JANUARY 21ST–27TH 2017

China: the global grown-up

Doing Brexit the hard way

The six sects of shareholder value

Neuroscience’s faulty toolkit

The Economist January 21st 2017 3

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Volume 422 Number 9024Published since September 1843to take part in "a severe contest betweenintelligence, which presses forward, andan unworthy, timid ignorance obstructingour progress."

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Contents continues overleaf

Contents

1

Brexit Theresa May promises a“truly global Britain” outsidethe European Union. Is thatplausible? Leader, page 8.Britain opts for a clean breakwith Europe. Negotiations willstill be tricky, page 46. Theprime minister’s maximalistBrexit supposes immigrationcuts. That is a mistake:Bagehot, page 48. How theCity hopes to survive the hardroad ahead, page 63. DonaldTrump suggests a trade dealwith Britain, page 47

The 45th presidentWhat is Donald Trump likelyto achieve in power? Leader,page 7. The drama of thetransition is over, and thenew president’s team is largelyin place. Now for the dramaof government, pages 14-19.Both economics and politicscould confound Republicantax plans: Free exchange,page 64. California, America’srichest state, is leading thefight against federal power,page 21

5 The world this week

Leaders7 A Trump White House

The 45th president8 African politics

A dismal dynast8 Britain and the EU

A hard road10 Regulating car emissions

Road outrage11 The legacy of gendercide

Too many single men

Letters12 On Theresa May, the split

infinitive, Disney,missiles, steel, Flashman

Briefing14 The Trump administration

A helluva handover18 Peter Navarro

Free-trader turnedgame-changer

United States21 Emboldened states

California steaming22 Women’s rights

March nemesis22 Asian-American voters

Bull in a China shop23 Chelsea Manning

The long commute24 Lexington

Presidential history

The Americas25 El Salvador

Unhappy anniversary26 Argentina

Tango in trouble28 Cuban migrants

Special no more

Asia29 Chinese influence in

South-East AsiaThe giant’s client

30 Thai educationNot rocket science

31 Street vendors in MumbaiStabbed in the snack

31 Australian politicsGoing for gold

32 Pakistan’s economyRoads to nowhere

China33 Geopolitics

The new Davos man34 Aircraft-carriers

A symbol of power36 Banyan

Forbidden City rifts

Middle East and Africa37 The African Union

Continental dog’s breakfast38 Qat-farming in Ethiopia

Green business boom39 Mozambique defaults

Boats and a scandal39 Bahrain

An unhappy isle40 Terrorism in Tunisia

Jihadists go home

Europe41 Turkey’s all-powerful

presidentIron constitution

42 Emigration from easternEuropeThe old countries

43 The European ParliamentA shift to the right

43 Reform in RussiaListen, liberal

44 Russian propagandaPutin’s puppets

45 CharlemagneEurope and Trump

Britain46 Brexit

Doing it the hard way47 Trade with America

The art of the deal48 Bagehot

Let the work permits flow

International49 Gendercide

The war on girls wanes50 Girls in South Korea

From curse to blessing

Gendercide The war on babygirls is winding down, but itseffects will be felt for decades:leader, page 11. If baby girlsare safer, thank urbanisation,economics and soap operas,page 49

Turkey Recep Tayyip Erdoganmay soon have the executivepresidency he has longsought, page 41

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4 Contents The Economist January 21st 2017

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Xi at Davos China’s presidentseeks to portray his country asa rock of stability in a troubledworld. His timing, at least, isfaultless, page 33. China’saircraft-carrier programmesays a lot about its ambitions,page 34. Why Cambodia hasembraced China, and whatthat means for the region,page 29

Diesel cars To stop carmakersbending the rules, Europe mustget tougher: leader, page 10.Fiat Chrysler Automobiles is inregulators’ headlights overemissions, page 52

Shareholder value Never fear,the guardians of businesses’favourite doctrine will find away to adapt to the age ofpopulism: Schumpeter, page 58

Neuroscience A paper castsdoubt on the tactics thatscientists use to infer how thebrain works, page 65

Business51 Cigarette companies

Plucky strike52 Fiat Chrysler

Gas puzzlers53 Samsung

Heir of disapproval54 Luxottica

An eye-catching deal54 Rolls-Royce

Weathering the storm56 India’s IT firms

Reboot57 Tata Sons

Chandra’s challenge58 Schumpeter

Shareholder value

Finance and economics59 Italy’s bank rescue

Saving Siena60 Finance in Cyprus

Bank from the brink60 Ukraine’s economy

The other war61 Buttonwood

Zombie companies62 Indonesian capital flows

Nerves on edge62 American finance

Not with a bang63 Brexit

Lost passports63 Inequality

The eight richest64 Free exchange

American tax reform

Science and technology65 Modelling brains

Does not compute66 Panda genetics

Hey, dude. Give me six!67 Solar physics and

palaeontologySet in stone

68 Submarine warfareTorpedo junction

Books and arts69 America in Laos

A great place to have a war70 Emile Zola disappears

Accuser accused70 Joys of smoking

Naughty, but nice70 AIDS in America

Chronicles of death foretold71 Elbphilharmonie

Hamburg makes waves72 Johnson

Mr Zhou and pinyin

76 Economic and financialindicatorsStatistics on 42 economies,plus a closer look at newpassenger-car registrations

Obituary78 Clare Hollingworth

A journalist sniffing thebreezes

The Economist January 21st 2017 5

1

After hard, soft and then red,white and blue, Theresa Mayannounced a “clean” Brexit. Inher most important speech yeton the issue, Britain’s primeminister set out a position forquitting the EU that includesleaving the single market andcustoms union. Mrs May saidshe would seek the best pos-sible trade terms with Europeand be a “good neighbour”,but that no deal would bebetter than a bad deal forBritain. Donald Trump heldout the promise ofa tradeagreement with America afterpraising Britain’s Brexit choice.

Germany’s chancellor, AngelaMerkel, responded to MrsMay’s Brexit speech withvows to hold the EU togetherand blockany British “cherry-picking” in the negotiations.Jean-Claude Juncker, the presi-dent of the European Commis-sion, promised to workfor afair deal for both sides, saying:“We are not in a hostile mood.”

Northern Ireland’s Assemblycollapsed amid a scandalinvolving the first minister’shandling ofa renewable-heating programme that couldcost taxpayers £490m($600m). Elections for a newAssembly on March 2nd mightcome to be used as a proxy pollon Brexit: the province voted toremain in the EU.

The European Parliamentelected a new president.Antonio Tajani, an Italianconservative from the Euro-pean People’s Party, will re-place Germany’s MartinSchulz. Under his leadership,the parliament will have thefinal say on approving Brexit.

An avalanche hit a hotel in theAbruzzo region ofcentral Italy.Around 30 people were inside.The avalanche was apparentlytriggered by one of three earth-quakes that struck the regionthis week. Earthquakes in thesame area last year killed morethan 300 people.

Germany’s federal courtrejected an attempt to ban theneo-Nazi National DemocraticParty. German states sub-mitted a petition to ban it in2013, citing its racist, anti-Semit-ic platform. The court foundthat although the party “pur-sues aims contrary to theconstitution”, it does not posea threat to democracy.

Davos man

In a speech at the WorldEconomic Forum in Davos,China’s leader, Xi Jinping,defended globalisation andsaid trade wars produced nowinners. His remarks ap-peared to be aimed at DonaldTrump, who has threatened toimpose huge tariffs on Chineseproducts. Mr Xi was the firstChinese president to attendthe event.

Australia, China and Malaysiaabandoned the search forMH370, a Malaysian airlinerthat disappeared in the south-ern Indian Ocean in 2014 with239 people on board. Debrisfrom the plane has washed upin Africa, but the crash site hasnever been located.

Hun Sen, the prime minister ofCambodia, launched a law-suit against Sam Rainsy, anexiled opposition leader, fordefamation. Mr Sam Rainsyclaims that Mr Hun Sen istrying to destroy his party toprevent it winning electionsscheduled for next year.

Rodrigo Duterte, the presidentof the Philippines, mulledimposing martial law ifneces-sary to advance his homicidalcampaign against drugs.

No preferential treatmentBarackObama ended the22-year-old “wet foot, dry foot”policy, under which Cubanswho landed on American soilwere permitted to stay. Cu-bans who try to get into theUnited States will now betreated like other migrants. MrObama’s decision is in keepingwith his policy ofnormalisingrelations with the communistgovernment ofCuba.

The wave ofviolence in Bra-zil’s prisons continued withthe deaths ofat least 30 peopleat a jail. Some of the inmateswere decapitated in a fightbetween gangs. About140people have died in prisonviolence so far this year.

Colombia will begin peacenegotiations in February withthe ELN, the country’s second-largest guerrilla group. It madepeace with the largest, theFARC, last year.

An Italian court sentenced inabsentia eight former officialsofSouth American militaryregimes to life in prison fortheir role in the disappearanceof23 Italians during the 1970sand 1980s. The officials partici-pated in Operation Condor, acampaign ofpersecution andmurder by halfa dozen gov-ernments against their leftistopponents.

Crisis actionHaving lost an election, YahyaJammeh missed a deadline tostep down as president of theGambia to make way for hissuccessor, Adama Barrow.Neighbouring west Africancountries have called on MrJammeh to go. Senegal movedtroops towards its border inpreparation for a possibleintervention.

In Nigeria an air-force jetoperating against Boko Haram,a jihadist group, mistakenlybombed a refugee camp killingat least 76 people. Aid workerswere among the dead.

Two people were killed inIsrael in clashes betweenpolice and residents ofa Bed-ouin village that the authori-ties are trying to demolish.

A high court in Egypt upheld aruling that prevented thegovernment from handingsovereignty of two islands inthe Red Sea to Saudi Arabia.The government’s proposal tohand the uninhabited islandsto the Saudis, who had askedEgypt to protect them in the1950s, sparked street protestslast year.

Clemency for ChelseaIn one ofhis final actions aspresident, BarackObamacommuted the sentence hand-ed down to Chelsea Man-ning, a former intelligenceanalyst, for passing secretdocuments to WikiLeaks. In2013 Ms Manning (BradleyManning as she was knownthen) was sentenced to 35years. As a convict she beganher transition from a male to afemale. Supporters praise heras a whistle-blower, but hercritics insist she put Americanand allied lives at risk.

Last year was the hottest sincedata started to be collected in1880 and the third consecutiveyear of record global warming,according to America’s Nation-al Oceanic and AtmosphericAdministration. The averagetemperature over land and seawas 58.69oF (14.8oC), 0.07oF(0.04oC) above 2015’s average.

Donald Trump prepared forhis inauguration on January20th as America’s 45th presi-dent. Mr Trump told a newspa-per that because of the celebra-tions he would take theweekend offand Day One ofhis administration would starton Monday January 23rd.

Politics

The world this week

6 The world this week The Economist January 21st 2017

Other economic data and newscan be found on page 76-77

Having sweetened its offer,British American Tobaccosecured a deal to gain fullcontrol ofReynolds for $49bn,creating the world’s biggestlisted cigarette company. Reyn-olds is based in the Americanmarket, which is again lookingalluring after years ofcostlylitigation and falling demand.The volume ofcigarettes soldin America has fallen sharplyin the past decade, but overallretail sales in the industry haverisen thanks to populationgrowth and new products,such as e-cigarettes.

That vision thingLuxottica, an Italian maker offashionable eyeware, agreed tomerge with Essilor, a Frenchcompany that produces lenses.The €46bn ($49bn) transactionis one of the biggest cross-border deals in the EU to date.The merger had long beenresisted by Luxottica’s founder,Leonardo Del Vecchio, whobuilt his firm up into a globalbehemoth that owns the Oak-ley and Ray-Ban brands andsupplies designer frames forChanel, Prada and others.

In a vindication of the strategypursued by Britain’s SeriousFraud Office, Rolls-Roycesettled claims dating from 1989to 2013 that it had bribed offi-cials in various countries inorder to win contracts. Theengineering company will paypenalties totalling £671m($809m) to regulators in Amer-ica, Brazil and Britain. Most ofthat goes to the SFO, whichpushed for a deferred prosecu-tion agreement, still a novelconcept under British law.

Fiat ChryslerAutomobiles’share price was left bruised byan allegation from America’sEnvironmental ProtectionAgency that it had used soft-ware in 104,000 diesel cars tolet them exceed legal limits onnitrogen-oxide emissions. TheEPA did not go as far as to saythat FCA had cheated in emis-sions tests; that transgressionhas cost Volkswagen billions infines. FCA strongly denied theclaim; its boss, Sergio Mar-

chionne, said “We don’t be-long to a class ofcriminals.”

Consumer prices in Britainrose by1.6% in December, a bigbounce from 1.2% in Novemberand the highest figure for twoyears. Costlier transport con-tributed to the spike. Risinginflation is an unwelcomeconundrum for the BankofEngland. Its governor, MarkCarney, noted that higherprices could dampen consum-er spending and slow eco-nomic growth, meaning futureinterest-rate decisions mightmove “in either direction”.

In South Korea a court rejectedprosecutors’ request to arrestLee Jae-yong, the vice-chair-man ofSamsung Electronics,on allegations ofbribery relat-ed to an influence-peddlingscandal that has rocked thecountry. Prosecutors allegethat money paid by Mr Lee to afriend ofSouth Korea’s presi-dent was intended as a bribe tohelp win a merger of twoSamsung affiliates. Mr Leedenies that. The prosecutorsare still pressing their case.

America’s Federal TradeCommission lodged an anti-trust lawsuit againstQualcomm, accusing it ofabusing its commanding posi-tion in the semiconductor

market to impose stringentlicensing terms on patents forchips in mobile phones.

Another profit warning fromPearson caused its share priceto plunge by 30%. The academ-ic publisher is facing a declinein demand for its textbooks inAmerica, partly because of therise ofservices that let studentsrent the books.

A surge in trading after theelection ofDonald Trumphelped America’s big banksreap big profits in the fourthquarter. Many investors adjust-ed their portfolios when MrTrump’s victory heightenedexpectations of interest-raterise and ofcuts in regulationsand taxes.

SpaceX sent its first rocket intoorbit since an explosion on alaunch pad last Septembergrounded its fleet. The govern-ment has accepted the com-

pany’s report on the accident,allowing it to start clearing itsbacklog ofsatellite launchesfor fee-paying customers andcargo missions to the Interna-tional Space Station.

Reversal of fortunesExxonMobil agreed to pay$6.6bn for several oil firmsowned by the Bass family inFort Worth, the latest in a flurryofdeals to snap up energyassets in Texas as oil pricesrebound. Meanwhile, SaudiArabia said it would soon startaccepting tenders for anexpansion ofsolarand windpower in the country that willcost up to $50bn. The collapseof the oil price two years agotore a hole in the kingdom’sfinances. It now hopes to get30% of its power from renew-ables by 2030.

China’s footballing authoritiescapped the number offoreignplayers that clubs can field in amatch to three per team, downfrom five, as part ofa series ofmeasures to foster the devel-opment of local Chinese tal-ent. The news came as XiJinping, China’s president,extolled the virtues ofglobal-isation at the annual gabfest atDavos.

Business

Net income

Source: Company reports

Q4 2016, $bn

0 2 4 6 8

JPMorgan Chase

Wells Fargo

Bank of America

Citigroup

Goldman Sachs

Morgan Stanley

The Economist January 21st 2017 7

MUCH of the time, arguesDavid Runciman, a British

academic, politics matters littleto most people. Then, suddenly,it matters all too much. DonaldTrump’s term as America’s 45thpresident, which is due to beginwith the inauguration on Janu-

ary 20th, stands to be one of those moments. It is extraordinaryhowlittle American votersand the world

at large feel they know about what Mr Trump intends. Thosewho back him are awaiting the biggest shake-up in Washing-ton, DC, in half a century—though their optimism is an act offaith. Those who oppose him are convinced there will be cha-os and ruin on an epoch-changing scale—though their despairis guesswork. All that just about everyone can agree on is thatMr Trump promises to be an entirely new sort of Americanpresident. The question is, what sort?

Inside the West WigYou may be tempted to conclude that it is simply too soon totell. But there is enough information—from the campaign, themonths since his victory and his life as a property developerand entertainer—to take a view of what kind of person MrTrump is and how he means to fill the office first occupied byGeorge Washington. There is also evidence from the team hehas picked, which includes a mix of wealthy businessmen,generals and Republican activists (see pages14-18).

For sure, Mr Trump is changeable. He will tell the New YorkTimes that climate change is man-made in one breath and pro-mise coal country that he will reopen its mines in the next. Butthat does not mean, as some suggest, that you must alwaysshut out what the president says and wait to see what he does.

When a president speaks, no easy distinction is to be madebetween word and deed. When Mr Trump says that NATO isobsolete, as he did to two European journalists last week, hemakes its obsolescence more likely, even if he takes no action.Moreover, Mr Trump has long held certain beliefs and atti-tudes that sketch out the lines of a possible presidency. Theysuggest that the almost boundless Trumpian optimism on dis-play among American businesspeople deserves to be tem-pered by fears about trade protection and geopolitics, as wellasquestionsabouthowMrTrump will run hisadministration.

Start with the optimism. Since November’s election theS&P500 index is up by 6%, to reach record highs. Surveys showthatbusinessconfidence hassoared. Both reflecthopes thatMrTrump will cut corporate taxes, leadingcompanies to bring for-eign profits back home. A boom in domestic spending shouldfollow which, combined with investment in infrastructureand a programme of deregulation, will lift the economy andboost wages.

Done well, tax reform would confer lasting benefits (seeFree exchange), as would a thoughtful and carefully designedprogramme of infrastructure investment and deregulation.But ifsuch programmes are poorly executed, there is the riskofa sugar-rush as capital chases opportunities that do little to en-

hance the productive potential of the economy. That is not the only danger. If prices start to rise faster, pres-

sure will mount on the Federal Reserve to increase interestrates. The dollar will soar and countries that have amassedlarge dollar debts, many of them emerging markets, may wellbuckle. One wayoranother, anyresulting instability will blowback into America. If the Trump administration reacts to wid-ening trade deficits with extra tariffs and non-tariff barriers,then the instability will only be exacerbated. Should MrTrump right from the start set out to engage foreign exportersfrom countries such as China, Germany and Mexico in a con-flict over trade, he would do grave harm to the global regimethat America itself created after the second world war.

Just as Mr Trump underestimates the fragility of the globaleconomic system, so too does he misread geopolitics. Even be-fore taking office, Mr Trump has hacked away at the decades-old, largely bipartisan cloth ofAmerican foreign policy. He hascasually disparaged the value of the European Union, whichhis predecessors always nurtured as a source of stability. Hehas compared Angela Merkel, Germany’s chancellor and theclosest ofallies, unfavourably to Vladimir Putin, Russia’s presi-dent and an old foe. He has savaged Mexico, whose prosperityand goodwill mattergreatly to America’s southern states. And,most recklessly, he has begun to pull apart America’s carefullystitched dealings with the rising superpower, China—imperil-ling the most important bilateral relationship ofall.

The idea running through Mr Trump’s diplomacy is that re-lationsbetween states followthe artofthe deal. Mr Trump actsas ifhe can get what he wants from sovereign states by pickingfights that he is then willing to settle—at a price, naturally. Hismistake is to think that countries are like businesses. In fact,America cannot walk away from China in search of anothersuperpower to deal with over the South China Sea. Doubtsthat have been sown cannot be uprooted, as if the game hadall along been a harmless exercise in price discovery. Alliancesthat take decades to build can be weakened in months.

Dealings between sovereign states tend towards anarchy—because, ultimately, there is no global government to imposeorder and no means of coercion but war. For as long as MrTrump is unravelling the order that America created, and fromwhich it gains so much, he is getting his country a terrible deal.

HairForce OneSo troubling is this prospect that it raises one further question.How will Mr Trump’s White House work? On the one handyou have party stalwarts, including the vice-president, MikePence; the chief of staff, Reince Priebus; and congressional Re-publicans, led by Paul Ryan and Mitch McConnell. On the oth-er are the agitators—particularly Steve Bannon, Peter Navarroand Michael Flynn. The titanic struggle between normal poli-tics and insurgency, mediated by MrTrump’s daughter, Ivanka,and son-in-law, Jared Kushner, will determine just how revolu-tionary this presidency is.

As Mr Trump assumes power, the world is on edge. Fromthe Oval Office, presidents can do a modest amount of good.Sadly, they can also do immense harm. 7

The 45th president

What is Donald Trump likely to achieve in power?

Leaders

8 Leaders The Economist January 21st 2017

1

IN MANYways the African Un-ion (AU) is outdoing its Euro-

pean counterpart. It has neverpresided over a continental cur-rency crisis. No member state isthreatening to quit. And youcould walk from Cairo to CapeTown without meeting anyone

who complains about the overweening bossiness of the Afri-cansuperstate. But this is largelybecause theAU, unlike the EU,is irrelevant to most people’s lives. That is a pity.

Before 2002, when it was called the Organisation ofAfricanUnity, it was dismissed as a talking-shop for dictators. For thenext decade, it was led by diplomats from small countries,picked by member states precisely because they had so littleclout. But then, in 2012, a heavyweight stepped in to run the AUcommission. Nkosazana Dlamini-Zuma, a veteran of the anti-apartheid struggle and a woman who had held three impor-tant cabinet posts in South Africa, was expected to inject morevigour and ambition into the AU. As she prepares to hand overto an as-yet unnamed successor this month, it is worth assess-ing her record (see page 37).

This matters for two reasons. First, because Africa’s forumfor tackling regional problems needs to work better. Second,because Ms Dlamini-Zuma apparently wants to be the nextpresidentofSouthAfrica.Herexperienceat the AU, supportersclaim, makes her the best-qualified successor to President Ja-cob Zuma, who happens to be her ex-husband.

Running the ill-funded AU is hard, but even so, nothing shehas achieved there suggests that she deserves to run her coun-try. Her flagship policy, Agenda 2063, is like a balloon ride overthe Serengeti, offering pleasant views of a distant horizon and

powered byhotair. By2063, when none ofitsboosterswill stillbe in power, it hopes that Africa will be rich, peaceful, corrup-tion-free and enjoying the benefits of “transformative leader-ship in all fields”. In the shorter term, Ms Dlamini-Zuma hascalled for a shared currency, a central bank and a “continentalgovernment” to tie together states that barely trade with oneanother. None of this is happening. She also wants to intro-duce a single African passport letting citizens move freelyacross the continent by 2018. A splendid idea, but for now theAU issues them only to heads ofstate and senior AU officials.

Ms Dlamini-Zuma has also failed to grapple with Africa’sconflicts. AU troops have done a creditable job in Somalia, butpromises from AU members to send troops to quell fighting orrepression in Burundi and South Sudan remain unkept. UnderMs Dlamini-Zuma, the AU has condemned blatant coups, butits monitors have approved elections that were far from freeand fair. Knowing that African leaders find the InternationalCriminal Court too muscular, she backs an African alternativethat explicitly grants immunity to incumbent rulers.

From the Union to the Union BuildingsThis is the opposite of what South Africa needs. Under MrZuma, corruption has metastasised. Ruling-party bigwigs doleout contracts to each other and demand slices of businessesbuilt by others. Investors are scared, growth is slow and publicservices, especially schools, are woeful. South Africa needs agraft-busting president: someone to break the networks of pa-tronage that stretch to the top. Instead, Mr Zuma, who is ac-cused of 783 counts of corruption, is paving the way for his ex-wife, whom he expects to protect him. Her family ties and timeat the AU suggest that Ms Dlamini-Zuma is the last person tohelp Africa’s most advanced economy fulfil its potential. 7

African politics

A dismal dynast

Africa’s top bureaucrat, Nkosazana Dlamini-Zuma, wants to be South Africa’s next president. Bad idea

HALF a year after choosingBrexit, Britons have learned

what they voted for. The single-word result of June’s referen-dum—“Leave”—followed a cam-paign boasting copious (incom-patible) benefits: taking backcontrol of immigration, ending

payments into the European Union budget, rolling back for-eign courts’ jurisdiction and trading with the continent as free-ly as ever. On January 17th Theresa May at last acknowledgedthat leaving the EU would involve trade-offs, and indicatedsome of the choices she would make. She will pursue a “hardBrexit” (rebranded “clean” by its advocates), taking Britain outof the EU’s single market in order to reclaim control of immi-

gration and shake offthe authority of the EU’s judges.Mrs May declared that this course represents no retreat, but

rather that it will be the making of a “truly global Britain”. Es-caping the shackles ofthe EU will leave the country “more out-ward-looking than ever before”. Her rhetoric was rousing. Butas the negotiations drag on, it will become clear that her visionis riven with tensions and unresolved choices.

Definitely maybeMrs May’s speech was substantial and direct—welcome aftermonths in which her statements on Brexit had been Delphic tothe point of evasion. Although she plans to leave the singlemarket, Mrs May wants “the freest possible” trade deal withthe EU, including privileged access for industries such as carsand finance (see page 46). In order to be able to strike its own

Britain and the European Union

A hard road

Exchange rate$ per £

J J A S O N D2016

J2017

1.21.31.41.5

BREXIT VOTE

THERESA MAY’S SPEECH

The government promises a “trulyglobal Britain” afterBrexit. Is that plausible?

10 Leaders The Economist January 21st 2017

1

2 trade deals outside Europe, Britain will also leave the EU’s cus-toms union (freeing itself from the common external tariff),butwill aim to keep itsbenefits in some areas. The governmentwill consider making some payments into the EU budget, butthe “vast” contributions of the past will end. Mrs May wouldlike a trade agreement with the EU to be wrapped up withintwo years, meaningthat there isno need fora formal transitionarrangement; she suggests a phasing-in period, whose lengthcould vary by sector. Parliament will get a vote on the finaldeal, though by then it will be too late for it to change much.

The pound rose on the discovery that Mrs Maybe had aplan after all. Sympathetic newspapers compared her steel tothat of Margaret Thatcher (perhaps forgetting that the singlemarket was one of the Iron Lady’s proudest achievements).Yet, for her plan to succeed, Mrs May must overcome severalobstacles—not least her own contradictory impulses.

The essential taskwill be to get the EU to agree to the sort ofdeal she set out this week. When it comes to the single marketand customs union, European leaders have made clear theiropposition to “cherry-picking”. A tailored transition plan mayget the same bleak response. And the EU has never concludeda trade agreement in two years, let alone a deep one.

Mrs May would retort that Britain will get a good deal be-cause its negotiating position is strong. In her speech, after dis-tancing herself from Donald Trump’s Eurobashing, shewarned that the EU would be committing “an act of calami-tous self-harm” if it tried to punish Britain with a bad deal.Europeans would miss London’sfinancial markets; they mightalso lose access to British intelligence, which has “alreadysaved countless lives” across the continent.

Her undiplomatic threats ring hollow. Everyone will lose ifthere is no agreement, but nobody will lose as much as Britain.The country is in no position to bully its way to a cushy dealand EU leaders in no mood to offer one.

MrsMay’swayforBritain to come outon top, even if it losesaccess to markets in Europe, is for the country to open itself upto the world. In rediscovering its past as a trading nation, Brit-ain can become a sort of Singapore-on-Thames, free of thedead hand ofan over-regulated EU. Long touted by some liber-al Brexiteers, the idea has a certain devil-may-care appeal.

Yet if Mrs May is to turn Britain into a freewheeling, laissez-faire economy, she will have to sacrifice some of her own con-victions. She has interpreted the Brexit vote as a roar by thoseleft behind by globalisation. On their behalf, she has railedagainst employers who break the “social contract” by hiringforeigners rather than training locals. UnderMrsMay, Britain, abeacon for investment, risks becoming less attractive to for-eigners, not more. The minimum wage is rising. She wants tovet foreign takeovers ofBritish firms. Above all, the promise to“control” immigration looks like a euphemism for reducing it(see Bagehot). Forced to choose on a visit to India, Mrs May putcontinued restrictions on student visas before a trade deal.

The Economist opposed Brexit. IfBritain has to leave the sin-gle market and the customs union, we would urge the globalis-ing side of Mrs May to prevail over the side that would put upbarriers. But for this, Mrs May will have to abandon views towhich, as home secretary, she has long held firm. Britain isheading out of the EU, and it will survive. But the chances arethat it will be a poorer, more inward-looking place—its draw-bridge up, its influence diminished. 7

AMERICA’S system of cor-porate justice has many

flaws. The size of the fines itslaps on firms is arbitrary. Its ha-bitual use of deferred-prosecu-tion agreements (a practice thatis spreading to Britain; this weekRolls-Royce, an engineering

firm, was fined for bribery—see page 54) means that too manycases are settled rather than thrashed out in court. But evencrude justice can be better than none. To see why, look at Eu-rope’s flaccid approach to the emissions scandal that engulfedVolkswagen (VW) in 2015 and now threatens others.

Diesel-engined vehicles belch out poisonous nitrogen-ox-ide (NOx) gases. Limits have been imposed around the worldon these toxic fumes. But the extra costofmakingengines com-pliant, and the adverse impact that this has on performanceand fuel efficiency, tempt carmakers to flout the rules. That iseasier to get away with in Europe than in America, where theregulations are tighter and enforcement is more rigorous.

American agencies were the ones to uncover VW’s use of a“defeat device”, a bit of software that reduced NOx emissionswhen its cars were being officially tested, and turned itself offon the roads. The German carmaker faces a bill of over $20bn

in penalties and costs; six of its executives were indicted by theDepartment of Justice this month. Fiat Chrysler Automobiles(FCA) is the latest carmaker to fall foul of American enforcers.On January 12th the Environmental Protection Agency (EPA)accused the firm, whose chairman is a director of The Econo-mist’s parent company, of using software to manipulate mea-sured NOx emissions on 104,000 vehicles. The agencystopped short of calling the software a “defeat device”, butFCA, which denies any wrongdoing, must convince the EPAthat it is acting within the rules (see page 52).

A gargantuan grey areaLife is much easier in Europe, where the regulations are pliableto the point ofmeaninglessness. The gentle motoring requiredin official emissions tests is far removed from the revving andbraking of real driving. Tests are also conducted at high tem-peratures, at which cars perform better. On the road, emissioncontrols in some cars turn off at temperatures of 17°C and be-low, ostensibly to protect the engine from the chill. (In Ameri-ca there is also a recognition that there should be a cold-startexemption, but it kicks in below 3°C.) Some cars spew up to 15times more noxious gases on the road than under test condi-tions. Damningly, VW felt able to conclude that, under theEuropean emissions regime, it had done nothing wrong.

Regulating car emissions

Road outrage

To stop carmakers bending the rules, Europe must get much tougher

The Economist January 21st 2017 Leaders 11

2 Even if the rules were tighter, enforcement would be a pro-blem. Diesel-engined vehicles, which make up around halfthe traffic on the continent’s roads, are central to the financialhealth of many European carmakers. That gives the nationalagencies which conduct tests a reason to look the other way.Another incentive lies in the battle against climate change, be-cause complyingwith NOxemissions regulation adds to costs.In the hugely competitive market for small cars, a higher pricecan steer consumers towards petrol cars, which are less effi-cient than diesel engines and hence produce more carbon di-oxide, the main greenhouse gas.

Neither is a good reason to avoid getting much tougher. It istrue that Europe’s carmakers have more at stake than Ameri-ca’s. But so do Europe’s citizens. NOx emissions cause the pre-mature deaths of an estimated 72,000 Europeans a year. And

one way or another, Europe’s love affair with diesel is souring.This week the city of Oslo used new powers to ban diesel carstemporarily in order to improve air quality. Paris, Madrid andAthensare set to ban dieselsaltogetherby2025. The fallingcostofbattery-powered cars may offer a greener alternative.

Europe is getting stricter. A new test that better mirrors driv-ing conditions on real roads will start to be rolled out later thisyear. To reduce the risk of manipulated results, regulators willexamine vehicles on the road as well as under test conditions.But EU member states have already won an exemption, mean-ing that NOx emissions will be allowed to exceed the officialtest limit for years. And the tests will still be conducted by na-tional agencies. The exemption should go. To beef up enforce-ment, Europe should hand more oversight to the EU. For thesake ofEuropeans’ lungs, it is past time to get tough. 7

AFEW years ago it looked likethe curse that would never

lift. In China, north India andother parts of Asia, ever moregirls were being destroyed bytheir parents. Many were de-tected in utero by ultrasoundscans and aborted; others died

young as a result of neglect; some were murdered. In 2010 thisnewspaper put a pair of empty pink shoes on the cover andcalled it gendercide. In retrospect, we were too pessimistic. To-day more girls are quietly being allowed to survive.

Gendercide happens where families are small and the de-sire for sons is overwhelming. In places where women are ex-pected to move out oftheirparents’ homes upon marriage andinto their husbands’ households, raisinga girl can seem like anact of pure charity. So many parents have avoided it that, byone careful estimate, at least 130m girls and women are miss-ingworldwide. It isas ifthe entire female population ofBritain,France, Germany and Spain had been wiped out.

Fortunately, pro-girl evangelising and economic growthhave at last begun to reverse this terrible trend (see page 49).Now that women are more likely than before to earn goodmoney, parents see girls as more valuable. And the craving forboyshasdiminished asparents realise that theywill be hard tomarry off (since there are too few brides to go around). So theimbalance between girls and boys at birth is diminishing inseveral countries, including China and India. In South Korea,where a highly unnatural 115 boys were being born for every100 girls two decades ago, there is no longer any evidence ofsex selection—and some that parents prefer girls.

This is wonderful news, and it will be still more wonderfulif the progress continues. Ending the war on baby girls wouldnot only cut abortions, which are controversial in themselvesand can entail medical complications, especially in poor coun-tries. It would also show that girls and women are valued. Yetgendercide will leave an awful legacy. Today’s problem is ashortage ofgirls; tomorrow’s will be an excess ofyoung men.

As cohort after cohort of young Asians reach marriageable

age, all of them containing too few women, a huge number ofmen will struggle to find partners. Some will import foreignbrides, thereby unbalancing the sex ratio in other, poorercountries. A great many will remain single. Some women willbenefit from being more in demand. But the consequences arebad forsocietiesasa whole, because young, single, sex-starvedmen are dangerous. Stable relationships calm them down.Some studies (though not all) suggest that more unattachedmen means more crime, more rape and more chance of politi-cal violence. The worst-affected districts will be poor, ruralones, because eligible women will leave them to find hus-bands in the cities. Parts ofAsia could come to resemble Amer-ica’s Wild West. (Many polygamous societies already do: thinkof Sudan or northern Nigeria, where rich men marry severalwomen and leave poor men with none.)

There are no easy answers. Historians note that rulers usedto deal with surpluses of young men by sending them off towar, but such a cure would obviously be worse than the dis-ease. Some saygovernments should tolerate a largersex indus-try. Prostitution is often lawless and exploitative, but it wouldbe less so if governments legalised and regulated it. One Chi-nese academic has suggested allowing polyandry (ie, lettingwomen take more than one husband). In the mostunbalancedareas something like this may happen, regardless of the law.

Don’t just do somethingAbove all, governments should be cautious and humble.When trying to strong-arm demography, they have an awfulrecord. China’s one-child policy, though recently relaxed, hasaggravated the national sex imbalance—and been coercive,brutal and less effective than its admirers claim. Without it, thebirth rate in China would have fallen too—perhaps just as fast.Bad policies often outlast the ills they are supposed to remedy.

It will be for Asian societies to deal with the excess malelump they have created. It would help if they did not lookdown on bachelors: some make it hard for unmarried peopleto get hold of contraceptives. But whatever policymakers donow, the sex imbalance will cause trouble for decades. The oldpreference for boys will hurt men and women alike. 7

The legacy of gendercide

Too many single men

The waron babygirls is winding down, but its effects will be felt fordecades

12 The Economist January 21st 2017

Letters are welcome and should beaddressed to the Editor atThe Economist, 25 St James’s Street,London sw1A 1hgE-mail: letters@economist.comMore letters are available at:Economist.com/letters

Conservative thought

Your leader on a “dithering”Theresa May recognised thatcomparisons of the currentBritish prime minister withMargaret Thatcher are difficultbecause Thatcher only cameinto her own in her secondterm (“Theresa Maybe”, Janu-ary 7th). If so much ofourpolitical horizon looks unfa-miliar it is because we arereluctant to recognise all thosesecond-term Thatcherite chick-ens that have come home toroost. The shift from manufac-turing to services; the indiffer-ence ofcentral governmenttowards the regions; the trans-fer ofwealth from poor to rich;the creation ofan unemploy-able underclass that generatesdemand for a resented migrantworkforce to fill the skills gap;the failure ofeducation toconsider how knowledgeadvances in the wider world;the neglect ofobvious housingneeds; the unaddressed pro-blem of low productivity andthe accompanying tendencyofBritain to become an ancienrégime rentier economy.

Thoughtful Conservativesknow that the seeds of thesemalaises were sown by theirparty 30 years ago. They knowthat not one of these issues hasa root cause in Britain’s mem-bership of the EU. Perhaps“Theresa Maybe” is a thought-ful Conservative. Maybe that iswhy she is dithering.PETER HAYDONLondon

The best comparison ofMrsMay would be to HaroldWilson, a consummate poli-tician who was brilliant atmanipulating his rivals andmanoeuvring them into impo-tence, usually by appointingthem to jobs beyond theirabilities. The unfortunateconsequence of this was thatmany of the most importantjobs in the land were put intothe hands of total incompe-tents. Wilson was so occupiedwith clever party politics thathe had little time to govern thecountry. Mrs May appears tobe purposefully striding downthe same blind alley.CHRIS WRIGHTDieburg, Germany

Defending the split infinitive

“Researchers demonstratedhow wirelessly to hacka car” isabsurdly unnatural syntax(“Breaching-point”, December24th). It encourages amisreading where “wirelessly”goes with “how” (as in “howfrequently”). “Demonstratedhow to wirelessly hacka car”expresses what was meant.The Economist has advocatedevidence-based inquiry andintellectual freedom since1843.Why submit to an adverb-positioning policy founded ondogmatism? The need forclarity should overrulesuperstitious dread of the splitinfinitive.GEOFFREY PULLUMProfessor of general linguisticsUniversity of Edinburgh

The Magic Kingdom

Walt Disney World makes theinauthentic believable (“Yes-terdayland”, December 24th).In just one day you can strollthrough an idyllic time thatreally never was (Main Street,USA), casually explore Mars(Mission Space) and go onsafari for white rhinos (Kili-manjaro Safaris). The experi-ence is so accomplished thatthe visitor has no time forreflection, or to consider theremarkable infrastructureunderground where employ-ees change into their costumes.The seamless gradient changein music and aesthetics makethe transition from Tomorrow-land to Mickey’s ToontownFair not just easy, but almostnatural. Perhaps there is hope,as the quote from Jean-JacquesRousseau displayed inside theLand Pavilion at EPCOT sug-gests: “Nature never deceivesus; it is always we who deceiveourselves.”BRENT WARSHAWFairfield, Connecticut

North Korea’s reach

America’s defence budgetrepresents 72% of total NATOspending, but this is mislead-ing, you say, because the figure“reflects America’s globalreach” as well as protecting theNorth Atlantic (“Allies andinterests”, December17th). Fair

enough. But as the missile flies,Pyongyang is closer to Berlinthan San Francisco.ANDY LADICKWashougal, Washington

Dumping grounds

“Men ofsteel, house ofcards”(January 7th) wonderedwhether cheap Chinese steelimports into America are“really so terrible” if theybenefit American firms thatconsume steel. The problem isthis: it is market forces thatgenerate the new technologies,products and improvements inefficiency that bring benefits toconsumers; but when govern-ments decide production andcapacity levels, profits sufferand innovation is stymied.

In recent years China, facedwith chronic overcapacity insteel because ofstagnatingdemand at home, pushed steelexports to around120mtonnes. These exports weresold at a significant loss, of$25bn on an annualised basis,according to data from theChina Iron and Steel Associa-tion. This prompted the col-lapse in the price ofsteel,causing American steelmakersto curb their capacity to pro-duce it. In this context theindustry rightly sought tradeactions to protect itself fromunfair trade practices.

So, yes to global trade andthe benefits it brings. But ex-porting unsustainable domes-tic losses to harm the sustain-ability of the same industry inanother country is not free orfair trade. For example, wereChina to start dumping mil-lions ofsmartphones into theAmerican market at a pricebelow cost I would be sur-prised ifApple sat idly by.NICOLA DAVIDSONVice-presidentArcelorMittalLondon

A rake and a scoundrel

I liked your piece about howHarry Flashman, a fictionalglobetrotter, would have madea great journalist (“The cad ascorrespondent”, December24th). When I stayed at theGandamackLodge in Kabul,Flashman was a looming

presence among the old Britishmuskets, swords and maps. Onthe wall outside was a plaquewith a quote from Flash: “Ka-bul might not be Hyde Parkbutat least it was safe for the pre-sent.” Well, not anymore. TheAfghan government closedthis haunt for journalists,diplomats, fixers and shadycharacters a few years ago afteran increase in attacks on for-eigners. I’m sure Flash foundanother appropriate wateringhole.TOM BOWMANNational Public Radio’s Penta-gon correspondentAlexandria, Virginia

William Boot, the brilliantcreation ofEvelyn Waugh in“Scoop”, his satire on newspa-pers and British imperial poli-tics during the grubby1930s,was an amiable eccentric whosucceeded in spite ofhimself.Flashman may have beencloser to the reality of theempire than Boot, but Boot ismore endearing, and success-fully ran a counter-revolution. ANDERS OUROMVancouver

As the late, great, ChristopherHitchens once said on discov-ering a friend ofhis had alsofallen for that arch-cad HarryFlashman, one can recognise aconfirmed addict and fellow-sufferer. As someone who alsolikes to re-read Flashmans inthe places they are set, it is mybelief that your correspondentis a terminal case. Huzzah! RICHARD CARTERLondon 7

Letters

13

The Economist January 21st 2017

The Banque centrale du Luxembourg / Eurosystem is seeking aHead of Economics and Research Department (m/f)

Job description:

The incumbent will lead and coordinate a team of economists analysing economic developments in Luxembourg and the euro area, conducting research on topics pertaining to central banking, including monetary policy, and analysing public fi nances, with a particular focus on Luxembourg. His/her responsibilities will also include representing the Bank in high level national and international meetings.

The incumbent will report directly to the Governor.

Main tasks and responsibilities:

• Provide advice to the Governor on monetary policy and to Management in general in terms of economic analysis and research;

• Develop the department’s work programme, with a particular emphasis on the strategic direction of its research activities;

• Organize, supervise and assess the department’s work, in particular its contribution to the BCL’s economic publications and to the department’s research output;

• Develop research partnerships with universities, research institutes, think tanks and other central banks.

Your profile:

• PhD in economics or M.A. in economics with extensive experience in research and economic analysis;

• Experience in conducting and supervising research related to central banking with a strong publication record;

• Solid knowledge of the Eurosystem’s monetary policy framework;• Excellent command of English. French or German will be considered as an

advantage;• Ability to communicate with peers, managers and policymakers; strong sense

of efficiency, organization and time management.

To apply, please email your cv and motivation letter to app8@egonzehnder.com before February 15, 2017.

EXECUTIVE DIRECTOR (United Nations Under Secretary-General level)

Applications are invited for the post of Executive Director of the International Grains Council (IGC), which will fall vacant on 1 February 2018.

The Executive Director is the chief administrative officer and head of the Secretariat of the International Grains Council. The IGC is an intergovernmental commodity body based in London. Its multinational Secretariat administers the Grains Trade Convention, 1995 and the Food Assistance Convention.

The IGC’s activities are primarily focused on providing, for the benefi t of member governments and subscribers, an independent source of information and analysis of world market developments in grains, rice and oilseeds. The Council also monitors changes in national grain policies, conducts surveys of the international grains industry and fosters co-operation between governments and the industry. (For more information about the IGC see www.igc.int).

Candidates should have a solid knowledge of the world grain economy as well as international agricultural and food policy issues; sound capabilities in the area of market and economic analysis; extensive administrative and managerial experience at an appropriately senior level; experience in working with government representatives and relevant international organisations; excellent communication skills in English, the working language of the Council and, at least one of the other three official languages of the Council (French, Russian or Spanish) would be desirable.

