NOVEMBER 14TH–20TH 2020

The economy Joe Biden will inherit

America’s allies: a long wishlist

The trouble with value investing

Zambia, becoming the next Zimbabwe

Suddenly, hope

DOWNLOAD

Email: info@thecsspoint.com

The CSS Point, Pakistan’s The Best Online FREE Web source for All CSS

Aspirants.

Download CSS Notes

Download CSS Books

Download CSS Magazines

Download CSS MCQs

Download CSS Past Papers

CSS Notes, Books, MCQs, Magazines

www.thecsspoint.com

BUY CSS / PMS / NTS & GENERAL KNOWLEDGE BOOKS

ONLINE CASH ON DELIVERY ALL OVER PAKISTAN

Visit Now:

WWW.CSSBOOKS.NET

For Oder & Inquiry

Call/SMS/WhatsApp

0333 6042057 – 0726 540141

CSS Solved Compulsory MCQs

From 2000 to 2020

Latest & Updated

Order Now

Call/SMS 03336042057 - 0726540141

PPSC Model Papers

78th Edition (Latest & Updated)

By Imtiaz Shahid

Advanced Publishers For Order Call/WhatsApp 03336042057 - 0726540141

FPSC Model Papers

50th Edition (Latest & Updated)

By Imtiaz Shahid

Advanced Publishers

For Order Call/WhatsApp 03336042057 - 0726540141

The Economist November 14th 2020 5

Contents continues overleaf1

Contents

The world this week8 A summary of political

and business news

Leaders11 Vaccines

Suddenly, hope

12 America and its alliesGreat expectations

12 America’s next presidentBiden’s economy

13 Asset managementBeyond Buffett

14 Democracy in AfricaZambia’s descent

Letters16 On transgender sports,

diplomacy, Facebook,management, Armenia,avatars, Brazil

Briefing19 Covid-19 vaccines

The technology of hope

Special report:Asset managementThe money doctorsAfter page 42

United States23 Covid-19 and Biden

24 Republicans and the result

25 The Pentagone

26 Fox News

26 Unhappy cowboys

28 The urban-rural divide

30 Lexington A Democraticdefeat in victory

The Americas31 The impeachment of

Martín Vizcarra

32 Hurricane Eta

33 Bello Proxy presidents

Asia35 Kyrgyzstan’s president

36 Sino-Australian trade

37 India’s covid-19-proofruling party

37 Myanmar’s election

38 Banyan Filipinos abroad

China39 Hong Kong’s legislature

40 Self-help books

42 Chaguan Musing over tea about unequal lives

Middle East & Africa43 Corruption in South Africa

44 Why Zambia may default

45 Fed-up feminists in Egypt

46 Saeb Erekat, RIP

Bagehot How PrincessDiana shaped politics,page 53

On the cover

A highly effective vaccineshould transform the fightagainst covid-19. But a lotremains to be done: leader,page 11, and briefing, page 19.Cheap, rapid tests forsars-cov-2 are here. Will theybe the stopgap needed? Page 71

• The economy Joe Biden will inherit He faces twoextraordinary challenges: leader,page 12. What he would dodifferently, and how muchdifference it would make, page 23. A vaccine and theworld’s largest economy, page 65

• America’s allies: a longwishlist What they can do forJoe Biden: leader, page 12. Andwhat the world wants from him,page 54

• The trouble with valueinvesting Made famous byWarren Buffett, it is struggling toremain relevant: leader, page 13,and briefing, page 62. A specialreport on asset managementafter page 42

We are working hard toensure that there is no dis-ruption to print copies of The Economist as a result ofthe coronavirus. But if youhave digital access as part ofyour subscription, then acti-vating it will ensure that youcan always read the digitalversion of the newspaper aswell as all of our daily jour-nalism. To do so, visit economist.com/activate

PEFC certifiedThis copy of The Economistis printed on paper sourcedfrom sustainably managedforests certified to PEFCwww.pefc.orgPEFC/29-31-58

PleaseSubscription serviceFor our full range of subscription offers, includingdigital only or print and digital bundled, visit:Economist.com/offers

If you are experiencing problems when trying tosubscribe, please visit our Help pages at:www.economist.com/help for troubleshootingadvice.

Published since September 1843to take part in “a severe contest betweenintelligence, which presses forward,and an unworthy, timid ignoranceobstructing our progress.”

Editorial offices in London and also:Amsterdam, Beijing, Berlin, Brussels, Cairo,Chicago, Johannesburg, Madrid, Mexico City,Moscow, Mumbai, New Delhi, New York, Paris,San Francisco, São Paulo, Seoul, Shanghai,Singapore, Tokyo, Washington DC

The best way to contact our Customer Serviceteam is via phone or live chat. You can contact uson the below numbers; please check our websitefor up to date opening hours.

North America: +1 800 456 6086Latin America & Mexico: +1 636 449 5702

© 2020 The Economist Newspaper Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying,recording or otherwise, without the prior permission of The Economist Newspaper Limited. The Economist (ISSN 0013-0613) is published every week, except for a year-end double issue, by The Economist Newspaper Limited, 750 3rdAvenue, 5th Floor, New York, N Y 10017. The Economist is a registered trademark of The Economist Newspaper Limited. Periodicals postage paid at New York, NY and additional mailing offices. Postmaster: Send address changes to TheEconomist, P.O. Box 46978, St. Louis , MO. 63146-6978, USA. Canada Post publications mail (Canadian distribution) sales agreement no. 40012331. Return undeliverable Canadian addresses to The Economist, PO Box 7258 STN A, Toronto,ON M5W 1X9. GST R123236267. Printed by Quad/Graphics, Saratoga Springs, NY 12866

6 Contents The Economist November 14th 2020

Volume 437 Number 9220

Europe47 Nagorno- Karabakh

48 Corruption and Ukraine

49 Europe’s recovery fund

49 France fights jihadistsin Africa

Britain51 Protest in the provinces

52 Foreign-investment rules

53 Bagehot Princess Diana,populist politician

International54 What the world wants

from Biden

Business57 China’s battered

entrepreneurs

59 Disney’s TV success

59 A growing taste for pasta

60 Royal Enfield revs up

61 Schumpeter McDonald’ssupersized comeback

Briefing62 Value investing struggles

Finance & economics65 America’s rebound

66 The vaccine and investors

67 Buttonwood Emergingmarkets

68 Turkey’s economic policy

68 Grain prices in America

69 A Swedish unicorn

70 Free exchange Workingwith epidemiologists

Science & technology71 Fast tests for covid-19

72 Life on Venus, redux

73 Better disposable cups

Books & arts75 Britain and slavery

76 Chinatown chic

77 American society

77 Billy Wilder’s story

78 Johnson Language andevolution

Economic & financial indicators80 Statistics on 42 economies

Graphic detail81 How less-educated whites spurn Joe Biden

Obituary82 James Randi, magician and professional sceptic

New consumer accounts only. Approval required. Food and beverages provided by a third party. Cafés available in select locations. Go to locations.capitalone.com for locator.Cafés do not provide the same services as bank branches but do have ATMs and associates who can help you. Off ered by Capital One, N.A., Member FDIC. © 2020 Capital One

Banking in the palm of your hands.

Capital One® checking and savings accounts have no fees or minimums and a top-rated banking app thatlets you manage your money anytime, anywhere.

This is Banking Reimagined.®

8 The Economist November 14th 2020

For our latest coverage of thevirus and its consequencesplease visit economist.com/coronavirus or download theEconomist app.

The world this week Politics

Donald Trump refused toconcede defeat in America’selection, despite Joe Biden’spassing the required 270electoral-college votes. Thepresident is pursuing severallegal challenges to states’results. None is expected tosucceed. Mr Biden’s transitionteam is considering suing toobtain federal funds and infor-mation usually granted toincoming administrations.

World leaders queued up tocongratulate Mr Biden. Amongthe strongmen who have so fardemurred are Vladimir Putinof Russia, Xi Jinping of Chinaand Jair Bolsonaro of Brazil. MrBolsonaro railed against MrBiden’s proposals to punishBrazil for not protecting theAmazon rainforest, saying,“Diplomacy alone won’t work.Once the saliva runs out, youhave to have gunpowder.”

Joe Biden announced acovid-19 advisory board to dealwith the pandemic. He said hisresponse would be led “byscience and by experts”.

Donald Trump tweeted that hehad “terminated” his defencesecretary, Mark Esper. In JuneMr Esper publicly disagreedwith the president about theuse of troops to quash protests.

Peru’s Congress removed fromoffice the president, MartínVizcarra. He has been accusedof taking bribes when he was agovernor, which he denies. Thelegislature’s speaker, ManuelMerino, succeeded Mr Vizcarraas president.

Luis Arce was sworn in asBolivia’s president. He was thecandidate of the Movement toSocialism, founded by EvoMorales, who was forced into

exile last year after protestsagainst his re-election. AfterMr Arce took office Mr Moralesreturned overland to Boliviafrom Argentina.

Eta, this year’s strongesthurricane, killed at least 130people in Central America.Perhaps 300,000 lost theirhomes. Eta broke a record setin 2005 for the number ofnamed storms in a season.

Britain’s House of Lords votedto amend a bill that wouldallow the government to re-write parts of its EuropeanUnion withdrawal treaty,including provisions aboutNorthern Ireland. The govern-ment says it will override thechanges. Joe Biden warnedBoris Johnson, Britain’s primeminister, not to imperil peacein Ireland.

After weeks of fighting overNagorno-Karabakh, Armeniaand Azerbaijan agreed to apeace deal. Armenia surren-dered the districts surround-ing the enclave, though a corri-dor linking Armenia andNagorno-Karabakh will beplaced under Russian control.Protesters demanded theresignation of Armenia’s primeminister, Nikol Pashinyan.

The European Parliamentreached an agreement with eu

member states over the cre-ation of a €1.8trn ($2.1trn)spending package for the nextseven years, including a€750bn recovery fund whichwill be raised on the capitalmarkets by the eu itself, not byindividual countries.

Bihar, one of the poorest partsof India, voted for an allianceled by the party of NarendraModi, the prime minister, instate elections. It was the firstbig state poll since covid-19swept the country and induceda deep recession. Voters inBihar, at least, do not seem toblame Mr Modi.

The National League for De-mocracy, led by Aung San SuuKyi, retained power in Myan-mar’s election. Despite failingto end the country’s simmering

civil wars, Ms Suu Kyi remainspopular, especially among theethnic-Bamar majority.

China authorised Hong Kong’sgovernment to disbar legisla-tors deemed to oppose Chineserule in the territory or tothreaten national security. Thelocal government promptlydismissed four pro-democracylawmakers. Fifteen others saidthey would resign.

America removed the EastTurkestan Islamic Movementfrom its list of terrorist organi-sations. It said there was nocredible evidence that thegroup, allegedly founded byUyghur separatists, still exist-ed. China reacted angrily,saying the organisation was athreat not only to China but tothe world.

Several people were injured bya bomb at an Armistice Dayceremony in Jeddah, in SaudiArabia. The event was attendedby representatives of foreignconsulates, including that ofFrance. Emmanuel Macron,France’s president, has angeredsome Muslims by defendingthe right to publish caricaturesof religious figures, includingthe Prophet Muhammad.

Saeb Erekat, a veteran Pales-tinian diplomat who wasinvolved in three decades ofnegotiations with Israel, diedafter contracting covid-19. Hewas 65.

Prince Khalifa bin Salmanal-Khalifa, the hardline primeminister of Bahrain, also died.He had held the post sinceindependence in 1971. PrinceKhalifa was 84.

Hundreds of people were killedin fighting between Ethiopiangovernment troops and forcesloyal to the province of Tigray.Abiy Ahmed, the prime min-ister, ordered the army intoTigray after its leaders heldregional elections in defianceof the federal government.

Police in Mozambique saidjihadists had beheaded morethan 50 people in Cabo Delga-do, a province in the north.

Coronavirus briefs

The European Commissionagreed to buy up to 300m dosesof the vaccine developed byPfizer and BioNTech.

Russia’s claims that its home-grown “Sputnik V” vaccine is92% effective in preventinginfection, a similar successrate to Pfizer’s, were met withscepticism.

The number of people in hos-pital with covid-19 in Americareached 65,000, a new record.Europe’s death toll from thevirus passed 300,000.

Lebanon announced a newlockdown that will last untilthe end of November. Authori-ties in Tehran ordered restau-rants and shops to close earlyamid rising cases.

Denmark’s government ad-mitted it could not force minkfarmers to cull livestock butrecommended they do so, afternew strains of covid-19 jumpedfrom the animals to people.

Weekly confirmed cases by area, m

To 6am GMT November 12th 2020

Confirmed deaths* Per 100k Total This week

Sources: Johns Hopkins University CSSE; UN; The Economist *Definitions differ by country

Belgium 118.7 13,758 1,427Peru 106.1 34,992 321Spain 85.8 40,105 1,987Brazil 76.9 163,368 2,262Chile 76.5 14,633 293Argentina 76.4 34,531 2,011Bolivia 75.5 8,818 60Mexico 74.8 96,430 3,202Britain 74.2 50,365 2,623Ecuador 73.2 12,920 216United States 72.7 240,783 7,785

2.0

1.5

1.0

0.5

0

NOSAJJMAM

Europe

US

Latin America

Other

The Economist November 14th 2020 9The world this week Business

Pfizer and BioNTech, twopharmaceutical firms, an-nounced that their vaccineagainst covid-19 is more than90% effective, according toearly results from trials. Thehigh success rate raised hopesof a quicker return to nor-mality than previously expect-ed. Other pharmaceutical firmsare also working on vaccinesand are expected to makeannouncements in the comingweeks. Current projectionssuggest 50m doses of thePfizer-BioNTech vaccine willbe available in 2020, rising to1.3bn the following year. On theday of the announcement,Pfizer’s and BioNTech’s shareprices surged 8% and 14%,respectively.

The news excited stockmark-ets. In America the Dow JonesIndustrial Average jumped by2.9% on Monday. The s&p 500rose sharply when it opened,before ending the day up 1.2%.The stoxx Europe 600 climbed4%. Oil prices increased to $45per barrel. By contrast, manytechnology firms that havebeen buoyed by the pandemicfaced a sell-off, includingZoom, a video-conferencingfirm, Ocado, a grocery deliverycompany, and Peloton, a makerof exercise bikes.

Regulators continued to takeaim at technology firms onantitrust grounds. The Euro-pean Union brought chargesagainst Amazon. After aninvestigation, the EuropeanCommission claimed that thetech giant uses data gatheredfrom vendors to give its ownproducts and services an un-fair advantage. Amazon saidthat it disagrees with the com-mission’s findings.

Meanwhile, India’s competi-tion watchdog has ordered aprobe into Google’s app store.It fears that a requirement thatconsumers buy apps using thefirm’s payment service smoth-ers competition. In Chinaregulators have drafted newantitrust rules aimed at tech-nology firms. They will target arange of practices, includingtreating customers differentlybased on their spending behav-

iour and data. The move fol-lows the suspension of theinitial public offering of AntGroup, a fintech firm, daysbefore its flotation in HongKong and Shanghai.

Out with the old

In a surprise shakeup RecepTayyip Erdogan, Turkey’spresident, fired the country’scentral-bank governor, only 16months after sacking his pre-decessor. One day later theTurkish finance minister, MrErdogan’s son-in-law, resignedsupposedly because of a feudwith the new central-bankgovernor. After the reshuffle,the banking regulator said itwould curb restrictions onforeigners trading the Turkishlira, which were imposed lastyear. Investors seemed towelcome the changes. The lirarose by more than 7% againstthe dollar in the past week,reversing a long decline.

Following two quarters ofcontraction, Britain’s gdp

grew by 15.5% between July andSeptember. The economy isstill 8.2% smaller than it wasbefore the virus struck and islikely to shrink again in the lastthree months of the year be-cause of a second lockdown.Unemployment over the sameperiod rose to 4.8%, up from4.5%. Redundancies surged toa record high, as firms wereforced to contribute more tothe cost of furloughed workers.

Unemployment figures fromAmerica were better thanexpected. Non-farm employ-ment rose by 638,000 in Octo-ber. The unemployment ratefell by one percentage point to6.9% in the same month.

China’s consumer-price indexdropped to 0.5% in October, itslowest level in over a decade.That reflects low food prices,particularly of pork, suppliesof which were hit by Africanswine fever but are now recov-ering thanks to record imports.Sluggish consumer demand isanother factor.

SoftBank Group announcedprofits of $6.1bn in the threemonths to the end of Septem-ber. The Japanese firm bookedlosses of $3.7bn with its forayinto investing in publicly listed

technology companies inAmerica. But that was offset byan improved performance byits Vision Fund, which is nowworth $1.4bn more than thecosts of it 83 investments.SoftBank also removed severalexecutives from its board,following investors’ concernsabout governance.

McDonald’s reported revenuesof $5.4bn in the latest quarter,down 2% from the same periodlast year but beating analysts’expectations. It performed wellin America where same-storesales grew by 4.6% from theprevious quarter.

Beyond Meat, an alternativeprotein provider, reportedlosses of $19.3m in the thirdquarter, compared with profitsof $4.1m in the same periodlast year. An easing of covid-induced consumer stockpilingand falling sales to restaurantswere blamed.

What goes aroundSingaporean holiday-makersitching for escape can now takea “cruise to nowhere”. Pas-sengers undergo covid-19 testsbefore boarding and are re-quired to carry contact-tracingdevices. The ship idles in thewaters off the city state for twodays before returning to port.

Banking is going hybrid.How can you create innovative customer experiences and keep regulators happy? With a smarter hybrid cloud approach. Get the tools, platform and expertise your business needs from IBM. The world is going hybrid with IBM.

ibm.com/hybridcloud

IBM and the IBM logo are trademarks of International Business Machines Corporation, registered in many jurisdictions worldwide. Other product and service names might be trademarks ofIBM or other companies. A current list of IBM trademarks is available at ibm.com/trademark. ©International Business Machines Corp. 2020.

Leaders 11

Nine long years elapsed between the isolation of the measlesvirus in 1954 and the licensing of a vaccine. The world waited

for 20 years between early trials of a polio vaccine and the firstAmerican licence in 1955. Marvel, then, at how the world’s scien-tists are on course to produce a working vaccine against sars-cov-2, the virus that causes covid-19, within a single year.

And not just any vaccine. The early data from a final-stagetrial unveiled this week by Pfizer and BioNTech, two pharmacompanies, suggests that vaccination cuts your chances of suf-fering symptoms by more than 90%. That is almost as good as formeasles and better than the flu jab, with an efficacy of just40-60% (see Briefing). Suddenly, in a dark winter, there is hope.

Not surprisingly, Pfizer’s news on November 9th roused themarkets’ bulls. Investors dumped shares in Clorox, Peloton andtech firms, which have all benefited from the coronavirus, andinstead switched into firms like Disney, Carnival and Interna-tional Consolidated Airlines Group, which will do well when thesun shines again (see Finance section). The oecd, a club of main-ly rich countries, reckons that global growth in 2021with an earlyvaccine will be 7%, two percentage points higher than without.

There is indeed much to celebrate. Pfizer’s result suggests thatother vaccines will work, too. Over 320 are in development, sev-eral in advanced trials. Most, like Pfizer’s, focus on the spike pro-tein with which sars-cov-2 gains entry to cells.If one vaccine has used this strategy to stimulateimmunity, others probably can, too.

Pfizer’s vaccine is also the first using a pro-mising new technology. Many vaccines primethe immune system by introducing inert frag-ments of viral protein. This one gets the body tomake the viral protein itself by inserting geneticinstructions contained in a form of rna. Be-cause you can edit rna, the vaccine can be tweaked should thespike protein mutate, as it may have recently in mink. This plat-form can be used with other viruses and other diseases, possiblyincluding cancer, BioNTech’s original focus.

So celebrate how far biology has come and how fruitfully itcan manipulate biochemical machinery for the good of human-ity (there will be time later to worry about how that power mightalso be abused). And celebrate the potency of science as a globalendeavour. Drawing on contributions from across the world, asmall German firm founded by first-generation Turkish immi-grants has successfully worked with an American multinationalcompany headed by a Greek chief executive.

Yet despite the good news, two big questions stand out, aboutthe characteristics of the vaccine and how fast it can be distri-buted. These are early results, based on 94 symptomatic cases ofcovid-19 from among the 44,000 volunteers. Further answersmust wait until the trial has gathered more data. It is, therefore,not clear whether the vaccine stops severe cases or mild ones, orwhether it protects the elderly, whose immune systems areweaker. Nor is it known whether inoculated people can stillcause potentially fatal infections in those yet to receive jabs. Andit is too soon to be sure how long the beneficial effects will last.

Clarity will take time. In the next few weeks the trial should be

declared safe, though further monitoring of the vaccine will beneeded. The companies predict that immunity will last for atleast a year. The 90%-plus efficacy is so high that this vaccinemay offer at least some protection to all age groups.

While the world waits for data, it will have to grapple with dis-tribution. Vaccine will be in short supply for most of next year.Although rna jabs may prove easier to make at scale than thosebased on proteins, Pfizer’s requires two doses. The company hassaid that it will be able to produce up to 50m doses in 2020 and1.3bn next year. That sounds a lot, but America alone has over20m first responders, medical staff, care-home workers and ac-tive-duty troops. Perhaps a fifth of the world’s 7.8bn people, in-cluding two-thirds of those over 70, risk severe covid-19. Nobodyhas ever tried to vaccinate an entire planet at once. As the effortmounts, syringes, medical glass and staff could run short.

Worse, Pfizer’s shots need to be stored at temperatures of-70°C or even colder, far beyond the scope of your local chemist.The company is building an ultra-cold chain, but the logisticswill still be hard. The vaccine comes in batches of at least 975doses, so you need to assemble that many people for their firstshot, and the same crowd again 21 days later for a booster. No-body knows how many doses will be wasted.

So long as there is too little vaccine to go around, prioritiesmust be set by governments. A lot depends onthem getting it right, within countries and be-tween them. Modelling suggests that if 50 richcountries were to administer 2bn doses of a vac-cine that is 80% effective, they would prevent athird of deaths globally; if the vaccine were sup-plied according to rich and poor countries’ pop-ulation, that share would almost double. Thedetails will depend on the vaccine. Poor coun-

tries may find ultra-cold chains too costly. The domestic answer to these problems is national commit-

tees to allocate vaccine optimally. The global answer is covax, aninitiative to encourage countries’ equal access to supplies. Ulti-mately, though, the solution will be continued work on morevaccines. Some might survive in commercial refrigerators, oth-ers will work better on the elderly, still others might confer lon-ger protection, require a single shot, or stop infections as well assymptoms. All those that work will help increase supply.

Only when there is enough to go around will anti-vaxxers be-come an obstacle. Early reports suggest the jab causes fevers andaches, which may also put some people off. The good news is thatan efficacy of 90% makes vaccination more attractive.

The tunnel aheadThe next few months will be hard. Global recorded death rateshave surged past their April peak. Governments will strugglewith the logistics of vaccination. America is rich and it hasworld-class medicine. But it risks falling short because the virusis raging there and because the transition between administra-tions could lead to needless chaos and delays. Squandering liveswhen a vaccine is at hand would be especially cruel. Science hasdone its bit to see off the virus. Now comes the test for society. 7

Suddenly, hope

Scientists have managed to create a vaccine for covid-19. Getting enough people vaccinated will be even harder

Leaders

12 Leaders The Economist November 14th 2020

1

In much of the world, and nowhere more so than amongAmerica’s allies, Joe Biden’s victory has come as a great relief.

Under his presidency there will be no more bullying and threatsto leave nato. America will stop treating the European Union as a“foe” on trade, or its own forces stationed in South Korea as a pro-tection racket. In place of Donald Trump’s wrecking ball, Mr Bi-den will offer an outstretched hand, working co-operatively onglobal crises, from coronavirus to climate change. Under MrTrump, America’s favourability ratings in many allied countriessank to new lows. Mr Biden promises to make America a beaconagain, a champion of lofty values and a defender of humanrights, leading (as he put it in his acceptance speech) “not only bythe example of our power but by the power of our example”.

Allies are central to Mr Biden’s vision. Herightly sees them as a multiplier of American in-fluence, turning a country with a quarter of glo-bal gdp into a force with more than double that.He is also a multilateralist by instinct. On hisfirst day in office he will rejoin the Paris agree-ment on climate change, which America for-mally left on November 4th. Unlike Mr Trumphe believes it is better to lead the World HealthOrganisation than to leave it. He will reinvigorate arms control, apriority being to ensure that New start, the last remaining nuc-lear pact with Russia, is extended beyond February 5th. He wouldlike to rejoin the nuclear deal with Iran that Mr Trump dumped,if he can persuade the Iranians to go back into compliance.

Inevitably, America’s friends have a long list of things theyhope it will do as it re-embraces global leadership (see Interna-tional section). The demands stretch from places and organisa-tions Mr Trump has abused, such as the un and allies like Ger-many, to parts of the world he has ignored, such as much ofAfrica. Yet it will not all be smooth travelling. Not all countriesare nostalgic for a return to Obama-era policies, when America“led from behind” and blurred its red lines. Several countries on

nato’s front line with Russia like the way defences have beenbeefed up under Mr Trump. And Asian allies like how Mr Trumphas confronted China, talked of a “free and open Indo-Pacific”and worked on the “Quad” with Australia, India and Japan. Mr Bi-den needs to prove that he will not turn soft.

His priorities will be to quell the virus and improve the econ-omy. On both counts he can count on little support, and muchpushback, if the Senate is under Republican control, as is likely.Such troubles at home have probably also exacerbated the coun-try’s reluctance to take on more foreign burdens. Who can besure that world-wary Jacksonians won’t come galloping back in2024, perhaps even with Mr Trump in the saddle?

So rather than pile demand upon needy demand, America’sallies should go out of their way to show thatthey have learned to pull their weight. nato

partners, for example, should not relax defencespending just because Mr Trump is no longerbullying them. Germany should pay heed toFrench efforts to build European defence capa-city—there is scope to do so without undermin-ing nato. Europeans could lend a bigger hand toFrance in the Sahel (see Europe section). In Asia

the Quad could keep deepening naval and other co-operation. Ja-pan and South Korea should restrain their feuding. Taiwan oughtto make a more serious contribution to its own defence.

Allies should also work with America to repair the interna-tional order. They can support efforts to resist Chinese or Rus-sian rule-bending. Many countries will want to join Mr Biden’sefforts at concerted carbon-cutting.

Mr Biden will face a world full of problems, but he will alsostart with strengths. Thanks to Mr Trump, he has sanctions onadversaries including Iran and Venezuela that he can use as bar-gaining chips. And among friends, he can seek to convert relief atrenewed American engagement into stronger burden-sharing.His allies would be wise to answer that call with enthusiasm. 7

Great expectations

America’s allies need to show that they have learned to pull their weight

The world and Joe Biden

America’s voters did not elect Joe Biden because theythought he would be the best steward of the economy. The

economy may well define his presidency nonetheless. Mr Bidenwill take office in January amid a crisis brought about by the pan-demic, which is capable of causing immensely more economicharm before vaccination is widespread. He will also inherit abusiness landscape in the throes of a once-in-a-generation shift,as technology becomes more embedded in everyday life and inmore industries—a shift that has been simultaneously hastenedand overshadowed by the disease. Whether Mr Biden succeeds orfails depends on how he manages these twin sources of change.

The good news is that gdp has rebounded impressively fromits collapse in the spring. The unemployment rate has droppedmuch faster than most forecasters expected, from 14.7% in Aprilto 6.9% in October. Were private-sector employment to keepgrowing at the pace of September and October it would return toits pre-pandemic level in less than a year. On most forecastsAmerica’s economy will shrink by less than any other big richcountry’s in 2020—the euro zone will take almost twice the hit,for example. So far there is little sign of the economic scarringthat was feared at the onset of the crisis (see Finance section).

Unfortunately this rebound is threatened by the winter wave

The economy Biden inherits

The incoming administration faces two extraordinary economic challenges

America’s new president

The Economist November 14th 2020 Leaders 13

1

2 of the virus. The logistics of rolling out a vaccine are dauntingand at first only emergency workers and the most vulnerable willreceive it. The spread of the disease will worsen before a mass in-oculation can take place. Already more Americans are in hospitalwith covid-19 than at the peak of the outbreak in the spring,though many fewer are dying. Some parts of the country couldsoon face more restrictions and lockdowns. Others might ex-periment with letting the virus rip—an approach which couldstill bring about a sharp drop in consumer spending if peoplechoose to stay at home in order to stay safe.

If the virus again puts the economy to the sword, it might notbenefit from the life support it got in March in the form of lavishunemployment insurance and emergency loans for small busi-nesses. Republicans in the Senate will probablysupport a limited second round of fiscal stimu-lus, but are in no mood for another blowout. Adebate is raging about whether the Federal Re-serve should extend its emergency lending intothe new year. Job cuts by state and local govern-ments, whose budgets have been hit by the pan-demic, are already weighing down the labourmarket. They need a bail-out that Republicansdo not want to give. Mr Biden’s first challenge will be to persuadeCongress to keep the purse strings loose until the vaccine hasbrought about a full reopening.

At the same time the new president will need to grapple withthe post-vaccine economy, which will look different from theone that entered the pandemic. The crisis has hastened the dig-itisation that was already poised to define business and invest-ing in the 2020s. That trend will not fully reverse, even after thepandemic has subsided. Investors are still struggling to makesense of an economy in which intangible capital replaces thebricks-and-mortar kind, and in which network effects make in-cumbents more dominant and profits more enduring.

As technology permeates business, the nature of investment

is changing. After the global financial crisis of 2007-09, the shareof private non-residential investment flowing to intellectualproperty hit 30%. Soon it may breach the 40% threshold (seenext leader). In this world, Walmart must become an e-com-merce giant, Ford must compete with Tesla to make electric cars,and computers must allocate capital. Even McDonald’s has beenworking on its digital strategy (see Schumpeter). The tech re-volution will change the economy as much as the globalisationwave that defined Bill Clinton’s presidency in the 1990s. As it re-shapes the labour market—blue- and white-collar jobs alike—itcould tear at the social fabric, much as the automation of manu-facturing jobs did.

America’s epidemic could be fading by the end of 2021. Thetech surge will outlive Mr Biden’s presidency.Yet the same principle should guide him onboth: that government must not resist eco-nomic change, but should instead help peopleadapt to it. One reason America’s economy isoutperforming Europe’s is that its stimulus hasdone more to prop up household incomes thanit has to preserve redundant jobs. Similarly, gov-ernments that respond to technological change

by remaking safety-nets and rewriting social contracts for thenew era will do better than those which seek to preserve obsoletemodels of capitalism and government.

There are thus reasons to worry that Mr Biden’s platform has aprotectionist streak, a nostalgia for manufacturing jobs and animpulse to load firms with worthy social goals. One of his new-economy policies already looks like a flop: he wants to extendnationwide the regulations for gig-economy work that Califor-nia voters rejected last week. To succeed, Mr Biden will need toshow competent crisis management. But he also needs to recog-nise the deeper changes taking place in the economy, and to helpAmericans profit from them. That is the way to raise living stan-dards—and, as it happens, to succeed as president. 7

GDP forecasts2020, % decrease on a year earlier

United StatesJapanCanadaEuro areaBritain

0-2-4-6-8-10

For a moment this week investors could afford to ignorestockmarket superstars like Amazon and Alibaba. As news of

a vaccine broke, a motley crew of more jaded firms led Wall Streethigher, with the shares of airlines, banks and oil firms soaring onhopes of a recovery. The bounce has been a long time coming. So-called value stocks, typically asset-heavy firms in stodgy indus-tries, have had a decade from hell, lagging behind America’sstockmarket by over 90 percentage points. This has led to a crisisof confidence among some fund managers, who wonder if theirframework for assessing firms works in the digital age (see Brief-ing). They are right to worry: it needs upgrading to reflect aneconomy in which intangibles and externalities count for more.

For almost a century the dominant ideology in finance hasbeen value investing. It has evolved over time but typically takesa conservative view of firms, placing more weight on their as-sets, cashflows and record, and less on their investment plans ortrajectory. The creed has its roots in the 1930s and 1940s, whenBenjamin Graham argued that investors needed to move on from

the pre-1914 era, during which capital markets were dominatedby railway bonds and insider-dealing. Instead he proposed a sci-entific approach of evaluating firms’ balance-sheets and identi-fying mispriced securities. His disciple, Warren Buffett, popular-ised and updated these ideas as the economy shifted towardsconsumer firms and finance in the late 20th century. Today mea-sures of value are plugged into computers which hunt for “fac-tors” that boost returns and there are investors in Shanghailoosely inspired by a doctrine born in Depression-era New York.

The trouble is that value investing has led to poor results. Ifyou had bought value shares worth $1 a decade ago, they wouldfetch $2.50 today, compared with $3.45 for the stockmarket as awhole and $4.65 for the market excluding value stocks. Mr Buf-fett’s Berkshire Hathaway has lagged behind badly. Despite its ef-forts to modernise, value investing often produces backward-looking portfolios and as a result has largely missed the rise oftech. The asset-management industry’s business model is understrain, as our special report this week explains. Now one of its

Beyond Buffett

The agonies of traditional value investing are a sign of frothy stockmarkets—and a changing economy

Asset management

14 Leaders The Economist November 14th 2020

2 most long-standing philosophies is under siege, too.Value investors might argue that they are the victims of a

stockmarket bubble and that they will thus be proved right even-tually. The last time value strategies did badly was in 1998-2000,before the dotcom crash. Today stockmarkets do indeed look ex-pensive. But alongside this are two deeper changes to the econ-omy that the value framework is still struggling to grapple with.

The first is the rise of intangible assets, which now accountfor over a third of all American business investment—think ofdata, or research. Firms treat these costs as an expense, ratherthan an investment that creates an asset. Some sophisticated in-stitutional investors try to adjust for this but it is still easy to mis-calculate how much firms are reinvesting—and firms’ ability toreinvest heavily at high rates of return is crucial for their long runperformance. On a traditional definition, America’s top ten list-ed firms have invested $700bn since 2010. On a broad one, the

figure is $1.5trn or more. Intangible firms can also often scale upquickly and exploit network effects to sustain high profits.

The second change is the rising importance of externalities,costs that firms are responsible for but avoid paying. Today thevalue doctrine suggests you should load up on car firms and oilproducers. But these firms’ prospects depend on the potential li-ability from their carbon footprint, the cost of which may rise asemissions rules tighten and carbon taxes spread.

Value investing’s rigour and scepticism are as relevant asever—especially given how frothy markets look. But many inves-tors are still only just beginning to get their heads round how toassess firms’ intangible assets and externalities. It is a laborioustask, but getting it right could give asset management a newlease of life and help ensure that capital is allocated efficiently.In the 1930s and 1940s Graham described how the old investingframework had become obsolete. Time for another upgrade. 7

Adecade ago, as the rich world was struggling with the after-math of the global financial crisis, much of Africa was surf-

ing a wave of optimism. At the front was Zambia, which in theearly 1990s was among the first African countries to ditch one-party rule and socialism. In 2012, after a decade of stunning eco-nomic growth, it joined the small club of African countries bor-rowing on international bond markets. Demand for its debt wasso strong that it was able to borrow more cheaply than Spain.

Now Zambia finds itself at the front of another, less admirablepack. On November 13th it was poised to become the first Africancountry to default since the imf’s “heavily indebted poor coun-tries” scheme in 2005 wiped clean the debts of 30 of the conti-nent’s poorest countries.

Zambia is not the only indebted African state that is strug-gling. Because of covid-19, sub-Saharan Africa’seconomy is expected to shrink by 3% this year,equivalent to 5.3% per person. The imf reckonsthat six African countries are struggling to payback loans and another 11 are thought to be at“high risk of debt distress”.

However, Zambia’s economic problems owemore to the disastrous presidency of EdgarLungu than to the pandemic. When he took of-fice in 2015 after the death of his predecessor, public debt stood at32% of gdp. After five years of profligacy and theft by the rulingelite, debt has ballooned to 120%. Economic growth has tum-bled—to 1.4% in 2019 owing in no small part to his government’shabit of scaring off investors by seizing mines and detainingmining bosses. A central-bank governor who resisted Mr Lungu’shints that he print more money was fired in August.

Mr Lungu may be economically incompetent, but he is politi-cally shrewd. Before a presidential election in 2016, his regimearrested opposition leaders and shut down the main independ-ent newspaper. He won by the slenderest of margins; eked out bylast-minute ballot-stuffing, according to the opposition. Whenit asked the constitutional court for a recount, the judges (manyappointed by Mr Lungu) set a date for a hearing two weeks later.

In the hearing they threw out the case, citing a constitutionalprovision that election petitions must be heard within 14 days.

Mr Lungu is taking few chances ahead of the next presidentialpoll in August 2021, which he would probably lose if it were freeand fair (see Middle East & Africa section). He has arrested andharassed Hakainde Hichilema, the main opposition leader, aswell as journalists, musicians and other critics. The electoralcommission is scrapping its voters’ roll and requiring all votersto register again in just 30 days. And if it turns out to be harder toregister during the rainy season in the opposition’s rural strong-holds than the ruling party’s urban ones, tough luck.

Many Zambians worry that their country is sliding into auto-cracy and economic ruin, like next-door Zimbabwe. To stop thatslide, the region and the wider world need to start paying atten-

tion now, rather than just sending election ob-servers a few weeks before the poll. South Afri-ca, which has the most clout, needs to speak up.So does sadc, the regional bloc. And Zambia’screditors should insist on cleaner and moredemocratic governance before agreeing to abail-out. They wield a big stick. Zambia’s mas-sive fiscal deficit of 12% of gdp means that it hasto win their agreement if it is to keep borrowing

in order to pay the salaries of soldiers, teachers and policemen. Lenders—a disparate group that includes both Chinese con-

struction firms and private bondholders—may object that it isnot their job to safeguard democracy. Their main interest, quitereasonably, is to be repaid; or, in the case of the imf, to help Zam-bia’s public finances get back on a sound footing. They do notwant to be involved in politics. Yet Zambia’s economic crisis iscaused mainly by its authoritarian and dysfunctional politics,not the pandemic or the slump in commodity prices. Its debtproblem cannot be fixed without facing up to its political pro-blem. Zambia’s next government will have to raise taxes and re-strain spending to balance its books and repay creditors anymore than a token amount. Only a government which Zambianssee as legitimate can do this without sparking unrest. 7

Zambia’s descent

There is still time to stop a slide to autocracy and economic collapse

Democracy in Africa

ZambiaGeneral government gross debt, % of GDP

120906030

0

20181614122010

FORECAST

16 The Economist November 14th 2020

Letters are welcome and should beaddressed to the Editor atThe Economist, The Adelphi Building,1-11 John Adam Street, London WC2N 6HT

Email: letters@economist.comMore letters are available at:Economist.com/letters

Letters

The sporting lifeThe problem of ensuring faircompetition in women’s sportgoes wider and deeper than thequestion of whether transwomen should compete asfemales (“Scrum down”, Octo-ber 17th). There really are bigdifferences between men andwomen in genes and geneactivity, size and strength,although there is a lot of varia-tion and some overlap in anytrait you can measure. Thesedifferences are largely, but notentirely, the result of androgenaction during development,and are not obviated by anti-androgen treatment.

It is clear that athletes whowere born and developed asmales have the advantage ofhigher stature, more leanmuscle and a bigger heart andlungs. But so, too, do femaleathletes with naturally hightestosterone levels. It seemsnonsensical to apply arbitrarylimits to testosterone levels insport, unless you were to banathletes with unusually longlegs, big hearts or lungs as well.Elite athletes are usually on thevery edge of distributions of allsorts of qualities that enhanceperformance.jenny graves

Melbourne

Few aspiring trans athletes willbe tempted to compete aswomen, given the massivedisadvantages they face. In theUnited States, trans women aretwice as likely to live below thepoverty line. Trans women ofcolour face higher risks ofmurder and other violence.That’s a poor swap for a leg upin the 100-metre sprint.peter johnston

San Francisco

A bizarre fixation on sportdominates the conversation ontrans rights. The only realadvantage possessed by a transwoman would be that of testos-terone if she has not begunhormone treatment. The Inter-national Olympic Committeesuggests changing resultsbased on testosterone levels.Given that these levels can varyamong cis women, should thisbe imposed on them also? Or

on men with different testos-terone levels?

The supposed risk thatwomen face from trans rightsis as much a mirage as was thefear of homosexual indoctrina-tion in the 1980s, which led tooppressive legislation, such asBritain’s Section 28.thomas robertson

Oxford

Diplomatic dispatchesThank you for introducing anew black humour section inyour edition of October 24th. Itis regrettable, though, that youhad to sacrifice over twocolumns of your Letters page toa response from the Chineseembassy to your articles on theUyghurs to do so.ian cartwright

Isle of Lewis, Outer Hebrides

Filter out the noiseSchumpeter missed a trickwith regard to annoyingadvertisements and newsfeeds on Facebook (October24th). Not only are ad blockersavailable, many other anti-spyware and tracker-blockingapps can easily be installed. Inparticular, an app known as fb

Purity integrates with Face-book and enables me to blockout not just annoying news-feeds and adverts, but alsoirritating spam thanks tokeyword-based text filtering.nicholas coote

Devizes, Wiltshire

Army trainingBartleby’s column on what thearmed forces can teach busi-ness scratched the surface ofmuch deeper opportunities(October 24th). In the 1980s thestrategy for the defence ofwestern Europe was changedfrom positional defence tofighting a mobile defensivebattle. This meant a highdegree of uncertainty with theneed for increased agility, alatter-day buzzword in busi-ness. As a battlefield com-mander I pushed the decisionsI would normally take down tothe lowest possible level. Somethings that would take 30minutes to accomplish could

be done in an astonishing 30seconds. The key is for leader-ship to move beyond being arole, position or competence(which are typically static) to avibrant dynamic. This achievesagile self-organisation that cannavigate uncertainty better,faster and with less stress.

Various companies aroundthe world have since used thisapproach to good effect. InChina, a team at Dow Chemicalachieved a 25% increase inproject productivity. In Ameri-ca two senior leaders of Nokiaachieved six times in a fewweeks what had taken a previ-ous team many months.

Sadly, many see the armedforces in light of the movies,strictly “command and con-trol”. The truth is far from that.major (ret’d) prince

nicholas obolensky

FounderComplex Adaptive LeadershipBath

Armenia respondsYour article on the fighting inNagorno-Karabakh provided adistorted picture of the conflict(“The wheel turns, this time”,October 31st). The reality is thatArtsakh (Nagorno-Karabakh)has always been populatedoverwhelmingly by Armeniansand it has never been a part ofindependent Azerbaijan. In1991 Nagorno-Karabakh votedfor its independence based onthe same legal framework asAzerbaijan.

Armenia has been consis-tent in its intentions for peace,by pushing for a compromiseacceptable to the people of allparties: Artsakh, Armenia andAzerbaijan. This message hasnever been reciprocated, thusmaking it clear that Azerbai-jan’s intention is neither nego-tiations nor peace, but war.

In the month of this latestconflict Azerbaijan, compre-hensively backed by Turkeyand with the use of interna-tional terrorist fighters, hasconsistently shelled Artsakh’stowns and villages. Civilianinfrastructure, hospitals,schools and even kinder-gartens have been bombed andwar crimes committed by theAzerbaijani armed forces.

The only alternative is apeaceful resolution, in whichthe security of Armenians ofArtsakh finds its expressionand their legitimate right forself-determination will bedelivered.aram araratyan

Press officerEmbassy of ArmeniaLondon

How might you feel?Technology Quarterly reportedon virtual realities (October3rd), noting that in virtualworlds “users will often co-optthe avatars as almost real ex-tensions of their own bodies”.One interesting experimentwould be to use avatars toimplement the veil of igno-rance as set out by John Rawlsin his “A Theory of Justice”. Letthe subjects of the experimentsmake decisions about fairnessand equity while inhabitingavatars with characteristicsother than their own.

