
Barnes, in ripe old age and in the firm con-
viction he was heading home. The moral
of the tale seems almost too easy to draw:
the selfish flaunter of happiness, weighed
down by gold, came to an awful end, while
the selfless one, wearing his prodigious
love so lightly, was praised and lamented.
Both men, though, left behind a deficit
of magic. After Mr Phuge died, no one
could find the wonderful gold shirt. It was
not in the house, nor at Ranka Jewellers; ru-
mour had it that a creditor from Mumbai
had taken it away. As for Mr Barnes, people
searched up and down, far and wide, for
the true secret of his happiness; for that,
too, had disappeared with him. 7
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