Applicants must be citizens of a country which is a member* of the International Grains Council. Interested individuals should apply directly to the email address below. Applicants should indicate whether the application is being sponsored by their government.

Remuneration will be in line with the United Nations Under Secretary-General level applicable in London, where the position is based.

Letters of application and a curriculum vitae in English should be sent by email to:

Mr. Aly Toure, IGC Chairman Email: Chairman2017@igc.int

The closing date for applications is 10 March 2017.

* Members of IGC are: Algeria, Argentina, Australia, Canada, Côte d’Ivoire, Cuba, Egypt, European Union, India, Iran, Iraq, Japan, Kazakhstan, Kenya, Korea (Rep), Morocco, Norway, Pakistan, Russian Federation, Saudi Arabia, South Africa, Switzerland, Tunisia, Turkey, Ukraine, United States, Vatican City.

INTERNATIONAL GRAINS COUNCIL

Executive Focus

14 The Economist January 21st 2017

1

HOLED up in Trump Tower, the NewYork citadel he seems reluctant to

leave, Donald Trump detected a tsunamiofexcitement in the national capital beforehis inauguration on January 20th. “Peopleare pouring into Washington in recordnumbers,” he tweeted. In fact the mood inWashington, DC, where MrTrump won 4%ofthe vote on November8th, wasmore ob-viously one of apathy and disdain for hisupcoming jamboree. Even the scalperswere unhappy, having reportedly overesti-mated people’s willingness to shell out tosee Mr Trump sworn in as the 45th presi-dent. Some 200,000 protesters are expect-ed to attend an anti-Trump march the dayafter the inauguration (see page 22).

Mr Trump’s post-election behaviourhas been every bit as belligerent as it wasduring the campaign. In his victory speechhe said it was time to “bind the wounds ofdivision”; he has ever since been insultingand threatening people on Twitter, at a rateof roughly one attack every two days. Histargetshave included Meryl Streep, Boeing,a union boss in Indiana, “so-called A-listcelebrities” who refused to perform at hisinauguration, Toyota and the “distortedand inaccurate” media, whose job it willbe to hold his administration to account.

He enters the White House as by far themost unpopular new president of recenttimes. It does not help that America’s intel-ligence agencies believe Russian hackers

sought to bring about his victory over Hil-lary Clinton (though she won the popularvote by almost 3m ballots).

Yet amid the protests, the launch of aSenate investigation into Russia’s hackingand nerves jangling in the United Statesand elsewhere at the prospect of PresidentTrump, the transition has been chuggingalong fairly smoothly. The markets have re-sponded with a “Trump bump”, exploringrecord highs in expectation of tax cuts andderegulation.

Mr Trump has named most of his se-nior team, including cabinet secretariesand top White House aides, and their Sen-ate confirmation hearings are well underway. These are even more of a formalitythan usual, thanks to a recent change to theSenate’s rules, instigated by a formerDemocratic senator, Harry Reid, which al-lows cabinet appointments to be ap-proved by a simple majority. As the Repub-licans control both congressional houses,even Mr Trump’s most divisive nomi-nees—such as Senator Jeff Sessions fromAlabama, his choice for attorney-general,an immigration hawk dogged by historicalallegations of racism—appear to be breez-ing through.

Tom Price, a doctor and congressmanfrom Georgia who is Mr Trump’s pick forhealth secretary, is touted by Democrats asthe likeliest faller; he is in trouble over leg-islation he proposed that would have ben-efited a medical-kit firm in which heowned shares. But as the Democrats main-lydislike DrPrice because he is the putativeassassin of Barack Obama’s health-care re-form, and Republicans like him for thesame reason, he will probably get a pass.“There are two people responsible for thedirection we are heading in,” says SenatorJohn Barrasso, a Republican from Wyo-ming, approvingly. “Donald Trump, whowon the election, and Harry Reid, forchanging the Senate rule. This has allowedthe president-elect to nominate patriots,not parrots.”

Indeed, Mr Trump’s cabinet picks havebeen solidly conservative, with a strongstrain of small-governmentism. At leastthree of his nominees appear to havemixed feelings about whether their futuredepartments should even exist.

Rick Perry, Mr Trump’s choice to leadthe Department ofEnergy, pledged to abol-ish that agency when campaigning for thepresidency in 2011. Ben Carson, a right-winger with little management experi-ence, whom Mr Trump has chosen to headhis Department of Housing and Urban De-velopment, once wrote that “entrustingthe government” to look after housing

A helluva handover

WASHINGTON, DC

The drama of the transition is over, and the newpresident’s team is largely in place.Now forthe drama ofgovernment

Briefing The Trump administration

Also in this section

18 Peter Navarro’s economics

The Economist January 21st 2017 Briefing The Trump administration 15

1

2 policy was “downright dangerous”. As at-torney-general of Oklahoma Scott Pruitt,picked to lead the Environmental Protec-tion Agency, has sued the EPA 14 times,partly in an attempt to foil the Clean PowerPlan, MrObama’smain effort to cutAmeri-ca’s greenhouse-gas emissions.

Climate ofopinionThat all three are climate-change sceptics isno coincidence. So, to varying degrees, arealmost all the politicians in Mr Trump’s ad-ministration (see graphic). Reince Priebus,his chief of staff, recently summarised hisboss’s view of climate science as mostly “abunch of bunk”. Mr Trump’s dishevelledchief strategist, Steve Bannon, a self-de-scribed nationalist populist, has similarviews, with a twist. Mr Trump has de-scribed climate change asa hoaxperpetrat-ed by the Chinese; Mr Bannon blames aconspiracy of shadowy “globalists” for the

UN’s Paris Agreement on climate, whichMr Trump has vowed to “cancel”. Plainly,Mr Pruitt’s brief will be to carry on doingwhat he was doing—with the power of thefederal government behind him.

The disavowal of climate science re-flects a wider disdain for expert opinion. Asmall illustration of this, with potentiallylarge consequences for American children,is that Mr Trump has discussed appointingRobertF. Kennedy junior, a lawyerand pro-ponent of a bogus theory linking vaccinesand autism, to chair a vaccine-safety com-mission. Abigger illustration is that the oneacademic economist on MrTrump’s senioreconomic team, Peter Navarro, is a protec-tionist with a maverick aversion to tradedeficits (see next article).

The team is dominated by bankers andbusinessmen, including two GoldmanSachs alumni, Steven Mnuchin, MrTrump’s choice for treasury secretary, and

Gary Cohn, the head of his National Eco-nomic Council. For his commerce secre-tary, Mr Trump has picked Wilbur Ross, abillionaire businessman who is also a pro-tectionist, having made a fortune by buy-ing and turning around stricken Americansteel and textiles mills, which he argues re-quire stiffer protective tariffs.

Reflecting Mr Trump’s outsider status,around half his appointees are non-politi-cians, including perhaps the most impor-tant, Mr Bannon and Mr Trump’s othermain adviser, Jared Kushner, his 36-year-old son-in-law. Ascion ofa billionaire NewYork property developer, and a reformedmetropolitan liberal, Mr Kushner is insome ways similar to Mr Trump. He is mar-ried to Mr Trump’s daughter, Ivanka, whois expected to take on many of the usualduties of a White House consort, and is asruthless as he is influential. GovernorChris Christie of New Jersey, whom Mr

TREASURYSTEVE MNUCHINFormerly withGoldman Sachs,movie producer

EDUCATIONBETSY DEVOSBillionaire, fan ofschool vouchers

HOMELAND SECURITYJOHN KELLYRetired general, incharge of buildingthe “wall”

VETERANS AFFAIRSDAVID SHULKIN

Doctor, currentundersecretary at VA

T H EC A B I N E T

O t h e r s e n i o r

C A B I N E T - L E V E L O F F I C I A L S †

p o s i t i o n s

VICE-PRESIDENTMIKE PENCEHas whatMr Trump lacks:Washingtonexperience

DEFENCEJAMES MATTIS

Retiredgeneral, aka“Mad Dog”

JUSTICEJEFF SESSIONSSenator from

Alabama, earlyTrump supporter ENVIRONMENT

SCOTT PRUITTAttorney-generalof Oklahoma,self-describedleading advocateagainst EPA

BUDGETMICK MULVANEYCongressman,fiscalconservative

CentralIntelligenceAgencyMIKE POMPEOCongressman from Kansas

National TradeCouncilPETER NAVARROAcademiceconomist

National EconomicCouncil

GARY COHNPresident,

Goldman Sachs

Director of nationalintelligenceDAN COATSFormer ambassadorto Germany, senator from Indiana

National-security adviserMIKE FLYNNEx-lieutenant general,headed DefenceIntelligence Agency

Chief strategistSTEVE BANNONBreitbart News, whichhe called “the platformfor the alt-right”

Homeland-security adviserTHOMAS BOSSERTGeorge W. Bushsecurity aide

Regulatory tsarCARL ICAHNBillionaire

activistshareholder

Public-liaisonadviser

ANTHONYSCARAMUCCI

Financier

CounsellorKELLYANNE CONWAYTrump-campaign manager

Cyber-securityRUDY GIULIANIFormer New YorkCity mayor

Senior adviserJARED KUSHNERSon-in-law

TRADEROBERT

LIGHTHIZERTrade lawyer,protectionist

UN AMBASSADORNIKKI HALEY

Governorof SouthCarolina

SMALL BUSINESSLINDA McMAHON

Wrestlingentrepreneur

CHIEF OF STAFFREINCE PRIEBUSHead of RepublicanNationalCommittee

INTERIORRYAN ZINKECongressman,from Montanaformer Navy SEAL

STATEREX TILLERSONOilman, cosy withVladimir Putin

“First Daughter”IvankaTrump

DonaldTrumpjunior Son

First LadyMelaniaTrump

EricTrumpSon

F A M I L Y T r u m p O r g a n i s a t i o n

COMMERCEWILBUR ROSS“King of bankruptcy”,investor, helpedMr Trump avoidpersonal bankruptcy

LABOURANDREW PUZDERFast-food executive,opposed to raisingminimum wage

HEALTHTOM PRICECongressmanand doctor, hates“Obamacare”

HOUSINGBEN CARSONRetired neurosurgeonTRANSPORTATION

ELAINE CHAOLabour secretaryunder GeorgeW. Bush, marriedto Senate MajorityLeader

ENERGYRICK PERRYEx-governorof Texas, oncevowed to abolishthe agency

82%

65

83

86%

52

74

55%

87

96

9% 14%

4

4

nil

nil

Barack Obama

George W. Bush

CABINET-LEVEL PICKS, % Male White Gov. experience Ex-generals Billionaires

Donald Trump

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Requires Senate approval

Climate-change scepticSources: Bloomberg; The Economist

Picture credits: AFP; AP; Bloomberg; EPA; Getty Images; Reuters *At January 19th 2017 Still to be announced: †Chairman of the Council of Economic Advisers

�

�AGRICULTURESONNY PERDUEFormer governor of Georgia

You’re hired!Donald Trump’s proposedcabinet-level and seniorWhite House officials*(and family)

16 Briefing The Trump administration The Economist January 21st 2017

1

2 Kushner axed as head of the transition, canattest to that.

The fact that many of Mr Trump’s picksare plutocrats reflects his preference forpragmatists over pointy-heads, as well ashis belief that moneymaking is a transfera-ble skill. That was the underlying logic ofhis own candidacy. He also likes toughguys, ideally in uniform, hence his selec-tion of three former generals: James Mattisand John Kelly, both former marines, at, re-spectively, the Pentagon and the Depart-ment of Homeland Security, and MichaelFlynn, his national-security adviser. MrTrump assured a crowd in Ohio that hiscabinet would include the “greatest killersyou’ve ever seen”.

His nominees’ ability to look the part,Hollywood-style, is indeed said to be animportant consideration for Mr Trump.“He’s very aesthetic,” one of his adviserstold the Washington Post. “You can comewith somebody who is very qualified forthe job, but if they don’t look the part,they’re not going anywhere.” In the case ofthe stern Mr Kelly and craggy-faced MrMattis—whose nickname, “Mad Dog”, MrTrump enunciates with relish—this ap-pears to have worked out well.

Divided and rulingMr Mattis owes his moniker to his combatrecord and fondness for scandalising civil-ians; it’s “fun to shoot some people”, hetold a crowd in San Diego. Yet he owes hisreputation as a commander to his thought-fulness, interest in history and concern forhis soldiers. “He’s perfect for Trump,” saysMichael O’Hanlon of the Brookings Insti-tution, who has worked closely with thegeneral. “His toughness gets him throughthe door. But he’s actually an intellectual inGenghis Khan clothing.” MrKelly is also re-spected, including for the understandingof America’s southern neighbours he de-veloped while heading the US SouthernCommand. That was apparent in his Sen-ate hearing, in which he said the borderwall that is Mr Trump’s signature promisewould not alone be sufficient to block ille-gal immigration: a “physical barrier, in andof itself, will not do the job.”

In another transition, such an array ofmilitary men would have sparked con-cerns for the civil-military balance; MrMattis had to obtain a waiver of a rule re-stricting former soldiers from becomingdefence secretary. That Messrs Mattis andKelly have nonetheless been welcomed onCapitol Hill reflects a fear, among Republi-cans and Democrats, that it will take atough guy to stand up to Mr Trump. “I firm-ly believe that those in power deserve fullcandour,” said Mr Kelly when asked for hisassurance on this. The highest-ranking offi-cer to have lost a child fighting in Iraq or Af-ghanistan, he is unlikely to be bullied.

This also seems to be true of MrTrump’s most intriguing cabinet appoint-

pingly partisan and Islamophobic—or asColin Powell put it, “right-wing nutty”—at-tacks on Mr Obama, Mrs Clinton and Mus-lims. Even if paired with a more emotion-ally stable commander-in-chief, Mr Flynnwould be a concern.

Yet the biggest uncertainty surroundingMr Trump’s cabinet concerns less the cali-bre of its members than the agenda theywill pursue. It is hard to exaggerate how di-vided his team is on the big policy ques-tions. Some members of the economicteam, including Mr Mnuchin, who will beprimarily busy with Mr Trump’s promisedtax cuts, and Mr Cohn, who will play a co-ordinating and shaping role, are broadly infavour of free trade. Yet the likeliest archi-tects of Mr Trump’s trade policy, Mr Ross,Mr Bannon and Mr Navarro, are economicnationalists.

Similarly, Mr Mattis and Mr Tillersonappear to hold mainstream conservativeviews; both say it behoves the UnitedStates to uphold international rules, ideal-ly by working through traditional alliancessuch as NATO. Mr Trump, however, hassuggested that NATO could be “obsolete”.Mr Tillerson also said that America shouldnot quit the UN’s Paris accord on climatechange; MrTrump hasboth vowed to “can-cel” the agreement and said that he was“open-minded” about whether to honourit or not.

MrTrump acknowledged the conflict ina tweet: “All my cabinet nominee[s] arelooking good…I want them to be them-selves and express their own thoughts, notmine!” Was he suggesting his nominees’views matter more than his own? Does heenvisage them capably governing whilehe, Mr Kushner and Mr Bannon set aboutmaking the great changes Mr Trump haspromised? Or will this be a squabblingtalking-shop of a government, over whichMr Trump will preside watchfully, beforeswooping down on one side of an argu-ment or another? That is how he has man-aged his business; it is also the role heplayed in “The Apprentice”.

Even those familiar with Mr Trump’sthinking cannot say how he means to gov-ern. “Trump is a wildcard, a political blackswan, we don’t know how pragmatic he’llbe or how dogmatic,” says Stephen Moore,who helped write his economic policy. Yetsome of his team’s current preoccupationsoffer early clues.

Deciphering DonaldOne is a House Republican tax proposalthat could indicate how protectionist MrTrump is. Known as “borderadjustability”,it is central to an ambitious House Republi-can tax plan and is intended to boost ex-ports by scrapping tax on foreign sales,even as firms would lose the right to de-duct the cost of imports from their profits.An additional advantage, some of its pro-ponents suggest, is that border adjustabil-

Terrible ratings

Source: Gallup

Pre-inauguration favourable ratingsof presidents-elect, %

0

20

40

60

80

(1993) (2001) (2017)

BillClinton

GeorgeW. Bush

(2009)

BarackObama

DonaldTrump

ment: Rex Tillerson, the former boss of Ex-xon Mobil, whom he has tapped to be sec-retary of state. This was at first denouncedas further evidence of Mr Trump’s strangecrush on Vladimir Putin’s regime, withwhich Mr Tillerson has done a lot of busi-ness, as well as his climate-change scepti-cism. That may be right on both counts. Inhis confirmation hearing, Mr Tillersoncalled for better relations with Russia andwas, at best, vague about what steps hewould take to counter global warming. Yethe appeared more measured in his view ofthe world than some of Mr Trump’s otheradvisers, including Mr Bannon and MrFlynn, who want to forge an alliance withRussia to fight Islamist militancy.

Mr Tillerson denounced Russia’s inva-sion of Ukraine as an “illegal action”,spoke up for NATO and said he looked for-ward to working with the Senate “particu-larly on the construct of new sanctions”against Russian aggression. He even of-fered a dash ofWilsonian warmth: “We arethe only global superpower with themeans and moral compass capable ofshaping the world for good.” Mr Tillersonappears to have the authority and judg-ment necessary to steer Mr Trump’s bellig-erent instincts into the realm of realism.

In short, this looks like a curate’s egg ofan administration. In Messrs Cohn, Kelly,Mattis, Mnuchin, Perry and Tillerson, MrTrump has assembled a group of success-ful people who appear to have at leastsome of the requisite qualities to run thegovernment. That could also turn out to betrue of Mr Trump’s choice for educationsecretary, BetsyDeVos, a billionaire Repub-lican benefactor and advocate for schoolchoice—though the results of her experi-ments in her native Michigan are not allthat impressive. Mr Carson, Mr Pruitt andMr Sessions look like awful appointments.

Mr Flynn may be worse. A gifted intelli-gence officer, with a flair for institutionalreform, he was sacked as head of the De-fence Intelligence Agency in 2014, alleged-ly for poor management skills. Alreadycritical of the president’s approach to fight-ing Islamist militancy, Mr Flynn proceededto get mad. He horrified former comradeslast year by launching several eye-pop-

18 Briefing The Trump administration The Economist January 21st 2017

1

2 ity could looksufficiently like an import ta-riff for Mr Trump to claim that he hadexecuted his threat to slap a tariffon Amer-ican outsourcers, without causing any-thing like the same economic damage. Yetit seems Mr Trump’s protectionist rhetoricis in earnest. “Anytime I hear border ad-justment, I don’t love it,” MrTrump told theWall Street Journal on January13th.

After tax cuts and new trade terms, MrTrump’s biggest economic promise is de-regulation. He should find quickwins in fi-nance and energy. But his pledge to scrapand replace Obamacare, with the manyrulesattached to it, will be a more dauntingtest of his political skills. Because Demo-cratic senators could filibuster away anybill to repeal the health-care programme,the Republicans plan to starve it of moneyuntil the insurance markets that underpinit collapse. Many think that, presentedwith a fait accompli, the Democrats wouldgrudgingly support whatever alternativescheme they are offered. But Mr Trump ap-pears unconvinced by this, and he is prob-ably right to be.

Slow starvation of Obamacare wouldensure many hard-luck stories, for whichthe Republicans would be blamed. An al-ternative ploy would be to make relativelyfootling changes to Obamacare and de-clare victory. It would be hard to persuadethe Republicans in Congress to swallowthat. But as Mr Trump claimed on January14th to be putting the final touches to a planthat would involve “insurance for every-body”, somewhat like Obamacare, andunlike any Republican proposal, perhapsthis is what he has in mind.

Deal orno deal?Besides the small matter of whether MrTrump means to launch a trade war, apressing foreign-policy question concernsRussia. Mr Trump, Mr Bannon and MrFlynn want a better relationship with MrPutin. “But what will they give up for it?”asks Nicholas Burns, a former Americanambassador to NATO. Mr Trump has sig-nalled thathe mightdrop some ofthe sanc-tions Mr Obama placed on Russia after itsintervention in Ukraine. Perhaps he wouldalso consider scrapping American troopdeployments to Poland and the Balticstates. Either step would be viewed byNATO’s European members as evidencethat Mr Trump’s apparent disdain for thealliance is for real.

This need not go badly. Mr Trump couldback-pedal on protectionism, ignore orsomehow improve Obamacare and main-tain America’s watchfully adversarial foot-ing with Russia. His administration couldturn out as well as the markets seem to ex-pect. But that would be largely down to MrTrump himself; it will not be, as some havefancifully hoped, because his administra-tion has been saved by the better angels inhis cabinet. 7

THE day after Ronald Reagan won hissecond term as president in 1984, a doc-

toral student at Harvard University pub-lished his second book. “The Policy Game:How Special Interests and Ideologues areStealing America” complained that greedyinterest groups and misguided ideologueshad led America to “a point in its historywhere it cannot grow and prosper”. Thesolution: increase political participationand swap ideology for pragmatism.

On January 20th that student, now aprofessor, will enter the White House aspart of a populist insurgency. Peter Na-varro, a China-bashing eccentric who willlead the new National Trade Council, hasemerged as the brains behind DonaldTrump’s brawn on trade. Lauded as a “vi-sionary” by Mr Trump, Mr Navarro maysoon be the world’s most powerful econo-mist working outside a central bank.

He once supported free trade. An entirechapter of“The Policy Game” extols its vir-tues, labellingthe protectionism ofReagan,who coerced the Japanese into reducingtheir car exports in 1981, as “dangerous andvirulent”. There was a hint ofhis later scep-ticism: he called for more compensationfor workers who lose their jobs to foreigncompetition, and stricter trade rules at thesupranational level. But one benefit ofsuch rules, he wrote, would be to providepresidents with an “escape from domesticprotectionist pressures…the issue wouldbe out of their hands.”

It seems that Mr Navarro’s change of

heart came decades later, after he took aninterest in China. (Like other members ofthe incoming administration, he has beenunavailable for interview in advance ofthe inauguration.) His road to China was along and winding one: his research inter-ests are broader than the average econo-mist’s. His doctoral thesis studied the rea-sons firms give to charity; his paper on thisremains his most cited work. He hasworked extensively on energy policy. In2000 or so he began studying online edu-cation, and wasan earlyadopteroftechno-logical aids in his own teaching, says FrankHarris, one ofhis former students.

Two themes emerge from Mr Navarro’szigzagging research, which, since 1989, hehas pursued at the University of Califor-nia, Irvine. The first is a preference for real-world issues over abstraction. In 2000 hewrote two papers with Mr Harris on thebest way to develop wind energy. Justmonths after the attacks of September 11th2001 he tried to calculate their economiccosts. He has written a popular bookaboutinvesting, “If It’s Raining in Brazil, Buy Star-bucks”. He is a prolific writer, but has nopublications in top-tier academic journals.

The second theme is his interest in thedistribution of income. But whereas thefortunes of rich and poor have grippedother economists, Mr Navarro has “alwaysbeen focused on a broad swathe of themiddle”, says Richard Carson, a co-author.(Mr Carson worked with Mr Navarro on apaper arguing that the growth of cities

Peter Navarro

Free-trader turned game-changer

Washington, DC

The head ofDonald Trump’s new National Trade Council is about to become one ofthe world’s most powerful economists. That’s worrying

Ready to rock

The Economist January 21st 2017 Briefing The Trump administration 19

2 should be tied to quality-of-life measures,such as traffic levels and school over-crowding.) Such concerns helped to drawMr Navarro into politics. In the 1990s heran for office several times as a Democrat,losing every race. He seems to be enjoyinghis political comeback: his television ap-pearances can deteriorate into rumbus-tious shouting matches. He is fond of hy-perbole. When he sends e-mails, his screenname appears as “ComingChinaWars”.

It is his recent work on China that led tohis unlikely hiringby MrTrump. In the pastdecade or so Mr Navarro has penned threebooks warning darkly of the dangersposed by China’s economic and militaryrise. The second, “Death by China”, be-came a documentary in 2012. Narrated byMartin Sheen, an actor and left-wing icon,the film tours communities that have suf-fered from competition with Chinese im-ports, juxtaposing shuttered American fac-tories with shots ofChinese sweatshops.

The core allegations Mr Navarro makesagainst China are not all that controversial.He accuses China of keeping its currencycheap, a common charge until 2015, whenChina began intervening in currency mar-kets in the opposite direction. He deploresChina’s practice of forcing American firmsto hand over intellectual property as a con-dition ofaccess to its market. He notes, cor-rectly, that Chinese firms pollute the envi-ronment more freely and employ workersin far worse conditions than Americanrules allow, and produce exports which of-ten benefit from government subsidies.

Trading positionsA charitable interpretation of his views istherefore that he is not a protectionist at all.Rather, he simply objects to mercantilismon the part of the Chinese. In 2006 he esti-mated that 41% of China’s competitive ad-vantage over America in manufacturingstemmed from unfair trade practices. In in-terviews he has noted the similarity be-tween this figure and the 45% tariff MrTrump threatens to levy on Chinese goods.

But this interpretation does not explainMr Navarro’s oddest views, like his opin-ion of the trade deficit. After China joinedthe World Trade Organisation in 2001, thetrade deficit exploded at the same time asmillions of manufacturing jobs vanished(see chart 1). Mr Navarro claims that, as amatter of arithmetic, unbalanced trade isresponsible for a slowdown in growthsince 2000. Mr Trump spouts similar lines,talking about the trade deficit as if it weresimply lost American wealth.

This is dodgy economics. A deconstruc-tion ofspending in the economy shows ex-ports as a positive and imports as a nega-tive. But the same accounting exercise alsoshows government spending as a compo-nent of GDP. Few economists—and certain-ly few Republicans—would say that thebigger the government, the richer the econ-

omy in the long-term. The equation showshow resources are used, not produced.

Were Americans unable to buy cheapimports, they would be poorer, with less tospend on other things. They would also beless specialised, and hence less productive,at work. Lawrence Edwards and RobertLawrence, two economists, estimate that,under certain assumptions, by 2008 tradein manufactured goods put $1,000 in thepockets of every American. China ac-counted for about a quarter of thatamount. Recent work by the Council ofEconomic Advisers has shown that tradebarriers, by raising the price of goods, tendto hurt the poorestmost (see chart2). IfChi-na exploits its workers and pollutes its riv-ers so that poor Americans can enjoycheaper goods, it is not obvious that Amer-ica is getting a raw deal.

Trade balances result primarily fromsaving-and-investment patterns. Whencapital flows in one direction, goods andservices flow in the other. China’s tradesurplus with America during the 2000swas a consequence mainly of the Chinesebuying Treasury bills, says Gordon Han-son, a trade specialist at the University ofCalifornia, San Diego. This was not neces-sarily benign. Ben Bernanke, a formerchairman of the Federal Reserve, suggest-ed in 2005 that it contributed to a “globalsaving glut”. Mr Navarro sometimes hintsat this more nuanced view. A book hewrote in 2010 with Glenn Hubbard, a more

mainstream Republican economist, ar-gued that “Asia saves too much and theUnited States consumes too much.” Yet MrTrump’s plan for tax cuts and infrastruc-ture spending, by pushing up governmentdeficits, would make this problem worse.

What might Mr Navarro recommend inoffice? He and Mr Hubbard say that Chinashould be subject to “appropriate defen-sive measures”. That probably meansmore than the retaliatory duties alreadyimposed on some Chinese goods. Mr Na-varro says that Mr Trump is merely threat-ening an across-the-board tariff, in order toexact concessions from the Chinese. Heseems to think that once they comply withglobal trade rules, the trade deficit willclose and manufacturing jobs will returnto America’s shores: “The best jobs pro-gramme…is trade reform with China.”

This is a fantasy. When manufacturingproduction moves overseas and then re-turns, productivity has usually risen in theinterim; so far fewer jobs come back thanleft. Messrs Edwards and Lawrence findthat even though the trade deficit in manu-factured goods in 2010 was about two-and-a-half times what it was in 1998, the num-ber of lost manufacturing jobs the deficitrepresented rose only very slightly, from2.5m to 2.7m. In any case, if China lost low-skilled jobs, manufacturers would relocateto other low-cost emerging economies, notAmerica, says Eswar Prasad of the Brook-ings Institution, a think-tank.

That means neither fairerplay by Chinanor tariffs could help many Americanworkers. More productive strategies areavailable. David Dollar, also of Brookings,has set out how a country could play “re-sponsible hardball” with China. He recom-mends restricting the acquisition ofAmeri-can firms by China’s state-ownedenterprises, something the Obama admin-istration cautiously started doing. Such in-vestment flows represent artificially highChinese savings rather than the invisiblehand of the market. Until now China hasinvested mainly in Treasury bonds. But it isincreasingly interested in buying Ameri-can technology firms. With restrictions im-posed, America could demand that Chinaopen up more of its services market.

What about environmental and labourstandards? The best way to improve those,argues Mr Prasad, would be to write tradedeals including rules which China willeventually have to follow. This was oneaim of the doomed Trans-Pacific Partner-ship. It is a more realistic goal than return-ing low-skilled work to America en masse.

It is possible that, in office, Mr Navarrowill lean towards these kinds of ideas. Butthere is no sign of it yet: he recently prom-ised “a seismic and transformative shift intrade policy”. Another change of opinionon trade might be too much to hope for. Aman who has waited 32 years for a revolu-tion has probably made up his mind. 7

1Free markets and free workers

Sources: US Census Bureau; BLS

United States

400

300

200

100

0

0

5

10

15

20

–

1995 2000 05 10 16

Trade deficit withChina in goods, $bn

Manufacturingemployment, m

2Tariffs as a tax

Source: Council ofEconomic Advisers

*Taxes on imported goods†After tax

United States, burden of tariffs* onhousehold income†, by decile, 2014, %

0

0.6

1.2

1.8

Poorest10%

Richest10%Income deciles

The people have spoken. Who’s listening?

films.economist.com/theagenda

Supported by

The Economist January 21st 2017 21

For daily analysis and debate on America, visit

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1

ON NOVEMBER 9th, as it started to sinkin that Donald Trump would be their

president too, Californians expressed theiranger and disappointment in different andcreative ways. Some took to the streets andburnt papier-mâché effigies of Mr Trump’sbronzed face. Others chanted “not mypresident” and waved signs that read “Im-migrants Make America Great” and “De-port Trump”. Kevin de León and AnthonyRendon, the leaders of the California Sen-ate and Assembly, respectively, released astatement.

“Today, we woke up feeling like strang-ers in a foreign land, because yesterdayAmericans expressed their views on a plu-ralistic and democratic society that areclearly inconsistent with the values of thepeople ofCalifornia,” it read. “We will leadthe resistance to any effort that wouldshred our social fabric or our constitution.”As Mr Trump takes residence in the WhiteHouse, California’s lawmakers are puttingtheir words into action.

They will have plenty of examples tofollow. During the Obama administration,Texas and Oklahoma were strident advo-cates for state sovereignty. Several otherstates also challenged the federal govern-ment in court and by making their ownlaws. Indeed calls for states’ rights and lim-ited federal power have been a definingfeature of American conservatism sincethe New Deal, says Ilya Somin, a federal-ism expert at George Mason University.

fornians could find themselves withouthealth coverage. And even though MrTrump has vowed to axe Barack Obama’sClean PowerPlan, which would have regu-lated carbon emissions from power plants,California is likely to continue complyingwith—or even exceed—the requirementslaid out in the framework. But its compa-nies might find themselves at a competi-tive disadvantage ifother states do not.

Politicians from California and otherblue states plan to resist Mr Trump usingthree main tools: legislation, litigation andcircumvention.

Start with legislation. On December 5thCalifornia’s lawmakers introduced a pack-age of laws to impede mass deportation.One bill would create a programme tofund legal representation for immigrants indeportation hearings. Andrew Cuomo, thegovernor of New York, announced earlierthis month that he would launch a similarfund. A recent national study found thatimmigrants with legal counsel were five-and-a-half times more likely to avoid de-portation than if they represented them-selves. Yet only 14% of detained immi-grants in deportation proceedings hadlawyers. Gun control, health care and envi-ronmental policy are other areas whereDemocrat-dominated states might focus inthe coming years, says John Hudak, a fel-low at the Brookings Institution.

The leaves are brownSeveral states are also getting ready to chal-lenge the Trump administration in court.Maura Healey, the attorney-general ofMassachusetts, which has a Republicangovernor, and Eric Schneiderman, the at-torney-general of New York, have both ex-pressed their willingness to square offagainst the federal government. Earlier thismonth the California State Legislature an-nounced that it had retained Eric Holder,

But with the election of Mr Trump, whoseparty controls both houses of Congressand who plans to appoint conservatives tothe Supreme Court, it is Democrats whofind themselves turning to the states asbul-warks of resistance. California, America’smost populous and progressive state, willlead the blue-state opposition.

California has plumped for Democratssince the early 1990s—Hillary Clinton wonby a margin of 30 percentage points. It isone ofsix states where Democrats hold thegovernor’s mansion and both houses ofthe state legislature. But Californians’ op-position to Mr Trump goes beyond parti-sanship. If America’s new president hon-ours his promises to deport illegalimmigrants, repeal the Affordable Care Act(better known as Obamacare) and relaxenvironmental protections, California—America’s largest economy—stands to losemore than any other state.

More than 3m undocumented immi-grants call the Golden State home, reckonsthe Migration Policy Institute, a think-tank.(Texas, the second most popular state forundocumented foreigners, has less thanhalf as many.) These workers make upnearly10% ofthe workforce and contribute$130bn—or about 5%—of the state’s annualoutput, according to a 2014 study. HealthAccess California, a consumer advocacygroup, estimates that the state governmentcould lose $22bn in federal funding annu-ally if Obamacare is gutted; some 5m Cali-

Emboldened states

California steaming

LOS ANGELES

America’s most progressive state is set to lead the newfight against federal power

United StatesAlso in this section

22 Women’s rights

22 Asian-American voters

23 Chelsea Manning

24 Lexington: History lessons

22 United States The Economist January 21st 2017

1

2 who served as Mr Obama’s attorney-gen-eral, as outside counsel. He will work withthe state’s next attorney-general to bringsuits against the federal government. Cali-fornia’s decision to hire outside counsel isdistinctive, but litigation as a means ofstalling the federal government is hardlynew. In 2010 a group of mostly Republicanattorneys-general filed a lawsuit to blockObamacare. According to analysis by theTexas Tribune, the Lone Star State sued theObama administration at least 48 timesduring Mr Obama’s term. Hiring Mr Hold-er “sends a message to the administrationabout the state’s resolve to defend our peo-ple, our diversity, and economic output,”

says Mr de León.Some potential suits are starting to take

shape. Gavin Newsom, California’s lieu-tenant-governor who will run for gover-nor in 2018, has said that the state could sueunder the California Environmental Qual-ity Act or its federal equivalent to quash MrTrump’s plans for a wall along the borderwith Mexico. The argument would rest onthe claim that construction of the wallcould upset water flows and quality aswell as wildlife. Richard Revesz, an envi-ronmental-policy expert at New York Uni-versity’s School of Law, says Democraticstates could also sue to slow the repeal ofthe Clean Power Plan.

The final way in which blue states canresist Mr Trump’s policy agenda is by try-ing to get around federal policy. Californiaalready has cap-and-trade agreementswith foreign jurisdictions such as Québec.Mr de León says that, under the Trump ad-ministration the state will work to expandsuch programmes. Since 2009 nine statesin the north-east have participated in theRegional Greenhouse Gas Initiative, a cap-and-trade programme. Even if climate pro-tections are relaxed under Mr Trump, suchan alliance could continue.

On immigration, California has legisla-tion preventing local jails from holdingpeople forextra time just so that federal im-migration enforcement officers can deportthem. So-called “sanctuary cities” in otherstates, including Chicago, New York, Seat-tle and others, have pledged to protecttheir undocumented residents in similarways. Such policies are likely to be effec-tive at obstructing a massive dragnet; thereare 5,800 federal deportation agents com-pared with more than 750,000 state and lo-cal police officers. Deporting undocu-mented immigrants without localco-operation is much more difficult.

Mr Trump has threatened to cut federalfunding for jurisdictions that insist on ad-hering to “sanctuary” policies, but Mr So-min suggests that courts may not lookkindly on such an action. In 2012 the Su-preme Court ruled that the federal govern-ment cannot force states to bend to itswishes with a financial “gun to the head”.Although much about the next four yearsis unpredictable, one thingseems clear: thecourts will be busy. 7

Women’s rights

March nemesis

OF ALL the things uttered by DonaldTrump during the election cam-

paign, none seemed to threaten hischances ofvictory more than his admis-sion, on tape, that he had grabbed wom-en “by the pussy” without their consent.Yet Republicans—and voters—eventuallylooked past his attitude towards women.Many Americans, however, remainworried that a Trump presidency heraldsa new age ofsexism and misogyny. In thedays after the election, donations towomen’s non-profit groups surged. Sodid demand for contraception, as womenworried that access to birth-controlwould be curtailed. On January 21st, theday after the inauguration, some200,000 American men and women areexpected to turn up at a march in Wash-ington to protest against regressive poli-cies and demand equal treatment for

women—and a lot more besides.The march grew from two unrelated

Facebookposts into the “Women’s Marchon Washington”, which promises to bethe biggest single anti-Trump demonstra-tion yet. It has also spawned sistermarches in New York, San Francisco,London and dozens ofother cities. Butarranging it has proved thorny. It wasoriginally called the “Million WomenMarch”, until organisers were admon-ished for appropriating the name of the1997 “Million Woman March”, whichfocused on African-American women.Others claimed that it too closely re-sembled the1963 “March on Washing-ton” led by Martin Luther King Jr. Theevent’s Facebookpage is rife with com-ments advising white women to “checktheir privilege”. Some women, put offbyall the bickering, decided not to attend.

It is the kind ofsemantic nitpickingthat has made progressive movementsunappealing to many Americans. Yet itmay have done some good: the marchhas brought together a broad coalition.Nearly 450 organisations, from the Coun-cil on American Islamic Relations toGreenpeace and the Coalition AgainstGun Violence, have signed on as officialpartners. In addition to well-troddenfeminist concerns like the wage gap andpaid parental leave, the protest platformembraces other causes—immigrant rights,ending police brutality, climate protec-tion—as integral to women’s progress.The organisers argue that matters ofsocial justice and women’s rights gohand in hand. In the comfortable Obamayears, many liberal Americans believedfeminism’s workwas mostly finished. MrTrump’s ascent banished such compla-cency. He may be the unifying enemythey need.

Donald Trump mayunwittinglybe a revitalising force forAmerican feminism

Still suffering

THE 2016 election marked a coming-outparty for conservative Chinese-Ameri-

cans, who offered Donald Trump some ofhis most passionate support among non-whites. Now some are feeling the firsttwinges of a hangover, as their hero threat-ens a trade war with China and hints thathe might upgrade ties with Taiwan, the is-land that Chinese leaders call no morethan a breakaway province.

“My members worshipped Trump reli-giously for a whole year,” says David TianWang, a 33-year-old businessman original-ly from Beijing, who founded “ChineseAmericans forTrump”, a group which paidfor Trump billboards in more than a dozenstates and flew aerial banners over 32 cit-ies. Perhaps most importantly, Mr Wang’s

Asian-American voters

Bull in a Chinashop

DIAMOND BAR, CALIFORNIA

A long-slumbering voterblockawakes

The Economist January 21st 2017 United States 23

2 members rallied supporters on Chinese-language internet forums and messagingapps includingWeChat, attractingoutsizedattention from media outlets and electedofficials in places where Asian voters canswing elections, such as southern Califor-nia. Interviewed in Diamond Bar, an afflu-ent, majority-Asian city east of Los Ange-les, Mr Wang remains a true believer. Butperhaps halfofhis members are anxiously“waiting for Trump’s next move”.

There are about 4m Chinese-Ameri-cans. Typically, most combined a mild pref-erence for Democrats with a general wari-ness of party politics. Early immigrantsfrom southern China, Hong Kong and Tai-wan lacked education, clustered in innercities and “worked in bad jobs”, makingthem prey for Democratic politicians offer-ing welfare, sniffs Mr Wang. Recent immi-grants from mainland China often attend-ed good universities, work in theprofessions and “want to mingle withwhite people”, he says. A big political mo-ment came in 2014, when Chinese-Ameri-cans mobilised against SCA5, a proposedamendment to California’s constitutionthat would have opened the door to race-based affirmative action. Many Chinese-Americans charge that race-consciousschool admissions hurt high-achievingAsian youngsters and favour black andHispanic candidates.

Asian votes helped Phillip Chen, ayoung Republican of Taiwanese descent,win a seat in the California state Assemblyin November, representing Diamond Barand a swathe of nearby suburbs. For yearsAsian-Americans, who make up about athird of his district’s registered voters,shunned politics, though they longed to as-similate and fit in in other ways. At the re-cent election his own mother’s friendswondered aloud why her son, “a niceyoung man” with a graduate degree, wasrunning for office. His Chinese-Americanconstituents admire Mr Trump’s businessacumen and worry about taxes, regulationand law and order, including a clamp-down on illegal immigration. But they alsowant peace between Taiwan and China,Mr Chen says, and so will be watching thenew president with a wary eye.

At an Asian shopping centre in Row-land Heights the most worried are those,such as Mike Lee, a sales director from Tai-wan, who backed Hillary Clinton. He fearsthat Mr Trump will use the island as a “bar-gaining chip” with China. In contrast JohnLin, a businessman from southern China,does not regret his Trump vote, cast be-cause he thinks that “generally speaking aman has more control than a woman”. Hescoffs at talk of a trade war: “Walmart can’tsurvive without Chinese products.” As forrows over Taiwan, Mr Trump just needstime to become “more familiar with theworld”. Mr Lin has strong nerves, a helpfulasset for Trump fans everywhere. 7

SLOPPY security at an American militarybase in Iraq in 2009 allowed a lowly sol-

dier to set off a diplomatic thunderstorm.Bradley Manning, a junior intelligence an-alyst, downloaded a database ofAmericangovernmentfilesonto a CD (labelled “LadyGaga” to avoid suspicion) and uploadedthem to WikiLeaks, a website devoted toexposing official wrongdoing.

The results were explosive and theprice was heavy. The hundreds of thou-sands of leaked documents included a vid-eo of a shocking American airstrike on in-nocent Iraqis, carelessly mistaken forterrorists. A caustic ambassadorial cabledescribing the sybaritic lifestyle of the Tu-nisian presidential family may havesparked the Arab Spring.

In truth, though, the leaked cablesmostly exposed nothing more than mildhypocrisy and buried literary talents. Butthey also endangered diplomats’ sources.In some countries—China and Zimbabwe,for example—candid discussions withAmerican officials are regarded as tanta-mount to treason; there and elsewhere ret-ribution duly followed. So too did costlyand secret State Department efforts to pro-tect, where possible, people who had mis-takenly trusted America’s ability to keep aconversation private.

Speedily arrested after leaving clues inan online conversation, the soldier wasjailed for 35 years on 22 charges, includingespionage. Fans decried persecution of a

brave whistle-blower, and what seemedvindictively harsh treatment, includingnearly a year ofsolitary confinement.

The cause gained added weight when,the day after being sentenced, the convictswitched name and sex: something thatwould have led to an immediate dischargefrom the army in any other circumstances.The authorities allowed her to take hor-mone-replacement therapy, but not togrow her hair.

Chelsea Manning, now aged 29, wasthe most prominent name on a list ofpresi-dential pardons and commutations, mostof which involved those serving longterms for drug offences, issued by BarackObama in the final hours ofhis presidency.Her sentence will now end in May, after al-most seven years behind bars.

Others are furious. Senator Tom Cot-ton, a former army officer, said “We oughtnot treat a traitor like a martyr.” His col-league Lindsey Graham, an air-force veter-an, tweeted that Ms Manning had“stabbed fellow service members in theback”. John McCain said the decision “de-values the courage of real whistle-blow-ers”. Such critics argue that Ms Manning ig-nored whistle-blowing criteria, such astrying internal channels first, and match-ing leaks with the purported wrongdoing.