How might evangelicalChristians feel about abortionif their avatars were rape vic-tims? How might supporters ofBlack Lives Matter feel aboutpolice intervening in riots iftheir avatars were Koreangrocery-store owners? Howmight rich people feel abouttax reform if their avatars werepoorer citizens?christopher bruce

Calgary, Canada

Reaching the bottom of a caseI was intrigued to read in Theworld this week (October 24th)that Brazilian police had raideda senator’s home and discov-ered about $5,000 wedgedbetween his buttocks. He hasdenied diverting funds thatwere meant for the pandemic.If he is innocent then this is amost unfortunate case of abum rap.david roessler

Hazel Park, Michigan

COVID-19 has aff ected billions of lives. Some call it a ‘black swan event’. But it isn’t, pandemics have always existed.

Many of the eff ects of a pandemic of this scale have been known for years, knowledge to which Swiss Re’s analysis has contributed. As the world’s leading provider of reinsurance and risk transfer, we specialise in modelling and underwriting risk.

Swiss Re and the re/insurance industry have set aside billions to help shoulder the fi nancial impact of the pandemic. And across the world, countries have made emergency aid programmes available. Still, the suff ering and the uncertainty for those aff ected is enormous.

To do better next time, we as a society need to be better prepared. One solution is to partner in public-private risk-sharing arrangements to cover pandemic-related losses.

Swiss Re is committed to helping society become more resilient and progress.

swissre.com

18 Executive focus

The Economist November 14th 2020 19

1

Deliverance, when it arrives, willcome in a small glass vial. First there

will be a cool sensation on the upper arm asan alcohol wipe is rubbed across the skin.Then there will be a sharp prick from a nee-dle. Twenty-one days later, the same again.As the nurse drops the used syringe intothe bin with a clatter, it will be hard not towonder how something so small can solvea problem so large.

On November 9th Pfizer and BioNTech,two firms working as partners on a vaccineagainst covid-19, announced somethingextraordinary about the first 94 people ontheir trial to develop symptoms of the dis-ease. At least 86 of them—more than nine

out of ten—had been given the placebo, notthe vaccine. A bare handful of those vacci-nated fell ill. The vaccine appeared to bemore than 90% effective.

Within a few weeks the firms couldhave the data needed to apply for emergen-cy authorisation to put the vaccine to use.The British and American governmentshave said that vaccinations could start inDecember. The countries of the eu havealso been told it will be distributed quickly.

The news lifted spirits around theworld, not to mention stockmarkets (seeFinance). The end of the pandemic seemedin sight; scientific insight and industrialknow-how had, in a bravura display of their

power, provided an exit strategy. Pfizer andBioNTech have not just developed a vaccineagainst a previously unknown disease in ascant ten months. They have done so on thebasis of an approach to vaccination neverbefore used in people. And their novel vac-cine has shown an unanticipated efficacy.Most in the field thought 70% efficacy wasgood as could be hoped for first time out;just 50% could have been good enough forregulatory approval. Exceeding 90% hitsthe virus for six.

Russia and China have been vaccinatingsome citizens against covid-19 for sometime outside the scope of clinical trials. OnNovember 11th the Russian Direct Invest-ment Fund announced that data showedRussia’s vaccine, known as Sputnik V, to be92% effective. Before the Pfizer announce-ment this would have seemed highly im-plausible. Now it may seem less so, thoughthe evidence is weak compared withPfizer’s. And neither Sputnik V nor the Chi-nese vaccines have yet had their safety andefficacy addressed by the stringent regula-tors at the Food and Drug Administration(fda) in America and the European Medi-cines Agency (ema).

Pfizer’s vaccine is now headed into thatregulatory gamut with a small posse of fol-lowers hot on its heels (see table on nextpage). Two other vaccines which are inphase-three trials—the sort of large, rando-mised trials designed to show the efficacyof a treatment—could submit data to theregulators fairly soon. Moderna, an Ameri-can biotech firm, is expected to deliver in-terim findings about the efficacy of its vac-cine in the next few weeks. AstraZeneca, apharmaceuticals company working inpartnership with the University of Oxford,should deliver results from its trial beforethe end of the year.

Challenges remain. Though the regula-tors will want to move quickly, they willstill have to do their job. Missteps coulderode confidence in the vaccine, as well asvaccination more generally. Plans for scal-ing up manufacture and for distribution onan unprecedented scale have been beingmade around the world for months, but it ishard to imagine that they will not requirerevision on the hoof. Even if the news con-tinues to be good, the numbers vaccinatedwill remain small for months to come. Buta fateful corner has been turned.

The technology of hopeGreat speed has come from great efforts.Cath Green, the boss of the clinical bioma-nufacturing facility at the University of Ox-ford, remembers the pressure to get thefirst candidate-vaccine vials filled in April.Everyone was doing double shifts andworking on weekends. “We knew it had tobe this fast if we were to get a vaccine topeople this year,” she says.

Bullseye

A highly effective vaccine will transform the fight against covid-19. But a lotremains to be done

Briefing Covid-19 vaccines

20 Briefing Covid-19 vaccines The Economist November 14th 2020

2

1

But it was not just hard work. New tech-nology, a lack of financial constraint and acommitment to speeding up regulatoryprocesses without sacrificing standardsmattered, too.

Technology first. Vaccines against vi-ruses used to be based on the virus parti-cles they were meant to stymie. Some werestrains of the virus “attenuated” so as not tocause disease; some were normal virus par-ticles inactivated so that they could not re-produce at all. Design was somewhat hitand miss. Today vaccine development isbased on viral genomes. Researchers lookfor a gene which describes a protein the im-mune system seems likely to recognise.Then they put that gene into a new context.

In the case of sars-cov-2, the virus thatcauses covid-19, the genome was publishedon January 10th. Understanding its struc-ture on the basis of their experience withother coronaviruses, would-be vaccine-makers immediately homed in on the genefor the distinctive spike protein withwhich the virus’s membrane is studded:just the sort of thing, they reckoned, to pro-voke a response from the immune system.

At BioNTech, a German biotechnologycompany that specialises in the use ofmrnas—sequences of genetic materialthat provide cells with recipes for makingproteins—the spike-protein gene wasmore or less all it took. The company’s re-searchers made an mrna version of it thatcould be injected into the body in tiny cap-sules made of lipids. There it would leadcells to produce the spike protein, and theimmune system would then take note. Orso they hoped: no mrna vaccine had beenused in humans before. Moderna, too, hasas its name suggests taken the mrna route.

In Oxford a version of the spike genewas instead put into the genome of a harm-less adenovirus originally found in mon-keys; when the resultant virus infects cellsit, too, makes them produce spike proteinsthat attract the immune system’s atten-tion. The vaccine developed by J&J alsouses the adenovirus approach, as doesSputnik V.

It is no accident that the vaccines thathave come along fastest are based on thesenovel strategies. Before the coronavirusstruck these technologies were already be-ing developed as platforms on which a rap-id response to a new viral disease could bebuilt, work supported in part by the Co-alition for Epidemic Preparedness Innova-tions (cepi). Vaccines which are built onsuch platforms are quick to engineer andcomparatively easy to make.

The correct egg-to-basket ratioThat said, the work still requires money,which in the vaccine world is usually inshort supply. With covid-19, though, gov-ernments have been willing to shovel cashat vaccine developers even though therewas a risk they would get nothing in return.“We persuaded the uk government to fundus before they had any idea whether itwould work,” says Dr Green. It was thisready cash, sometimes provided in theform of a commitment to buy the end pro-duct, which sped the process up, ratherthan any loosening of normal rules andprocedures. “We haven’t cut any corners,”Dr Green continues. “And we haven’t takenany risks with our product.”

Rather than standing back, regulatorsin many countries have worked closelywith companies to make sure their trialsprovide all the data needed for approvalwhen the time is right. When it was safe todo so, the different phases of trials were al-lowed to overlap, with larger, later trialsstarting before smaller preliminary oneshad produced all their data. At Oxford theywere able to start human trials the day afteranimal safety data had been published.

Richard Hatchett, the head of cepi, saysPfizer’s positive results increase the proba-bility that other covid vaccines will be suc-cessful, too. They show that an mrna vac-cine can work, which is good news forModerna; they also show that targeting thespike protein pays off. And the success goesbeyond the current pandemic. Work cepi

expected to take five or ten years has beenmanaged in less than one; if the various

platforms in play all pay off, Dr Hatchettsays, it will “transform vaccinology”.

The fact that there are more vaccines onthe way matters for a number of reasons.One is that, despite this week’s good news,the Pfizer vaccine is not yet guaranteed ap-proval. For one thing, its safety needs to bemore fully ascertained. The firm says thatno serious safety concerns have arisen dur-ing the trial. But the vaccine will come withside-effects, at least for some, and the com-pany will only be in a position to requestapproval for the vaccine on an “emergencyuse” basis after it has two months of safetydata showing such effects to be manage-able. That requirement looks likely to bemet in time for an application in the thirdweek of November.

Then comes the question of what exact-ly the vaccine does: is it stopping infec-tions completely—providing “sterilisingimmunity”—or simply amping up thebody’s response so that infections do notcause disease? The latter attribute is un-doubtedly a useful one for the individualconcerned; all the better if, as well as lower-ing the chance of infection leading to dis-ease, it also makes the disease less severe inthose who succumb (there is as yet noavailable data on this). But it is a lot less de-sirable in public-health terms. If the vac-cine stops disease but not infection, vacci-nated people may be able to infect otherswhile staying safe themselves.

If the Pfizer vaccine does not providesterilising immunity there will be a needfor one that does. And there are other waysthat subsequent vaccines might provepreferable. Different vaccines can workbetter or worse with different populations,and for covid-19 it is important to find avaccine which works well in old people.Their immune systems can often be unre-sponsive to vaccination, and they may dobetter with vaccines which, in the generalpopulation, do not look as effective. Thereis no guarantee that the best vaccine overallwill be the best for the elderly.

And the Pfizer vaccine has some incon-venient characteristics. It needs to be keptat -70°C or even colder as it is moved fromwhere it is made to where it is used, whichrequires a lot of equipment that other vac-cines do not need. Seth Berkley, head of thevaccine finance group gavi, warns thatmany countries do not currently have thewherewithal to meet that challenge. But healso notes that the lack is not insuperable.The Democratic Republic of Congo suc-cessfully deployed an Ebola vaccine thatrequired similarly special care. “It’s a painin the ass, it’s expensive, but it’s doable.”

Still, a vaccine which, if not liking it hot,at least liked it less cold would be a boon. Sowould one that only needed to be givenonce. The Pfizer, AstraZeneca and Modernavaccines all require two jabs weeks apart. Aone-and-done vaccine, which is what J&J

A full field

Sources: PLOS; VFA; ClinicalTrials.gov; press reports *Estimated number of enrolees in phase three †US trial ‡Announcement of phase 2/3

Selected covid-19 vaccines in phase-three clinical trials, 2020

Developer Participants*Type Doses Study locationPhase-3start date

Johnson & Johnson

AstraZeneca/Oxford University

Moderna

Sinovac

Gamaleya (Sputnik V)

Novavax

International Sep 7th

Aug 28th†

Jul 27th‡

Sep 7th

Jul 27th

Jul 21st

Sep 28th

Viral vector

Viral vector

Inactivated

mRNA

Inactivated

Viral vector

International

United States

Britain, US, Mexico

International

International

1

2

2

2

2

2

Pfizer/BioNTech

60,000

45,000

50,000

30,000

27,980

43,600

43,998mRNA International2

The Economist November 14th 2020 Briefing Covid-19 vaccines 21

2 hopes for, makes setting up a vaccinationprogramme far simpler. It also means a giv-en number of doses will go a lot further.

On top of all this, the long-term efficacyof the vaccine will matter a lot. The Pfizer/BioNTech collaboration says that protec-tion should last at least a year. But that willnot be known for sure before they apply toregulators for full authorisation on the ba-sis of final trial results, which they are ex-pected to do in the first quarter of next year(as are the makers of the other front-run-ners). A vaccine that provides protectiononly briefly might well not be able to dis-rupt the virus’s transmission, instead feed-ing a constant stream of newly susceptiblepeople back into the population at large.Marcus Schabacker, the boss of the Emer-gency Care Research Institute, an Ameri-can organisation focused on the qualityand safety of medical practices, thinks sixmonths of follow-up data ought to be scru-tinised, not just two, before final decisionsare made on deploying the vaccine.

Such questions will be on the minds ofregulators at the fda and ema when theyare asked to consider the Pfizer vaccine foremergency use later this month and whenPfizer and the makers of other vaccinessubmit all the data from their trials nextyear. Their opinions will have worldwideeffects, as the World Health Organisation(who) will use the analytical capabilities ofthose authorities to accelerate the reviewof vaccines for use in low- and middle-in-come countries.

If emergency authorisation is granted itis likely the agencies will restrict the use ofthese vaccines, initially, to those at highestrisk of death or serious disease. If after see-ing the full data the regulators still haveworries they may continue to limit the vac-cines’ use. Whatever they decide they arevery likely to insist on years of follow up.

Andrew Pollard, director of the OxfordVaccine Group, says it is important that all

developers carry on with trials as long aspossible. But this may be hard unless earlyuse is restricted to specific groups. If a vac-cine is approved for use in the general pop-ulation, few will volunteer to take part in atrial for another vaccine that uses a placeboas a control (if Pfizer and BioNTech receivean emergency authorisation they plan tooffer all the volunteers who were given aplacebo the active vaccine). A trial thatcompares an experimental vaccine withone that is already approved needs to bevery large to get results, since both wingscan be expected to show comparatively fewinfections. Such trials are under discus-sion, but they will take a long time.

If vaccines are approved for widespreaduse, the world will face what some havecalled the largest supply-chain challengein history. There is normally little sparevaccine-manufacturing capacity to repur-pose. And production is not the only limit-ing factor. Analysts at ubs, a bank, warnthat “fill and finish”, where the vaccine isput into vials and packaged, could be one ofthe most significant bottlenecks.

Pfizer says it will only be able to makeenough vaccine to inoculate 25m people in2020. Up to 1.3bn doses are possible, in the-ory, next year—enough for another 650mpeople. If other vaccines are approved thenthe supply will increase. In even the mostoptimistic scenarios, though, Dr Hatchettexpects demand to exceed supply through-out 2021.

Various countries have already set uppurchase agreements with vaccine devel-opers (see chart). The covax facility set upby cepi, gavi and the who will buy vac-cines for 150 countries, and aims to procureenough for them to get 20% of their popu-lations vaccinated over the course of 2021.unicef, the un’s children’s agency, willtake a leading role in distribution. It nor-mally procures 600m-800m syringes forroutine childhood immunisations every

year. The demands of covid are likely to tre-ble or quadruple that number.

There is clearly a risk that nations willhoard some vaccine for their own use rath-er than that of the most needy, but it is noteasy to say how large the problem will be.Pharma firms have cleverly placed manu-facturing sites around the world, includingin small countries such as Belgium andSwitzerland which can quickly producemore vaccine than these countries couldever want. And the covax framework haswide international support.

That framework follows advice from thewho in identifying three priority groupsfor early vaccination: front-line health-and social-care workers; the over 65s; andthose under 65 who have underlying healthconditions, such as diabetes, which putthem at particular risk. Countries settingtheir own priorities are by and large priori-tising the same groups. This means thatyoung and middle-aged people not in anyrisk categories are unlikely to be vaccinat-ed until well into next year. Social distanc-ing and mask wearing will stay importantfor some time to come even after vaccina-tion becomes widespread. But a more nor-mal form of life looks unlikely to be toolong delayed.

For vaccination to work as well as it canrequires a widespread willingness to bevaccinated—something that cannot be tak-en for granted in a world where anti-vac-cine disinformation has a strong foothold.The data on this front, though, are broadlyencouraging. A survey of 20,000 adults in27 countries undertaken for the World Eco-nomic Forum this August found that 74%would get a vaccine if it were available. InChina the figure was 97%, in India 87%, inAmerica 67%. Countries with low rates ofacceptance were Russia (54%), Poland andHungary (both 56%) and France (59%).

A cold comingBetter testing, new antibody treatmentsand improvements in care will continue todrive down the death rate for coronavirusboth before widespread vaccination andafter it. Vaccination will instead change thefundamentals. Its advent marks the begin-ning of the end of covid-19 as a pandemic.

But for all the hope that diligence andscience have kindled, there are hard wintermonths to face before that spring. The offi-cial tally of daily deaths round the world isnow for the first time higher than it was inthe pandemic’s first peak, and the spread ofthe virus in America appears to be out ofcontrol (see United States). In the nextthree months hundreds of thousands ofpeople look likely to die. Not only will theirloved ones have to come to terms with thisloss, they will also have to live with theknowledge that a vaccine that could havesaved them, even though developed atbreakneck speed, arrived just too late. 7

AstraZeneca/Oxford University2.4bn doses

Novavax1.3bn

Sanofi-GSK732mPfizer/BioNTech526m

Covax†

EU

JapanBritain

Other

United States

India

Vaccinedeveloper

Destination

Getting a piece of the action

Sources: Duke Global Health Innovation Centre; press reports*There may be gaps due to the speed of developments and lack of public

knowledge †An organisation working for equitable access to vaccines

Covid-19 vaccines, top four by confirmed number of doses ordered*, to November 12th 2020

Get started with our free toolsor talk to an advisor today at:

personalcapital.com/econ

1-"Corporate Sustainability: First Evidence on Materiality,” Harvard Business School, 2015, https://dash.harvard.edu 2-Advisory services are offered for a fee by PCAC, a wholly owned subsidiary of Personal Capital Corporation, an Empower company. Personal Capital Advisors Corporation (“PCAC”) is a registered investment adviser with the Securities and Exchange Commission (“SEC”). SEC registration does not imply a certain level of skill or training. Investing involves risk. Past performance is not a guarantee nor indicative of future returns. The value of your investment will fluctuate, and you may lose money. All charts, figures, and graphs are for illustrative purposes only and do not represent an actual client experience. Featured individuals are actors and not clients of PCAC. Personal Capital Corporation is a wholly owned subsidiary of Empower Holdings, LLC. © 2020 Personal Capital Corporation, an Empower Company. All rights reserved.

Do you want your investments to align with your values? Our Socially Responsible Personal Strategy® is a wayfor you to support companies that proactively manage ESG-related issues. Studies show that investing in higher-rated ESG (Environmental, Social, Governance) companies could also lead to better returns over time.1Ready to start? Talk to an advisor about buildinga personalized plan.2

Socially Responsible InvestingPut new energy in your portfolio.

FREE FINANCIAL TOOLS AVAILABLE ON WEB & MOBILE

The Economist November 14th 2020 23

1

Partisanship has long coloured Ameri-can perceptions of covid-19. Even so, the

contrast between the top echelons of themain parties was striking on November9th, the day the country passed 10m record-ed cases of the disease. On that day theWhite House of outgoing President DonaldTrump was dealing with reports that it mayhave hosted a second superspreadingevent in the span of a month—this one foran election-night party that may have sick-ened Ben Carson, the housing secretary,among others. The same day, President-elect Joe Biden announced the members ofthe coronavirus advisory board for histransition, staffed by the sort of public-health experts the president likes to mock.

While national attention was otherwisediverted, an extraordinary third surge incovid-19 infections began in the weeks be-fore the presidential election. There arenow 1,000 new deaths reported each dayalong with 120,000 new infections. Eventhough testing has been ramped up to near-ly 1.5m per day, the test-positivity rate is ap-

proaching 10%—suggesting that even now,many infections are being missed. In allbut a handful of states, there seems to beuncontrolled transmission, limiting theefficacy of contact-tracing. Hospitalisa-tions had been declining up until the endof September, when they bottomed out un-der 30,000. Now they have doubled to over60,000—higher than the previous peak inApril. In North Dakota, the location of theworst outbreak in the country, nearly everyintensive-care bed is occupied.

The argument that Mr Trump has han-dled the epidemic uniquely terribly mayjust have cost him the election. However,this most recent surge is not an AmericaFirst phenomenon. It has roughly coincid-ed with a second wave in Europe which,measured both by deaths and by cases perperson, is even more severe. Europeancountries have reimposed harsh lockdownmeasures, whereas the president andAmerica’s governors have been less draco-nian. France’s intensive-care wards look al-most as strained as those of North Dakota.

But whereas President Emmanuel Macronhas declared a second national lockdown,Governor Doug Burgum, a Republican, re-cently declined to impose even a maskmandate in his state.

Forecasting the course of the diseasehas proved supremely difficult. It is there-fore unclear how bad a situation a newlyinaugurated President Biden would inheriton January 20th 2021. But current signs donot augur well. Ashish Jha, dean of theBrown University School of Public Health,reckons that there may be 100,000 newdeaths between now and then. The Econo-mist’s best estimate of total deaths in Amer-ica, including those we think are missed byofficial reporting, is nearly 300,000. Afternine long months of living with the virus,Americans and their elected officials seemtired of restrictions on movement andbusinesses. With no new curbs, exponen-tial growth could continue for weeks. Coldweather may push more people to movetheir gatherings indoors, where transmis-sion is much more likely. Many Americanswill travel for Thanksgiving and Christmas;no politicians will want to take the blamefor cancelling the holidays.

Federal action on the economy does notseem imminent either. Democrats and Re-publicans in Congress have been dead-locked over a new economic stimulussince many supports expired in July. Thestalemate has not yet been broken. NancyPelosi, the Democratic leader in the House

Covid-19 and the next president

Transmission and the transition

WA S H I N GTO N , D C

What the Biden administration would do differently, and howmuch difference it would make

United States

24 Digesting the election

25 Firings and hirings

26 Fox News and Donald Trump

26 Rewilding the prairie

28 The urban-rural divide

30 Lexington: A Democratic defeat inthe midst of victory

Also in this section

24 United States The Economist November 14th 2020

2

1

of Representatives, may with to hold outfor the larger package her party couldachieve if Democrats win two run-off Sen-ate elections in Georgia, thus flipping con-trol of the chamber. Mitch McConnell, theRepublican leader in the Senate, may notwant to concede a pre-emptive victory tothe Biden administration.

A virus spreading fast with no compen-sating stimulus would be a brutal startingposition for a Biden administration. Evenwith expedited approval and distribution,getting a vaccine to every American whoneeds it would take months (see Briefing).Mr Biden has announced plans to takemore serious federal action. He has namedRon Klain, who co-ordinated Obama WhiteHouse’s response to an Ebola outbreak in2014, as chief-of-staff. Mr Biden would usehis executive authority to create a Roose-veltian Pandemic Testing Board to compelcompanies to produce more tests, labora-tory materials and personal protectiveequipment. He probably lacks the author-ity to impose a mask mandate nationwide,but would push states to do so.

Most Republican governors are alreadywary about implementing public-healthmeasures. They might see the chance todefy Mr Biden’s recommendations as anadditional incentive to stay that course.Democratic ones seem averse to a Euro-pean-style response too. The ban an-nounced by Phil Murphy, the Democraticgovernor of New Jersey, on indoor diningin restaurants between 10pm and 5am,typifies the urge to do something, but nottoo much.

In her vice-presidential debate withMike Pence, Kamala Harris expressed somedistrust in the imminent vaccine MrTrump had been hyping ahead of the elec-tion. “If the doctors tell us we should takeit, I’ll be the first in line to take it. Absolute-ly. But if Donald Trump tells us to take it,I’m not taking it,” she said. Republican vot-ers offered a new vaccine by President Bi-den might be similarly sceptical. Already,33% of Republicans tell pollsters that theywould not take a coronavirus vaccine whenit becomes available, compared with 18% ofDemocrats and 31% of independents.

While campaigning, Mr Trump liked totalk about covid-19 as though it were al-most over. “It is disappearing” he said onOctober 10th, shortly after contracting ithimself. “We are rounding the corner,” heargued on October 22nd. The assessment ofMr Biden’s transition team is more in tunewith reality, which is a good start. “Ourcountry is facing an unprecedented timewith covid-19 cases accelerating nation-wide,” says Marcella Nunez-Smith, a Yaleepidemiologist who is co-chairing Mr Bi-den’s advisory board. Anyone who hopesthe virus will go away once America in-stalls a president who follows scientific ad-vice is likely to be disappointed. 7

Among republicans’ favourite griev-ances over the past four years is a claim

that Democrats never accepted the resultsof the 2016 election. In fact, nine hoursafter the Associated Press called the elec-tion for Donald Trump, Hillary Clintontook to a much smaller stage than she hadhoped to command to say that she had“congratulated Donald Trump, and offeredto work with him on behalf of our country.”Soon afterward, then-President BarackObama said he would “make sure that thisis a successful transition...we are now allrooting for [Mr Trump’s] success in unitingand leading the country.” Democrats maynot have liked the result, but they did noth-ing to prevent Mr Trump from taking office.

Things have gone differently this time.The Associated Press called the election forJoe Biden on November 7th. Mr Trump hasspent the time since insisting that he wonand tweeting evidence-free conspiracytheories. His campaign has filed lawsuitsin five states that Mr Biden won, and his ad-ministration has refused to co-operatewith Mr Biden’s transition team. And al-though four Republican senators have con-gratulated Mr Biden and his running-mate,Kamala Harris, most elected Republicanshave remained quiet or supported MrTrump’s effort to challenge the result, aneffort which looks doomed to failure.

Typically, the head of the General Ser-vices Administration (gsa), the federal gov-ernment’s non-partisan procurementagency, issues an “ascertainment” letter,which gives the incoming president’s tran-sition team access to federal funds andspace, within 24 hours of an election beingcalled. Emily Murphy, whom Mr Trump ap-pointed gsa head in 2017, has yet to do so.White House officials note precedent from2000, in which a disputed election delayedthe start of a transition until December.

Then the election hinged on just 537votes in a single state, Florida. Of the fivestates where the Trump campaign has filedpost-election lawsuits—Nevada, Arizona,Michigan, Georgia and Pennsylvania—MrBiden’s smallest margin of victory is over11,000 votes (in Arizona). His lead in Michi-gan is nearly 150,000 votes. His campaignhas produced no evidence of fraud or irreg-ularities large enough to shift tens of thou-sands of votes in multiple states.

A few prominent Republicans, notablysenators Mitt Romney, Susan Collins, LisaMurkowski and Ben Sasse, have acknowl-edged Mr Biden’s victory. Other senatorshave implicitly done so. Roy Blunt notedthat Mr Trump’s legal challenges will prob-ably fail. Marco Rubio has urged the gsa tobegin its transition process.

Most have fallen back on, in the wordsof Mitch McConnell, the Senate majorityleader, defending Mr Trump’s “rights tolook into allegations...and weigh his legaloptions”. Some Republican senate staffersexplain this reticence by saying that allow-ing the courts to rule in these cases willbuild trust in the result. Larry Hogan,Maryland’s anti-Trump Republican gover-nor, calls his party’s response “a trainwreck,” but says that behind the scenes, agrowing number of Republicans have “hadsome pretty frank conversations with him,and he doesn’t seem to be listening.”

So far, Mr Trump’s lawsuits have faredpoorly. But as long as he keeps fighting,most Republicans see more political risk inaccepting Mr Biden’s victory—and thus in-viting the wrath of Mr Trump—than in hu-mouring him. Another goal of his lawsuitsmay be to raise just enough doubt about theoutcome in key states to pressure Republi-can-held state legislatures to put forththeir own sets of electors, substitutingtheir will for the voters’.

And continuing to fight keeps the pres-sure on other Republicans. Brad Raffen-sperger, Georgia’s secretary of state, has ac-ceded to the Trump campaign’s demand fora hand recount, to be conducted by all ofGeorgia’s 159 counties at taxpayer expense.Recounts rarely change more than a fewhundred votes, but Georgia’s will be diffi-cult to complete before the state’s certifica-tion deadline of November 20th—particu-larly for the state’s larger and moreBiden-friendly counties. That, in turn,

WA S H I N GTO N , D C

Republican elites indulge DonaldTrump’s alternative election fantasy

Digesting the election

Nothing to see here

A new lost cause

The Economist November 14th 2020 United States 25

2 raises the risk of the state legislature ap-pointing a Trump-friendly slate of electors.

Mr Trump’s administration has alsobacked him. Asked about transition plansat a briefing on November 10th, Mike Pom-peo, the secretary of state, made whatseemed to be a joke about “a smooth transi-tion to a second Trump administration”.One day earlier Mr Barr, who previouslycompared line prosecutors to preschool-ers, authorised them to investigate allega-tions of electoral irregularities.

Mr Trump is fundraising on the back ofhis refusal to concede. His campaign sendsout several texts each day, warning that“the Left will try to steal this election”, andurging recipients to “step up & fight

back” by sending cash—most of which willgo to a Trump’s political action committee.

Going along with it makes some sensefor elected Republicans, at least in theshort term. Most of their voters like MrTrump more than they like their congress-man or senator. In the medium term,though, if the party wants to get back intothe business of winning over a majority ofAmericans it needs to move past him. Thiswill become harder if Republican elitessend their voters a signal that he is therightful president, rather than Joe Biden.

Republican timidity risks long-termdamage. Mr Pompeo’s hilarious gags mayhamper American diplomats’ work ontransitions of power in younger democra-cies abroad. At home, Mr Trump’s doubt-sowing about the election has damagedAmericans’ faith in their own institutions.The most recent Economist/YouGov pollshows that 86% of Mr Trump’s voters be-lieve Mr Biden’s victory to be illegitimate.Mr Trump will leave office on January 20th,but the distrust he has sowed will not. 7

Anthony tata, a retired brigadier-gen-eral, wrote in 2018 that Barack Obama

was a Muslim “terrorist leader”. Shortly af-terward he accused John Brennan, a formerdirector of the cia, of sedition, asking MrBrennan to choose between “firing squad,public hanging, life sentence as a prisonb*tch, or just suck on your pistol”. On No-vember 10th Mr Tata was appointed policychief at the Department of Defence.

His arrival was part of a wider clear-outwhich also ousted the Pentagon’s chief-of-staff, intelligence chief—and the defencesecretary himself. “Mark Esper has been

terminated”, tweeted Donald Trump onNovember 9th. That leaves a vacuum of ex-perienced civilian leadership just as Amer-ica plunges deeper into a political crisis.

Mr Esper’s dismissal was not out of theblue. When protests over racial injusticerocked the country in June, Mr Esper hadoutraged protesters first by encouraginggovernors to “dominate the battlespace”and then by appearing alongside Mr Trumpin Lafayette Square in Washington, dc,shortly before the area was forcibly clearedof peaceful demonstrators. Mr Esper quick-ly apologised for his bellicose languageand—contradicting the president—saidthat he did not support invoking the Insur-rection Act, a centuries-old law that wouldallow the domestic use of federal forces toput down unrest. Mr Trump was furious atthat act of modest dissent.

In July Mr Esper provoked the presidentfurther. First, he approved a promotion forLieutenant-Colonel Alexander Vindman,who as director for European affairs on theNational Security Council had been a keywitness during Mr Trump’s impeachmenthearing in November 2019 (Colonel Vind-man chose to retire). Then he issued an or-der that in effect banned the Confederateflag, a symbol of the pro-slavery South inAmerica’s civil war, from military facilities.Days later, Mr Trump insisted that “whenpeople proudly have their Confederateflags, they’re not talking about racism…Itrepresents the South.”

That largely settled Mr Esper’s fate. InAugust the president publicly belittled hisdefence secretary, calling him “MarkYesper” (having earlier dubbed him “MarkEsperanto”). In an interview with the Mili-tary Times conducted on November 4thand published after his firing, Mr Esper

took pride in his record of standing up tothe president, asking: “Who’s pushed backmore than anybody? Name another Cabi-net secretary that’s pushed back.” He wenton: “I could have a fight over anything, andI could make it a big fight, and I could livewith that—why? Who’s going to come inbehind me? It’s going to be a real ‘yes man’.And then God help us.”

Mr Esper’s fears are not unfounded. LikeMr Tata, many of the Pentagon’s new lead-ers are better known as partisan ideologuesthan serious policy wonks. Kash Patel, thenew chief-of-staff, worked for DevinNunes, a fervently pro-Trump congress-man. In 2018 Mr Patel sought to discreditthe fbi investigation into Mr Trump’s tiesto Russia. Ezra Cohen-Watnick, the new in-telligence chief, worked for Michael Flynn,Mr Trump’s first national security adviser,who later plead guilty to lying to the fbi.

Christopher Miller, picked to succeedMr Esper, carries less political baggage—heserved for three decades in the army, retir-ing as a colonel in 2014—but has little expe-rience. He led the National Counterterror-ism Centre for less than three months.Before that, he was a lowly deputy assistantsecretary of defence with responsibility forspecial forces. It is not clear why he has su-perseded David Norquist, Mr Esper’s for-mal deputy, as federal statute demands. Be-cause he has been retired for less thanseven years, he may also require a waiverfrom Congress.

“This is a legal move, but it is not a wiseone,” says Peter Feaver, an expert on civil-military relations at Duke University whoserved in Bill Clinton’s and George W.Bush’s administrations. “Normally, ad-ministrations are begging the talent to staythrough the lame-duck session so they cancontinue to govern responsibly.” Mr Bi-den’s transition team will have to deal withofficials who have only just turned upthemselves. The change of leadership willalso disrupt the department’s budget sub-mission for 2022, which is in preparation.

Perversely, the best-case scenario is thatMr Trump has cleaned out the Pentagon“for the petty joy of settling a score”, as MrFeaver puts it. A more worrying possibility,entertained by some former senior defenceofficials, both in and out of the Biden camp,is that he is planning a radical policy move,such as an accelerated withdrawal oftroops from Afghanistan, Syria or Iraq.

The darkest scenario is that Mr Trump isconsolidating control of America’s securityforces to frustrate a peaceful transfer ofpower. Insiders suspect that the heads ofthe cia and fbi may be fired next. MarkMilley, the chairman of the joint chiefs ofstaff, America’s most senior uniformed of-ficer, is said to be in the cross-hairs, too. “Itall has a terrible ‘burn it down’ on the wayout feeling,” tweeted James Stavridis, a for-mer admiral and commander of nato. 7

Another Defence Secretary is sacked,probably for insufficient subservience

Firings and hirings

Going, going,Pentagone

Yesper? No sir

26 United States The Economist November 14th 2020

1

With florida in the bag, at 11.20pm onelection night the party at the White

House was in full swing. Then Fox News,playing on large television screens aroundthe building, punctured the mood, callingArizona for the Democrats—the first time anetwork had projected a Republican stateto flip. Despite a complaint from the WhiteHouse to Rupert Murdoch, Fox’s boss andone-time friend of the president, the Foxdecision desk did not budge.

Fox has been the most reliable main-stream-media ally of Donald Trump’s ad-ministration. Its hosts have given the pres-ident unchallenged airtime and amplifiedpro-Trump conspiracy theories from theinternet. The relationship has been mutu-ally beneficial: since 2015 the network’s rat-ings have risen by one-third (see chart),and in the latest financial year Fox Newsand Business generated 80% of Fox Corp’sgross operating profit. Now, with the cred-its ready to roll on the Trump show, the net-work must figure out how to deal with theexit—and wrath—of its star.

Fox has influence like no other newsoutlet. About 60% of Republicans watch itweekly, double the share of any other net-work. When the Pew Research Centre askedin September whether mail-in ballot fraudwas a “major problem”, 61% of Republicanswho got their tv news from Fox agreed,compared with 23% of Republicans whogot their news elsewhere. Mr Trump, a Foxaddict, hired its producers into the WhiteHouse and sent staff in the other direction.

But the lost election has broken the rela-tionship. Prime-time hosts have largelystuck to the White House’s script, SeanHannity declaring that “it will be impossi-ble to ever know the true, fair, accurateelection results.” But Fox’s news anchorshave got gutsier. On November 9th Neil Ca-vuto abruptly cut away from footage inwhich the White House press secretary wasclaiming fraud. After the election wascalled, Fox’s website’s headline read:“Americans take to streets in celebrationafter Biden projected to win White House”.

Other Murdoch-owned outlets, includ-ing the New York Post and Wall Street Jour-nal, have taken a similar line. Mr Murdoch’sfriendship with Mr Trump, like most of hisalliances, appears pragmatic. In 2015,ahead of the Republican primaries, hetweeted: “When is Donald Trump going tostop embarrassing his friends, let alone thewhole country?” When his British newspa-

pers switched their support from the Con-servatives to Labour in 1997, he described itas “like two porcupines making love: veryslowly and very carefully”.

Fox is already having a prickly time.Outside one Arizona vote-counting centre,Trump fans chanted, “Fox News sucks!”.Despite reporting strong earnings on No-vember 3rd, Fox Corp’s share price dipped.“There appears to be something below thesurface that is torpedoing the stock,” wroteMichael Nathanson, a media analyst. “Thatsomething might be the potential launchof a new Trump News Network.”

Rival conservative channels that couldform the basis of such a venture are gleeful.“Fox News viewers have been writing usand expressing frustration with the funda-mental shift…to a more liberal slant,” saysCharles Herring, head of One AmericaNews, whose website has a story entitled:“Trump Won, Fox News Admitted Its LeftistAgenda”. “We’ve arrived at Waterloo, andthe battle is about ready to take place,” de-clares Chris Ruddy, head of Newsmax. MrRuddy says revenues from advertising—forhearing aids, testosterone pills, hats thatprevent hair-loss, and so on—have dou-bled in the past six months.

Yet Fox looks buoyant. Even if Mr Trumpbecame the star of another network, thedamage would be to advertising, whichmakes up only about 30% of Fox News’srevenue. The rest comes from the fees cablecompanies pay to carry it, and 90% of thosedeals are locked down for at least two years.

The Trump presidency has been a gift toall news media. “It may not be good forAmerica, but it’s damn good for cbs,” LeslieMoonves, its then-boss, remarked in 2016.But if anything it has been better for the lib-eral rebels. msnbc has seen its ratings al-most treble since 2015. The New York Times,leader of the resistance in print, has seensubscriptions soar. Fox’s ratings under MrTrump have been sky high, but its share ofthe total was greater in the Obama years.The outrage business works better whenyou’re not in power. 7

The conservative cable networkprepares for a spell in opposition

Fox News and Donald Trump

Season two iscancelled

Eyes rightUnited States, viewers of cable television*By channel, average, m

Sources: Nielsen;MoffettNathanson analysis

*Total live and same-day audience†Excluding news

1.5

1.2

0.9

0.6

0.3

0

191817162015

CNN

MSNBC

Fox News

Cable average†

Deanna robbins and her husband,ranchers in a wild patch of central

Montana known as the Missouri Breaks,fought a blizzard this week. They ploughedthrough knee-deep snow, spending hoursto find a herd of black Angus cattle. Then, tofeed the cows, they had to dig out bales ofburied hay. “We were trudging throughdrifts, it’s hard work,” she says, but she rel-ished every moment of it. “It has to be inyour blood,” she says. Her family have beenranchers in Montana for the past century.

Could anything chase her out? She dis-likes her neighbours. Abutting her sprawl-ing ranch on three sides is federal land thatis being incorporated into a wildlife park.The American Prairie Reserve (apr) wasfounded as a charity in 2001 and aspires tobecome the largest park in the Lower 48states. Already it stretches over nearly420,000 acres (from 29 ranches it hasbought so far), and will eventually growand stitch together another 2.75m acres ofpublic land. Its aim is for prairie dogs, sagegrouse, coyote, bighorn sheep and otherspecies of native plants, birds and mam-mals to thrive in a contiguous space thesize of Connecticut.

For environmentalists, scientists andthe apr’s donors—notably wealthy SiliconValley folk—this is a bold, market-friendlyexperiment in massive conservation. Thearea is precious: one of only four vast, tem-

LE W I STO W N , M O NTA N A

America’s answer to the Serengeti isspreading in Montana

Rewilding the prairie

Where the wildthings are

The Dozen Wines You Need to Try plus Bonus Bottles & Glasses

Yours for ONLY $69.99 worth $259.99

Our Top 12 wines feature major award winners, and bottles that have been ‘favorited’ and given 5-star ratings by thousands of wine fans online. Enjoy them all with this special introduction to the WSJwine Discovery Club —plus two bonus, 98-point Super Tuscan reds and a pair of stylish Dartington Crystal stemless glasses—for only $69.99 (plus $19.99 shipping & tax).

Take the Top 12 reds or choose whites or a mix for the same low price. Full tasting notes tell the story of each wine with useful serving advice. Then, look forward to a dozen exciting, new fi nds every three months. You take only the cases you want—each saving you at least 20%—and can skip or cancel anytime. We’ll also reward you with further bonus bottles and members-only treats throughout the year. Plus, every wine comes with our 100% money-back guarantee.

Scroll down our Top 12 at right, decide which bottle you’ll open fi rst, and join us on a journey of wine discovery today.

TOP 12SAVE$190

order today at wsjwine.com/bonusor call 1-877-975-9463 Quote code AADD003

Offer available to fi rst-time WSJwine Discovery Club members only and limited to one case per household. Wines and offer may vary by state. 100% money-back guarantee applies to each wine. Offer subject to availability and club enrollment. All orders fulfi lled by licensed retailers/wineries and applicable taxes are paid. You must be at least 21 years old to order. Offer valid in U.S. only (excluding AL, AR, DE, HI, KY, MS, RI, UT). WSJwine is operated independently of The Wall Street Journal’s news department. Full terms and conditions online. Void where prohibited by law.

Two 98-Point Tuscan Reds and 2 Stemless Glasses$64.97 value

To welcome you in style, we’ll add in two bonus bottles of a fantastic, 98-point Super Tuscan red, plus a pair of Dartington Crystal stemless glasses.

YOUR SPECIAL BONUS

9 Boutique Oak-Aged Rioja

8 Luscious Old-Vine Zinfandel

10 Southern Italian Stunner

11 Double-Gold Aussie Favorite

7 Double-Gold Portuguese Gem

5 Handcrafted Chianti Classic

3 Glorious 2019 Bordeaux

4 Triple-Gold Portuguese Hit

1 Iconic-Estate California Cab

2 Mighty Argentine Malbec

12 Silky California Pinot Noir

6 Châteauneuf Star’s Reserve

28 United States The Economist November 14th 2020

2 perate, grassland ecosystems left on Earth(steppe land in Mongolia, Kazakhstan andPatagonia are the other three). This territo-ry of shortgrass prairie could becomeAmerica’s answer to the Serengeti, alongthe upper reaches of the Missouri River.

In the view of many ranchers, whosebeef industry is worth $1.5bn annually inMontana, that is a grim prospect. Theyworry about more ranch land disappearinginto the reserve. “They’d be idling 3.5macres from food production,” complainsMrs Robbins. She helps to run a campaignagainst the “elite” apr, known as “Save theCowboy”. It opposes the sale of ranches tothe reserve and argues that the Bureau ofLand Management is wrong to allocate fed-eral lands to it. Its placards, showing thesilhouette of a big-hatted horserider in anorange sunset, are ubiquitous in centralMontanan towns.

A large one is in Lewistown, where theapr will open a centre for tourists. Resi-dents sound less than keen. “We’re tryingto preserve the ranching way of life againsta bunch of billionaires who came in and gotcontrol”, says Kari Weingart. Her husband’sfamily is unhappy that its old ranch hasbeen sold to the reserve. She says youngerMontanans, unexcited by city ways, aregrowing interested in farming again butstruggle to find land. A rancher’s wife,Joann Bristol, suspects the project is a ruseby outsiders to take over from locals. Thespending power of the reserve is “scary”while promises of gains from tourism are“overblown” says another.

Then there are long-standing fears ofdangerous animals. The odd prairie dogmay be cute, but ranchers long ago exter-minated wolves, mountain lions and griz-zly bears which threatened their stock.Now the apr wants them all back. Wolvesand bears may return on their own, fromCanada or Yellowstone. The first 850 bisonhave already been reintroduced; they couldeventually number 10,000. Farmers worrybison could trample fences or spread a dis-ease, brucellosis, to cattle. Worse could bethe impact of huge increases in elk num-bers. The apr wants 40,000 of them, ten-times more than now, to serve as tasty preyfor predators. Ranchers fear escaping elkwill chomp grass their own cattle need.