The move also casts a spotlight on twoother cases. One is WikiLeaks’ founder, Ju-lian Assange, holed up since 2012 in the Ec-uadorean embassy in London to avoidquestioning in a Swedish sexual-assaultcase. WikiLeaks had said he would be will-ing to face trial in America for leaking se-crets if Ms Manning was pardoned. Mr As-sange says he will stand by that position.

The other is Edward Snowden, an intel-ligence contractor who fled to Russia in2013. Officials dismissed any talk of for-giveness for him, saying that the damagehe had done was far graver, and that MsManning had already served a sufficientsentence. Mr Obama said that “justice hadbeen served”.

Despite his clemency splurge, MrObama has been mostly regarded as ratherharsh on whistle-blowers. Few expect MrTrump to be lenient either. 7

Chelsea Manning

The long commute

BarackObama cuts short thewhistle-blower’s sentence

Small mercies

Source: Department of Justice

United States, presidential clemency

0 400 800 1,200

Pardons Commutations

4.4

3.6

7.6

0.1

19.8

1.1

10.1

0.4

Granted,as % of total

petitions

BarackObama

GeorgeW. Bush

BillClinton

GeorgeH.W. Bush

24 United States The Economist January 21st 2017

CAN a bad man be a good president? The potential urgency ofthis question took Lexington on a cross-country pilgrimage

to the Richard Nixon Presidential Library and Museum in YorbaLinda, California. The museum, which reopened in October afteran expensive overhaul, attempts to weigh the flaws of the 37thpresident against his undoubted merits, starting with his intelli-gence, daunting capacity for work and a poker-player’s willing-ness to take calculated risks in geopolitics.

Much thought has gone into burnishing the reputation of theonlypresident to resign the office. Anewdisplayfor the selfie gen-eration allows visitors to photograph themselves on the GreatWall of China next to a life-size Nixon cut-out, recalling his his-tory-makingvisit in 1972. Little-known momentsofphysical cour-age are remembered. Carefully preserved bullets and glass frag-ments testify to a nearly fatal mob attackon his car while visitingVenezuela in 1958 as Dwight Eisenhower’s vice-president—thedisplay explains how Nixon prevented a bloodbath by orderinghis Secret Service agent to hold fire.

The museum hails Nixon for rallying a “silent majority” ofAmericans who felt ignored and disdained by bossy, self-dealingelites. Captions suggest that Nixon balanced a conservative’swariness of big government with a pragmatist’s willingness towield federal authority to heal chronic ills, whether that involveddesegregating schools in the South to an extent that had eludedhis Democratic predecessors or creating the Environmental Pro-tection Agency to clean up rivers so polluted that they caught fire.This empathy for America’s forgotten, damaged places was allthe more remarkable because—as the museum admits via filmedinterviews with aides and family members—Nixon was a brood-ing introvert, “suspicious” to the point ofparanoia.

The Watergate scandal that felled Nixon is presented in a side-gallery filled with sombre black, red and grey panels bearing la-bels like “Dirty Tricks and Political Espionage” and “Obstructionof Justice”. In the brightly lit main halls an elegant display ex-plainshowNixon recorded White House conversationswith hid-den microphones, to preserve his presidency for posterity. Anold-fashioned telephone plays such recordings as “Daddy, DoYou Want to Go Out to Dinner?” a 1973 call from Nixon’s daughter,Julie. Walk a few yards into the Watergate gallery and the taped

recordings are ofthe president growlingabout Jews in his govern-ment, snarling, “Generally speaking, youcan’t trust the bastards.”Blazered volunteers earnestly describe Nixon’s strong and weakpoints. They work hard, with one guide spending long minutesexplaining Maoist China to two youngsters perched on the ca-nary-yellowsofas in a replica ofhisOval Office from around 1969.

Alas for keepers of the Nixon flame, the museum—whose his-torical displays have become more candid over the years, nota-bly when the complex became part of the official presidential li-brary system in 2007—is too honest for its own good. Themuseum would like visitors to judge Nixon the man, which iswhy it includes a sculpture ofa favourite dogcurled up in an arm-chair and tours of the modest cottage where he was born, backwhen Yorba Linda was a rural backwater. But it ends up telling astory larger than any one individual. It reveals how close Ameri-ca’s ship of state came to being wrecked by a particularly lethalsort ofbad leader: one guided by a broken moral compass.

The museum quotes one eyewitness to Watergate saying ofNixon’s resignation: “The system worked.” It nearly didn’t,though. A pilgrimage to Yorba Linda offers several troubling les-sons. First, Nixon employed in his cabinet and White Housemany clever men with brilliant CVs. They did little to rein in thethugs and glinty-eyed loyalists infesting his inner circle, thoughsome grandees did resign out of principle—notably the attorney-general and deputy attorney-general, who both quit rather thanobey Nixon’s orders to fire a special prosecutor closing in on him(in the end the solicitor-general did the deed). Second, and per-haps unintentionally, the museum suggests that if the SupremeCourt had not forced Nixon to release White House tapes of hisordering illegal acts, many partisans might have continued tolook the other way. A striking interview, filmed in 2008, showsBob Dole, a young senator back in 1973 who later became a partyleader and presidential candidate, conceding that he tried to con-vince himself that sinister aides were behind every misdeed. “Ididn’t want to make myselfbelieve Nixon did this, that he actual-ly participated,” he explains in a telling tangle ofwords.

A piece ofcake, until you get to the topNext, the museum records Nixon fulminating against perceivedtormentors in the press. But photographs also show him ac-knowledging its reach by speaking in a newly opened West Wingbriefing room—a facility whose future is currently in doubt. To-day, amid confected rows about “fake news”, reporters who un-earthed a new Watergate would start with roughly half the coun-try ready to disbelieve them. Finally, the Nixon museum showshow the symbolic powerofthe presidency can cow dissent, evenin this sceptical age. Toursend with a peekinto a lovingly restoredSea King helicopter used by four presidents. A reverential guidepointsouta chicwhite racingstripe along the darkgreen fuselage,painted at Jacqueline Kennedy’s suggestion. He adds, lightly, thatthe aircraft is the one that carried Nixon into enforced retirement,and museum-goers lookno less impressed.

Indoors, a diorama recreates that departure from the SouthLawn of the White House, portraying the former presidentialcouple in their helicopter seats and quoting Pat Nixon’s lament toher husband: “It’s so sad, it’s so sad.” The staging lends the scenedignity and pathos. But the moment was not sad, it was a meriteddisgrace. No political leader isan angel. Good men have been badpresidents (cf, Jimmy Carter). But the presidency is the wrong jobfor an amoral man. 7

History lessons

In inauguration week, remembering an accomplished but fatally flawed president

Lexington

The Economist January 21st 2017 25

1

EL SALVADOR was reborn 25 years ago.On January 16th 1992 the government

signed a peace accord with left-wing guer-rillas at Chapultepec castle in Mexico City,ending a 12-year civil war in which 75,000people died. The agreement, followed by atruth commission that laid bare the war’satrocities and by an amnesty, was a modelfor reconciliation in other countries. It un-derpins El Salvador’s political order today.

Stirring as that achievement was, thefestivities held to commemorate it thisweekfell flat. The convention centre in SanSalvador’s Zona Rosa, not far from whereguerrillas invaded the capital in 1989,prompting the first peace talks, was empti-er than normal for big events. A small exhi-bition, displaying military uniforms, guer-rillas’ weapons and quotes about peacefrom the likes of Confucius and John Len-non, lined the walkway to the stage. Thecrowd, clad in white, seemed more inter-ested in free pupusas (bean-and-cheesefilled tortillas) than in the speeches. Theevent ended with a confetti drop, listlessapplause and a return to the food queues.

The mood was downbeat because ElSalvador’s 6m people have little to cele-brate. The dominant feeling these days is“fear, not peace”, says Alejandro Marro-quín, a member of a breakdancing groupthat was invited to the commemoration.Having fled gang violence in greater SanSalvador four years ago, he thinks that “the

omy for now. Arena’s party song proposesa different goal. “El Salvador will be thetomb where the reds end up,” it prophe-sies. The clash “doesn’t allow for a visionof the country”, says Luis Mario Rodríguezof Fusades, a pro-business think-tank.About the only thing the parties agree on isthat the real point of wielding power is toenjoy the spoils. The result is what Salva-doreans call a “patrimonial state”, whichjustifies itself through patronage and stiflesany institution that stands up to it.

El Salvador’s leaders now finally realisethat a new peace agreement of sorts isneeded. Mr Sánchez Cerén used the com-memoration ceremony to present a specialenvoy from the UN, Benito Andión, to “fa-cilitate dialogue”. Just how Mr Andión, aMexican diplomat, will interpret that is un-clear. Some suggest that his job will be tohelp broker a peace between the govern-ment and the two main gangs, Barrio 18and Mara Salvatrucha. But the UN state-ment on Mr Andión’s appointment sayshis job is to “address the keychallenges” af-fecting El Salvador, which sounds like abroader brief. Just as in 1992, “we need dia-logue that matches today’s historical mo-ment,” declared Mr Sánchez Cerén.

Budget brinkmanshipGridlock has brought El Salvador to thebrink of economic catastrophe. After yearsof slow growth and overspending, in partto prop up a state pension scheme, the cen-tral government nearly ran out of cash latelast year. Blocked from long-term borrow-ing by the opposition, which has moreseats in congress, it stopped makingmonthly payments to municipalities.Health workers went on strike after thegovernment reneged on wage agreements.It came close to a default on its debt.

A deal in November between the gov-

war has continued. The only difference isthat now it’s between the gangs and thegovernment.” El Salvador is the most viol-ent country in the Americas, with a mur-der rate of 80 per 100,000 people—morethan 15 times that of the United States.

That is not the only disappointment.Afteran initial spurt, economic growth hasdropped to a torpid 2% or so, less than halfthe Central American average (see chart onnextpage). Corruption is rife. Two post-warpresidents face charges; another one diedlast January before he could be tried. ManySalvadoreans have given up on their coun-try. More than 40% want to leave withinthe next year, says a new poll by the Cen-tral American University. That is the high-est level since the university started askingthe question a decade ago.

A big factor behind these let-downs isthe flawsofthe main political parties, heirsto the combatantsofthe civil war. Since thepeace accord, the right-wing NationalistRepublican Alliance (Arena) and the leftistFarabundo Martí National LiberationFront (FMLN) have had turns in power.(The current president, Salvador SánchezCerén, a former guerrilla commander, be-longs to the FMLN.) They renounced war,but failed to learn statesmanship.

The antagonism between them is ab-normal for rivals in a democratic system.The FMLN still yearns forsocialism, thoughit has reconciled itself to the market econ-

El Salvador

Unhappy anniversary

SAN SALVADOR

The countryneeds a newpeace accord

The AmericasAlso in this section

26 Last Tango in Buenos Aires

28 The end of wet foot, dry foot

Bello is away

26 The Americas The Economist January 21st 2017

1

2 ernment and Arena averted disaster by al-lowing the government to issue $550m ofnew debt in exchange for agreeing to a “fis-cal-responsibility law”, which would capborrowing and spending. But that is just astopgap. The opposition, doubting that thegovernment will keep its fiscal promises,has refused to approve the budget for 2017.Anothercrisis looms. “We are playingwithfire,” says Alex Segovia, an economist.

The quarrel is partly about how to re-duce the budget deficit, which was an esti-mated 4% of GDP last year. The FMLNwants to lift the government’s low revenueby raising income tax and levying one onproperty. Arena pushes mainly for spend-ing cuts. The parties have yet to agree on aneeded reform ofpensions. A “negotiatingtable” set up last April has so far failed tocome up with a solution. The governmenthas called in the IMF, which may now bro-ker a resolution to the crisis.

A budget deal, if it happens, would un-lock just one of the many manacles on theeconomy. El Salvador’s use of the strongdollar as its currency keeps prices stablebut holds back exports. A lethargic bu-reaucracy is another obstacle: shippinggoods from El Salvador to the United Statesis no faster than from Vietnam, says an ob-

server in San Salvador. With a trade deficitof nearly 20% of GDP, El Salvador dependson remittances from 2m Salvadoreans liv-ing in the United States. Its biggest firms areconsumer-oriented conglomerates thatmainly live offthe American bounty.

Nothing constrains the economy morethan crime, which deters investment anddrives young workers out of the country.The cost of violence and insecurity is 16%

of GDP, by one estimate. Gangs extort vastsums from businesses, equivalent to 3% ofGDP. Recently, the threat of gang violencehas emptied entire villages. In Septemberone local government in western El Salva-dor set up a camp on a basketball court fordozensoffamilies thathad been ordered toleave bygangs, the first settlement for inter-nally displaced people since the civil war.

The FMLN government, which tries toseem as tough on criminals as is the oppo-sition, claims that its recent crackdown isworking. Security forces have killed 900gangmembersover the past two years. Thegovernment has largely cut off mobile-phone contact between imprisoned gang-sters and their confederates on the outside,who operate the extortion business andcarryoutmurders. The numberofmurdersdropped by 20% last year to 5,278.

Mara Salvatrucha and a faction of Bar-rio 18, perhaps weakened by the govern-ment’s offensive, have recently proposed adialogue with the government and offeredto lay down their arms. Barrio 18 even of-fered to give up extortion. The FMLN has sofar rejected negotiation.

Critics contend that the government’smano dura (iron-fist) policies have wors-ened conditions in prisons, which were al-ready appalling. They say that the killing ofgangsters by police amounts to state-spon-sored murder. Such brutality will provokemore violence, believes José Luis Sanz, di-rector ofEl Faro, a digital newspaper.

The accidental attorney-generalWhen the state does something right, it isusually in spite of the main parties ratherthan because of them. The process of ap-pointing people to such sensitive jobs asprosecutor and high-court judge is de-signed to ensure that only creatures of thepolitical parties get them. On occasion,though, less pliant candidates slip through.Such is the case with Douglas Meléndez,attorney-general since 2016, who startledSalvadoreans by pursuing corruptioncases against figures of both parties. OneFMLN ex-president, Mauricio Funes, hastaken refuge in Nicaragua. Antonio Saca,who governed until 2009 as a member ofArena, is in jail awaiting trial on chargesthat he helped embezzle $246m of publicmoney, roughly 1% of GDP. “To see a presi-dent in handcuffs was like something outof a film,” says Roberto Burgos of DTJ, anNGO that promotes good government. Theconstitutional court has also shown an in-dependent streak by challenging politicalparties’ abuses. Such checks on power areEl Salvador’sbesthope forcleaningup gov-ernment and modernising politics.

But the ruling party has responded todefiance with threats and abuse. Demon-strators encouraged by the FMLN havebeen issuingdeath threats against constitu-tional judges, says Sidney Blanco, who sitson the court.

*EstimateSources: Department of Homeland Security; IMF

Moving too slowly

El Salvador, GDP, % change on a year earlier

Salvadoreans apprehended by US borderauthorities, years ending September, ’000

020406080

2002 04 06 08 10 12 14 16

5

0

5

10

+

–

1992 95 2000 05 10 16*

Argentina

Tango in trouble

WHEN couples tango outdoors inBuenos Aires, it is usually to cadge

coins from tourists. A recent display,outside the city hall, had a new purpose:to draw attention to the plight of thecity’s milongas, tango events where thedancers’ only audience is other dancers.

Perhaps150 milongas take place week-ly in dance halls and community centresacross the capital, either in the afternoonsor after midnight. “They are the heart ofthe tango,” says Julio Bassan, president ofthe Association ofMilonga Organisers(AOM). And they are in trouble.

With a weakeconomy and high in-flation cutting into incomes, attendancefell by as much as half last year, Mr Bas-san reckons; 17 milongas closed. “Whenthere’s so much uncertainty, the firstthing that people cut backon is recrea-tion,” says Jimena Salzman, who runsthe Milonga de las Morochas (“Milongaof the Dark-Haired Women”). She char-ges an entrance fee of100 pesos ($6.25),the cost ofa cinema ticket. That putssome people off. “I love to dance, but Ineed to eat,” says Augustín Rodrigo, ateacher, who has reduced his daily tango-ing to twice a week.

A milonga is a dance as well as an

event, a forerunner to the tango thatmixes Cuban, African and Europeaninfluences. In tango’s heyday, some 70years ago, milongas attracted thousandsofdancers. Club Huracán in the city’ssouth had seven dance floors. Some clingto tradition. A man must invite a womanto dance with a cabeceo (nod). If sheaccepts, the pair will dance anti-clock-wise to a tanda, or set of three or foursongs. A cortina, a few seconds ofmusic,signals the end ofa set, during which theman escorts his partner back to her seat.

Few milongas are so conservativenow. Young milongueros prefer moderntango, which mixes the music ofclassicalcomposers like Carlos Gardel, who diedin 1935, with electronic beats. But theyoung come less often. In an age of dat-ing apps, fewer find mates in milongas.

Tango itself is in no danger. Glitzyshows are a daily event in Buenos Aires.But campaigners say neighbourhoodmilongas are tango’s spiritual home. OnDecember 7th the city council passed a“milonga promotion law”. It sets up aregistry and offers tax exemptions and9m pesos a year offinancial aid from thebudget. Like it or not, taxpayers will helpkeep milongas alive.

BUENOS AIRES

The flat-footed economyis pulling dancers offthe floor

Influence Creativity Relationships

The world belongs to people with something to say.We’ve all had our fill of politicians who waffle their way around the important issues and say nothing.

Which is why, like them or hate them, people with guts get heard.

They make the twitter timeline, the Brexit referendum and become the next President of the United States.

And, whether they’re brands or businesses, the same is also true.

Whether you want to reach government, investors, lobbyists or journalists, you need to have the pluck to say something clearly, even if it is going to put a few celebrity noses out of joint.

At Thoburns we go beyond PR and advertising and look at different ways to say interesting things; our approach is to bring a provocative mind, and a different perspective and create more than a little fun on the way.

Why not email Pepper Sells at p.sells@thoburns.com and see if we can help your organization find its voice.

thoburns.com

28 The Americas The Economist January 21st 2017

2 Independent-minded officials survivein office thanks largely to backingfrom out-side powers such as the United States. Pho-tos of Mr Meléndez in the company of for-eign ambassadors send the message thathe is not alone, notes Mr Burgos. Americansupport for the attorney-general is part ofabroader programme to improve govern-ance, investment conditions and law en-forcement in El Salvador, to weaken thelure of emigration to the United States. ElSalvador is a beneficiary ofthe Alliance forProsperity, which provides it and the two

other countries in Central America’s“northern triangle”, Guatemala and Hon-duras, with nearly $750m a year. Authori-sation to spend that money in El Salvadorprobably would have been withheld hadthe government shut Mr Meléndez down.

Salvadoreans expect that assistance tocontinue under the Trump presidency. Itsaim, after all, is to slow down immigration.That is encouraging. But something iswrong when outsiders show more of thepolitical will needed to reform El Salvadorthan do the country’s own politicians. 7

AMONG a group of young men gatheredin a tin-roofed telephone-repair shop

in Havana, the topic of conversation ishow to leave Cuba. The easiest way, theynow reckon, is to marry a European. That isbecause on January12th, in one of his finalacts as president, BarackObama ended the22-year-old “wet foot, dry foot” policy,which allowed Cubans who land onAmerican soil to stay in the country; thosecaught at sea were sent home. That shutsoff the main escape route for Cubans insearch ofa better life.

Mr Obama’s decision looks like an at-tempt to protect one of his few foreign-policy successes: his agreement withCuba’s president, Raúl Castro, in Decem-ber2014 to restore diplomatic relations andloosen an economic embargo imposed onthe island by the United States in 1960. Do-nald Trump, who will become the Ameri-can president on January 20th, has saidcontradictory things about the rapproche-ment with Cuba, but his more recent com-ments have been negative. Some membersof his transition team are fierce opponentsof the normalisation policy.

Mr Trump’s administration may thustry to undo the rapprochement with Cuba,which includes freer travel and better tele-coms links with the island. The wet foot,dry foot decision makes that harder. MrTrump does not like immigration; he willfind it awkward to reverse a decision thatmakes it more difficult. It will also be trickyto justify reopening automatic asylum forCubans but not for citizens of countriesthat are even more repressive.

Fearing that the United States wouldshut its Cubans-only entrance, many Cu-bans rushed to its borders. In fiscal year2016, which ended in September, 56,000arrived, more than double the number oftwo years before. Many paid thousands of

dollars for tickets and in bribes and fees topeople-smugglers to reach the UnitedStates’ southern border. One popular routestarted with a flight to Ecuador, followedby a perilous land journey through CentralAmerica. Some Cubans still venture intoleaky boats to cross the Florida Strait.

Mr Obama’s abrupt decision to end thewet foot, dry foot policy leaves some—noone is sure how many—stranded en routeto the United States. More than 500 are insouthern Mexico, waiting for documenta-tion from the Mexican government thatwould allow them to journey to the Amer-ican border. They will now be treated justlike others clamouring for admission,though the United States says it will try togive them humanitarian assistance.

Nearly half a million people werecaught trying to enter the United States ille-gally in fiscal 2015 (down from 1.8m in2000). They face detention until they aresent back. About a third were from CentralAmerica’s “northern triangle”, where gov-ernments are less repressive than in Cubabut violence is far worse. Cubans who face

political persecution will still have a rightto asylum. Others can apply for the 20,000migrant visas available to the country’scitizens each year.

American conservatives have slam-med Mr Obama’s wet foot, dry foot rever-sal, and his simultaneous decision to stopgiving Cuban doctors who defect from athird country fast-track entry to the UnitedStates, as his final betrayal of the Cubanpeople. The regime has become more re-pressive since he unfroze relations, theymaintain. Arrests of dissidents, for exam-ple, have increased.

Defenders of Mr Obama’s thaw pointout that the government now uses short-term detention rather than long jail sen-tences to discourage its opponents. Thenumber of political prisoners has fallensharply. Although Mr Trump has com-plained that the United States gets “noth-ing” from its new relationship with Cuba,it has led to co-operation in such areas asdrug-trafficking and cyber-crime.

In Havana, the reaction to Mr Obama’sgambit is mixed. Cuba’s government,which saw the wet foot, dry foot policy asan insult and a cause of a damaging braindrain, is pleased. Some ordinary folk thinkthe change is justified. Wet foot, dry footwas just “another way to implement theblockade”, said a well-dressed womanwho would not give her name. Barbara Iz-quierdo, a housewife whose brother wentto the United States 15 years ago, admitsthat most Cubans leave for financial rea-sons, not political ones.

But many Cubans, living on monthlyincomes of $50-200, are crestfallen. “Wedon’t live, we survive,” says a young manwho works in property. He had hoped toleave and then to return to “build some-thingformyself”. He mustnowwait for thegovernment to allow greater economicand political freedom. The death last No-vember of Fidel Castro, the leader of theCuban revolution, and Raúl Castro’s planto step down as president next year, mayhelp bring change. Ambitious Cubans, de-nied the prospect ofescaping to the UnitedStates, may now push harder for that. 7

Cuban migrants

Special no more

HAVANA AND MEXICO CITY

The end ofwet foot, dryfoot

Floating to Florida is now futile

The Economist January 21st 2017 29

For daily analysis and debate on Asia, visit

Economist.com/asia

1

“CAMBODIAisa thin piece ofham be-tween two fat pieces ofbread,” says

a former Cambodian minister, as he stirs aglass of iced coffee. To Cambodia’s west isThailand, which has more than four timesas many people; the two countries have adormant but unsettled border dispute. Tothe east isVietnam, nearly six times aspop-ulous, which invaded Cambodia in 1979and occupied it for ten years. So Cambodiahas done what small countries always do:it has found a protector.

As long ago as 2006 Hun Sen, Cambo-dia’s prime minister, declared China hiscountry’s “most trustworthy friend”. Chi-na’s past three presidents have all visitedCambodia, offering lavish aid and invest-ment. The current one, Xi Jinping, declaredMr Hun Sen “an ironclad friend”. China isCambodia’s biggest source of foreign di-rect investment by far: in 2015 it contribut-ed a greater share to the total than all othercountries combined (see chart). Cambodiahas continued to accept Chinese largessewith glee, even as most ofthe rest of South-East Asia grows ever warier of its giantneighbour to the north (Laos, an even thin-ner slice of ham just north of Cambodia, isan exception). The ramifications of thestrengthening relationship extend well be-yond Cambodia’s borders.

China has long taken an interest inCambodia. When America backed LonNol, a strongman who seized power in1970, China supported his opponents: No-rodom Sihanouk, the deposed king; and

infrastructure and hydropower. Othershold at least 369,000 hectares of land con-cessions on which they grow sugar, rubber,paper and other crops.

The government is often willing tobend the rules forChinese firms. One is de-veloping a luxury resort inside a nationalpark on the edges of Sihanoukville, thecountry’s main port. Another has won de-velopment rights over some 20% of Cam-bodia’s coastline. Human-rights groups al-lege that fishermen who had lived in thearea forgenerations were summarily evict-ed, taken inland and told that they werenow farmers.

Each side gets somethingout ofthe rela-tionship. For Cambodia, the most obviousbenefit is economic: it is poor and aid-dependent; Chinese money lets it buy andbuild things it could not otherwise afford.Phay Siphan, a government spokesman,said last year: “Without Chinese aid, we gonowhere.”

But there are also two strategic benefits.First, Cambodia uses China as a counter-weight to Vietnam. Among ordinary Cam-bodians, anti-Vietnamese sentiment runsdeep. Many bitterly recall the Vietnameseoccupation and some demand the returnof “Kampuchea Krom”—the delta of theMekong river, which today is part of Viet-nam, but is home to many ethnic Cambo-dians and was for centuries part of theKhmer Empire. Since Vietnam harbouredMr Hun Sen, the opposition depicts him asa Vietnamese puppet. Closeness to Chinahelps to defuse such claims.

Cambodia also uses China as a hedgeagainst the West. Chinese money comeswith no stringsattached, unlike most West-ern donations, which are often linked tothe government’s conduct. When Mr HunSen mounted a putsch against his coalitionpartners in the 1990s, Western donors sus-pended aid. China boosted it. Westernersmay threaten to cut funding again if, as is

the Khmers Rouges, who displaced LonNol in 1975 and then murdered around 2mof their countrymen. China continued tosupport the Khmers Rouges even after theVietnamese invasion pushed them out.But once Mr Hun Sen, a defector from theKhmersRougessheltered byVietnam, fullyconsolidated power in the 1990s, China be-gan assiduously courting him.

China provides military aid: uniforms,vehicles, loans to buy helicopters and atraining facility in southern Cambodia. Be-tween 2011 and 2015 Chinese firms fun-nelled nearly $5bn in loans and invest-ment to Cambodia, accounting for around70% of the total industrial investment inthe country. Chinese firms run garmentand food-processing factories and are alsoheavily involved in construction, mining,

Chinese influence in South-East Asia

The giant’s client

PHNOM PENH

WhyCambodia has embraced China, and what that means for the region

AsiaAlso in this section

30 Thailand’s rotten schools

31 Mumbai’s hawkers under attack

31 An expenses scandal in Australia

32 Roads to nowhere in Pakistan

Middle blingdom

Source: National statistics

Cambodia, foreign direct investmentInflows, $bn

0

0.3

0.6

0.9

1.2

1.5

1.8

2011 12 13 14 15

From China

From othercountries

30 Asia The Economist January 21st 2017

2 likely, the government rigs elections nextyear (this week Mr Hun Sen again suedSam Rainsy, the exiled leader of the mainopposition party, for defamation, one ofmany steps seemingly intended to neuterhis opponents). Chinese money will makeit much easier for Mr Hun Sen to shrug offWestern protests.

As for China, it gets a proxy within theten-country Association of South-EastAsian Nations (ASEAN). Cambodia has re-peatedly blocked ASEAN from makingstatements that criticise China’s expansiveterritorial claims in the South China Sea,even though they conflict with those ofseveral other ASEAN members. Last year,less than a weekafter Cambodia endorsedChina’s stance that competing maritimeclaims should be solved bilaterally, Chinagave Cambodia an aid package wortharound $600m. (Mr Hun Sen insists thetwo were not related.)

China also seems to be eroding Ameri-ca’s clout in the region. For the past eight

years Cambodia has held joint military ex-ercises with America, but this week it an-nounced that it would not do so this yearor next. Cambodia and China, meanwhile,staged an eight-day joint exercise in No-vember. The two countries also held theirfirst joint naval exercises last year.

ASEAN’s long-standing complaint, thatChinese influence on Cambodia hindersregional unity, is growing moot: over theSouth China Sea, at least, that unity ap-pears to have disintegrated anyway. ThePhilippines, which took China to an inter-national tribunal over its maritime claims,has reversed course. Its new president,Rodrigo Duterte, expresses contempt forAmerica and affection for China. Vietnam,China’s other main adversary in the sea,recently pledged to resolve its maritimedispute bilaterally. Nobody yet knowswhat America’s policy on the South ChinaSea will be under Donald Trump, but in-creasingly it looks as if Cambodia haspicked the winning side. 7

EVERYONE knows that nurturing brain-boxes is good for an economy. In Thai-

land, school reformershave an extra incen-tive: to narrow differences between richpeople in cities and their poorer rural cous-ins, which have led to a decade of politicaltension and occasional eruptions of vio-lence. For years shoddy teaching has fa-voured urban children whose parents canafford to send them to cramming schoolsor to study abroad. Dismal instruction inthe countryside has made it easier for cityslickers from posh colleges to paint theirpolitical opponents as pliable bumpkins.

The dangerous social divide is all themore reason to worry about Thailand’spoor rating in an educational league tablepublished in December. Thailand limpedinto the bottom quarter of 70 countrieswhose pupils participated in the maths,reading and science tests organised underthe Programme for International StudentAssessment (PISA). Its scores have deterio-rated since a previous assessment in 2012,when researchers found that almost one-third of the country’s 15-year-olds were“functionally illiterate”, including almosthalfof those studying in rural schools.

Thailand’s dismal performance is notdramatically out of step with countries ofsimilar incomes. But it is strange given itsunusually generous spending on educa-tion, which in some years has hoovered up

more than a quarter of the budget. Rotelearning is common. There is a shortage ofmaths and science teachers, but a surfeit ofphysical-education instructors. Manyhead teachers lack the authority to hire orfire their own staff. Classrooms are sternand bullying teachers numerous: in one in-cident that caused uproar in the media lastyear, a PE instructor was alleged to havestrucka schoolgirl in the face with a mug.

A big problem, argues Dilaka Lathapi-

pat of the World Bank, is that Thailandspends too much money propping upsmall schools, where teaching is poorest.Almost half of Thai schools have fewerthan 120 students, and most of those haveless than one teacher per class. Openinglots of village schools once helped Thai-land achieve impressive attendance rates,but road-building and other improve-ments in infrastructure mean most schoolsare now within 20 minutes of another.Over the next ten years falling birth rateswill reduce school rolls by more than 1m,making it ever more difficult for tiny insti-tutions to provide adequate instruction ata reasonable cost.

Prayuth Chan-ocha, Thailand’s primeminister and the leader of its junta, saysschool reform is urgently needed. Butsome of his goals are aimed more at boost-ing his and the monarchy’s prestige thanmaking children smarter. Soon after takingpower in a coup in 2014 Mr Prayuth grum-bled that few Thai children could cite theachievements of long-dead kings. He or-dered schools to display a list he drew upof12 “Thai” values, including obedience toelders, “correctly” understanding democ-racy and loyalty to the monarch.

Insiders say that some officials areworking on better approaches. In June thegovernment restarted a long-stalled planto merge small schools; authorities saythey hope to subsume more than 10,000schools over four years. Analysts worrythat the junta’s effort to re-centralise gov-ernment will deprive good schools of in-dependence. But they also hope it willeventually allow reformers to force an os-sified education system to adopt the bestof international practice. There is talk ofeducation reform in a vague 20-year planwhich the junta has promised to bequeathto the nation, and which future electedgovernments will be constitutionallybound to follow. Better hope that the armysets only its sanest policies in stone. 7

Education in Thailand

Not rocket science

To soothe Thailand’s bitterpolitics, first fixits rotten schools

I must not oppose military coups

The Economist January 21st 2017 Asia 31

Politics in Australia

Going for gold

HAVING scraped back to power with aone-seat majority last year, Malcolm

Turnbull always expected “plenty ofsurprises and challenges in 2017”. He didnot expect them to start so soon. OnJanuary13th the prime minister acceptedthe resignation ofSussan Ley, his healthminister, after claims that she had mis-used taxpayers’ money. As the scandalerupted, the government was pursuingspending cuts and clamping down onsome welfare recipients in a bid to bal-ance the budget. That made it all themore embarrassing that Ms Ley hadbought an investment property worthalmost A$800,000 ($600,000) in 2015,while on a government-paid visit to theGold Coast in Queensland.

Ms Ley tried to explain the apparentblurring ofpublic and private businessby suggesting, to widespread derision,that she had bought the flat on impulse. Astring of revelations followed: she hadcharged taxpayers for several other GoldCoast trips; two were to New Year’s Eveparties hosted by a businesswoman whohad donated money to the ruling LiberalParty; she had chartered planes to fly toofficial engagements instead of takingcommercial flights at a fraction of the cost(she is a pilot) and so on. Ms Ley calledthe furore a “distraction” but has agreedto repay some of the money she claimed.

Ms Ley has been one of the moretalented and colourful members ofMrTurnbull’s cabinet. Born in Nigeria, she

has been a cattle farmer, a cookfor sheepshearers and an official in the AustralianTaxation Office. Yet she failed to heed thelessons of“Choppergate”, an expensesscandal that rocked the government17months ago. Bronwyn Bishop, thenspeaker of the lower house, quit after thedisclosure that she had spent more than$5,000 chartering a helicopter to attend aLiberal fundraising event. Politiciansfrom both sides have charged taxpayersthousands to fly their families with themto events in the farthest corners of thecountry. Australians have paid for JulieBishop, the foreign minister, to attend apolo match. Steve Ciobo, the trade min-ister, says taxpayers “expect” to pay forpoliticians to go to sporting events.

Perhaps. But opaque rules have givenpoliticians leeway in judging how muchthey can get away with. An inquiry afterChoppergate called the laws on parlia-mentary expenses a “complex patch-work” that was “close to impossible” tounderstand and administer. In the wakeof the latest scandal, Mr Turnbull haspromised to shift responsibility for over-seeing MPs’ claims to a new independentagency run by auditing experts, a formerjudge and a former MP. Politicians willalso have to disclose expenses monthlyinstead of twice a year. Mr Turnbullreckons the new system’s independenceand openness will “make a very bigchange”. This year will be all the trickierfor him if it does not.

SYDNEY

Aseries ofscandals prompts tougherrules on politicians’ expenses

AGOOD street-food stall is the one placein Mumbai where the posh and the

poor might rub shoulders, if only for thefew seconds it takes to gobble down a sa-voury snack. You can be sure the vendorhimself will have come from the latter cat-egory: hawking, as it is known, rivals taxi-driving as a time-tested route from ruralpoverty to somethinga little lesswretched.But nativist politicians may change that: inthe name of helping hawkers, they are try-ing to impose new rules that would barmost of them from the trade.

Life was supposed to be getting easier

for Mumbai’s 150,000-odd hawkers. In2014 the national parliament passed a lawthat required states to formalise the prac-tice, for instance by issuing licences anddesignating areas where it was expressly

permitted. States have been slow to com-ply. The government of Maharashtra, ofwhich Mumbai is the capital, had been sit-ting on its hands for three years. It only de-cided to act in the run-up to municipalelections in February.

The draft rules, however, include a re-quirement that would-be hawkers bedomiciled in Maharashtra. Under locallaw, domicile comes only after 15 years ofresidence. Few hawkers are likely to be eli-gible: most are immigrants from poorernorthern states. Even those who havebeen living in the city for decades wouldhave trouble proving their status, sincethey tend to live in informal dwellings andso cannot prove an address.

The proposed rule is the work of theShiv Sena, a party that blends Maharash-trian chauvinism with Hindu nationalism.(Its previous triumphs include renamingBombay as Mumbai in 1995, in a bid tocleanse the city of any vestige of colonial-ism.) Elections to the city council are pit-ting it against the Bharatiya Janata Party ofIndia’s prime minister, Narendra Modi,with which it rules both the city and thestate in uneasy coalitions.

The proposal may not be legal. Al-though India is a federal country, states donot have the right to barother Indians fromsettling or working. The national govern-ment is trying to pull down internal eco-nomic barriers: it has fought hard to re-place local levies with a pan-Indian goodsand services tax.

Many of Mumbai’s hawkers may notbother with the new system. Only 14,000of them make use of the existing one, al-though at least ten times thatnumber oper-ate, according to unions that representthem. Those who obtain a licence, how-ever, ought to find it easier to stand up tobribe-demanding cops and bureaucrats. Apolitician for the opposition Congresspartyclaims the current system allows offi-cials to squeeze some 3bn rupees ($44m) amonth from hawkers. If such bounty is in-deed to be had, expect the new rules tokeep hawkers on the fringes of legality. 7

Street vendors in Mumbai

Stabbed in thesnackMUMBAI

State legislators decide that not allhawkers are created equal

Can I see your licence?

32 Asia The Economist January 21st 2017

NEARLY 20 years after it opened, Paki-stan’s first motorway still has a deso-

late feel. There is scant traffic along the375km link between Islamabad and La-hore (pictured). Motorists can drive formiles without seeing another vehicle, saveperhaps for traffic cops manning speedtraps. As the two cities are already connect-ed by the Grand Trunk Road, which is90km shorter and toll-free, there is simplynot much demand for a motorway.

Yet this $1.2bn white elephant is one ofthe proudest achievements of Nawaz Sha-rif, who was prime minister when itopened in 1997 and is once again runningPakistan. Mr Sharif, who enjoys compari-sons to Sher Shah Suri, a16th-century rulerwho renovated the Grand Trunk Road,never tires of talking about it. He regainedpower in 2013 with a campaign which bothharked back to his famous road and prom-ised more infrastructure to come. He evenpledged bullet trains that would enable pi-ous passengers to leave Karachi after dawnprayers and arrive in Peshawar, more than1,000km to the north, in time for eveningworship.

It is an article of faith for Mr Sharif andhis party, the Pakistan Muslim League Na-waz (PML-N), that investment in infrastruc-ture is a foolproof way of boosting theeconomy. His government is racing to fin-ish umpteen projects before the next elec-tion, due by mid-2018, including a metroline in Lahore and a new airport for Islam-abad. The likelihood is that the newairport(which has been plagued with problems,includingrunways thathave been built tooclose together) will be as underused asmost of the country’s other airports, manyofwhich are modern and spacious.

Pakistan’s infrastructure is underusedbecause the economic boom it was meantto trigger has never arrived. Over the pastthree years the government has successful-ly staved off a balance-of-payments crisis,achieving some measure of macroeco-nomic stability. It has trimmed the budgetdeficit, partly by broadening the tax takeand partly by cutting energy subsidies.That, along with lower oil prices, has nar-rowed Pakistan’s trade deficit and allowedit to begin rebuilding its foreign-exchangereserves. The stockmarket has risen by 50%since the end of2015.

But terrorism and insurgency have putoff investors, both foreign and domestic.The country is also held back by inefficientand often cartelised industries, which

have fallen behind rivals in India and Ban-gladesh. Exports, 60% ofwhich are textiles,have been shrinking for years. Much moreneeds to be done to create an educatedworkforce. Almost half of all those agedfive to 16 are out of school—25m children.Health, like education, is woefully under-funded, in part because successive govern-ments shy away from taxing the wealthy.Only 0.6% of the population pays incometax. As the World Bank puts it, Pakistan’slong-term development depends on “bet-ter nutrition, health and education”.

Cement to beBut Mr Sharif’s government is pinning itshopes on yet more infrastructure to fix thecountry’s economic problems, in the formof a $46bn investment scheme known asthe China-Pakistan Economic Corridor(CPEC). Much of it is being financed oncommercial terms, including several pow-er plants. Pakistan undoubtedly needs torelieve a chronic shortage ofelectricity. Butcritics fear the country will struggle to payback the debt, especially if foreign-ex-change earnings from exports continue todwindle. At the very least, the governmentwill need to continue chasing deadbeatcustomers to pay their bills and cutting ex-pensive subsidies—steps that are deeplyunpopular.

In addition to boosting Pakistan’s pow-er supply, CPEC is supposed to link China

by land to Gwadar, a deep-water port onthe Arabian Sea, in the hope of creating alucrative new trade route. New or upgrad-ed roads will stretch the length ofthe coun-try. The Karakoram Highway between thetwo countries, which was built in the 1960sat vast expense over a high and crumblymountain range, is being upgraded as partof the trade corridor. But it forever needspatching up and is little used. Sceptics sayXinjiang, China’s westernmost region, isstill too poor for better transport links tomake much difference to Pakistan’s econ-omy. Securing isolated stretches of roadfrom separatist rebels in Balochistan is alsogobbling up large amounts ofcash.

Lijian Zhao, a Chinese diplomat, saysChina is all too aware that Pakistan needsmore than just big-ticket infrastructure if itis to flourish. Disarmingly, he praises the ef-forts of Britain and other countries to im-prove Pakistan’s “software”, such as educa-tion and the rule of law. “But China’sexpertise is hardware,” says Mr Zhao.

It may not concern Mr Sharif unduly ifthe next generation of roads is as desertedas the last. Civilian governments have of-ten struggled to get much done in betweenmilitarycoups, butvotersare impressed bygleaming new projects, even if they neveruse them. It’s an approach that has workedfor Mr Sharif’s brother, Shehbaz, the popu-lar chief minister of Punjab province. Hehas lavished resources on endless se-quences ofover- and underpasses to create“signal-free” traffic corridors in Lahore, theprovincial capital, that are of most benefitto the rich minority who can afford cars.

There are limits, however. KhawajaSaad Rafique, the railways minister, recent-ly admitted to parliament that the countrywould not be getting a bullet train after all.“When we asked the Chinese about it, theylaughed at us,” he said. 7

Pakistan’s economy

Roads to nowhere

ISLAMABAD

An obsession with showyinfrastructure distracts from deeperproblems

Jam tomorrow?

The Economist January 21st 2017 33

For daily analysis and debate on China, visit

Economist.com/china

DELEGATES at the World Economic Fo-rum in the Swiss resort of Davos often

treat politicians as rock stars. But the fawn-ing reception given to China’s leader, XiJinping, on January17th was extraordinary.He was the first Chinese president to at-tend the annual gathering of the world’sbusiness and political elite. Even an over-flow room was packed when he delivered,in his usual dour manner, a speech lacedwith literary references—rendered throughbulky headsets into equally monotonetranslations. Mr Xi said little that was new,but the audience lapped it up anyway.Here, at a time of global uncertainty andanxiety for capitalists, was the world’smost powerful communist presentinghimself as a champion of globalisationand open markets.

Mr Xi (pictured, next to a panda ice-sculpture) did not mention Donald Trumpby name, nor even America, but his mes-sage was clear. “No one will emerge as awinner in a trade war,” he said, in a swipeat Mr Trump who has threatened, amongother mercantilist acts, to slap heavy tariffson Chinese goods. Mr Xi likened protec-tionism to “locking oneself in a darkroom”, a phrase that delegates repeatedwith delight. His words seemed comfort-ing to many ofthem after a year ofpoliticalsurprises, not least in America and Britain.Mr Xi quoted from Dickens to describe a“world of contradictions”, as he put it. “It

he is in charge of China’s economy, as heclearly is ofevery other main portfolio).

Mr Xi would have relished the occasioneven had the predictions of many in theglobal elite a year ago proved accurate—that Britain would vote to stay in the EUand that Mr Trump would not win. The fo-rum is one where embarrassing questionsabout China’s politics are seldom raisedopenly. Mr Xi could talk airily of China’sopenness, with little fear of being askedwhy he is clamping down on dissent andtightening controls on the internet (lastyear this newspaper’s website joined themany foreign ones that are blocked). OnJanuary 14th China’s most senior judgecondemned judicial independence as a“false Western ideal”.