Beth Saboe, of the apr, says complaintsare overblown. Land prices are rising inMontana, she agrees, but not because of thedeep-pocketed charity. One recent factor isthat outsiders, fleeing cities because of co-vid-19, are keen on second homes or land inBig Sky Country. Nor is the apr hostile toagriculture, she says. It lets farmers, fornow, graze 14,000 head of cattle on its landand runs a company to sell bison meat.With 63m acres in Montana for farming, italso sees plenty of space for cowboys. No-where else in America, however, could hosta prairie wildlife reserve of this scale. 7

For a moment, it looked as if voters werestarting to find some common ground.

In the weeks leading up to the elections onNovember 3rd, polls showed that many ofthe fault lines dividing Democrats and Re-publicans—including age, race and educa-tion—were beginning to narrow. Even thegap between city dwellers and rural folkseemed to be shrinking. According to a pollconducted by YouGov between October 31stand November 2nd, voters in rural areas fa-voured President Donald Trump over JoeBiden, his Democratic opponent, by a mar-gin of ten percentage points. Four yearsago, this gap was 20 points.

But an analysis of the election results byThe Economist suggests that the partisan di-vide between America’s cities and openspaces is greater than ever. Preliminary re-sults supplied by Decision Desk hq, a data-provider, show that voters in the least ur-banised counties voted for Mr Trump by amargin of 33 points, up from 32 points in2016. (Specifically these are the bottom20% of counties by population density.Counties which are more than 10% Hispan-ics, which shifted right for reasons unrelat-ed to density, have been excluded.) Mean-while, voters in the most urbanisedcounties—the top 20%—plumped for MrBiden by 29 points, up from Hillary Clin-ton’s 25-point margin in 2016. More broad-ly, the greater the population density, thebigger the swing to the Democratic candi-date (see chart). Even after controlling forother relevant demographic factors, suchas the proportion of whites without collegedegrees or Hispanics in each county, thedata suggest that urban and rural voters are

more divided today than they were in 2016.Preliminary results also show that Mr

Biden gained most ground in counties thatswung hardest toward Democrats betweenBarack Obama’s re-election in 2012 and Hil-lary Clinton’s failed bid for the WhiteHouse in 2016. One possible explanationfor this trend is the tendency for Democratsand Republicans to live among their ownkind. Americans are still sorting them-selves into politically like-minded com-munities, a movement noted by Bill Bishopin “The Big Sort” published in 2008. For lib-erals, this means diverse, densely populat-ed cities; for conservatives it is places thatare mostly white, working-class and wherethe neighbours are a .22 round away.

Such sorting has two major conse-quences. Jonathan Rodden, a professor atStanford University and author of “WhyCities Lose”, a book about geographic polar-isation, says that the partitioning of Ameri-ca by density has led to an underrepresen-tation of Democratic votes. Because theseats in the House of Representatives andthe Senate are awarded on a winner-take-all basis, rather than in proportion to thepopular vote, they can end up skewing theallocation of legislative seats away fromthe party whose voters are crammed intojust a few states or congressional districts.As Democrats cluster in cities, the systemreduces their political clout. It can bethought of as a natural gerrymander.

Geographic polarisation also hurtsDemocrats’ chances in the electoral col-lege, America’s system of choosing its pres-ident. In this year’s election, for example,Mr Biden will win the national popularvote by about five percentage points. Buthis margin in the “tipping-point” state thatultimately gave him enough votes to winthe election, Wisconsin, will be less thanone point. That four-point advantage forthe Republicans is the biggest in at leastfour decades. So long as Democrats contin-ue to be the party of the cities, and Repub-licans the party of small-town and ruralAmerica, those biases will persist. 7

WA S H I N GTO N , D C

Our analysis of the results suggests along-running trend has sped up

The urban-rural divide

City v hills

Big city bluesUnited States presidential electionsBy county*

Sources: Decision Desk HQ; US Census Bureau; The Economist

2016-20 change in Democratic vote marginPercentage points

10,0001,0001001010.1Population density, 2020, people per km2, log scale

15

10

5

0

-5

-10

-15

Circle size =total votes, 2020

*Excluding those in which Hispanics exceed 10% of the population

ATEM Mini.......US$295*

ATEM Mini Pro.......US$595*

ATEM Software Control.......Free

Introducing ATEM MiniThe compact television studio that lets you

create presentation videos and live streams!Blackmagic Design is a leader in video for the television industry, and now you can create your own streaming videos with ATEM Mini. Simply connect HDMI cameras, computers or even microphones. Then push the buttons on the panel to switch video sources just like a professional broadcaster! You can even add titles, picture in picture overlays and mix audio! Then live stream to Zoom, Skype or YouTube!

Create Training and Educational VideosATEM Mini’s includes everything you need. All the buttons are positioned on the front panel so it’s very easy to learn. There are 4 HDMI video inputs for connecting cameras and computers, plus a USB output that looks like a webcam so you can connect to Zoom or Skype. ATEM Software Control for Mac and PC is also included, which allows access to more advanced “broadcast” features!

Use Professional Video EffectsATEM Mini is really a professional broadcast switcher used by television stations. This means it has professional effects such as a DVE for picture in picture effects commonly used for commentating over a computer slide show. There are titles for presenter names, wipe effects for transitioning between sources and a green screen keyer for replacing backgrounds with graphics.

Live Stream Training and ConferencesThe ATEM Mini Pro model has a built in hardware streaming engine for live streaming via its ethernet connection. This means you can live stream to YouTube, Facebook and Teams in much better quality and with perfectly smooth motion. You can even connect a hard disk or flash storage to the USB connection and record your stream for upload later!

Monitor all Video Inputs!With so many cameras, computers and effects, things can get busy fast! The ATEM Mini Pro model features a “multiview” that lets you see all cameras, titles and program, plus streaming and recording status all on a single TV or monitor. There are even tally indicators to show when a camera is on air! Only ATEM Mini is a true professional television studio in a small compact design!

Learn more at www.blackmagicdesign.com*Price subject to change.

30 United States The Economist November 14th 2020

Besides donald trump, the election’s big loser was the Demo-cratic Party. Having been predicted to win a governing trifecta,

it retained its House majority with around six fewer seats, won theWhite House by a nerve-jangling margin and has probably fallenshort in the Senate. Joe Biden can expect to sign little legislation asa result. He may be constrained in his cabinet appointments. If henominated as attorney-general Stacey Abrams, the hero of hisprobable win in Georgia and a hate figure on the right, for example,Mitch McConnell might give her the Merrick Garland treatment.

Unlike the president, Mr Biden’s party is already reckoningwith its failure. Bruised members of the centre-left—a faction thatincludes almost all the party’s candidates in the battlegroundstates—blame the activist left for making them seem radical anduntrustworthy. The left, in particular its 31-year-old standard-bearer, Representative Alexandria Ocasio-Cortez, is hitting back.

A leaked record of a meeting between House Democrats lastweek—before Mr Biden’s victory had been called—included angryexchanges between the two groups, which have continued on so-cial media and in the pages of the New York Times. Abigail Span-berger, a narrowly re-elected Virginian moderate, warned that theparty must resolve among other things “to not ever use the wordsocialist or socialism again”. Ms Ocasio-Cortez, a proud democrat-ic socialist, responded by suggesting the centre-left losers didn’tunderstand how to campaign on social media (unlike her, presum-ably, with her 10m Twitter followers). Moderates were outraged.

Understandably so. The Democratic losses were in spite of ahuge cash advantage and against a Republican opponent that overthe past four years appeared to have given up on governing. TheTrump party passed no major law besides a tax cut. It has nohealth-care policy. Yet Democratic candidates ran behind Mr Bi-den almost everywhere. And there are signs—beyond what MsSpanberger and other battleground Democrats heard from theirconstituents every day—that the party’s perceived “radical left-ism” was a big reason why. The Democrats lost most ground withtwo groups that have a special loathing of socialism, Cuban-Amer-icans and Venezuelans. Their shift to the Republicans cost theDemocrats two House seats in Florida and Mr Biden the state.

Ms Ocasio-Cortez says this is wrong because it is unfair. No

Democrat ran on socialism, “defund the police” or other leftist slo-gans, she notes. Any damaging impression to the contrary wasconfabulated by right-wing attack ads—which Democrats shouldtherefore do more to counteract. Point by point, she is right. But asa proposed solution to the Democrats’ problems, it suggests that“aoc”, who won her own district in Queens by a comfortable 38points, has little conception of how hostile the battlegrounds havebecome for Democrats.

That chiefly reflects the imbalances in the electoral system,which mean that Democrats, the most popular party, need to filchvotes from the other side in a way that less-popular Republicansneed not. Democrats’ inflated—as it turned out—hope for thiselection was to ride an anti-Trump wave big enough to compensatefor the over-representation of rural, conservative voters in theSenate and electoral college that is the cause of the imbalance.Some hoped the president’s unpopularity might even give them abig enough Senate majority to reform it. Instead, the Republicans’structural advantage appears to have grown so large as to havedashed even the Democrats’ more modest expectation of power.

Mr Biden is on course to win the election by more than 5mvotes, but the presidency by less than 100,000 across a handful ofincreasingly conservative states. Wisconsin—the indispensablelast component in his electoral-college majority, which he won bya whisker—is more than three points more Republican than thecountry at large. That is a measure of Mr Biden’s achievement; itmay also suggest how unrealistic it was for Democrats to havecounted on adding Senate seats in even more conservative states.

If all the battlegrounds continued on their current electoral tra-jectory, North Carolina and Texas, where they had such hopes,might not turn Democratic until after the ageing, white rustbelthas become so reliably Republican that Democrats will have losttheir five Senate seats there. Having approached the election hop-ing to win sufficient power to reform the system, Democrats arenow contemplating a bleak struggle to stay competitive in it.

The early Democratic feuding is mainly a response to the grim-ness of that prospect. Ms Ocasio-Cortez makes herself an easy tar-get for the aggrieved centre-left. Her claim that Democrats mainlyneed a better Facebook strategy is as dilettantish as the “defund thepolice” insanity she signally failed to disavow. The election alsosuggests the left’s bigger idea to change the political tide, by wean-ing working-class voters off right-wing identity politics with pop-ulist economic policies, may be no more feasible. An electoratethat has embraced Mr Biden personally but rejected his agenda astoo radical seems unlikely to warm to the left’s actual radicalism.Yet that was already off the menu, following Mr Biden’s thumpingwin in the Democratic primaries. The dejection of battle-hardenedmoderates such as Ms Spanberger chiefly reflects the overthrow oftheir more promising effort to break the partisan deadlock.

Change the recordIf the left dreams of moving America with the power of its ideas,the centre-left places its hope in compiling a solid governing re-cord. The evidence of previous bouts of populism suggests there isno better way to re-establish the centre. It is also a bolder approachthan the Sandernistas allow. The Democrats’ historic weakness,devastatingly exploited by the Tea Party movement, is its reputa-tion for defending bad government against small government. Thecentre-left’s commendably daunting ambition is to compile a rep-utation for modern, effective government. But to do that, it musthave power. And Mr McConnell is likely to give it none. 7

A Democratic defeat in victoryLexington

If Joe Biden’s party cannot wrest power from the Republicans now, when ever will it?

The Economist November 14th 2020 31

1

Peru’s constitution makes it relativelyeasy for Congress to get rid of a presi-

dent. The legislature need only decide thathe or she is “morally unfit”, and, by a two-thirds majority of its single chamber, evictthe chief executive from the Pizarro Palace.On November 9th, by a vote of 105 to 19 withfour abstentions, Congress did just that toMartín Vizcarra (pictured). That marks thesecond time in less than three years that ithas toppled a president. (Mr Vizcarra tookover from Pedro Pablo Kuczynski, who quitbefore he could be impeached.)

Manuel Merino, who was Congress’sspeaker until he took over as president onNovember 10th, will probably hold on tothe office until his term expires next July.But that does not mean Peru will enjoy sta-bility. It is dealing with an outbreak of co-vid-19 that has killed 35,000 people. As ashare of the population, that is the third-worst in the world. The economy contract-ed by 15.7% in the first eight months of 2020compared with the same period a year ear-lier, and is expected to shrink by 12% for thefull year. There is little reason to believethat the presidential and congressional

elections scheduled for next April, inwhich by law none of the current office-holders may seek to hold on to their jobs,will produce leaders who can manage theeconomy or the pandemic better.

Mr Vizcarra fell over allegations that hetook kickbacks from public-works projectsduring his one term as governor of thesouthern department of Moquegua from2011 to 2014. Although he clearly has ques-tions to answer, nothing has been proved.His critics say he has been meddling in thejudiciary to avoid prosecution and to harmhis foes. In his 50-minute self-defence be-fore Congress, Mr Vizcarra agreed that aninvestigation was warranted but said itshould wait until he finished his term. Hisousting would cause chaos, he warned.

Rather than debate the merits of thecase against him, lawmakers denouncedhis ethics and his handling of the pandem-

ic. Mr Vizcarra challenged the “legality”and “legitimacy” of the impeachment, butwent quietly. He declared his innocenceand said he would go home “with my headheld high”.

As he left the palace residents of Limabanged pots and pans to oppose his remov-al. Several thousand people gathered nearCongress and outside the capital on No-vember 10th to protest. Riot police usedtear gas and water cannon to control theprotesters. Some were arrested. More thanthree-quarters of Peruvians opposed hisimpeachment, according to one survey.

It is the latest crisis for a political sys-tem whose prestige and institutions havebeen ground down by allegations of graft.All of Peru’s presidents since 2001 havebeen ensnared in one way or another by thescandal surrounding Odebrecht, a Brazil-ian construction firm that bribed politi-cians across Latin America. Two formerpresidents are under house arrest; one is atliberty while he awaits trial; a fourth com-mitted suicide to avoid arrest. Keiko Fuji-mori, until recently the most powerful op-position leader, is awaiting trial. Theallegations against Mr Vizcarra were the re-sult of a tentative plea bargain by suspectsin the Odebrecht investigations.

Peruvians see corruption as the coun-try’s biggest problem, even ahead of thepandemic, according to opinion polls. Butthey regard Mr Vizcarra as part of the sol-ution. His approval ratings averaged 58% inthe three main polls published in October.To many, his war with Congress looked like

Peru

Early retirement

LI M A

Congress topples President Martín Vizcarra on its second attempt

The Americas

32 Hurricane Eta hits Central America

33 Bello: Proxy presidents

Also in this section

32 The Americas The Economist November 14th 2020

2

1

a valiant battle against graft.Last year, when Congress resisted en-

acting political reforms proposed by MrVizcarra, he found a pretext to dissolve itand call new legislative elections. The votein January this year did not produce a morepliant body. The nine parties representedin the chamber extend from the far left ofthe political spectrum to the religious-fun-damentalist right. Mr Vizcarra had hopedfor support from a reasonable centre, com-posed of about 70 lawmakers. But from thebeginning the new Congress rowed withhim over how to handle the pandemic andthe economic crisis that came with it.

Congress made an abortive attempt toimpeach him in September, when record-ings leaked that appeared to show himmeddling in an investigation of contractsbetween the government and a folk singerwho had given him political support. Thismonth’s attempt looked like a long shot atfirst. It succeeded after Mr Vizcarra angeredcongressmen by pointing out that many ofthem, too, are under investigation.

Peruvians now worry that Mr Merinowill seek to postpone the election in orderto continue enjoying the spoils of office.Others fear an orgy of populism in a previ-ously well-managed economy, in the ex-pectation that this might benefit presiden-tial candidates who are either in Congressor have allies there. Mr Vizcarra’s financeminister, María Antonieta Alva, had foughttenaciously to block populist measures,such as early withdrawals from the pay-as-you-go public pension system (with a fiscalcost of up to 2% of gdp) and a freeze of re-payments of bank debts. She has now re-signed, along with the rest of Mr Vizcarra’scabinet. The price of Peru’s foreign bondsslumped after the impeachment vote, andthe sol sank against the dollar.

Mr Merino, a congressman fromTumbes, the smallest department, has giv-en few clues as to how he will handle Peru’soverlapping crises. He has promised to ap-point an ideologically diverse cabinet andto work closely with Congress. A formerspeaker, Ántero Flores-Aráoz, is to lead it.His most important pledge in a 13-minuteinauguration speech was that electionswill happen on schedule.

His successor may find it no easier togovern, even if he or she is free from suspi-cions of wrongdoing. Twenty-four peoplehave declared their candidacy for the presi-dency. None is backed by a strong politicalparty. Some hope to boost their chances byechoing popular indignation at Mr Viz-carra’s removal. George Forsyth, a formermayor and football goalkeeper who is theearly front-runner, tweeted that it was a“veiled coup”. The eventual winner is un-likely to be able to elicit co-operation froma fragmented Congress. It may eventuallyfind an excuse to usher Peru’s next presi-dent out of the door. 7

In only one previous year, 2005, havemeteorologists resorted to the Greek

alphabet to name Atlantic storms. Theyhad run through the 21 names starting withthe letters of the Roman alphabet (five un-common letters are not used). With Hurri-cane Eta this month the storm-namershave reached further into the Greek-lettersequence than ever before. The strongeststorm of this year’s season, Eta made land-fall on November 3rd in Nicaragua as acategory-four hurricane, with gusts of upto 240km (150 miles) per hour. It proceededto cause havoc across Central America andthe Caribbean (see map).

The winds weakened after landfall, buttorrential rain caused floods and land-

slides in Honduras, Guatemala and Cuba.Scores of Central Americans are confirmeddead and many are missing or injured.Countries on the edge of the storm’s path,including Mexico and Panama, suffereddeaths and damage. Flooding disrupted anelection in Belize on November 11th. Acrossthe region, perhaps 300,000 people lefttheir homes to seek shelter in communitycentres or with family and friends.

The death toll in Guatemala—with 18mpeople Central America’s most populouscountry—will probably be the highest. Sofar, 44 people are confirmed dead and near-ly 100 are missing. Mudslides engulfedhouses in central Guatemala, which borethe brunt of the storm in that country. InQuejá a villager lost 22 members of herfamily, Reuters reported. In Honduras 1.7mof the country’s 10m people have been af-fected in some way, says the Red Cross.Hondurans criticised the government forfailing to prepare for the storm. Nicaraguahad just two deaths but lots of damage toroads and houses. Thirty thousand peoplewere evacuated and 25,000 householdshave no electricity.

Eta is far less devastating than manypast disasters, such as Hurricane Mitch,which in 1998 killed more than 11,000 peo-ple in Central America. But it comes at aworse time. Eta adds to the misery causedby the pandemic and makes it more dan-gerous. Central America appears to havecontained the number of cases and deaths

As well as causing destruction, Hurricane Eta could spread covid-19

Central America

Greek tragedy

Nov 12th00:00 EDT

UNITED STATES

BAHAMAS

EL SALVADORGUATEMALA

NICARAGUA

HONDURAS

COSTA RICAPANAMA

MEXICOBELIZE

CUBA

500 km

Source: NOAA

Hurricane EtaWind strength

Tropical stormOver 63kph

HurricaneOver 119kph

Quejá

The Economist November 14th 2020 The Americas 33

2

Bello The problem of proxy presidents

On november 8th Luis Arce tookoffice as Bolivia’s president following

his clear victory in an election lastmonth. A day later the man who pickedhim as a candidate, Evo Morales, wasgreeted by adoring crowds as he crossedinto Bolivia from Argentina, a year afterfleeing his country after protests overelectoral fraud. Mr Arce, who was MrMorales’s finance minister, insists he ishis own man. His former boss, who ruledas an increasingly authoritarian socialiststrongman for 13 years, “has no role inthe government”, he said. But someBolivians believe Mr Arce will have MrMorales breathing down his neck.

Mr Arce joins a small but growingband of proxy presidents who owe theirjobs to the sponsorship of a more pow-erful leader. In Colombia Iván Duque wasan inexperienced senator when he waselected to the top job in 2018 thanks tothe backing of Álvaro Uribe, a conserva-tive two-term former president who wasbarred from re-election by term limits. InArgentina Cristina Fernández de Kirch-ner, president in 2007-15, struck a dealwith Alberto Fernández (no relation)whereby he ran and won in 2019, with heras his running-mate. Ecuador may benext. Rafael Correa, the country’s strong-man between 2007 and 2017, hopes toreturn to power via a proxy candidate,Andrés Arauz, a young economist. MrCorrea lives in Belgium and has beenconvicted of corruption in absentia.

The rise of the proxy president ispartly a result of term limits and partly aconsequence of the commodity boom ofthe 2000s, which helped leaders fortu-nate enough to be in office at the time tobecome popular and politically strong.The gambit sometimes backfires. MrCorrea thought he would control thingsby choosing Lenín Moreno, his vice-

president, as his party’s candidate—onlyfor his successor to turn on him. Mr Uribereluctantly backed Juan Manuel Santos,his former defence minister, to succeedhim in 2010. The two men soon becamebitter foes. In Brazil Luiz Inácio Lula daSilva (2003-10) chose Dilma Rousseff tokeep the presidential seat warm for him.Ms Rousseff outmanoeuvred him to runfor a second term, only to be impeachedfor breaking budget rules.

When the gambit works it causes evenbigger problems. A proxy risks being aweak president, carrying the can for deci-sions inspired by a sponsor who exercisespower without responsibility. Take Colom-bia: Mr Duque is a moderate who in 26months has yet to put his stamp fully onhis own government. Mr Uribe is seekingto abolish a special court to investigate warcrimes set up under the peace agreementwith the farc guerrillas negotiated by MrSantos. Mr Duque, meanwhile, must de-fend his implementation of that agree-ment before the un and other bodies.Security has deteriorated under Mr Duque.His former and current defence ministers

are people close to Mr Uribe with noprevious security experience. Prominentmembers of Mr Uribe’s party campaignedfor Donald Trump in Florida. Mr Duquemust now deal with his victorious oppo-nent, Joe Biden.

Mr Fernández, a more substantialpolitician than Mr Duque, is struggling toproject authority, too. His controversialvice-president, a leftist-populist, contin-ues to control the street in Buenos Aires’srustbelt. Mr Fernández has imposed theworld’s longest lockdown, which delayedrather than curbed the coronavirus. Itincreasingly looks like a sign of politicalweakness. The government pulled off arestructuring of its debt with bondhold-ers but failed to capitalise on that bylaunching a credible economic plan,perhaps because of the difficulty ofgetting agreement between the twoleaders. Mr Fernández is paying a politi-cal price for a plan for a judicial reformthat seems designed to save his running-mate from corruption charges.

That is an example of the underlyingproblem that proxies face. The interestsof their sponsors are not necessarilythose of the country. Mr Uribe appears tobe pursuing a personal vendetta againsthis enemies and seems to want to installanother proxy in 2022 by continuing topolarise Colombian politics. Mr Correawants revenge, too, and like Ms Fernán-dez wants control of the courts.

As for Mr Arce, he has named a cabi-net in which only the defence minister isclose to Mr Morales. Their party, theMovement to Socialism, is broad-based,and includes people critical of the formerpresident. Mr Arce has no illusions aboutMr Morales. “He’s not going to change,”the new president said. If so, sooner orlater Mr Arce will face a choice: imposehis own authority or lose it.

They are proliferating in Latin America

from covid-19 better than Brazil, Ecuador,Mexico and Peru. Guatemala’s reporteddeath toll from covid-19 is a fifth of Peru’s asa share of population. Nicaragua is an out-lier. It barely attempted to curb the spreadof the disease. Its reported death toll isamong the lowest in Latin America, thoughthat may be because the government issimply refusing to disclose accurate infor-mation. In all the countries battered by Etadoctors and aid workers fear that infec-tions will rise. Thousands of people arecrammed into shelters, where the virus caneasily spread. In some places that are still

habitable water supplies have been cut, sopeople cannot wash their hands. 

The storm has hit livelihoods, especial-ly in farming. In Honduras, where agricul-ture accounts for a tenth of gdp and nearlya third of employment, coffee and bananaestates have been devastated. Food may be-come scarce. Rebuilding will be even slow-er than after past disasters. Government fi-nances are stretched by recession and byextra spending to control the pandemic.Guatemala’s budget deficit is forecast to be6% of gdp, nearly triple what it was lastyear. The World Bank expects 1m more Gua-

temalans will fall below its poverty line of$1.90 of income a day.

The combination of Donald Trump andcovid-19 had largely stopped the flow of mi-grants heading from Central America to theUnited States. It could be restarted by Eta,plus the belief that Joe Biden, the Americanpresident-elect, will be friendlier to immi-gration. Tropical Storm Theta, which hasformed in the middle of the Atlantic, seemsto be heading away from the Americas. Butthe hurricane season runs to the end of No-vember, and there are 16 letters to go in theGreek alphabet. 7

PAY ITFORWARD

Modernizing customer-facing technology platforms is the topstrategic priority for US fi nance and technology companies asthe economy recovers, according to a recent survey fielded by(E) BrandConnect, a commercial arm of The Economist Group,on behalf of WEX.

And 62% rate technology investments in finance, includingpayments, as key to positioning their business for future growth.

The pandemic made digital paymentsmandatory. How can they help increasethe pace of innovation?

ADVERTISEMENT

Discover how fi nance and technology companies are creating customer value through payments innovation. Visit paymentsinnovation.economist.com

The Economist November 14th 2020 35

1

American diplomats warned of an “at-tempt by organised crime groups to ex-

ert influence over politics and elections”.The acting mayor of the capital city steppeddown in protest at a “wave of ochlocracy”—mob rule. mps complained that they werebeing coerced into acceding to an illegiti-mate power grab. A candidate for primeminister was knocked unconscious whenthugs attacked a political rally.

Yet the man who has benefited mostfrom the tumult in Kyrgyzstan, Sadyr Japa-rov, denies that his meteoric rise, from pri-son to the presidency in ten days, has anysinister underpinning. It was popular prot-ests that brought him to power, he says.Those who claim “that I’m a bandit, that Icame out of prison and seized power” aresimply political rivals trying to smear him,he insisted this week in an interview withThe Economist over WhatsApp. Far from try-ing to hijack Kyrgyzstan’s shaky democra-cy, he intends to “establish justice, transpa-rency, honesty and legality, and eradicatecorruption at the root”, he said.

In early October crowds protestingabout tainted parliamentary electionssprang Mr Japarov and several other politi-cians from prison. When the prime minis-ter resigned to appease the protesters, MrJaparov got mps from the outgoing parlia-ment to award him the job, though therewere rows about quorums and proxy votes.He then persuaded the president to resignand the speaker of parliament to declinethe role of acting president, which there-fore fell to Mr Japarov instead.

Mr Japarov next convinced mps to delayfresh elections for parliament, to allow fora presidential poll in January first—to theconsternation of many officials and politi-

cal parties. As acting president he wouldnot be allowed to stand, so he plans to re-sign, handing the reins to an ally he hashelped install as speaker of parliament.And he wants to amend the constitution tostrengthen the presidency and reduce theclout of parliament.

Mr Japarov, a former mp, rose to promi-nence by campaigning for the nationalisa-tion of Kumtor, a Canadian-owned goldmine. He has twice been convicted ofcrimes in connection with his political ac-tivism: once for leading a crowd thatstormed the grounds of the White House,which houses parliament and the presi-dent’s office, and once for orchestrating thekidnapping of a local official as part of aprotest, although he was not present at thetime and denied any involvement. He ismore comfortable speaking Kyrgyz thanRussian, which sets him apart from theRussophone elite. His nationalism goesdown well in a country that fears becomingan economic dependency of neighbouringChina and has suffered strife between theKyrgyz majority and the Uzbek minority.

The uprising that brought Mr Japarov topower is the third since 2005. Although themountainous country of 6m is sometimesdescribed as the only democracy in CentralAsia, in practice it has run through a seriesof presidents whose behaviour graduallybecame more autocratic until they wereturfed from office by public protests. Withpolitics in constant turmoil and competing

Politics in Kyrgyzstan

A crowd-sourced commander-in-chief

A LM AT Y

The new president says he is restoring the rule of law. Others say he threatens it

Asia

36 The Sino-Australian trade war

37 India’s covid-proof ruling party

37 Aung San Suu Kyi’s triumph

38 Banyan: Filipinos abroad

Also in this section

36 Asia The Economist November 14th 2020

2 politicians in search of financial backing,organised crime has flourished. Journal-ists last year exposed a smuggling ringwhich laundered at least $1bn of its pro-ceeds abroad (gdp last year was $8bn).America has labelled Kyrgyzstan a “majormoney-laundering country”.

Mr Japarov insists he marks a breakwith all that. He has ordered the arrest oftwo alleged crime bosses whom the previ-ous government left be: Raimbek Matrai-mov, who has been accused of involvementin the smuggling ring, and Kamchybek Kol-bayev, whom America has labelled a “sig-nificant foreign narcotics trafficker”. MrKolbayev remains in detention, but Mr Ma-traimov was allowed to return home afterpromising to pay the state $24m in a vaguepenalty for unspecified abuses. The opac-ity and arbitrariness of this step (Mr Japa-rov concedes it was a political decision, al-though he denies links to Mr Matraimov)have prompted some to question Mr Japa-rov’s sincerity. Keneshbek Duyshebayev, aformer senior security official, dismisseshis attack on organised crime as a “show”.

By the same token, when Mr Japarovspeaks of the need for constitutional re-forms to ensure strong, stable government,some see a naked power grab. The presentconstitution was intended to guard againststrongman rule. Its architect, Omurbek Te-kebayev, an mp, says Mr Japarov’s propos-als will set Kyrgyzstan’s politics back 30years, to their state at the time of indepen-dence from the Soviet Union in 1991. Thisweek journalists issued a statement ex-pressing “extreme concern” about Mr Japa-rov’s vilification of outlets that have criti-cised him—“distorted information” is hisconstant retort to uncomfortable ques-tions—which presents a “risk to the freepress”. Last month a mob of his supportersthreatened to burn down the offices of anobstreperous radio station and website.

Yet Mr Japarov is trying to present him-self as a moderate, unifying force. TilekToktogaziyev, the politician attacked by MrJaparov’s supporters, has been named min-ister of agriculture. Mr Japarov has alsowon over Omurbek Babanov, a liberal op-position leader who ran for president in2017. Mr Babanov says he won’t run in thecoming election and has endorsed Mr Japa-rov instead. Mr Japarov promises not topursue the politics of revenge “because I’vebeen through that myself”. In early Novem-ber he invited the only two former presi-dents who are not in exile or in prison—Sooronbay Jeyenbekov, whom Mr Japarovhas just elbowed out of office, and RozaOtunbayeva, the elder stateswoman of Kyr-gyz politics—to attend an event with him.

Mr Japarov is also toning down his jin-goism. “I am not a nationalist,” he insists,promising to rule for Kyrgyz and minor-ities alike. He says he is not sure whether itis worth nationalising the Kumtor mine

any more, given its dwindling reserves. Hehas urged protesters to end their attacks onChinese firms. Locals must understand thevalue of such investments, he says, andkeep the country open for business.

Mr Japarov seems likely to win the elec-tion, given the reluctance of possible rivalsto run. His flair for populism is evident: hehas ordered the removal of the fencearound the White House, to reduce the dis-tance between politicians and the gov-erned. And whatever constitution thecountry ends up with, he insists, he couldnever become a strongman, thanks to theultimate safeguard: the Kyrgyz people.“They can put up with things for a year, ortwo, or three, then chase out any presi-dent,” he says. “You can’t establish a dicta-torship in our country.” 7

The row is already six months old and issteadily intensifying. In May China im-

posed an 80% tariff on imports of Austra-lian barley and restrictions on imports ofAustralian beef. More recently shipmentsof Australian lobsters have been subject todelays. Aussie wine has been formallythreatened with higher tariffs. The Chineseauthorities are reportedly discouragingfirms from buying Australian coal, cottonand timber. There are fears that more Aus-tralian goods will soon feel the squeeze. OnNovember 9th Australia’s trade minister,Simon Birmingham, said that rumours of

an outright, if unofficial, ban on seven bigexports did not appear to be correct.

China hoovers up a third of Australia’sexports of goods. Belinda Allen of the Com-monwealth Bank of Australia calculatesthat 7% of the total have now been affectedby or threatened with restrictions. (Chinais also a massive consumer of Australianservices such as education and tourism.)

In theory, China has distinct and unre-lated reasons for each step it has taken. Thetariffs on wine and barley are supposedlybecause those products are being exportedbelow cost. Concerns about hygiene havebeen used to justify impediments to foodimports, and so on. The Australian govern-ment assumes there is a bigger grievance atwork, though Mr Birmingham’s Chinesecounterpart won’t even speak to him,much less explain.

The spat started shortly after Australialed international calls for an inquiry intothe origins of covid-19. Australia has alsoannoyed China by rejecting its claims inthe South China Sea, legislating to preventChinese interference in Australian politicsand cosying up to the likes of America, Japan and India—with which it is holdingjoint naval exercises this month.

China could also be angling for specificconcessions. Its investigation into the“dumping” of barley came after Australialaunched 33 anti-dumping probes of Chi-nese goods between 2006 and 2018. Thetwo countries began talks on a trade deal in2005 on the condition that Australia treatChina as a market economy, makingdumping claims harder to sustain—butAustralia never followed through.

Restrictions on agricultural productsmay have another benefit for China, too.The Chinese government has pledged tobuy $37bn of agricultural goods fromAmerica as part of a recent trade deal, but isbadly behind schedule. Pushing Chineseimporters away from Australian supplierscould help to get it back on track.

Whatever the explanation, the Austra-lian government has been encouraging ex-porters to find other buyers, and has beenpursuing trade deals that might help, in-cluding the reportedly imminent RegionalComprehensive Economic Partnership,which involves other 14 countries, includ-ing China. A recent poll by the Lowy Insti-tute, a think-tank, found that 94% of Aus-tralians supported government efforts toreduce dependence on China.

Realistically, though, China is too big amarket for Australian exporters to replacevery quickly. For most of the affected pro-ducts, China, in contrast, can easily findother sellers. For some goods, such as coal,it may want to succour its own producers.Iron ore is the only big Australian export ofwhich China would struggle to find alter-native suppliers (see chart)—and trade init, oddly enough, has not been curtailed. 7

China is curbing imports of more andmore Australian goods

Australia’s trade with China

Down under and out

Uneven keelTrade dependence, 2019

Source: ITC Trade Map *Not yet implicated in trade tensions

Wheat

Coal

Beef

Copper

Copper ore

Wine

Cotton

Wood chips

Animal hair

Crustaceans

Barley

Iron ore*1007550250

Australian exports as % of all Chinese importsChinese imports as % of all Australian exports

The Economist November 14th 2020 Asia 37

1

As the state of Bihar went to the polls atthe end of October, its 125m citizens

were contending with both the pandemicand the associated economic slump.Would they punish the Bharatiya JanataParty (bjp) of the prime minister, NarendraModi? Exit polls suggested they might.

But when the results were released onNovember 11th, they showed the bjp and itslocal ally, the Janata Dal (United) (jdu),winning roughly the same share of the voteas their biggest challengers, a coalition ofthe local Rashtriya Janata Dal (rjd), leftistparties and Congress, a much enfeebledparty that nonetheless remains the onlynationwide rival to the bjp. In terms ofseats in the state assembly, the bjp’s alli-ance actually won a narrow majority. Andwithin the alliance it was the bjp that per-formed best, winning most of the seats itcontested. The jdu, whose leader, NitishKumar, has served three near-consecutiveterms as Bihar’s chief minister, floundered.

“The bjp has achieved exactly what itwanted in Bihar, which is to have a govern-ment but to cut Nitish Kumar down to size,”says Pavan Varma, a former adviser to MrKumar. To make things sweeter for the bjp,Congress won only a meagre 19 of the 70seats it fought. Better yet for Mr Modi, theElection Commission declared his partythe winner in dozens of local by-electionsthat were held simultaneously in 11 otherstates. Most significantly it strengthenedits hold on the pivotal state of Madhya Pra-desh, returning under its banner a clutch ofdeputies whose defection from Congresslast year gave the bjp a narrow majority inthe state assembly.

Given that India’s economy has shrunkperhaps by 10% since covid-19 hit and thatmore than 128,000 people have died fromthe disease, this was a stellar performance.Six years into office and 18 months afterwinning a landslide national election, MrModi has not only kept his own sheenbright but has also expanded his party’s in-fluence. The serial humiliation of Con-gress, now widely blamed for draggingdown the opposition’s “grand alliance” inBihar, will further shrink its bargainingpower in other states where it needs alliesto challenge the bjp. And by outshining hisown ally in Bihar, Mr Modi has again shownthe effectiveness of a tactic that has trans-formed the bjp from a regional party to thedominant political force across India. Instate after state it has gained power with

the help of a local partner, only to eclipse itgradually with the help of its vastly greaterfinancial resources and the disciplinedground troops provided by Hindu-nationalist groups allied to the party.

To be fair, the bjp’s narrow victory in Bi-har owes as much to the fragmenting of itsopponents in a first-past-the-post systemas to its own potency. Congress’s ally, therjd, a local party led by the 31-year-old sci-on of a political dynasty, won 75 seats, onemore than the bjp. With a slightly broadercoalition it might have carried the day.

Four more states are due to elect new as-semblies in the first half of next year. Sever-al of the contests promise to be big and bru-tal. The bjp has vowed to seize West Bengalin particular. If Mr Modi had begun to wor-ry that he was losing his famous hawa, ortailwind, he will be resting easier now. 7

D E LH I

Neither a pandemic nor a recessioncan slow Narendra Modi’s juggernaut

State elections in India

Against dauntingodds

Su pon chit had to contain her excite-ment. It was November 8th, the day of

Myanmar’s second election since the endof military rule in 2015. A poll observer, shewas duty-bound to be impartial. But she isalso an ardent supporter of Aung San SuuKyi, Myanmar’s de facto leader, and herparty, the National League for Democracy(nld). She watched as voters queued andballots were counted in her neighbour-hood in Yangon, the commercial capital.The nld’s tally, scrawled on a blackboard,

soared past its opponents’. Exhausted butjubilant, Ms Su Pon Chit went home towrite her report. Hundreds of nld suppor-ters, sharing her confidence, flocked toparty headquarters to celebrate.

The Union Election Commission,which organised the poll, has not yet re-leased all the results, but Monywa AungShin, the nld’s spokesperson, says it haswon 399 of the 476 elected seats in the twochambers of the legislature. That is enoughto form a government and name the presi-dent, and nine more than the nld won inits big victory five years ago. Once again thenld appears to have trounced its biggestopponent, the army-backed Union Solidar-ity and Development Party (usdp), and ithas beaten expectations in states domin-ated by ethnic minorities.

The usdp, however, claims that the pollwas unfair. The election commission is aneasy target. It is appointed by the president,an nld stalwart. It did not publish the finalnumber of registered voters until after vot-ing started. It disqualified candidates wellinto the campaign. Citing security worries,it did not hold elections in several states,disenfranchising 1.5m voters, mainly fromethnic minorities. Yet on the day itself, theCarter Centre, an ngo that monitored theelection, found “no major irregularities”.

Nevertheless, the scale of the nld’s vic-tory is surprising. Its record in office hasbeen lacklustre. Economic growth hasbeen disappointing. Efforts to end the civilwars simmering on the country’s peripheryare flagging. Discontent with the nld hasbeen mounting, especially among ethnicminorities.

After their poor performance in the pre-vious election in 2015, many parties cham-pioning ethnic minorities merged, in ordernot to split the opposition vote. The num-ber of covid-19 cases sharply increased in

YA N G O N

Aung San Suu Kyi’s party defiesexpectations with a landslide victory

Myanmar’s election

Mother knows best

Voters’ enthusiasm for the NLD has not flagged

38 Asia The Economist November 14th 2020

2

Banyan Money but not a class

Nine months after Taal volcanoerupted, life in the Calabarzon re-

gion of the Philippines, south of thecapital, Manila, is slowly returning tonormal, despite the raging pandemic.Cinders buried houses, destroyed papayaplantations and sent tens of thousandsfleeing. Today, the roads have beencleared and the power is back on. Evacu-ees have returned to patch up homes.Local distilleries producing lambanog, afierce spirit made from fermented palmsap, have sputtered to life. Few locals,though, are holding their breath for thepromised splurge of government assis-tance. That leaves only one sure source ofincome: remittances from relativesworking abroad.

The 2.2m Overseas Filipino Workers(ofws, as they are typically known) arefeted nationally for their sacrifices.Nearly half toil in Saudi Arabia or theGulf states as maids, drivers or hotelstaff. All hotel bands in China seem tohave a Filipina singer. Hong Kong hasmore than 150,000 ofws and Singapore120,000, most of them women workingas domestic helpers and nannies. CentralHong Kong on a Sunday is like the Philip-pines writ small: a pavement map of thecountry’s many languages as Filipinasgather with friends from their region.

A fifth of all ofws are from Cala-barzon. One, Bernadette, is a nanny inHong Kong. Her home in Calaca, in theshadow of the volcano, escaped the worstof the ash fall. But many of her friendshave been sending what money they earn(just over HK$5,000, or $645, a month) tohelp rebuild homes and livelihoodsdestroyed by the eruption.

In other respects, Bernadette’s story istypical. The 40-year-old has worked inHong Kong for a decade, far from herhusband and son. She supports not only

them but an elderly father with big medi-cal bills. She has put the son, now 17,through boarding school. Her six siblingscall on her when they have a financialemergency. Through all this, she hasbought a plot of land back home and built atwo-storey house. She and many otherofws are immensely proud of what theyhave accomplished. They are welcomed ontheir annual Christmas trip home (can-celled this year because of the pandemic)as bayani, or heroes. Huge parties arethrown for them. They nearly always pay.

ofws are only one part of a 10m-strongPhilippine diaspora. Without the Philip-pines’ 378,000 seafarers, the global mer-chant fleet would be sunk. Nurses, doctorsand oil and mining engineers the worldover make up an expatriate professionalclass. In all, the diaspora sends home$30bn a year, a tenth of gdp.

Politicians recognise the political andeconomic clout of expatriates. In Calaca,says Bernadette, they woo ofws withpromises of jobs when they return, schol-arships for their children or health insur-ance—“but they are just trying to get our

vote.” Presidential candidates or theirproxies come to Hong Kong for rallies.Not only do ofws’ votes count, but lovedones at home will listen to them.

On occasion, expats’ social-mediacampaigns have drawn attention togovernment corruption or incompe-tence, such as after the deadly TyphoonHaiyan in 2013. Some academics hopethat expatriates, when they return, can infuture help reshape the country’s poli-tics, demanding better government and amore responsive approach to the coun-try’s inequalities in the place of graft andthe cult of the strongman. There are toofew signs of that happening. ofws do notyet represent the kind of middle classcapable of urging change. While remit-tances can enable upward mobility—Bernadette’s son plans to study aeronau-tical engineering—they can just as easilybe spent by husbands on booze, roastpigs, gambling and lovers. Professionals,meanwhile, are more likely to emigratepermanently.

One professional returnee, RonaldMendoza, dean of the school of govern-ment at Ateneo de Manila University,posits another factor: ofws work largelyin authoritarian places, where the modelof the strongman is rarely questioned.

Most Filipinas in Hong Kong, forexample, were bemused by recent pro-democracy protests and approve of theirsuppression. As for President RodrigoDuterte, who embodies personal rule andpromotes vigilante justice, he remainswildly popular among ofws. When, athome, this columnist lamented that 18journalists have been murdered while MrDuterte has been unremittingly hostileto the press, his Filipina cleaner wasindignant, taking it as an insult to herpresident. Banyan was impelled to mut-ter an apology.

Filipinos working abroad are a source of cash, not reform

September, just as campaigning began,stirring fears about turnout.

But “Mother Suu” remains hugely popu-lar in Myanmar, especially among the eth-nic-Bamar majority, but also with someminorities. Win Lae Shwe Yee, an ethnicShan, voted for the nld in this election andin 2015. She vehemently disagrees withthose who have come to see the nld as aparty of the Bamar, rather than all Burmese,saying Ms Suu Kyi works “tirelessly” for thewhole country. It helps that the nld tendsto field candidates from the dominant eth-nicity in each constituency. Moreover, it

controls government budgets, notes SalaiJimmy Rezar Boi, secretary of the Chin Na-tional League for Democracy (cnld), anethnically based party. He says that in Chinstate, the nld, having promised to buildschools, bridges and the like, took 35 out of39 seats in the state parliament, up from 28in 2015. The cnld won just one.

The army may have given the nld anunintentional fillip just days before theelection, when Min Aung Hlaing, the com-mander-in-chief, impugned the integrityof the election and accused the govern-ment of making “unacceptable mistakes”,

prompting fears that the top brass mightrepudiate the election result (it is anywayguaranteed 25% of the seats in parliament,enough to block constitutional reform).The general, perhaps realising his mistake,later said he would accept the outcome. ButMoe Thuzar of the iseas-Yusof Ishak Insti-tute, a think-tank in Singapore, suspectsthat his intervention helped to turn out thevote. On November 11th the usdp demand-ed that the election commission “hold anew election again, co-operating with themilitary”. That will only strengthen MotherSuu’s appeal. 7

The Economist November 14th 2020 39

1

There is “nothing to be ashamed of”,said Hong Kong’s leader, Carrie Lam,

when asked how she would feel about theterritory’s legislature passing controver-sial bills after being stripped of an opposi-tion by the expulsions and resignations ofpro-democracy lawmakers. “We are moreexcited when bills are passed more effi-ciently.” Mrs Lam’s remarks on November11th signalled a dark new phase of China’scampaign to snuff out Hong Kong’s free-doms and usher in rule by rubber stamp aspractised on the Chinese mainland.

Storm clouds had been gathering overthe Legislative Council (commonly knownas Legco) ever since China imposed a dra-conian national-security law on HongKong on June 30th. In July the local govern-ment barred 12 politicians, including foursitting members of Legco, from standing inelections that were due to be held in Sep-tember. It accused them of opposing thenew law and other political misbehaviour.Shortly afterwards it postponed the elec-tions for a year, citing the pandemic.

Early this month police arrested eightopposition politicians, including fiveLegco members, for their alleged involve-

ment in a scuffle in the chamber. Thencame the ruling by the parliament in Bei-jing, the National People’s Congress (npc),that resulted in the final purge and, on thesame day, Mrs Lam’s chilling response. Itsaid Hong Kong’s government could disbarany legislator who did not accept Chineserule in Hong Kong or who otherwise violat-ed national security.

The Hong Kong authorities respondedswiftly to the npc’s edict. It declared thatthe four legislators who had been barredfrom re-election would also be stripped oftheir seats. In response, 15 other oppositionlawmakers held a press conference to an-nounce they would resign in sympathy (seepicture). With two others from their camphaving already stepped down in Septemberin protest against the postponement of thepolls, their move would leave Legco withno opposition voice for the first time in de-cades. The legislators were formally sub-

mitting their resignations as The Economistwent to press.

Just a year ago prospects looked muchbrighter for pro-democracy politicians. Inlocal-council elections, held in November2019 during anti-government unrest thathad been sweeping the city since mid-year,they made unprecedented gains. It waswidely believed that they would haveachieved similar success in this year’sLegco polls, if they had been held—eventhough only half of the body’s 70 seats aredirectly elected. By issuing this week’s rul-ing the npc has made it clear that even ifopposition politicians were to win a major-ity of seats (in the most recent elections in2016 they fell just short), their numberscould be whittled down again at the gov-ernment’s whim.

The four legislators who were disbarredfollowing the npc’s ruling were DennisKwok, Kwok Ka-ki, Kenneth Leung and Al-vin Yeung. They are hardly radicals. “Wefollow the rules of procedure, we wearsuits. The four of us—two lawyers, onedoctor, one accountant—are the mostmoderate of moderates,” says DennisKwok. The government has not spelled outwhy they were kicked out. But in July, whenthey were disqualified from standingagain, they were variously accused of sign-ing petitions against the national-securitylaw, pledging to block passage of the bud-get were democrats to gain a majority andsupporting American sanctions on HongKong. In March Mr Leung travelled to Cali-fornia to attend a conference about suchsanctions. But he says he did not encourage

Politics in Hong Kong

Leaving in despair

H O N G KO N G

Expulsions and resignations strip the territory’s legislature of a vocal opposition

China

40 Self-help books

42 Chaguan: Tea before dawn

Also in this section

40 China The Economist November 14th 2020

2

Bookshops in china are replete withworks offering advice on self-better-

ment. Topics range from coping with shy-ness (“How to Make Friends with Strangersin One Minute”) to succeeding in business(“Financial Management in Seven Min-utes”). The title of one recent bestsellerurges: “Don’t Opt for Comfort at the Stage ofLife that is Meant to be Difficult”. Theirpopularity and contents reflect the stressesof a society in rapid flux—one in whichpaths to wealth are opening up in waysbarely imaginable a generation ago andcompetition is fierce (see Chaguan).

Reliable statistics on China’s book mar-ket are hard to find. But according to astudy by Eric Hendriks-Kim, a sociologistat the University of Bonn, self-help booksmay account for almost one-third of Chi-na’s printed-book market. In America theymake up only 6% of adult non-fiction printsales, reckons npd Group, a research firm.

Although China’s leaders keep stressingthe need for China to be “self-reliant”, seek-ers of advice on how to succeed often turnto American books for guidance. In Chinalast year the top ten self-help sellers in-cluded translations of several Americanworks, such as “How to Win Friends and In-fluence People”, “Peak: Secrets from theNew Science of Expertise” and “The SevenHabits of Highly Effective People”.

Chinese readers appear more eager forsuch imports than people in many othercountries that are culturally closer to

America. That may be because both Chinaand America are “hyper-competitive andmaterialistic regimes”, argues Mr Hen-driks-Kim, who has described this in hisbook “Life Advice from Below: the PublicRole of Self-Help Coaches in Germany andChina”. In the early 2000s a Chinese trans-lation of “Who Moved My Cheese?”, a moti-vational book by an American, Dr SpencerJohnson, became so popular that a playbased on it toured theatres and the Chineseword for cheese acquired a new meaning:one’s own self-interest. Books proliferatedin China with cheese in their titles.

China has a long tradition of reading forpractical purposes. In 2018 fiction account-ed for 7% of sales, compared with morethan 30% in Germany. “One of the moststriking features of China’s market forbooks is its absolute and passionate rele-vance to life,” said a report in 2006 by ArtsCouncil England. The exam-focused edu-cation system leaves little time to developinterpersonal skills, so people, desperatefor advice on how to sell themselves, turnto self-help books instead.

That may suit the Communist Party, ea-ger as it is to promote “positive energy”. Butthe party would prefer native-born rolemodels. State media have touted a book byPresident Xi Jinping, “Seven Years as anEducated Youth”, as the kind of tome peo-ple should study (see picture). It describesMr Xi’s hard life in the countryside duringthe Cultural Revolution of the 1960s and1970s. “Is there really any self-help bookbetter than Xi’s?” asked one headline.

Mr Xi is also fond of the classics, someof which are being repurposed for self-im-provement purposes. Yu Dan, perhaps Chi-na’s best-known pop philosopher, has sold11m legal copies (millions more may havebeen peddled in photocopied form) of“Confucius from the Heart”. Some Chinesehave mocked it for making the sage sound“much like the masters of American self-help”, says Mr Hendriks-Kim.

Perhaps the self-help industry has comefull circle. After all, China’s 6th-century-bc

masterpiece for would-be generals, “TheArt of War” by Sun Tzu, was arguably theself-help prototype. Its title has been ech-oed, consciously or otherwise, in thenames of countless other books of thegenre. One such is Donald Trump’s “The Artof the Deal”. Its fifth and most recent trans-lation in China was published in 2016 bythe Communist Youth League. 7

The market for self-help books is booming, strongly influenced by America’s

Self-help books

Highly effective people’s republic

Xi and the power of positive thinking

the imposition of them, fearing they wouldharm Hong Kong’s economy.

Pro-democracy politicians—at leastthose not disqualified—may still stand innext year’s elections. Mr Leung says thenext Legco must have an opposition. Butthe trend is clear. Vocal opposition inLegco, which increasingly has involvedfilibustering by democrats, will be throt-tled. The opposition “may have to shift tovenues outside the establishment” to ex-press discontent, says Eliza W.Y. Lee of theUniversity of Hong Kong—although, as shenotes, opportunities for street activism arebeing shut down, too. The national-securi-ty law, along with coronavirus-related re-strictions, have all but stamped out unrest.

It is unlikely that many members of thepublic will be upset by the democrats’ de-parture from Legco. Those who support thegovernment have long regarded them astroublemakers bent on disrupting legisla-tive proceedings. Opinion polls suggest thegovernment’s many critics have little hopethat the legislature will ever be democratic.So, as the Communist Party tightens con-trol over Legco, they increasingly regardthe involvement of pro-democracy politi-cians in it as meaningless, says Ho-FungHung of Johns Hopkins University. In Sep-tember the Hong Kong Public Opinion Re-search Institute canvassed views on the de-cision to delay the elections. It found analmost even split among opposition sup-porters between those who wanted theircamp’s legislators to carry on working dur-ing Legco’s extended term, and those whopreferred that they resign. “I’ve been re-ceiving a lot of messages of support frommembers of the Hong Kong public sayingthey don’t want us to give credence to thisinstitution anymore. They tell us that by re-maining, we give it some sort of credibil-ity,” says Mr Kwok.

Such pessimism is easy to understand.Since the security law was adopted therehas been a steady stream of news that hasspooked Hong Kong’s democrats. Severaloutspoken academics have been forced toquit, or have not had their contracts re-newed. Earlier this month a televisionjournalist was arrested after helping toproduce a story for Hong Kong’s publicbroadcaster, rthk, that was critical of thepolice response to an attack by thugs onanti-government protesters during lastyear’s protests. Her alleged offence was ob-taining car-ownership details from a gov-ernment database using a false pretext.

But the existence of an opposition inLegco, however frustrated by the electoralsystem (almost half of the seats are re-served for interest groups such as indus-tries and professions), has long made HongKong’s political system stand out from themainland’s. The prospect of a Legco de-prived even of the few teeth it has is indeeda bleak one. 7

7 Ways to Help Generate Income in Retirement

With �is Free Guide You’ll Learn Ways to:

Our Free Guide Can Help: Written speci�cally for those with $500,000 or more ininvestable assets, what you learn might surprise you and give you peace of mind.

©2020 Fisher Investments. 5525 NW Fisher Creek Drive, Camas, WA 98607. Investments in securities involve the risk of loss. Past performance is no guarantee of future returns. *As of 09/30/2020.

Set your retirement goals—from spending every cent toleaving a legacy

Get an estimate for how long youare likely to live, so you can planyour income needs over yourretirement years

Generate “homegrown dividends”to save on taxes

Estimate your retirement costs with the included worksheet,

factoring in in�ation and longevity expectations

Balance Social Security, pensions, retirement savings, real estate and

other assets to create a dependable income stream

And many more suggestions and ideas to help you avoid running

out of money in retirement!

BonusO� er

MillionsHave

Requested

Fisher Investments’ Retirement Guides!

If You Are Approaching Retirement or Already Retired, Call 888-210-0912 or

Visit FisherIncomeGuide.com/Free for Your FREE Guide!

While it’s easy to imagine retirement as a time of relaxation, enjoyment and fun, the fact of the matter is that a successful retirement doesn’t just happen. It takes thought, planning and action. To help you get ready for retirement or make your retirement even better, we’ve assembled 99 retirement tips. Importantly, we’ve gleaned these tips from our clients, people who successfully have navigated or are navigating the transition from work to retirement.

99 Tips to Make Your Retirement More ComfortableAbout Fisher Investments Fisher Investments is a money management � rm serving over 75,000 successful individuals as well as large institutional investors.* We have been managing portfolios through bull and bear markets for over 40 years. Fisher Investments and its subsidiaries use proprietary research to manage over $135 billion in client assets.*

If your portfolio is $500K or more, call now for your FREE guides!

Toll-free 888-210-0912 or FisherIncomeGuide.com/Free

Making the Switch From Saving to Spending Deciding how to generate income in retirement is one of the most stressful, complicated and confusing

aspects of retirement life. Even if you have accumulated a large nest egg, making the wrong income moves could put your entire retirement at risk. � at’s why we urge you to call for your free copy of

� e De� nitive Guide to Retirement Income.

42 China The Economist November 14th 2020

Decades spent brewing tea in rural Sichuan have left Li Qiangwith firm views on what makes for an authentic chaguan, or

Chinese teahouse. If age and beauty were the only tests, his shop,the Old Teahouse in Pengzhen, would pass easily. A place to drinktea for more than a century, the grey-roofed, timber-framed build-ing dates back to the Ming dynasty, when it was a temple to Guan-yin, a Buddhist immortal. Maoist slogans painted on the walls, incharacters of faded red, reflect Pengzhen’s history as a people’scommune. Hours before dawn the air is already thick with tobaccosmoke and fumes from a coal-fired stove, for the first customersarrive for “early tea” at half past three in the morning. Human com-panionship makes a teahouse, says Mr Li, who rented the hall froma collective enterprise in 1995. Only when customers treat ateashop like a home is it a chaguan, he declares. Until then, in MrLi’s withering judgment, it is merely “selling tea to passers-by”.

Your correspondent visited Pengzhen this week to mark the100th Chaguan column, a name that pays homage to China’s tea-houses and their history as places where ideas are exchanged. MrLi’s establishment draws a stream of locals. Many are old men infarmers’ blue cotton jackets and caps, puffing on pungent cherootsor cigarettes in sturdy bamboo armchairs. Those photogenic cus-tomers lure Chinese urbanites, who carry expensive cameras andlook for images of rural life or selfies to post on social media. Sucha diverse customer base makes Mr Li’s teahouse a good place for anexperiment: an unscientific survey of how Chinese think. It beingunsafe and unfair to ask Chinese citizens directly, in public, aboutCommunist Party rule, this columnist spent a happy (if painfullyearly) few hours asking people two questions often used to assessmorale in different countries. The first concerns a subject’s owneconomic circumstances. The second is about whether future gen-erations are likely to be better off than their parents.

The exercise generated strikingly consistent answers. Despitewide differences of age and education, patrons in the Old Teahouseare optimistic about China as a whole, after decades of rising pros-perity. Yet many also describe modern life as stressful, with toomany families chasing too few chances to secure a good education,a good job and other paths to success.

Jiang Huiyun, an 82-year-old widow, sits in a prime window-

seat each morning from four o’clock. Crop-haired and chain-smoking, Ms Jiang married in 1957 at a time of scarcity and hunger.Her wedding feast consisted of carrot porridge, but only after shehad pleaded tearfully with her production-brigade leader for anadvance on her vegetable ration. None of her four children fin-ished junior high school. Her eldest son dropped out in his firstyear of primary school after being unjustly accused of vandalism.He earned money by “collecting dog shit and chicken shit”, re-members Ms Jiang. In the 1950s toughs attacked anyone with a sidebusiness as “capitalists”, she recalls. During the Cultural Revolu-tion, from 1966 to 1976, Red Guards smashed Buddhist statues inPengzhen’s temple-teahouse and “nobody dared to stop them”.

Unsurprisingly, she thinks life today is far better. As a ruralpensioner she receives social insurance and old-age payments ofover 2,000 yuan ($300) a month. Her grandchildren, having gradu-ated from university, are upwardly mobile like many young peoplethese days. A quarter-century ago just one-in-twenty Chinese at-tended university. Today half of all Chinese youngsters of under-graduate age are in higher education. Ms Jiang no longer lives infear of hunger or political violence. Still, some forms of scarcity in-volve things that are harder to spot, such as equal access to oppor-tunity. Like many in Pengzhen, Ms Jiang’s family have rural house-hold-registration, or hukou. As a result, her grandchildren aresecond-class citizens, able to live and work in big cities but deniedmany public services there. Notably, they will have to find fees of30,000 yuan a year to send Ms Jiang’s great-grandchildren to highschool. “If we didn’t borrow money from others, how could we af-ford that?” she asks. Ms Jiang is emphatic: “We have a good lifenow.” But she adds: “Young people face a lot of pressures.”

In China to get rich is glorious, but daily life is a slogA middle-aged man sipping tea before work will give only his sur-name, Huang. He praises modern China, declaring that “Each gen-eration is doing better than the last.” Yet Mr Huang’s own life re-mains precarious. Now 59, he has no retirement fund. So he saves1,000 yuan from his monthly pay as a cleaner in a factory, whichranges from 2,000 to 4,000 yuan depending on overtime. He wentunpaid while covid-19 closed his factory for nearly three months,and has not forgotten the terror of worrying if his savings wouldrun out before work resumed. His hopes rest on enabling his five-year-old grandchild to land a good job one day, though he worriesabout school fees. Taking early tea is one of his few indulgences.His daughter is too busy working to visit teahouses, he sighs.

Two 20-year-old women photographing tea-drinkers turn outto be undergraduates from Sichuan University of Media and Com-munications, on a class assignment. “There is definitely a lot ofpressure” on the young, says one. She has an internship but no joblined up after graduation. Her mother’s uncomplicated childhoodmemories—“stealing bananas in the countryside”—make her al-most envious. Still, the students are confident that life is better to-day, though not confident enough to give their names to a foreignreporter asking almost-political questions.

Mr Li, 55, suggests that some people create pressure for them-selves by setting their sights too high. A devotee of the simple life,his menu consists of a single item: jasmine tea from Ya’an, in thefoothills of the Tibetan plateau. He charges locals one yuan for un-limited refills, and everyone else ten yuan. “You chat a bit, drinksome tea every day, that’s happiness,” he says. Pengzhen’s un-eventful pleasures are not for everyone, for modern China is a rest-less, brutally unequal place. The tea, however, is excellent. 7

Tea before dawnChaguan

Visiting a century-old chaguan in China’s heartland, for the 100th Chaguan column

The money doctors

→ November 14th 2020

3 The industry outlook

5 Index funds

5 Agency problems

7 Capital allocation

8 Private markets

9 Venture capital

10 The Chinese future

SPECIALREPORT:

Asset management

12 Prescriptions

Gold has been the asset to own thisyear. The first half of 2020 saw theprice of the precious metal soar by16.8% in US dollars,1 outperformingmost major asset classes and evenits own average return of around10% per year ² since 1971.

The covid-19 pandemic has causedinstability across global markets, raisingthe appeal of gold as a volatility hedge.At the same time, the crisis has causedcentral banks to U-turn on plans to tightenmonetary policies, with the US FederalReserve signalling its intention to keepinterest rates at ultra-low levels until 2023.

As a result, government bonds—traditionally seen as safe-haven assetsand portfolio diversifiers—have losttheir appeal while the opportunity costof holding gold has fallen significantly.Coupled with its negative correlation toequity and bond markets, it is unsurprisingthat a growing number of investors areturning to gold.

According to David Coombs, head of multi-asset investments at Rathbone InvestmentManagement, gold “has a place in aportfolio now more than at any other pointsince the 1970s”.

The strong demand for the asset class hasbeen supported by its dual nature as bothan investment and a luxury good, saysJuan Carlos Artigas, head of research atthe World Gold Council.

He explains that consumer demand isprocyclical, meaning it is positively linkedto the economic cycle. The investmentside, on the other hand, is countercyclical.As a result of these opposing forces, goldremains in demand during both times ofexpansion and contraction in the economy.Looking ahead, Mr Artigas believes that“the combination of elevated risk and lowopportunity cost will continue to supportinvestment demand for gold”.

In fact, research by the World Gold Councilshows that adding a 2-10% allocationto gold within a well-diversified portfoliocan significantly enhance long-termrisk-adjusted returns.3 The decision asto how much to allocate within this rangeshould be based on the risk profile of anindividual portfolio.

The general rule of thumb is that theriskier the portfolio, the more gold itshould include as a counterbalance andsafeguard. Additionally, in today’s ultra-lowinterest-rate environment, gold can act asa substitute to fixed income, which could

mean increasing allocations above the 10% threshold.

For investors wishing to add gold to their portfolios there are a variety of options, including physical gold bars and coins, vaulted gold, Internet Investment Gold (IIG), derivatives and gold-mining stocks.

Increasingly, investors are turning to gold-backed exchange-traded funds (ETFs)— a liquid option for tracking the price of gold without physically buying it. In the first three quarters of 2020, gold-backed ETFs recorded global net inflows of US$55.7bn.4

The choice depends on an investor’s objective, time horizon and personal preferences.

The wide variety of vehicles to invest in gold and its multiple advantages mean the asset class suits a broad selection of investor objectives and can be a smart investment in all market conditions.

Visit goldhub.com/gold-for-individuals to learn more about the case for investing in gold

1 According to the World Gold Council’s Gold mid-year outlook 2020

2 In US dollar terms3 The relevance of gold as a strategic asset,

World Gold Council4 Global gold-backed ETF flows data,

World Gold Council

ADVERTISEMENT

Setting the bar - the case for investing in gold

The Economist November 14th 2020 3

In march 1868 a prospectus appeared for a new kind of money-market scheme. The Foreign & Colonial Government Trust

would invest £1m ($5m at the time) in a selection of bonds. For £85an investor could buy one of 11,765 certificates giving an equalshare. The trust promised a 7% yield. Its aim was to give “the inves-tor of moderate means the same advantages as the large capitalistin diminishing the risk of investing…by spreading the investmentover a number of different stocks.” The modern asset-manage-ment industry was born.

A week later The Economist ran a leading article broadly wel-coming the new trust. But—setting the tone for 150 years of finan-cial punditry—it quibbled about the selected bonds. A chunk wasallocated to Turkey and Egypt, countries that “will go on borrow-ing as long as they can, and when they cease to borrow, they willalso cease to pay interest.” Fears were expressed that Europe wasdisintegrating. “In lending to Italy, you lend to an inchoate state;and in lending to Austria, you lend to a ‘dishevelled’ state; in boththere is danger.”

The trust was the brainchild of Philip Rose, a lawyer and finan-cial adviser to Benjamin Disraeli. His idea of a pooled investmentfund for the middle class caught on. In1873 Robert Fleming, a Dun-dee-based businessman, started his own investment trust, theFirst Scottish, modelled on Rose’s fund but with a bolder remit. Itwas largely invested in mortgage bonds of railroads listed in NewYork. The holdings were in dollars, not sterling. And whereasRose’s trust was a buy-and-hold vehicle, the trustees of the FirstScottish reserved the right to add or drop securities as they saw fit.

Rose’s trust survives to this day, but asset management is now afar bigger business. Over $100trn-worth of assets is held in pooledinvestments managed by professionals who charge fees. The in-dustry is central to capitalism. Asset managers support jobs andgrowth by directing capital to businesses they judge to have thebest prospects. The returns help ordinary savers to reach their fi-nancial goals—retirement, education and so on. So asset manage-ment also has a crucial social role, acting as guardian of savingsand steward of firms those savings are entrusted to.

It is a business unlike any other. Managers charge a fixed fee onthe assets they manage, but customers ultimately bear the fullcosts of investments that sour. Profit margins in asset manage-ment are high by the standards of other industries. For all the talkof pressure on fees, typical operating margins are well over 30%.Yet despite recent consolidation, asset management is a fragment-ed industry, with no obvious exploitation of market power by a fewlarge firms and plenty of new entrants.

In many industries firms avoid price competition by offering aproduct distinct from their rivals—or, at least, that appears dis-tinctive. Breakfast cereal is mostly grain and sugar, but makers of-fer a proliferation of branded cereals, with subtle variations on atheme. Asset management is not so different. Firms compete inmarketing, in dreaming up new products and, above all, on theirskill in selecting securities that will rise in value.

The industry has not performed well. Ever since a landmark pa-per by Michael Jensen in 1968, countless studies have shown thatmanagers of equity mutual funds have failed to beat the market in-dex. Arithmetic is against them. It is as impossible for all investorsto have an above-average return as for everyone to be of above-

The money doctors

Special report

The asset-management industry is at last sorting the quacksfrom the true specialists, argues John O’Sullivan

Asset management

1

4 Special report Asset management The Economist November 14th 2020

2 average height or intelligence. In any year,some will do better than the index andsome worse. But evidence of sustained out-performance is vanishingly rare. Where itexists, it suggests that bad performers staybad. It is hard to find a positive link be-tween high fees and performance. Quite theopposite: one study found that the worst-performing funds charge the most.

Why do investors put up with this? Oneexplanation is that investment funds aremore complex than breakfast cereals. Atbest they are an “experience good” whosequality can be judged only once consumed.But they are also like college education ormedical practice: “credence goods” thatbuyers find hard to judge immediately.Even well-informed investors find it trickyto distinguish a good stockpicker from alucky one. Savers are keen to invest in the latest “hot” funds. Butstudies by Erik Sirri and Peter Tufano in the 1990s show that, oncefund managers have gathered assets, those assets tend to be sticky.They are lost only slowly through bad performance.

Firms have a fiduciary duty to act in the best interest of custom-ers. Securities regulators (eg, the Financial Conduct Authority(fca) in Britain and the Securities and Exchange Commission (sec)in America) oversee asset managers. Unlike banks, which borrowfrom depositors and markets, asset managers are unleveraged andso not subject to intensive rules. The assets belong to beneficial in-vestors; they are not held on a firm’s balance-sheet. The thrust ofregulation is consumer protection from fraud and conflicts of in-terest. It does not prescribe investment strategies or fees. An in-vestigation by the fca in 2016 found that investors make ill-in-formed choices, partly because charges are unclear. The problemof poor decision-making is most acute for retail investors. Buteven some institutional investors, notably those in charge of smallpension schemes, are not very savvy. Around 30% of pensionfunds responding to a survey by the fca required no qualificationsor experience for pension trustees. Investors are a long way fromthe all-knowing paragons of textbook finance theory.

Medical mannersA paper in 2015 by Nicola Gennaioli, Andrei Shleifer and RobertVishny argued that fund managers act as “Money Doctors”. Mostpeople have little idea how to invest, just as they have little ideahow to treat health problems. A lot of advice doctors give is genericand self-serving, but patients still value it. The money doctors arein the same hand-holding business. Their job is to give people theconfidence to take on investment risk.

In asset management, as in medicine, manner and confidenceare as important as efficacy. “Just as many patients trust their doc-tor, and do not want to go to a random doctor even if equally qual-ified, investors trust their financial advisers and managers,” sayMr Shleifer and his co-authors. This may explain why investorsstick with mutual-fund managers even inthe face of only so-so performance. As longas asset prices go up, a rising tide lifts mostboats in the asset-management industry—including a lot of leaky vessels.

But the seas are getting rougher. Overthe past decade, investors have placedmore capital with low-fee “passive” funds.These funds invest in publicly listed stocksor bonds that are liquid—that is, easy tobuy or sell. The most popular are “index”

funds, run by computers, that track bench-mark stock and bond indices. The indus-try’s big winners have been indexinggiants whose scale keeps costs down andfees low. The two largest, BlackRock andVanguard, had combined assets undermanagement of $13.5trn by the end of 2019.The losers were active managers that try topick the best stocks.

High fees have not disappeared. Theboom in passive investing has spawned itsantithesis: niche firms, run by humans, inthinly traded assets charging high fees. Agrowing share of assets allocated by bigpension funds, endowments and sover-eign-wealth funds is going into privatelytraded assets such as private equity, prop-erty, infrastructure and venture capital.What has spurred this shift is a desperate

search for higher returns. The management of private assets is anindustry for boutiques rather than behemoths. But it has its ownbig names. A quartet of Wall Street firms—Apollo, Blackstone, Car-lyle and kkr—have captured much of the growth in assets allocat-ed to private markets.

The shake-up in asset management owes a lot to macroeco-nomics. The investors who snapped up certificates in Rose’s trustwere dissatisfied with 2% interest in the money markets. Today in-vestors would sell their grandmothers for such a yield. Interestrates in parts of the rich world are negative. In Germany and Swit-zerland, government-bond yields are below zero across the curve,from overnight to 30 years. Inflation is absent, so ultra-low inter-est rates are likely to persist. The expected returns on other as-sets—the yields on corporate bonds, the earnings yields on equi-ties, the rental yield on commercial property—have accordinglybeen pulled down. The value of assets in general has been raised.

The steady decline of long-term rates is a nightmare for pen-sion funds, because it increases the present value of future pen-sion promises. Industry bigwigs often blame the Federal Reserveand other central banks. But interest rates have been falling steadi-ly since the 1980s. There are deeper forces at work. The real rate ofreturn is in theory decided by the balance of supply and demandfor savings. The balance has shifted, creating a bonanza for assetmanagers, whose fees are based on asset values.

There are competing explanations for the savings glut. Demo-graphy is one: people are living longer, but average working life hasnot changed much. More money must be salted away to pay for re-tirement, with much of the saving taking place in the years of peakearnings in middle age. A bulge in the size of the middle-age cohorthas pushed the supply of savings up. Another factor is the growthof China and other high-saving emerging markets. At the sametime, the demand for savings has fallen. When Robert Fleming setup his investment trust, enterprises like railways were capital-in-tensive. Today the value of firms lies more in ideas than in fixedcapital. Big companies are self-financing. Small ones need lesscapital to start and grow. The upshot is that more money is chasingfewer opportunities. Investors are responding by trying to keepfund-management costs down and putting more money into priv-ate markets in hopes of higher returns than in public markets. Thisresponse is reshaping the asset-management business.

This special report will consider the outlook for the industryand ask what it means for the economy, for the stewardship offirms, for capital allocation and for savers who place their trust inthe money doctors. It will examine whether China’s untappedmarket can be a source of renewed growth. A good place to start iswith the forces shaping the industry’s elite. 7

Passive aggressionUnited States, fund flows, $bn

Source: Morningstar *To September

800

600

400

200

0

-200

-400

20*152009

Active800

600

400

200

0

-200

-400

20*152009

Passive

In asset manage-ment, as in medi-cine, manner andconfidence are as important asefficacy

The Economist November 14th 2020 Special report Asset management 5

1

The story of a quiet revolution in asset management beginswith Jack Bogle. Actually, it starts in 1974 when Paul Samuelson,

an economist and Nobel prizewinner, published an article in theJournal of Portfolio Management arguing that the bulk of mutual-fund managers should go out of business. Most failed to beat themarket average and those that did could not be relied upon to re-peat the trick. An archetype was required. Someone should set up alow-cost, low-churn fund that would do nothing more than holdthe constituents of the s&p 500. Mr Bogle decided that Vanguard,the mutual-fund group he founded in 1975, should take up thechallenge. His index fund was denounced on Wall Street as un-American. It received only a trickle of inflows. But by the time ofBogle’s death last year, Vanguard was one of the world’s biggest as-set managers, largely on the strength of its index funds.

An investor can now buy exposure to the market return (beta,

as it is known) for a few basis points. Indeed, “beta is becomingfree” is an article of faith among industry bigwigs. Technology al-lows access to stockmarkets at vanishingly low cost. BlackRockand State Street Global Advisors, the other firms of a leading trium-virate, owe their growing heft to index (or “passive”) investing.These three are the industry’s big winners; everyone else is “fight-ing for scraps”, as the boss of a midsized asset manager puts it.

These firms benefit from a virtuous circle, in which lower costsmean lower fees, more inflows and yet lower costs. Their domi-nance is only the most salient sign of consolidation in the asset-management industry. The biggest firms are getting bigger. A glo-bal elite has emerged of firms that each manage more than a tril-lion dollars in assets. Unsurprisingly the idea has taken hold thatsize is a strategic advantage. If you are not a niche player in an in-dustry, you had better be a scale one, says business-school wis-dom. No one wants to be stuck in the middle.

Bigger is not always better in asset management. A point ar-rives when size becomes a spoiler of performance. The portfoliomanager may lose focus. The size of the fund begins to push uptrading costs, notably in illiquid assets in which the buying andselling of large tranches tends to move prices adversely. But assetmanagers benefit from operational gearing. As the value of man-aged assets goes up, profits rise even faster. Fees are a fixed per-centage of assets under management: the bigger the fund, thehigher the revenues. But costs—mostly the wages of research an-

Passive attack

How index investing is reshaping the asset-management industry

Index funds

Double trouble

The trouble with delegating choices about what to invest in

Someone wise once said that all theproblems of capitalism are agency

problems. Agency costs arise whensomebody (the principal) delegates a taskto somebody else (the agent) and theirinterests are at odds. In the textbookexample, the principal is a manager, theagents are employees. It is in the manag-er’s interest that the agent works hard.The more effort each worker puts in, thehigher the firm’s output and the greaterits profits. But the employer cannotgauge the true effort of the workers,especially if the results are a team effort.Each worker has an incentive to shirk.

Asset management has a doubleagency problem. The first lies with theseparation of ownership and control inlarge public companies. Shareholders arethe principals, who delegate running thefirm to managers. Shareholders careabout returns on their investment, butmanagers have different goals. They mayvalue perks and prestige—a plush office,a company jet, a high-profile mergerdeal—more than profits. Running a bigcompany is a complex task. It is hard tobe sure if the bosses are making a goodfist of it. No individual shareholder has abig enough stake to make the effort ofmonitoring worthwhile.

Mechanisms have emerged to limit

such agency costs. A classic paper pub-lished in 1976 by Michael Jensen and Wil-liam Meckling argued that loading a publicfirm with debt was a useful device to stopmanagers frittering away shareholders’cash. Bosses feel greater pressure to cutcosts and raise revenues if they must meetregular interest payments. The leveragedbuy-out boom of the 1980s was predicatedon the idea of debt as a tool to focus theminds of managers. Private-equity firmsemploy this trick.

Another way to limit this sort of agencyproblem is to give managers the right to

buy discounted shares once their pricereaches a predetermined target. Stockoptions, it is argued, make managers act asif they were shareholders. Yet this devicejust creates a different sort of agency prob-lem. Traders of shares use quarterly earn-ings as a rough-and-ready guide to howwell a company is run. Managers knowthis. So they eschew investment projectsthat are in the long-run interests of share-holders in order to boost short-term pro-fits, lifting the share price and the value oftheir stock options.

The second agency problem arises fromconflicts of interest between asset manag-ers and those on whose behalf they invest.It is in the interests of investors that assetmanagers seek out the best long-termreturns. But fund-management firms arepaid a fixed percentage of the value ofassets. To attract capital into their funds,they may opt for faddish stocks that dowell in the short term, but whose short-comings become apparent only in the longrun. They may shun unfashionable stocks,even if they believe they are good long-term investments. Once an asset managerhas captured funds to manage, they tend tostay. A good recent run will lure in morefunds. This agency problem has no easysolution—but investors could be quickerto ask searching questions.

6 Special report Asset management The Economist November 14th 2020

2

1

alysts, office space, marketing and soon—do not rise in lock-step.

Scale is both a friend and an enemy, saysManny Roman, boss of pimco, a giantfixed-income manager. If you have a lot ofexposure to bad positions, it is hard to es-cape. But buying at scale can also meankeener prices—on new corporate-bond is-sues or from a seller looking to get out of abig position. There are other advantages.Research capabilities and technologicalmuscle can be spread over a large numberof similar markets and securities.

Industry types distinguish betweenmanufacturing (managing assets) and dis-tribution (selling funds to retail investors).Fidelity, a family-owned Boston-basedgiant, does both. Scale matters in retail dis-tribution, where brand is important. In in-dexing there is also a real scale advantage,says Cyrus Taraporevala, of State Street Glo-bal Advisors. Index funds hold stocks inproportion to their market capitalisa-tion—by the value weighting in the index.Trading costs are tiny. The fund buys astock when it qualifies for the index (as ahandful of new ones do each year) and sellsany that drop out. In between it simplyholds them. The market for large-capital-isation stocks is liquid enough to absorbsales or purchases whenever index fundsneed to match inflows or redemptions. Themarginal cost of running an ever-biggerfund is trivial: it just requires a bit morecomputing power. There are no expensive portfolio managers.

Beta is not the only passive strategy. Trillions of dollars are alsoinvested in “factor-based” or “smart-beta” strategies. These rely onpowerful computers to sort stocks by characteristics, such as lowprice-to-book (“value”) or high profitability (“quality”), that havebeen shown to beat market averages in the long run. The churn inthese portfolios is higher than for index shares. But the analysisand trading are automated. Increasingly bond investing is goingpassive, too. The value of bonds held in exchange-traded funds (oretfs, baskets of securities listed on an exchange like companyshares) passed $1trn last year. The largest bond etfs track an index,such as the Bloomberg-Barclays Aggregate, and are often more liq-uid than the individual bonds they contain. Factor-based bondetfs are also growing in popularity.

The growth of the big three passive managers is part of a trendtowards greater industry concentration. Of assets managed world-wide by the industry’s leading 500 firms,the proportion managed by the top 20 firmshas risen from 37% in 2005 to 42% now. Butthe search for scale economies to offsetpressure on fees is not the only factor be-hind this. The bigger fund-managementgroups increasingly look to offer expertiseacross asset classes, from large-cap equi-ties to private assets. A lot of asset manag-ers, including BlackRock, are betting on thebenefits of scope as much as scale.

The heads of big pension funds nowwant three things, says David Hunt, boss ofpgim, the asset-management arm of Pru-dential Financial, an insurance giant. They

want to understand their whole portfolioof assets (to get a sense of how diversified itis); to push fees down by concentratingtheir buying power; and to have a long-term relationship with asset managers.That means cutting the number they use.So managers offering the full spectrum ofproducts (stocks, bonds, property, privateassets and so on) will have an edge. Thistrend towards fewer managers is happen-ing on the retail side as well. The prolifera-tion of funds sows confusion. There is toomuch choice. So the retail gatekeepers—the brokerages, online platforms and mo-bile apps—are starting to cut back thenumber of funds they carry.

If index funds and etfs are winning in-vestors, who is losing them? One way to in-fer this is the spread of fees. The more liq-uid the assets, the greater the fee pressure.The managers of so-called “core” activefunds, generally large-company shareslisted in rich-world stockmarkets, haveseen fees fall towards the indexers’ level. Itis hard to categorise but industry wisdomis that “closet indexers” are gradually beingwinnowed out. These funds are ostensibly“active” (ie, they are stockpickers) but theymanage their portfolios to ensure thattheir performance does not deviate muchfrom the index.

For all the talk about polarisation, thechange in asset management is not thatdramatic. The squeezed middle—firms in

the top 250 but outside the top 20—have lost around five percent-age points of market share since 2005. But they retain a 50% share.Inflows follow performance, but outflows do not. Investors are re-markably conservative. For individuals, a move from one mutualfund to another often triggers capital-gains tax. Institutional in-vestors suffer from inertia, or perhaps from a failure of nerve.What if your underperforming active managers suddenly improveafter you drop them? As a consequence, says an executive at a bigasset manager, the industry’s market structure “forms like stalac-tites and stalagmites—drip by drip”.

In any other industry, mergers would speed up the sorting intoscale and niche. There has been a spate of tie-ups in recent years:Standard Life and Aberdeen Asset Management in Scotland; themarriage of Janus, an American outfit, with Henderson, a Britishone; Invesco and Oppenheimer; and Franklin Templeton and LeggMason. None has been a roaring success. Perhaps that is not sur-

prising. In an industry where human capi-tal plays a big role, it is not easy to find costsavings. People are not as fungible as of-fices. Integrating it systems is a headache.Corporate-culture clashes are common.There is a risk of losing clients if things gowrong—and even if they don’t. New clientswill steer clear while a merger is pending.

Despite the pitfalls, the merger wavecontinues. Morgan Stanley recently ac-quired Eaton Vance to fold into its asset-management business. Nelson Peltz, anactivist investor, has taken biggish stakesin Janus-Henderson and Invesco with aview to pursuing mergers. The industry

The trillion-dollar clubGlobal assets under management, 2019, $trnAsset managers with more than $1trn under management

Sources: Thinking Ahead Institute; Pensions & Investments 500

86420

AegonNatixis Investment ManagersNuveenAXAWells FargoMorgan StanleyWellington ManagementT. Rowe PriceInvescoNorthern TrustBNP Paribas

UBSPrudential FinancialLegal & GeneralAmundi

Goldman Sachs

BNY MellonCapital Group

JPMorgan ChaseAllianz Group

Fidelity InvestmentsState Street Global Advisors

AegonNatixis Investment ManagersNuveenAXAWells FargoMorgan StanleyWellington ManagementT. Rowe PriceInvescoNorthern TrustBNP Paribas

UBSPrudential FinancialLegal & GeneralAmundi

Goldman SachsPIMCOPIMCOBNY MellonCapital Group

JPMorgan ChaseAllianz Group

Fidelity InvestmentsState Street Global Advisors

VanguardBlackRock

The sticky middleTop 500 managers, assets under management% of total

Sources: Thinking Ahead Institute; Pensions & Investments 500

2019

2010

100806040200

251-50021-250Top 20managers

The Economist November 14th 2020 Special report Asset management 7

2

1

seems set for a shake-up. A bold response for a midsized firmwould be to downsize: strip back to the core; cut prices; offer fewerproducts; and focus on those in which one has a chance to be dis-tinctive. In a different industry Steve Jobs followed something likethis strategy when he returned to Apple in 1996. Apple was fightingfor its survival, however. Things are not that desperate in assetmanagement. The fee pressure on new business is intense, but alot of existing customers will stay put. A mediocre firm with a bigback-book can stay alive for quite a while.

Perhaps that explains all the talk of “zombie” asset managers—firms from which life is slowly draining as their initially fat mar-gins grow ever thinner. Is there another means of escape? The vir-tue of passive funds is their low cost; they buy stocks in the indexor whatever the quantitative screen prescribes. There is no need tothink deeply about the companies behind the securities. But thatvirtue is also a vice. Investors increasingly care about what compa-nies do. And many active asset managers hope there might be a liv-ing from that. 7

Robert fleming has a claim to be a pioneer of active asset man-agement. His First Scottish investment trust pledged to invest

mostly in American securities, with choices informed by on-the-ground research. Fleming saw that shareholders needed to act asstewards in the governance of the businesses that they part-owned. So once the fund was launched, in 1873, he sailed directly toAmerica. It was the first of many fact-finding trips across the At-lantic over the next 50 years, according to Nigel Edward More-croft’s book, “The Origins of Asset Management”.

The art of asset management is capital allocation. It is easy tomiss this amid confusing talk of alpha and beta, active and passive,private and public markets. For investors of Fleming’s kind thework of finding the best investment opportunities and engagingwith business was inseparable. Walter Bagehot believed the rapidgrowth of the mid-Victorian economy owed much to the efficientchannelling of capital. In England, he wrote, “Capital runs assurely and instantly where it is most wanted, and where there ismost to be made of it, as water runs to find its level.”

Most of today’s financiers will say they are engaged in capitalallocation. There are many dedicated stockpickers who take thissocial role seriously and see it as a vocation. But for the most partties between suppliers and users of capital have become more ten-uous. An index fund does not screen the best stocks from theworst. It holds whatever is in the index. Other passive strategies se-lect stocks or bonds based on narrow financial characteristics. Thenature of the entity behind the securities and how well the peoplerunning it perform their duties are incidental. Does such disen-gagement matter? Some evidence suggests that it might.

To understand why, it helps to distinguish two functions ofcapital allocation. The first is to direct savings to their best use.This involves finding new opportunities, comparing their meritsand deciding which should receive capital and on what terms.John Kay, a business economist, calls this role “search”. The sec-ond role is stewardship, ensuring that the best use is made of thecapital stock that is the product of past investment.

Both matter. Search matters in the early stages of economic de-velopment, when ideas are abundant, businesses are capital-in-tensive and savings are scarce. The late 19th century was such atime. In New York, Fleming’s hunting-ground, most bonds werefor railroad companies. In Britain, brewers, distillers and minerswere also thirsty for capital. In 1886 Guinness, a century-old beercompany, raised £6m in London. A few years later shares in theBroken Hill Proprietary Mining Company (bhp), which began trad-ing in Australia, were owned and exchanged in London.

When search works well and capital runs to “where there ismost to be made of it”, relevant information is quickly reflected inasset prices. The case for index investing rests on the idea that thestockmarket is, in this sense, broadly efficient. Prices are set by in-formed buying and selling by active and engaged investors. But asmore money goes to index funds, the market might become less ef-ficient. Whether it does rests in theory on the quality of investorsbeing displaced. If they are “noisy” active managers, who buy andsell on gut feel, expect more efficiency, not less. If they are farsight-ed stockpickers, the quality of market prices might suffer.