Previously, the highest-rankingChineseattendees had been prime ministers. In2016 the vice-president, Li Yuanchao, whoranks lower than the prime minister in theparty hierarchy, led the team. So why hasMr Xi waited until his fifth year as presi-dent to turn up? He may well have wincedat the thought of doing so last year, whendiscussions were dominated by questionsabout China’s management of its slowingeconomy in the wake of a stockmarketcrash and a sudden devaluation of theyuan. Many analysts still worry about Chi-na’s economy (not least its growing debt),but the West’s problems have loomed larg-er over the Swiss Alps this week.

And for all his uplifting talk, Mr Xishows no signs of wanting to take over asthe world’s chief troubleshooter, even ifMrTrump shuns that role. MrXi is preoccu-pied with managingaffairsathome and as-serting control in seas nearby (see nextstory). “Nothing is perfect in the world,”the new Davos man sagely informed thedelegates. But he is unlikely to take the leadin making the world a better place. 7

was the best of times, it was the worst oftimes,” he said. Many foreign businessescomplain about what they regard as a riseof protectionism in China, too—but no onecould accuse Mr Xi of being out of tunewith the Davos mood. China, Mr Xi as-sured delegates, “will keep its door wideopen and not close it”.

The Chinese president also portrayedhiscountryasa staunch defenderofthe en-vironment. He said that sticking to the Par-is agreement on climate change, whichcame into effect last year, was “a responsi-bility we must assume for future genera-tions”. These, too, were welcome words tomany listening: Mr Trump’s threat to rejectthe pact will make China’s commitment toit all the more crucial.

The weekof whose inauguration?The timing of Mr Xi’s trip was fortuitous—according to the Financial Times his aideswere working on it before Britain voted toleave the European Union and well beforeMr Trump’s election victory. But he musthave relished the points that those eventsenabled him to score at Davos. Mr Xi facespolitical battles of his own as he preparesfora five-yearlyCommunistPartycongressin the autumn and a reshuffle right after it.He wants to install more of his allies in keypositions. Standing tall on the world stagecould help (and attending Davos will havereinforced the point to his colleagues that

China and the world

The new Davos man

BEIJING AND DAVOS

Xi Jinping tries to portrayhis countryas a rockofstability in a troubled world. Histiming, at least, is faultless

ChinaAlso in this section

34 China’s new aircraft-carrier

36 Banyan: The factious politics ofChinese museums

34 China The Economist January 21st 2017

FOR Admiral Wu Shengli, the command-er of China’s navy since 2006, it must

have been a sweet swansong to mark hisimminent retirement. In November Chinaannounced that its first and only aircraft-carrier, the Liaoning, was combat ready. OnDecember 24th its navy duly dispatchedan impressive-looking carrier battle-groupwith three escortingdestroyers, a couple offrigates, a corvette and a refuelling ship. Itsailed from the northern port of Qingdaodown through the Miyako Strait, past Tai-wan and into the South China Sea.

Three weeks later the Liaoning (pic-tured) wasbackin porthavingsailed homevia the Taiwan Strait, thus completing aloop around the island. The point was notlost on the Taiwanese, who scrambledfighter jets and sent naval ships to monitorthe group’s progress. The Chinese shipsshowed offtheirfirepower, with ShenyangJ-15 fighters staging a series of take-off andlanding drills. That everything wentsmoothly was evidence of the navy’stransformation under Admiral Wu (his ca-reer perhaps destined by his forename,which means victory). He had meticulous-ly prepared for this moment, which camejust four years after the carrier, acquired asa partially built hulk from Ukraine in 1998,formally entered naval service.

China’sdeploymentofan aircraft-carri-er is not a military game-changer. But it is aconspicuous symbol of the country’s am-bitions as a maritime and global power.The Liaoning has been a crucial buildingblock for the navy in its evolution from acoastal defence force into what is now amodern navy that China uses to assert its(contested) maritime claims in the East andSouth China Seas. Within the next 25 yearsChina expects its navy to become a power-ful blue-water fleet that can guard China’ssea lanes of communication against anyaggressor, push the US Navy beyond the“second island chain” far out into the Pacif-ic (see map) and protect the country’s far-flung commercial interests.

To thatend, probablyaround 2004, Chi-na made up its mind that it must have air-craft-carriers. A second, indigenously de-signed one, based on the Liaoning but withthe latest radar and space for more aircraft,is nearing completion at the northern portof Dalian. Many analysts believe that athird such vessel, larger and more com-plex, is under construction in Shanghai.Andrew Erickson of the US Naval War Col-lege says Admiral Wu adopted a “crawl,

walk, run” approach to developing a carri-er capability, recognising the difficulties in-volved. Carrier operations are inherentlydangerous—America lost 8,500 aircrew inthe 40 years to 1988 on its way to reachingwhat Mr Erickson calls its current “goldstandard” ofcarrier expertise.

Commissioning the Liaoning was agood way to start. Much modified and fet-tled by the Chinese, the ship is based onthe Soviet Kuznetsov-class design. It is big,with a displacement of about 60,000 tons,but nowhere near the size of America’s su-per-carriers such as the USS Ronald Reagan,which is based in Japan. That Nimitz-classship displaces around100,000 tons.

In other ways, too, the Liaoning pales incomparison with America’s 10 Nimitz-class carriers. They can carry more than 55fixed-wing aircraft. The Liaoning can onlyhandle 24 J-15s (based on the Russian Suk-hoi SU-33) and a handful of helicopters.Unlike the American carriers, it lacks a cat-apult to propel aircraft from its deck. In-stead it relies on a “ski-jump” prow to pro-vide extra lift. As a result, the J-15s have tocarry a lighter load of weapons and fuel.Heavier, slower airborne early-warningand anti-submarine aircraft cannot takeoff from the Liaoning at all. That limits thetype of missions the ship can perform andmakes the vessel vulnerable when operat-ing beyond the range of shore-based air-craft. The Liaoning also depends on a noto-riously unreliable Soviet-era design for itssteam turbines, which cuts its range andspeed compared with the nuclear-pow-ered Nimitz-class carriers.

The US Office of Naval Intelligence hasdismissed the Liaoning’s ability to projectnaval power over a long distance. But theship does have military value. It can pro-vide air-protection for China’s fleet, andwould be a major asset in disaster-relief orevacuation missions. Peter Singer of theNew America Foundation, a think-tank,says thata Liaoning-led battle group wouldalso seem pretty formidable to neigh-bours, such as Vietnam or the Philippines,should China feel like bullying them.

But the main value ofthe Liaoning is theexperience that it is giving the navy in thecomplex choreography of carrier opera-tions. Those skills will help in the eventualdeployment of indigenously designed car-riers. The Chinese have been training withcatapult-launch systems on land. This hasfuelled speculation that the carrier thoughtto be under construction in Shanghai willbe a genuine flat-top. It is possible that theship will also be nuclear-powered, whichcould give it the range and speed ofAmeri-can carriers.

It is not clear how many carriers Chinaplans to build. As a rule of thumb, youneed three to be certain of having one atsea all the time. MrErickson says that someanalysts in China have been suggesting afleet as large as six. Mr Singer thinks it ispossible that China’s carriers will one daymatch the capability ofAmerican ones. MrErickson says that while China can copy alot, without combat experience and “tribalknowledge” passed from one crew to an-other, it will find it hard to attain that level.

China, ironically, has done more thanany other country to sow doubts aboutwhether carriers are worth all the effortand expense, by developing shore-basedanti-ship ballistic missiles, such as theDF-21D and DF-26, known as “carrier kill-ers”. Submarines are less vulnerable, buthighly visible ships bristlingwith weapon-ry are still badges ofpride foraspiring greatpowers like China. As in America, the viewin China that carriers and status go togeth-er will be hard to change. 7

The navy

Deep blue ambition

China’s aircraft-carrierprogramme says a lot about its ambitions

P A C I F I CO C E A N

SouthChinaSea

EastChinaSea

TaiwanStrait

C H I N A

N. KOREA

S. KOREA

JAPAN

PHILIPPINES

VIETNAMCAM-

BODIA

THAI-LAND

LAOS

TAIWAN

Shanghai

Beijing

Guam

Okinawa

1st IslandChain

Qingdao

Ningbo

Zhanjiang

Sasebo

Yokosuka

Chinhae

RUSSIA

MiyakoStrait

Dalian

MONGOLIA

2nd IslandChain

Chinese fleet headquartersMajor American navy bases

Source: IISS

1,000 km

Scary, perhaps, but also easy to sink

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36 China The Economist January 21st 2017

IFTHE world’smostpopularmuseum, drawingover15m visitorsa year, suddenly offered a distant city a priceless haul of arte-

facts—on permanent loan and absolutely free—you would expectthat city’s residents to jump for joy. Not so, when the city is HongKong, and when the Palace Museum, which occupies most ofBeijing’s vast Forbidden City, is doing the offering. In DecemberHong Kong’s chief secretary, Carrie Lam, announced surpriseplans to build a branch of the Palace Museum in a showcase cul-tural district going up on reclaimed land in Hong Kong’s harbour.Many of the territory’s residents erupted in anger.

The cultural and commercial benefits for Hong Kong are unar-guable, says MarkO’Neill, who has written a bookon the Forbid-den City’s treasures. The complex was the seat of China’s emper-ors from the 15th century until Pu Yi, the last emperor, resigned in1912. It houses such an array of imperial Chinese pieces that thePalace Museum is able to display less than 1% of the collection atany time. A trove on show in Hong Kong would draw in millionsof visitors a year. As well as ticket sales, think of all the merchan-dising possibilities, from catalogues to replicas of jewellery andfurniture. Not just the museum but the whole city would profitfrom increased visitors. And then there is the intangible aspect: aboost fora youngcity with a relatively sparse cultural hinterland.

One country, two Hong KongsSo great is the furore, however, that itmayeven scupper the plans.The problem is that Hong Kong these days is a divided place. Onone side are those who favour smooth relations with mainlandChina and who would do the bidding of China’s Communistmasters in Beijing. On the other are Hong Kongers who resent thecentral government’s growing influence and heavy hand, andwho aim zealously to guard Hong Kong’s freedoms. With an eyefor the telegenic gesture, pro-democracy politicians staged a prot-est in the subway system in front ofa huge display promoting themuseum project. Their leaders said they were not opposed to theidea ofa museum, but to the murky way in which the decision infavour of it was reached. They also made clear that they associat-ed the Forbidden City mostly with the bloody crackdown on stu-dents who in 1989 protested in Tiananmen Square just in front ofit. Underpressure, Ms Lam has agreed to a period ofconsultation.

Yet at the same time the Hong Kong administration has calledfor politics not to be dragged into the debate. The call is absurd.For a start, Ms Lam wants to be Hong Kong’s next chief executive,who will be chosen in March; her museum enthusiasm willsurely help to reinforce the Communist Party’s faith in her. More-over, China’s rulers want a museum in Hong Kong precisely tomake a political point. As local obstreperousness has grown in re-cent years, they have lamented that brattish Hong Kongers lackpatriotism and appreciation for China’s greatness. The museumis intended to teach them a lesson.

Moreover, the Forbidden City has always been about politicsand power. The Yongle emperor, or rather thousands offorced la-bourers, built it as an expression of Ming-dynasty might. From itradiated the emperors’ cosmic as well as terrestrial power. That iswhy, at the height of the Cultural Revolution, Mao Zedong stoodbefore the Forbidden City to call for the destruction of all traitscarried over from old, imperial China—though not the palace it-self. Zhou Enlai is said to have closed it to save it from rampagingmobs of Red Guards. It was reopened in 1971 when Henry Kissin-ger, Richard Nixon’s national-security adviser, visited Beijing aspart of America’s effort to forge ties with the Communist regime.At a time when Beijing itself was looking miserable and drab, MrO’Neill points out, there was no better way to impress on Mr Kis-singer a sense ofChina’s power and sophistication. (He has beenin awe of China ever since.) The palace still serves this purpose.Thousands of tourists gather every morning to watch paramili-tary troopsmarch outofthe Forbidden City, goose-step across theroad and raise the national flag on Tiananmen Square.

Lastly, remember the rivalry with Taiwan. It, too, has a PalaceMuseum—with a far finer display than the one in Beijing and theword “National” at the beginningof its name. It is filled with hun-dreds of thousands of artefacts, mostly from the Forbidden City,that were carried to the island by Chiang Kai-shek and his Kuo-mintang(KMT) forceswhen theyretreated to Taiwan in 1949. Theytook the best ones, though beauty is sometimes in the eye of thebeholder: the “Meat-shaped Stone”—a hideous carving in theshape of a piece of braised pork—is, perversely, the biggest drawtoday. ForChiang, the treasures boosted the KMT’s claim to be thesole and rightful ruler ofChina.

When ties across the Taiwan Strait improved under the thenKMT president, Ma Ying-jeou, who stepped down last year, Bei-jing’sPalace Museum lentpieces to itsTaiwanese counterpart asamark of goodwill. Since President Tsai Ing-wen took over, Chinahasbeen farfrostier. HerDemocraticProgressive Party inclines to-wards independence and downplays historical links with China.Yet even the KMT used Taiwan’s Palace Museum to make a pointabout the island’s distinct identity. A branch of the collectionopened two years ago near Chiayi, a city in southern Taiwan. Itemphasises a history ofTaiwan not as an adjunct to China but asan island nation steeped in Asian influences. And even as Chinahas sought to enforce Taiwan’s diplomatic isolation, the treasuresremain a source of soft power, with Taiwan lending them to theworld’s top museums—but not to Beijing’s Palace Museum, forfear (implausibly) that China might not return the pieces.

As for Hong Kong, China’s leaders will be peeved at the in-gratitude of many residents over the museum offer. But HongKongers’ refusal to be awed by a supposedly glorious past is hard-ly surprising. Their problem is an inglorious present, with Chinadenying them full democracy. And China’s problem is that it isstill scrabbling for a source ofsoft power with which to appeal. 7

Dangling forbidden pleasures

Whyall the fuss about Hong Kong getting a world-class museum?

Banyan

The Economist January 21st 2017 37

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

Economist.com/world/middle-east-africa

1

ALTHOUGH a jolly spot for surfand sun,Durban is hardly a centre ofAfrican di-

plomacy. So it was a surprise when Nkosa-zana Dlamini-Zuma, the outgoing head ofthe African Union (AU), chose to deliverthe first-ever “State of the Continent”speech there last month instead of at theAU’s grand headquarters in Addis Ababa.

Ms Dlamini-Zuma’s speech focused onhigh-minded plans for education and agri-culture. She acknowledged “pockets ofproblems” in war-ravaged Burundi, Libya,Somalia and South Sudan, but only inpassing. Journalists fought to stay awake.The thin crowd had to be cajoled into ap-plause. South African cabinet ministersdue to attend sent lackeys instead. Back inAddis, the event fed the widely held viewthat Ms Dlamini-Zuma spent her term atthe AU with one foot in South Africa,where she is jockeying to succeed her ex-husband, Jacob Zuma, as president in 2019.

Ms Dlamini-Zuma’s four-year term ashead of the AU’s executive arm shouldhave ended six months ago but was ex-tended when its members could not agreeon a successor. They will gather again fromJanuary 22nd and vote for her replace-ment. Among the contenders are a veterandiplomat from Senegal and the foreignministers of Kenya and Chad. The selec-tion process is less about the candidate’stalents than about governments and re-gional blocs vying for influence. For the

ulators when they told her that humantrials would be unethical. However, ashome-affairs minister, she was creditedwith making her ministry less corrupt andinept. So many thought she would getthings done at the AU. For the most part,they were disappointed. “Her heart isn’t init,” says one observer. “Someone who wasmore invested might have done more.”

Her flagship policy, known as Agenda2063, isa mishmash ofproposals. Some areunambitious; others, implausible. Within50 years, the document declares, Africanswill grow more, earn more and eat more.(This is a safe bet, but in the unlikely eventthat it does not come to pass, Ms Dlamini-Zuma will not be around to take theblame.) A few paragraphs later it promisesAfrican passports and visa-free travel forall Africans by 2018. Governments willhave to hurry to meet this goal. So far, onlypresidentsand officials can getpan-Africanpassports. They are so rare that even MsDlamini-Zuma struggles to convince bor-der guards that hers is real. The documentalso aims to end all wars in Africa by 2020.How, it does not say.

It isbyno meansall MsDlamini-Zuma’sfault that the AU is so ineffective. It is a clubthat welcomes autocrats and democratsalike. The only leaders it ostracises arethose who seize power in a coup orwho ig-nore the results ofan election too blatantly,as recently happened in Gambia. Thosewho merely rig the polls are welcomed.The AU’s current chairman, a ceremonialbut symbolically important figure chosenby the body’s assembly, is Idriss Déby, theoil-fuelled strongman of Chad. The previ-ous one was Robert Mugabe, who has mis-ruled Zimbabwe since 1980.

Yet even given these constraints, MsDlamini-Zuma has been a let-down. Shehas campaigned against sex discrimina-

The African Union

Ex factor

JOHANNESBURG

Nkosazana Dlamini-Zuma heads home to South Africa aftera disappointing spellrunning the African Union

Middle East and AfricaAlso in this section

38 Qat on a streak

39 Mozambique’s default

39 Bahrain cracks down

40 Tunisia’s jihadists come home

Darfur

Abyei

CONGO

C A R

MALI

WesternSahara

IVORYCOAST

LIBERIA

SOMALIA

BURUNDI

LIBYA

CHAD SUDANSENEGAL

KENYA

SOUTHAFRICA

THEGAMBIA

ZIMBABWE

NIGERIA

AddisAbaba

Mogadishu

ETHIOPIASOUTHSUDAN

United Nations

Sources: United Nations; AMISOM

Major peacekeepingmissions, 2017

African Union

AU and UN

Johannesburg

Durban

second consecutive summit, representa-tives of civil society will be barred; someAU leaders apparently don’t like scrutiny.

As the first woman to head the AU’s ex-ecutive arm, Ms Dlamini-Zuma came intothe role in 2012 buoyed by high hopes andpromises to reform a moribund institu-tion. A medical doctor and veteran of theanti-apartheid struggle, she had served asa cabinet minister under four South Afri-can presidents, including Nelson Mandela.

Her record in government was contro-versial: as health minister she promotedthe use of a toxic industrial solvent as amiracle cure forAIDS, and then purged reg-

38 Middle East and Africa The Economist January 21st 2017

2 tion, violence against women and for anend to child marriages. Yet for all her rheto-ric, the AU has failed to grapple seriouslywith the crisis in South Sudan, wherewomen and girls are gang-raped by sol-diers. She seldom visits countries riven byconflict; for instance, she has yet to visit So-malia. When put to the test the AU has re-peatedly failed to deploy peacekeepers tocrisis zones. The notable exceptions areDarfur, where it was the first outfit to sendpeacekeepers, and Somalia, where an AUforce has helped to push jihadists from thecapital. Acrisis in Burundi offered a chancefor the AU to show its mettle. PresidentPierre Nkurunziza’s decision to seek an il-licit third term ignited mass protests fol-lowed by a brutal, ethnically chargedcrackdown. The AU said it would sendpeacekeepers to protect civilians. Butwhen Mr Nkurunziza objected, it decidednot to. A modest plan to send 100 observ-ers is still on the starting blocks. The AUalso promised, in July 2016, to send a forceto South Sudan. It is nowhere to be seen.

The AU struggles to persuade memberstates to bankroll it. Some 70% of its budgetcomes from non-African donors such asthe European Union. Ms Dlamini-Zumatried to reduce the AU’s reliance on theWest, appointing Donald Kaberuka, a for-mer head of the African DevelopmentBank, to find new sources ofcash. His plan,to finance the organisation through a 0.2%levy on imports into African countries, ismeant to start this month.

Ms Dlamini-Zuma is wary of foreignerswho scold Africans about human rights.During her tenure the AU has considered amass pullout from the International Crimi-nal Court, which some members deemprejudiced because most of its targets havebeen African. Her alternative is the AfricanCourt of Justice and Human Rights, whichthe AU has barred from hearing casesagainst incumbent government heads andtheir senior officials.

Such deference to high office woulddoubtless please her ex-husband, who hasbeen charged with 783 counts of corrup-tion and fraud by South African prosecu-tors. (He denies wrongdoing.) Mr Zuma isexpected to stand down as head of SouthAfrica’s ruling party, the African NationalCongress, in December. Whoeversucceedshim as party chief is likely to win the presi-dency at the next general election. MrZuma has used all his presidential powersto avoid standing trial and isno doubt keento anoint a sympathetic successor.

On an unrelated subject he argues thatit is time for the ANC to have a female presi-dent and that his ex-wife is the most quali-fied candidate. Ms Dlamini-Zuma has saidlittle about her plans beyond blandly indi-cating that she would never refuse a re-quest from the ANC to serve the party.Judging by her Durban speech, she wouldwelcome such an opportunity. 7

“THIS is qat,” explains Teklu Kaimo,gesturing to the wooded field be-

hind him. He started growing it in1976, andover the years its soft, green leaves havebrought him a measure of prosperity. Hehas a modest plot of land, 11 children andmoney to pay their way through school.

A short walk down the hill, the centralmarketplace of this part of southern Ethio-pia comes alive with farmers, merchantsand salesmen as the sun sets. Young mensprint down streets with bundles of freshqat leaveson theirshoulders, as traders callout prices and haul the bags aboard lorries.They are bound for Addis Ababa, the capi-tal, where the following morning they willbe sold to qat-chewers in the city, or packedonto planes bound for neighbouring Dji-bouti and Somaliland.

Ethiopia’s trade in qat, a mild stimulantnative to this part of Africa, is booming.Where once cultivation and consumptionwere restricted to the Muslim lowlands to-wards the country’s east, today it is grownand masticated throughout the country.Nearly half a million hectares of land arethought to be devoted to it, some two-and-half times more than was grown 15 yearsago. Many of those cultivating it haveswitched from coffee, Ethiopia’s biggest ex-port, to one that offers juicier and more sta-ble returns. Qat is now the country’s sec-ond-largest source offoreign currency, and,with prices rising, a handy source of gov-ernment revenue.

The industry’s growth is partly due toincreased consumption. Qat kiosks aredotted around all main towns; young men

chewing on street corners or in universitylibraries have become a ubiquitous featureof Ethiopian life. For many, its spread is asymbol of national decline. “It is gettingworse by the day,” saysFitsum Zeab, a busi-nessmen in Addis Ababa.

Much the same is true in neighbouringKenya, the region’s second-largest qat pro-ducer. Here, too, demand is growing,thanks to a large diaspora of Somalis (theplant’s long-standing international mis-sionaries) and better roads that allowfarmers to get perishable qat to marketwhile it is still fresh. And economic impor-tance is translating into political heft: lastyear Kenya declared it an officially sanc-tioned cash crop.

But the plight of Maua, a small townconsidered the Kenyan trade’s epicentre,gives pause for thought. Britain’s decisionin 2014 to ban the substance (against theadvice of its drugs advisory council, whichthought it harmless) slammed the qateconomy. In 2013, before the prohibition,Britain imported some £15m-worth ($25m)worth of the stuff. Prices have since fallenby half and unemployment has risensharply. “Everyone is feeling the pinchnow,” says Lenana Mbiti, a former trader.

That gives pause to Ethiopian farmerstoo. Although they have been less affectedby bans in Europe because they sell mostof their crop close to home, they fret thattheir market will shrink.

Expertsdoubt thatqatwill everbecomea mass-marketed global commodity likecoffee, tea or sugar. Instead, small towns inplaces such asWondo-Genetare becomingdependent upon the production and tradeof a substance that will probably be out-lawed in yet more countries.

Even so, qat’s popularity among farm-ers persists because it is perhaps the onlycrop that can provide sufficient incomefrom a small plot of land to support a fam-ily. “There is simply nothing else,” says Bir-hanu Kiamo, Mr Kaimo’s brother, neigh-bour and fellow qat farmer. 7

Farming in Ethiopia and Kenya

Qatnip

CHUKO AND MAUA

Abooming green business that mayturn to bust

Qat, a tonic?

The Economist January 21st 2017 Middle East and Africa 39

1

IN 2014 Mozambique seemed a goodplace to host the IMF’s “Africa Rising”

conference. The economy was buoyant,having grown by about 7% a year for a de-cade. Offshore gas promised riches. Inves-tors were optimistic, so much so that, in2013, they snapped up $850m of bonds is-sued by a state-owned tuna-fishing com-pany, with temptingly high yields.

But Mozambique’s rise has halted.Those “tuna bonds” were the first mis-stepin a widening scandal that led the govern-ment to say on January 16th that it woulddefault on its debt.

The government’s financial difficultiesarise partly from a downturn in commod-ity prices that caused economic growth toslump to 3.4% in 2016 (though it should im-prove this year). Yet the main reason thegovernment is in a pickle is its own feck-lessness. The state-owned tuna companythat issued the bonds never caught manyfish. That is scarcely surprising since muchof the money it raised went toward buyinggunboats instead of the fishing sort. Whenitbecame clear that the companycould nothonour its debts, bondholders agreed toswap the bonds it had issued for govern-ment ones. Yet before the ink was dry onthatdebt-swap the governmentadmitted ithad also guaranteed $1.4bn in secret loans,worth 11% of GDP. The revelation shockedthe IMF and donors into freezing supportto a country that still relies on internation-al aid to balance its books.

The government, now weighed downby debt equalling some 112% of GDP, maybe trying to use the default as a tactic toforce bondholders into “restructuring” thedebt, which is a polite way of saying that itwants them to give it a handout.

This week’s missed payment will irkbondholders but may not be enough toforce them to the table, says Stuart Culver-house of Exotix, a brokerage. Having beenhooked once, few trust the government.Theyhave refused to negotiateuntil it signsup to an IMF programme and allows a full(and independent) audit of its indebted-ness. The IMF, for its part, also wants an in-vestigation into where the money wentand who authorised the borrowing beforeit will lend more. Kroll, a firm of investiga-tors hired by the government, is expectedto release a report next month.

Instead of squeezing bondholders thegovernment may do better by trying to re-structure, oreven repudiate, its secret loans(one of which is already in arrears and all

of which may be unconstitutional sincethey were not approved by parliament).

Few members of the ruling party, Fre-limo, want to shine too much lighton thoseloans since bigwigs may be implicated. Yetimposing IMF-mandated spending cutsalso carries risks. With less bounty tospreadaroundFrelimomaystruggle tobuysupport in local elections next year and ina presidential contest in 2019, says AlexVines of Chatham House, a think-tank. Itsbest hope may be to hold out for the boun-tiful gas revenues expected in the middleofthe nextdecade. Regulators, meanwhile,are probing the banks that arranged boththe bonds and the secret loans, CreditSuisse and VTB. More may yet be revealedabout Mozambique’s fishy finances. 7

Default in paradise

Boats and ascandal

KAMPALA

Mozambique fails to pay its debts

On the hook

Source: IMF

Mozambique

*Estimate

0

2

4

6

8

10

0

25

50

75

100

125

2007 08 09 10 11 12 13 14 15 16*

GDP, % increase on a year earlier

Government debt,as % of GDP

A SAGGING rope, haphazard barri-cades—and fear. That is all it has taken

to keep Diraz, Bahrain’s largest Shia village,undersiege for the past seven months. Twocheckpoints bar access to all but residents.Friends and family members are kept out.Grocers offload their wares at the perime-ter wall. And the protesters who oncethronged to hear the island’s leading Shiacleric, Isa Qassim, deliver his Friday ser-mon now stay at home. “Forget the thou-sands who used to join rallies,” says a cler-ic in a neighbouring village, recalling theprotests which erupted after tanks crushedthe mass demonstrations fordemocracy in2011. “Today we can’t even find ten. Whowants to risk five years of prison and tor-ture for ten minutes ofglory?”

Though small, running out of oil anddependent on largerGulfneighbours, Bah-

rain typifies how Arab autocrats havecrushed the Arab Awakening’s demandsfor greater representation. After six yearsof suppression, the Shia opposition is dis-heartened. Maligned as the cat’s paw ofIran and a threat to Sunni rule in Bahrain,their movement is battered and broken.More than 2,600 political prisoners are injail, a large number in a kingdom of just650,000 people. Many of the detainees arechildren, says a former member of parlia-ment from Wefaq, the Shia party the gov-ernment banned last year. Hundreds havebeen exiled, scores barred from travel, andover 300 stripped of their nationality, in-cluding Sheikh Qassim. Even the execu-tion on January15th ofthree Bahrainis—thefirst for two decades—roused onlysporadicunrest by the island’s opposition.

The “national dialogue” that was es-

Bahrain

An unhappy isle

MANAMA

The royals have won. Yet they are still hounding the Shias

Protesters may topple bins but they can’t bin Hamad

40 Middle East and Africa The Economist January 21st 2017

2 poused during more turbulent times bythe king’s son and crown prince, Salmanbin Hamad, is on hold. Many of his erst-while interlocutors are in jail on implausi-ble terrorist charges. The online edition ofthe last independent daily newspaper wasbanned on January16th. Although the graf-fiti on village walls declare “Death to [King]Hamad”, few youngsters risk more than atoken rally before police start firing bird-shot. “We had a revolution and we lost,”says a female protest leader now in exile.

Shia and Sunni subjects should sharemany grievances. Both resent a ruling fam-ily that hoards ministerial posts. The king’suncle, Khalifa bin Salman, is the world’slongest serving prime minister, havingbeen in place for46 years. The kinghimselfhas ruled since the death of his father in1999. Although the Al Khalifas monopolisepower, they spread the pain of austerity. Inline with Vision 2030, an economic pro-gramme devised for Bahrain by McKinsey,a consultancy, they have cut subsidies onsuch basics as meat. Even this is notenough. The oil price would have to dou-ble to balance the budget. Last year Stan-dard and Poor’s, a ratings agency, judgedthe country’s debt to be junk.

The government’s fiscal measures havefallen most harshly on Shias. Fellow Gulfstates have given billions in aid to prop upthe kingdom, but much has been chan-nelled into building housing for Sunnisand foreigners. New mansions, com-pounds and high-rise blocks screen run-down Shia villages. Undulating parksalong the corniche beautify Sunni parts.The authorities have also chipped away atthe demographic majority of the Shias,who once made up 60% of the population.A rash of new Hindu temples, churchesand Sunni mosques testifies to an influx ofnon-Shia foreigners. Unusually for theGulf, Bahrain has opened its doors to Syri-an Sunnis from Jordan’s refugee camps. Anacrid xenophobia peppers Shia discourse.Shias gibe that even the ruling Al Khalifas,who came from the Arabian hinterlandover the water in 1783, are foreigners.

Communal tension is less fierce in thefew places where Sunnis and Shias live to-gether. But sects that once shared the samestreets in new towns built in the 1980s arenow moving apart. Flags of Shia saintshang from the homes on one side of themain road through Hamad Town; Bahrainiflags of loyalist Sunnis fly from the other.Intermarriage, too, is getting rarer, says Su-hail Algosaibi, who runs an interfaithgroup. Alone of the Gulf states, Bahrainstill marks Ashoura, the holiest day in theShia calendar, as a public holiday, but divi-sions are widening. Though some Sunnigrandmothers still bake pomegranatecakes for Ashoura, their husbands whoonce joined the chest-beating rites nowfurtively watch from afar. For many Sun-nis, Shia villages are no-go areas.

Last month Islamic State put out anhour-long video of a Bahraini ideologuefrom the same tribe as the royal family ap-pealing for Sunni suicide bombers to at-tack the island’s Shias. And on New Year’sDaymilitantShiasbroke into a high-securi-ty jail, freeing ten dissidents and prompt-ing the opposition to askif it might be moreeffective underground. “We desperatelyneed a political process,” says Jasim Hus-sain, a former Wefaq MP. “The countrycan’t afford anything less.” 7

“IF BEN GUERDANE had been locatednext to Falluja, we would have liberat-

ed Iraq.” So (reportedly) said Abu Musabal-Zarqawi, the leader of al-Qaeda in Iraq,before he was killed a decade ago. He wasreferring reverentially to a town in south-eastern Tunisia that is one of the world’sbiggest exporters of jihadists. No place bet-ter epitomises the challenges facing Tuni-sia’s government as it tries to consolidate awobblydemocracysixyearsafter the revo-lution that toppled the old dictatorship.

Hundreds of Tunisians marked the an-niversaryofthe revolution on January 14thby taking to the streets to demand jobs. Theprotests began in Ben Guerdane beforespreading to other poor places, such as SidiBouzid, Meknassi and Gafsa, where localsblocked the route of Beji Caid Essebsi, thepresident, who was in town to mark theanniversary. “Work is our right,” yelled theprotesters, using the slogans of2011.

Work is indeed a right enshrined in theconstitution, adopted in 2014. But the un-employment rate of 16% is higher than itwas before the revolution. The rate foryoungsters and those in the countryside ishigher still. This is partly because a seriesofterrorist attacks has driven away touristsand foreign investors. Unemployed protes-ters have blocked roads leading from phos-phate mines, further harming export earn-ings. Past governments have responded bypromising to create public-sector jobs. Theresult is a bloated, unaffordable bureauc-racy. A hiring freeze is now in effect.

Disillusioned and aimless, youngstersin rural areas are prime targets of jihadistrecruiters. Some 6,000 Tunisians havejoined armed groups abroad, with mostgoing to fight in Iraq, Syria and Libya, andsome farther afield (see chart). One wasAnis Amri, a 24-year-old follower of Islam-ic State (IS) who drove a lorry into a Christ-mas market in Berlin, killing 12 people. He

was later killed by Italian police.The government is trying to stem the

flow of people joining jihadists abroad. Ithas closed mosques led by radical preach-ers and keeps an eye on thousands ofyoung suspects. Tunisians under the age of35 are not allowed to travel to Libya, Turkeyor Serbia, the main transit routes to Iraqand Syria. The borders with Algeria andLibya have been tightened. Parliament haspassed an anti-terrorism law, criticised byhuman-rights groups, that gives the gov-ernment more power to detain suspectsand tap phones, among other things.

In any case, the flow is reversing, withfighters making their way home as thegroups they had joined are pushed back.The interior ministry says 800 have al-ready returned. Many fear that some willcarry out attacks once back. Indeed, IS hastold them to do so and has claimed respon-sibility for several atrocities in the country.Last March a large group of Tunisian ISmembers crossed the border from Libya tostage an assault on Ben Guerdane that leftdozensdead. Tunisian security forces fearapossible Somalification of the country.

Last month Mr Essebsi played downthe threat. But after much criticism, andcalls to strip the militants of their citizen-ship, the government braced up. YoussefChahed, the prime minister, who belongsto Nidaa Tounes, the main secular politicalparty, has said that returning militants willimmediately be arrested. Ennahda, themoderate Islamist party that shares powerwith Nidaa Tounes, backs this approach,though some blame it for having exacer-bated the problem by previously indulgingradical preachers. “We have all the detailson [the returnees],” says Mr Chahed. “Weknow them one by one.” But many proba-bly left the countryand came backwithoutpassing through customs. Moreover, thegrievances that prompted so many to be-come jihadists have not yet been dealtwith. In places like Ben Guerdane localsstill feel that the government does not carevery much about them. 7

Terrorism in Tunisia

Jihadis come home

CAIRO

Tunisia struggles with fightersreturning from Iraq and Syria

Tourists of terror

Sources: The Soufan Group; The Economist *Estimate

Origin of foreign jihadists in Iraq and Syria2015, ’000

0 1 2 3 4 5 6

TunisiaSaudiArabiaRussia

Turkey

Jordan

France

Morocco

Lebanon

Germany

Britain

17

26

26

34

9

12

150

258

527

78

Number per 1mpopulation*

The Economist January 21st 2017 41

For daily analysis and debate on Europe, visit

Economist.com/europe

IT HAS been a U-turn to make a stuntdriver proud. For the past couple of

years, Devlet Bahceli, the head of theNationalist Movement Party (MHP), thefourth-largest in parliament, had been con-sidered one of President Recep Tayyip Er-dogan’s most vicious critics. Mr Erdogan’splan to replace the country’s parliamenta-ry system with an executive presidency, heonce warned, was a recipe for a “sultanatewithout a throne” and a system with “nobalances, no checks, and no brakes”. MrBahceli opposed the constitutional over-haul as recently as October.

Today, the raspy-voiced nationalist issuddenly rolling out the red carpet for MrErdogan’s pet project. As The Economistwent to press, Turkey’s parliament waspoised to adopt a package of 18 amend-ments that would place all executive pow-er in Mr Erdogan’s hands. In the first roundof voting, concluded on January 15th, eachof the amendments passed with a major-ity of at least 330 votes. Of these, no morethan 316 came from the ruling Justice andDevelopment (AK) party. Mr Bahceli andhis whips, undeterred by a mutiny that hasbeen swelling inside their party formonths, provided the remaining votes.Barring a new wave of defections, the newconstitution will be put to a referendum inearly April or late March.

AtpresentTurkey’spresidency is largelyceremonial—in theory. In fact, Mr Erdogan,who spent a decade as prime minister be-

direction which Turkey is taking. The gov-ernment has disowned peace talks withKurdish insurgents, opting instead for aruthless military offensive, a solution MrBahceli has favoured for years. Since thefailed coup, Mr Erdogan and his ministershave revved up nationalist rhetoric to justi-fy a mounting crackdown against Kurdishpoliticians, socialists and the press. Islam-ists and nationalists have closed ranks.“Bahceli might be in opposition, but hisideas are in power,” says Asli Aydintasbas,a fellow at the European Council on For-eign Relations. “These might be the happi-est days ofhis life.”

Wham, bam, ErdoganThe vote on the constitutional changes hasbeen a pathetic spectacle. Ruling-partylawmakers openly flouted a rule on secretballoting, then assaulted an opposition MPwho used her phone to film them.Punches, notebooks and at least one flow-er pot flew across the parliamentary floorduring the brawls. One AK member dis-played a gash on his shin, claiming to havebeen bitten during the melee.

The referendum, if it goes ahead, risksbecoming an even worse travesty. Underthe state of emergency, the governmenthas arrested, sacked or suspended over130,000 people, only some of them linkedto July’s coup. Over 100 journalists are inprison. Mainstream media outlets are in-creasingly wary of airing dissenting opin-ions. Mr Erdogan, meanwhile, retains theright to close newspapersand NGOswith astroke of his pen. In late 2016 his ownprime minister, Binali Yildirim, opinedthat the referendum should not take placeunder such conditions. Yet that is what isset to happen. On January19th, just as par-liament began voting on the amendments,emergency rule went into effect for anoth-er three months. 7

fore being elected president in 2014, hascontinued to rule almost uncontested.Emergency law, adopted in the wake of aviolent coup attempt in July, has removedmost remaining checks on his power.

The proposed changeswould make thissituation permanent. The office of primeminister would cease to exist. Mr Erdoganwould manage his own cabinet, appoint-ing senior officials without needing ap-proval from parliament. He could issue de-crees and declare a state of emergency. Histerm in office would last five years, renew-able once. Since the changes would kick inafter the 2019 presidential elections, Mr Er-dogan could remain in power until 2029.AK officials say the set-up would precludeunwieldy coalitions. Critics call it a blue-print for an elected dictatorship.

Analysts—and the handful of MHPmembers willing to speak to the press—areat a loss to explain what Mr Bahceli gainsby backing constitutional amendmentsthat his own voters seem to oppose. (Popu-lar support for the changes has long lan-guished below 50%.) Umit Ozdag, a one-time MHP deputy chairman, suggests thathis former boss may have been offeredcabinet posts. Others say he is paying backMr Erdogan for a court verdict that helpedhim stave off a leadership challenge overthe summer. Though he has never won anelection, Mr Bahceli has not relinquishedcontrol over his party for two decades.

He may be pleased, however, with the

Turkey’s all-powerful president

Iron constitution

ISTANBUL

Recep Tayyip Erdogan maysoon have the executive presidency he has long sought

EuropeAlso in this section

42 Emigration from eastern Europe

43 Enter Antonio Tajani

43 Economic reform in Russia

44 Putin’s overrated propaganda

45 Charlemagne: Trump anxiety

42 Europe The Economist January 21st 2017

IN THE Lithuanian town of Panevezys, ashinynewfactorybuiltbyDevold, a Nor-

wegian clothing manufacturer, sits alonein the local free economic zone. The fac-tory is unable to fill 40 of its jobs, an eighthof the total. That is not because workers inPanevezys are too picky, but because thereare fewer and fewer of them. There areabout halfas many students in the munici-pality’s schools as there were a decade ago,says the mayor.

Such worries are increasingly commonacross central and eastern Europe, wherebirth rates are low and emigration rateshigh. The ex-communist countries thatjoined the European Union from 2004 ondreamed of quickly transforming them-selves into Germany or Britain. Instead,many of their workers transported them-selves to Germany or Britain. Latvia’sworking-age population has fallen by aquarter since 2000; a third of those whograduated from university between 2002and 2009 had emigrated by 2014. Polls ofBulgarian medical students show that80-90% plan to emigrate after graduating.

Lithuania’s loss of workers is costly,says Stasys Jakeliunas, an economist. Re-mittances and EU money for infrastructureupgrades have helped, but labour short-ages discourage foreign investment andhurt economic growth. According to theIMF, in some countries in eastern Europeemigration shaved 0.6-0.9 percentagepoints from annual GDP growth in 1999-

2014. By 2030 GDP per person in Bulgaria,Romania and some of the Baltic countriesmay be 3-4% lower than it would havebeen without emigration.

All of this imperils public finances. Pen-sions, which take up about half of socialspending in eastern Europe, are the biggestworry. In 2013 Latvia had 3.3 working-ageadults for each person older than 65, aboutthe same as Britain and France; by 2030that is projected to fall to just over two, alevel Britain and France will not reach until2060. Countries are raising the retirementage (apart from Poland, which is recklesslylowering it). Benefits are already meagre,leaving little room for cuts. As a share of

GDP, social spending in Bulgaria, Romaniaand the Baltic states is roughly half of thatin many richer European countries.

Unable to dissuade people from leav-ing, governments are trying instead to lurethem back, inspired by successful efforts inIreland and South Korea. Daumantas Si-menas, project manager of the Panevezysfree economic zone, credits his return fromBritain to the country’s “Create for Lithua-nia” programme, which matches educatedprofessionals from the diaspora with gov-ernment jobs. Having a job already linedup made the decision to return easier, hesays. Plus, he adds, “home is home.”

Whether such efforts can turn the tideseems doubtful. “Create for Lithuania” hasbrought back more than 100 people sinceits launch five years ago, says Milda Dargu-zaite, who started the programme afterleaving an investment-banking career inAmerica for a government post in Vilnius.Returnees include an MP, a deputy mayorand several advisers to the prime minister.Bringing back doctors and engineers, how-ever, is trickier. Studies show that skilledworkers from eastern Europe are attractedabroad primarily by the quality of institu-tions such as good schools; better socialbenefits matter more for unskilled mi-grants. Data on return migration are scanty,but a recent report by the IMF suggests ithas been “modest”, in some countries aslow as 5% of those who left.

Firms are adapting to labour shortages.At a recent business conference in Bulgaria,employers said they are having to raisewages to entice workers from farther andfarther away. In Bulgaria and the Balticstates wages have grown faster than pro-ductivity for the past five years—a trendthat makes exports less competitive.

That may change. Higher labour costsare pressing firms to automate, says RokasGrajauskas, an economist at Danske Bank.On the factory floor at Devold many tasksonce done by hand, such as cutting clothinto shapes for winter pullovers, are nowexecuted by robots.

Some countries are warming to anoth-er solution: immigrants from poorer neigh-bours. Estonia’s population increased in2016 for the second year in a row thanks toincomers from Ukraine, Belarus and Rus-sia, after fallingsteadily since the 1990s. Butimmigration may not plug the brain drain.Almost all of the 400,000 Ukrainians whoobtained residency permits in Poland in2015 work in agriculture, construction or ashousehold help. By contrast, about 30% ofPolish émigrés have higher education—roughly twice the share in Poland’s generalpopulation (see chart).