Some empirical studies hint at a problem. A paper in 2011by Jef-frey Wurgler finds that whether a share is part of an index influ-ences its price. Shares that are included in an index go up in valuerelative to similar shares that are not. When shares drop out of anindex, they tend to fall disproportionately. And once in the index, ashare’s price moves more in sympathy with others that are also in-cluded. Another paper, by researchers at the University of Utah,finds that index inclusion leads to a higher correlation with indexprices. Inclusion also spurs a reduction in “information produc-tion”: fewer requests for company filings, fewer searches on Goo-gle, and fewer research reports from brokerages. Even so, the au-thors conclude that more intensive effort by the remaining activeinvestors may counter any adverse effects.

Share prices may no longer matter so much for how capital isallocated. Most big companies are nowadays self-financing. Guin-ness (now Diageo) and bhp are still among the leading stocks list-ed in London. Like a lot of businesses, they generate enough cashto cover their investment needs. When a company taps the capital

Stewards’ inquiry

If investors buy index funds, who watches the companies?

Capital allocation

8 Special report Asset management The Economist November 14th 2020

2

1

markets, it is usually to tidy up its capital structure (lengtheningthe maturity of debt, say, or buying back shares) or to build cash re-serves in times of stress, such as now. It is management teams thatnow do most to allocate capital.

This makes stewardship more important. When it works, in-vestors engage with a firm’s managers to verify that the business iswell run. The problem is that the incentives to be good stewardsare weak. An asset manager that bears the cost of stewardship willcapture only a small share of the benefits. A paper in 2017 by LucianBebchuk, Alma Cohen and Scott Hirst, a trio of law professors,found that asset managers mostly avoid making shareholder pro-posals, nominating directors or conducting proxy contests to voteout managers. Index funds are especially at fault. Their businessmodel is to avoid the costs of company research and deep engage-ment. The law professors reckoned that the big three asset manag-ers devoted less than one person-workday a year to stewardship.

Bosses and agentsThe growth of index investing is likely to have raised the agencycosts of asset management. Bosses may be either too timid or toolax, depending on the circumstances, to act in the best interest ofshareholders. They may shun profitable projects because it is hardto persuade disengaged owners that the rewards justify the risks.Or they may be careless with shareholders’ money. Some researchfinds passive ownership aggravates these problems. A paper byPhilippe Aghion, John Van Reenen and Luigi Zingales finds thatcompanies with a larger share of active owners are more innova-tive. They find no such link between index ownership and innova-tion. Other research suggests that indexing makes it more likelythat managers will pursue ill-judged mergers.

Investors now care more about what they are investing in. Thegrowth of environmental, social and governance (esg) investing,which selects companies on how they score on such matters, re-flects this. Some asset managers suspect esg is a fad, but many donot. An esg score will soon be a requirement, says one. It will even-tually be as important to a firm as its credit rating, says another.“Sustainability” is increasingly seen as a risk factor for long-termperformance. “If your firm is more sustainable, you will get thebest people, customers and regulators,” says Christian Sinding,boss of eqt, a Swedish private-equity firm. These are the firms youwill want to own in ten years’ time, he adds.

esg looks like a lifeline for active fund managers. “Active has abig advantage over passive when it comes to esg,” says Ashish Bhu-tani, chief executive of Lazard Asset Management. Passive fundscan only tick boxes. Some environmental matters, such as a firm’scarbon footprint, can be quantified, but others cannot. The socialcriterion requires qualitative judgment about a firm’s hiring prac-tices, its efforts to reduce inequality or the broader impact of in-vestment projects. Governance is somewhere in between. Goodanalysts have a deep knowledge of companies and their manage-ment. They know things that are hard to quantify and cannot befound on a financial statement or a boilerplate disclosure.

The challenge for active managers is to show that sifting firmsby esg or any other qualitative criteria will make for better port-folios that justify a fee premium over an index fund. A greater fo-cus on the long term would be welcome for both companies andtheir shareholders. It is a stretch to claim that active managers inthe main are great stewards. They are not. Most are (or at least havebeen) either transient owners, trading in and out of faddish stocks,or closet index-huggers.

The best-performing stockpickers are both patient and strongin their convictions. They hold stocks for long periods in a concen-trated portfolio. It is in part a quest for these traits—commitmentand patience—that has persuaded a lot of investors to flock intoprivate equity and other closely held assets. 7

The notion of the “first 100 days” as critical for a new adminis-tration goes back at least as far as Franklin Roosevelt. He first

used the term in a radio address in 1933, shortly after becomingAmerica’s 32nd president. Private equity has its own version. The100-day plan sets priorities for a bought-out business. The newowner looks for “quick wins”—standard remedies for the mostglaring operating problems. Fixes may include updating comput-ing systems, slimming the array of products or closing loss-mak-ing divisions. The plan also prescribes the easiest ways to raisecash to pay off hefty debts used to acquire the firm.

The promise of private asset management (buy-out funds, priv-ate debt, venture capital and so on) is that endurance will be re-warded. Investors in private equity must lock up their money foryears; they cannot easily sell out. Big stakes in private assets tradequite rarely. But there is an upside. Private managers are able to ekeout better returns than would be possible if their assets weretraded each day. Investors in the public markets like predictableshort-term profits and strategic certainty. They are too skittish toinvest in a corporate turnaround. If the boss of a listed companyunveiled a 100-day plan, it might spark a run on the shares.

That is the sales pitch—and plenty of investors buy it. Desper-ate for returns, pension funds have piled into private markets inrecent years. A survey by Morgan Stanley finds that 64% of institu-tional investors plan to increase their allocation to private equitythis year and only 5% to reduce it—a net balance of 59%. The bal-

Taking back control

Privates are what listed assets are not: niche, illiquid and fee-rich

Private markets

ance for venture capital was 39%; for private debt, 33%. For listedassets, the balance was negative. Private markets are at the nicheend of asset management. Only around $4trn or so is invested inprivate equity, about half of total assets under BlackRock’s man-agement alone. But private assets are where the fees are. The ques-tion is whether performance and fees can be sustained.

Of several influences behind the growing interest in private as-sets, three stand out. The first is the example of successful pio-neers. In the 1980s and 1990s the endowment funds of a handful ofbig American universities shifted much of their invested fundsinto private assets. The largest retirement schemes in Canada, ledby the Ontario Teachers’ Pension Plan (otpp), have a similar ap-proach: run the plan like a business, pay for good in-house fundmanagers and invest in lots of private assets. This model has beencopied by sovereign-wealth funds in other parts of the world. Theintellectual leader of such investing was David Swensen, at Yale.He argued that, since life-insurance funds, endowments andsovereign-wealth funds have obligations stretching far into the fu-ture, they can afford to take a long-term view. It is hard to be re-warded for diligence in listed stocks. Private markets, in contrast,are inefficient. Data are hard to come by, assets are complex andtrickier to appraise and waiting for opportunities to pay off re-quires patience. But the right homework brings rewards.

A second factor is disenchantment with public markets. Theage-old agency problem means that invest-ing in projects with an uncertain payoff canbe a career risk for managers of a listedbusiness. It is easier to explain corporatestrategy to a few committed backers than tolots of shareholders. Founders of technol-ogy firms who are used to getting their ownway often struggle in the glare of publicmarkets, and so prefer to stay private for aslong as they can. And the costs and hassleassociated with being a public companyhave grown. The Sarbanes-Oxley act,passed in 2002 in the wake of a slew of cor-porate scandals in America, introducedtougher disclosure and financial-reportingrequirements for public companies. Theregulatory requirements on private com-panies are significantly lighter. And theNational Securities Markets ImprovementAct of 1996 made it easier to set up pools ofprivate investors. 

A third factor is changes to banking. Thegrowth of private debt is, in large part, a re-sponse to the retreat of banks from lendingto midsized businesses and their private-equity sponsors. Asset managers, starvedof yield in the government-bond markets,are happy to fill the void. The bigger firmswill even take souring loans off the booksof banks looking to clean up their balance-sheets. In 2017 pimco, the fixed-incomegiant, led a buy-out of €17.7bn ($20bn) ofloans from UniCredit, an Italian bank.There are likely to be more such deals inEurope. China is another potential hunt-ing-ground for distressed debt.

One of the fastest-growing areas of priv-ate credit is direct lending to companieswhich cannot (because they are too small)or will not (for reasons of confidentiality)tap the public markets. A private bond

might be sold to only a handful of lenders, or even to just one. Bor-rowers may feel that they ought to know who their creditors are be-cause they might have to renegotiate with them. That is the casefor private-equity firms. Specialist private-credit funds also oftenprefer to be the sole financiers of a private-equity buy-out if theylike the terms and judge the bought-out firm to be a good risk. Theymight even be the credit division of a buy-out outfit that has lostthe bidding war for the borrowing company.

Private livesDo the results justify the hype? Private equity uses a lot of debt tomake its acquisitions. One suspicion is that allocation to privateequity is simply a way for pension funds to get around constraintson borrowing to enhance returns. But the buy-out industry has adecent story to tell on capital allocation. The academic literaturefinds that private-equity and venture-capital funds mostly add op-erational nous to businesses. They inspire better managementhabits than in entrepreneur- or family-owned firms. Buy-outs leadto modest net job losses but big increases in job creation and de-struction. They promote efficiency by taking capital off “sunset”firms and putting it into more promising “sunrise” firms.

And returns? Asset managers are adept at presenting statisticsin the most favourable light. Dud mutual funds are often quietlymerged or folded. Managers can then claim that most of their

The Economist November 14th 2020 Special report Asset management 9

2

1

Frogs and princes

More and more capital is chasing fewer and fewer ideas

Who are the heirs of Robert Flem-ing, the 19th-century Scot who saw

that America was the coming place to putrisk capital? The venture capitalists ofSilicon Valley have the best claim. Thebusinesses that loom largest in publicequity markets—Amazon, Apple, Face-book, Google, Tesla and the rest—werenurtured by vcs. Venture-backed com-panies account for around a fifth of themarket capitalisation of public com-panies in America and almost half theirresearch spending. The funds that un-earth such gems stand to make pots ofmoney. vcs have on average (an impor-tant qualifier) beaten the public marketnet of fees over the long run.

Most firms that receive vc fundingfail. But the winner-takes-all nature oftechnology markets means those thatsucceed often do so extravagantly. The vc

industry is at the frontier of capital allo-cation. The typical investor has to kiss alot of frogs to find a prince (or even adecent-looking frog). The average vc firmscreens 200 targets, but makes only fourinvestments, according to a study in theJournal of Financial Economics. Part of theadded value, say its authors, is to im-prove the governance of startups andkeep a watchful eye on management.

No wonder pension schemes, sover-eign-wealth funds and mutual funds are

competing to write big cheques for Sil-icon Valley’s next generation of stars. Butunlike the railways, brewers, distillersand mines of the Fleming era, today’snew firms have no great need of capital.A young technology firm can rent com-puting power from the cloud, downloadbasic software from the internet and usea range of cheap, outsourced services tohelp it grow. Startups are staying privatefor longer. When they list, it is becausethe founders need to cash out or (as withthe latest rash of tech ipos) when themoney on offer in the public markets issimply too good to turn down. It is not toraise capital for the business.

Very few new firms turn out to beworld-beaters. Good ideas are scarce. Butvc firms that have succeeded in the pastmay have an edge in finding them. Astudy by Morten Sorensen finds thatcompanies funded by more experiencedvcs are more likely to succeed. Andsourcing the best entrepreneurial talentis more important to success than thedevelopment of that talent.

In this sense the best venture-capitalfirms resemble elite universities. Be-cause the brightest turn up at their door,they are able to charge the highest fees.And those fees are mostly for the accredi-tation and the social networks that theinstitution can offer.

10 Special report Asset management The Economist November 14th 2020

2

1

funds beat the market—these being simply the funds that havesurvived the cull of underperformers. The private-equity businessis notorious for selecting metrics that flatter its performance.Nonetheless, over the long haul, the best private-equity funds doreally well. A landmark study led by Steven Kaplan, of the Univer-sity of Chicago, found that venture-capital and buy-out funds, onaverage, beat the s&p 500 index over the long term. The range waswide. Funds in the top quartile did much better than average; thosein the bottom quartile did a lot worse. Pension-fund managers fac-ing big deficits have an incentive to put money into private assetsin the hope that their fund will be one of the winners.

As more capital chases opportunities, the evidence points to di-minishing returns. Mr Kaplan and his colleagues find that returnsin the buy-out industry beat the stockmarket in nearly all years be-fore 2006, but broadly matched the s&p 500 afterwards. Private-equity funds used to buy businesses that were cheaper than listedfirms. But the competition is keener now. The bigger beasts of priv-ate equity are becoming even bigger. They have large fixed costs—all those in-house rainmakers, lawyers, analysts and consultants.With so much capital yet to draw from their pension-fund part-ners, the pressure to do deals that might once have been shunnedhas increased.

Investors need to be cautious. “Focusand selection are very important” in priv-ate markets, says Jo Taylor, ceo of the otpp.His fund is big enough, with C$200bn($150bn) under management, to do its ownbuy-outs. This gives it a big advantage inchoosing good managers as well as deals.In general bigger schemes also have moremuscle in fee negotiations. The surest wayto irritate a private-equity boss is to say thecurse words “two-and-twenty”, which was once a common fee ar-rangement for “alternative” asset managers, meaning a 2% annualfee and 20% of the profits. Private-equity bigwigs claim that suchlarge fees are vanishingly rare. Big clients can usually negotiatelower charges by, for instance, taking a direct stake in an acquiredbusiness (a so-called “co-investment”). A typical management feeis “in the low- to mid-ones plus free co-investments”, says a priv-ate-equity boss. And, he insists, the 20% performance fee is paidonly once returns have cleared a hurdle rate.

Fat fees, outperforming funds, happy clients: from the perspec-tive of asset managers that invest in public equities the buy-outbusiness looks too good to be true. “Hope-and-pray assets,” sneersone. But hope springs eternal in all parts of the asset-managementbusiness. A lot of it now rests on China. 7

A rock and a hard placeMarket capitalisation, January 1st 2014=100

Source: RefinitivDatastream

*Apollo Global Management, Blackstone, Carlyle Group and KKR †Affiliated Managers,AllianceBernstein, Eaton Vance, Franklin Resources, Invesco, Legg Mason and T. Rowe Price

250

200

150

100

50

0

2014 15 16 17 18 19 20

Private-equity firms*

Other asset managers†

BlackRock

Over the longhaul, the bestprivate-equityfunds do really well

Asset management is mostly a rich-world affair. North Amer-ica, Europe, Australia and Japan between them account for

around three-quarters of assets under professional management.The United States is far and away the single most important mar-ket. America sets the tone for capital markets everywhere else. Glo-bal trading starts when New York opens.

Yet just as London gave way to New York after economic su-premacy passed from Britain to America, so it is not hard to imag-ine a future when the global trading day will begin in Shanghai.China already has the world’s second-largest economy. Its heft inglobal finance lags, but it is putting much effort into catching up. Ithas opened its mainland markets to foreign investors in sharesand bonds. It is relaxing regulations to allow foreign asset manag-ers to operate more freely. Asset management is growing faster inAsia than in the West. The industry’s balance of power is shiftinginexorably. Time, size and momentum are on China’s side.

What is not clear is precisely how asset management will devel-op in China. No asset manager can offer a global service unless ithas a footprint in China and across Asia. If you are selling Chineseequity or bond mutual funds to Western investors, you need peo-ple on the ground in China. The same business logic applies to sell-ing global assets to Chinese investors, once outgoing capital con-trols are relaxed. The big prize—and the big unknown—is “local tolocal” ie, selling Chinese mutual funds to Chinese investors. Andthe competition for this prize looks wide open.

China’s financial markets are immature. Much householdwealth is on deposit in banks or tied up in homes. The commonestkinds of pooled investments resemble bank deposits: either mon-ey-market funds or “wealth-management products”, higher-yield-ing alternatives to bank deposits, which have a fixed term of a fewmonths but are often used to finance long-term property projects.Stockmarket trading is dominated by retail investors, who trade di-rectly in individual shares via brokerages. Only around a tenth oflisted shares are owned through domestic mutual funds.

China’s stockmarket has a very high churn rate. But the marketis becoming more institutionalised. Mostly this reflects buying byforeigners, following the inclusion of a selection of shares andbonds listed on China’s mainland markets in the benchmark indi-ces compiled by msci and Bloomberg Barclays. The hope is thatChina’s domestic market will also come under the stabilising swayof asset managers.

If it does, it is an enticing fee pool. As China gets richer, house-holds are likely to change their mix of wealth: less in bank depositsand wealth-management products (which regulators are keen tokill off for reasons of financial stability); more in traded securities,such as shares and bonds. More of those securities, it is hoped, willbe held in diversified mutual funds, managed by professionals fora fee. Pension funds will mushroom. gdp is likely to continue togrow faster than in rich countries. A bigger economy implies moresavings to be deployed—and more securities to be issued, by bothcompanies and the government.

In short, managed assets will continue to grow faster in China.For active asset managers, it is a dream. Their concern is that feerevenue in America and Europe is diminishing, or at least cannotgrow much further. China offers a new frontier. “These are very big

The Shanghai Open

The future of finance is Chinese. But what will it look like?

China

The Economist November 14th 2020 Special report Asset management 11

2 and liquid markets that are also inefficient,” says the boss of oneEuropean fund. Many of the same conditions are found in otherparts of emerging Asia. A secular fall in inflation in India, the otherAsian giant, has encouraged the well-off out of inflation hedgeslike gold and property into the stockmarket.

China appears to want to graduate from a rickety system inwhich state-backed banks decide who gets capital. Its regulatorsplan to establish a professional class of asset allocators. They seeforeign involvement as a means to this goal. Since 2018 foreignfirms have been allowed to take majority stakes in asset-manage-ment joint ventures with domestic banks. From April this year,they have been permitted to set up wholly owned subsidiaries inChina. Within days of this rule change, JPMorgan Asset Management paid $1bn tobuy out its minority partner. Others aremoving to take advantage of China’s open-ing up. Still, most Chinese asset managershave foreign partners. The foreigners bringwith them expertise in building portfolios,trading, research, investment process, re-cord-keeping and the management ofhighly skilled teams. Their partners bringcustomers and local know-how.

Everyone thinks that China will be a bigdeal. But industry bosses are not confidentabout how things will shake out in practice.There are broadly three areas of uncertain-ty. The first is how to acquire customers.Some of the world’s biggest asset managersbecame that way partly from having a cap-tive market. They are often offshoots of in-

surance companies, retail banks or investment banks. A foreignasset manager with no brand in China needs to find another way tobuild the business. For some a tie-up with a local bank is a good fit.Amundi is an offshoot of two European banks, Crédit Agricole andSociété Générale, from whose customer base they have built a for-midable market share in France. It has a joint venture with Agricul-tural Bank of China and another with Bank of China. These arelenders with hundreds of millions of customers. It also has a jointventure with State Bank of India, the country’s largest commercialbank. From such strongholds, Amundi has accumulated an assetbase of €300bn across Asia.

But banks are not the only money doctors in China. Some rich-world equity funds have emerged out of life-insurance businesses.They essentially sold equity risk under the guise of an insuranceproduct. Something similar might yet happen in China. China Life,for instance, has a sales force of 1.8m. The two tech giants, Alibabaand Tencent, have mobile-payment platforms that are widely usedand trusted. These are potential launching pads for asset-manage-ment businesses.

Very big, ChinaIn 2013 Ant Group, an offshoot of Alibaba, created a fund for its cus-tomers to invest the cash piling up in their Alipay mobile-paymentaccounts. Within a few years it was the world’s largest money-mar-ket fund. Vanguard now has a joint venture with Ant Group to offerinvestment advice. It signed up 200,000 clients in its first 100 days.The choice of distribution channel hinges on whom Chinese in-vestors will ultimately trust. It is not mostly a matter of technology.“People make a distinction between tech platforms and bank net-works,” says Yves Perrier, chief executive of Amundi. “But it is afalse distinction because the way we bank in France is both humanand digital.”

A second uncertainty is how the industry in China will evolve.The bet is that it will become more like America, a market in whichmutual funds have the muscle. But there is no guarantee of this. In-deed, in recent months America’s stockmarket has looked a lot likeChina’s: retail-led, noisy and informed by social-media fads and agambling mentality. China’s market might stay that way. Or themarket for pooled investments might be swiftly captured by indexand other kinds of low-cost products.

A third source of uncertainty is policy in China. It is friendlynow, but might not always be. “With distribution-driven jvs,sometimes you lose control of the factory,” warns one industry big-wig. That is not the only risk. The prospect of selling rich-world se-curities to Chinese investors depends on China allowing capital toflow freely outwards. It has been loth to do this because it would

mean ceding greater control of the yuan tomarket forces. China may balk at furtheropening up. A bigger question lies behindthis. One industry executive puts it bluntly:“How serious is it about allowing people tomake money?”

Perhaps the trade-and-technology warswill make China inhospitable to Americanasset managers. Perhaps Europe has an ad-vantage. If Shanghai is to follow Londonand New York, the yuan must become free-ly convertible. China has to be open. Buteconomic and financial hegemony may beexpressed differently. “Will we make mon-ey? We haven’t a clue,” says the executive.But like many of his peers, he sees China asa low-stakes bet with a potentially largepayoff. “We still need to be there,” he says.“So we are there.” 7

America FirstAssets under management by region, $trn2019

Source: Boston Consulting Group *Excluding Japan

Middle Eastand Africa

Latin America

Offshore

Japan andAustralia

Asia*

Europe

North America

403020100

12 Special report Asset management The Economist November 14th 2020

acknowledgments A list of acknowledgments and sources is included in the online versionof this special report

offer to readers Reprints of this special report are available, with a minimum orderof five copies. For academic institutions the minimum order is 50 and for companies 100.We also offer a customisation service. To order, contact Foster Printing Service:Tel: +1 866 879 9144; email: economist@fosterprinting.com

For information on reusing the articles featured in this special report, or for copyright queries,contact The Economist Rights and Syndication Department: Tel: +44 (0)20 7576 8000;email: rights@economist.com

more special reports Previous special reports can be found atEconomist.com/specialreports

“There are two kinds of forecasters,” said the economist JohnKenneth Galbraith. “Those who don’t know and those who

don’t know they don’t know.” Asset management is a businessbuilt on the notion that the future is somewhat knowable, even ifin large part it is not. So we must look for omens. Today’s “dishev-elled” or “inchoate” borrower should not be expected to pay backits debts tomorrow, as The Economist warned in its editorial ofMarch 28th 1868.

Speculations about the future are also often helpful in organis-ing thoughts about the present. In this spirit, this special reportfinishes with some predictions tied to its main themes. Some areextensions of current trends. Others aremore speculative—concerning, say, atrend that may reverse or one that couldgo in a surprising direction.

The first prediction is the least bold.By 2030 the sorting of the industry into asmall club of giant asset managers and abigger one of niche managers will belargely complete. Already in 2020, index-tracking funds and etfs account for amajority of pooled investment funds inAmerica. In a decade’s time they maymake up the bulk of all stockholdings.Investors will mix beta, the market risk,with exposures picked from a menu ofsmaller specialists which, to survive theindustry’s upheaval, must have a trulydistinctive approach. These remainingfunds might be thematic, based aroundincreased longevity, say, or climatechange. Or they could have a particular investment philosophy.Such specialist funds will be global or regional in scope.

A second prediction is that competition in asset managementwill revolve around products designed for particular needs. Thepresent-day industry is a creature of the baby-boom era. Manyboomers have built up assets in workplace schemes in whichbenefits depend on the size of a pension pot at retirement. Theirneeds are changing. A challenge to which the industry has not re-sponded well is to find ways for people to draw on their retirementsavings without running out of money too quickly, says Mr Tara-porevala, of State Street Global Advisors. Quite so.

Another challenge is to tailor products to millennials. Theirshare of wealth is still small, but it will grow. And their preferencesare different. For baby-boomers a mutual fund was the only way toinvest in equities at a reasonable cost. The technology now existsto buy and sell individual shares at virtually no cost. Low-fee“robo-advisers” mechanically allocate savings to a mix of bondand equity index funds according to preset rules. These advancesappeal to a generation reared on smartphones. Millennials haveless need of the money doctors who tended to the boomers.

A third forecast is that esg will not be the saviour of active assetmanagement. By 2030 it will be too mainstream to be a source ofdifferentiation. There is likely to be a surfeit of choices for inves-tors who want even the most exacting kinds of esg. Despite the in-

creased salience of corporate governance, the big passive fundsmay ultimately choose not to use their vast voting power to influ-ence firms—a fourth prediction. Securities-market regulators willcontinue to push them to vote their shares, to fulfil their fiduciaryduty to investors. But antitrust agencies will increasingly fretabout the latent ability of big funds to soften competition amongfirms they indirectly own. Trustbusting is moving back to the “bigis bad” assumption that governed it before the 1980s. It may provecostly and legally messy for funds to exercise their voting power ina way that satisfies all watchdogs.

Some popular predictions about private markets—that theywill be “democratised”, and fees will come under pressure—willturn out to be wrong (or premature). Private-equity fees do lookout of whack and big pension-fund managers are more inclined tohaggle over costs. Returns on private equity are likely to disap-point. Yet fees for public equity came down because there was acheaper option: buy the index. Private-equity stakes are not astradable as listed shares, so there is no index. So fees will stay high.

Other popular predictions will prove correct. Private debt willgrow in importance. America will slowly lose its lead in venturecapital. The big brand-name vcs of Silicon Valley will retain their

lustre, thanks to their record of creatingbillionaire founders. But more newchampions will emerge elsewhere.

Finally, there is China, where the un-certainty is perhaps greatest. Scepticspoint to China’s record of allowing for-eigners to profit only as long as it takesChinese firms to copy and supplantthem. Asset management is different.Unlike with makers of breakfast cereals,it is hard for consumers to judge the mer-its of an asset manager. It is equally hardfor copycat firms to find out what worksand what doesn’t.

That is not the only reason the foreignmoney doctors will stick around in Chi-na. Rich-world banks are increasinglycontained by national borders. Busi-nesses are less inclined to set up abroad.Offshoring is being replaced by onshor-

ing. Almost by default, capital markets will become the main ave-nue for diversifying risk by geography. If China’s leadership wantsShanghai to be a global financial centre and the yuan to be an inter-national currency, it needs to keep channels open. Foreign assetmanagers will be a crucial conduit.

In the quiet revolution of asset management, one thing will re-main constant. Philip Rose’s investment trust was composed of ex-otic foreign bonds traded in London; his idea inspired RobertFleming, who mostly invested in America. From the start, assetmanagement has been global. Why change that now? 7

Doctor’s prescriptions

How will asset management look in 2030?

The end-game

The Economist November 14th 2020 43

1

The residents of the township inBloemfontein call it Dark City. The area

was one of many segregated neighbour-hoods built during apartheid. Today it is amicrocosm of the failures of the ruling Af-rican National Congress (anc): pock-marked roads, sporadic electricity, erraticrubbish collection and house after houseof people unable to find work. And, on thetop of most, roofs made of asbestos.

These should be long gone. In 2014 theregional government awarded a contractworth 255m rand ($23.5m) to survey and re-move the health hazards. But in Dark City,as in most of Free State province, there isnothing to show for it. Geelbooi Mzaza,who has lived in the area since 1995, saysthat nurses have told him that asbestos isworsening his tuberculosis. “They said Ihad to move, but I have nowhere to go.”

Corrupt procurement deals are ubiqui-tous in South Africa. So much so that thecountry coined the term “tenderpreneur”

to describe politically connected winnersof public contracts. Under Jacob Zuma (pic-tured, centre), president from 2009 to 2018,the corruption reached such kleptocraticlevels it became known as “state capture”.

One of the former president’s closest al-lies was Ace Magashule (pictured, left). To-day Mr Magashule is the secretary-generalof the anc, one of the most powerful peo-ple in the party and the locus of internal re-sistance to Mr Zuma’s successor, Cyril Ra-maphosa (pictured, right). For severalyears there has been speculation that MrMagashule would be brought to book forcorruption in Free State, where he was pre-

mier during the Zuma presidency. On No-vember 10th he was issued with a warrantfor his arrest on corruption charges relatedto the asbestos case. (He denies any wrong-doing.) The move by the country’s NationalProsecuting Authority (npa) and theHawks, a police unit, may therefore provegood news not just for people like MrMzaza, but also for Mr Ramaphosa.

Mr Magashule’s alleged role in the as-bestos deal was described in “GangsterState” by Pieter-Louis Myburgh, a journal-ist. The book, published in 2019, drew onleaked documents and a spreadsheet usedby Igo Mpambani, one of two businessmengiven the contract (and who was murderedin his Bentley in broad daylight in 2017).Last month the other businessman, EdwinSodi, was arrested. “Gangster State” allegedthat Mpambani shared the proceeds of thetender with various insiders, including MrMagashule, whom Mr Myburgh placedclose to the businessman soon after the lat-ter made large withdrawals of cash. The au-thor later estimated that just 3% of thefunds went to the clean-up.

The case is one of many scandals fromMr Magashule’s time as premier. Others in-clude a taxpayer-funded trip to Cuba forhim and fellow “comrades”, and shoddilycompleted contracts for low-cost housingthat involved Thoko Malembe, his daugh-ter. Then there is the other major case be-

South Africa

Ace in the hole?

B LO E M F O N T E I N

The imminent arrest of a ruling-party bigwig is good news for Cyril Ramaphosa

Middle East & Africa

44 Why Zambia may default

45 Fed-up feminists in Egypt

46 Palestinians mourn Saeb Erekat

Also in this section

44 Middle East & Africa The Economist November 14th 2020

2

1

ing aggressively pursued by the npa: astate-subsidised dairy costing hundreds ofmillions of rand linked to Mr Zuma’s closeallies, the Gupta brothers, for whom MrMagashule’s son, Tshepiso, worked.

That much is known about state captureis testament to many of South Africa’s in-stitutions. Investigative journalists, ngos,civil servants such as Thuli Madonsela, theformer public protector, and dogged oppo-sition politicians, especially from theDemocratic Alliance, have all helped revealthe extent of the graft. But whether anyonegoes to jail will depend on a criminal-jus-tice system eviscerated in the Zuma era.

Upon taking office, Mr Ramaphosapledged to revive organisations like thenpa, the Hawks and the South African Rev-enue Service. He has replaced party hackswith competent leaders and let them get onwith their jobs. South Africans are under-standably impatient. But prosecutors arefinally racking up arrests. And if the statewins its case against Mr Magashule, itwould be the clearest sign yet that the pres-ident’s anti-corruption drive is serious.

History suggests that a successful pros-ecution will not be easy. No anc politicianhas so far been convicted for taking part instate capture. For 15 years Mr Zuma hasbeen in and mostly out of court for his al-leged part in a corrupt arms deal datingback to the late 1990s. Mr Magashule maytry to copy the mix of denial and delay thathas served the former president well. Andalthough the relevant law defines corrup-tion fairly broadly, it may be hard to proveMr Magashule’s involvement; his formercolleagues note that he had a habit of usingother people’s mobile phones.

Mr Ramaphosa should benefit fromhaving his rival occupied, even if Mr Ma-gashule refuses to step down from his postwhile he is facing charges. Since Mr Rama-phosa took office his (over)cautious re-formism has been hobbled by internal op-ponents. Though these include more thanjust allies of Mr Magashule, the secretary-general’s arrest should give the presidentgreater power in negotiations with partyfactions and trade unions, for exampleconcerning his efforts to slow the growth ofthe public wage bill.

Mr Ramaphosa nevertheless has muchto do to convince increasingly scepticalSouth Africans that the anc can change.State capture was about more than just in-dividuals, however powerful. It was aboutan entire system of corruption, deploy-ment of party members and patronage.

Back in Dark City, the residents’ mood isalso sombre. Most scoff at the notion thatarrests would signal a change in their for-tunes. The best some people hope for is tobe next in line for the spoils of a rotten sys-tem. Approaching your correspondent, ayoung man calls out: “Write it down—wewant the next tender!” 7

In his studio Fumba Chama gets ready toplay his new song. Unlike in most Zam-

bian workplaces there is no photograph onthe wall of Edgar Lungu, the presidentsince 2015. Looking down instead is ayoung Kenneth Kaunda, who led Zambiafor 27 years after independence from Brit-ain in 1964.

If that is a silent protest, then out of thespeakers comes a louder one. In “Coward ofthe County” Mr Chama raps laconicallyabout Mr Lungu’s failings over—whynot?—a sample of the song of the samename by the late Kenny Rogers, a beardedAmerican country star. It is his latest trackabout how the ruling Patriotic Front (pf)has crushed civic freedoms and crashedthe economy. As if to prove his point, theauthorities have repeatedly arrested andintimidated Mr Chama, whose stage nameis PilAto. “People say I have no fear,” hesays, “but I’m scared.”

Mr Chama is not alone. Unless it pays anoverdue $42.5m coupon, or bondholdersgive it more time, on November 13th Zam-bia will officially default on its debt.Though it would be the first African state todo so since the start of the pandemic, co-vid-19 is not the root cause of its troubles.More important is the pf’s misrule, whichwill worsen ahead of elections in August2021. “We are heading in the same directionas Zimbabwe,” says Laura Miti of Alliancefor Community Action (aca), an ngo.

Any such comparison to the failingstate on its southern border is cause foralarm. Since 1991, when Mr Kaunda eventu-ally made way for multiparty democracy,the country has held regular, if flawed,elections. In the 2000s gdp grew by an av-erage of 7% per year, thanks in part to a

soaring price for copper, which accountsfor four-fifths of exports.

After it took office in 2011 the pf was nothelped by droughts and a fall in the copperprice. Yet it made matters worse by ramp-ing up borrowing. Government debt as ashare of gdp has risen from 21% to 120%(see chart). External debt has increasedseven-fold, as Zambia borrowed in dollarsfrom Western bondholders and Chinesestate banks. It now spends four times asmuch on external debt as on health care.

Much of the money has been wasted. Adual carriageway north from Lusaka esti-mated to have cost $1.2bn stops on the out-skirts of the capital. Other roads have beencommissioned at inflated prices (roughlytwice the African average per kilometre),suggesting ample opportunities for thewell-connected to take a cut. An order forfire engines and a cash-transfer scheme forthe poor are among many fishy tenders.The Financial Intelligence Centre, an offi-cial watchdog, found $520m worth of mon-ey-laundering or suspicious transactionsin 2018, up from $382m in 2017. Institutionsmeant to oversee borrowing—the financeministry and parliament—have been by-passed as departments and agencies with-in the presidency have racked up debts.

Ordinary Zambians are paying the price.Annualised inflation was 16% in October,versus 11% a year ago. The local currency,the kwacha, has lost almost a third of itsvalue against the dollar this year. Civil ser-vants are not paid on time. Graduatesstruggle to find jobs; such is the plight ofteacher-training graduates that the Unem-ployed Teachers Association of Zambiarepresents tens of thousands of people.

Zambia has asked the imf for a cheaploan to tide it over. An imf programmewould also reassure creditors who worrythat any relief they provide will only bol-ster the pf’s election war chest or the ac-counts of Chinese lenders. Yet the antics ofthe Lungu regime have done little to con-vince creditors that it can be trusted.

In August Mr Lungu fired Denny Kalya-lya, the governor of the central bank, andreplaced him with Christopher Mvunga, apolitical ally. Mr Kalyalya was dismissedpartly because he rebuffed efforts to havethe central bank print money, according topeople familiar with the decision. MrMvunga “does not have the power to resist”,says a former senior central banker.

Zambia’s latest budget, passed on Sep-

LU S A K A

Zambia is starting to look like the failure next door

Zambia

Slouching towards Zimbabwe

Cliff-edgeZambia, general government gross debt% of GDP

Source: IMF *Forecast

125

100

75

50

25

0

20*1918171615141312112010

The Economist November 14th 2020 Middle East & Africa 45

2

1

tember 25th, also raised eyebrows. It in-cluded 5.7bn kwacha ($275m) for farm in-puts, such as fertiliser—a 300% increase onthe previous year. It may win over some ofthe 56% of Zambians who live in the coun-tryside. Another crafty tactic is cancellingthe voter roll and replacing it with a newone. Zambians have been given just 30 daysto sign up. Many fear it will be harder to reg-ister in opposition strongholds. “Lunguhopes to disenfranchise as many opposi-tion supporters as possible,” argues Sish-uwa Sishuwa of the University of Zambia.

Mr Lungu has not had it all his own way.On October 29th parliament rejected a billthat would have removed constraints onthe president and made it easier for him towin re-election. The defeat suggests that hedoes not have an iron grip on his party, es-pecially among its Bemba-speaking eliteshailing mainly from the north-east.

But weak “strongmen” are often themost dangerous. After the bill’s demise, afurther anti-democratic backlash may oc-cur, fears Ms Miti. The ruling party hasshown itself willing to throttle freedoms. Ithas put allies of Mr Lungu on the constitu-tional court, which in 2018 ruled that hecould stand a third time for president, con-trary to the views of many Zambian jurists.Authorities have shut Zambia’s main inde-pendent newspaper and a television sta-tion. pf thugs harass journalists and oppo-sition campaigners.

And musicians. In his studio Mr Chamapoints out that many of his friends are paidto play by the pf, or have received moneyfrom a youth “empowerment” fund, an-nounced in August. Though he worriesabout what will happen next, he wouldnever take the cash. “Better to be dead thanalive in a dead country,” he says. 7

When nadeen ashraf was walkingthrough a wealthy part of Cairo last

month, she was not surprised to hear sex-ual comments aimed her way. Most womenin Egypt have experienced sexual harass-ment or violence. But her catcaller was sur-prised when the 22-year-old philosophystudent jumped into the taxi he was driv-ing. “I had an hour-long conversation withhim,” she recalls. “It was so foreign to himthat this was sexual harassment.”

For much of this year Egypt has wrestledwith the problem of sexual violence andthe issue of women’s rights. Men there

have long policed women’s behaviour, us-ing antiquated notions of morality, whiletolerating crimes by men against women.But lately young women like Ms Ashraf(pictured) have been challenging the coun-try’s conservative, male-dominated cul-ture, using social media to amplify theirvoices. It has not always gone well.

The reckoning began in June, when astudent at the American University in Cai-ro (auc) posted a warning on Facebookabout a former student, Ahmed BassamZaki, whom she accused of sexually harass-ing and blackmailing women. Days later,

after that post disappeared, Ms Ashraflaunched an account on Instagram calledAssault Police, which repeated the allega-tions against Mr Zaki—and listed more. Hewas soon arrested. Assault Police was bornout of anger, says Ms Ashraf, who also at-tends auc. “I was very frustrated that wom-en’s voices were not being taken seriously.”

Around the time of Mr Zaki’s arrest, oth-er cases began making headlines. A womanalleged that a group of wealthy young mendrugged and gang-raped her at a five-starhotel in Cairo in 2014. Another woman,called Aya Khamees, accused a man ofrape—and accused the police of ignoringher claims. It seemed as if Egypt was havinga #MeToo moment. The National Councilfor Women, a government body, urged oth-er victims of sexual violence to come for-ward. Parliament approved a law guaran-teeing them anonymity. Assault Police nowhas over 200,000 followers.

But the progress was largely illusory.Take the alleged gang rape, which was re-portedly recorded by the attackers. It tookweeks of campaigning by activists beforethe Public Prosecution Office moved, al-lowing some of the suspects to flee thecountry. Five men have since been arrest-ed; at least two suspects are still at large.Three of the men arrested have beencharged with rape, which they deny. Ab-surdly, the authorities also charged fourpeople who came forward as witnesses(and two of their acquaintances) with vio-lating laws on “morality” and “debau-chery”. The media have characterised theincident as a “group sex party”, smearing allinvolved, including the alleged victim.This has had a chilling effect: once-vocalwomen have gone into hiding.

After Ms Khamees was turned away bythe police, she broadcast her accusationson TikTok, an app for sharing short videos,where she had more than 100,000 follow-ers. Days after the video went viral, the po-lice picked up the entire group who hadbeen partying with her that night. The au-thorities seemed as concerned with theiruse of hash and the mixing of unmarriedmen and women, as with Ms Khamees’sclaim that a man had held a razor to her faceand raped her. Her attackers (she accused agroup of people of facilitating the rape)were charged with rape and other offences.But Ms Khamees was also charged—withprostitution, drug use and “violating fam-ily values”. Only after she completed a pro-gramme to “correct her concepts” were thecharges against her dropped.

These cases are indicative. Egypt haslaws against sexual violence and harass-ment (the latter enacted only in 2014), butvictims keep quiet for fear they will beblamed and shamed. The authorities havebeen known to subject women to so-called“virginity tests” and to ask about their sex-ual history, often using the information to

C A I R O

But are the men of Egypt listening?

Feminism in Egypt

Speaking up about sex crimes

46 Middle East & Africa The Economist November 14th 2020

2 muddy a case. The law is vague and, any-way, “it is just what you write on a piece ofpaper,” says Salma El Tarzi, a film-makerwho focuses on sexual violence. The realproblem is the attitude of Egyptian men.

Most of Egypt’s judges and prosecutorsare men. They decide what violates Egyp-tian values. Lately they have been using acyber-crime law to crack down on womendancing and clowning around on TikTok.Since April the authorities have arrestedten female TikTok influencers on chargesof violating family values and inciting “in-decency” and “debauchery”. Six have beensentenced to two years each in prison; twohave received three-year sentences. Part ofwhat panics the old arbiters of morality ishow the internet has empowered young,often lower-class women.

The country as a whole, though, re-mains deeply conservative. Many Egyp-

tians supported the arrests of the TikTokstars. A survey released in 2017 by the un

and Promundo, an advocacy group,showed that 64% of Egyptian men (and60% of women) believe that a womanshould marry her rapist. Almost three-quarters of men (and 84% of women) saidwomen who dress provocatively deserve tobe harassed. Only in Egypt are the views ofyoung men as conservative as those of old-er men when it comes to gender, says AmelFahmy, who worked on the survey.

“There are millions of men in Egypt whohave no clue about their sexuality and theideas of boundaries and consent,” says MsAshraf. She grew more disillusioned aftertalking to her catcalling cab driver. He ulti-mately apologised, she says, but thenclaimed he would never get married. Askedwhy, he responded, “Because you told me Ishouldn’t compliment girls.” 7

It was 1991, and dozens of men were hud-dled around a long white table in Spain,

clad in the formless dark suits that are derigueur at diplomatic functions. Only onestood out: a bearded, bespectacled univer-sity professor, shoulders draped in a keffi-yeh, the chequered scarf that has become asymbol of Palestinian nationalism. SaebErekat caused a stir at the Madrid confer-ence, the first direct talks between Israeland the Palestinians. Binyamin Netanya-hu, then a mere spokesman for the Israelidelegation, suggested that his dress was a“provocation”. But, for Mr Erekat, the sum-mit would start a diplomatic process thatbecame his life’s work.

On November 10th Mr Erekat died in Je-rusalem at the age of 65. He tested positivefor covid-19 in October, a grim diagnosis fora man who had a lung transplant in 2017. Is-rael allowed him to receive treatment atHadassah hospital, but he never recovered.

Born in 1955, he grew up in Jericho, anancient city nestled in the Jordan valley.After university studies in America andBritain he returned to the West Bank andbecame a loyal member of Fatah, now theterritory’s ruling party. A mediator ratherthan a militant, he would play an integralrole in the earliest agreements between Is-rael and the Palestinians, including thesecond Oslo accords, signed in 1995.

The two-state solution became an ob-session. He never bought into the idea of abinational state where Jews and Arabs

would coexist under a single political sys-tem: in his mind Israel would never relin-quish its Jewish majority. Only divorce—territorial partition—would grant his peo-ple their rights. In public he could beobstinate, prone to legal diatribes and oc-casional outbursts. In private, though, heoften recognised that he had a bad hand.

Palestinian critics accused him of play-ing it badly. A batch of leaked memos, pub-lished in 2011by Al Jazeera, revealed that MrErekat and his team offered to cede nearlyall of east Jerusalem when negotiating withIsrael in 2008. The Palestinians claim that

land as the capital of their future state. InMr Erekat’s words, though, he was ready togive Israel “the biggest Yerushalayim inJewish history” (the Hebrew name for thecity). He got nothing in return—and re-signed soon after the documents were pub-lished, something he did every few years.His departures were always short-lived.

In its immediate ramifications, Mr Ere-kat’s death may say more about domesticpolitics than about the moribund peaceprocess. Mahmoud Abbas, the Palestinianpresident, turns 85 on November 15th andhas been ailing for years. His term shouldhave ended 12 years ago. Yet he clings jeal-ously to his post and views would-be suc-cessors with suspicion. Mr Erekat was oneof the few to stay in his good graces and hadbeen a contender to replace the ageingpresident. Instead Mr Abbas will have to re-place him; his choice may hint at who leadsin the succession struggle.

Still, it is hard to escape the symbolismof his death. In Jordan last year your corre-spondent asked Mr Erekat about his health.“I’m fine,” he replied. “On two feet, workingfor two states.” Typical Saeb: earnest andfolksy, even at a time when there was littlefor him to negotiate. The Obama adminis-tration dispatched John Kerry, its secretaryof state, on a quixotic quest to broker anagreement. Talks stalled in 2014 and neverresumed. President Donald Trump had his“deal of the century”, unveiled in Januaryand dead on arrival.

Mr Trump’s successor, Joe Biden, is un-likely to spend much time on his own ef-fort, likely to be futile. Mr Netanyahu, nowthe Israeli prime minister, has devoted hiscareer to obstructing an agreement thatwould lead to a Palestinian state. The Pales-tinians are mired in divisions and increas-ingly cast doubt on the two-state idea. MrErekat will be mourned as a fighter for thePalestinian cause. When the eulogies aredone, many Palestinians will wonder if hisis a fight worth continuing. 7

B E I RU T

The Palestinians mourn the loss of a forceful advocate for their cause

Saeb Erekat

A negotiator in winter

Rest, but no peace

The Economist November 14th 2020 47

1

The two capitals erupted at roughly thesame time. On November 9th, known as

the national flag day in Azerbaijan, Bakuburst into jubilation. Crowds swarmed thecity and flocked to the Alley of Martyrs, amemorial to fallen soldiers. They wrappedthemselves in Azerbaijani and Turkishflags, sang the national anthem andpraised their victorious leader, Ilham Ali-yev. On the same day in Yerevan, the capitalof Armenia, angry crowds stormed the par-liament building, cursing Nikol Pashin-yan, their prime minister.

The cause of both scenes was the an-nouncement of a peace deal. Brokered byRussia and Turkey, it ended a six-week warover Nagorno-Karabakh. This is an enclavein Azerbaijan, mostly populated by ethnicArmenians but of cultural and historicalsignificance to both sides. A day earlier,Azerbaijan had raised its flag over Shusha,a strategic hilltop citadel inside Nagorno-Karabakh and a cradle of Azerbaijani cul-ture. Within hours Armenia’s exhaustedand demoralised forces surrendered, a hu-

miliation for which Mr Pashinyan haddone nothing to prepare his country.

The peace deal marks one of the biggestshake-ups in a turbulent region at thecrossroads of Europe, Asia and the MiddleEast since the collapse of the Soviet empire,which also began in Nagorno-Karabakh. InFebruary 1988 a few hundred Armenianscame out onto Lenin Square in Stepana-kert, the enclave’s capital, demanding to beunited with Soviet Armenia. They started achain of events that catalysed the break-upof the Soviet Union and later led to a two-year war between Armenia and Azerbaijan.

That war ended with the victory of theArmenians, partly because of Russian mil-itary support. Armenia captured Nagorno-Karabakh and occupied seven adjacent dis-tricts that belonged to Azerbaijan. The con-flict was (mostly) frozen but neverresolved, leaving Azerbaijan with a sense oftrauma and the border between Turkey andArmenia shut.

On September 27th, after 25 years ofwaiting for the return of its territory, Azer-

baijan went back to war. It was aided byTurkey, which provided drones and train-ing. It recaptured most of its lost territory.

The war was all but inevitable. Azerbai-jan, a petro-state, had grown richer, moreconfident and more frustrated at the lack ofprogress in talks with Armenia. However,three other factors played a role.

One was the growing assertiveness ofTurkey. It has shown its willingness to useforce and provide military backing to Azer-baijan, in the form of planners and Syrianmercenaries.

The second was Russia acquiescing toAzerbaijan’s advance and to Turkey’s in-volvement. In the past Azerbaijan had beenafraid to launch an all-out offensive be-cause of Russia’s commitment to defendArmenia. But as Azerbaijan correctlyguessed, Vladimir Putin cared more abouthis anti-Western alliance with Turkey andwas no longer inclined to side with Arme-nia’s government after a largely peaceful“colour” revolution in 2018 swept the popu-list Mr Pashinyan to power. Russia’s presi-dent does not recognise the legitimacy ofleaders brought to power by uprisings. MrPashinyan further angered Mr Putin by im-prisoning a friend of his, Robert Kocharian,a former Armenian president. Mr Putinwas not allowed to see him during a visit toYerevan last year.

The third factor has been the gradualdisengagement of America from the re-gion, which has accelerated under Presi-

Nagorno-Karabakh

Peace, for now

A bloody war ends in the Caucasus

Europe

48 Hobbling graftbusters in Ukraine

49 Sharing Europe’s recovery fund

49 France fights jihadists in the Sahel

Also in this section

— Charlemagne is away

48 Europe The Economist November 14th 2020

2 dent Donald Trump. So the autocratic lead-ers of Russia and Turkey were left alone tohammer out their deal. Under it, Armeniais to withdraw from the remaining districtsaround Nagorno-Karabakh. Russia will de-ploy a 2,000-strong peacekeeping force inNagorno-Karabakh, for the next five andpossibly ten years. There was no mentionof the status of Nagorno-Karabakh, whichin the past had been promised autonomywithin Azerbaijan. Tens of thousands ofethnic Armenians fled their homes in Ste-panakert during the fighting as Azerbai-jan’s army closed in.

Within hours of the announcement,Russia moved in its troops, establishing itslong-craved presence in the Lachin corri-dor linking Armenia to Nagorno-Karabakh.Mr Aliyev had for years resisted this. Hav-ing closely observed the use of Russianpeacekeepers in the war unleashed by Mos-cow against neighbouring Georgia in 2008,he had no desire to see Russian troops inNagorno-Karabakh. Yet he had littlechoice. Going any further in the war riskeda direct confrontation with Russian forces.

Turkey probably helped persuade Azer-baijan to accept the deal. Though not men-tioned in the trilateral agreement signedbetween the two belligerents and Russia,Turkey is a big beneficiary of it. It is to getaccess to a transport corridor through Ar-menian territory from the Azerbaijani en-clave of Nakhchivan, which borders Tur-key, to the main bit of Azerbaijan and theCaspian Sea, thus linking Turkey to CentralAsia and China’s Belt and Road Initiative.

Russia will control the road itself, butTurkish and Chinese goods will travelalong it, and all parties stand to benefit eco-nomically. “This trade route could trans-form the entire region and become themain staple of a peace settlement,” says Mi-kayil Jabbarov, Azerbaijan’s American-edu-cated economy minister. Perhaps it is theprospect of this geopolitical transforma-tion that has enticed Mike Pompeo, theAmerican secretary of state, to visit the re-gion in the next few days. After four yearsof Mr Trump’s presidential neglect, he isvery late to the party, and there are manypitfalls ahead. 7

Shusha

Yerevan

Tbilisi

Baku

TURKEY

IRAN

ARMENIA

AZER.

AZERBAIJAN

G EORGI A

RU SSIA

Nagorno-Karabakh

CaspianS ea

LachinStepanakert

Nakhchivan

Areas of controlNovember 10th 2020

Source: Polgeonow.com

Nagorno-KarabakhArmenian forcesAzerbaijani forcesUnclear

100 km

In 2014 ukrainians got so fed up with thegrotesque corruption of their political

class that they staged a revolution. Sincethen, reformers have been trying to buildinstitutions to hold the country’s oligarchsand crooked politicians to account. One bigvictory was establishing an electronic as-set-declaration system, an online registrywhere officials must list all of their mainpossessions. But on October 27th Ukraine’sconstitutional court found a clever way tocripple this system: it struck down theanti-corruption authorities’ power to pun-ish anyone for lying on it.

Piquantly, four of the court’s 18 justiceswere being investigated by those same au-thorities. After the ruling, Schemes, an in-vestigative news outfit, reported that thechief judge had failed to declare propertyhe owns in Russian-occupied Crimea, ac-quired under Russian law, which wouldimply recognising Russian sovereignty. Inhis defence, he said he did not know how tofile an e-declaration for land in Crimea.

It has been 18 months since VolodymyrZelensky went from playing Ukraine’spresident on television to being electedpresident in real life. He now faces a test ofhis pledge to clean up the country. Bit bybit, the country’s top court is dismantlingthe anti-corruption infrastructure. In Au-gust it partially struck down the NationalAnti-Corruption Bureau of Ukraine (nabu)and ruled that its head had been appointedillegally. The new ruling strips the NationalAgency on Corruption Prevention (nacp)of much of its power.

Fighting graft is not just a domestic con-

cern. Ukraine’s economic stability is bol-stered by a $5bn loan secured in June fromthe imf. It stands to get another €1.2bn($1.4bn) in economic and covid-19 aid fromthe eu (as well as continuing to enjoy visa-free travel in it). Both organisations maketheir assistance conditional on fightingcorruption. On November 3rd the eu

warned that both aid and visa-free travelcould be jeopardised. It says it will firstwait to see whether Ukraine restores powerto the anti-corruption bodies.

Reformers are divided over how to dothis. Mr Zelensky, trying to rally popularsupport after his party did badly in munici-pal elections last month, has urgently de-manded that parliament pass legislationfiring all of the constitutional court’sjudges. It is not clear that he has the votes.Even if he does, legal experts say the movewould itself be unconstitutional. Anotherproposal is to pass new laws re-establish-ing the anti-corruption agencies on firmerground. But activists, who suspect thecourt of being corrupt and compromisedby pro-Russian interests, fear it will find anexcuse to strike down those new laws too.In the short term the court has been slowedby four liberal judges who are refusing toattend, denying it a quorum. Some proposeraising the quorum requirement, making iteasy for a few reformers to block action.

Those who dislike the clean-up effortsmay next attack laws that have let dodgybanks (owned by oligarchs) be national-ised, and a new law opening up the landmarket. The Anti-corruption Action Centre(antac), the country’s premier watchdog,says such legal challenges are a stubborneffort to re-establish the sort of klepto-cratic order that existed under Viktor Yanu-kovych, a disgraced ex-president, and tosabotage Ukraine’s turn towards the West.The constitutional court is “the most pro-tected organ in the country,” says OlenaShcherban, Antac’s chief legal expert. If MrZelensky wants to salvage his presidency,he will have to take it on. 7

KY I V

Ukraine’s constitutional court attacksanti-corruption laws

Ukraine

Judge not, that yebe not judged

The Economist November 14th 2020 Europe 49

1

The puff of white smoke came on No-vember 10th. After months of ill-tem-

pered talks between governments and theEuropean Parliament—one French mep

even went on hunger strike to protestagainst cuts—the two sides at last agreedon a seven-year budget for the EuropeanUnion. Some hurdles remain. Rules mustbe thrashed out for running the Recoveryand Resilience Facility (rrf), the centre-piece of the covid-19 recovery plan agreedby eu leaders in July. (This, along with theregular budget, makes up an overall €1.8trnpackage.) Viktor Orban, Hungary’s primeminister, is threatening to veto the wholething because of rule-of-law conditions at-tached to the budget. But officials are cau-tiously optimistic that an end is in sight.

The deal in July empowered the Euro-pean Commission to borrow €750bn($886bn) from capital markets and distri-bute the proceeds, in grants and loans, toeu governments over six years according tospecific economic criteria. The plan (seechart) emerged from a fear that the di-vergent effects of covid-19 could drive apermanent wedge between governments.Its scale sparked talk of a “Hamiltonianmoment”—a watershed for eu integration.In truth, it may do more than pessimistshad feared, and less than the optimistshoped.

It has slowly dawned on governmentsthat the recovery fund—Next Generationeu (ngeu), to give it its full title—is notthere to prop up short-run demand. Realmoney will not start flowing until the sec-ond half of 2021 at best, by when the recov-ery should be in full swing. The bulk of thegrants will not be dished out until 2024. In-stead the commission hopes to use ngeu

to promote its own vision for long-term re-form. The recovery plans governmentsmust submit to Brussels next year will haveto identify projects in line with Europeanpriorities. Fully 37% of the spending in therrf, for example, should go on climate-friendly schemes, such as insulating oldbuildings, and 20% on digital projects. Asecond, related aim is to promote structur-al reform in member states to lift long-termgrowth rates. The commission is quietlyhelping governments knock their recoveryplans into shape, and some are struggling.So far, says an official, they are doing betteron the investment part than on reform.

But Brussels will have its work cut out.Governments have their own priorities,

and face competing claims on any availablecash. Some, such as Italy, have a less thanstellar record of investing for the longterm. Eastern European countries oftenhave trouble absorbing eu funds as it is.The commission itself will face serioustechnical and capacity constraints, andthere will be pressure to get the scheme upand running soon. “You need strong gov-ernments to implement the changes therrf demands, and you don’t have that in It-aly and Spain,” says Mujtaba Rahman of theEurasia Group, a consultancy.

While they wait for the process to grindon, governments must keep economiesafloat themselves. Europe has avoided themistakes of the early 2010s, when prema-

ture fiscal and monetary tightening trig-gered a needless double-dip recession.Funding furlough schemes and other de-mands could cause average deficits acrossthe eu to swell to 9% of gdp this year,helped by a suspension of the eu’s fiscalrules and the European Central Bank’s ul-tra-loose monetary policy. Yet some worrylest governments withdraw stimulus toosoon. Shahin Vallée at the German Councilon Foreign Relations reckons that, strippedof accounting tricks, the French and Ger-man draft budgets for 2021 reveal, at best, aneutral fiscal stance, even as a second covidwave portends a deeper recession and aspate of corporate bankruptcies looms.With the outcome of a suspended fiscal-rules debate unknown, some governmentsmay fear racking up debts too quickly.

As for the Hamiltonian moment, in thelong run that will depend in part on wheth-er talks on eu-wide taxes—“own re-sources”, in the jargon—on matters like fi-nancial transactions get anywhere. (A“roadmap” approved this week does notcommit governments to anything.) A morepressing question is whether the recoveryfund can be made to work in the first place.The commission says ngeu could boost eu

output by up to 2% at its peak. But if gov-ernments pour money into pensions andpublic-sector wages rather than electriccars and 5g networks, sceptics in Germanywill be reluctant to see the experiment re-peated. Success is far from assured, andBrussels is nervous. But at least mepsshould be able to start eating again. 7

B E R LI N

The European Union’s €750bn recoveryplan comes one step closer

Europe’s recovery fund

Turn on the spigot Dividing the pieRecovery and ResilienceFacility grants, 2021-22Selected countries, % of 2018 GNI

Sources: European Commission; Eurostat *Forecast

GermanyFranceItalySpainPoland

RomaniaPortugal

GreeceBulgariaCroatia

1086420

-5.6-9.4-9.9-12.4-3.6

-5.2-9.3

-9.0-5.1-9.6

GDP, 2020*% decrease ona year earlier

The twin-engine French army helicop-ter swoops at high speed and low alti-

tude over the arid plains of the Sahel, itsside-mounted machineguns trained on theground. A vast expanse spreads out in eachdirection, interrupted only by acacia treesand the occasional herd of goats sent scam-pering by the helicopter’s roar. It is en routefrom the French military base in Gao, cen-tral Mali, to Ménaka, at the heart of a zonewhere a jihadist insurgency last year killedsome 4,800 people.

Arising from the rust-coloured sand,the French forward base at Ménaka is acompound of newly built tents and con-verted containers. Under a searing sun on aNovember morning, parachutists andcommandos line up to brief Florence Parly,the French defence minister, who is visit-

ing from Paris. The soldiers have just con-ducted an operation code-named Bour-rasque against jihadists from Islamic Statein the Greater Sahara (isgs) in the plainsand valleys of the Liptako region.

For a month, troops from France, Nigerand Mali, backed by special forces and act-ing on French and American intelligence,tracked jihadists. Temperatures inside ar-moured vehicles were at times sweltering.Tyres often blew out, and sand snarled upthe mechanics. They killed several dozeninsurgents and seized weapons, motor-bikes, fuel and food supplies. It was “in-tense”, says a unit captain, with “violentencounters” at close range on the ground,often at night. “We slept when we could.”

The French government first dis-patched troops in 2013 to halt a jihadist ad-

G A O A N D M É N A K A

France’s thankless yet valuable war against jihadists in the Sahel

France in the Sahel

Mission impossible but necessary

50 Europe The Economist November 14th 2020

2 vance on Mali’s capital, Bamako. Today itkeeps 5,100 soldiers in the Sahel, as part of acounter-terrorism mission called Opera-tion Barkhane, which President EmmanuelMacron this year reinforced. No otherEuropean country contributes anythinglike this number to military activities inthe Sahel, even to a parallel United Nationspeacekeeping operation. The un has 13,600soldiers, among them some 350 Germans,soon to be joined by 250 British.

Most combat operations, though, fall tothe French-led forces. These campaigns,amid the heat and billowing sand, are gru-elling and risky. Last year, described by MrMacron as “cruel and painful”, was the re-gion’s deadliest for years. The French lost 13elite soldiers in a single night-time heli-copter crash in the “three frontiers” zonebetween Mali, Niger and Burkina Faso. TheFrench base in Gao, Barkhane’s biggest,was attacked with a car-bomb. The armiesof Niger and Mali lost scores of soldiers interrorist attacks. Across the Sahel, an esti-mated 4m people have fled their homes.

In January Mr Macron hosted a summitin the French town of Pau with the leadersof the five Sahel countries (Burkina Faso,Chad, Mali, Mauritania and Niger). Amidaccusations of neo-colonialism, France’spresident partly sought confirmation fromregional leaders that they actually wantedFrench troops to stay, which they gave. Butthe idea was also to share out the securityburden, both by recruiting fellow Euro-peans to help and getting regional armiesto do a better job themselves.

This has brought some successes. InMénaka and Gao, Estonian special forcestook part in operation Bourrasque along-side French commandos, as part of a newjoint task-force, Takuba. They worked welltogether, says an Estonian commando.Czech and Swedish special forces are due toarrive soon. Such forces, explains a Frenchcommando, operate discreetly alongsideMalian regulars, so that villagers can seetheir own country’s troops on the job. Thisis part of a broader plan to improve localconfidence and security. The British andDanes help to provide air-lift. During Bour-rasque, French soldiers worked with unitsfrom Niger and Mali, a form of on-the-jobtraining that went better than expected, aFrench officer says.

Certainly the mood in Gao, where onerecent morning French officers could befound in the canopied mess discussing Ni-gerian and Malian novelists over crois-sants, is more upbeat. General Marc Con-ruyt, who commands Barkhane, declareshimself very satisfied with recent opera-tions. The French sense they have dealt areal blow to isgs. “They certainly haven’tdisappeared,” says the general. “But theydon’t have the same capacity to cause trou-ble in this zone that they did at the end of2019.” The French now consider rivalgroups affiliated to al-Qaeda to be thegreater threat. On October 30th Barkhanekilled at least 50 jihadists linked to al-Qaeda in an assault on a night-time convoy.

For all these encouraging signs, how-ever, the French are stuck in an unwinna-ble war. On motorbikes and pick-up trucks,insurgents are mobile and nomadic. Theysupport themselves by trafficking guns anddrugs, and have a talent for disappearinginto the bush. Across the north of Mali,they still hold sway. Tactical successes inone zone can push jihadists into another.The operational aim, says General Conruyt,is to harass and weaken them so as to “tipthe balance in favour of our allies”. France,suggests Michael Shurkin of rand, a think-tank in Washington, in a recent paper,“does not aspire to…defeat the jihadists.”

Rocky local politics do not help. As it is,Sahelian armies have themselves been ac-cused of atrocities, which can help jiha-dists recruit. In August Malian officersousted the president in a coup. The newleaders have promised elections, and saythey want France to stay, even if its missionis unpopular. But they dismayed Frenchobservers by freeing 200 jihadists as part ofa hostage-liberation deal last month. Thenew rulers now want to negotiate witharmed jihadist groups. France disapproves.

Ms Parly stresses that “France is no lon-ger alone.” Yet the Sahel is nobody else’spriority, despite France’s efforts to per-suade its friends that the region’s stabilitydirectly affects Europe’s. The French willnot be thanked for staying, but nor wouldthey be for packing up. Under Joe Biden,America will still be under pressure towithdraw personnel from Africa. “The bot-tom line is that the French are actually outthere on the ground,” says Charles Kup-chan of the Council on Foreign Relations inWashington. “When the us is looking tolighten the load, having a partner ready tostep up to the plate is a big deal.”

Next month Mr Macron, who has nowput soldiers on anti-terrorist patrol on thestreets in France, will take stock. He coulddecide to bring some troops home. “Theobjective”, says Ms Parly, “is progressivelyto be more in a support role than on thefront line.” But for now, like it or not, Franceis stuck there. As Ms Parly says, “This is along-term job.” 7Gruelling and risky

NIGER

NIGERIA

ALGERIA

CAMEROON

MALIMAURITANIA

BURKINA FASO

Bamako

Gao Ménaka

Liptakoregion

S A H E L CHAD*

500 km

SAHEL

Operation BarkhaneBases

Sources: ACLED; Menastream;French Ministry of Defence

*Two temporary basesin Chad not shown

PermanentTemporary

Violent events involvingjihadist groups, 2020To Oct 30th

The Economist November 14th 2020 51

1

If the united nations staffers whodrafted Agenda 21 in 1992 had been pre-

sent at the protest on November 7th in apark in Stroud, a market town carved intothe Cotswold hills, they would have beenbemused by the vitriol poured on theirwork. But to those in the know, this non-binding resolution to promote sustainabledevelopment conceals a plan for “the GreatReset”, which will change society beyondrecognition. Covid-19 has been faked tosoften the world up for it and allow a vacci-nation programme that will render hu-manity infertile. “I’ve heard this has beenplanned for 60 years,” says a protester.“Longer than that,” says another. “It’s beenplanned since Babylonian times.” A thirddismisses the conspiracy theories as “bull-shit”. He is protesting against “not beingable to go to the pub”.

The 200-odd people brought togetherby the Stroud Freedom Group were an un-likely marriage of cranks and conserva-tives. Among them, said Bruce Fenton, a lo-cal author, were “members of the Green,

Labour, Conservative and Brexit parties, xr

activists and members of the local RudolfSteiner community.”

The speeches were fiery, but swiftly dis-rupted by police. A few arrests were made.An organiser was fined £10,000 ($13,000).Similar scenes played out in 26 other towns

that day. Further protests are planned eachSaturday until lockdown ends.

These gatherings are a sign not just ofthe rise of weird ideas during the pandem-ic, but also of the changing pattern of prot-est. The route from Marble Arch to Parlia-ment Square is no longer the only venue forpeople wanting to make a point. The scenein Stroud is increasingly common, as datafrom police forces show (see chart).

The failure of big marches calling for asecond referendum to shift the dial mayhave encouraged organisers to try other op-tions. For much of this year, huge marcheshave been out of the question. And currentprotest movements are local affairs, nottop-down operations run from the capital.Extinction Rebellion (xr), for instance, wasfounded in Stroud and is organised onwhat it calls a “holacratic” basis, in whichlocal groups operate as loosely regulatedfranchises. Those who marched for BlackLives Matter (blm) this year belong to avariety of distinct regional groups. TheDemocratic Football Lads Alliance (dfla),whose followers protected statues threat-ened by activists this summer, is a co-alition of football-supporters’ groups.

The anti-lockdown movement includespeople with varying motivations—oppo-nents of big government, covid-19 deniers,raging conspiracy theorists and far-rightactivists—and different competences.StandUpx is better at street activism; SaveOur Rights focuses on legislation. Science

Protest

Small-town revolution

ST R O U D , G LO U CE ST E R S H I R E

Protest movements used to focus on Central London and ignore the provinces.Now rebellion has spread around the country

Grab your pitchforksBritain, number of protestsBy police force area, 2017=100

Source: Police forces; includes only those thatrecorded at least five protests in 2017 and 2018†Includes parades

500

400

300

200

100

0

2019182017

Greater Manchester

Northamptonshire†

Bedfordshire

Britain

52 Foreign-investment rules

53 Bagehot: Princess Di the populist

Also in this section

52 Britain The Economist November 14th 2020

2 deniers congregate in Stop New Normal;Piers Corbyn, its figurehead, is a climate-change sceptic whose brother Jeremy is theformer Labour leader. The most rapid con-spiracies abound in Collective ActionAgainst Bill Gates. And there are adherentsof qanon, a theory that the world is run by acabal of Satanist paedophiles, blending atprotests with the other strands.

The demographics of protest havechanged, too. Last year Boris Johnson de-scribed xr activists as “nose-ringed…crus-ties” living in “hemp-smelling bivouacs”.But today’s protest movements have di-verse followings, from construction work-ers to civil servants. A protester is just aslikely to resemble Mr Johnson—well-edu-cated, middle-aged and overweight—as ananarchist student from central casting.

Regional tendencies shape protest indifferent parts of the country. In Cornwall,rural conservatism has rubbed off on thearea’s revolutionaries. Black Voices Corn-wall, a group set up after the summer’s blm

protests, has abandoned its progenitor’ssocialism and doesn’t support police de-funding. Devon and Cornwall’s assistantchief constable, Jim Colwell, will be on theassurance board that the organisation issetting up.

The internet’s role in campaigning haschanged. Online petitions are out of fa-vour, because politicians pay no attention.Instead people huddle in densely populat-ed chat channels on Telegram, an instant-messaging platform, which is used for or-ganising real-life protest. Patriotic Alterna-tive, a nationalist group with around15,000 members, now mostly works off-line. “Forming ‘in real life’ communities ismuch better than operating only online,”says Laura Towler, its deputy leader. “Therelationships you form are more authenticand long lasting.”

Digital communication encouragesproliferation. When a messaging groupgets too big to manage, it spawns newgroups. xr Kettering was first part of xr

Northampton, but numbers swelled and itseceded. That process of localisation en-sures that there are battalions ready to re-spond to a local incident, says Paul Mason,a writer who tracks protest movements.“It’s not like they have to assemble the net-work from scratch; it’s already there.”

Despite the lockdown, the pandemichas accelerated these trends. Michelle Mc-Donald, a StandUpx organiser in Brighton,says that it motivated her to find out thedisturbing truths behind the new world or-der. “We’re waking up to all the darknessthat’s going on… I feel like I’m living undera mix of communism and the Taliban.”

The provincial protesters have not yetchanged the world. xr’s target of makingBritain carbon neutral by 2030 has had nomore uptake than blm’s call to defund thepolice. Yet both have, arguably, shifted the

way people think about the climate andabout Britain’s culpability in the slavetrade. The anti-lockdown protests may,similarly, have contributed to the findingof a recent research study, that a quarter ofBritons think covid-19 was manufacturedin a Wuhan laboratory and an eighth thinkit is a plot to vaccinate humanity.

Whether or not these protests changepolicy, they change people’s lives. Thoseinvolved now belong to vast social net-works, formed by, and reliant on, protest.For some, that is part of the appeal. “I feelquite on my own with my neighbours lo-cally, who don’t see the agenda for what itis,” says Dominic Graville, a Stroud protes-ter whose acting work dried up during thepandemic. “It’s a way to form new bondsand connections: we’re stronger together.”The campaign to roll out a covid-19 vaccineis likely to bind them tighter. 7

In september 2016, Theresa May ap-proved a plan allowing a state-owned

Chinese company to take a minority stakein a project to build Hinkley Point nuclearpower station, but her government was un-comfortable with the decision. It carriedout a review of its power to control foreigninvestments from a national-securitystandpoint, and found it wanting.

On November 11th Boris Johnson’s gov-ernment introduced legislation stemmingfrom that review process to Parliament.

The bill would require companies to tellthe government about any planned tran-sactions within 17 areas of the economy, fo-cused on technology, including categoriesas broad as “computing hardware”, “artifi-cial intelligence” and “data infrastructure”.The government will also have the power tounwind any transaction completed withinthe last five years if it deems that transac-tion to be a matter of “national security”.

Chinese investment is the principalconcern. Britain’s new rules look very simi-lar to America’s Foreign Investment RiskReview Modernisation Act (firrma),passed in 2018. Both rely on the applicationof the rather loose term, “national securi-ty”, and have sweeping remits over broadcategories of technologies. Chinese in-bound investment to the United States hasplunged in the two years since firrma waspassed. Australia, France and Germany allhave similar laws.

Although Alok Sharma, the businesssecretary, says that the new legislation willensure that Britain remains attractive toforeign capital, problems loom. The big-gest is an open question over the extent towhich the law would give the governmentcontrol over any economic activity involv-ing the flow of data, which underpins mostof the 17 categories targeted.

It is unclear whether deals like Ctrip’s£1.4bn purchase in 2016 of Skyscanner, aflight-booking service based in Edinburgh,would be caught. James Palmer of HerbertSmith Freehills, a London law firm thinksthat they would. The proposed purchase ofa stake in Nanopore, a genetic-sequencingcompany based in Oxford, by Tencent, aChinese messaging and gaming app, is nowin question.

If the government insists on reviewingall foreign transactions involving dataflows, that would discourage firms frombasing themselves in Britain. Why would atech startup subject its future, and any po-tential sale, to the national-security deter-minations of the British government whenit could just as easily set up shop in freer ju-risdictions in Ireland or the Netherlands?The American government has defined na-tional security so broadly that both a NewYork Times story on spying and Joe Biden’scriticisms of immigration policy fall intoit. If Britain were to follow the same path itwould bode ill for foreign investment.

The government has set up an Invest-ment Security Unit which will be the firstport of call for notifications when the billbecomes law. Corporate lawyers are in thebusiness of reducing risk, and so will not-ify it when there is any doubt. At present,there is plenty of it. Foreign control of vitaltechnologies is a serious issue, with genu-ine national-security risks. But the govern-ment must be sure that the damage it doesthe tech sector in dealing with them doesnot outweigh the benefits. 7

Britain’s government is increasing itscontrol over foreign investment

Foreign-investment rules

For yourprotection

https://avxlive.icu/

https://avxlive.icu/

The Economist November 14th 2020 Britain 53

Netflix’s flagship series, “The Crown”, has done a fine job oftelling the story of post-war Britain through the prism of the

monarchy. The previous series left viewers in the mid-1970s, miredin the miners’ strike and the three-day week. The new one, whichbegins streaming on November 15th, introduces us to two womenwho were destined to change the country in profound ways—Mar-garet Thatcher and Lady Diana Spencer.

Lady Thatcher made it clear from the first that she was in thebusiness of changing the nation. Lady Diana Spencer was a bird ofa very different feather—a shy girl who had failed all her o-levelstwice and had no interest in politics. She was brought onto the na-tional stage for the sole purpose of producing (male) heirs to thethrone. Yet the country is still living with her political legacy assurely as it is with Lady Thatcher’s.

Princess Diana’s genius was to mix two of the most profoundforces of modern politics—emotion and anti-elitism—into a pow-erful populist cocktail. She was one of the modern masters of thepolitics of emotion, feeling the people’s pain just as they felt hers.She repeatedly outmanoeuvred Prince Charles during the long“War of the Waleses” because she was willing to bare her soul inpublic. Her interview with Martin Bashir of the bbc in November1995 is now the focus of controversy, as her brother, Earl Spencer,claims that it was obtained under false pretences, using forgeddocuments. Whatever the reason for giving it, the interview was amasterclass in emotional manipulation. At one pivotal momentPrincess Diana acknowledged that she would never be queen buthoped that she would be “queen of people’s hearts”.

The princess used her mastery of the politics of feeling to turnherself into a champion of the people against the powerful—the“people’s princess” in Tony Blair’s phrase. She patronised charitiesthat helped marginalised folk such as hiv patients, and kept com-pany with pop stars and celebrities rather than with the usual royalwaxworks. The most memorable music at her funeral was not anhistoric hymn but a song by Elton John, adapted for her but origi-nally written about another icon-turned-victim, Marilyn Monroe.

Her anti-elitism was directed not at the monarchy’s wealth—she happily lived in Kensington Palace and received a £17m ($23m)divorce settlement plus £400,000 a year—but at its stunted emo-

tional state. The traditional deal to which royals signed up allowedthem to behave as they liked in private—kings have almost alwayshad mistresses because they marry for reasons of dynasty notcompatibility—so long as they behaved with decorum in public.Princess Diana regarded this as humbug.

She succeeded in reconciling the most jarring of opposites. De-spite being a top-tier aristocrat (her family, the Spencers, lookeddown on the Windsors as German carpetbaggers) she was univer-sally known as “Di”. Her death in a car crash won her a spectacularposthumous victory against the royal court. It produced the great-est outburst of public lacrymation Britain has ever seen and led towidespread demands that the royals should display more emo-tion, as if the damp cheek had replaced the stiff upper lip as the de-finition of Britishness. “What would really do the monarchy good,and show that they had grasped the lesson of Diana’s popularity,”an editorial in the Independent thundered, “would be for the Queenand the Prince of Wales to break down, cry and hug one another onthe steps of the Abbey this Saturday.”

Since her death, her emotional populism has threaded throughpolitics. Tony Blair presented himself as the people’s prime minis-ter. He championed “Cool Britannia”, surrounded himself withpop stars and urged his staff to “call me Tony”. The next Conserva-tive prime minister, “Call me Dave” Cameron—a distant relation ofPrincess Diana’s—adopted this combination of compassion-sig-nalling (hugging hoodies instead of cracking down on juvenile de-linquents) and studied informality (chillaxing and kitchen sup-pers replacing previous Tory premiers’ stiffness).

Both men were too responsible to let emotional populism in-terfere with the affairs of state. Domestic and foreign policychoices continued to be conducted according to the icy dictates ofreason and evidence. Brexiteers, by contrast, followed the Diana-script. They appealed to the heart rather than the head; to win theirarguments they used feelings of patriotism and resentment ratherthan facts about trade flows. They denounced the elites for tryingto frustrate the wisdom of the people in much the same way as Di-anaphiles had denounced the Palace for ignoring the people’semotions. They turned on the nation’s core institutions—Parlia-ment, the civil service, the Supreme Court—when they suspectedattempts to frustrate their wishes. They succeeded in defeating theestablishment in much the same way as Princess Diana had, byclaiming to stand for emotion rather than reason and the peoplerather than the elite. Alexander Boris de Pfeffel Johnson has recon-ciled the opposites he embodies just as she did. A card-carryingmember of the metropolitan elite, he has managed to sell himselfas a man of the people. As she was Di, so he is Boris.

The first series of “The Crown” shows a young Queen Elizabethstudying Walter Bagehot’s “The English Constitution” under theguidance of Sir Henry Marten, the vice-provost of Eton, who kept apet raven in a cage and addressed the young princess as “gentle-men”. Bagehot’s great work distinguishes between the dignifiedbranch of the constitution (the monarchy) and the efficient branch(elected politicians). Implicit in that distinction is Bagehot’s per-ception that emotions pose a dangerous threat to the proper con-duct of politics. The monarchy provides a controlled outlet forthem, thus enabling responsible people to get on with the difficulttask of running the country.

By using people’s feelings as the fuel for her astonishing career,Princess Diana broke that safety valve. Britain will be living withthe consequences of the emotional populism that she helped to re-lease for years to come. 7

A populist in the palaceBagehot

How Princess Di shaped politics

54 The Economist November 14th 2020

1

On the morning after the polls closedlast week, America withdrew from the

Paris agreement on climate change. The ef-fects will be short-lived. President-electJoe Biden has promised to rejoin the pact assoon as he enters the White House.

Donald Trump’s defeat has evokedstrong reactions around the world. Themain one “is relief”, says Andreas Nick, aGerman mp. But the world will not return tohow it was in 2016, and Mr Biden will notplease everyone.

Consider climate change. Most coun-tries are eager to welcome America backinto the club of those that care about it. Inthe past eight weeks, China, Japan andSouth Korea have vowed to reduce netemissions to zero by mid-century or there-abouts. Four of the five largest economieshave now committed themselves to emis-sions cuts that are in line with limiting glo-bal warming to 2°C above pre-industriallevels or less (see chart 1 on next page).

Mr Biden has said he intends to adopt a

target of net-zero emissions by 2050,which modellers say will shave 0.1°C offtheir temperature projections for the endof the century. To rejoin the Paris deal, hewill need formally to submit this goalalongside an updated national pledge toslash emissions. Most observers believe a45-50% decrease from 2005 levels by 2030would be tough but feasible, fair and com-mensurate with what Europe is doing.

Mr Biden can re-enter the Paris dealwithout congressional approval, but hewill need some degree of buy-in from bothsides of the aisle to make his pledges cred-ible. Integrating green infrastructure, ener-gy, and research and development into anynew government stimulus would help.American public opinion is broadly favour-able. In exit polls two-thirds of voters saidthat climate change was a serious problem.Whether they will accept higher energyprices to fix it remains to be seen.

Outsiders are watching to see if Mr Bi-den structures his team in a way that makes

it clear that he wants to integrate climateaction across his foreign and domesticpolicy. The importance of having Americaback on the climate train is hard to over-state. Over the past four years, votersaround the world have noticed not onlywarmer temperatures, but increasingnumbers of floods, droughts and forestfires. Europe is pushing through an ambi-tious green deal at home and workingclosely with China, the world’s largestemitter. If Mr Biden can formalise Ameri-ca’s emissions targets for 2030 and 2050before the cop26 un climate summit nextyear, that will help convince other govern-ments that the country intends to pull itsweight. That should give others—includ-ing China—the guts to decarbonise faster.

However, not all governments will wel-come a carbon warrior in the White House.Oil- and coal-producers are wary. So is Bra-zil’s President Jair Bolsonaro, not least be-cause Mr Biden has threatened “economicconsequences” if Brazil continues to teardown the Amazon rainforest. Mr Bolso-naro, who thinks foreign eco-scolds haveimperialist designs on Brazilian territory,tweeted “OUR SOVEREIGNTY IS NON-NE-GOTIABLE” and spoke vaguely of needing“gunpowder” to defend it. Brazil’s carbonemissions rose by a whopping 9.6% in2019, mainly due to deforestation.

Another area where the world expectsmore collaboration is health. Mr Trump an-

American foreign policy

What does the world wantfrom Joe Biden?

B E I RU T, B RU S S E LS , P A R I S , S Ã O P A U LO A N D TO KYO

Predictability, and a sense that people all share the same planet

International

The Economist November 14th 2020 International 55

2

1

nounced in July that America was pullingout of the World Health Organisation(who), the main global body for fightingpandemics (among other things), grum-bling that it was beholden to China. Mr Bi-den says he will reverse this rash decisionon the first day of his presidency.

By executive order, he can stop the clockon the withdrawal process, which was to becompleted by July 2021. It is unclear howbig the disruption will be. America is thewho’s biggest donor: in 2019 it providedaround 15% of its budget. With Mr Biden incharge, America is also expected to join aglobal coalition funding the developmentof covid-19 tests, drugs and vaccines andtheir distribution to poorer countries. In-ternational co-operation is likely to workbetter than “America First”. The pandemic“won’t be over in the us if it’s not over inMexico,” notes a Mexican official.

Governments everywhere are askinghow Mr Biden will affect their national in-terest. China’s state media have given him acautious welcome. Global Times, a tabloid,even called him an “old friend”. China’s re-gime may have relished the decline ofAmerican soft power under Mr Trump, butit also chafed at the capriciousness of hisChina policy and the hawkishness of hisofficials. In its view, the Trump administra-tion is to blame for pushback in much ofthe West against Chinese influence.

China does not expect a Biden presiden-cy to reduce Western anxiety. But it hopesfor more predictability. Under Mr Trump,China feared a sudden policy shift towardsTaiwan that might have brought the twocountries closer to war. It hopes that Mr Bi-den will be more careful.

China would also like a less choppytrade relationship. It doubts that Mr Bidenwill ramp up tariffs in a futile effort to makebilateral imports equal to exports, as MrTrump did. It hopes that he will cut some ofthose tariffs. It does not expect any changein America’s attitude towards Chinese in-volvement in building 5g networks, or itsmilitary build-up in the South China Sea.

India’s prime minister, Narendra Modi,was quick to fire congratulatory messagesboth to Mr Biden and to his running-mate.Kamala Harris inspires “immense pride”not just among her chittis (aunties) butamong all Indian-Americans, Mr Modigushed. Indian pundits speculate that he iskeen not to be punished for having betheavily on Mr Trump, his fellow populist.

He probably won’t be. Whoever is incharge, bilateral ties have warmed in recentdecades. “The us cannot create an effectivebalance of power against China without In-dia,” notes Ashley Tellis of the Carnegie En-dowment for International Peace, a think-tank. Mr Biden’s campaign website took In-dia to task for its backsliding on democracyand human rights. India’s unspoken retort,in the words of Sadanand Dhume of the

American Enterprise Institute, anotherthink-tank, is “Let us do whatever we like,because we are with you on China.”

When it comes to asserting hard power,America’s friends in Asia want Mr Biden tobe closer to Mr Trump than to BarackObama. Mr Obama drew red lines in theSouth China Sea, but then did little whenChina crossed them. The Trump adminis-tration, by contrast, more vociferously re-jected China’s claims in the sea and uppedthe American naval presence. It reaffirmedAmerica’s defence commitment to Japa-nese islands harassed by China. And it soldarms to Taiwan. Bilahari Kausikan, former-ly Singapore’s top diplomat, says that whenMr Trump told President Xi Jinping of Chi-na, his guest at Mar-a-Lago in 2017, that hehad just bombed Syria over its use of chem-ical weapons, he did much to restore thecredibility in Asia of American power.

Say it ain’t so JoeSome Asians worry that Mr Biden mightmake security concessions to China in pur-suit of other goals, such as co-operation onclimate change. Where Mr Obama “put em-phasis on engagement first, it’s time to putdeterrence first,” says Miyake Kunihiko ofthe Canon Institute for Global Studies, athink-tank in Tokyo. “They shouldn’t leaveChina with any illusions it would be able toattack Taiwan,” says Sasae Kenichiro, a for-mer Japanese ambassador to the United

States. Still, many would like to see Mr Bi-den approach China in closer co-ordina-tion with allies, and with less blind rage.For all that Japanese policymakers wish toconstrain their huge neighbour, they are,given China’s proximity and the two coun-tries’ enmeshed economic ties, reluctant toconfront it. They dread the kind of openbreak with China that the Trump adminis-tration has seemed bent on.

Japan’s new prime minister, SugaYoshihide, surely hopes for a more conven-tional relationship with his country’s mainally. “It’s extremely important for us tohave professional consultations with theUnited States, and with a head of govern-ment who is knowledgeable about foreignpolicy,” says Tanaka Hitoshi, a former dep-uty foreign minister.

South Koreans would agree. Mr Trumptore up a trade deal and constantly threat-ened to withdraw American troops fromKorean soil if Seoul did not pay more fortheir presence. Mr Biden, in an op-ed forSouth Korea’s national news agency, calledsuch threats “reckless” and vowed tostrengthen the alliance. In a poll before theelection, almost two-thirds of South Kore-ans said they wanted Mr Biden to win.