For those who leave eastern Europe, thefreedom to live and work where onechooses isan immense boon. But the coun-tries where they were raised face a difficultchallenge. They must learn how to attractand retain new workers, or decline. 7

Emigration in eastern Europe

The old countries

VILNIUS AND RIGA

Eastern Europe is losing workers and keeping pensioners

Brain drainEducation level of emigrants v general population2010

%of

emig

rant

sw

ith

tert

iary

educ

atio

n

Source: IMF

SlovakiaBulgaria

Ukraine

Croatia

Lithuania

CzechRep

Romania

Poland

Hungary

Slovenia

Latvia

Estonia

10

20

30

40

10 20 30 40% of population with tertiary education

The Economist January 21st 2017 Europe 43

1

EXPECTATIONS were high last week asAlexei Kudrin, a former finance minis-

ter and the informal leader of a moderateliberal camp in the Russian establishment,outlined his proposed economic pro-gramme in a packed Moscow auditorium.Russia’s top economic officials occupiedthe front row. Foreign ambassadors sat be-hind. Journalists stood in the aisles. Thesetting was the Gaidar Forum, a sympo-sium named after the architect of Russia’smarket reforms in the 1990s. The date, Fri-day the13th, was perhaps unfortunate.

Nine months ago, as Russia’s recessiondeepened, Vladimir Putin drafted Mr Ku-drin to come up with a new economicstrategy. The former minister, who over-saw strong economic growth in the early2000s, resigned in 2011 in protest against amassive increase in military spending.Since then he has acquired cult-like statusamong Russian liberals. A personal friendof Mr Putin, he is a counterweight to thehardliners of Russia’s security services,and has stayed inside the system ratherthan becoming a dissident. Although heholds no formal position, he is seen as themost senior liberal courtier in the Byzan-tine world of the Kremlin.

MrKudrin’sverdictwasgrim. Russia,he

said, is at a low pace of economic growtheven compared with the period of stagna-tion in the 1970s and 1980s that led to theSoviet collapse. The reasons go well be-yond lowoil pricesand Western sanctions:“The main problems lie within Russia andthey are structural and institutional.” Rus-sia lags far behind in technology and inno-vation, and faces a severe demographicslump. The key problem is not a lack of in-tellect or business talent, but state ineffi-ciency and dysfunctional institutions. “Inour country the state dominates every-thing, so you have to start with reformingthe state,” Mr Kudrin said.

Mr Kudrin made it clear that the techni-cal tinkering favoured by the Kremlin can-not pull Russia out of its economic trough.Reforms must involve fundamentalchanges to the system, particularly to thejudiciary. Courts must provide justice evenwhen that requires ruling against the stateor security services. To convince his boss,Mr Kudrin framed his strategy in terms ofnational security and global prestige—oneof the few subjects Mr Putin seems to careabout. “Unless we become a technologi-cally advanced country we face a problemof diminishing defence potential and athreat to sovereignty,” he said.

Reform in Russia

Listen, liberal

MOSCOW

Alexei Kudrin wants to save Russia’s economy, but the Kremlin now thinks itsmodel is winning

AT FIRST glance the European Parlia-ment might look invulnerable to the

populist wave sweeping across Europe.Antonio Tajani, a centre-right Italian whowon the presidencyofthe chamberon Jan-uary 17th, is the sort of bland functionarythe European Union specialises in. Littleon Mr Tajani’s CV grabs the eye, bar an af-fection for Italy’s long-defunct monarchyand a spell as spokesman for Silvio Berlus-coni, the bunga-bungatastic former primeminister. His victory was engineered inclassic EU fashion, after four rounds of vot-ing and endless dealmaking between theparliament’s sundry political groupings.

Yet Mr Tajani’s win can be traced tothose same disruptive forces. At the lastelection, in 2014, nearly one-third of theparliament’s 751 seats went to anti-EU oranti-establishment outfits. That forced itstwo biggest groupings, the centre-rightEuropean People’s Party (EPP) and the So-cialists & Democrats (S&D), into a “pro-European” grand coalition. Under theirdeal Martin Schulz, a German SocialDemocrat, was to serve a two-and-a-half-year term as president before givingway toan EPP candidate.

That pact collapsed in a style that is vin-tage Brussels. After the deal was struck theother two top EU jobs went to EPP figures:Jean-Claude Juncker secured the presiden-cy of the European Commission, the EU’sversion of an executive arm, and DonaldTusk was appointed president of the Euro-pean Council, the forum for the EU’s heads

of government. Furious at being shut out,last year the S&D reneged on the agree-ment. After Mr Schulz said, last November,that he would return to German politics,the S&D’s parliamentary leader, Gianni Pit-tella, declared he would run.

The upshot was virtually unheard-of intheparliament’shistory:agenuinecontest.Seven candidates, many of them fromfringe outfits, threw their hats into the ring.Mr Tajani defeated Mr Pittella only afterthe EPP struck deals with the Euro-federal-ist ALDE grouping, led by Guy Verhofstadt,and with the European Conservatives andReformists, a Eurosceptic outfit dominatedby Britain’s Conservatives. This odd three-some leaves plenty ofquestions.

The job ofthe president sits somewherebetween parliamentary speaker and insti-tutional cheerleader. After his win Mr Ta-jani suggested he would lean towards theformer, vowing not to “push a politicalagenda”. On his watch the parliament willnot enjoy the stature it did under the bruis-ing Mr Schulz, but after the collapse of thegrand coalition, wiliness may be more im-portant than charisma.

And there is plenty to do. The parlia-ment is often mocked, but it plays a crucialrole in EU policymaking. This year it mustwork on tricky reforms to Europe’s migra-tion and asylum systems, as well as ratify-inga controversial trade deal with Canada.The EPP-ALDE agreement calls for actionwhen “European principles” are breached,which could mean steps against Poland’spopulist government. The deal also seeks abigger role for the parliament in Brexittalks. MEPs must approve the final settle-ment; their vote may take place in early2019, just as they gear up for re-election.

One relationship to watch will be thatbetween Messrs Tajani and Juncker. Thecommission president and Mr Schulz goton famously, despite hailing from differentpolitical families. That helped smooth theprocess of passing legislation (under EUrules the commission proposes laws, andthe parliament and representatives fromnational governments pass them). Mean-while, the S&D is left licking its wounds.Another European trend, then, for the par-liament to follow: the collapse of the main-stream left. 7

The European Parliament

A shift to the right

BRUSSELS

Anewpresident has a shakycoalitionand a tough agenda

Wiles over charisma

44 Europe The Economist January 21st 2017

2

Russian propaganda

Putin’s prevaricating puppets

PRODUCERS at RT, the Kremlin-fi-nanced media weapon formerly

known as “Russia Today”, must havebeen glowing. More than halfof thereport on Russian electoral interferencewhich America’s intelligence agenciesreleased on January 6th was devoted towarning of the network’s growing influ-ence. The report noted the “rapid expan-sion” ofRT’s operations and budget—now $300m a year—and cited impressiveaudience numbers listed on the RT web-site. The channel, whose professed mis-sion is to present the Russian point ofview to foreign audiences, claims toreach 550m people worldwide, withAmerica and Britain as its most success-ful markets. Conclusion: RT is part ofa“Kremlin-directed campaign to under-mine faith in the US Government”.

That is no doubt true, but whether it issucceeding is a different question. RT hasa clever way with numbers. Its “audi-ence” of550m refers to the number ofpeople who can access its channel, notthose who actually watch it. RT has neverreleased the latter figure, but a 2015 sur-vey of the top 94 cable channels in Amer-ica by Nielsen, a research firm, found thatRT did not even make it into the rankings.In Britain last month, it captured just0.04% ofviewers, according to the Broad-cast Audience Research Board.

On Twitter and Facebook, RT’s reach isnarrower than that ofother news net-works (see chart). Its biggest claim todominance is on YouTube, where it billsitselfas the “most watched news net-work” on the platform. As the intelli-gence report fretfully notes, RT videos get1m views a day, far surpassing otheroutlets. But this is mostly down to thenetwork’s practice ofbuying the rights tosensational footage, for instance of Ja-pan’s 2011 tsunami, and repackaging it

with the company logo. RT hopes that theauthenticity ofsuch raw content willdraw viewers to its political stories too,explains Ellen Mickiewicz ofDuke Uni-versity. This sounds like a canny strategy,but it does not work. RT’s most popularvideos are ofearthquakes and grislyaccidents. Among the top 15, the closest toa political clip is one ofVladimir Putinsinging “Blueberry Hill”.

RT is not all strongman serenades. Itbroadcasts loopy conspiracy theoriesand fake news stories that encouragedistrust ofWestern governments (the CIAcreated Ebola; the 9/11attacks were aninside job; Ukraine crucifies babies).Ofcom, Britain’s media regulator, hasrebuked the network, and NATO hascalled for counter-messaging to combatits propaganda. But the conflation of RTwith Russian hacking and espionage hasmade it out to be a10-foot monster, saysSamuel Charap, a Russia analyst. In factthe Kremlin cut its funds by10% last yearas it struggled to balance the federalbudget. With awestruckreviews fromAmerican spooks, however, money mayflow more freely in the future. 7

RT broadcasts drivel, but is far less influential than the West fears

Toxic, but not viral

Source: Twitter *Early December 2016 to January 18th 2017

News organisations’ Twitter accountsFollowers, January 18th 2017, m

0 5 10 15 20 25 30 35

nytimes

CNN

Reuters

AP

BBCNews

AJEnglish

RT_com

Averageretweets

per tweet*

240.7

400.3

96.8

190.9

211.6

135.1

109.7

Mr Kudrin presented Mr Putin with achoice. If the government does nothing,and provided oil prices do not fall, he esti-mates Russia’s growth rate between nowand 2035 will hover in the vicinity of 2%(see chart). If it implements Mr Kudrin’s re-forms, growth rates will top 4%—enoughgradually to close the income gap withWestern economies. Yet from the Krem-lin’s point of view Mr Kudrin’s reforms arerisky: they threaten to destabilise Russia’scentralised, cronyistic political system.

The government is already trying to cutpublic spending from 37% of GDP down to32%, creating a fight for shrinking resourcesthat was evident at the forum. Aday beforehis speech, Mr Kudrin moderated a panelcomposed of Russia’s most successful andpowerful regional governors. The presi-dent of the Muslim republic of Tatarstancomplained of excessive centralisationand a lack of trust from Moscow. “To ruleany territory, you need money and cad-res,” he said. Last year Moscow cut 8bnroubles ($134m) from his budget, about 5%ofhis annual spending.

Instead of granting economic freedomand rewarding regional initiative, Moscow,fearful of separatism, keeps the regions de-pendent on hand-outs from the centre.“God forbid if your budget revenues aregrowing: you will immediately lose subsi-dies and be forced to finance other federalprojects,” said Anatoly Artamonov, the go-vernor of the car-making region of Kaluga.“Transferring most executive powers to theregions is long overdue,” said Sergei Moro-zov, the governor of the Ulianovskregion.

For Mr Putin, however, the risks of com-prehensive reforms, such as decentralisa-tion, could be greater than the benefits—es-pecially when he faces no immediatepressure, at home orabroad. Asource closeto the Kremlin says the president is confi-dent that he has earned the unwaveringsupport of his people and no longer needsto reinforce his standing through stellareconomic performance. Despite two yearsofrecession, Russians have adjusted to fall-ing incomes without much protest. Mean-while, Donald Trump’s election in Ameri-ca and the growing wave ofnationalism in

Europe have convinced many in the Krem-lin that things are going their way.

State television channels ignored MrKudrin’s speech, concentrating instead onMr Trump’s upcoming inauguration. Onthe largest, Channel One, announcers rel-ished America’s humiliating obsessionwith claims that Russia had interfered in itselections and that Mr Trump employedprostitutes while visiting Moscow. (Mr Pu-tin discounted the allegations but notedthat Russian prostitutes were “the best inthe world”.) The reason for America’s hys-teria over Russia’s relationship to the presi-dent-elect, explained Valery Fadeev, the

anchor of Channel One’s weekly analyti-cal programme, is that the era of Westernliberal interventionism is coming to anend. Those who attackMrTrump’s admira-tion ofMrPutin can see the commonalitiesbetween their approaches: “The world or-der can be renewed on the basis of ourprinciples.”

The popularity of this view bodes ill forMr Kudrin’s programme. Russia’s long-term economic prospects may be as dire ashe says. But it is unlikely to adopt liberal re-forms when its elite believes that liberal-ism is on the retreat and a new Russianmodel is on the rise. 7

Promises, promises

Sources: Economist Intelligence Unit;Centre for Strategic Research

Russian GDP, % change on a year earlier

F O R E C A S T

9

6

3

0

3

6

9

12

+

–

2000 05 10 15 20 25 30 35

Target

Actual

Projectionwithoutreforms

The Economist January 21st 2017 Europe 45

JUST over a year ago Barack Obama decided that the EuropeanUnion needed his help. His advisers devised a strategy to bol-ster America’s European allies, incorporating transatlantic vis-

its, political theatre and pep talks. Mr Obama talked of the dan-gers of Brexit in London and invited Matteo Renzi, Italy’sill-starred prime minister, to Washington to backhis constitution-al referendum. Last April Mr Obama’s visit to Hanover, ostensi-bly to encourage a floundering transatlantic trade pact, occa-sioned a stirring defence of European unity, the memory ofwhich still turns beleaguered Brussels bureaucrats misty-eyed.

Sharp-eyed readers will have noticed that each of these gam-bits failed. Britons ignored Mr Obama’s warning that a post-EUBritain would be at the “back of the queue” for any new tradedeals; Italians spurned Mr Renzi’s constitutional changes (andforced him from office); and Donald Trump’svictory, in the wordsof the EU’s trade commissioner, put multilateral trade talks intothe “freezer”. All of these outcomes revealed voters’ discontentwith their political masters, a mood that found its fullest expres-sion in the election ofMr Trump.

If Europeans seek change, they will receive it good and hardfrom America’s new president. This week Mr Trump told Britishand German newspapers that he expected other countries to fol-lowBritain outofthe EU, which he termed “basicallya vehicle forGermany”. Slamming America’s allies for miserly defencespending, he declared NATO “obsolete”. He said he was as likelyto fall out with Germany’s chancellor, Angela Merkel, as withVladimir Putin, the Russian president. These remarks hardly rep-resented an about-face: Mr Trump has lamented security free-rid-ing for decades, for example. But coming four days before his in-auguration, they delivered a hefty payload.

Mr Trump appears to promise the biggest rupture in trans-atlantic relations since 1945. Should he be taken at his word? On arecent visit to Washington your columnist was urged by Atlanti-cists to pin his hopes on appointments like that of James Mattis,Mr Trump’s pick for defence secretary. During last week’s confir-mation hearings General Mattis, a conventional Republicanhawk, hammered Russia and declared NATO vital to Americaninterests. What to make of such apparent conflict inside MrTrump’s cabinet? Perhaps it is a calculated strategy to confound

America’s foes. More likely it reveals Mr Trump’s slapdash ap-proach to policy, and promises bureaucratic chaos those adver-saries will be delighted to exploit.

Mr Trump shows little affection for Germany, despite his Ba-varian grandfather. Yet if this has caused panic in Germany, it iswell concealed. Charlemagne has heard an official in Berlin sug-gest, with a straight face, that Mr Trump would surely change hismind on Mr Putin once the intricacies of the 1994 Budapest Mem-orandum, under which Ukraine agreed to give up its legacy nuc-lear arsenal in exchange for guarantees of territorial integrity,were explained to him. OtherGerman officials place their faith inAmerica’s institutions—Congress, the civil service, the mili-tary—to restrain the new commander-in-chief.

Very well: hope for the best. Bien-pensant Europeans were ter-rified ofRonald Reagan when he tookoffice in 1981; less than a de-cade later they watched the Berlin Wall tumble. Mr Trump has notrack record in government on which to base forecasts, and hishabit of self-contradiction renders prediction impossible. Someeven spy opportunity. Perhaps a Putin-friendly president couldease tensions with Russia, at least in the short term. Mr Trump’sthreat to withdrawAmerica’s securityumbrella providesa usefulargument to those Europeans pressing for more defence spend-ing at home. Maybe the uncertainty Mr Trump has injected intoglobal politics will galvanise Europeans into resolving their pettydifferences and forging a genuine common foreign policy.

Be afraidBut the risks to Europe of a Trump presidency outweigh any pos-sible benefits. First, a fraying EU may be susceptible to the presi-dent’sbrand ofbilateralism. Watch Britain, seekingfresh partnersas it Brexits (Mr Trump pledges a trade deal “very quickly”,though Brussels rules make that impossible). Poland’s nationalistgovernment, a pariah in the EU for its unconstitutional powergrabs at home, is a prime candidate for Trumpian deal-making,says Jan Techau of the American Academy in Berlin, a think-tank.Watch, too, Mr Trump’s choice of European friends. The roll callof visitors to his gold-plated tower since the election includes theleaders of populist outfits from Britain, Austria and France, whosee in Mr Trump’s victory a validation of their own assaults onthe established order.

The principal victims may be outside the EU. Europe’s fate liesin its own hands, Mrs Merkel said this week. But the EU strugglesto extend its sway to weak countries on its fringes. Take MrTrump’s hint that he might ease sanctions on Russia, imposed in2014 over its aggression in Ukraine. The offer carries a cost even ifit comes to nothing. Without American backing the EU’s consen-sus on Russian sanctions will evaporate (especially ifFrançois Fil-lon, a Putin-friendly Gaullist, wins France’s presidential electionin May). As the West loses its attraction Ukraine may be suckedinto Russia’s orbit. Atlanticists in post-Soviet states like Moldovaand Georgia will be left in the cold. Tensions in the Balkans maybubble over, especially ifMr Putin steps up his meddling.

American support, both hard and soft, has always under-girded European unity, and its absence will be keenly felt. Thecondition may not be permanent: American presidential termslast only four years. But that is plenty of time to inflict immenseharm. During his last visit to Europe, in November, Mr Obamasought to reassure his allies that the transatlantic bond wouldsurvive the Trump era. Europeans must hope that on this trip, un-like the earlier ones, the president got it right. 7

Looking hairy

Europeans might hope for the best with Donald Trump, but must prepare for the worst

Charlemagne

46 The Economist January 21st 2017

For daily analysis and debate on Britain, visit

Economist.com/britain

1

IT MIGHT be called May’s paradox. Sinceshe became prime minister last July, Mrs

May has been urged by businesses to clari-fy her Brexit goals. Yet every time she hastried, investors have reacted by selling ster-ling, because she has shown a preferencefor a “hard” (or, as her advisers prefer,“clean”) Brexit that takes Britain out of theEU’s single market and customs union.

In fact the pound rose on January 17thwhen she gave a speech that set out hermost detailed thinking so far about Brexit.That was partly because her decision toleave the single market and customs unionhad been widely trailed, causing thepound to fall in the run-up to her speech.But it may also have been because marketswere pleasantly surprised by her languagein setting out a dream of a liberal, open fu-ture for the country—she spoke behind theslogan “A Global Britain”—and her ex-pressed wish for continuing friendly rela-tions with Europe.

There is a liberal vision of a post-Brexitfuture in which Britain escapes the mostprotectionist features of the EU and opensits economy to the rest of the world. It isone that includes lower taxes, less pettifog-ging regulation and freer trade. During thereferendum campaign it was sometimestalked of as “Singapore on steroids”: a dy-namic, open Britain capable of competingnot just with other EU countries but withthe whole world.

was less honest in not admitting that Brexitwill impose costs, and that a hard Brexitwill make them heavier. A YouGov poll forOpen Britain, a pro-EU group, finds thateven a majority ofLeave voters are not pre-pared to be made worse offin order to con-trol immigration.

Mrs May’s response that the economyhas done better since the referendum thaneconomists forecast is disingenuous. Notonly have easier monetary and fiscal poli-cy and the fall in sterling cushioned the im-pact but Brexit has not yet happened—anduntil recently many firms hoped to stay inthe single market. Nor did Mrs May offerany solution to the problems that leavingthe single market and customs union willcause for the border with Ireland, wherethere are currently no customs checks.

Negotiating free-trade agreements willbe harder and more time-consuming thanMrsMaysuggests. She expressed hope thata comprehensive deal with the EU couldbe done in two years. But experience sug-gests this is highly unlikely. Many EU coun-tries say they need to settle divorce terms(dividing up property, pensions and so on)before even talking about trade. Canada’sfree-trade deal with the EU has taken sevenyears and is not yet in force. For Britain toreplicate the EU’s trade deals with 53 thirdcountries will be more testing than today’senthusiastic talk of an early agreementwith America suggests (see next story).And ratification is always tricky: a recentECJ rulingmakesa free-trade deal with Brit-ain a “mixed” agreement that must be ap-proved by every parliament in the EU, in-cluding regional ones.

The truth is that when Mrs May formal-ly triggers Brexit she will find the cardsstacked against her. Subject to an immi-nentSupreme Court rulingon needingpar-liamentary approval, she plans to initiate

The trouble is that, for all her pleasingrhetoric, Mrs May is not really pursuingthisvision. She hasset immigration controlas her priority (see Bagehot), even thoughtoday’s service businesses depend on be-ing able to move people around at shortnotice, as does high-tech industry. A simi-lar drawback attaches to her insistence onescaping the jurisdiction of the EuropeanCourt of Justice (ECJ). Free-trade deals re-quire a neutral umpire. So would any ef-fort, hinted at again by Mrs May, to securepost-Brexit barrier-free access to the EU’ssingle market for such key industries ascars and financial services (see page 63).

Such a sectoral approach is anyway un-likely to work, for two reasons. One is thatthe EU will not offer favoured access to itsmarket only for certain industries. The sec-ond is that the World Trade Organisationdoes not allow it. The WTO accepts free-trade deals and customs unions, but only ifthey embrace “substantially all the trade”.Were the EU to single out cars, say, for barri-er-free trade with Britain, the EU would beobliged by the WTO’s non-discriminationrules to offer the same deal to all WTOmembers, including China and India.

Mrs May was frank about the trade-offbetween being in the single market andtaking back control of borders and laws.She even declared that to stay in the singlemarketwould mean “to all intentsand pur-poses” not leaving the EU at all. But she

Brexit

Doing it the hard way

Theresa Mayopts fora clean breakwith Europe. Negotiations will still be tricky

BritainAlso in this section

47 Trading with Trump

48 Bagehot: Let the work permits flow

The Economist January 21st 2017 Britain 47

2 the process in March. The divorce proceed-ings then have an extremely tight two-yeardeadline. Mrs May acknowledged theneed for transition, but only as an imple-mentation process towards a final deal. Asshe conceded, the other 27 EU countrieshave been impressively united over Brexit.They may welcome her new clarity, but forthem the preservation ofthe union is morepressing than all else. As several leadershave said, Britain cannot have a better dealoutside than inside the club.

Mrs May made helpful noises aboutnot wishing to see the EU unravel, unlikeDonald Trump. She stressed the need to re-tain co-operation on foreign policy and se-curity. And she said Britain mightpay mod-estly into the EU budget (though no longer“vast contributions”, so talk in Brussels ofan initial Brexit bill of upwards of €50bn,or $53bn, may not go down well). But shealso threatened her partners, calling it anact of “calamitous self-harm” if they

pushed for a punitive settlement; Britaincould retaliate by slashing taxes, she said.She believes her predecessor, David Cam-eron, made a mistake by not being ready towalk out rather than accept inadequatenew membership terms. In her speech, in-deed, she insisted that no deal was betterthan a bad deal.

As Malcolm Barr of J.P. Morgan pointsout, this is a dangerous line. No deal wouldmean fallingbackon WTO terms, implyingnot just non-tariff barriers and lost accessto the single market but actual tariffs on ex-ports of cars, pharmaceuticals, processedfoods and much else. The EU would suffertoo, but its goods exports to Britain areworth only3% ofitsGDP; Britain’s to the EUare worth12% of its own GDP. Mrs May hasmade a powerful case for her version of ahard Brexit. But it is Britain, not the 27, thatis the demandeur in these negotiations.And that will make securing a good out-come hard in every sense. 7

IT WAS music to Brexiteers’ ears. In an in-terview with the Times and Germany’s

Bild, Donald Trump revealed that he want-ed a trade agreement between Americaand Britain “very quickly”. Less widely re-ported was Mr Trump’s refusal to specifyhow far up his list of priorities Britainwould be after he took office on January20th. Trade deals have assumed fresh im-portance since Theresa May confirmedthis week that Britain would leave the EU’ssingle market and customs union, allow-ing it to sign trade agreements of its own.Unfortunately the probable benefits of adeal with the Donald are underwhelm-ing—especially for Britain.

In 2015 Britain sent exports worth about£100bn ($121bn) to America, making it Brit-ain’s biggest export destination after theEU, to which it sold goods and servicesworth over £200bn. Americans are heavyusers of British financiers’ expertise. In in-surance Britain probably has a larger tradesurplus with America than it does with theEU. An index of “trade complementarity”produced by the World Bank suggests thatthe British and American economieswould be highly suitable trade partners.

However, gummy regulations holdback commerce. Britain sends relativelyfew cars to America, for instance, partly be-cause America and the EU use differentsafety standards. America has turned itsnose up at British meat since a food-safety

crisis in the 1980s. Haggis, a Scottish deli-cacy containing sheep heart, liver andlungs, is in effect banned.

A bonfire of rules and tariffs could helpcertain industries. Haggis makers are de-lighted by rumours that Mr Trump, whosemother was born in Scotland, wants to liftthe ban. (“Consider it done,” he supposed-ly told one hotelier following his election.)Alan Winters ofthe UK Trade Policy Obser-

vatory at Sussex University says that Brit-ish consumers could benefit if the homemarket were opened to cheap Americanfood. Britain might allow in geneticallymodified crops, which are regulated moreheavily in the EU, or buy from America’shighly competitive beef farmers.

But as the car industry shows, it is nottariffs but non-tariffbarriers, such as differ-ing regulations, that most impede British-American trade. One research paper findsthat in the chemicals industry, EU exportsto America face non-tariff barriers equiva-lent to a tariffofabout 20%.

Agreements to scrap non-tariff barrierswould help trade along. Caroline Freundof the Peterson Institute, a think-tankbased in Washington, DC, reckons thatBrit-ain and America could make progress on“digital trade”, somethingon which negoti-ations between the EU and America havestalled. This could include, for instance,agreements on data sharing and copyright.

It would not all be plain sailing, how-ever. British firms, especially small ones,would struggle to comply with Americanand EU standards simultaneously (a paperfrom 2015 noted that the area of the wind-screen cleaned by wipers must in certaincases be larger for American-compliantcars than EU ones, for instance). And al-though Mr Trump might swallow sheep’slungs, he may play hardball with more lu-crative industries. Britain, whose economyis one-sixth the size of America’s, wouldhave little bargaining power.

American negotiators could, for in-stance, target Britain’s insurance market,extracting an agreement to lower non-ta-riff barriers and in so doing cutting thatprized trade surplus. Britain’s public-pro-curement market might also be of interest,in which case expect headlines aboutAmerican health-care firms snapping upNational Health Service contracts. Britishcarmakers may be disappointed: MrTrump makes political capital from pro-tectingAmerica’s auto industry, not throw-ing it open to foreign competition.

Even if these bumps can be smoothedover, geography will also limit the impactof a British-American trade deal. So-calledgravity models of trade reveal somethingvery simple: nearby countries trade morewith each other. It is hard for a London-based lawyer to provide services to a Cali-fornian client when their working daysbarely overlap.

Other countries “are already queuingup” for a trade deal with Britain, accordingto Boris Johnson, the foreign secretary. Butthere is a mountain to climb. One estimatesuggested that quitting the EU and fallingback on World Trade Organisation ruleswould be associated with a decline ofabout a fifth in Britain’s total trade vol-umes. Mr Trump’s proclamations, ifofanysubstance, are encouraging. But Britain isnot about to enter a golden era of trade. 7

Trade with America

The art of the deal

Don’t get too excited by the prospect ofa trade agreement with President Trump

48 Britain The Economist January 21st 2017

THERESA MAY’S speech on Brexit lasted almost an hour, butfive seconds would have sufficed. She could just have said:

“Immigration controls will be imposed at any cost.” As home sec-retary, she tried and failed to implementDavid Cameron’spledgeto drive net immigration below 100,000 (it was 335,000 in theyear to June 2016). After she replaced him she could easily havedumped the target, but instead cleaved to it. When Amber Rudd,her liberal-minded home secretary, suggested it be softened,Number 10 promptly overruled her. Clearly the prime ministerbelieves it worth pulling Britain out of the European single mar-ket and the customs union to achieve this elusive goal. So expectdrastic immigration cuts when, in 2019, free movement is re-placed by a system ofworkpermits.

The prime minister’s thinking is not hard to fathom. Immigra-tion was integral to the anti-EU campaign in the Brexit referen-dum. A poll of Leave voters’ motivations commissioned by LordAshcroft, a Tory peer, after the vote found that regaining controlof borders had been second only to casting off rules from Brus-sels. Dominic Cummings, the mastermind of the Brexit victory,says: “All focus groups now start with immigration and tend to re-vert to it within two minutes unless you stop them.” One onlyhas to join an MP on a canvassing round to see what he means:door after door, residents raise it when asked what bothers them.

Yet such sessions also make clear that immigration is nomonolithic political issue. It contains multitudes. And pickingthese apart suggests Mrs May should think twice about slam-ming the door.

That starts with being frank about something politicians usepatronisingly tortuous insincerities to describe: some voters justdon’t like immigrants. These voters are not bad people—they maybe pillars of their communities, compassionate and generous totheir fellow citizens—but they dislike hearing foreign languages,mistrust cultures other than the native one and assume foreign-ers are scoundrels and malingerers. This group is a small minor-ity: in 2015 YouGov, a pollster, found that 10% of respondentswould mind ifsomeone ofa different ethnicity moved next door;16% if he or she married one of their children. In general, Britonslike immigrants even if they dislike immigration. British Future, athink-tank, found that 84% (and 77% of Leave voters) favoured al-

lowing European residents in Britain to stay after Brexit. Which is not to say that culture is irrelevant. Listen to voters

discuss their worries about immigration and it becomes clearthat these are part of a broader sense that society is unstable andunjust; that the system doesnotworkproperly. Thisencompassesconcerns about the integrity of borders; crime and terrorism; so-cial atomisation; the speed at which society is changing; the wan-ing ofdeference. One study last year showed that people who donot feel in control oftheir livesare more likely to oppose immigra-tion. Voters need have no specific quarrel with immigrants to seethem as part of this phenomenon. Reducingnumbers is thereforeunlikely to get to the heart of their complaints.

Most of all, however, objections to immigration are material.Accordingto pollsbyIpsosMORI, the five most-cited reasons peo-ple give when asked why they consider immigration too high are:job shortages, overcrowding, pressures on the state, welfarestrainsand housingshortages. (Cultural factors—crime, lossofna-tional identity and failure to integrate—are far behind, on low sin-gle digits.) In other words, though immigrants make Britain rich-er, locals correctly believe that the prosperity they generate isunevenly spread. Yet only a fraction of the political energy andcapital invested in cutting immigration goes into thinking up andimplementing ways of relieving its pressures.

Even ifall this were wrong, and Britons really disliked the peo-ple who moved to join them on their islands, would shutting theborders cheer them up? Views about immigration bear only animprecise relationship to number of immigrants. In the Brexit ref-erendum, the parts ofthe country with the most foreign-born res-idents voted most heavily to remain; it was those areas that hadseen the fastest increase in foreigners that were among the keen-est to leave. Britons guess 31% of the population is foreign-born,when the true figure is 13%—and when confronted with the dis-parity they tend to question the figures rather than their assump-tions. Whether voters would acknowledge, let alone notice, alarge fall in immigration is therefore open to question.

MrsMay’sdoor-slam, then, threatens to represent the worstofall worlds: creating unmeetable expectations among voters,while the fall in immigration damages the British economy, low-ering tax receipts, putting services under even more strain andthus compounding the immigration “problem”. As such, thecoming crackdown could alienate not just cosmopolitans—agroup likely to grow, given young Britons’ relaxed stance on im-migration—but also those nativists it is meant to placate.

Don’t cut. BuildTo politicians struggling with the subject: there are alternatives.Ditch the constipated talk of “concerns about immigration”(which only looks evasive) and make the honest case for the cur-rent, controlled levels. Propagate accurate facts about the num-bers of immigrants, their impact and the process by which workpermits are to be issued. Revive and expand the Migration Im-pacts Fund, a foolishly mothballed programme that channelledgovernment resources to places experiencing fast populationchange. Embrace the proposals by Sajid Javid, the communitiessecretary, to relax the green belt to accelerate housebuilding.Have a proper debate about health-care funding, make the wel-fare system more contributory, put more police officers on thebeat, make a period of national service compulsory for young-sters. Before reaching for reckless immigration cuts, pick the low-hanging fruit. It is plentiful. 7

Let the work permits flow

The prime minister’s maximalist Brexit need not mean immigration cuts

Bagehot

The Economist January 21st 2017 49

1

FOR somethingso private and covert, theselective abortion of female fetuses is

an oddly common topic ofconversation inIndia. Narendra Modi, the prime minister,exhorts his countrymen to save girls andsend them to school. When Sakshi Malikwon India’s first medal at the Rio Olym-pics, in wrestling, it was an occasion for re-gret as well as national chest-beating. Suchvictories are only possible when girls arenot killed, commented Virender Sehwag, adashing cricketer turned Twitter star.

India has cause to fret. According to twodemographers, John Bongaarts and Chris-tophe Guilmoto, a staggering 45m girls andwomen are missing from the country.Some were never born, having been de-tected by ultrasound scans and aborted.Others died young as a result of being ne-glected more than boys. Some villages inthe north have an alarming surplus ofboys and young men. Yet attitudes and be-haviour are changing. In India, and in theworld as a whole, the war on baby girlsseems to be winding down.

Even without human meddling, the sexratio is skewed. Asians and Europeanstend to have about 105 boys for every 100girls, whereas Africans have closer to 103boys. That seems to be nature’s way ofcompensating for the higher death rate ofboys and men; by the time men and wom-en are ready to have children, the numbersought to be roughly balanced. But in a fewcountries the ratio is unnaturally high. At

two children are more likely to try to tip theodds. Third, there must be an accessible,tolerated way of getting rid of superfluousgirls. Today, that is usually abortion.

All three things used to be true of SouthKorea (see box on next page) and they aretrue today of China, India, Pakistan, Viet-nam and the south Caucasus. They hold inparts of Indonesia but not the whole coun-try. Indeed, Indonesia has an unusualgroup that proves the rule. The Minangka-bau, from West Sumatra, practice matrilo-cality—that is, newly married couplesmove into the wife’s household. Theyhave a normal sex ratio. But birth data sug-gest that they are hungry for daughters. AMinangkabau who gives birth to a boywill, on average, have a second child morequickly than one who gives birth to a girl.

Uptown girlThe first signs that sex ratios might be re-turning to normal appeared after the lastround of censuses. The sex ratio amongChina’s children, which had risen steadilyfor decades, did not budge between 2000and 2010. In India, the excess of boys overgirls worsened slightly between 2001 and2011. But more girls were counted in thestates where sex selection had been mostcommon, such as Haryana and Punjab.

Annual data on births, which are lessauthoritative than census figures on chil-dren but more up-to-date, suggest the tidehas turned. India’s sex ratio at birth has be-come more normal over the past decade,especially in cities (see chart). In China—where, admittedly, official figures of allkinds are fishy—the sex ratio at birth hasfallen from a peak of 121 boys per 100 girlsin 2004 to 114 in 2015.

Vietnam still has too many male births,but the situation has not worsened sinceabout 2010. Armenia and Azerbaijan arealso holding steady; sex ratios had become

the last census, in 2011, India had 109 boysaged 0-6 for every 100 girls; in Punjab, awealthy northern state, the ratio was 118 to100. China had 119 boys aged 0-4 for every100 girls in 2010.

Sex ratios go out of whack when threethings occur at once. First, a large propor-tion of couples must fervently desire boys.That happens mostly in “patrilocal” societ-ies, where a woman moves out of her par-ents’ home upon marriage and into herhusband’s home, to dote on his parentsand harvest his family’s crops. Second,birth rates must be low. A couple who in-tend to have five or six children (as Nigeri-ans do today, for example) will almost cer-tainly get a boy just by the law of averages,whereas a couple who would like one or

Sex selection

Boy trouble

The waron babygirls has turned. Thankurbanisation, economics and soap operas

InternationalAlso in this section

50 Prizing girls in South Korea

Getting back to nature

Source: Census of India

India, sex ratio at birthBoys per 100 girls, three-year moving average

105

100

110

115

120

1999 2001 03 05 07 09 11 13

Urban

Rural

NATURAL RATIO

50 International The Economist January 21st 2017

2 Prizing girls

Like father, like daughter

“ICRIED when I heard,” writes oneblogger, recalling the moment she

learned that her baby was a boy. Thosewere bitter tears. The woman was “soenvious” ofa mother who had just givenbirth to a daughter. She was not at allunusual. South Koreans of reproductiveage now prefer girls to boys (see chart).They have created a new term, “ddal-babo”—“daughter crazy”—for men whogo loopy over their female offspring.

Until the early 20th century failure tobear a son was grounds for divorce. Kore-ans greatly preferred boys, who could notonly support their parents financially but

also carry out ancestral rites. Whenultrasound technology became wide-spread in the1980s, many South Koreansused it to detect female fetuses and thenhave them aborted. Sex ratios becameskewed. In1992 twice as many fourthbabies were boys as were girls.

In response to these trends the SouthKorean government made it illegal fordoctors to reveal the sex ofa fetus. Itproduced pro-girl slogans: “There is noenvy for ten sons when you have onewell-raised daughter.”

That may have helped, but not asmuch as economic change. Following theAsian financial crisis of1997, many wom-en tookpart-time jobs to supplement thefamily income. Parents noticed, andbegan to invest more heavily in educat-ing girls. In 2015 three-quarters ofSouthKorean female secondary-schoolerswent to university, compared with two-thirds of their male peers.

Aborting girls simply because they aregirls has become so unthinkable that thelaw has been relaxed. Since 2009 expec-tant parents have been allowed to knowthe sex of their baby after 32 weeks’ gesta-tion. Many will have found out before,from doctors who trust that parents’attitudes have changed.

SEOUL

HowSouth Korea learned to love baby girls

Girl power

Source: Korea General Social Survey

South Korea, % responding by age group, 2012If you could have only one child, would you prefer a:

0 20 40 60 80 100

18-29

30-39

40-49

50-59

60-69

70+

SonDaughter No preference

unbalanced in both countries in the 1990s.Sex selection is disappearing in Georgiaand Taiwan. Then there is South Korea, thecountry that most cheers demographers.In 1990 it had a sex ratio at birth of 116 to100. For the past three years the figure hasbeen 105—precisely what it should be.Something is driving sex ratios back to nor-mal levels. But what?

Not, probably, the efforts that somecountries have made to crackdown on sex-selective abortion. Indian couples find iteasy to circumvent an official ban by book-ing their ultrasound scans at one clinic andtheirabortions at another. The Chinese au-thorities have cracked down harder, scruti-nising couples who already have a girl andare thus highly likely to abort another fe-male fetus. The sex ratio for second birthsin China duly became more normal. But,as Monica Das Gupta of the University ofMaryland, an expert on the subject, pointsout, some Chinese couples simply movedto sex-selecting in the first pregnancy.

Ms Das Gupta thinks that urbanisationis a more powerful force for change. A city-dwelling couple might be teased by neigh-bours for having only girls, but that is noth-ingcompared with the pressure heaped onvillagersbyclan patriarchsand matriarchs.And young city-dwellers tend to live apartfrom theirparents, which removesone rea-son for preferring sons. Now that childrentend to support their parents by sendingmoney, daughters are just as good. Urba-nites have access to the latest medical tech-nology, but they seem less keen on using it.

As urban women grow more indepen-dent and more valuable to their parents,rural men are struggling. Years of skewedsex ratios mean there are already too manywould-be grooms for every village bride.Worse, the women they might marry oftenhead for cities, where they can find betterhusbands. “There’s an awareness that lifeis not great for males,” says Therese Hes-keth of University College London, whofollows sex ratios in China.

Indeed, rural Chinese men increasinglylook like burdens on their parents. A re-markable paper by Shang-Jin Wei andXiaobo Zhang shows that parents of sonsin districts with high sex imbalances tendto save large amounts of money, fearingthat theywill have to splash outon houses,consumer goods and weddings if they areto snag a local girl. This effect is so strong,the authors calculate, that it explains abouthalf the increase in China’s household sav-ings rate between 1990 and 2007.

Spying a coming social catastrophe,governments have tried to cajole citizensinto prizing girls by putting up posters oreven offering them money. They mighthave changed a few minds. But officialshave often muddled their message. UnderChina’s one-child policy, for example, cou-ples who gave birth to a girl were often al-lowed to have a second child, implying

that the state felt sorry for those who hadfailed to produce a boy. But where govern-ments have been confused and half-heart-ed about the worth ofgirls, popularculturehas been loud and insistent.

TV is good foryouFor sheer attention-grabbing power, noth-ing beats TV in India. One study found that51% of women in Kurukshetra, a district inthe state of Haryana, had seen a soap op-era called “Na Aana Is Des Laado” (Don’tCome To This Country, Beloved Daughter).That soap revolves around female infanti-cide: in one episode, a father murders hisbaby daughter by drowning her in milk. Bycontrast, just 5% of women in the districthad seen a film produced by the govern-ment about the equality of boys and girls,and less than 1% had heard about the sub-ject from religious leaders.

“TV is not just entertainment—it is a bigsource ofeducation,” says Purnendu Shek-har, a writer of soap operas. One of hissoaps, “Balika Vadhu” (Child Bride), isabout the evil of child marriage. Mr Shek-har thinks the show changed attitudes,and it certainly entertained the country.“Balika Vadhu” ran daily for eight years,

ending last July, and has also been popularin Vietnam. He believeseven conventionalsoaps, which tend to hinge on conflicts be-tween women and their mothers-in-lawand dial all emotions up to 11, get viewersused to the idea of powerful women. “Sto-ries with strong male protagonists do notwork in India,” he says.

Studies of India have shown that TV-watching is associated with reduced pref-erence for sons, even after controlling forwealth and other factors. That might seemimplausible. But rememberthat Indians of-ten distrust politicians and public officials,says Shoma Munshi, an expert on Indiansoap operas. They are at least as willing tolisten to actors. That is why TV and filmstars often become politicians, or are usedto front public-health campaigns.

Sex ratios remain highly unbalanced inmany countries. But there is an importantdifference between a giant social problemand an endless one, and gendercide nowlooks like an example of the former. MrGuilmoto believes that sex ratios will con-tinue to normalise until they return to nat-ural levels. Asia has engaged in a demo-graphic experiment with disastrousconsequences. It will surely not repeat it. 7

The Economist January 21st 2017 51

For daily coverage of business, visit

Economist.com/business-finance

1

BRITISH AMERICAN TOBACCO (BAT)announced on January17th a final deal

to buy Reynolds American for $49bn. BATalready owns 42% of Reynolds; buying therest of it will create the world’s largest list-ed tobacco company by sales and profits. Itwill peddle brands such as Dunhill, Cameland Newport. The casual observer mightimagine the deal to be a frantic bid to re-vive an ailing industry. On the contrary.Cigarettes may kill you, but the big compa-nies that make them are rather healthy.

That is despite a decline in smokingrates. In 2015 just over a fifth of adultssmoked, estimates the World Health Orga-nisation, down from almost a quarter tenyears earlier. This drop hardly helps com-panies, but it isn’t ruinous either.

Smoking is still popular in certain spots.More than three-quarters of men light upin Indonesia, for example. The habit is be-comingmore common amongmen in Afri-ca and the eastern Mediterranean (seechart). And though global smoking rateshave fallen, population growth means thatabout 1.1bn people still smoke, roughly asmany as did in 2005. This, combined withrising prices, means that the value of retailsales jumped by 29% in the decade to 2015,according to Euromonitor, a data firm.

The gravest threat to big cigarette mak-ers comes from rivals. Indeed, this week’sdeal increases the chance that Altria,which sells Marlboro in America, will bebought by Philip Morris International,

passed a battery of laws to fight smoking,including taxes and bans on advertisingand on smoking in pubs. Tobacco compa-nies have fought these ferociously, suingcountries such as Australia for prohibitinglogos on cigarette packs, for example. Butsome rules had hidden benefits. Bans onadvertising lower marketing costs andmake it harder for young upstarts to chal-lenge established brands.