Likewise, in South-East Asia, MrTrump’s calls for an ideological crusadeagainst “Communist China”, to be foughton every front, showed an administrationout of touch with diplomatic realities, ar-gues Dino Patti Djalal, an Indonesian for-mer ambassador to America, in the Dip-lomat, a magazine. Yes, China causesheadaches in South-East Asia. But it hasposed no ideological threat for decades. Fornow, he says, the region’s priority is toovercome the pandemic (with China’shelp) and chart an economic recovery (inwhich China will be the motor of growth).The American presence is welcome, buthaving to take sides is not—which is whyIndonesia recently refused to offer a hometo American spy planes.

As for Mr Biden, Asians are counting ona return of what Kevin Rudd, an Australianformer prime minister, calls “strategic andeconomic ballast” to America’s relation-ship with Asia, and “a more nuanced diplo-macy”. Is that likely? Mr Rudd thinks so. MrBiden is pulling together a team of Asia ex-perts for whom “the granularity of theIndo-Pacific is like second nature”.

During the Trump years the EuropeanUnion (eu) unexpectedly found itself theguardian of multilateralism. After Mr Bi-den’s victory, Europeans hope this burdenwill be shared. Besides rejoining the Parisagreement, they would like America tostop undermining the World Trade Organi-sation and to revive the Iran nuclear deal.Mr Biden has suggested he will do so.

In grand strategic terms, the eu’s mainaim is to avoid being dragged into a hege-monic struggle between America and Chi-

Whither will he wander?United States, countries visited by the presidentAverage, per year of term

Source: US Department of State

2

Donald Trump

Barack Obama

George W. Bush

Bill Clinton

George H. W. Bush

Ronald Reagan

1086420

Total

22

59

74

74

37

27

They have promises to keepGreenhouse-gas emissions*Gigatonnes of CO2 equivalent

Source: ClimateAction Tracker

*Excluding land use and forestry†Biden election pledge ‡Net zero

1

15

12

9

6

3

0

60504030201020001990

EuropeanUnion

US†

China

PLEDGES

‡ ‡

56 International The Economist November 14th 2020

2 na. It wants to be slightly firmer and lesscredulous with China, but may not supportMr Biden if he pursues confrontation.

Mr Biden will not undermine nato ashis predecessor did. And he will insist thatnato allies, two-thirds of whom fail tospend 2% of gdp on defence, invest more intheir own armed forces. Germany hopesthat this message will no longer be accom-panied by threats to slap tariffs on Germancars, and that disputes between allies willbe settled quietly, rather than over Twitter.

France hopes for a fresh American pushto resolve regional conflicts that affectEuropean security, from Turkish expan-sionism in the eastern Mediterranean toinstability in Lebanon and Libya. Germanyand France will welcome a return of Ameri-can civility and seriousness, and an end toMr Trump’s efforts to divide Europe.

Yet there is also a clear-eyed recognitionin European capitals that, even under MrObama, Europe had begun to slip out ofAmerican sight. “The Americans are obvi-ously indispensable,” says a French presi-dential source, “but the world haschanged.” France now wants Europe to domore for itself, and differently. EmmanuelMacron, France’s president, will need topersuade the Biden team that his ambi-tions to build up “strategic autonomy” inEurope are not aimed at sidelining nato.

Not your average JoeBritain hopes to secure a trade deal withAmerica (to offset the damage done byBrexit) and to punch above its weight glob-ally via its “special relationship” with thesuperpower. However, Mr Biden, who hasIrish ancestry, has hinted that Britain canforget about a trade deal if it reimposes ahard border between Northern Ireland andthe Republic of Ireland. He has describedBoris Johnson, Britain’s prime minister, as“the physical and emotional clone of Do-nald Trump”, which is not meant as a com-pliment. That Mr Johnson was the secondworld leader to speak to Mr Biden after hisvictory will allay some fears, but Britainwill probably lose its role as the bridge be-tween the United States and Europe.

In the Middle East reviving the Iran nuc-lear deal will not be easy. Most AmericanRepublicans and some Democrats revile it.Mr Biden may lift some sanctions and thentry to negotiate a follow-up agreement. Is-rael and the Gulf states will want it to gomuch further than the original 2015 ver-sion—to impose limits on Iran’s ballistic-missile programme and perhaps its sup-port for militant groups. Iran is unlikely toagree to such terms, though, in which caseAmerica’s Middle Eastern partners willurge Mr Biden to maintain the sanctions.

Mr Trump had a notable success in per-suading Arab states to recognise Israel. MrBiden will be under pressure to continuethe thaw. Israel’s prime minister, Binyamin

Netanyahu, was close to Mr Trump, andwill have to mend ties with Mr Biden. How-ever, his country retains strong support inAmerica. The Palestinians hope to reversesome of Mr Trump’s more antagonisticmoves, such as closing their diplomaticmission in Washington and cutting aid.They are unlikely to convince Mr Biden tomove America’s embassy in Jerusalemback to Tel Aviv. Most countries want Mr Bi-den to slow the drawdown of Americantroops from Afghanistan, where fightingbetween the government and the Taliban isintensifying, and to keep a foothold in Iraq,where Islamic State is active (see chart 3).

For the world’s populists and national-ists Mr Trump’s presence in the WhiteHouse was evidence that theirs was the ide-ology of the future. “The value Bolsonaroderived from Trump was the narrative,”says Oliver Stuenkel of the Fundação Getu-lio Vargas, a university in São Paulo. AndrésManuel López Obrador, Mexico’s left-wingpopulist president, has so far refused tocongratulate Mr Biden.

Viktor Orban, Hungary’s illiberal primeminister, supported Mr Trump on the

ground that Mr Biden’s party stood for“moral imperialism”. Poland’s rulers did sofor similar reasons. Janez Jansa, primeminister of Melania Trump’s native Slove-nia, insisted for days that Mr Trump hadwon and retweeted fake news to that effect.

Back to life, back to realityThese countries now face a president whosees upholding the rule of law as a foreign-policy priority. As vice-president, Mr Bidenrepeatedly toured eastern Europe explain-ing that America saw corruption as a tool ofRussian influence, and fighting it as crucialto nato’s security. Daria Kaleniuk of antac,an anti-graft group in Kyiv, hopes Mr Bidenwill be “much stronger and more involved”.

Many autocratic leaders will miss MrTrump’s tendency to overlook their sins.Saudi Arabia’s crown prince, Muhammadbin Salman, will find his regular WhatsAppchats with Jared Kushner less useful. Vladi-mir Putin expects frostier relations. Hence,perhaps, the histrionics of Dmitry Kiselev,his propagandist-in-chief. “For a long time,they have been trying to teach us [democra-cy],” he said. “But now the teacher hasstaged a debauchery, smashed the win-dows and shit his pants.”

Many poor countries hope that Mr Bi-den will notice them. Governments in Afri-ca want support to deal with the economicfallout of the pandemic. Central Americawants aid to curb violence and give peoplean alternative to emigration. Developingcountries everywhere would like less blus-ter about a new cold war with China andmore American trade and investment.

Human-rights groups would like a vo-cal ally in the White House, or even a long-winded one. “We will clearly see a more se-rious voice on democracy and humanrights in Africa,” says Judd Devermont ofthe Centre for Strategic and InternationalStudies, a think-tank. “The Trump admin-istration’s absence was most deafening onpolitics and governance.”

Finally, the world expects America towelcome more foreign talent. Mr Bidenvows to repeal Mr Trump’s toughest immi-gration curbs, stop building the wall, stopputting children in cages and offer a path tocitizenship for people living in America il-legally. Countries that send lots of emi-grants, such as India, are pleased.

So are the migrants themselves. ArvinKakekhani, an Iranian researcher at theUniversity of Pennsylvania, designs cata-lysts to turn water and carbon dioxide intoclean fuels. After Mr Trump’s “Muslim ban”he felt “so insecure”, not knowing whetherhe would be able to stay in the country, herecalls. He has had to live apart from hisIranian wife for two years. “My dream is touse expertise to tackle the climate crisis,”he says, adding that with Mr Biden’s vic-tory, he is “now much more motivated tostay” and do it in America. 7

Bring the boys back homeUnited States, overseas active-duty troops*, ’000

Sources: Defence ManpowerData Centre; The Economist *At September

3

300

250

200

150

100

50

0

20162012

Unknown/other

AmericasSouth &

Central Asia

East & South-East Asia

Middle East &north Africa

Europe

The Economist November 14th 2020 57

1

At a summit with China’s richest entre-preneurs in late 2018 Xi Jinping sought

to allay concerns that the state had de-clared war on the country’s private sector.Although officials in Beijing had spent theprevious year bringing to heel unruly ty-coons, China’s president insisted that ru-mours of a forceful push for party influ-ence in the private sector were untrue. Heexhorted the business leaders to “take a pillof reassurance”.

The medicine has been hard to swallow.Since then the Communist Party hassought a more active hand in recruitmentand business decisions. And after sub-duing a band of headstrong bosses at over-extended financial conglomerates, thestate is now taking aim at China’s tech bil-lionaires, making it clear that outspokencritics will not be tolerated.

Mr Xi’s preoccupation has always beenmaintaining China’s social and financialstability. Keeping big business in check ispart of that plan. It should come as no sur-prise that the state is now homing in on

tech, which has expanded rapidly (seechart on next page). Six of China’s 20 mostvaluable listed companies are tech firmsand with billions of users they touch thelives and wallets of almost all citizens.

A reckoning for the sector began withwhat looked like a shot across the bows ofChina’s largest financial-technologygroup. The suspension by regulators onNovember 5th of Ant Financial’s $37bn ini-tial public offering with less than 48 hours’notice was at first interpreted merely as awarning to its founder, Jack Ma, who hadpreviously criticised China’s state-owned

banks. But on November 10th the publica-tion of an extensive draft of new rules fortechnology groups laid bare the state’s am-bitions to bring to heel not just Ant, but thewhole of China’s tech industry.

Mr Xi’s relationship with China’s ty-coons has always been troubled. When hebecame president in 2013, he inherited acorporate system replete with fraud,patchy regulation and surging debt. Afterthe success of an anti-corruption cam-paign that mostly targeted officials, Mr Xitook aim at a group of businessmen whowere ploughing huge sums into risky over-seas investments. Purchases included Sea-World, an American amusement-parkgroup, and the Waldorf Astoria, a swish ho-tel in New York. Officials argued that manyof these acquisitions were thinly disguisedmeans to divert capital out of China. 

Many of the businessmen who oncefancied themselves as a Chinese WarrenBuffett are in prison or worse. Wu Xiaohui,the chairman of Anbang, which bought theWaldorf among other assets, was handedan 18-year prison sentence in 2018 for fi-nancial crimes. Ye Jianming, who attempt-ed to buy a $9bn stake in Rosneft, a Russianoil producer, was detained in early 2018.His whereabouts is still unknown. XiaoJianhua, a broker for China’s political elitewho once controlled Baoshang Bank, waskidnapped by Chinese agents from his flatat the Four Seasons Hotel in Hong Kong in2017 and is thought to be co-operating with

Chinese private enterprise

The intimidation game

H O N G KO N G

The humbling of Jack Ma wasn’t a one-off. Xi Jinping is determined to assertmore Communist Party authority over China’s glittering tech industry

Business

59 Disney’s streaming-TV success

59 A growing taste for pasta

60 Royal Enfield revs up

61 Schumpeter: The big McComeback

Also in this section

— Bartleby is away

58 Business The Economist November 14th 2020

2 authorities in the unwinding of his finan-cial conglomerate.

The crackdown has put an abrupt end toa boom in global spending by Chinesefirms: in 2016 there were $200bn-worth ofoverseas mergers and acquisitions, the fig-ure in 2019 was less than a fifth of that. Andunder government pressure private groupshave divested assets worth billions of dol-lars. hna, an airlines and logistics groupthat bought a large stake in Deutsche Bankand Hilton Worldwide, a hotel group, hassold assets worth over $20bn in recentyears. Anbang Insurance was nationalised,putting the Waldorf under the ownershipof China’s Ministry of Finance. Baoshangwas taken over by the state and allowed tofile for bankruptcy in August. Acquisitionsof European football clubs by Chinesegroups have all but ended.

Analysts have praised the way in whichsystemic risks posed by companies such asAnbang and hna appear to have been re-duced on Mr Xi’s watch. Within China fewdare to criticise him for his failings. Thosewho have done so have been dealt with se-verely. Ren Zhiqiang, a senior member ofthe Communist Party who once ran a state-owned property firm, penned a missive tofriends earlier this year in which he re-ferred to Mr Xi as a “naked clown”. He wassentenced to 18 years in prison in Septem-ber for bribery and embezzlement.

The party has also been increasing itsinfluence over private firms in more subtleways. Under a strategy referred to as “partybuilding”, firms have been asked to launchparty committees, which can opine onwhether a corporate decision is in line withgovernment policy. The number of com-mittees in publicly traded but privatelycontrolled companies is still low. Accord-ing to a survey of 1,378 Chinese listed firmsby Plenum, a consultancy, of the 61% thatwere privately controlled only 11.5% hadparty-building clauses in their charterscompared with 90% of state-owned firms.

Party invitationYet the prevalence of such committeeslooks likely to grow. In September Mr Xiasked for the private sector to “unitearound the party”. A day later Ye Qing, vice-chairman of the All-China Federation of In-dustry and Commerce, a powerful organi-sation controlled by the Communist Party,issued a more detailed list of demands. Hecalled for private groups to establish hu-man-resources departments led by theparty and monitoring units that would al-low the party to audit company managers.

This might not affect all firms equally.“For big companies, there’s no negotiation.The party approaches you and you say yes,”says Joe Zhang, a business consultant whohas sat on the boards of Chinese privateand state corporations. However, he alsoargues that for most smaller firms, less vis-

ible and not as economically important,party cells are little more than a rubberstamp as profits will trump state influenceon decision-making. Their influence maynot necessarily be unwelcome either. Oneexecutive, whose company has a partycommittee, argues that by growing closerto the thinking of the party leadership, “wecan steer the company accordingly”. Thisheads off potential clashes with the state.

So far there is little evidence to suggestthat party committees have hurt profitabil-ity, says Huang Tianlei of the Peterson In-stitute for International Economics, athink-tank. But increased party influencecould inhibit some operations. “Innova-tion may be suppressed. More red tape canemerge. A firm can turn from profit-drivento goal-driven, sacrificing profitability,”says Mr Huang.

It is possible that party committees maysoon play a larger role in tech firms. A raftof new regulations presents a more imme-diate threat. Ant is connected to hundredsof millions of people through its paymentsand lending platforms. Like other Chinesetech giants it holds precious data on cus-tomers as well as controlling a pipelinethrough which hundreds of billions of dol-lars are lent and spent. That such powerlies in private hands is a source of tensionbetween the party and entrepreneurs.

“These resources need to be tightly con-trolled and the political loyalty of the firmsand entrepreneurs, not only to the regime

but also to individual political leaders,needs to be strictly maintained,” says SunXin, an academic at King’s College London.“The case of Ant is just one manifestationof this underlying logic.”

The halting of Ant’s ipo was triggered bynew draft regulations aimed at online mi-cro lending. For Ant, the rules can only beinterpreted as an attack on the firm’s lend-ing platform, its biggest source of revenue.Mr Ma may regret comparing China’s banksto pawnshops in a speech in October. Thecomments infuriated senior officials andplayed a part in the hasty suspension ofAnt’s ipo. But Mr Ma is not to blame for thelatest onslaught of antitrust rules, al-though he may have sped up their arrival.

vie-ing for influenceThe new rules, under consideration forsome while, will for the first time explicitlyapply monopoly controls on internet ande-commerce firms. For many years China’santitrust laws have not exempted thegroups but they have also not been targetedin monopoly cases. This has allowed a fewcompanies to control large swathes of thedigital economy. They also take aim at thestructures that have allowed Chinese techfirms to raise capital overseas. Barred fromallowing foreign investors to take directstakes, for two decades virtually all capital-hungry tech groups have skirted the rulesby using a “variable-interest entity” (vie) tolink foreign cash to the Chinese market.The structure creates an offshore holdingcompany into which foreigners invest.That company has a contractual agreementwith an onshore firm to receive the eco-nomic benefits of the underlying assets.

The vie structure has long been tolerat-ed by Chinese authorities, but without fulllegal recognition. Foreigners have virtuallyno recourse in China to claim rights to theassets they have invested in. Foreign fundshave long been wary of the framework butmost Chinese tech companies still use it tostructure their overseas listings. The newantitrust rules could require companies toseek approval for such arrangements, call-ing into question whether vies will be per-mitted in the future and so the way that for-eign capital will reach Chinese techfirms. The threat of withdrawing tacit ap-proval for a vie is another way the state canintimidate firms and their owners.

Perhaps the new rules will humble theoutspoken Mr Ma. He has not spoken pub-licly on the matter, but Ant has bent theknee and agreed to embrace the new regu-lations. Mr Xi has made clear that no com-pany is too big, and no ipo too valuable, tobe allowed to challenge the state. 7

Tech-tonic shiftChina

Sources: Plenum; Bloomberg

*At November 11th†Based on 1,378 firms representing 80% of Chinese market cap‡Guidelines promoting Communist Party

Listed companies† with “party building”terms‡ in charter, June 2020, %

Mainland-domiciled companiesMarket capitalisation*, $trn

Private

State-owned

All

100806040200

18

15

12

9

6

3

0

20152010

Tech companiesshare of total, %

23.714.76.8

Tech

Other

Correction In our article on video-gaming last weekwe wrongly attributed a quote to Tony Habschmidtat Newzoo, rather than his colleague, Tom Wijman.Apologies for the error.

The Economist November 14th 2020 Business 59

1

Disney promised investors in spring2019 that a new video-streaming ser-

vice would win between 60m and 90m sub-scribers by 2024. Disney+ has outper-formed that forecast spectacularly, hittingits five-year subscriber target in just eightmonths. In doing so it is fulfilling the digi-tal-transformation plan set in motionthree years ago by Bob Iger, Disney’s long-time boss, now its executive chairman.

Marketing muscle, crucial to success,has been backed up by “The Mandalorian”,a space western inspired by “Star Wars”.Such is its popularity that Disney was latemeeting demand for a plush-toy of its babyYoda character. The pandemic added a tur-bocharge, dashing fears that Disney+ andother new streaming services, like hbo

Max and Apple tv+, might struggle to at-tract time-starved consumers. Lockdownsmean extra hours to while away, notes TimMulligan of midia Research.

Amid school closures Disney+ has beenas trusty a baby-sitter as baby Yoda’s nursedroid. Of all the new streaming servicesDisney+, which launched in western Eu-rope in March, just as lockdowns began, isthe clear winner. Even so it has not touchedthe leader, Netflix, which has 195m sub-scribers worldwide and over 70m in Ameri-ca alone (see chart).

Disney’s other businesses have sufferedbecause of the pandemic. Shuttered themeparks, closed cinemas and cancelled sport-ing events have taken their toll. In AugustDisney said covid-19 wiped out $3.5bn of

operating profits at its parks, experiencesand products division in three months.The company is expected to report anotherquarterly loss on November 12th, after TheEconomist went to press. Yet the streamingservice’s subscriber gains have helpedshield the firm’s share price. It has fallenbut by far less than its peers.

Disney+’s rapid success also underlinesa doubt about the firm—whether Mr Iger’schoice of successor was correct. The fa-vourite for the top job was Kevin Mayer,who designed and launched Disney+. MrIger chose Bob Chapek, a talented operat-ing executive who had been running themeparks. “Given the runaway success of Dis-ney+ it is even harder to understand howthe theme park and home-entertainmentexecutive got the top job,” says Rich Green-field of LightShed Partners, a research firm.Mr Mayer left Disney this summer.

Will Mr Chapek now bet heavily on Dis-ney+? The firm as a whole lavishes nearly$30bn a year on original and acquired con-tent but this year set aside only $1bn forDisney+. Netflix spends $15bn a year. TheDisney service’s rich library is enough tokeep under-tens engaged but it may lose

subscribers unless it regularly offers origi-nal grown-up fare. Third Point, an activistinvestor, wants Disney to stop its dividendand spend the $3bn a year on Disney+.

Disney could do more than that if itwent “all-in” on streaming, dropping itscurrent system in which, for example, big-budget films go exclusively to cinemas,and putting everything it makes onto Dis-ney+ at once. The service could then spendas much as Netflix and raise its price from$6.99 per month to over $10.

This would make for a huge global busi-ness but there is a danger that it wouldswiftly cannibalise the existing parts ofDisney’s empire. A more likely course isthat Disney will move new content morerapidly onto Disney+. It could also com-bine Disney+ with Hulu, a separate andsuccessful video-streaming service thefirm took control of last year.

Disney is expected to announce in December that it will spend a lot more oncontent for the service. All eyes will be onwhether Mr Chapek seems as tuned-in tostreaming’s bright future as Mr Iger was. 7

Disney bet on the right new product.But has it bet on the right new boss?

Disney

The streamingkingdom

Screen captureUnited States, streaming subscribers*Q3 2020, m

Sources: UBS; Netflix;press reports

*Selected services†Includes non-streaming services

ESPN+CBS All AccessShowtime OTTPeacockDisney+HBO Now/MaxHuluNetflixAmazon Prime†

1209060300

From “Star Wars” to streaming wars

Supermarket shelves stripped bare bystockpilers were familiar scenes as anx-

ious shoppers loaded up with toilet rollsand pasta when lockdowns were first im-posed. The taste for long-lasting dried foodhas been a boon for Italy, a country in deeprecession. Although Italians remain thebiggest eaters of pasta worldwide, munch-ing through 23kg per head annually, thecountry’s pasta-makers export 60% of theirproduction, mostly to Europe and Ameri-ca. While stuck at home far more cooksmade plates of spaghetti, fettuccine andfarfalle. According to istat, the Italian sta-tistics agency, exports of pasta increased by30% in the first six months of the year com-pared with the same period in 2019.

Barilla, the world’s biggest pasta-makerwith sales of €3.6bn ($4.2bn) last year,must keep up with increased demand forits core product. The 143-year-old familyfirm also owns Wasa, the world’s biggestmaker of Swedish crisp bread, as well as ahost of smaller snack brands. The com-pany’s high-tech headquarters in Parmaoperated at close to capacity, producing1,000 tonnes a day, throughout Italy’sharsh lockdown in spring. Some other Ba-rilla factories produced more pasta thanever, says Bastian Diegel of Barilla in Ger-

B E R LI N

Germany’s insatiable appetite forItalian pasta is keeping one firm busy

Pasta

On board thespaghetti express

60 Business The Economist November 14th 2020

2 many, albeit at significantly higher costthanks to the additional safety measures. Itcontinued to make all of its 120 varieties.

Maintaining supplies to Germany, oneof Barilla’s most important markets, evenrequired dedicated transport. Starting inMarch the job of providing 22% of the pastaand as much as 39% of the sauces eaten inGermany meant dispatching two trains aweek from Parma to Ulm, its main ware-house in the country. Each train has 16 wag-ons transporting 490 tonnes of pasta, 60tonnes of sauces and 50 tonnes of pesto.From June the trains ran three times aweek; soon they might make four journeys.

The question for Barilla and other pas-ta-makers is whether the boom will outlastthe pandemic. Luigi Cristiano Laurenza ofthe International Pasta Organisation isconfident. Pasta consumption worldwideincreased from 7m tonnes in 1999 to 16mtonnes last year, even before it became apandemic staple. Italy may have lost its ap-petite a little in recent years but there isroom for growth nearly everywhere else, inparticular in Africa and Asia. Pasta is cheap,tasty and versatile, says Mr Laurenza, mak-ing it especially attractive for cash-strapped families battered by a pandemic.

It is especially important for Barilla thatplates remain laden after a series of mis-steps. In 2002 it spent €1.8bn on a hostiletakeover of Kamps, a German baker. Itturned out to be a costly mistake and in2010 Barilla sold Kamps to a private-equityfirm. In September 2013, Guido Barilla, thecompany’s chairman, said that the firm’sfamily values meant that he would not do a“commercial with a homosexual family”.The comments provoked an outcry, in par-ticular in America, and threats of a boycott.Mr Barilla was forced to apologise and thefirm subsequently launched a limited-edi-tion pasta box showing two women shar-ing a kiss over spaghetti. Although cookingpasta requires plenty of hot water, pasta-makers should stay out of it. 7

Profit sauce

Despite the autumn chill, a group hasgathered in front of the Iron Horse

Royal Enfield dealership, a small stonebuilding set in the Connecticut hills. Awoman sits on a motorcycle, its single-cylinder engine thumping with a dis-tinctive sound. In the window a strikingchrome-and-black model looks muchlike what would have rolled out of En-field’s original factory in Redditch in theBritish Midlands in the company’s hey-day in the 1950s.

Enfield, dating back to 1901, boasts ofthe longest lifespan of any motorcyclemanufacturer. But Iron Horse only beganselling its bikes in 2018 and the nameremains relatively unknown in Americaand other markets outside India. Thecompany’s original British operationsclosed in 1970; the surviving Indianremnant was heading the same waybefore a stunning revival that saw annualsales grow from 31,000 units in 2006 tomore than 800,000 in 2019, transformingthe value of Enfield’s parent company,Eicher Motors, a tractor-maker, from justa few hundred million dollars to $8.5bn.Now the company is accelerating into thewider world.

Enfields are a throwback, devoid ofmodern frills and with the looks of aclassic bike. Engines ranging from 350ccto 650cc are large for India but smallcompared with machines from firmssuch as of Triumph and bmw. Enfielddeclined to enter the largest part of theIndian market, which is for small andcheap bikes, and will not attempt tomake the expensive, tech-laden ma-

chines that bikers generally hanker afterin rich countries. Improvements havetackled mechanical shortcomings with-out undermining the existing sound, feeland look. They must, says Siddhartha Lal,Eicher’s boss, provide “everything youneed and nothing you don’t”.

A consequence of this approach isthat production is confined to a limitednumber of straightforward motorcyclesproduced at high volume which en-hances economies of scale and enablesprofitability at low prices. The mostexpensive Enfield in America is $6,400,making the bikes accessible to a widerpotential market. Machines from Harley-Davidson, which has suffered fallingsales in recent years, often cost morethan three times as much.

Enfield is aiming to sell 20% of itsproduction abroad. Over the past fiveyears, it has added 700 dealers world-wide to its 1,600 in India. Exports dou-bled to 39,000 units in the year to the endof March and in June, admittedly an oddmonth because of the covid-19 lockdown,an Enfield 650cc motorcycle topped theBritish sales chart.

A sign that it might succeed as anexporter is that the bikes are becomingpart of popular culture outside India. AYouTube diary by a young Dutch woman,for example, begins with her purchase ofan Enfield in Delhi and follows her jour-ney back to theNetherlands. More than100,000 people subscribe to her posts.The urge to cross borders is shared notonly by Enfield but, apparently, its cus-tomers as well.

KickstartRoyal Enfield

K E N T, CO N N E CT I C U T

An Indian reincarnation of a failed British motorcycle brand is going global

Taking the classic route

The Economist November 14th 2020 Business 61

Chris kempczinski is anything but supersized. One year intohis tenure, the ceo of McDonald’s is a lean-framed 52-year-old

who runs marathons. Hard to believe, then, that he eats a McDon-ald’s meal twice a day, five days a week. “There are days when I’mindulgent and days when I’m careful about what I’m eating, but Ieat a lot of McDonald’s,” he admits in an interview. Indeed he putsmany of his best customers to shame. On average, the top 10% ofBig Mac bingers visit his restaurants a fifth as regularly as he does.

Perhaps he is making up for lost time. Unusually for a McDon-ald’s boss, he is not a company lifer. He joined in 2015, hired by hispredecessor, Steve Easterbrook, when McDonald’s was on theverge of meltdown. It was floundering in its attempts to competewith innovative American upstarts, such as Chipotle and ShakeShack. Its premises were shabby even as it offered hundreds ofitems on the menu that many of its customers could not afford.Critics called it a parasite on society, paying low wages and pro-moting obesity. Mr Kempczinski acknowledges that it sufferedfrom hubris. Under Mr Easterbrook, who took charge in 2015, themission was to shake it out of its complacency.

What followed was a lesson in corporate renewal that couldhave made Mr Easterbrook a megastar ceo had he not been firedlast year for having a consensual relationship with an employee.(McDonald’s has recently sued him for allegedly concealing othersexual relationships and wants to recover a big pay-off.) Yet sensi-bly Mr Kempczinski is sticking to the programme. Unlike manynew bosses overeager to tear up the legacy of their disgraced prede-cessors, he unveiled a new strategy on November 9th that buildson the work started in recent years. In the midst of a pandemic, itoffers a valuable lesson of its own. Never let a crisis go to waste.

The seeds of the revival of McDonald’s started with a simple de-cision that is surprisingly easy to get wrong: go back to basics.From 2015 onwards, it pared back its array of menu offerings andfocused on price and quality. It recommitted to Ray Kroc’s belovedbusiness model, increasing the share of franchises last year to 93%(of almost 39,000 restaurants), up from 82% in 2015. That providedit with higher-margin and steadier royalty and rental income. Itstreamlined its sprawling international operations, selling con-trol of its restaurants in China and Hong Kong. The results were

impressive. Across McDonald’s sales exceeded $100bn last year; itsoperating margins, thinner than a frazzled patty in most of the res-taurant industry, ballooned to 43%. And its share price sizzled.Since 2015 its market value has almost doubled to $160bn.

As it recovered its financial footing, it turned to investing in thefuture. But counter-intuitively, it probably benefited by not rush-ing. According to John Gordon, a San Diego-based restaurant con-sultant, its franchisee model makes it hard to move fast—and im-portant to build consensus. It tests new ideas out in local marketsbefore suggesting them to franchisees worldwide. Its ownershipof the land under franchisees’ restaurants gives it a joint interestwith them in co-investing in refurbishments and technologicalupgrades. Not only does this help woo customers by reinforcingthe brand, it also supports the value of the land. In recent years Mc-Donald’s and its franchisees have invested heavily in installing kiosks for touchscreen ordering and making other improvementssuch as two-lane drive-throughs. Last year the company made itsbiggest acquisition in years, buying a tech firm that helps perso-nalise the drive-through experience. The overhauls may have costfranchisees a lot. But over the course of the covid-19 pandemic,they have started to reap the benefits.

That is because McDonald’s has used the crisis to step up thepace of its transformation, resulting in big sales surges in recentmonths, especially in America. With the interiors of many of itsrestaurants closed, it has relied on the roll-out of its digital, drive-through and delivery initiatives, all of which encourage a more“contactless” experience that it believes will outlast the pandemic.Recalling Kroc’s aphorism that “We’re not in the hamburger busi-ness. We’re in show business,” it has dazzled customers with cus-tomised menus by superstar rappers such as Travis Scott. And ithas made old favourites, such as Big Macs and Quarter Pounders,central to its menu, which adds to simplicity in the kitchen andspeeds up customer service. Over the next two years it hopes along-awaited digital loyalty programme will enhance sales growthand maintain margins at their elevated levels of 2019. With a covidvaccine, it could do even better.

Many challenges remain for Mr Kempczinski. On food, McDon-ald’s is a laggard when it comes to chicken sandwiches and plant-based products. It promises a Crispy Chicken Sandwich and non-meat McPlant soon. The former is vital to catch up with competi-tors such as Chick-fil-a. The company says it is shifting marketingaway from sales drives towards promoting itself as a community-focused-brand, but not everyone likes the pious tone. “Social Jus-tice Warriors are now running McDonald’s Corporation. Stuff thathas nothing to do with selling Big Macs,” says one franchiseequoted in an analyst’s report. McDonald’s faces two lawsuits fromformer and current black franchisees, alleging racial discrimina-tion by pushing them into poor areas. It refutes the accusations.

From Big Macs to big dataIts ubiquity means McDonald’s is often in the news for the wrongreasons. But as a corporate turnaround, it is a compelling story. In-stead of suffering from a tech onslaught as many bricks-and-mor-tar chains have, it has turned itself into a digital pioneer. Instead ofhunkering down during the pandemic, it has embraced new waysof doing business. Despite Mr Kempczinski’s baptism of fire, eventhe leadership transition has been the best the industry has seen inyears, says Sara Senatore of Bernstein, an investment firm. Heshould not be harshly judged for his frequency at the lunch coun-ters. So far he has earned all the Quarter Pounders he can eat. 7

The big McComebackSchumpeter

Takeaways from the revival of a fast-food behemoth

62 The Economist November 14th 2020

1

It is now more than 20 years since theNasdaq, an index of technology shares,

crashed after a spectacular rise during thelate 1990s. The peak in March 2000 markedthe end of the internet bubble. The bustthat followed was a vindication of thestringent valuation methods pioneered inthe 1930s by Benjamin Graham, the fatherof “value” investing, and popularised byWarren Buffett. For this school, valuemeans a low price relative to recent profitsor the accounting (“book”) value of assets.Sober method and rigour were not featuresof the dotcom era. Analysts used vaguermeasures, such as “eyeballs” or “engage-ment”. If that was too much effort, theysimply talked up “the opportunity”.

Plenty of people sense a replay of thedotcom madness today. For much of thepast decade a boom in America’s stock-market has been powered by an elite oftechnology (or technology-enabled)shares, including Apple, Alphabet, Face-

book, Microsoft and Amazon. The valuestocks favoured by disciples of Grahamhave generally languished. But change maybe afoot. In the past week or so, fortuneshave reversed. Technology stocks have soldoff. Value stocks have rallied, as prospectsfor a coronavirus vaccine raise hopes of aquick return to a normal economy. Thismight be the start of a long-heralded rota-tion from overpriced tech to far cheaper cy-clicals—stocks that do well in a strongeconomy. Perhaps value is back.

This would be comforting. It would vali-date a particular approach to valuing com-panies that has been relied upon for thebest part of a century by some of the mostsuccessful investors. But the uncomfort-able truth is that some features of value in-vesting are ill-suited to today’s economy.As the industrial age gives way to the digitalage, the intrinsic worth of businesses is notwell captured by old-style valuation meth-ods, according to a recent essay by Michael

Mauboussin and Dan Callahan of MorganStanley Investment Management.

The job of stockpicking remains to takeadvantage of the gap between expectationsand fundamentals, between a stock’s priceand its true worth. But the job has beencomplicated by a shift from tangible to in-tangible capital—from an economy wherefactories, office buildings and machinerywere key to one where software, ideas,brands and general know-how mattermost. The way intangible capital is ac-counted for (or rather, not accounted for)distorts measures of earnings and bookvalue, which makes them less reliable met-rics on which to base a company’s worth. Adifferent approach is required—not theflaky practice of the dotcom era but a seri-ous method, grounded in logic and finan-cial theory. However, the vaunted heritageof old-school value investing has made ithard for a fresher approach to gain traction.

Graham’s crackerTo understand how this investment phi-losophy became so dominant, go back acentury or so to when equity markets werestill immature. Prices were noisy. Ideasabout value were nascent. The decision tobuy shares in a particular company mightby based on a tip, on inside information, ona prejudice, or gut feel. A new class of equ-ity investors was emerging. It included far-

Diminished value

Value investing, made famous by Warren Buffett, is struggling to remain relevantas an ever greater share of the economy becomes intangible

Briefing Investment strategies

The Economist November 14th 2020 Briefing Investment strategies 63

2

1

sighted managers of the endowment fundsof universities. They saw that equities hadadvantages over bonds—notably thosebacked by mortgages, railroads or publicutilities—which had been the preferred as-set of long-term investors, such as insur-ance firms.

This new church soon had two doctrinaltexts. In 1934 Graham published “SecurityAnalysis” (with co-author David Dodd), adense exposition of number-crunchingtechniques for stockpickers. Another ofGraham’s books is easier to read and per-haps more influential. “The Intelligent In-vestor”, first published in 1949, ran in re-vised editions right up until (and indeedbeyond) Graham’s death in 1976. The firstedition is packed with sage analysis, whichis as relevant today as it was 70 years ago.

Underpinning it all is an important dis-tinction—between the price and value of astock. Price is a creature of fickle senti-ment, of greed and fear. Intrinsic value, bycontrast, depends on a firm’s earningspower. This in turn derives from the capitalassets on its books: its factories, machines,office buildings and so on.

The approach leans heavily on companyaccounts. The valuation of a stock shouldbe based on a conservative multiple of fu-ture profits, which are themselves basedon a sober projection of recent trends. Thebook value of the firm’s assets provides across-check. The past might be a crudeguide to the future. But as Graham argued,it is a “more reliable basis of valuation thansome other future plucked out of the air ofeither optimism or pessimism”. As an extraprecaution, investors should seek a marginof safety between the price paid for a stockand its intrinsic value, to allow for any er-rors in the reckoning. The tenets of valueinvesting were thus established. Be conser-vative. Seek shares with a low price-earn-ings or price-to-book ratio.

The enduring status of his approachowes more to Graham as tutor than the rep-utation he enjoyed as an investor. Grahamtaught a class on stockpicking at ColumbiaUniversity. His most famous student wasMr Buffett, who took Graham’s investmentcreed, added his own twists and becameone of the world’s richest men. Yet the sto-ries surrounding Mr Buffett’s success are asimportant as the numbers, argued AswathDamodaran of New York University’s SternSchool of Business in a recent series of You-Tube lectures on value investing. The boldpurchase of shares in troubled AmericanExpress in 1964; the decision to dissolve hispartnership in 1969, because stocks weretoo dear; the way he stoically sat out thedotcom mania decades later. These storiesare part of the Buffett legend. The philoso-phy of value investing has been burnishedby association.

It helped also that academic financegave a back-handed blessing to value in-

vesting. An empirical study in 1992 by Eu-gene Fama, a Nobel-prize-winning financetheorist, and Kenneth French found thatvolatility, a measure of risk, did not explainstock returns between 1963 and 1990, as ac-ademic theory suggested it should. Insteadthey found that low price-to-book sharesearned much higher returns over the longrun than high price-to-book shares. Oneschool of finance, which includes these au-thors, concluded that price-to-book mightbe a proxy for risk. For another school, in-cluding value investors, the Fama-Frenchresult was evidence of market inefficien-cy—and a validation of the value approach.

All this has had a lasting impact. Mostinvestors “almost reflexively describethemselves as value investors, because itsounds like the right thing to say”, says MrDamodaran. Why would they not? Every in-vestor is a value investor, even if they arenot attached to book value or trailing earn-ings as the way to select stocks. No saneperson wants to overpay for stocks. Theproblem is that “value” has become a labelfor a narrow kind of analysis that oftenconfuses means with ends. The approachhas not worked well for a while. For muchof the past decade, value stocks have laggedbehind the general market and a long waybehind “growth” stocks, their antithesis(see chart 1). Old-style value investing looks

increasingly at odds with how the econ-omy operates.

In Graham’s day the backbone of theeconomy was tangible capital. But thingshave changed. What makes companies dis-tinctive, and therefore valuable, is not pri-marily their ownership of physical assets.The spread of manufacturing technologybeyond the rich world has taken care ofthat. Any new design for a gadget, or gar-ment, can be assembled to order by con-tract manufacturers from componentsmade by any number of third-party fac-tories. The value in a smartphone or a pairof fancy athletic shoes is mostly in the de-sign, not the production.

In service-led economies the value of abusiness is increasingly in intangibles—assets you cannot touch, see or count easi-ly. It might be software; think of Google’ssearch algorithm or Microsoft’s Windowsoperating system. It might be a consumerbrand like Coca-Cola. It might be a drugpatent or a publishing copyright. A lot ofintangible wealth is even more nebulousthan that. Complex supply chains or a set ofdistribution channels, neither of which iseasily replicable, are intangible assets. Soare the skills of a company’s workforce. Insome cases the most valuable asset of all isa company’s culture: a set of routines, pri-orities and commitments that have beeninternalised by the workforce. It can’t al-ways be written down. You cannot easilyenter a number for it into a spreadsheet.But it can be of huge value all the same.

A beancounter’s nightmareThere are three important aspects to con-sider with respect to intangibles, says MrMauboussin: their measurement, theircharacteristics, and their implications forthe way companies are valued. Start withmeasurement. Accounting for intangiblesis notoriously tricky. The national ac-counts in America and elsewhere havemade a certain amount of progress in grap-pling with the challenge. Some kinds of ex-penditure that used to be treated as a cost ofproduction, such as r&d and software de-velopment, are now treated as capitalspending in gdp figures. The effect on mea-sured investment rates is quite marked (seechart 2). But intangibles’ treatment in com-pany accounts is a bit of a mess. By their na-ture, they have unclear boundaries. Theymake accountants queasy. The more lee-way a company has to turn day-to-day costsinto capital assets, the more scope there isto fiddle with reported earnings. And notevery dollar of r&d or advertising spend-ing can be ascribed to a patent or a brand.This is why, with a few exceptions, suchspending is treated in company accountsas a running cost, like rent or electricity.

The treatment of intangibles in mergersmakes a mockery of this. If, say, one firmpays $2bn for another that has $1bn of tan-

Not by the bookRussell 3000 stockmarket index, total returnsNovember 1st 2010=100

Source: Refinitiv Datastream

500

400

300

200

100

0

2019181716151413122010

1

Main

Value

Growth

2Let’s get non-physical

Sources: BEA; Bloomberg

United States, intellectual property investment

% of GDP% of non-residentialfixed investment

1970 80 90 2000 10 20

0

1

2

3

4

5

0

10

20

30

40

50

64 Briefing Investment strategies The Economist November 14th 2020

2 gible assets, the residual $1bn is counted asan intangible asset—either as brand value,if that can be appraised, or as “goodwill”.That distorts comparisons. A firm that hasacquired brands by merger will have thosereflected in its book value. A firm that hasdeveloped its own brands will not.

The second important aspect of intan-gibles is their unique characteristics. Abusiness whose assets are mostly intangi-ble will behave differently from one whoseassets are mostly tangible. Intangible as-sets are “non-rival” goods: they can be usedby lots of people simultaneously. Think ofthe recipe for a generic drug or the designof a semiconductor. That makes them un-like physical assets, whose use by one per-son or for one kind of manufacture pre-cludes their use by or for another.

In their book “Capitalism Without Capi-tal” Jonathan Haskel and Stian Westlakeprovided a useful taxonomy, which theycall the four Ss: scalability, sunkenness,spillovers and synergies. Of these, scalabil-ity is the most salient. Intangibles can beused again and again without decay or con-straint. Scalability becomes turbo-chargedwith network effects. The more people usea firm’s services, the more useful they areto other customers. They enjoy increasingreturns to scale; the bigger they get, thecheaper it is to serve another customer. Thebig business successes of the past decade—Google, Amazon and Facebook in America;and Alibaba and Tencent in China—havegrown to a size that was not widely predict-ed. But there are plenty of older asset-lightbusinesses that were built on such networkeffects—think of Visa and Mastercard. Theresult is that industries become dominatedby one or a few big players. The same goesfor capital spending. A small number ofleading firms now account for a large shareof overall investment (see chart 3).

Physical assets usually have some sec-ond-hand value. Intangibles are different.Some are tradable: you can sell a well-known brand or license a patent. But manyare not. You cannot (or cannot easily) sell aset of relationships with suppliers. That

means the costs incurred in creating the as-set are not recoverable—hence sunken-ness. Business and product ideas can easilybe copied by others, unless there is somelegal means, such as a patent or copyright,to prevent it. This characteristic gives riseto spillovers from one company to another.And ideas often multiply in value whenthey are combined with other ideas. So in-tangibles tend to generate bigger synergiesthan tangible assets.

The third aspect of intangibles to con-sider is their implications for investors. Abig one is that earnings and accountingbook value have become less useful ingauging the value of a company. Profits arerevenues minus costs. If a chunk of thosecosts are not running expenses but are in-stead spending on intangible assets thatwill generate future cashflows, then earn-ings are understated. And so, of course, isbook value. The more a firm spends on ad-vertising, r&d, workforce training, soft-ware development and so on, the more dis-torted the picture is.

The distinction between a running ex-pense and investment is crucial for securi-ties analysis. An important part of thestock analyst’s job is to understand boththe magnitude of investment and the re-turns on it. This is not a particularly novelargument, as Messrs Mauboussin and Cal-lahan point out. It was made nearly 60years ago in a seminal paper by MertonMiller and Francesco Modigliani, twoNobel-prize-winning economists. They di-vided the value of a company into twoparts. The first—call it the “steady state”—assumes that that the company can sustainits current profits into the future. The sec-ond is the present value of future growthopportunities—essentially what the firmmight become. The second part dependson the firm’s investment: how much it

does, the returns on that investment andhow long the opportunity lasts. To begin toestimate this you have to work out the truerate of investment and the true returns onthat investment.