Electronic cigarettes would seem an-other existential threat. But they increas-ingly appear to be an opportunity. Large to-bacco firms are investing in such“reduced-risk” products, as they termthem. New requirements for e-cigarettes inEurope and America, finalised last year,may also hinder smaller companies’ abili-ty to innovate. That could help Big Tobaccogain even greater market share: large firmsmay be the only ones with resources tonavigate complex rules.

Companies are particularly bullish onnew products that heat tobacco, withoutburning it. These gadgets are more satisfy-ing to smokers than e-cigarettes, whichcontain nicotine but no tobacco, so mayencourage more smokers to switch. Ciga-rette executives claim that would be ahealth boon: just heating tobacco avoidsmuch of the nasty stuff that comes withcombustion.

Less encouraging for health is the pros-pect that some smokersmight switch to thenew products rather than give up tobaccocompletely. For years companies have soldto a shrinking share of the population. Ifenough would-be quitters switch to “saf-er” cigarettes instead, firms could slow oreven reverse what had seemed a perma-nent downward trend. Far from fadingaway, Big Tobacco might be on the verge ofa new boom.

If so, the company formed by BAT andReynolds stands to gain, as it will combine

which sells Marlboro elsewhere and is theindustry’s leader to date—a scary prospecteven for a merged BAT and Reynolds.

Regardless of whether their rivals’ dealproceeds, the merger of BAT and Reynoldshasclear logic. The firmsclaim it could saveat least $400m each year. Reynolds willalso give BAT access to America, a marketthat once looked repulsively litigious butnow seems stable. Companies still operateunder a vast settlement reached withAmerican states in 1998, but separate class-action suits have turned out to be less cost-ly than feared.

New regulations have not snuffed outtobacco firms, either. Countries have

Cigarette companies

Plucky strike

New York

Amerger is the latest sign ofBig Tobacco’s resilience

BusinessAlso in this section

52 Fiat’s emissions trouble

53 Scandals at Samsung

54 Europe’s eye-catching merger

54 Rolls-Royce rumbles on

56 Upgrading Indian IT firms

57 A new boss at Tata Sons

58 Schumpeter: Shareholder value

Eternal flame

Sources: National Cancer Institute; WHO

FORECAST

Prevalence of smoking, %

0

10

20

30

40

2000 05 10 13 15 20 25

Number of smokers worldwide, m906 1,006

AfricaThe Americas

EasternMediterranean

Europe

South-East Asia

WesternPacific

52 Business The Economist January 21st 2017

2 the two firms’ research into reduced-riskproducts. That will help it compete againstPhilip Morris, which has spent nearlytwice as much on research as BAT. PhilipMorris isnowseekingapproval in Americato market its heated tobacco product as saf-er than traditional cigarettes; it submittedits application to American regulators inDecember. The firm already reckons theproduct might add $1bn in profit by 2020.

André Calantzopoulos, Philip Morris’schief executive, describes a possible futurein which his giant cigarette companyphases out cigarette sales.

Many health advocates view such dec-larations sceptically. For now, combustibleproducts still account for almost all of ciga-rette firms’ revenue. And tobacco remainsresponsible formore than one in nine ofalladult deaths. 7

THE priorities of America’s Environ-mental Protection Agency (EPA) will

doubtless change under Donald Trump.Mr Trump may well relax emissions rulesfor carmakers in return for concessions,such as keeping production in Americarather than relocating to Mexico or otherlower-cost countries. So it is perhaps no co-incidence that on January12th, before con-ditions change, the agency took actionagainst Fiat Chrysler Automobile. It ac-cused FCA (whose chairman, John Elkann,sits on the board of The Economist’s parentcompany) of using software in 104,000Dodge pickups and Jeeps that allowedthem to exceed legal limits on toxic emis-sions of nitrogen-oxide (NOx) gases fromtheir diesel engines.

Nervous investors feared a repeat ofthehuge penalty imposed on Germany’sVolkswagen (VW) for cheating Americanemissions laws. FCA’s shares plummetedby 16%, though they have since recoveredslightly. AdayearlierVWhad agreed to paya criminal fine of $4.3bn for selling around500,000 cars in America fitted with so-called “defeat devices” designed to reduceNOx emissions under test conditions. Thatpushes its total bill for the scandal above$20bn. IfFCA were fined on the same basisit would have to pay over $4bn.

Yet the Italian-American carmaker maynot suffer so severely. VW admitted that ithad employed an illegal defeat device.FCA’s engines used undisclosed softwarethat, under some circumstances, alters thecharacteristics of emissions controls to ex-ceed NOx limits. Crucially, however, theEPA has not determined whether these bitsof software constitute a defeat device. Fail-ure to disclose this type of software alsobreaks the rules, however. The firm mustnow demonstrate that it is not illegal. Im-portant to its argument will be the fact thatexcessive emissions are permitted for lim-ited periods, in circumstances where theengine may be damaged without allowing

them, such as cold-weather starts.Any wrongdoing is strongly denied by

the company. Its chief executive, SergioMarchionne, suggested that anyone draw-ing parallels with the VW scandal was“smoking something illegal”. He called thedispute a “difference of opinion” overwhether the engine’s “calibrations met theregulations”, insisting that FCA “may betechnically deficient but not immoral”. Thecomplexities mean it will be hard to prose-cute. If FCA is right it can expect a fine butnothing as severe as VW’s punishment.

The Italian-American carmaker is alsoin the firing line in Europe. A spat with Ger-many’s regulators has intensified. In AprilGerman authorities concluded that emis-sions controls were timed to turn downafter 22 minutes of the engine starting insome of FCA’s cars. Europe’s test cycle lastsaround 20 minutes. Italy’s testing agency,which certifies the cars for the Europeanmarket, dismissed the complaints, saying itwas part of a “modulation” of the controls

designed to protect the engine. Yet on Janu-ary 15th Germany’s transport minister in-sisted that it amounted to an “illegal shut-off device” and said the cars should bewithdrawn for sale.

FCA is not alone. A day after the EPA an-nounced its investigation of FCA, Frenchprosecutors said that they were probing Re-nault over abnormally high emissionsfrom some of its diesel engines. The Frenchcarmaker’s shares also dipped, but by only6% and have since rebounded slightly too.Europe’s watchdogs are much less of athreat than the EPA, largely because thecontinent’s emissions rules are open toratherwide interpretation. Indeed, VW hasreached the conclusion that its “defeat de-vice” does not actually contravene Euro-pean regulations.

Manydieselsemit farmore noxious gas-es than under test conditions. Transport &Environment, an NGO based in Brussels,reckons thatnewmodels from the worst of-fenders produce on average 15 times moreNOx on the road than when tested. En-forcement, however, is almostnon-existentin Europe and no penalties have ever beenissued for carmakers contravening emis-sions rules. The EU is beefing up its testingsystem but there will still be lots of grey ar-eas for carmakers to exploit.

FCA’s biggest worry, therefore, remainsthe EPA. Even in the worst case—ie, its soft-ware is deemed a defeat device—a fine ex-ceeding $4 billion would not “break itsneck in the current environment”, explainsPatrick Hummel of UBS, a bank. But itwould scupper Mr Marchionne’s target ofshedding debt and having cash in the bankby 2018 in order to weather any downturnin the global car market, now widely as-sumed to be at a peak. It would also com-plicate any attempts to merge with a bigcarmaker, another ofhis ambitions, even ifhe can find a willingpartner. Emissions canhave far-reaching consequences. 7

Fiat Chrysler

Gas puzzlers

The Italian-American carmaker is in regulators’ headlights overemissions

An exhausting process

The Economist January 21st 2017 Business 53

THE deal which did most to secure LeeJae-yong’s control over South Korea’s

biggest conglomerate threatened thisweekto ruin him. On January16th special prose-cutors accused Mr Lee, the only son ofSamsung’s chairman, Lee Kun-hee, ofbrib-ery, embezzlement and perjury. But threedays later a court rejected a request to ar-rest him, as a suspect in an investigationinto a vast influence-peddling case that ledlast month to the South Korean president’simpeachment. It saw “no reasonablegrounds” to detain him while prosecutorspursue their probe.

For now, the result is a victory for Sam-sung. Prosecutors had accused Mr Lee ofpaying 43bn won ($36m) into sports andcultural organisations controlled by ChoiSoon-sil, a formerconfidante ofPark Geun-hye, the president: the biggest-ever sum ina South Korean bribery charge. In returnfor that grant, they allege, Samsung se-cured government support for a controver-sial $8bn merger of two affiliates—Cheil In-dustries, the group’s de facto holdingcompany, and Samsung C&T, its construc-tion arm—in July 2015. That support, theysay, came from a vote cast by the state-runNational Pension Service (NPS), the singlebiggest shareholder in C&T. (The head ofthe NPS, who has admitted to pushing thefund into backing the merger when he washealth minister, was recently indicted.)

During intense questioning by MPs andprosecutors—including one 22-hourstretch—Mr Lee has said he provided thefunds, but denies any bribery. At the time

of the merger, advisory firms such as ISSurged shareholders to reject the deal be-cause ofa big discrepancy in the two firms’valuations. Because it went ahead, Mr Leewasable to gain large stakes in keyaffiliatesat no extra cost through the group’s com-plex web of cross-shareholdings—smooth-ing an eventual takeover from his father,who has been in hospital for nearly threeyears since a heart attack.

Legal experts say that the decision bythe court, which deemed that the evidencefor bribery was not persuasive enough todetain Mr Lee before any official chargewas made, may yet propel prosecutors tostrengthen their case. The charge, linking acorporate “princeling” to the president, isunprecedented, says Chung Sun-sup ofChaebul.com, a corporate watchdog basedin Seoul, the capital. It came despite the fact

that collusion between the state and itschaebol, the large conglomerates behindSouth Korea’s economic boom, has longbeen tolerated.

Nowhere has that collusion been clear-er than in the circus of corporate pardons:the elder Mr Lee was convicted of bribingpoliticians in 1996, and of tax evasion in2008, but spent no time in prison. The mis-creant bosses ofCJ, Hanhwa, Hyundai andSK, other chaebol, have all been sentencedto prison in the past decade. Each has alsobeen pardoned, supposedlybecause oftheimportance of their firms to the economy.(Samsung alone accounts for one-fifth ofSouth Korean exports and is the country’sbiggest employer.)

Research by Sustinvest, a proxy adviso-ry firm, suggests that argument is dud: theperformance of chaebol whose owner-families have done stints in prison is usual-ly unharmed. Lawyers for a DemocraticSociety, an activist group in Seoul, says that“the law has once again knelt before thewealthy”. Lee Sung-bo, formerly head ofKorea’s anti-corruption and civil-rightsagency, says citizens often misunderstandpre-charge arrests as a punishment.

The prosecution says that it will carryon its investigation “unshaken” by thecourt’s decision. Investors seem unruffledtoo: they are happy with the recent stellarperformance of Samsung Electronics, thecrown jewel of the group (see chart),whose share price has stayed steadythroughout the twists and turns of theprobe. Despite quarterly losses estimatedat over 2trn won after a recall last year offaulty devices, Samsung Electronics ex-pects fourth-quarter profit, out on January24th, to be 9.2trn won: itsbestperformancein three years. Revived global demand forchips and screens that use OLED (organiclight-emitting diode), of which SamsungElectronics produces more than any otherfirm, are buoying up the firm.

When the division announced in No-vember that it would boost dividends andconsider moving to a holding-companystructure, its shares rose to a 40-year highon the expectation of more transparencyin its Byzantine workings. A watcher at aforeign bank in Seoul says that the corrup-tion probe, whatever itsoutcome, will helpto speed up governance reform at thegroup: in a televised hearing last month,MrLee said Samsungshould have seta bet-ter example.

The firm’s image is at stake. South Kore-ans are fed up with the culture of impunityat its chaebol; many will see the court’s de-cision as leniency towards them. In a re-cent poll, 70% thought their third-genera-tion heirs were unfit to lead firms run toglobal standards. Mr Lee is trying to bur-nish his credentials to be the face of Sam-sung for the next three decades, says MrChung. At the moment, his image is too of-ten used for the wrong reasons. 7

Samsung

Heir of disapproval

SEOUL

Lee Jae-yong dodges an arrest on briberycharges

Take note

Source: Thomson Reuters

Samsung Electronics, share price, won, m

1997 2000 05 10 15 170

0.5

1.0

1.5

2.0

54 Business The Economist January 21st 2017

1

FORthose who still associate Rolls-Roycewith its past as a posh carmaker, its

home on a scruffy industrial estate comesas a shock. Yet it is there the engine-makerassembles the Trent XWB, the second-big-gest commercial jet engine in the world.Some components are made to a toleranceof 50 microns—the width of a human hair.The job of running the firm is a bit messier.

On January 16th, in a deal with Ameri-can, British and Brazilian regulators, Rollsagreed to cough up £671m ($809m) to settleallegations that it had in the past securedsales with bribery. The fine is the largest-ever imposed by Britain on a firm for crimi-nal conduct. But given the wrongdoing thedeferred prosecution agreement outlines,the firm got off lightly (the co-operation ofthe company’s more recent managementhelped). It admitted a dozen counts of cor-ruption and bribery in seven countries,spanning decades. This included giving of-ficials money, hotel stays and even a luxu-ry Rolls-Royce car to secure engine sales.Rolls has since cut its use of the freewheel-ing third-party consultants who got thecompany in trouble, and promises betteroversight ofall staff. If it errs again, the firmwill be prosecuted for the original charges.

The settlement puts one source of con-cern to bed: shares in Rolls surged the fol-lowing day. But investors have other, lesstractable worries. Despite bulging order-books the engine-maker has been strug-gling to make any money.

The last three years have been fraughtfinancially. In 2014 and 2015 Rolls issuedfive profit warnings in quick succession,halving the firm’s share price. Last Febru-ary it was humiliatingly forced to cut itsdividend in two—the first such paring formore than 24 years. Next month, it is ex-pected to reveal that profits fell from £1.6bnin 2014 to just £680m in 2016. The fine—ofwhich £293m will be paid this year—mayprevent Rolls from meeting financial tar-gets in 2017.

By rights, Rolls should be raking it in.The market for passenger jets, the enginesfor which make up more than half of thecompany’s revenues, is flying at full throt-tle. On January 11th Airbus revealed it hadbuilt a record 688 planes last year; Boeing awhopping748. Orders are also solid. As en-gines represent a third of the price tag of anew jet, some analysts reckon that engine-makers will sell more than $1 trillion overthe next two decades.

But Rolls has been badly buffeted by

Rolls-Royce

Weathering thestormDERBY

A big fine comes at a bad time fora largeengine-maker

IT MAY be an exaggeration to talk ofFrench firms “colonising” corporate Italy.

Some Italian business leaders nonethelessfret about expansionists from across thenorthern border plucking control of someof their most celebrated local firms. Fam-ily-run companies, especially, can maketempting prospects: ones that make excel-lent products but struggle to grow, or thatface agonising succession problems, arenotably juicy targets.

The latest example, announced thisweek, is the merger between Luxottica, anItalian maker of fancy specs, and Essilor, aspiffy French producer of lenses. Togetherthey will produce an entity with a marketvalue of at least €46bn ($49bn), 140,000staff and annual revenues of €15bn. Thedeal, one of the largest cross-border tie-upsattempted by European firms, had longbeen expected by industry watchers. Theidea is to produce an entity that combinesItalian style and skills in marketing withdeft French engineering.

The new firm will be listed on the Parisbourse (as probably its eighth-largest firm)later this year. That will mark the culmina-tion of a long campaign by Essilor to ar-range a merger. The founder and owner ofLuxottica, Leonardo Del Vecchio, now 81years old, had long resisted. But he nowgushes that “two products which are natu-rally complementary, namely frames andlenses, will be designed, manufacturedand distributed under the same roof.”

His change of heart may stem from theproblem of arranging for a successor. Thecompany he founded in 1961 is widely lau-ded and owns global brands such as RayBan, Oakley and Sunglass Hut. Mr Del Vec-chio himself rose from poverty (he spentsome of his childhood in an orphanage) tobecome Italy’s second-richest man, worthsome €20bn. Yet for all his strengths, hecould not foster a strong alternative leaderand would not let any ofhis children (fromvariousmarriages) become managers. Col-leagues felt squeezed out, seeing the bossas reluctant to delegate. One ex-employeesays “90% of top management” aban-doned the company in recent years.

The deal with Essilor is thus a way out,even if Mr Del Vecchio is not steppingdown yet. Through his family trust, Delfin,he will be the largest shareholder in themerged entity (potentially with 38% of it)and its “executive chairman and chief ex-ecutive” for the next fewyears. ButEssilor’sboss, Hubert Sagnières, who is 61 and will

share equal managerial duties of the newentity, looks well placed to take chargeonce Mr Del Vecchio retires.

Building a bigger company looks possi-ble. Some savings will come from knittingtwo teams of managers together. The glo-bal eyewear market, already worth some€90bn, is alluring. It is expected to grow ascohorts ofmiddle-class consumers in Asia,especially, find they need eyesight correc-tion and develop a likingfor specs as acces-soriesorprotection againstultraviolet rays.

An amicable merger hardly ranks as aFrench assault on Italy. But it does come inthe context of other Franco-Italian tie-ups.In luxury goods, for example, French con-glomerates with deep pockets, notablyLVMH and Kering, have been acquiringsmaller Italian rivals foryears. French firmsfirst grew faster by attending to flourishingmarkets for accessories such as handbags.Then they paid handsomely to take overprominent Italian brands, including Gucci,Bulgari and Fendi.

The French are active in other sectors,too. Vincent Bolloré, a swaggering billion-aire who is determined to grow in Italy, lastyear led his firm, Vivendi, to buy nearly aquarter of Telecom Italia. (Unconfirmedrumours say he might sell to anotherFrench operator, Orange.) The daringFrenchman is also pushing Vivendi in asecond bold bid, for Mediaset, a companyin which Silvio Berlusconi, a former Italianprime minister, and his family are the big-gest owners. Vivendi now owns nearly29% ofMediaset.

In retailing, too, a pair of French super-market chains, Auchan and Carrefour, to-gether operate more than 2,000 supermar-kets in Italy’s unusually fragmentedindustry. Given that many businesses in It-aly are run by ageing, first-generation foun-ders with no clear plan for succession,more targets are bound to attract buyersfrom its neighbour to the north. 7

French and Italian firms

Into the frame

Paris

Acontinental mergerbetweenLuxottica and Essilorfits a pattern

An eye-catching opportunity

nomura.com/connects

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56 Business The Economist January 21st 2017

1

2

COMPUTERS slow as they age, and be-fore long must be replaced by newer

models. Something similar is true of thebusiness models of Indian IT firms. Spe-cialised in running global companies’ out-sourced back-offices, the likes of Infosys,Wipro and Tata Consultancy Services(TCS) used to be national championsgrow-ing at double-digit rates. Their prospectshave dimmed of late; an entire industrybuilt on the backofglobalisation is frettingabout the incoming American president.But Donald Trump is merely the latestthreat to their operating systems.

Over three decades, Indian IT has be-come a $140bn industry built on a simpleproposition: rich-country companiescould trim costs by getting tedious behind-the-scenes IT work done by cheap engi-neers in India. The Indian firms hooveredup bright graduates—the big three haveover 700,000 employees in total—payingthem starting salaries of $5,000 or so, a de-cent local wage. After gaining some experi-ence, tens ofthousands were dispatched toclient sites in Europe or America, alongwith a few expensive local staff. The restensured their clients’ computer systemskept tickingover from cosy cubicles in Ban-galore, Hyderabad and elsewhere.

Growth spurts and stalls are nothingnew for the trio, the most international ofdozens of Indian IT firms (American andEuropean companies such as IBM, Accen-ture and Capgemini have large Indianpresences, too). Their prospects are ulti-mately tied to thesluggishrich-worldecon-omies of their clients: America makes upover half of Indian IT sales, Europe a quar-ter. Banks and insurance companies, the

biggest customers, have been in penny-pinchingmode oflate; ditto energycompa-nies struckby falling oil prices.

But what felt like cyclical softness looksincreasingly like it is being compoundedby structural decline. Dollar-denominatedgrowth rates have oscillated but clearlytrended downwards and are now firmly inthe single digits (see chart). Margins ofover20% are coming under pressure, even aftera sustained fall in the rupee against the dol-lar increased the cost advantage of earningin America and paying staffin India.

There is still plenty of the $900bn glo-bal IT services budget for them to capture.But some headwinds now look like theywill endure. Mr Trump’s swearing-in is themost immediate concern. The incomingpresident has railed against certain visasfor skilled workers, many of which aregobbled up by Indian IT firms to send staffon stints to America. A proposal to hike theminimum salaries to qualify for such

Information technology

Reboot

Mumbai

Indian outsourcing specialists must upgrade theirstrategies

Low-tech

Source: Jefferies India

Revenue, moving four quarters% change on a year earlier, $ terms

2007 08 09 10 11 12 13 14 15 1610

0

10

20

30

40

50

+

–

Infosys

TCS

Wipro

simultaneous downturns in many of itsother businesses. Both its main engine-making rivals, GE and UTC, are huge con-glomerates, and churn out other productsthat can make up the shortfall; Rolls ismore exposed. Defence cuts have hit de-mand for its military-jet engines. Low oilprices hurt sales of its power-generationturbines and marine engines. As a result,several investorshave said it should sell offits non-aerospace divisions and focus onjet engines, which are largely responsiblefor the thickness of its £80bn order-book.

To tackle its problems, the engine-mak-er lured Warren East out of retirement in2015 to turn the firm around. A former bossof ARM, a British chipmaker, he trans-formed the middling startup into a world-beating tech giant. It was sold last year toSoftBank of Japan for £24bn. The new bossreckons that selling off Rolls’s non-aero-space businesses is unwise. In Novemberhe revealed that the firm’s accountingprac-tices had been flattering the performanceof its civil-aerospace engines for manyyears. Instead of the £800m in profit de-clared for 2015, that division probablymade a small loss.

Engine revampRolls wants growth to fill that hole. It plansto double production to 600 enginesa yearby 2020—the fastest increase to date in itshistory. The boost will increase the firm’seconomies of scale in its factories. And themore of its engines that are installed, themore in profit thatcan come from servicingthem over the next decade, explains EricSchulz, the boss of Rolls’s civil-aerospacebusiness. Each engine brings in four timesas much revenue from maintenance overits lifetime as from its original sale. Cost-cutting is under way to try and pay for theproduction boost. The firm currentlymakes an initial loss of up to £2m on eachand every engine it sells. More than 4,000jobs have been culled (nearly a tenth of itsworkforce) and a third of cost centres havebeen eliminated.

Mr East says the cuts are ahead ofschedule. But other challenges lie ahead.Brexit isone. The fallingvalue ofthe poundsince June has reduced its assembly costsin Britain, but leaving Europe’s single mar-ket will disrupt its international supplychain. Many analysts also question thefirm’s decision in 2011 to exit the faster-growing engine market for short-haulplanes. Mr East hopes Rolls can considerre-entering this segment in the 2020s withthe cash generated by servicing the en-gines it is currently building.

Although reliance on investment todayforprofits tomorrowhasbeen compared toa startup’s business plan, investors seem tobelieve in Mr East’s strategy, says SandyMorris at Jefferies, a bank. But if Rolls failsto generate the cash for Mr East’s visions,recovery will be hard to engineer. 7

The Economist January 21st 2017 Business 57

2 schemes from $60,000 to $100,000 wouldmake many postings uneconomical.

That would mean replacing Indian ex-pats to America with locals, especially ifthe cap for the number ofnew visas is low-ered from the existing65,000 a year. Add inhigher visa-application fees for large-scalelabour importers, and thatmight trim up tofive percentage points from IT companies’margins, analysts think. Fuzzy talk of an“outsourcing tax” will in any case hardlyencourage IT procurement managers tolookoverseas.

Changes in how clients think abouttechnology is a bigger worry for Indian ITfirms. Budgets globally are growing steadi-ly, at about 3% a year reckons Gartner, a re-search outfit. But an increasing amount ofthe money is spent on trendy stufflike ana-lytics or the internet of things. Such new“digital” services will rise from a tenth oftotal IT spending in 2014 to over a third in2020 accordingto McKinsey, a consultancy.

IT managers at big firms think they canfinance the development of snazzy big-data projectsand mobile appsbytrimmingspending in their existing IT infrastructure,for example by replacing their own datacentres (which they pay Indian firms to

maintain) with cloud storage (which theydo not). And some of the tasks which engi-neers used to do, such as tailoring softwarefor a client, can now be done by machines.It seems that workers in India’s vast code-writing centres are as much at risk of beingmade obsolescent by automation as thosein factories making cars or shoes.

Indian firms want to get in on the newdigital action, which they think is less like-ly to be commoditised. But they specialisein fixing problems cheaply, not driving in-

novation. Devising a mobile-banking appformillennials, say, is a far cry from parsinglines ofcode for bugs.

The IT firms know they need to adapt.“We will not survive if we remain in theconstricted space of doing as we are told,depending solely on cost arbitrage,” VishalSikka, the boss at Infosys, wrote in a recentletter urging staff to shape up. “If we don’twe will be made obsolete by the tidal waveof automation and technology-fuelledtransformation that is almost upon us.”

Please wait, update in progressOthers have a head start in the race to thesunlit digital uplands. Accenture has digi-tal-services revenue per employee aroundfour times its Indian rivals, points out Vaib-hav Dhasmana of Jefferies, a bank. It de-rives more than a fifth of its revenues fromsuch work. Most Indian firms don’t breakout this figure, somewhat tellingly, but it isthought to be in the 10-17% range.

European and American rivals haveheftier consulting arms that can shapecompanies’ spending. They are eager ac-quirers ofcompanies, often boutiques thatgive them skills they cannot develop inter-nally. They spend more on research anddevelopment, too: 2% of revenues for Ac-centure, compared with a mere 0.5-1% ofrevenues at Indian firms. All this reducesprofits: Accenture has margins on earningsbefore interest and tax of around 15%, notmuch more than half what Indian firmshave traditionally secured.

The Indian firms are moving in this di-rection. All have invested in “platforms”they can sell to more than one client—forexample, to analyse social media. But bytheir own admission progress has beenlimited. Pivoting towards higher-value of-ferings requires an overhaul of Indiancompanies’ past models, not a tweak. Thefocus must now be on the quality, not thequantity, ofemployees. Hiring has slowed:in the nine months to end-December 2016,Infosys added 5,700 new staff, comparedwith 17,000 in the same period a year ago.There are fewer junior engineers—ableonly to carry out the most routine tasks—and more relatively senior staff as a result(see chart). This middle-age bulge in staff-ers increases staff costs by 5-7%, says Anan-tha Narayan ofCredit Suisse, a bank.

All this is happening as Infosys and Wi-pro are still adapting to a newish genera-tion of professional managers who tookover from the entrepreneurs that foundedthese firms. On January 12th, meanwhile,TCS lost its respected boss, NatarajanChandrasekaran, who has been tapped totake over the reins at the firm’s parent com-pany (see box). The economics that madeIndian IT such a compelling propositionare fading rather than disappearing alto-gether. But as with computers, it is best toreplace an ageing model before it unex-pectedly crashes. 7

Tried and tested

Sources: Infosys; Credit Suisse

Infosys employees by experience, %

0

20

40

60

80

100

2005 09 12 16

0-1 year

1-3 years

3-5 years

More than5 years

Tata Sons

Chandra’s challenge

IT WAS a predictable end to a corporatesaga which has been anything but

prosaic. On January12th Natarajan Chan-drasekaran, the head ofTata ConsultancyServices (TCS), became the boss ofTataSons, its parent and India’s largest com-pany. Universally known as Chandra,and just as universally respected forhelping build up the IT services firm thatdelivers much of the salt-to-steel con-glomerate’s profitability, he now takes onIndia’s toughest corporate job.

An internal appointment seemedinevitable. Few expected an outsiderafter the botched defenestration of Tata’slast boss, Cyrus Mistry, on October 24th.Slighted, and emboldened by his family’s18% stake, Mr Mistry has had to be easedoffthe boards offirms operating underthe Tata aegis, but ofwhich it is often onlya minority shareholder (for now he stillsits on the board ofTata Sons). As well ashiring a battalion of lawyers, Mr Mistryhas thrown heaps ofmud at the group,and particularly at Ratan Tata, the 79-year-old patriarch who seized back thereins from him. Some of it has stuck.

Chandra’s appointment should bringa modicum ofpeace. As boss ofTCS since2009, he has overseen steady progress,even if the company now faces head-

winds. He is a rare boss in India whostarted offon the shop floor, as a TCSintern three decades ago, rather thanbeing handed the family kingdom.

But nothing will have prepared Chan-dra for his new job. From running a singlecompany, he will now have to overseearound 100 businesses that make up theTata group. Many are faring poorly, nota-bly its European steel unit, an undersizedmobile-telephony arm in India, a stalleddomestic carmaker, and the strugglingglobal chain ofTaj hotels. Chandra hasno experience in turning around failingbusinesses, let alone in any industryoutside IT. Worse, he must ensure his oldTCS fiefdom, whose day-to-day manage-ment he will now give up, continues togenerate enough profits to prop up theduds as they are dealt with.

Mr Mistry complained he was nevertruly at the helm, and that all his deci-sions were second-guessed by Mr Tata inhis role as chairman ofcharitable truststhat own two-thirds of the group. He isnow contesting the legality ofChandra’sappointment, to boot. The byzantinestructure that frustrated him remains inplace. Chandra will need the right ideasto get Tata backon an even keel—and theauthority to put them into action.

Mumbai

Old problems await a newboss

58 Business The Economist January 21st 2017

AS THEY slid down the streets of Davos this week, many exec-utives will have felt a question gnawing in their guts. Who

matters most: shareholders or the people? Around the world a re-volt seems under way. A growing cohort—perhaps a majority—ofcitizens want corporations to be cuddlier, invest more at home,pay higher taxes and wages and employ more people, and arevoting for politicians who say they will make all that happen. Yetaccording to law and convention in most rich countries, firms arerun in the interest of shareholders, who usually want companiesto use every legal means to maximise their profits.

Naive executives fear that they cannot reconcile these two im-pulses. Should they fire staff, trim costs and expand abroad—andface the wrath of Donald Trump’s Twitter feed, the disgust oftheir children and the risk that they’ll be the first against the wallwhen the revolution comes? Or do they bend to popular opinionand allow profits to fall, inviting the danger that, in the run up totheir 2018 annual general meeting, a fund manager from, say, Fi-delity or Capital will topple them for underperformance?

Wiser executives know that shareholder value comes inshades ofgrey. It has been a century since the idea was baked intoAmerican law. In 1919 a court ruled that “a business corporation isorganised and carried on primarily for the profit ofthe stockhold-ers.” In the 1990s this view spread to Europe, Asia and LatinAmerica because of reforms to governance laws and the risingclout of institutional investors. But the doctrine is not monolithic.Schumpeter reckons there are six distinct corporate tribes, eachwith its own interpretation of what shareholder value means.Firms have some flexibility to choose which one they belong to.

Start at the far right of the spectrum, with the corporate funda-mentalists. Boosting their profits and share price—immediate-ly—is their goal. Firms built on these objectives rarely do well forlong. Valeant, a Canadian pharmaceutical concern, is an exam-ple. In 2011-15 it raised prices, slashed investment, paid little taxand fired staff. By 2016 it faced scandals and its shares fell by 85%.Occasionallyfirmsbecome so weakthat theyuse fundamentalisttactics, temporarily, to try to restore confidence. IBM is shoring upits stockprice with savage cost cuts and share buy-backs.

Shift a little to the left and there are the corporate toilers. MostWestern firms place themselves in this group. They believe in the

primacy of shareholder value but are prepared to be more pa-tient. At their best these firms are consistently successful—thinkofShell or Intel investing on a ten-year time horizon.

Corporate oracles, the third group, want to maximise profitswithin the law, but with a twist. They think the law will evolvewith public opinion and so they voluntarily do things today thattheymaybe required to do tomorrow. Mostenergyfirmshave be-come greener to anticipate changing public expectations on pol-lution and safety. Laggards discover it can be devastating whenthe rules of capitalism change. Shares of coal and nuclear-energyfirms in the rich world have collapsed. Soft-drinks firms may benext, as attitudes and laws about sugar and obesity change.

Corporate kings are in a luxurious position. They are so suc-cessful at creating shareholder value that they have a licence to ig-nore it periodically. In July Jamie Dimon, the boss of JPMorganChase, now the world’s most valuable bank, gave its lowest-paidstaff a pay rise, “because it enables more people to begin to sharein the rewards of economic growth”. Paul Polman describesUnilever, the consumer-goods firm he runs, as a non-governmen-tal organisation committed to cutting poverty. He can do so onlybecause Unilever makes a stonking return on equity (ROE) of34%.

Outside Western boardrooms, the most common sect is thefifth, corporate socialists. These firms are controlled by the state,families or dominant managers. They think that shareholder val-ue is not as important as social objectives such as employment,high pay or cheap products. But they recognise that institutionalinvestors have some legal powers. So profits are set according toan informal quota system—outside shareholders should get theminimum required to avoid a revolt, but no more. China’s statefirms together book an ROE of 6-8%. Goldman Sachs is a cor-porate champagne socialist. It pays its shareholders the least itcan getawaywith and allocateswhat is leftasbonuses for its staff.

On the far left are the corporate apostates. They are organisedin a corporate form but don’t care about shareholders at all. Usu-ally this is a result of political dysfunction. PDVSA, Venezuela’sstate oil firm, pays formuch ofthe country’swelfare state and cro-nyism. Fannie Mae and Freddie Mac, two state-owned Americanmortgage firms, are run to make cheap loans, not profits.

Sects changeBetween 1990 and 2007 companies around the world driftedright, towards shareholders. Now in response to populism theymay drift back. But don’t expect a governance crisis. The system isadaptable. Carmakers are shifting factories to America; drugsand defence firms may slash prices. All have become oracles.They anticipate that the Trump administration will change ruleson tariffs and government procurement that govern their busi-nesses. Shareholders can object only so much. Firms become cor-porate socialists if they have controlling owners who demandthey prioritise social objectives. There is no sign of this yet.

Many individual firms will still move the other way, towardsshareholders. Google is becominga corporate toiler, not a king, asits growth slows. After its emissions scandal, Volkswagen is drop-ping its extravagant ways and firing staff. Under its new boss, TataGroup in India will now start to worry about profits as much asnation-building. And in order to revive the economy, Japan’sfirms will need to drive their ROE above the present, sluggish 8%.In the contest between shareholders and the people, companiesand bosses are caught in the middle. But there are no final victo-ries. Just constant, pragmatic accommodations. 7

Six sects of shareholder value

Businesses’ favourite doctrine will adapt to the age ofpopulism

Schumpeter

The Economist January 21st 2017 59

For daily analysis and debate on economics, visit

Economist.com/economics

1

ANOTHER blow to national pride: onJanuary 13th DBRS, a Canadian rating

agency, downgraded Italy’s sovereigndebt, stripping the country of its last A rat-ing. Government bond-yields rose; so willthe cost of funding for Italian banks. ErikNielsen, chief economist of UniCredit, Ita-ly’s biggest lender, calls the extra €5bn($5.3bn) or so banks will have to put up ascollateral for their loans from the EuropeanCentral Bank (ECB) “immaterial”. Still, it isa burden they could do without.

Weighing heaviest on bankers’ minds isa planned state rescue of Monte dei Paschidi Siena, now Italy’s fourth-largest lender.A private recapitalisation scheme col-lapsed in December, prompting it to seekgovernment help. Days earlier, anticipat-ing the plan’s demise, the state had createda €20bn fund to support ailing banks.

Nextmonth Monte dei Paschi’s chiefex-ecutive, Marco Morelli, will present a newbusiness plan. On January 18th he con-firmed to a Senate committee that 500branches and 2,450 jobs will go withinthree years. Soon the bankis expected to is-sue a state-backed bond, for perhaps€1.5bn, to shore up liquidity; it hopes even-tually to raise €15bn to replace depositsthat bled away last year. Once the plan isout, negotiations between Italy and theEuropean Commission will ensue, overthe first state rescue of a big bank since thecommission tightened state-aid rules.

Between 2007 and 2014 the commis-sion approved €5trn-worth of state aid, in-

in a stress test—such as one Monte dei Pas-chi failed last summer. That would imply“burden-sharing”, converting junior debtto equity, rather than a bail-in. Separately,retail investors who were “mis-sold” sub-ordinated bonds may be compensated.

The world’s oldest bank, Monte dei Pas-chi was founded in 1472 by Sienese magis-trates. Its recent history has been an igno-ble shambles. With exquisite timing, in2007 it bought Antonveneta, another Ital-ian bank, from Spain’s Santander for €9bnin cash. Further blunders followed. It hashad two capital increases since 2014. In theyear to December 23rd, when the privaterescue failed and trading was suspended,its share price fell by 88%.

How much help it needs now remainsunclear. The private plan, devised in July,would have stripped out and securitised€27.6bn-worth (gross) of non-performingloans and recapitalised the bank with€5bn. After it failed, the ECB told the bankthat its capital shortfall, under an “adversescenario” in the summer’s stress test, hadwidened to €8.8bn. But the capital re-quired will depend on MrMorelli’s revisedplan, and in particular on what will bedone to clean up bad loans. The conver-sion of bonds to equity could raise €4bn,but retail investors, who have around€2bn-worth of bonds and are in line forthe same value in shares, maythen be eligi-ble for compensation. The government’stotal bill could amount to around €6bn.

Pier Carlo Padoan, the finance minister,says the banking system is turning a page.Ifhe is to be proved right, Monte dei Paschimust be sorted out. Yet other signs are en-couraging. On January 12th UniCredit’sshareholders approved a €13bn share is-sue, part of an overdue overhaul. Last yearwas the first since 2008 in which banks’ to-tal non-performingexposuresdeclined, ac-cording to PwC, an accounting firm. ABI,the national banking association, and

cluding guarantees, for banks. Italy’s sharewas a piffling €130bn. But “bail-in” hassince replaced “bail-out”. The Bank Recov-ery and Resolution Directive, which camefully into force last year, demands thatbanks receiving state help be put into “res-olution”—in effect, bankruptcy. Share-holders and junior creditors cop it, for atleast 8% of liabilities, if the state steps in.

For investors in Monte dei Paschi, theoutlook may not be so bleak. The govern-ment plans a “precautionary recapitalisa-tion”—allowed by the directive. To qualify,a bank must be solvent; the injection mustbe on market terms; and the capital mustbe needed to make up a shortfall identified

Italy’s bank rescue

Saving Siena

MILAN

The world’s oldest lenderprovides the European Union’s new bank-rescue ruleswith theirfirst big test

Finance and economicsAlso in this section

60 Cyprus’s banking Lazarus

60 Ukraine’s economy

61 Buttonwood: Zombie companies

62 Indonesian capital flows

62 American financial regulation

63 Brexit and the City

63 Oxfam’s striking wealth sums

64 Free exchange: America andborder-adjusted taxes

Mountain rescue

Sources: Bloomberg;company reports

*Merger of Banco Popolare andBanca Popolare di Milano, Jan 1st 2017

Italian banks’ assets, September 30th 2016€bn

0 200 400 600 800

UniCredit

Intesa Sanpaolo

Banco BPM*Banca Monte deiPaschi di SienaUBI Banca

BPER Banca

Mediobanca

Banca Mediolanum

Credito EmilianoBanca Popolaredi Sondrio

60 Finance and economics The Economist January 21st 2017

1

2

Finance in Cyprus

Bank from the brink

THE banking woes of Italy, the euroarea’s third-biggest member, pale next

to those that, four years ago, plaguedCyprus, its second-smallest. Now there iscause for cautious optimism. This monthBankofCyprus, the biggest local lender,finished repaying €11.4bn ($12.2bn) ofemergency liquidity assistance from thecountry’s central bank. It followed thatby returning to the bond markets, raising€250m in a sale ofunsecured notes,albeit with a stiff9.25% coupon.

Even better, on January19th BankofCyprus listed on the London StockEx-change. This, says John Hourican, thechiefexecutive, fulfils a promise to in-vestors in 2014, when the bankraised€1bn ofequity, to list on “a liquid, index-driven European exchange”. It is quittingthe Athens bourse, now that it “no longerhas any business ofsignificance inGreece.” (Its listing in Nicosia remains.) Ithas also rid itselfofoperations in Roma-nia, Russia, Serbia and Ukraine. Althoughits return on equity is still meagre, just2.7% in the third quarter, its ratio of equityto risk-weighted assets, a key gauge ofstrength, is respectable enough, at14.6%.

All this marks a big improvementsince 2013, when Cyprus seemed in gravedanger of tumbling out of the euro area.Banks closed their doors and capitalcontrols were imposed for the first timein the zone’s existence. The price ofarescue by the IMF and the rest of thecurrency club was steep. Owners ofbonds and uninsured deposits in Bank ofCyprus and its closest rival, Laiki, were“bailed in” (the losers included manyRussians). Laiki was wound up, its badloans were put into a “bad bank” and itsgood ones and deposits were transferredto BankofCyprus.

The last of the capital controls werelifted in 2015. The economy returned togrowth the same year. It managed 2.9% in

2016; Moody’s, a rating agency, expects2.7% in 2017. But it is still smaller thanbefore the bust. Sustained growth will beneeded to grind down Cypriot banks’worryingly large heap ofnon-perform-ing loans—which as a share of the total issecond only to that ofGreek lenders,according to the European Banking Au-thority (see chart). Progress in recent talkson reunifying the Greek-Cypriot south ofthe island and the Turkish-Cypriot north,which is recognised only by Turkey,would surely be a boon.

The bad-loan pile has, however, beenshrinking for almost two years. A newforeclosure law, says Mr Hourican, hashelped to hasten restructuring, by creat-ing a “credible foreclosure threat”. In thefirst nine months of2016 BankofCyprustook€900m-worth ofproperty onto itsbooks, at a “sensible” discount, in swapsfor defaulted debt; around €170m-worthhas been sold. With a bad-loan ratio stillover 40%, it has a long way to go. But 2017,at any rate, has begun well.

The repair job at Cyprus’s biggest lender

Sisyphean Cyprus

Source: European Banking Authority

Banks’ non-performing loans as % of totalSeptember 2016

0 10 20 30 40 50

Greece

Cyprus

Portugal

Italy

Ireland

Spain

EU AVERAGE

France

Germany

Netherlands

86

14

37

255

29

127

159

61

41

Value, €bn

IN THE tense, uncertain days of late 2013,when Ukrainians filled Kyiv’s Indepen-

dence Square in protest at their govern-ment’s turn towards Russia, the then presi-dent, Viktor Yanukovych, grabbed alifeline. To bolster his resolve in resistingthe demands of pro-EU protesters, RussialentUkraine $3bn in the form ofa bond. MrYanukovych was subsequently oustedanyway. Russia and Ukraine went to war.The money was never paid back.

So Russia took legal action against Uk-raine. The bond was issued under Englishlaw, and a hearing began this week in Lon-don. Those on the Ukrainian side say thecountry has no case to answer. In 2015 agroup of creditors agreed to a debt restruc-turing on favourable terms: Russia refusedto take part. And Russia made it harder forUkraine to repay the bond by annexingCrimea and stoking war in the Donbass re-gion. Moreover, it has fiddled with gas sup-plies to the country and slapped on tradesanctions. In 2013-15 Ukraine’s GDPdropped by 15%. The purchasing power ofordinary folk has fallen far more. In 2013eight hryvnias bought one American dol-lar; it now takes more than 25.

It is not clear, however, that Englishcourts, which pride themselves on theirpolitical impartiality, would wish to ruledefinitively that Russia was responsible forUkraine’s economic woes. Awkwardly,Ukraine continued to pay interest on thebond in part of 2015, when it was in thedepths of recession. And Crimea was reli-ant on subsidies from the Ukrainian gov-ernment. So Russia’s annexation, per-versely, may have made it easier in somerespects for Ukraine to repay the bond.

The legal spat comes as the Ukrainianeconomy is looking stronger. The weakhryvnia is helping to lift exports; in Octo-ber the IMF predicted 2.5% growth in GDPfor 2017. A building boom is under way inKyiv and the shopping malls off Indepen-dence Square are now filled with peopleeating noodles and hamburgers. A fewmonths ago Uber, a car-hailing app,launched in Kyiv. Markets do not seemoverly concerned by the prospect of a pro-Russian Donald Trump becoming Ameri-can president: the hryvnia has weakenedonly slightly since November.

Were $3bn eventually extracted fromUkraine as a result of the Russian lawsuit,however, the hryvnia would come underrenewed pressure. Repaying Russia wouldalso infuriate ordinary Ukrainians. Al-

Ukraine’s economy

The other war

KYIV

Ukraine’s conflict with Russia is alsobeing waged on the financial front

Cerved, a ratings agency, predict that by2018 bad loans will almost be back to theirpre-crisis level—although that may dependon what happens to Monte dei Paschi. Theplan to securitise its portfolio was intend-ed to kick-start a market in duffdebt.

Italy’s fragmented banking industry isalso consolidating. The resolution in No-vember 2015 of four tiny banks, in whichbondholders were bailed in, causeduproar. Now UBI Banca, the fifth-largestlender, hopes to buy three of the four“good” residual banks for €1. A merger fi-nalised on January 1st created Banco BPM,

now Italy’s third-biggest bank. Another ison the horizon, of two Venetian banks. An-alysts at Credit Suisse suggest that the gov-ernment’s €20bn fund should suffice toplug any remaining capital gaps.

All this is necessary—but not sufficient.Most banks need to slash costs and get ridof dud loans. With interest rates in the cel-lar, revenue is hard to find. And withoutstronger growth than Italy’s recent pitifulrecord, many lenders will find life a grind.Forecasters say GDP will expand by just0.7% this year and 0.8% next. The viciouscycle will be hard to break. 7

The Economist January 21st 2017 Finance and economics 61

2

EQUITY markets have shrugged off theBrexitand Trump votes. Indices in Lon-

don and New York have reached newhighs. But individual stocks and indus-tries have had the odd wobble, not leastwhen they have been the subject ofa hos-tile tweet from the incoming president.“You’ve been fired at” mayturn out to be adominant meme of the next four years.

Indeed, what seems to be emerging onboth sides of the Atlantic is a new versionof industrial policy, in which Brexit nego-tiations, tax laws and trade talks are usedas a way to favour some industries andpunish others. And that ought to be causefor real investor concern.

The standard criticism of industrialpolicy is that it is all about “picking win-ners”. But the real problem is that it ismore about protecting the position of es-tablished corporations—cosseting losers,in other words.

Which companies are most likely toget protected? The obvious answer is in-cumbent groups that possess lobbyingclout. Many companies have expressedconcern about Brexit, but it is to Nissan, aJapanese cargiant, that the British govern-ment has made an undisclosed commit-ment. Startups are unlikely to be affordedthe same courtesy. The danger is that thiscements in place the existing structure ofthe corporate sector and prevents theemergence ofmore efficientfirms that candrive forward productivity improve-ments. This has been called the “zombiecompany” phenomenon.

A new paper* from the OECD finds alink between the proportion of zombiefirms surviving in an economy and de-clining productivity. Specifically, a 3.5% in-crease in the zombie share is associatedwith a1.2% decline in labour productivityacross industries.

The paper defines zombie firms as

those aged ten years or older with an inter-est-coverage ratio (the ratio ofoperating in-come to interest expenses) of less than onein each of the preceding three years. In aharsher age, their creditors might have fin-ished them off. But today the zombies shuf-fle on, discouraging more efficient firmsfrom investing and making it harder for ri-vals to earn increased profits and gain mar-ket share. Worse still, the decline in newbusiness formation may be partly causedby the suffocating impact ofzombies.

Europe, for example, often gets criti-cised for its economic inflexibility—partic-ularly in the labourmarket, where the diffi-culty of firing workers makes companiesreluctant to hire them in the first place. Butthe OECD study suggests that the problemof corporate ossification may be evenmore widespread.

The issue may also help to explain whythe productivity performance ofthe globaleconomy has been so disappointing. Fig-ures released by the US Conference Board,a research group, earlier this monthshowed that total factor productivity (TFP)globally fell in 2015 and had been flat in theprevious two years. (TFP is that element of

growth that cannot be explained by theuse of increased labour or capital.)

The new versions of industrial policyare likely only to exacerbate this problem.They look worryingly like the “LatinAmerican” model of the 1960s and 1970s(ie, an import-substitution policy). If acompany makes an investment decisionon the backofa tax breakor a threateningpresidential tweet, then it is probably notmaking the most efficient use of its capi-tal. It may seem like good news in theshort term for the workers who keep theirjobs. But it is not good in the long run. Thecompanies theyworkforwill be less com-petitive in international markets; and, asconsumers, workers will either pay high-er prices or buy inferior goods. Instead ofan inflexible labour market, you get an in-flexible corporate market.

It all adds up to a double problem forequity investors. For now the market maybe benefiting from a couple of sugarhighs: in Britain, the impact of a fallingpound on the overseas earnings of multi-nationals; and in America, the hopes forfiscal stimulus and lower corporate taxes.But in the long run, a more interventionistgovernment policy is likely both to weighon economic growth and to make equi-ties riskier. Who knows, after all, whichsectors will fall out of favour?

Imagine the reaction of investors ifleft-wing leaders were in charge. If Presi-dent Bernie Sanders were berating Amer-ican companies on Twitter, or Jeremy Cor-byn was pledging unquantified Britishgovernment support to manufacturers,markets would be plunging.

Zombies ate our growthButtonwood

Investors should be aghast at the trend towards a more active industrial policy

...............................................................* “The Walking Dead: Zombie Firms and ProductivityPerformance in OECD Countries” by Mûge AdaletMcGowan, Dan Andrews and Valentine Millot

Economist.com/blogs/buttonwood

ready, the next few years looktough. To ser-vice other dollar debts Ukraine will haveto fork out about $15bn in 2017-20—anamount roughly equivalent to its currentreserves of foreign exchange. Should thosereserves fall below about $10bn, investorswill start to worry about the country’s fi-nancial health. Ukraine’s bail-out pro-gramme with the IMF, agreed in 2015,should soften the blow, but it is behindschedule. Last year Ukraine received just$1bn in disbursements from the fund.

Bond repayment or no bond repay-ment, Ukraine’s economic to-do list isdaunting. Far-reaching reforms are needed

to stamp out corruption and improve therule of law. Some progress has been made.The recent nationalisation of the nation’sbiggest lender, the struggling PrivatBank,has maintained financial stability, says To-masFiala ofDragon Capital, an investmentbank based in Kyiv. Raising heavily subsi-dised gas prices has improved the financesof the state monopoly, Naftogaz.

These positives aside, however, reformmomentum has slowed recently. Hopesthat Ukraine’s market for agricultural landwould be thrown open to foreign investorshave been dashed. Ukraine’s sprawlingpension system needs change: spending

on public pensions is worth 13% ofGDP, ex-tremely high by international standards.

Popular disillusionment has set inabout the government’s reformist zeal.Elena Besedina of the Kyiv School of Eco-nomics points out that no big names fromthe old regime have been thrown in jail fortheir wrongdoing. GDP per person is lessthan a tenth of America’s, yet luxury-cardealers and fashion boutiques still do asurprisingly brisk trade. With electionsscheduled for 2019, populist vote-winningmeasures will doubtless be wheeled out.And this time, Russia will not be financingany part of the bill. 7

62 Finance and economics The Economist January 21st 2017

IN RECENT weeks signs have appeared inthe poky arrivals hall at Soekarno-Hatta

airport in Jakarta, Indonesia’s capital, ex-horting visitors to shun the dollar in thename of national sovereignty. “Use rupiahfor all transactions in Indonesia!” travel-lers are told, as they wait, interminably, atthe luggage carousels. That reflects old sus-picions of foreign interference in the econ-omy, South-East Asia’s largest, coupledwith newer concerns about the currency’svulnerability to capital flight.

In 2013, when the Federal Reserve’s “ta-pering” of its asset purchases led to a 21%slide in the rupiah against the dollar, Indo-nesia was seen as one of the “fragile five”emerging markets. Of late, anxieties haveresurfaced. On December 14th the Fedraised interest rates for the first time in ayear. More rises are expected this year.Higher yields in advanced economiesdraw capital from emerging markets, put-ting pressure on their currencies. The rupi-ah fell by 3.7% against the dollar in Novem-ber, the steepest monthly decline for morethan a year, as part of a wider sell-off ofemerging-market currencies.

ThispartlyexplainswhyIndonesianof-ficials are so prickly. On January 3rd the fi-nance ministry severed all business tieswith J.P. Morgan, after the American in-vestment bank downgraded its view of In-donesian equities to “underweight” fol-lowing Donald Trump’s election victory.Sri Mulyani Indrawati, the finance minis-ter, said that financial institutions have aresponsibility to create positive sentiment.On January16th J.P. Morgan partially back-tracked, shifting to a “neutral” stance andsaying the post-election volatility it hadfeared had “played out”.

It is not the first time Indonesian offi-cials have penalised banks for their re-search. In 2015 Bambang Brodjonegoro, MsMulyani’s predecessor, memorably told J.P.Morgan analysts responsible for a similar-ly critical note to do 100 press-ups. Ms Mu-lyani, however, is widely regarded as thecabinet’s most pro-market member, fol-lowing a previous, reformist stint as fi-nance minister in 2005-10. Markets ralliedwhen the president, Joko Widodo, broughther back in a reshuffle last July. So her ac-tions tookobservers aback.

Indonesia relies on foreign capital to fi-nance a current-account deficit (see chart).Foreign reserves amount to a hefty $116bn,but are amongthe lowest in Asia relative tothe economy’s overall financing needs.

Foreigners hold nearly 40% of Indonesia’slocal-currency bonds. So it is vulnerable tosouring sentiment.

Still, the economy seems better placedto withstand shocks than a few years ago.The trade surplus rose to $8.8bn last year,the highest level since 2011. Exports are re-covering rapidly, boosted by higher pricesfor coal and other commodities. At 1.8% ofGDP, in the most recentquarter the current-account deficit is less than half what it wasin 2013. External debt is relatively low.

Alarmist signs at the airport and lash-ing out at banks for their research tend tobury rather than highlight such positive in-dicators. Not for the first time, Indonesiannervousness risks making the country ap-pear weaker than it actually is. 7

Indonesian capital flows

Heavy baggage

JAKARTA

The economyis not as fragile asofficials’ nervousness suggests

Not as bad as all that

Source: IMF *Estimate

Indonesia

0

2

4

6

8

2007 08 09 10 11 12 13 14 15 16*

GDP% increase on a year earlier

4

2

0

2

4

+

–

2007 08 09 10 11 12 13 14 15 16*

Current-account balanceAs % of GDP

THIS week, Credit Suisse and DeutscheBank became the latest banking giants

to finalise multi-billion dollar settlementswith American authorities over misdeedsin the mortgage market in the run-up to thefinancial crisis. But other, less publicisedsettlements have hissed out of the waningObama administration like a series ofslow punctures: with Moody’s, a leadingcredit-rating agency; with Citadel Securi-ties, a critical component of America’sequity-trading system; and with the PortAuthority of New York and New Jersey.High-profile defendants all, but the moststriking characteristic of the deals is howgently their tyres were let down.

The Moody’s deal, about high ratings

accorded securities that crashed during thecrisis, was announced late on January 13th,the Friday before a holiday weekend. Theother cases were resolved almost as dis-creetly. Admittedly the amounts involvedwere comparatively small (Moody’s willpay $864m, Citadel $23m, and the Port Au-thority a mere $400,000). But the caseswere bigger than the numbers suggest.

The Moody’s settlement will inflamesuspicions that Wall Street is infested withconflicts of interest. As part of it, the firmadmitted that itvitiated its stated standardsfor evaluating securities in an area wherethose standards put in question its abilityto win business. It could still assert, how-ever, that the “settlement contains no find-ing ofany violation of law.”

The case involving the Port Authoritystems from its failure to provide investorswith critical information on the risks of a$2.3bn bond offering. Disclosure violationsare not particularly unusual. The penalty,however, surely is. The cost will be leviedon the Port Authority itself, which is fi-nanced by local taxpayers. No individualswere punished. This, says the Securitiesand Exchange Commission (SEC), is thefirst time a municipality admitted wrong-doing in an enforcementaction. So it opensthe door to further actions against munici-palities ever keener to raise debt.

The Citadel settlement, which was re-vealed on January 13th, revolved aroundcharges that unfavourable prices wereused to consummate trades from retail cus-tomers on orders routed from other bro-kers. Clients, the SEC concludes, were mis-led. That is a particularly jarring revelation:investors have little or no control overwhere their trades are filled and little abili-ty to detect such problems on their own.Citadel neither admitted nor denied guilt.

The business prospects of none of thedefendants seem to have suffered muchharm from these investigations. Citadel re-mainsa huge factor in itsbusiness. The PortAuthority keeps borrowing. Moody’s,along with S&P Global Ratings, still domi-nate their industry, accounting for 84% ofall ratings issued in 2015, according to a re-port issued by the SEC in December. Rev-enues have kept rising for years. The largeagencies have had the heft to comply witha costly regulatory framework imposedafter the crisis. Smaller ones struggle.

It is worth wondering whether thesethree entities would fare worse if their le-gal travails were better known. The PortAuthority, for example, might be requiredto disclose its failure prominently on itswebsite, for local residents to see. Similarly,Citadel could be required to note its settle-ment on trade confirmations sent to cli-ents. And Moody’s could add a footnote toratings citing its admission. That would beconsistent with the original mission of theSEC: to provide relevant, timely informa-tion to the market. 7

American financial regulation

Not with a bang

NEW YORK

Recent legal cases raise big questionsabout America’s financial markets

The Economist January 21st 2017 Finance and economics 63

Inequality

A minivan of Mammon

EVERYten minutes, blackVolkswagenshuttle vans ferry delegates from their

hotels in Davos, Switzerland, to thisyear’s World Economic Forum, held fromJanuary17th to 20th. Ifyou could squeezethe world’s eight richest men into one ofthese vans, they might feel cramped. Butthey could comfort themselves with anextraordinary statistic: according toOxfam, a charity, they own as muchwealth ($426bn) as half the world’s pop-ulation combined ($409bn).

To make this striking calculation, thecharity draws on data from Forbes maga-zine, which lists the wealth of the billion-aires, and Credit Suisse, which estimatesthe smaller holdings ofeveryone else,thanks to painstaking workby threescholars ofwealth, Anthony Shorrocks,Jim Davies and Rodrigo Lluberas.

Pedants can nonetheless criticiseOxfam’s headline-grabbing comparisonfor its handling ofdebt, the dollar, labourand data. The world’s least wealthyinclude over 420m adults whose debtsexceed their assets, leaving them withnegative net worth. Most of this net debtis owed by people in high-income coun-tries. There are, for example, over 21mAmericans with a combined wealth ofminus $357bn. Only people with relative-ly good prospects, by global standards,can be so poor; the wretched of the earthcould never borrow so much. Ifall of thepeople with sub-zero wealth are exclud-

ed from the comparison, the poorest halfof the remaining population would havea combined wealth equivalent to therichest 98 billionaires.

The Credit Suisse team converts theworld’s wealth into dollars at marketrates. But the dollar stretches further inpoor countries. So studies ofglobal pov-erty typically make currency conversionsat “purchasing-power parity” (PPP) in-stead. Wealth data also exclude thepoor’s biggest asset: their labour or “hu-man capital”. The returns on that asset—such as wages—do however appear inincome statistics. So whereas the bottomhalfof the global population have anegligible share ofglobal wealth (only0.15% at market exchange rates, accordingto Credit Suisse), they have a bigger shareofglobal income (10.6% at PPP in 2013, thelatest number available, according toChristoph Lakner of the World Bank).

In valuing the poor’s wealth at$409bn, Oxfam also seems to have com-mitted a rounding error. The figureshould be just $384bn, according to MrShorrocks (although the data are toopatchy to allow much precision). Forwhat it’s worth, $384bn is less than thewealth of the world’s seven richest men.There would be no need to squeezeMichael Bloomberg, the world’s eighth-richest person, into the minivan. Thatwould leave room for the magnificentseven to stretch their legs.

DAVOS

Are eight men as wealthy as half the world’s population?

THERESAMAY’S speech on January17thset Britain definitively on a path to a

“hard” Brexit, in which it will leave not justthe EU but the European single market.This was not what the City of Londonwanted to hear. The prime minister did atleast pick out finance, along with carmak-ing, as an industry for which “elements ofcurrent single-market arrangements”might remain in place as part of a futuretrade deal. The City is holding out hopethat a bespoke deal built on the existing le-gal concept of “equivalence” could still ac-cord it a fair degree ofaccess to Europe.

“Passporting”, which allows financialfirms in one EU member state automatical-ly to serve customers in the other 27 with-out setting up local operations, was alwaysgoingto be difficultafterBrexit. Outside thesingle market, says Damian Carolan of Al-len & Overy, a lawfirm, the “passportasweknow it is dead.” Already, two big banks,HSBC and UBS, this week each confirmedplans to move 1,000 jobs from London.

Financial companies all have to firm uptheir contingency plans. For the City, thesefocus on so-called “equivalence” provi-sions, allowing third-country financialfirms access to the EU if their home coun-try’s regulatory regime is deemed equiva-lent. Currently only some regulations,such as those governing clearing housesand securities trading, contain the provi-sions. Much of finance, notably bank lend-ing and insurance, is not covered. Andeven where the provisions exist, applyingthem will, in effect, be a political decision.

Optimists hope equivalence could notjust form the basis of a feasible deal, but

might even allow Britain to remove someonerous regulations. Jonathan Herbst ofNorton Rose Fulbright, another law firm,notes that precedents exist for “variable ge-ometry” in regulation. For instance, to gainaccess to American clients, some Britishclearing houses already submit to partialAmerican regulatory oversight. If theydeal in euro-denominated trades, nothingseems to stop them from submitting to, say,direct oversight by the European CentralBankwithout leaving London.

Such proposals may be stymied by coldpolitical considerations. Equivalence de-terminations are at the full discretion ofEUregulators, and the status can be with-drawn at short notice. Britain, as a currentEU member, starts with identical rules. In acharged political environment, even asmall future divergence could be con-strued as moving away from equivalence.For all the creative solutions proposed bylawyers in London, Europeans are notminded to let Britain offthe hookby allow-ing it easily to “cherry-pick” sectoral carve-

outs. Even before the Brexit referendum inJune the ECB had sought to move euroclearing into the euro area.

Yet that is not a reason to dismiss equiv-alence altogether. It would seem strange,asMrHerbstpointsout, to admitCanadianbanks into the EU on the back of the recentEU-Canada free-trade deal under betterterms than British banks. (Indeed, manyCanadian bankshave theirmain Europeanpresence in London.)

Even on clearing, it is more likely thateuro-denominated derivatives wouldmove to New York rather than continentalEurope. According to Mr Carolan, it wouldbe tricky for the ECB to stop this unless itwere to forbid European banks from usingnon-European clearing houses, whichwould deprive them of access to liquidity.It might be in the ECB’s interest, then, toagree on a bespoke arrangement on clear-ing. Other financial-market activities mayprove harder nuts to crack—especially if, asseems possible, broader Brexit negotia-tions descend into acrimony. 7

Brexit and financial regulation

Lost passports

Howthe Cityhopes to secure its futureaftera hard Brexit

64 Finance and economics The Economist January 21st 2017

AMONG other things, the start of Donald Trump’s presidencythis week heralds a collision between campaigning rhetoric

and legislative and economic reality. What follows will be alearning experience for all, it is fair to say. Though not perhaps themost consequential ofthe loomingreality checks, the outcome ofa brewingdebate overa proposed border-adjusted taxplan couldprove a taste of things to come. As Mr Trump and his Congresswork to make policy, there are many ways for things to go awry.

Both MrTrump and congressional Republicans are keen to cuttaxes on corporations. America’s inefficient corporate-taxsystemhas remarkably high rates but leaks like a sieve, yielding a pitifultax take (see chart). As a solution, Mr Trump favours a large cut inthe corporate-tax rate, from 35% to 15%, and a chance for compa-nies to repatriate foreign profits at a tax rate of 10%. Paul Ryan,Speaker of the House of Representatives and chief Republicanpolicy wonk, has something very different in mind.

At present American firms are assessed for tax on their globalincome. This encourages multinationals either to use clever ac-counting to book profits in foreign subsidiaries, or to “invert”: torelocate their headquarters, at least on paper, to countries withmore favourable tax regimes. Mr Ryan’s radical solution is toscrap the tax on corporate income and replace it with a modifiedvalue-added tax (VAT). The new tax, assessed at a rate of 20%,would apply to all domestic sales while exempting foreign ones.This “destination-based” system would reduce the incentive tomove profits oroperations abroad. As is common in VAT systems,the plan includes a border adjustment: imports would be subjectto the taxwhile firmswould receive a credit for their exports. Andthat is where things get tricky.

Many suppose that a VAT, because of the adjustment, pro-vides the countries which use it with an export advantage. SomeRepublicans have argued in favour of their reform plan on justthose grounds. Imposing a 20% VAT means adding 20% to theprice of imports while rebating domestic firms 20% of the valueof their exports. The combination of import tax and export subsi-dycertainlysounds likeaboon toexportingfirms.Yeteconomistsare practically unanimous in their view that it is not.

To see why, imagine that Congress were to impose a universalsales tax on all coffee mugs sold in America, regardless of origin.The tax would have no effect on the price of American coffeemugs sold abroad and therefore would not give a boost to export-ing American mugmakers. Suppose the tax were then extended

to include foreign sales of American mugs. The American taxwould then come on top of whatever sales taxes were in place inforeignmarkets, leavingtheAmerican mugsata significant disad-vantage relative to competitors. The rebate paid to exporters is theway the government prevents what is essentially a national salestax from penalising domestic firms seeking to compete in foreignmarkets. A value-added tax with border adjustments has no ef-fect on export competitiveness whatsoever. Sad!

That is not quite the end of the story. Republican leaders donot consider their plan to be a VAT. That is partly because label-ling it as such might discomfit rank-and-file Republicans accus-tomed to seeing VAT as a money-generating machine, fit to sup-port a European-style welfare state. More substantively, MrRyan’s reform also exempts labour costs: a practice common incorporate income-tax regimes but not VATs.

Exempting firms’ wage bills would add an additional subsidyto exporters’ rebates, which might cause the plan to run afoul ofthe rules of the World Trade Organisation (or at least to attract achallenge from other countries). Still, the effect of the wage ex-emption is similar to that of a cut in payroll tax. It can hardly betaken as a ham-fisted attempt to sock it to foreign competitors.Perhaps this should come as no surprise. Mr Ryan unveiled hisplan in June of last year, long before election day, in a distant pastwhen Republicans were less supportive of trade restrictions. It istempting to suspect congressional leaders of trying to slip a non-protectionist tax plan past Mr Trump under the cover of “borderadjustment” language.

If so, Mr Trump is on to them. In a recent interview with theWall Street Journal he criticised the complexity of the plan, add-ing: “Anytime I hear ‘border adjustment’, I don’t love it.” A morestraightforwardly mercantilist policy such as import tariffs mightnot please him any better, even ifhe could wring one out ofCon-gress. In a world offlexible exchange rates, policies which reducedemand for foreign goods—and, correspondingly, for foreign cur-rency—generate exchange-rate shifts which offset much of thecompetitiveness effect.

We’ve had enough ofexportsIndeed, plans for tariffs could generate a speedy rise in the dollar,squeezing goods exporters before tariffs take effect (and hurtingexporters of services who could not expect much help from ta-riffs in the first place). American exporters would suffer in theshort run, and a rising dollar could exacerbate global financialstress. Mr Trump seems to be aware of that threat as well. In thesame interview he suggested the time was right for a dollar de-cline, as the currency’s strength, as he put it, is “killing us”. In thisarea, as in others, the need to make real-world policy decisionswill reveal to Mr Trump previously unappreciated inconsisten-cies in his policy preferences.

In practice, the impact that competing Republican tax planshave on exports will be a sideshow. Centre stage will be occupiedbyother issues: the impactoftaxchangeson inequality, forexam-ple; and separate policy debates such as over the repeal of Oba-macare. Overshadowing it all will be the unceasing, stomach-churning drama to be expected in the presidency of Mr Trump.But the tax-policy battle will reveal how well he and Congresscan manipulate each other. And it will give a taste of how thepresident reacts when economies fail to do as they are told. 7

Tariff-eyeing policy

The American exception

Source: OECD *2014

Tax revenue as % of GDP, 2015

0 2 4 6 8 10

Australia*

Japan

Canada

Sweden

Britain

United States

France

Germany

30.0

32.1

26.7

22.0

20.0

39.0

38.0

30.2

Corporate-tax rate, %Corporate tax Value-added tax

Both economics and politics could confound Republican taxplans

Free exchange

Economist.com/blogs/freeexchange

The Economist January 21st 2017 65

For daily analysis and debate on science andtechnology, visit

Economist.com/science

1

NEUROSCIENCE, like many other sci-ences, has a bottomless appetite for

data. Flashy enterprises such as the BRAINInitiative, announced by Barack Obama in2013, or the Human Brain Project, approvedby the European Union in the same year,aim to analyse the way that thousands oreven millions of nerve cells interact in areal brain. The hope is that the torrents ofdata these schemes generate will containsome crucial nuggets that let neuroscien-tists get closer to understandinghow exact-ly the brain does what it does.

But a paper just published in PLOS Com-putational Biology questions whethermore information is the same thing asmore understanding. It does so by way ofneuroscience’s favourite analogy: compar-ing the brain to a computer. Like brains,computers process information by shuf-fling electricity around complicated cir-cuits. Unlike the workings of brains,though, those of computers are under-stood on every level.

Eric Jonas of the University of Califor-nia, Berkeley, and Konrad Kording ofNorthwestern University, in Chicago, whoboth have backgrounds in neuroscienceand electronic engineering, reasoned thata computer was therefore a good way totest the analytical toolkit used by modernneuroscience. Their idea was to see wheth-er applying those techniques to a micro-processor produced information thatmatched what they already knew to be

Kong”—the Nintendo game that intro-duced Mario the plumber to the world—while preserving its ability to run othergames. But it would be a mistake, Dr Jonaspoints out, to conclude that those transis-tors were thus uniquely responsible for“Donkey Kong”. The truth is more subtle.They are instead part ofa circuit which im-plements a much more basic computingfunction that is crucial for loading onepiece ofsoftware, but not some others.

Another neuroscientific approach is tolook for correlations between the activityofgroupsofnerve cells and a particular be-haviour. Applied to the chip, the research-ers’ algorithms found five transistorswhose activity was strongly correlatedwith the brightness of the most recentlydisplayed pixel on the screen. Again,though, that seemingly significant findingwas mostly an illusion. Drs Jonas andKordingknow that these transistors are notdirectly involved in drawing pictures onthe screen. (In the Atari, that was the job ofan entirely different chip, the Television In-terface Adaptor.) They are only involved inthe trivial sense that they are used by somepart of the program which is ultimately de-ciding what goes on the screen.

The researchers also analysed thechip’s wiring diagram, something biolo-gists would call its connectome. Feedingthis into analytical algorithms yielded lotsofsuperficially impressive data that hintedat the presence of some of the structureswhich the researchers knew were presentwithin the chip. On closer inspection,though, little of it turned out to be useful.The patterns were a mishmash of unrelat-ed structures that were as misleading asthey were illuminating. This fits with thefrustrating experience of real neurosci-ence. Researchers have had a completeconnectome of a tiny worm, Caenorhabdi-tis elegans, which has just 302 nerve cells,

true about how the chip works.Their test subject was the MOS Technol-

ogy6502, firstproduced in 1975 and famousfor powering, among other things, earlyAtari, Apple and Commodore computers.With just 3,510 transistors, the 6502 is sim-ple enough for enthusiasts to have createda simulation that can model the electricalstate ofevery transistor, and the voltage onevery one of the thousands of wires con-necting those transistors to each other, asthe virtual chip runs a particular program.That simulation produces about 1.5 giga-bytes ofdata a second—a large amount, butwell within the capabilities of the algo-rithms currently employed to probe themysteries ofbiological brains.

The chips are downOne common tactic in brain science is tocompare damaged brains with healthyones. If damage to part of the brain causespredictable changes in behaviour, then re-searchers can infer what that part of thebrain does. In rats, for instance, damagingthe hippocampuses—two small, banana-shaped structures buried towards the bot-tom of the brain—reliably interferes withthe creatures’ ability to recognise objects.

When applied to the chip, though, thatmethod turned up some interesting falsepositives. The researchers found, for in-stance, that disabling one particular groupof transistors prevented the chip from run-ning the boot-up sequence of “Donkey

Modelling brains

Does not compute

Acautionary tale about the promises ofmodern brain science

Science and technologyAlso in this section

66 Evolution and panda genetics

67 Sunspots, 290m years ago

68 Supercavitating torpedoes

66 Science and technology The Economist January 21st 2017

1

2 since 1986. Yet they understand much lessabout how the creature’s “brain” worksthan they do about computer chips withmillions of times as many components.

The essential problem, says Dr Jonas, isthat the neuroscience techniques failed tofind many chip structures that the re-searchers knew were there, and which arevital for comprehending what is actuallygoing on in it. Chips are made from transis-tors, which are tiny electronic switches.These are organised into logic gates, whichimplement simple logical operations.Those gates, in turn, are organised intostructures such as adders (which do exact-ly what their name suggests). An arith-metic logic unit might contain several ad-ders. And so on.

But inferring the existence of such high-level structures—working out exactly howthe mess of electrical currents within thechip gives rise to a cartoon ape throwingbarrels at a plumber—is difficult. That is nota problem unique to neuroscience. Dr Jo-nas draws a comparison with the HumanGenome Project, the heroic effort to se-quence a complete human genome thatfinished in 2003. The hope was that thiswould provide insights into everythingfrom cancer to ageing. But it has provedmuch more difficult than expected to ex-tract those sorts of revelations from whatis, ultimately, just a long string of text writ-ten in the four letters of the genetic code.

Things were not entirely hopeless. Theresearchers’ algorithms did, for instance,detect the master clock signal, which co-ordinates the operations of different partsofthe chip. And some neuroscientists havecriticised the paper, arguing that the analo-gy between chips and brains is not so closethat techniques for analysing one shouldautomatically workon the other.

Gaël Varoquaux, a machine-learningspecialist at the Institute for Research inComputer Science and Automation, inFrance, says that the 6502 in particular isabout as different from a brain as it couldbe. Such primitive chips process informa-tion sequentially. Brains (and modernmicroprocessors) juggle many computa-tions at once. And he points out that, for allits limitations, neuroscience has made realprogress. The ins-and-outs of parts of thevisual system, for instance, such as how itcategorises features like lines and shapes,are reasonably well understood.

Dr Jonas acknowledges both points. “Idon’t want to claim that neuroscience hasaccomplished nothing!” he says. Instead,he goes back to the analogy with the Hu-man Genome Project. The data it generat-ed, and the reams of extra informationchurned out by modern, far more capablegene-sequencers, have certainly been use-ful. But hype-fuelled hopes of an immedi-ate leap in understanding were dashed.Obtaining data is one thing. Working outwhat they are saying is another. 7

CONVERGENT evolution—the arrival,independently, by different species at

the same answer to a question posed bynature—is a topic of great interest to biolo-gists. One aspect of the phenomenonwhich has not yet been much looked at,however, is its underlying genetics. In par-ticular, an issue not previously addressedis how often such changes arise from simi-lar mutations in the two convergent lines,and how often they have different geneticcauses that happen to have similar effectson the organisms’ forms and functions.That has now been rectified by an exami-nation of two creatures which, thoughonly distantly related, share an unusualfeeding habit, an unusual anatomical fea-ture and an unusual name: panda.

The giant panda is a black and whitebear. The red panda (pictured above) is re-lated to weasels, raccoons and skunks.Their habitats—mountainous areas ofsouthern China and its neighbours—over-lap, but their last common ancestor lived43m years ago. They do, though, share alimited kinship, for both are members(alongwith dogs, cats, hyenas, mongooses,seals and so on) of the mammalian orderCarnivora. Which is curious, because bothare vegetarian.

More intriguing still, both subsist al-most entirely on bamboo (some etymolo-gists think their mutual name is derivedfrom the Nepali phrase nigalya ponya,meaning “bamboo-eater”). And most curi-

ously of all, both have a sixth digit on theirforepaws—a kind of ancillary thumb de-rived from one of the bones of the wristthat helps them hold bamboo stalks forconsumption. These common features ledHu Yibo of the Institute of Zoology, in Beij-ing, and his colleagues, to wonder if thetwo vegetarian carnivores also shared ge-netic modifications that might explainthose features. And, as Dr Hu observes in apaper just published in the Proceedings ofthe National Academy of Sciences, they do.

To search for such genetic commonal-ities, Dr Hu and his colleagues comparedthe DNA of the two pandas with that offour other members of the Carnivora: po-lar bears (close relatives of giant pandas),ferrets (close relatives of red pandas), andtigers and dogs (close relatives of neither).If pandas share features of their DNA witheach other, but not with the four compari-son species, he reasoned, then it is likelythat those features encode recent adapta-tions common to the two of them.

Altogether, the team identified 70 genes(out of the 20,000 or so that mammalshave) which sport bits ofDNA that seemedto be shared. They also found ten geneswhich have been disabled by cripplingmutations in both of the pandas, but not inthe other four species. Not all of the sharedgenetic features obviously tied in with theshared peculiarities of pandas, but somedid. These fell into three categories: genesaffecting anatomy, genes affecting appetite

Panda genetics

Hey, dude. Give me six!

Two strange mammals illuminate the process ofnatural selection

The Economist January 21st 2017 Science and technology 67

2 and genes affecting the digestion and me-tabolism ofnutrients.

The anatomy-related adaptations werethose that seemed to control the develop-ment of the pandas’ second thumbs. Twogenes in particular, DYNC2H1 and pericen-trin, have mutations that cause identicalchanges in each type of panda in the pro-teins encoded by these genes. In mice, mu-tations in these genes are known to en-courage extra digits to grow, so it is notunreasonable to suspect that they are alsothe cause of this in pandas.

The appetite-modifying change in-volved one of the disabled genes. Whenworking, this gene encodes a proteinwhich formspartofthe tongue’s tastebudsfor umami, a savoury “meatiness” sepa-rate from the other four tastes of sweet-ness, sourness, bitterness and saltiness.Umami perception is stimulated by glu-tamic acid, one of the 20 amino acids thatmake up proteins—but one that is morecharacteristic of animal proteins thanplant ones. Sensitivity to umami is valu-able to a carnivore but unnecessary (andpossibly harmful) to a herbivore.

The other genetic convergences Dr Hurecorded were related to the digestion andmetabolism of substances scarce in, or ab-sent from, bamboo. He and his colleaguesnoted parallel changes in the genes forthree digestive enzymes whose job is toliberate two particular amino acids, lysineand arginine, from proteins. Both lysineand arginine are abundant in meat, but inshort supply in bamboo. The team alsonoted parallel changes in four genes thatencode proteins involved in the metabo-lism oftwo vitamins, A and B12, and ofara-chidonic acid, a lipid essential for bodilyfunction. All of these are scarce or non-ex-istent in bamboo as well. Exactly how thegeneticchangesseen alter the effectivenessof the proteins involved remains to be de-termined. But the prediction would be thatthey enhance the availability of the nutri-ents in question.

The upshot is that the two pandas do in-deed seem to have similar genetics under-lying their similar peculiarities. Such simi-larities are, admittedly, easier to find thandifferent genetic routes to the same out-come would be. But Dr Hu has establishedthat, at least in the case of pandas, naturalselection has often taken the same paths toarrive at the same outcomes. 7

EVERY11 years or so, a new sunspot cyclebegins. Sunspots are apparent blemish-

es in the sun’s photosphere, the layerwhich emits its light. Though still hot(about 3,500°C), they are cooler than theirsurroundings (about 5,500°C) and thus ap-pear dark by contrast. A cycle starts withspots appearing at mid-latitudes in bothnorthern and southern hemispheres. Overtime, the spot-generating areas migrate to-wards the equator. As they do so, theamount of light and other radiation thesun emits first increases to a maximumand then decreases to a minimum, untilthe spots vanish and the cycle renews.

On Earth, the increased illumination ofsolar maxima drives photosynthesis, andthus plant growth. That permits botaniststo use trees’ annual growth rings to workout what sunspot activity was like hun-dreds, and occasionally thousands, ofyears ago. Determining solar activity mil-lions of years ago, though, has not been soeasy. But it is of interest to solar physicists,who wonderhow farbackinto the past theoscillations of the sun’s magnetic field thatdrive the cycle go, and how they mighthave changed over the course of time.

Now, Ludwig Luthardt and Ronny Röss-ler of the Natural History Museum ofChemnitz, in Germany, have cracked theproblem. They have been able to apply thetree-ring method to petrified trunks from a

nearby fossil forest. This forest (imaginedin an artist’s impression below) was bu-ried by a volcanic eruption 290m yearsago, during the Permian period. And, asthey report in Geology, Mr Luthardt and DrRössler have found that the sunspot cyclewas little different then from what it isnow.

The Chemnitz fossil trees, mostly coni-fers and ferns, are particularly well pre-served. Volcanic minerals seeped intothem soon after the eruption and petrifiedthem before bacteria and fungi could rottheir tissues away. Mr Luthardt and DrRössler selected 43 ofthe largest specimensand looked at their growth rings.

They found 1,917 rings which were in agood enough state to be measured under amicroscope. They knew that the trees haddied simultaneously, giving them a base-line to workfrom, and so were able to com-pare the rings from different plants. Theywere stunned by how clearly they couldsee the cycles.

About three-quarters of their speci-mens showed synchronous growth peakslike those caused by modern sunspot ac-tivity. In total, the rings they measured letthem study 79 years of forest growth be-fore the eruption. During this period, thesolar cycle averaged 10.6 years. That com-pares with 11.2 years in the modern era, al-though this figure conceals wide variationin the lengths of individual cycles. Withinstatistical limits, then, it seems that the sun-spot cycle was the same in the early Perm-ian as it is now, suggesting that the sun’smagnetic oscillations were the same thenas they are at present. Whether that is a co-incidence has yet to be determined, butthere is no reason why the method MrLuthardt and Dr Rössler have developedshould notbe applied to otherpetrified for-ests, from different periods, to find out. 7

Solar physics and palaeontology

Set in stone

An ancient forest reveals the sun’sbehaviour290m years ago

Down in the forest, something stirred

The Richard Casement internship

We invite applications for the 2017 Richard Casementinternship. We are looking for a would-be journalist tospend three months of the summer working on thenewspaper in London, writing about science andtechnology. Applicants should write a letter introducingthemselves and an article of about 600 words that theythink would be suitable for publication in the Scienceand Technology section. They should be prepared tocome for an interview in London or New York. A stipendof £2,000 a month will be paid to the successfulcandidate. Applications must reach us by January 27th.These should be sent to: casement2017@economist.com

68 Science and technology The Economist January 21st 2017

WHEN introduced 40 years ago, the So-viet Shkval (“Squall”) torpedo was

hailed as an “aircraft-carrier killer” be-cause its speed, more than 370kph (200knots), was four times that of any Ameri-can rival. The claim was premature. Pro-blems with its design meant Shkval turnedout to be less threatening than hoped (or,from a NATO point of view, less dangerousthan feared), even though it is still madeand deployed. But supercavitation, theprinciple upon which its speed depends,has continued to intrigue torpedo design-ers. Now, noises coming out of the SovietUnion’s successor, Russia, are leadingsome in the West to worry that the coun-try’s engineers have cracked it.

Life in a bubbleBubbles ofvapour (ie, cavities) form in wa-ter wherever there is low pressure, such ason the trailing edges of propeller blades.For engineers, this is usually a problem. Inthe case of propellers, the cavities erodethe blades’ substance. Shkval’s designers,however, sought, by amplifying the phe-nomenon, to make use of it. They gavetheir weapon a blunt nose fitted with a flatdisc (pictured above) that creates a circulartrailing edge as the torpedo moves for-ward. Theyalso gave it a rocketmotor to ac-celerate it to a speed fast enough for thatedge to create a cavity consisting of a sin-gle, giant bubble which envelopes the en-tire torpedo except for the steering fins.

The result is thatmostofthe torpedo ex-periences no hydrodynamic drag, greatlyenhancing its potential velocity. To take ad-vantage of this it is propelled, when thebooster rocket runs out of oomph, by a hy-drojet—a motor fuelled by a material, suchas magnesium, that will burn in water.

Shkval’s problems are threefold. First, ithas a short range—around 15km comparedwith around 50km for America’s principalsubmarine-launched torpedo, the Mk 48.Second, the hydrojet is noisy, so opponentscan hear the weapon coming. Third, it can-not track its target. Most torpedoes use so-nar to home in on the ship they are intend-ed to sink. Because Shkval travels inside abubble, any sonar needs to be mounted onthe cavitation disc, which is too small forthe purpose. In addition, returning sonarpings would be drowned out by the hydro-jet’snoise. Asa consequence, Shkval’sonlyguidance is an autopilot which steers it to-wards the place where its target was locat-ed at the moment of launch, in the hopethat the target has not moved.

These deficiencies have not stoppedWestern countries trying to build super-cavitating torpedoes of their own. Diehl, aGerman firm, announced a programmefor such a weapon, Barracuda, in 2004. In2006 General Dynamics, a big Americanfirm, was commissioned to look into thematter (though its brief did not include theword “torpedo”, referring only to an “un-dersea transport”) by the country’s De-

fence Advanced Research Projects Agency. The firms’ engineers tried to overcome

the guidance problem by developing anew type of cavitator. Rather than a flatdisc, General Dynamics’ design had acurved surface, increasing the area avail-able for sonar reception. In addition the so-nar’s transmitters, mounted on the torpe-do’s steering fins, were separate from thereceiver, and the interference caused byen-gine noise was reduced by special filters. Inthe end, though, these efforts ran into thesand. Barracuda was never completed.General Dynamics’ project was shelvedafter a year. American naval research intosupercavitation in general ended in 2012,though which particular problems provedinsurmountable has never been revealed.

Russia, though, has not given up on theidea. In October 2016 plans emerged for anew supercavitating torpedo, Khishchnik(“Predator”). Few details have been re-leased, except that the work is being car-ried out by Elektropribor, a design bureauspecialising in high-precision systems forsubmarines. Combining a General Dy-namics-style sonar with a better motorcould, however, result in a weapon that theworld’s navies would truly have to fear.

Such a motor is possible, according toGeorgiy Savchenko of the Institute ofHydromechanics at Ukraine’s NationalAcademy of Sciences. His supercavitation-research group estimates that with theright fuel (perhaps lithium, which packsmore energy per kilogram than magne-sium) a new torpedo could have ten timesthe range of Shkval. It would still be noisy,but, added to its speed, such a combinationofrange and trackingability would make ithard to evade. Moreover, there is no theo-retical reason why Khishchnik should nottravel quite a lot faster than Shkval does. Inlaboratory tests, supercavitating projec-tiles have clocked more than 5,000kph.

Kanyon diaboloThe supercavitating design being devel-oped for Khishchnik might also feed intothe Kanyon project, a giant nuclear-pow-ered torpedo with a nuclear warhead thatis intended to attackcoastal targets. In whatwas either a deliberate leak or a piece ofdisinformation, this project was revealedto the world in 2015 during a televisedmeeting between Vladimir Putin, Russia’spresident, and senior officers of the coun-try’s armed forces. The camera, lookingoverone ofthese officers’ shoulders, gave apicture of plans for the putative device, an-notated with helpful information such as“speed of travel—185kph”.

The leaked design did not appear to usesupercavitation—but if Kanyon is genuine,then thoughts of adding it cannot have es-caped its designers. Even if Kanyon issmoke and mirrors, though, Khishchnikseems real enough. Perhaps, this time, air-craft-carrier skippers should be worried. 7

Submarine warfare

Torpedo junction

AnewRussian weapon maygive that countryan underwateradvantage

The Economist January 21st 2017 69

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THE bombing of Laos in the 1960s andearly1970salwaysused to be referred to

asAmerica’s “secretwar”. Thiswasnot justa mistake or even a misunderstanding: itwas a terrible misnomer. For the Laotianswho cowered in caves to escape what isconsidered the heaviest bombardment inhistory, the campaign was certainly not asecret. America’s involvement was wellknown in the capital, Vientiane, and cov-ered in the international press. Eventuallyit became well publicised and was even in-vestigated by Congress. But the “secret” la-bel stuck to America’s war in Laos, in partbecause of official denials and in part be-cause ofpublic indifference.

At last the secret is out in full. This wasbrought home during President BarackObama’s visit to the tiny South-East Asiannation in September, when he pledgedmore money to remove unexplodedAmerican bombs, though without offeringany formal apology. For those looking formore, the war’s entire compelling tale canbe found in the lucid prose and revelatoryreporting of Joshua Kurlantzick’s newbook, “A Great Place to Have a War”. Freshinterviews and newly declassified recordsdocument how American involvement es-calated and then swiftly ended, leavingAmerica’s Laotian partners holding thebag. But Mr Kurlantzick, a senior fellow atthe Council on Foreign Relations and a for-

In his book Mr Kurlantzick paints a viv-id picture of protagonists like Vang Pao, amilitary leader who emigrated to America,where he was arrested in 2007 for plottinga coup against the Laotian government,and Tony Poe, a hard-drinking CIA opera-tive who lived in the jungle and collectedsevered enemy ears. Mr Kurlantzick con-cludes that, in the future, “the CIA wouldnot lock up men like Poe; instead, it wouldfind manymore TonyPoes.” But the bookisnot just a polemic against the agency. MrKurlantzick looks into allegations that theCIA sold heroin and opium. He findsno ev-idence of this, although the agency washappy to look the other way when theHmong sold drugs.

One question is why the CIA’s conductdid not spark outrage, or even much inter-est, among the American public. MoreAmericans died in Laos than in Cambodia,but it was the bombing of Cambodia thatsparked protests including at Kent StateUniversity in Ohio in May1970, where fourstudents were killed by the national guard.Even a high-profile hearing, when SenatorTed Kennedy challenged the war, pro-voked little public reaction. Heavier mediacoverage of the bombing in Cambodiamay have contributed, as did the CIA’s at-tempts at a cover-up in Laos and the factthat the American dead were clandestineadvisers rather than young draftees.

Laos was a model. Successive Ameri-can administrations went on to wage “se-cret” wars in Central America and the Mid-dle Eastwith minimal American casualtiesand without congressional interference.The CIA viewed its Laotian operation as asuccess, even though the Pathet Lao tookover after America’s withdrawal, and arestill in power. In Laos, however, thewounds have yet to heal. 7

mer contributor to this newspaper, enrich-es his study even further by connecting theCIA’s unprecedented paramilitary activi-ties in Laos to the secret wars of today in Yemen, Somalia and elsewhere.

In 1961 Laos was the focal point ofAmerica’s containment strategy againstcommunism in South-East Asia, with Pres-ident Dwight Eisenhower giving it priorityin a pre-inauguration briefing to his succes-sor, John Kennedy. A CIA operation thenbegan to train and fight alongside an armytaken mostly from the Hmong ethnic mi-nority against the Pathet Lao—translated as“Lao Nation”—who were backed by NorthVietnam. Hitting the Pathet Lao in thenorth and on the Ho Chi Minh trail in thesouth, the American air force unleashedan average of one attack every eight min-utes for nearly ten years. By 1970 tens ofthousands of American-backed fighterswere involved, at an annual cost of $3.1bnin today’s dollars. By the time the cam-paign ended in 1973, a tenth of Laos’s pop-ulation had been killed. Thousands moreaccidental deaths would follow from unexploded bombs left in the soil.

America’s secret war

They just kept coming

America bombed Laos fora decade, killing a tenth of its population. Why was thisnot considered more ofan outrage?

Books and artsAlso in this section

70 Emile Zola in London

70 The joys of smoking

71 Hamburg and its Elbphilharmonie

72 Johnson: The story of pinyin

A Great Place to Have a War: America inLaos and the Birth of a Military CIA. ByJoshua Kurlantzick. Simon & Schuster,320 pages; $28

70 AIDS in America

70 Books and arts The Economist January 21st 2017

1

EMILE ZOLA came to London in1893 andwas “received like a prince”. Some dis-

approving bishops and headmastersthought his novels, particularly “La Terre”(“The Earth”), to be corrupting. Butwith hiswife, Alexandrine, he stayed in the SavoyHotel, met leading literary figures andaddressed thousands at banquets at Crys-tal Palace and the Guildhall. By contrast,when he arrived at Victoria Station in July1898 he was alone, a fugitive, carrying anightshirt wrapped in newspaper. In “J’ac-cuse”, his open letter in L’Aurore, a Frenchnewspaper, he had attacked the authori-ties for their shameful anti-Semitic con-duct in the political scandal that came to beknown as the Dreyfus affair. Found guiltyof libel and sentenced to prison, Zola fledto England with no idea of when it mightbe safe to return.

He was to stay foralmost a year, and it is

the story of this little-known episode thatMichaelRosen tells incharacteristically en-gaging style. Assisted by one of his Englishtranslators, Ernest Vizetelly, Zola movedfrom one safe-house to another before tak-ing refuge “in a suburban hotel in Nor-wood”. There he established his routine:writing “Fécondité” (“Fruitfulness”), cy-

cling, taking photographs, communicatingwith his friends and family in France, pon-dering “the effect of the capital ‘I’ on Eng-lish character”, complaining about thetasteless food and bemoaning the fact thatBritish journalists wrote anonymously—still the practice in The Economist.

Zola’s wife joined him from time totime, and so, for idyllic weeks and with herpermission, did Jeanne, his other, younger,chère femme, and the children he had hadwith her, whom he adored. Theirhopes forhis swift return from exile were contin-ually disappointed, as was his desire thathis son, Jacques, should work hard andcome top of the class. Eventually theFrench government relented, the innocentDreyfus’s case was reopened, though hewas not yet pardoned, and Zola could re-turn to France. However, there was no hap-py ending: in 1902 Zola died, possibly mur-dered, ofcarbon-monoxide poisoning.

Some of the book’s charm lies in itssnippets of information: in France childrenare happy as chaffinches, rather than larks;“a big snooze” is un gros dodo. A chilliernote appears towards the end. Forty yearsafter Zola’s death “a tragic rerun” of anti-Semitism saw Mr Rosen’s great-uncles de-ported to Auschwitz, along with 76,000other French Jews. Religious divisions inFrance have a doleful way ofenduring. 7

19th-century French literary history

When Emile Zolafled Paris

The Disappearance of Emile Zola: Love,Literature and the Dreyfus Case. By MichaelRosen. Faber & Faber; 302 pages; £16.99

Accuser-in-chief

NEWS of a fatal new disease affectinggay men first broke in 1981. But it took

many years and very many deaths beforethe public noticed. In New York, theplague’s epicentre, a new case ofAIDS wassoon being diagnosed every day, yet EdKoch, the mayor, did next to nothing to pre-vent its spread. According to a new book,“How to Survive a Plague”, the virus hadinfected 7,700 people in America by 1984and killed 3,600, yeta question about it at aWhite House press conference arousedlaughter. It was only in 1985, after RockHudson, a Hollywood star, was hospital-ised with AIDS, that President Ronald Rea-gan publicly acknowledged the virus. Buthe did little to help the epidemic’s largelygay victims. In 1987, after nearly 20,000Americans had died, he quipped: “When itcomes to preventing AIDS, don’t medicineand morality teach the same lessons?”

David France’s masterful account of theepidemic offers plenty of opportunity foroutrage. America’s response to this public-

The AIDS crisis in America

Chronicles ofdeath foretold

How to Survive a Plague: The Inside Storyof How Citizens and Science Tamed AIDS.By David France. Knopf; 640 pages; $30.Picador; £25

The joys of smoking

Naughty, but nice

“IREALLYshouldn’t be writing thisbook. It’s too much ofa risk,” notes

Gregor Hens, a German author and anaccomplished translator, at the start ofhismemoir about smoking. Yet write it hedoes, disguised as a quest to understandwhy: why did he do it? And, though thisis a modest bookconcerned only withthe memories and motivations of itsauthor, why, by extension, does anyone?

The fact is, as every smoker knows butfew admit, nicotine is easy enough tokick. The physiological addiction can beovercome with patches, with hypnosis,with self-help books, with good old-fashioned will power. Nicotine is theleast ofany smoker’s problems. The truthis that every ex-smoker is and always willbe a smoker. This book is, he admits, “acontinuation ofmy addiction via othermeans.”

Why do smokers do it? Because, as MrHens writes, “every cigarette that I’veever smoked served a purpose—they

were a signal, medication, a stimulant ora sedative, they were a plaything, anaccessory, a fetish object, something tohelp pass the time, a memory aid, acommunication tool or an object ofmeditation. Sometimes…all at once.”Cigarettes represent youth, rebellion,wilful disregard for sensible advice.

They function as punctuation for life.They make it coherent and add drama,inserting commas and semi-colons andellipses (and, in the end, an inarguableand often premature full stop). “WhetherI actually smoke or not, my personality isa smoker’s personality,” Mr Hens writes.To stop smoking isn’t just to give up theintake of that toxic, redeeming air intoyour lungs. It is to cease being yourself.That is why quitting is so hard.

Readers and smokers and especiallyreaders who smoke will be grateful thatMr Hens wrote “Nicotine” despite theriskof relapse. It is that rare book onaddiction: neither preaching nor self-loathing, lapsing only occasionally intoromanticism. And like the best cigarettes,it is over too soon. Though any morewould probably be too much.

Nicotine. By Gregor Hens. Translated byJen Calleja. Other Press; 176 pages; $16.95.Fitzcarraldo Editions; £12.99

The Economist January 21st 2017 Books and arts 71

1

2 health crisis was one offederal neglect, bu-reaucratic incompetence, corporate greedand brazen prejudice. AIDS would claimover 300,000 Americans—a third of themin New York—before a pharmaceuticalbreakthrough in 1996 enabled the infectedto lead ordinary lives. For those who havesurvived, Mr France writes that the betray-al of so many politicians, doctors, clergy-men and family members remains “im-possible to forget”.

At a time when several states stillbanned gay sex, many Americans sawAIDS as a punishment for sinful behav-iour. Early patients were thrown out ofhospitals, ignored by ambulances andlocked out of their homes. Nearly everyNewYorkundertakerrefused to handle thecorpses. The popular press initially avoid-ed the story; it took two years and 600dead before the New York Times covered iton the front page. When reports becameinevitable, editorials frequently castigatedgay men as public-health menaces. Anti-gay hate crimes surged, rarely resulting inarrests. Gay foreigners entering the coun-try were often quarantined and deported.

HIV, which causes AIDS, was a tena-cious foe, genetically far more complexthan other known retroviruses. AIDS sup-pressed the immune system and by 1990one American was dying from the diseaseevery 12 minutes, often after succumbingto a preventable infection. But even as hos-pitals overflowed with AIDS patients, thefederal government failed to help statestreat and prevent the disease, and federalresearch remained sluggish and disorgan-ised. Drugs that officials called promisingin 1985 had still not been tested five yearslater. Others that were transforming livesin off-market experiments, such as an anti-blindness drug called DHPG, still awaitedclinical trials, ensuring that many AIDS pa-tients would go blind unnecessarily. Feder-al officials dithered for years before issuingguidelines on treatable infections. Nineyears of the country’s war on AIDS had ex-tended the average 18-month lifespan ofpatients by a mere three months.

Public indifference and political inepti-tude drove activists to take matters intotheir own hands. Gay men began circulat-ing materials promoting “safe sex” in 1983.Condoms became popular, bath housesclosed and transmission rates for all sex-re-lated diseases slowed dramatically. Yet itwould take over a decade for Washingtonto fund a safe-sex campaign nationally.The government’s flat-footed strategy forresearching and testing new drugs and thecripplingly high costs of developing thera-pies spurred black-market clubs that ped-dled unapproved drugs by the truckload.Activists staged protests to highlight thecost of federally approved drugs, and theylearned enough about virology, chemistryand immunology to propose essentialdrug-trial innovations. Federal and private

researchers eventually took note of whatthey were saying. Never before had agroup of patients done so much to guidethe agenda ofso-called experts.

As a gay man in New York during thistime, Mr France buried many friends andlovers. His own story is one of those heknits together in this rivetingaccount ofthemen and women who refused to surren-der in the face ofAIDS. Despite itsgrimsub-ject, this is an inspiring book. At a timewhen many Americans are worried onceagain about the wisdom and compassionof their elected leaders, “How to Survive aPlague” offers a salient reminder of whatcan be achieved by citizens who remainunbowed and unbroken. 7

ON OCTOBER 31st, the lights on thenew concert hall in Hamburg spelled

out fertig—“finished”, and the city heaved asigh of relief. The history of the crazily am-bitious project known as the Elbphilhar-monie had been chequered. Conceived in2003 at a projected cost of€77m ($82.3m), itended up costing ten times that and wascompleted seven years late. It survived dis-putes, lawsuits and a parliamentary inqui-ry. No wonder its architects, Jacques Her-zog and Pierre de Meuron—creators of TateModern and, along with Ai Weiwei andothers, of the “bird’s nest” Olympic Stadi-um in Beijing—feared at one point that thejob would destroy their Basel-based firm.In 2011 Barbara Kisseler, Hamburg’s out-

spoken culture senator, neatly summed upher fellow-citizens’ ambivalence: “The Elb-philharmonie is very dear to us, in bothsenses of the word.”

The tallestbuildingin town, its roofcov-ered in giant sequins, it sits on the end of abusy wharfand has been likened to a crys-tal on a rock, a bubble-wrapped ice-cubeand a ship under sail. The hull has beenconstructed from a converted cocoa ware-house. The sails are a technical marvel:1,000 plate-glass panels, heated to 600°Cto curve, bulge or pucker, each imprintedwith a seemingly random pattern of metaldots that change colour in response to theshifting light. This is kinetic art on a gargan-tuan scale.

The hall had to fit into a very small foot-print, so the architects had to think verti-cally. Their acoustics expert was the cele-brated and demanding Yasuhisa Toyota.His 30-year-old Suntory Hall in Tokyo isstill a benchmark for acoustic refinementand visual elegance. His customary ter-raced “vineyard” seating design—pioneer-ed at the Berlin Philharmonie in the1960s—is now widely adopted. The tradi-tional “shoebox” design has good seatsand bad seats, but the more democratic“vineyard” has no “best” seats. At the Elb-philharmonie in Hamburg no one is morethan 30 metres from the stage.

Achieving the sound that Mr Toyotawanted meant hanging the hall like a co-coon from the roofand surrounding it withfeather pillows to isolate the building fromexternal industrial noise. The interior isclad with 10,000 distressed gypsum pan-els, each individually computer-designedboth to diffuse the sound and to keep itrich. Hollowed-out like a cave, and con-ceived in curves and swirls with not astraight line in sight, the space feels as if ithas been crafted entirely by hand.

The inaugural concert on January 11th,programmed to show offthe acoustic flexi-bility, was a triumph. Whether for a smallperiod-instrument ensemble or a massiveWagnerorchestra, forSirBryn Terfel’s clari-on baritone or Philippe Jaroussky’s ethere-al falsetto, the sound was balanced andwarm with absolute clarity of detail. Thebare oak foyers, with their vast flights ofstairs, are spartan, reflecting the tastes of acity that is elegant yet restrained.

The main hall is only part of the project.There is also a smaller chamber hall and asubstantial education department. Theresident NDR Elbphilharmonie Orchesteris there, as is Resonanz, a radical experi-mental string ensemble. What impressesmost is the programme being devised byChristoph Lieben-Seutter, the Elbphilhar-monie’s general director. This features notjust glittering names, though there areplenty of those, but also breadth and vari-ety, and a determined drive to bring in newaudiences. “Salaam Syria” in mid-Marchwill be a three-day festival devoted to the

The Elbphilharmonie

Worth the wait,and the costHAMBURG

Anewconcert hall will make theHanseaticcity a cultural destination

Making waves

72 Books and arts The Economist January 21st 2017

2

FEW people live to 111. Fewer still leaveasbiga markon linguistic lives asZhou

Youguang, who died on January 14th. MrZhou was the chiefarchitect ofpinyin, thesystem that the Chinese use to write Man-darin in the roman alphabet.

Pinyin has not, of course, replaced theChinese characters. Rather, it is used as agateway to literacy, giving young childrena systematic way to learn the sounds ofthe thousands of characters required tobe literate in Chinese. Pinyin is also usedby most Chinese people to input Chinesecharacters into computers: type a wordlike wo (meaning “I”) and the proper char-acter appears; if several characters sharethe same sound (which is common inChinese), users choose from a short menuof these homophonic characters.

In other words, the primary way thatthe Chinese interact with their languagein the digital age is via an alphabet bor-rowed by Communist China from itsideological enemies in the 1950s. The taleisan odd one. Mao Zedong(who wasMaoTse-tung before pinyin, under the “Wade-Giles” romanisation system) wanted aradical break with old ways after 1949,when the civil war ended in mainlandChina. He was hardly the first to thinkthat China’s beautiful, complicated andinefficient script was a hindrance to thecountry’s development. Lu Xun, a cele-brated novelist, wrote in the early 20thcentury: “If we are to go on living, Chi-nese characters cannot.”

But according to Mr Zhou, speaking tothe New Yorker in 2004, it was JosefStalinin 1949 who talked Mao out of full-scaleromanisation, saying that a proud Chinaneeded a truly national system. The re-gime instead simplified many Chinesecharacters, supposedly making them eas-ier to learn—but causinga split in the Sino-phone world: Taiwan, Hong Kong and

other overseas Chinese communities stilluse the traditional characters.

Mr Zhou, who had been working for aChinese bank in New York (he was largelyself-trained as a linguist), had returnedhome in a burst of patriotic optimism after1949. He was drafted by Zhou Enlai, Mao’spremier, in the 1950s to create a system notto replace, but to complement, the Chinesecharacters. After three years’ work, pinyinwas ready. It used just the standard Romanletters and a few (often omitted) diacriticalmarks, especially over vowels to show the“tones”: steady, rising, dipping or fallingpitch. People joked that Mr Zhou’s teamhad taken three years to deal with just 26letters. But pinyin dealt neatly with all ofthe sounds of Mandarin with a minimumof tricky typography: even q and x wereused (for what had been ch’ and hs inWade-Giles). These letters do not alwayssound the same as they do in Western lan-guages, but pinyin overall was a hit, credit-

ed plausibly with a huge boost in literacyin China. Even the Taiwanese, who abhorMao’s simplified characters, are graduallyadopting Mr Zhou’s pinyin (which theyhad also once abhorred), making the useof pinyin one of the few practical thingsthe two countries can agree on.

Why don’t the Chinese just adopt pin-yin? One is the many homophones(though these are not usually a problemin context). Another is that Chinese char-acters are used throughout the Chinese-speaking world, not just by Mandarin-speakers but also speakers of Cantonese,Shanghainese and other varieties. Theseare as different from each other as the bigRomance languages are, but the writingsystem unifies the Chinese world. In fact,character-based writing is, in effect, writ-ten Mandarin. This is not obvious fromlooking at the characters, but it is obviousif you look at pinyin. If China adopted itwholesale, the linguistic divisions in Chi-na would be far more apparent.

But there is another reason for attach-ment to the characters. They represent tra-dition, history, literature, scholarship andeven art on an emotional level that manyforeigners do not understand. Outsidersfocus so much on efficiency probably be-cause those who do try to learn the char-acters cannot help but be struck by howabsurdly hard they are to master.

There is a real trade-off between effi-ciency and culture. English-speakers haverejected most efforts to clean up the lan-guage’s notorious spelling, making coff,ruff, thru, tho and bow from cough, rough,through, though and bough. The Irish ac-cept the expense of keeping Irish on signsand in classrooms, even if it isn’t efficient.In language, as in love, the heart is oftenthe master of the head. Pinyin, which hashelped the Chinese have a bit of both,will long outlast the long-lived Mr Zhou.

One country, two systemsJohnson

The coexistence ofpinyin and Chinese characters highlights the role ofemotion in language decisions

music of the world’s most strife-torn coun-try, with performances from the players ofthe Syrian Expat Orchestra. Since Ham-burg is home to many migrants, this ismore than a gesture. It is telling that everyconcert in the opening season sold outwithin hours of tickets going on sale.

Concert halls are increasingly a politi-cal matter. Angela Merkel and five othermembers of the federal government at-tended the birth of the already-beloved“Elphie”. Four months ago the depressedRuhr-valley city of Bochum opened acharming new concert hall which hadbeen in part crowdfunded by 20,000 local

residents. Two years ago the superb Phil-harmonie de Paris opened its doors tonear-universal acclaim, after a three-decade campaign for its creation led byPierre Boulez and other French musicians.In Paris the mainspring was left-wing poli-tics: the Philharmonie makes a point ofdrawing audiences from poor areas, and itencourages children to learn to play instru-ments from other cultures. Yet anotherhall, the mostly publicly funded Seine Musicale, is due to open in Paris soon.

London may be the outlier here. A pro-posed new hall for the Barbican Centre,which would probably cost £400m

($493m), has its cheerleaders in the press.But the project, promoted with implausi-ble bombast about “outreach” but increas-ingly seen as a metropolitan vanity, hasfew friends even in the music profession,let alone outside it. It would of course benice for London to have its own state-of-the-art concert hall, but with the already-existing Southbankand Barbican halls, im-perfect though they may be, musical life isperfectly liveable without one. Hamburg,however, is a different story. One of therichest cities in Europe, it has never beenseen as a top-tier cultural destination. TheElbphilharmonie may change that. 7

73

The Economist January 21st 2017

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Courses

Business Opportunities

74

The Economist January 21st 2017

The Mossavar-Rahmani Center for Business and

Government at Harvard Kennedy School invites

distinguished professionals with at least 20 years ofexperience in government and/or business to apply

for a one-year, unpaid appointment as Senior Fellow

to conduct research on topics at the intersection ofthe public and private sectors, including regulation,

corporate governance, and the role of government in

the changing global economy. The Center is led by

Lawrence Summers, University Professor, and has

numerous Harvard faculty as members.

Deadline for applications is March 1, 2017.

For more information please visit

www.hks.harvard.edu/centers/mrcbg/about/fellows/srfellows

Chief Analyst, NHS England (Job Ref: 990-NHSE6622C)Commissioning Strategy Directorate

Salary: ESM Grade 1, from £100,000 per annum

London and Leeds based

NHS England is seeking a Chief Analyst to provide outstanding professional leadership across NHS England’s analytical group. You will ensure that the organisation’s analytical services are highly effective, producing world-class actionable insight and evidence, and that policy development, decisions and implementation in NHS England are underpinned by world-class analysis.

Reporting to the National Director for Commissioning Strategy, you will work closely with NHS England national directors and the NHS England Board, as well as other colleagues and external partners, to ensure that analysis is focused in areas where it can make the biggest impact, to harness international evidence and understanding of effective health systems for the benefi t of the NHS, and to provide expert assurance of NHS England models and analytical outputs.

Possessing strong leadership, teamwork and communication skills, you will be a highly experienced leader, with an excellent reputation and signifi cant track record of professional achievement, nationally and/or internationally. You will make an impact both inside and outside of NHS England and will play a key role in establishing new partnerships with academic and other experts in the health and care sector.

NHS England values contributions from diverse backgrounds, and would welcome applications from under-represented groups.

If this sounds like you please visit www.jobs.nhs.uk and search for the above reference number.

AppointmentsCourses

75

The Economist January 21st 2017

Tenders

Economic data% change on year ago Budget Interest Industrial Current-account balance balance rates, % Gross domestic product 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 Jan 18th year ago

United States +1.7 Q3 +3.5 +1.6 +0.5 Dec +2.1 Dec +1.4 4.7 Dec -476.5 Q3 -2.6 -3.2 2.35 - -China +6.7 Q3 +7.4 +6.7 +6.2 Nov +2.1 Dec +2.0 4.0 Q3§ +264.6 Q3 +2.3 -3.8 2.99§§ 6.83 6.58Japan +1.1 Q3 +1.3 +0.9 +4.6 Nov +0.5 Nov -0.2 3.1 Nov +189.1 Nov +3.7 -5.6 0.05 113 117Britain +2.2 Q3 +2.3 +2.0 +1.9 Nov +1.6 Dec +0.7 4.8 Oct†† -138.1 Q3 -5.6 -3.7 1.37 0.81 0.70Canada +1.3 Q3 +3.5 +1.2 +1.6 Oct +1.2 Nov +1.5 6.9 Dec -53.6 Q3 -3.5 -2.5 1.71 1.31 1.45Euro area +1.7 Q3 +1.4 +1.6 +3.2 Nov +1.1 Dec +0.3 9.8 Nov +384.3 Oct +3.3 -1.8 0.36 0.94 0.92Austria +1.2 Q3 +2.4 +1.5 +0.2 Oct +1.4 Dec +1.0 5.8 Nov +8.0 Q3 +2.2 -0.9 0.52 0.94 0.92Belgium +1.3 Q3 +0.7 +1.2 +2.8 Oct +2.0 Dec +1.9 7.6 Nov +3.4 Sep +0.9 -3.0 0.73 0.94 0.92France +1.0 Q3 +1.0 +1.2 +1.8 Nov +0.6 Dec +0.3 9.5 Nov -28.6 Nov‡ -1.2 -3.3 0.78 0.94 0.92Germany +1.7 Q3 +0.8 +1.8 +2.1 Nov +1.7 Dec +0.4 6.0 Dec +296.9 Nov +8.8 +1.0 0.36 0.94 0.92Greece +1.6 Q3 +3.1 +0.4 +2.3 Nov nil Dec nil 23.0 Oct -1.0 Oct -0.3 -7.7 7.05 0.94 0.92Italy +1.0 Q3 +1.0 +0.9 +3.2 Nov +0.5 Dec -0.1 11.9 Nov +49.5 Oct +2.4 -2.6 1.97 0.94 0.92Netherlands +2.4 Q3 +3.1 +2.1 +2.9 Nov +1.0 Dec +0.2 6.6 Nov +57.1 Q3 +8.6 -1.1 0.43 0.94 0.92Spain +3.2 Q3 +2.9 +3.2 +4.6 Nov +1.6 Dec -0.3 19.2 Nov +23.0 Oct +1.7 -4.6 1.40 0.94 0.92Czech Republic +1.6 Q3 +0.9 +2.4 +7.1 Nov +2.0 Dec +0.6 5.2 Dec§ +3.7 Q3 +1.5 nil 0.35 25.3 24.9Denmark +1.1 Q3 +1.5 +1.0 +13.3 Nov +0.5 Dec +0.6 4.2 Nov +23.9 Nov +7.5 -1.0 0.38 6.95 6.86Norway -0.9 Q3 -1.9 +0.6 +2.6 Nov +3.5 Dec +3.5 4.8 Oct‡‡ +18.0 Q3 +4.4 +3.5 1.62 8.45 8.90Poland +2.0 Q3 +0.8 +2.6 +3.3 Nov +0.8 Dec -0.7 8.3 Dec§ -3.1 Nov -0.5 -2.7 3.63 4.08 4.10Russia -0.4 Q3 na -0.5 +2.6 Nov +5.4 Dec +7.0 5.4 Nov§ +22.2 Q4 +2.3 -3.7 8.19 59.3 79.1Sweden +2.8 Q3 +2.0 +3.1 +0.1 Nov +1.7 Dec +1.0 6.2 Nov§ +22.2 Q3 +4.9 -0.3 0.60 8.91 8.59Switzerland +1.3 Q3 +0.2 +1.4 +0.4 Q3 nil Dec -0.5 3.3 Dec +68.2 Q3 +9.4 +0.2 -0.18 1.00 1.01Turkey -1.8 Q3 na +2.7 +4.6 Nov +8.5 Dec +7.8 11.8 Oct§ -33.7 Nov -4.7 -1.8 11.33 3.77 3.03Australia +1.8 Q3 -1.9 +2.4 -0.2 Q3 +1.3 Q3 +1.3 5.8 Dec -47.9 Q3 -3.2 -2.1 2.68 1.32 1.45Hong Kong +1.9 Q3 +2.5 +1.6 -0.1 Q3 +1.3 Nov +2.4 3.3 Nov‡‡ +13.3 Q3 +2.9 +1.6 1.76 7.76 7.80India +7.3 Q3 +8.3 +7.0 +5.7 Nov +3.4 Dec +4.9 5.0 2015 -11.1 Q3 -0.6 -3.8 6.45 68.1 67.7Indonesia +5.0 Q3 na +5.0 -2.3 Nov +3.0 Dec +3.5 5.6 Q3§ -19.2 Q3 -2.1 -2.3 7.48 13,343 13,933Malaysia +4.3 Q3 na +4.3 +6.2 Nov +1.8 Dec +2.1 3.4 Nov§ +5.6 Q3 +1.7 -3.4 4.26 4.44 4.40Pakistan +5.7 2016** na +5.7 +8.0 Nov +3.7 Dec +3.8 5.9 2015 -5.0 Q4 -1.4 -4.6 8.03††† 105 105Philippines +7.1 Q3 +4.9 +6.9 +14.6 Nov +2.6 Dec +1.8 4.7 Q4§ +3.1 Sep +0.9 -2.3 4.29 49.8 47.7Singapore +1.1 Q3 +9.1 +1.8 +11.9 Nov nil Nov -0.5 2.1 Q3 +63.0 Q3 +22.5 +0.7 2.32 1.42 1.44South Korea +2.6 Q3 +2.5 +2.7 +4.8 Nov +1.3 Dec +1.0 3.2 Dec§ +99.0 Nov +7.2 -1.3 2.13 1,167 1,211Taiwan +2.0 Q3 +3.9 +1.1 +8.8 Nov +1.7 Dec +1.4 3.8 Nov +74.7 Q3 +13.0 -0.4 1.18 31.5 33.6Thailand +3.2 Q3 +2.2 +3.2 +3.8 Nov +1.1 Dec +0.2 1.0 Nov§ +47.9 Q3 +11.8 -2.3 2.61 35.3 36.3Argentina -3.8 Q3 -0.9 -2.1 -2.5 Oct — *** — 8.5 Q3§ -15.7 Q3 -2.6 -5.3 na 16.0 13.4Brazil -2.9 Q3 -3.3 -3.4 -1.1 Nov +6.3 Dec +8.4 11.9 Nov§ -20.3 Nov -1.2 -6.3 10.77 3.22 4.03Chile +1.6 Q3 +2.5 +1.8 -1.4 Nov +2.7 Dec +3.8 6.2 Nov§‡‡ -4.8 Q3 -1.9 -2.7 4.16 659 730Colombia +1.2 Q3 +1.3 +1.6 +1.6 Nov +5.7 Dec +7.5 7.5 Nov§ -13.7 Q3 -4.8 -3.7 6.91 2,935 3,301Mexico +2.0 Q3 +4.0 +2.1 +1.3 Nov +3.4 Dec +2.9 3.6 Nov -30.6 Q3 -2.8 -3.0 7.74 21.8 18.3Venezuela -8.8 Q4~ -6.2 -13.7 na na +424 7.3 Apr§ -17.8 Q3~ -2.9 -24.3 10.43 10.0 6.31Egypt +4.5 Q2 na +4.3 -1.2 Nov +23.3 Dec +13.2 12.6 Q3§ -20.8 Q3 -6.8 -12.2 na 18.9 7.83Israel +5.2 Q3 +3.6 +3.3 -0.8 Oct -0.2 Dec -0.5 4.5 Nov +13.3 Q3 +2.8 -2.4 2.32 3.81 3.95Saudi Arabia +1.4 2016 na +1.4 na +2.3 Nov +3.6 5.6 2015 -46.8 Q3 -5.5 -11.2 na 3.75 3.75South Africa +0.7 Q3 +0.2 +0.5 +0.5 Nov +6.8 Dec +6.3 27.1 Q3§ -12.3 Q3 -3.9 -3.4 8.64 13.5 16.8Source: 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, Nov 35.38%; year ago 25.30% †††Dollar-denominated bonds.

76 The Economist January 21st 2017Economic and financial indicators

The Economist January 21st 2017 Economic and financial indicators 77

Other markets% change on

Dec 31st 2015Index one in local in $

Jan 18th week currency termsUnited States (S&P 500) 2,271.9 -0.2 +11.2 +11.2United States (NAScomp) 5,555.7 -0.1 +10.9 +10.9China (SSEB, $ terms) 332.4 -2.9 -18.0 -22.0Japan (Topix) 1,513.9 -2.4 -2.2 +3.9Europe (FTSEurofirst 300) 1,434.0 -0.6 -0.2 -1.8World, dev'd (MSCI) 1,785.7 +0.4 +7.4 +7.4Emerging markets (MSCI) 897.9 +1.3 +13.1 +13.1World, all (MSCI) 431.1 +0.5 +7.9 +7.9World bonds (Citigroup) 892.6 +1.5 +2.6 +2.6EMBI+ (JPMorgan) 785.4 +0.9 +11.5 +11.5Hedge funds (HFRX) 1,207.2§ -0.3 +2.8 +2.8Volatility, US (VIX) 12.5 +11.3 +18.2 (levels)CDSs, Eur (iTRAXX)† 70.0 +1.2 -9.3 -10.7CDSs, N Am (CDX)† 66.4 +0.3 -24.8 -24.8Carbon trading (EU ETS) € 4.9 -4.0 -42.1 -43.0Sources: Markit; Thomson Reuters. *Total return index. †Credit-default-swap spreads, basis points. §Jan17th.

The Economist commodity-price index2005=100 % change on one one Jan 10th Jan 17th* month year

Dollar IndexAll Items 144.7 148.1 +4.3 +19.8

Food 157.0 161.0 +4.0 +10.7

Industrials

All 131.9 134.7 +4.7 +33.4

Nfa† 141.9 146.4 +7.3 +37.4

Metals 127.6 129.7 +3.6 +31.5

Sterling IndexAll items 216.0 223.3 +6.8 +40.4

Euro IndexAll items 169.9 173.7 +2.1 +23.1

Gold$ per oz 1,188.1 1,202.5 +6.3 +10.7

West Texas Intermediate$ per barrel 50.8 52.5 +1.1 +85.0Sources: Bloomberg; CME Group; Cotlook; Darmenn & Curl; FT; ICCO;ICO; ISO; Live Rice Index; LME; NZ Wool Services; Thompson Lloyd & Ewart; Thomson Reuters; Urner Barry; WSJ. *Provisional †Non-food agriculturals.

Markets % change on Dec 31st 2015 Index one in local in $ Jan 18th week currency termsUnited States (DJIA) 19,804.7 -0.7 +13.7 +13.7China (SSEA) 3,259.8 -0.7 -12.0 -16.4Japan (Nikkei 225) 18,894.4 -2.4 -0.7 +5.4Britain (FTSE 100) 7,247.6 -0.6 +16.1 -2.8Canada (S&P TSX) 15,397.9 -0.6 +18.4 +25.6Euro area (FTSE Euro 100) 1,114.0 -0.5 +1.8 +0.2Euro area (EURO STOXX 50) 3,294.0 -0.4 +0.8 -0.8Austria (ATX) 2,659.3 -0.4 +10.9 +9.2Belgium (Bel 20) 3,584.3 -1.0 -3.1 -4.6France (CAC 40) 4,853.4 -0.7 +4.7 +3.0Germany (DAX)* 11,599.4 -0.4 +8.0 +6.3Greece (Athex Comp) 643.5 -3.0 +1.9 +0.3Italy (FTSE/MIB) 19,358.1 -0.7 -9.6 -11.0Netherlands (AEX) 484.8 -0.4 +9.7 +8.0Spain (Madrid SE) 946.8 -0.3 -1.9 -3.4Czech Republic (PX) 925.9 -0.2 -3.2 -4.7Denmark (OMXCB) 805.2 -0.7 -11.2 -12.3Hungary (BUX) 32,841.3 -0.4 +37.3 +38.7Norway (OSEAX) 774.5 nil +19.3 +25.0Poland (WIG) 53,431.9 -0.5 +15.0 +11.3Russia (RTS, $ terms) 1,151.7 -0.3 +23.6 +52.1Sweden (OMXS30) 1,516.0 +0.3 +4.8 -0.9Switzerland (SMI) 8,312.4 -1.4 -5.7 -5.8Turkey (BIST) 82,779.3 +6.6 +15.4 -10.6Australia (All Ord.) 5,733.7 -1.5 +7.3 +10.6Hong Kong (Hang Seng) 23,098.3 +0.7 +5.4 +5.3India (BSE) 27,257.6 +0.4 +4.4 +1.5Indonesia (JSX) 5,294.8 -0.1 +15.3 +19.1Malaysia (KLSE) 1,665.0 -0.6 -1.6 -5.0Pakistan (KSE) 48,642.2 -1.5 +48.2 +48.1Singapore (STI) 3,000.2 nil +4.1 +3.9South Korea (KOSPI) 2,070.5 -0.2 +5.6 +6.1Taiwan (TWI) 9,342.0 nil +12.0 +16.7Thailand (SET) 1,560.8 -0.8 +21.2 +23.5Argentina (MERV) 18,870.1 +2.2 +61.6 +30.9Brazil (BVSP) 64,149.6 +2.7 +48.0 +81.9Chile (IGPA) 21,264.1 +1.3 +17.1 +25.9Colombia (IGBC) 10,161.5 -1.2 +18.9 +28.6Mexico (IPC) 46,360.6 +0.9 +7.9 -14.5Venezuela (IBC) 30,166.8 -7.9 +107 naEgypt (EGX 30) 13,304.4 +1.6 +89.9 -20.9Israel (TA-100) 1,261.0 -1.2 -4.1 -2.0Saudi Arabia (Tadawul) 6,853.5 -0.6 -0.8 -0.8South Africa (JSE AS) 52,933.3 +0.9 +4.4 +20.0

Indicators for more countries and additionalseries, go to: Economist.com/indicators

New passenger-car registrations

Sources: ACEA; AEB;ANFAVEA; Autodata;JAMA; Thomson Reuters

*Sales†Includes light trucks

‡Includes light commercial vehicles

2016, % change on a year earlier

24 18 12 6 0 6 12 18+–

Italy

China*

Spain

EuropeanUnionFrance

Germany

Britain

Belgium

UnitedStates*†

Japan

Russia*‡

Brazil Total, m

1.8

24.3

1.1

14.6

2.0

3.4

2.7

0.5

17.6

4.1

1.4

1.7

China’s car industry boomed last year:the world’s largest auto market saw thenumber of passenger cars sold swell by15%, thanks to government tax incen-tives. Growth will probably slow this yearas the stimulus is phased out. New pas-senger-car registrations in the EuropeanUnion rose for the third consecutive year.Although Volkswagen saw its share of theEuropean market shrink following itsemissions-testing scandal, it remainedthe best-selling brand. Sales in Britaindo not seem to have been strongly affect-ed by the Brexit referendum; and lowinterest rates could keep sales buoyant.Although 17.6m cars were sold in theUnited States last year, sales are expect-ed to plateau or decline.

78 The Economist January 21st 2017

WELL into her 80s Clare Hollingworthwould sleep on the floor every week

or so, just to prevent her body from getting“too soft”. Her passport was to hand, withvisas up to date, just in case the foreigndesk rang. She liked to have two packedsuitcases, one forhotclimates, one for cold,though her wardrobe was notoriouslysparse: in later life she was seldom seen inanything but a safari suit and cloth shoes.And all you really needed, she said, werethe “T & T”—typewriter and toothbrush.

Hardiness and bravery were her hall-marks. Neither shot nor shell ruffled her—excitement trumped fear, she said. She ad-mitted to disliking only rickety lifts, andfleas in her hair. But she didn’t mind bed-bugs, going without food for five or sixdays, or not washing for even longer (de-spite entreaties from her colleagues).

She could swim, ride, ski, fly a planeand jump with a parachute. And shoot:during the war she slept with a revolverunder her pillow; spares included a smallpearl-handled one for her evening bag.Aged nearly 80, she was seen climbing alamppost to gain a better look at the crack-down in Tiananmen Square. She onceavoided arrest in Bucharest by stayingwrapped only in a towel. Romanian secretpolice might strip a woman, she reckoned,but would not dress one by force.

Her wiles were legendary. She ruthless-ly trounced rivals, broke rules and exploit-ed an unmatched array of contacts. WhenIndia banned foreigners from covering thewar with Pakistan in 1965, she cajoled theprime minister, Indira Gandhi—whom sheknew from a previous posting in Paris—into making an exception. She then askedto bring along two “servants” (in fact, theywere colleagues). She had a knack for thetelling detail: still-wet concrete in a Polishgun emplacement as the country buckledunder the German assault, or insanitaryplumbing in a supposedly advanced Chi-nese arms factory.

Laconic and unadventurous in print,she was better at getting the story than tell-ing it. Her husband, Geoffrey Hoare, also ajournalist, would briskly correct the spell-ing, enliven the prose, and unearth thelead—which she tended to bury five para-graphs down, prefaced, cryptically, with“according to certain sources”.

And what sources they were. Shequizzed and befriended generals, primeministers and spymasters, politely but re-lentlessly. She gained the first interviewwith the last Shah of Iran in 1941; after hisfall in 1979, he said he would speak only toher. Another scoop, in 1968, was the plansfor peace talks to end the Vietnam war,brought to her in Saigon cathedral by an

anonymous source. At an age when mostjournalists are contemplating retirement,she moved to Beijing to open the DailyTelegraph bureau. Though she spoke not aword of Chinese (languages were not herthing) she became a notable China-watch-er. Scoops there included Mao’s stroke in1974 and Deng Xiaoping’s rise. Both weremet with scepticism; both proved true.

It all started in August 1939, when, aged27 and a foreign correspondent for barelyfour days, she commandeered a Britishconsulate car and drove into Germanyfrom Poland. A gust of wind lifted a road-side hessian screen, revealing Hitler’sarmy, mustered for the invasion. It was tobe the scoop of the century, though at firstnobody believed her. On her return shehad to produce her shopping—Germanproducts unavailable in Poland—to showshe had crossed the border.

It was a similar story with her nextscoop, that the invasion had started. The of-ficial line was that talks were still continu-ing—so she held her telephone out of thewindow to prove to Warsaw that tankswere indeed roaring into battle. When shededuced that Kim Philby, a former Britishspy, had defected to Moscow, her editorssat on that story for three months (she latertook over his job, writing for this paperfrom Beirut).

She was sometimes thought to be a spyherself—a notion she airily dismissed bysaying that there was no need: if she foundout anything like that she would tell theBritish military attaché anyway. In fact, thespy world originally regarded her withdeep mistrust for helping some undesir-able communists reach Britain (part of herunsung, pre-journalistic work with refu-gees in pre-war Poland).

Pots and kettlesShe was loyal when it mattered. In Algiersshe marshalled herfellows into a 30-strongposse to accompany (and save the life of) ajournalist arrested by paramilitaries. Butshe was mostly a difficult colleague. As aneditor in London, she habitually second-guessed her correspondents: “clare-voyance”, they called it crossly. She struckmost people as driven and unreflective.But a biography compiled from diaries andletters revealed a more three-dimensionalpicture, including a conversion to Catholi-cism prompted by her husband’s adultery(she also threatened to shoot his mistress).Her own love life was discreetly lively, too.

She was ferociously competitive, un-abashedly criticising female colleagues forbeing “pushy”, or for—perish the thought—using their femininity to get ahead. Retire-ment was also anathema. Even in her final,half-blind years she haunted the ForeignCorrespondents’ Club in Hong Kong, por-ing over the news, with passport at theready, just in case. 7

Sniffing the breezes

Clare Hollingworth, foreign correspondent, died on January10th, aged 105

Obituary Clare Hollingworth