The nature of intangible assets makesthis a tricky calculation. But worthwhileanalysis is usually difficult. “You can’t ab-dicate your responsibility to understandthe magnitude of investment and the re-turns to it,” says Mr Mauboussin. Old-stylevalue investors emphasise the steady statebut largely ignore the growth-opportuni-ties part. But for a youngish company ableto grow at an exponential rate by exploitingincreasing returns to scale, the future op-portunity will account for the bulk of valu-ation. For such a firm with a high return oninvestment, it makes sense to plough pro-fits back into the firm—and indeed to bor-row to finance further investment.

Picking winners in an intangible econ-omy—and paying a price for stocks com-mensurate with their chances of suc-cess—is not for the faint-hearted. Someinvestments will be a washout; sunken-ness means some costs cannot be recov-ered. Network effects give rise to winner-takes-all or winner-takes-most markets, inwhich the second-best firm is worth a frac-tion of the best. Value investing seems saf-er. But the trouble with screening forstocks with a low price-to-book or price-to-earnings ratio is that it is likelier to selectbusinesses whose best times are behindthem than it is to identify future success.

Up, up and awayProperly understood, the idea of funda-mental value has not changed. Graham’skey insight was that price will sometimesfall below intrinsic value (in which case,buy) and sometimes will rise above it (inwhich case, sell). In an economy mostlymade up of tangible assets you could per-haps rely on a growth stock that had gotahead of itself to be pulled back to earth,and a value stock that got left behind toeventually catch up. Reversion to the meanwas the order of the day. But in a world ofincreasing returns to scale, a firm that risesquickly will often keep on rising.

The economy has changed. The way in-vestors think about valuation has tochange, too. This is a case that’s harder tomake when the valuation differential be-tween tech and value stocks is so stark. Acorrection at some stage would not be agreat surprise. The appeal of old-style valueinvesting is that it is tethered to somethingconcrete. In contrast, forward-looking val-uations are by their nature more specula-tive. Bubbles are perhaps unavoidable;some people will extrapolate too far. Nev-ertheless, were Ben Graham alive today hewould probably be revising his thinking.No one, least of all the father of value in-vesting, said stockpicking was easy. 7

3By the few, not the many

Sources: BEA; Bloomberg

United States, estimated shareof total business investment, %

0

5

10

15

20

25

1999 2005 10 15 20

Top 10 listed firms

Top 50 listed firms

Listed tech firms

The Economist November 14th 2020 65

1

On november 9th the end of the coro-navirus pandemic came into tantalis-

ing sight. Pfizer and BioNTech announcedthat their vaccine was more effective thanexpected. Investors’ hopes for a strongereconomy sent stockmarkets soaring. Ten-year Treasury yields neared 1%, levels lastseen in March (see next page).

Even before the vaccine news broke, thespeed of America’s economic bouncebackwas exceeding forecasts and surpassingothers in the rich world. In April the imf

reckoned that gdp would shrink by 6% in2020. It now projects a decline of 4%. Un-employment peaked at 14.7% in April; inJune the Federal Reserve had expected it tostill be around 9% by the end of the year. Itwent on to fall below that rate only twomonths later. In October it stood at 6.9%.

Can a vaccine accelerate the economy’sreturn to its pre-covid state? The coronavi-rus is still spreading unchecked, with theburden often falling on the poorest. Butmany economists had also worried that thepandemic would leave broader economic

scars that take time to heal. Here, a look atfirms’ and households’ finances offersgrounds for optimism.

The resurgence of the virus will put adampener on the recovery in the monthsbefore a vaccine becomes widely available.Infections are rising so rapidly that, in the

admittedly unlikely event that currenttrends were to continue, 1m Americans aday would be catching the disease by theend of the year (see United States section).Renewed local restrictions on activityseem inevitable. That will lower sometypes of economic activity and could inturn increase the number of people whohave lost their jobs permanently.

Still, it seems unlikely that America willenter a double-dip recession, as Europe isexpected to. For one thing, it probably willnot impose lockdowns as severe as those inBritain, France or Germany. High-frequen-cy indicators, including The Economist’sanalysis of Google mobility data, suggestthat America’s recovery has slowed com-pared with the summer. But it has not goneinto reverse, as it has in Europe. And thevaccine could boost the economy in someways even before it becomes available. Tor-sten Slok of Apollo Global Management, anasset manager, argues that “householdsand firms are going to plan ahead, for ex-ample by booking travel [and] vacations”.

On the current growth path, at the turnof the year there will still be 10m fewer jobsthan there would have been without thepandemic. Output will be some $700bn, or4%, lower than otherwise. Most forecastersreckon that income per person will not ex-ceed its pre-covid level until 2022, if notlater. But growth will accelerate as jabs areadministered. Everything from theatres topublic transport will feel safer. That will

America’s economy

Giant jab

What a vaccine means for the world’s largest economy

Outperforming actsGDP forecasts, 2020 % change on a year earlier

Source: IMF

1

Britain

Euro area

World

United States

China

30-3-6-9-12

October 2020Forecast made in: April 2020

Finance & economics

66 A booster shot for investors

67 Buttonwood: Emerging markets

68 Turkey—a new economic regime?

68 An amber wave in America

69 Klarna, a Swedish payments unicorn

70 Free exchange: Epidemiologists veconomists

Also in this section

66 Finance & economics The Economist November 14th 2020

2

1

further revive the labour market. Beforethe pandemic over a fifth of workers werein jobs involving close proximity to others.

There are other reasons to think Ameri-ca’s recovery may be faster than after previ-ous recessions. History suggests that re-coveries are sluggish when downturnsleave deep economic scars. The financialcrisis of 2007-09 cast a long shadow oversubsequent years in part because of itschilling effect on bank lending, for in-stance. This time around, the effect ofschool closures on children’s educationwill be felt for decades to come. But inmany other respects there is less evidenceof lasting economic damage. A wave ofbankruptcies and permanent closures hasbeen avoided—especially of small firms,which employ half the workforce. Andfamilies’ finances have been resilient.

Start with small firms. At one point inApril nearly half of them were closed, ac-cording to data from Opportunity Insights,a research team based at Harvard Universi-ty, as shelter-in-place orders forced clo-sures and fear of the virus prompted peopleto stay at home. Six months on, many firmsare still struggling. In early October nearly athird of small firms reported that the pan-demic had a large negative effect on busi-ness, according to the Census Bureau. Onequarter of small businesses remain closed.

But these closures may not become per-manent. Total commercial bankruptcy fil-ings are running below their pre-pandemictrend, not to mention the levels of the lastrecession. Such data are not perfect, be-cause not every firm that closes down filesfor bankruptcy. A new paper by economistsat the Fed brings together many differentmeasures of “business exit”, and finds“somewhat mixed” evidence that morebusinesses have gone bust in 2020.

But these unlucky outfits do not appearto represent a large share of employment.In addition, this bankruptcy ripple seemsunlikely to turn into a wave. The share ofsmall firms very late on their debt repay-ments is currently about half its level in2009. Moreover, although the number of

active businesses fell during the first waveof the pandemic, it has recovered almost allthe lost ground, suggesting that new firmsmay have come up in place of exiting ones.

Firms’ resilience helps explain why un-employment has dropped much fasterthan expected. The share of unemployedAmericans who say they have lost their jobtemporarily remains unusually high. Suchworkers expect to be recalled to their oldemployer, pointing to further declines inthe unemployment rate.

What explains small firms’ surprisingresilience? It seems hard to credit Ameri-ca’s business-focused stimulus measures.So far less than $4bn (or 0.02% of gdp) hasbeen doled out by the Fed’s Main StreetLending Programme, which is supposed tochannel funds to small and midsized en-terprises. Economists are also under-whelmed by the Paycheck Protection Pro-gramme (ppp), which provided loans tosmall businesses that are turned intogrants as long as recipients do not sack

their employees. A paper by David Autor ofthe Massachusetts Institute of Technologyand colleagues found that “each job sup-ported by the ppp cost between $162,000and $381,000 through May 2020”. But thismoney was poorly targeted: a lot of it waslapped up by firms that planned to contin-ue operating, come what may.

Other factors are more important. Manysmall firms have managed to trim theiroutgoings. A recent paper from GoldmanSachs, a bank, finds that in May rent-col-lection rates fell to 10% or less for firmssuch as cinemas and gyms. A growingnumber of landlords now set rent as a per-centage of tenants’ revenues, an arrange-ment that was uncommon before covid-19.

But perhaps the biggest reason for thelack of small-business carnage relates toconsumer spending. In September retailsales were more than 5% up on the previ-ous year. Americans appear to have tiltedtheir spending towards small firms overlarge ones, on the premise that they are lesslikely to catch covid-19 in places with fewerpeople. The latest figures from JPMorganChase, a bank, show that credit-cardspending in early November was only mar-ginally lower than it was a year ago.

This relatively sturdy consumption inturn reflects the second factor behind thelack of scarring this time around: resilienthousehold finances. Compared with otherrich countries, America has directed moreof its fiscal stimulus towards protectinghousehold incomes. The federal govern-ment sent out cheques worth up to $1,200per person and temporarily bumped up un-employment benefits by $600 a week. Thatis not to say that the disadvantaged havenot been badly hit: some measures of de-privation have risen sharply. But viewed in

On the mendUnited States

Sources: Goldman Sachs; Department of Commerce; Federal Reserve Bank of St Louis; Bureau of Labour Statistics

2

12

9

6

3

0

2015100520001996

Active small businesses, m

RECESSION

RECESSION

Incorporated

Unincorporated

Total

80

60

40

20

0

2015100520001996

Temporary lay-offs, % of total unemployed

A dose of optimismUnited States

*Nov 6th-11th 2020 †Jan 2nd-Nov 6th 2020Sources: Bloomberg; US Department of the Treasury

2.0

1.5

1.0

0.5

0

30Y20Y10Y7Y5Y

By maturity3Y2Y1Y6M3M2M1M

Government-bond yields, %

Nov 6th 2020

Nov 11th 2020

200150100500-50-100Before Pfizer vaccine announcement†

S&P 500 companies, 2020% change in share price Since Pfizer vaccine

announcement*40

20

0

-20

-40

Amazon

Boeing

Biogen

EtsyNVIDIA

AmazoneBay

Carnival

Kimco RealtyWynn Resorts

Pfizer

Boeing

Share price fell in 2020, but rosepost-vaccinenews

Share price fell in 2020, but rosepost-vaccinenews

Prices rose for much ofthe year, but fell afterthe vaccine news

Prices rose for much ofthe year, but fell after the vaccine news

After news of an efficacious vaccine broke on November 9th, investors bet on a partialreturn to economic normality. Cruise and casino stocks leapt, and e-commerce firmsskidded. The yield on ten-year Treasuries climbed to almost 1%.

Booster shot

The Economist November 14th 2020 Finance & economics 67

2 aggregate, the financial security of house-holds has proved remarkably stable.

A survey by the Federal Reserve foundthat 77% of adults were doing “at least OK”financially in July 2020, up from 75% in Oc-tober 2019, before the pandemic struck. Be-tween March and September householdssaved 19% of their gross income, up from6% during the same period the year before,thereby accumulating $1.3trn (6% of gdp)in extra savings.

The stockpile gives consumers a bufferfor the coming months, and should helpsupport economic growth. In part for that

reason, another blowout stimulus packagemay not be needed now that a vaccine isnear. Lawmakers from the DemocraticParty have pressed for spending of $3trn ormore. Injecting money into the economycould well hasten the recovery. But another$1trn a year in stimulus may be enough torestore normality, assuming that by thestart of next year the gap between Ameri-ca’s current and potential gdp may bearound 4% of output, and that increases ingovernment spending will translate some-what less than one-to-one into extra gdp,as the evidence currently suggests.

A lot could still go wrong. Stringentlockdowns, European style, could still de-rail the recovery. Stimulus may not bepassed at all. Either would worsen the eco-nomic scars that have so far been min-imised, for instance by making it harder forthe 3.6m Americans who have been unem-ployed for more than six months to findwork. America’s many layers of govern-ment could delay the distribution of vac-cines, just as they have botched the alloca-tion of covid-19 tests. But households andbusinesses, at least, are in better shapethan you might have feared. 7

Buttonwood Coming out of the ultracold

An indian economic official onceremarked to Buttonwood that his

country’s economy does best when therest of the world does well—but not toowell. India’s exports benefit from globalgrowth. But when the world economygains too much momentum, interestrates and oil prices can rise uncomfort-ably high, hobbling a country that is a netimporter of both capital and crude.

His observation came to mind asIndia’s stockmarket roared to a recordhigh on November 10th, after news that acovid-19 vaccine developed by Pfizer andBioNTech was proving more effectivethan expected. It will be months before itbecomes widely available even in thecountries equipped to handle it. But thereproduction number of investors’ exu-berance can be very high.

Another spur to India’s stockmarket—and to emerging-market equities morebroadly—was America’s election. Theresult, when it emerged at last, removedone lingering source of uncertainty. Thathas made room in investors’ stomachsfor other types of risk. The renewedappetite for edginess helped lift msci’sbenchmark emerging-market equityindex by over 6% from November 3rd to9th. It is now up by more than half fromits lowest point in March.

Though Wall Street has been settingrecords, the emerging-market index isstill far from the all-time high it reachedin 2007 or even its peak in 2018. Indeedover the past decade emerging-marketshares have made little forward progress,albeit by the most nail-biting route pos-sible. Big gains in 2012, 2016-17 and 2019were offset by spectacular falls in theintervening years. Overall the index isjust 3% higher than ten years ago.

That underperformance, however,leaves emerging-market stocks looking

much better value than their rich-worldcounterparts. According to Oxford Eco-nomics, a consultancy, the ratio of price toearnings, adjusted for the cycle, for emerg-ing markets lies in the bottom half of itshistorical distribution. America’s ratio, bycontrast, is above the 98th percentile.

The valuation gap looks even moreglaring when compared with immediategrowth prospects. The gdp of emergingmarkets, weighted according to theirstockmarket capitalisation, will shrink byless than 2% this year and grow by about5% in 2021, according to forecasts by theEconomist Intelligence Unit, a sister com-pany of The Economist. America is doingbetter than most of the rich world, buteven so its economy will still shrink by4.6% in 2020 and grow by less than 4% in2021. Some members of the msci’s index,such as China and Taiwan, have handledthe pandemic well, allowing for an earlyreturn to growth. Others, such as India,have handled it badly. But precisely be-cause their first attempts at lockdownswere so ineffective, they are unlikely tointerrupt growth by trying another one.

These discrepancies have not goneunnoticed. Some strategists think thatunloved emerging-market shares mightbenefit from the kind of “rotation” thatin the past few days has propelled in-vestors out of expensive “growth” stocks(such as tech) and into “value” stocks, therevenues of which are more closely tiedto the state of the economy.

They also think that the most belea-guered emerging markets might benefitfrom a rotation within the rotation. JohnLomax of hsbc, for example, recom-mends increasing holdings of countrieslike Brazil and South Africa (which arestill heavily down on the year) at theexpense of Asian ones, like Taiwan.

There may be a catch, though. Emerg-ing-market assets may be priced likevalue stocks. But in another importantrespect—their sensitivity to bondyields—they more closely resemblegrowth stocks. When interest rates andbond yields rise, investors become lesswilling to bear risk or wait for futureprofits. That hurts growth stocks andemerging markets alike.

Consider the following scenario. ThePfizer vaccine is approved. But because itmust be stored at Antarctic tempera-tures, it never reaches the emergingmarkets, such as India, that lack the coldchains needed to distribute it safely. Thevaccine might therefore spur an unevenrecovery, led by rich countries.

That rebound could put upwardpressure on bond yields: the Pfizer newsalone raised yields on ten-year AmericanTreasuries to almost 1% on November9th. And the tightening of global fi-nancial conditions could hurt emergingeconomies by more than the improve-ment in rich-world growth helps them.They could do badly, if the rest of theworld does too well.

Will the vaccine be a jab in the arm for ailing emerging-market shares?

68 Finance & economics The Economist November 14th 2020

1

For someone thought to be the second-most-powerful person in Turkey and a

possible successor to President Recep Tay-yip Erdogan, it was an unseemly exit. In astatement posted on Instagram on Novem-ber 8th and riddled with grammatical mis-takes, Berat Albayrak, the president’s son-in-law, said he was stepping down as fi-nance minister and leaving politics. It tookMr Erdogan and his officials over a day todigest and confirm the news. It took anoth-er day to name Lutfi Elvan, a former deputyprime minister, as his replacement.

Mr Albayrak, popularly referred to asthe damat (son-in-law), said he was leavingfor health reasons. But insiders blame afeud with the new central-bank governor,Naci Agbal, who had criticised the minis-ter’s record. Mr Agbal had been appointedonly a couple of days earlier, after Mr Erdo-gan ousted his predecessor, Murat Uysal,without giving an explanation. (Mr Uysal isthe second head of the central bank to besacked in as many years.) Mr Albayrak wasreportedly not briefed on the decision.

Mr Albayrak’s management of the econ-omy was even worse than his grammar. Asthe minister and his father-in-law leanedon both the central bank and commerciallenders to keep borrowing rates low, thelira set one record low after another. Be-tween the damat’s surprise appointment in2018 and his shock resignation, the curren-cy lost 46% of its dollar value, eating awayat Turks’ buying power. Instead of raisinginterest rates the central bank sold dollarreserves to relieve pressure on the lira. Itthrew in the towel this summer, but onlyafter squandering more than $100bn, andhad begun to use a byzantine system of

multiple interest rates to tighten the mon-ey supply indirectly. For his part, Mr Albay-rak laughed off concerns about the curren-cy collapse. “For me, the exchange rates arenot important at all,” he told reporters inSeptember. “I don’t look at that.”

Investors hope for a return to more or-thodox policies. In its first few days of trad-ing since the shakeup, the lira had risen byover 7% against the dollar, reversing a longdecline (see chart). Both Mr Elvan and MrAgbal, who preceded the damat as financeminister, are staunch allies of Mr Erdogan,but experienced technocrats. Both say theywill prioritise fighting inflation, which inOctober approached 12%, almost two per-centage points higher than the policy inter-est rate. Mr Agbal is said to have already be-gun removing Mr Albayrak’s surrogatesfrom top posts at the central bank andpromised to improve communication. Inanother encouraging move, on November11th the banking regulator eased restric-tions on lira trading by foreigners. Thecurbs had been imposed to stop outsidersshort-selling the currency.

Still, for all of Mr Albayrak’s foibles, thedamat only did what all ministers are nowused to doing: follow Mr Erdogan’s lead.And the president gives no sign of beingready to loosen his grip on the finance min-istry and the central bank, or to dispensewith his bizarre economic views, such asthat high interest rates cause inflation.“There’s this narrative building that pinsall the bad things that happened since 2018on Mr Albayrak,” says Erik Meyersson ofHandelsbanken. “Maybe it was his strategyto start selling foreign reserves, but the rea-son they resorted to this stupid measurewas because they had this stupid directive[from Mr Erdogan] not to increase rates.”

The central bank’s monetary-policycommittee convenes on November 19th. It“needs to meet expectations by hikingrates and simplifying the policy frame-work”, says Hakan Kara, a former chiefeconomist at the bank. If not, the change atthe top will have been window-dressing. 7

I STA N B U L

Will a shakeup at the finance ministryand central bank win over investors?

Turkey

Comings andgoings

Losing purchaseTurkey

Source: Refinitiv Datastream

9

8

7

6

2020

Lira per $Inverted scale

25

20

15

10

5

0

2019182017

Consumer prices% increase ona year earlier

Berat departs

The harvest rush in America’s heart-land is subsiding. More than 90% of the

country’s corn and soyabeans had beenpicked by November 8th. Crops movedfrom cart to trailer to grain elevator. Now adifferent kind of frenzy is taking hold.

Exports of American corn are poised toreach a record of 67.3m tonnes for the mar-keting year that began in September, ac-cording to forecasts by the United StatesDeparture of Agriculture (usda) publishedon November 10th. Demand for corn andsoyabeans may push American stocks totheir lowest levels in seven years. By thetime markets closed after the usda’s re-port, the most actively traded corn andsoyabean futures contracts had jumped to$4.23 and $11.46 a bushel, respectively, withcorn up by more than a third since early Au-gust and soyabeans at their highest price inover four years. They may rise higher still.

The surge in prices follows years of tur-moil for American farmers. Gripes include:the government’s limit on the ethanol thatcan be blended in petrol; President DonaldTrump’s trade war with China; and the co-ronavirus, which depressed demand for oiland therefore the biofuels mixed with it.

Prices are climbing, in part, due to badweather. Wet conditions prompted someAmerican farmers to forgo planting andcollect government crop insurance in-stead, notes Dan Basse of AgResource, a re-search firm. Other farms suffered a dry Au-gust. A derecho, or wind storm, blastedacross the Midwest, with gusts of morethan 100 miles per hour. Farmers else-where have also experienced dismal condi-tions. Usually fertile fields near the BlackSea are producing less corn than expected.Production in Ukraine is expected to fall bymore than 20% compared with last year.

Meanwhile demand from China hassoared. In the first phase of Mr Trump’strade deal, announced in January, Chinaagreed to buy an additional $200bn-worthof American goods in 2020-21. Even with-out the deal, Chinese demand for cropswould probably have been robust. Thecountry is keen to expand its herds of hogs,decimated last year by African swine fever.That is raising demand for animal feed,such as soyabeans. Anxiety about food se-curity means the government is refillingstockpiles, too. The usda expects Chinesewheat imports to reach the highest level in25 years, with total imports of corn and oth-er coarse grains setting a new record.

N E W YO R K

Demand for American grain is surging

Commodities

Amber wave

The Economist November 14th 2020 Finance & economics 69

2 Little surprise, then, that export pricesfor American corn and soyabeans havesailed above $220 and $470 a tonne, re-spectively, up by about 60% and 50% fromtheir 52-week lows. But bulls should not betoo confident. China’s buying may ebb if itseeks a different trade deal with America’spresident-elect, Joe Biden. Agriculturalcommodities move in much quicker cyclesthan, say, metals, points out Aakash Doshiof Citigroup, a bank. It is simpler to plantextra beans than it is to start mining forbauxite. Higher prices now may promptfarmers to plant more later; a spell of goodweather could boost supply further.

Still, prices may hold up in the shortterm, for better or worse. In America, saysMr Doshi, “demand is improving well fromthe covid-19 trough in the second quarter.”Dry weather from La Niña is interferingwith planting in Brazil. A spat may promptChina to ban imports of several Australiancrops (see Asia section). Russia’s govern-ment is mulling a quota on wheat exports.For the more than 100m people who havesunk into poverty this year, that is worry-ing. An index of food prices, published bythe United Nations, rose in October for thefifth straight month. The index is now 6%above its level a year ago. 7

“As a child, when you see your parentsstruggling, it creates a drive,” says Se-

bastian Siemiatkowski, the chief executiveand co-founder of Klarna, an online-pay-ment-processing firm. His family movedto Sweden from Poland in 1981, the year hewas born; his university-educated fatherwas unemployed for long spells or just gotby behind the wheel of a cab. The experi-ence nurtured a strong ambition “to fix theeconomy for the family”.

Today, just shy of 40, Mr Siemiatkowksiis at the helm of one of Europe’s biggest fin-tech firms. A funding round in Septemberraised $650m and valued Klarna at$10.65bn. Investors include Sequoia Capi-tal, a venture-capital firm; Visa, a credit-card firm; and Snoop Dogg, a rapper whoperforms as “Smoooth Dogg” in a pepto-pink ad for the payments firm. Havinggained a foothold in Europe, Klarna has itssights set on America.

Klarna is one of several “buy now, paylater” (bnpl) services that have grown rap-idly in recent years. Its attraction, for bothonline retailers and their customers, issimplicity. Instead of entering their carddetails at checkout, shoppers sign up toKlarna’s app with their email and deliveryaddress, and leave payment to be made in14 or 30 days. Klarna pays the retailer in themeantime, bearing the risk that shoppersdo not pay—something few other fintechsdo—while charging the merchant a fee.

Customers are recognised when theyuse the app again, without needing to re-enter their details. Algorithms use publiclyavailable credit information and details ofthe size, type and timing of the purchase tocalculate the chance of fraud, and offer ex-tended-payment plans, for a charge.

The ease of the process hugely increasesthe “conversion” rate—the share of cus-tomers who go ahead and buy an item afterputting it into their virtual basket. That iswhy Klarna attracts retailers like bees to ahoneypot. It has signed up 200,000 sellersin 17 countries and captured 10% of the e-commerce market in northern Europe.Etsy, an online marketplace for arts-and-crafts items, signed up on October 26th.

Last year Klarna’s revenue jumped by al-most one-third to Skr7.2bn ($840m) as thevalue of wares sold through it rose by 32%.Merchant fees are the main source of its in-come; it also runs checkout infrastructurefor some retailers. Late fees from custom-ers make a smaller contribution.

It was Klarna’s success in Britain—where it has almost 10m customers and

this year has opened some 95,000 accountsa week—that made it reckon that it couldconquer America, where online-paymentsfirms have typically struggled to gain mar-ket share. It began 2019 with its splashy“Smoooth Dogg” campaign and pouredfunds into its operations in New York, LosAngeles and Columbus, Ohio, ahead of itslaunch in America. The firm now has 9mcustomers there, and will probably go pub-lic there in the not-too-distant future.

It is expanding in other ways, too. Backin Europe, it obtained a banking licence in2017, and has launched new products insome countries, such as a credit card. It hasopened a tech hub in Berlin’s trendy Mitteneighbourhood that employs 500. Thishelps explain why last year Klarna ran itsfirst loss since it was set up in 2005. “Profit-ability is for later,” says Mr Siemiatkowski.

Demand is certainly on Klarna’s side.According to Kaleido Intelligence, a re-search firm, bnpl will grow to $680bn intransaction value in 2025 worldwide, from$353bn in 2019, driven by young, credit-hungry shoppers. Covid-19 has only accel-erated the rise in online shopping.

Still, the business model brings risks.One comes from some shoppers’ worsen-ing finances. Klarna reported a net loss ofSkr522m between January and June, a sev-enfold increase from the net loss of Skr73min the same period last year. Credit lossesalmost doubled to Skr1.2bn, more than 25%of revenue compared with 19% in the firsthalf of 2019. The industry is also drawingcriticism for encouraging people to over-spend. “I am concerned about anythingthat makes it very easy to sleepwalk intodebt,” says Martyn James of Resolver, a Brit-ish consumer-rights group. In SeptemberBritain’s Financial Conduct Authority be-gan a review of the unsecured-credit mar-ket, which includes bnpl. Having charmedshoppers and retailers, the firm may haveto win over regulators too. 7

STO CK H O LM

A Swedish payments unicorn hopes to crack the American market

Klarna

Smooth shopping

Snoop’s into it

70 Finance & economics The Economist November 14th 2020

For epidemiologists, 2020 has been a trial by fire. Economistsshould be able to relate; it was just over a decade ago that their

own practices and forecasts were subjected to the harsh glare ofthe public eye in the aftermath of the global financial crisis. In-stead the relationship between the two disciplines has been a testyone. Some economists even questioned whether epidemiologistswere intellectually equipped for the trial. “How smart are they?What are their average gre scores?” wondered Tyler Cowen ofGeorge Mason University in April. The snootiness is unfortunate.The challenges posed by the coronavirus pandemic—and thosethat are still to come, as vaccines are distributed—cry out for co-operation. But too often, when economists venture into other aca-demic areas, their arrival often looks more like a clumsy invasionforce than a helpful diplomatic mission.

The two fields got off on the wrong foot early on in the pandem-ic. Back then there was an acute need for models that predicted thepossible course of covid-19, in order to inform the policy response.Epidemiologists, like economists, use different sorts of models intheir work, each subject to its own limitations and more useful insome contexts than others. In March researchers at Imperial Col-lege London used a model to calculate the potential death toll ofthe virus, assuming that people and governments took no mea-sures to stop its spread. The analysis concluded that perhaps500,000 Britons and 2.2m Americans would die in such circum-stances (roughly ten times as many as have died so far). The num-bers frightened governments into taking drastic steps to mitigatethe spread of the virus, but they drew intense criticism, much of itfrom economists. Detractors argued that the model’s assumptionswere unrealistic (a strange stone for an economist to throw). Peo-ple would of course act to protect themselves from harm, they ar-gued, meaning that the death toll would surely be much smaller.

The authors of the Imperial College study had been open aboutthis assumption, though, and even noted that it was unrealistic. Ina newly published essay in the Journal of Economic Perspectives El-eanor Murray, an epidemiologist at Boston University, says econo-mists misunderstood the aim of the model, which was to set out aworst-case scenario as a baseline against which to estimate the ef-fects of potential policy interventions. Criticisms of other model-

ling approaches were similarly rooted in misinterpretation oftheir intended audience and purpose, she reckons.

Given that building models is a favourite pastime of econo-mists, the perception that epidemiologists’ efforts were not goodenough led many to dig into the data themselves. This too provedproblematic, writes Ms Murray. Drawing sound conclusions fromthe available epidemiological data is hard when the scope of po-tential uncertainty is unknown—because the share of covid-19cases that are asymptomatic either cannot be determined orchanges as the virus spreads, for example. Such ambiguities neces-sarily apply when dealing with a novel pathogen like the viruswhich causes covid-19, a fact that economists unaccustomed todealing with epidemiological data may not have appreciated.Rather than attempting to outdo the experts, Ms Murray writes,economists ought to have taken advantage of specialisation, andfocused their efforts on questions epidemiologists are lessequipped to address.

This is a bit unfair. Yes, some modelling attempts by econo-mists have been the work of dabblers. But the subfield of economicepidemiology has been studying how social factors influence thespread of a disease for decades. Much of the outpouring of recenteconomic work on issues related to covid-19 has steered clear ofmodelling its course, and focused instead on precisely those areaswhere economists can better add value. Confounding uncertaintynotwithstanding, scholars have worked at great speed, producinghundreds of papers evaluating policy measures, analysing the eco-nomic costs associated with outbreaks and lockdowns, and as-sessing how the pandemic is reshaping the global economy—workthat this newspaper has relied upon in its coverage of covid-19.

Still, economics could do better. Interdisciplinarity has longbeen eyed with suspicion. Robert Solow, a Nobel prizewinner,once dismissed critics of his profession by saying that, “When theywant economics to be broader and more interdisciplinary, theyseem to mean that they want it to give up its standards of rigour,precision and reliance on systematic observation interpreted bytheory, and to go over instead to some looser kind of discourse.”Even those scholars interested in wandering off-piste face incen-tives not to collaborate with researchers in other fields, reckonsTony Yates, an economist formerly of the University of Birming-ham. For academics seeking tenure, publication in top economicjournals is of paramount importance. Co-operation with a non-economist places some control over research in the hands ofscholars for whom acceptance by a top journal is less of a priority.Economists’ forays into other disciplines therefore benefit muchless from knowledge-sharing across fields than is ideal.

A lack of disciplinesAll this is especially unfortunate, because epidemiologists’ chiefsource of frustration in the pandemic is one that also bedevils theeconomics profession. As Ms Murray notes, the epidemiologicalcommunity was unprepared for the way in which its policy recom-mendations would be politicised and its public statementswarped by agents of misinformation. Economists should empath-ise. Their efforts to explain complicated ideas to the masses, fromthe virtues of trade to the need for bank bail-outs, have often foun-dered. Such failures encourage economists to become more insu-lar. But, as the pandemic has revealed, sometimes the effects of apolicy hinge on how well the public understands what is beingdone and why. A profession that is more open to collaborationmight also learn from the communications struggles of others. 7

Field excursionFree exchange

Economists have had a rocky relationship with epidemiologists this year. But there are gains to trade

The Economist November 14th 2020 71

1

As news emerged this week that an ex-perimental vaccine against covid-19

has proved effective in late-stage clinicaltrials, hopes that the pandemic’s days maybe numbered are running high (see Brief-ing). But, even with the best of luck, it willbe months before a vaccine starts to make adifference on the ground in those coun-tries that get the first supplies of it, letalone the ones at the back of the queue. Inthe meantime, the pandemic juggernautrolls on.

To try to slow it, many countries arestarting to deploy tests which, at some costin accuracy, deliver their results muchmore rapidly than the polymerase-chain-reaction (pcr) tests that were common-place at the pandemic’s beginning. Theserapid tests will allow greater numbers ofinfected people than previously possible tobe detected and quarantined before theycan spread the contagion. They are there-fore being used in increasing numbers toscreen people for the presence of sars-cov-2, the virus that causes covid-19, in set-

tings ranging from airports to nursinghomes. In Europe, indeed, they are some-times used to blitz entire neighbourhoods,cities and even small countries, like Slova-kia. But will they change the course of thepandemic?

Smaller, faster, cheaperpcr tests look for the genetic sequence ofthe virus in nose and throat swabs. Theseswabs have to be processed in laboratoriesand require machines that take hours tocome up with a result. They are extremelyaccurate. But the delay involved can hobbletest-and-trace systems.

Rapid tests, by contrast, are designed todetect certain proteins that sars-cov-2sheds when it replicates during an infec-tion. These proteins, known as antigens,

spur the immune system into making oth-er proteins, called antibodies, that go on todisable the virus. Antigen tests need nolaboratory backup and can report a resultin 15-20 minutes. They work by dipping theswab into a vial containing a solution thatextracts the antigen of interest. A few dropsof the mix are then applied to a test striplaced with antibodies that recognise thatantigen. The test strip displays the resultslike a home pregnancy test.

The speed with which these tests havebeen developed is impressive. More than70 are now on the market in one part of theworld or another, according to a cataloguecompiled by the Foundation for InnovativeNew Diagnostics (find), a charity in Gene-va that supports the World Health Organi-sation (who) with research on diagnostictools. So far, only two of them have beengranted provisional (“emergency use”) ap-proval by the who, and seven by America’sfederal regulator, the Food and Drug Ad-ministration. But more approvals are ex-pected to be forthcoming in the weeksahead as find and other organisationscomplete validation studies that test thetests in the real-life conditions in whichthey are likely to be used.

Early antigen tests were not terriblygood, but many of the newer ones are ex-tremely accurate. If a pcr test is negative, amodern antigen test on the same individ-ual will agree with that analysis more than97% of the time, a value called its specific-

Fast diagnosis for covid-19

Test match

Cheap, rapid tests for sars-cov-2 are here. Will they be the stopgap needed before a vaccine is deployed?

Science & technology

72 Life on Venus, redux

73 Better disposable cups

Also in this section

72 Science & technology The Economist November 14th 2020

2

1

ity. The story gets complicated, though,when the virus is actually around. If some-one tests positive for covid-19 in a pcr test,the best antigen tests will agree in morethan 90% of cases if the testing is happen-ing within a week or so of the onset ofsymptoms, a value called the sensitivity.But the rate of agreement falls if the anti-gen test is done at the beginning or end ofan infection, when the amount of viruspresent in the nose and throat is consider-ably lower. This means that diagnoses rely-ing on antigen tests are unreliable duringthose periods.

Fortunately, from a public-health pointof view this may not matter. The relation-ship between viral load and contagious-ness is not fully understood, but currentthinking is that higher loads make peoplemore contagious. Since those with higherloads are most likely to show up as positivein an antigen test and therefore be asked toisolate themselves, the transmission-breaking value of the new tests should notbe too badly compromised.

In theory, then, all of this sounds great.But reality is messier. Even a highly accu-rate test will produce fewer true positivesthan false positives if the people being test-ed are unlikely to be infected in the firstplace (see chart). That would be the kind ofproblem which arises with mass testing inplaces that are not covid-19 hotspots. Forexample, Britain’s Office for National Sta-tistics estimates that on October 28th0.82% of people in private households inLondon were infected. If everyone in Lon-don that day was given a test that has theminimum “acceptable” accuracy for rapidtests set by the who (80% sensitivity and97% specificity) the number of those withfalse-positive results will be 353% biggerthan those with true positive results.

This is why deciding whether to trustthe result of an imperfect rapid test—or, in-deed, whether it is worth using the test atall—depends on who is being tested, andwhy. A positive result is more credible forsomeone with symptoms, or who is a closecontact of an infected individual, and per-

haps lives in an area with a high covid-19rate. But testing people when there is noobvious reason to believe they may be in-fected is likely to be a waste. A positive re-sult in that case will be suspect.

Do try this at homeDoctors are used to making such decisionswhen testing for things like cancer, sexual-ly transmitted infections and so on. Theguidelines they employ draw on years ofresearch and practice. But for covid-19things are new and changing rapidly. Todeal with that, some test developers arepairing their products with “digital wrap-arounds” such as apps in which such deci-sion-making algorithms are fed up-to-datedata on things like trends in local covid-19prevalence and the weight of various per-sonal risk factors derived from various an-alyses. Some of these apps issue a time-limited bar code to those who test negative,for use where proof of a negative test maybe required.

For now, rapid tests are licensed for useonly by medical professionals. The regula-tory bar for stand-alone home tests is sethigh. They must be 99% accurate and passextensive usability trials to ensure thatpeople employ them correctly. That wouldbe easier if the secretion being tested wassaliva, which is freely accessible, ratherthan material found high in the nose ordeep in the throat. Saliva does work reli-ably in some pcr tests but no one has yetdevised a good antigen test that uses it.

At the current pace of progress, though,this may soon change. Bruce Tromberg ofAmerica’s National Institutes of Health(nih) thinks that a rapid over-the-countertest could be available in America as earlyas next summer. Rapid antigen tests are,then, likely to become a big part of coun-tries’ covid-19 testing strategies. In particu-lar, they will be used for testing at home, indoctors’ surgeries, and in remote placeswhere pcr laboratories are not available.They will be especially handy for mass test-ing in places prone to outbreaks, such asprisons and student dormitories.

As more rapid tests are developed anddemand for them increases, competitionand manufacturing at scale will make themcheaper. Stand-alone antigen tests are nowavailable for as little as $5 apiece, but pricesmay eventually drop nearer to $1, which isthe cost of a rapid test for malaria. Teststhat use small machines are about $10-20each, plus a few hundred dollars for the de-vice. A pcr test now costs around $50, butwill be cheaper for automated large-scaletesting of samples that come in bulk on aset schedule, such as samples from univer-sities or workplaces.

Even though antigen tests are cheap,however, some people worry that richcountries will corner the market for themuntil production has ramped up suffi-

ciently, leaving poorer places with a short-age. To avoid this, the Bill and MelindaGates Foundation, a big charity, has teamedup with the who to place an order for 120mrapid tests which will go to 133 developingcountries over the next six months.

Dr Tromberg, who leads a project at thenih which invests in new covid-19 testingtechnologies that can be scaled up rapidlyto mass production, reckons the 22 pro-ducts in his pipeline which are already atthe manufacturing stage will add 2.5mtests a day by the end of this year—helpingraise America’s total to 6m-7m. Around theworld, several makers of rapid covid-19tests have said they have the capacity tomake tests in the tens or hundreds of mil-lions a year. This sounds plausible, giventhat 400m malaria test kits are made eachyear. But expanding into the billions is ter-ra incognita. Though new production linescan be built and existing ones put to workaround the clock, making tests requiresskilled workers, who are in limited supply.

Whether rapid tests change the courseof the pandemic and end the need for lock-downs until a vaccine can likewise be madeand distributed at scale will depend onwhether those which are available are usedwisely. Eventually, such a vaccine will re-duce the demand for tests dramatically.But, for now, the world needs them. 7

What is truth?

Source: The Economist

Covid-19 test results*, %

*For a test with 80%sensitivity, 97% specificity

0

25

50

75

100

0 25 50 75 100Share of population with active infection, %

True positiveAs % of positive tests

True negativeAs % of negative tests

Extraordinary claims require extraor-dinary evidence. So goes the dictum,

usually credited to Carl Sagan, a celebratedastronomer, on the need for caution wheninterpreting radical new ideas in science.And there are few claims more extraordi-nary than that of the discovery of life be-yond Earth.

Jane Greaves of Cardiff University, inBritain, has not actually made that claim.But she came close to it when, in Septem-ber, she and her colleagues published re-search that appeared to show the existenceof a gas called phosphine in the clouds ofVenus. This substance, a compound ofphosphorus and hydrogen, should be ableto survive only briefly in an atmospherelike that of Venus. But Dr Greaves’s team re-ported that it actually seemed to be persis-tent there, at a concentration of 20 parts perbillion. This turned heads because, onEarth, the minuscule amounts of phos-phine around have only two sources:chemists and microbes. The former are

Is there really phosphine on Venus?

Planetary science

Questions of life

The Economist November 14th 2020 Science & technology 73

2 surely absent from Venus, so the questionbecame whether there was a plausible, nat-ural, but non-biological explanation forthe gas being there. Neither Dr Greaves noranyone else has yet come up with one, sothat leaves open the tantalising possibilitythat it is a sign of life on the planet.

But there is another possibility. This isthat the signal Dr Greaves and her teamsuggest is phosphine isn’t. And, in theweeks since the results were published,other groups have been busy poring overthem, conducting their own analyses andattempting to poke holes in the originalclaims. Their concerns are twofold. One isan inability to find evidence for phosphinein independent observations of Venus’s at-mosphere. The other is whether Dr Greavesand her colleagues have processed theirdata correctly.

Crucial gapsThose data came from the Atacama LargeMillimetre Array (alma), a set of radio-telescope dishes that sit at an altitude of5,000 metres in the mountains of Chile.The solar radio spectrum reflected from Ve-nus has, according to Dr Greaves, a gapknown as an absorption line in it at a wave-length of around 1.1 millimetres. Phos-phine molecules are known to absorb radi-ation of this wavelength.

But phosphine also absorbs other wave-lengths. A robust way to verify Dr Greaves’sfindings, therefore, would be to find simi-lar characteristic gaps in other parts of Ve-nus’s reflected solar spectrum. Therese En-crenaz of the Paris Observatory set herselfthis task, and went hunting for appropriategaps in the infrared region of that spec-trum. She combed through data collectedusing texes, a spectrograph at the GeminiObservatory in Hawaii, between 2014 and2016. But she drew a blank. That result,published in the November issue of Astron-omy & Astrophysics, seems to be a contra-diction to the original claim of phosphineon Venus.

The second possible contradiction, ofDr Greaves’s data-processing methods,comes from Ignas Snellen of Leiden Uni-versity in the Netherlands. Any work of thissort requires the data to be passed througha software noise-filter in order to subtractthe effects of both Earth’s atmosphere andthe telescope array itself. Dr Snellen andhis colleagues have reprocessed the origi-nal alma data using a different noise-filter,to see if similar results emerge.

In a paper posted on arXiv (a website forso-called preprints, which have not yetbeen peer-reviewed but which their au-thors wish nevertheless to put into thepublic domain), they found some evidencefor phosphine, but not enough to claim aconfident discovery. More troubling, per-haps, was that when they used Dr Greaves’snoise-filter on a wider portion of the Venu-

sian spectrum they found five other strongsignals for molecules not actually believedto be present in the planet’s atmosphere.

Dr Greaves’s claim in September was,then, just the starting gun. Investigationsabout phosphine will continue, probablyfor years and perhaps for decades, as as-tronomers spiral in on the truth. Indeed, asif to highlight both the messiness of thecurrent uncertainty and the desire of mostscientific researchers to get at the truth re-gardless, Dr Greaves herself is one of the co-authors of the phosphine-dissenting paperpublished by Dr Encrenaz.

One way to settle the matter would be tosend a spacecraft to Venus and takeclose-up measurements of its atmosphere.There are hopes here. India’s space agencyplans to launch Shukrayaan-1, which is in-tended to orbit the planet, in 2025. Mean-while, nasa, America’s space agency, hastwo Venus probes—veritas and da-

vinci+—in the final selection stage for itsnext programme of missions. Rocket Lab, aprivate space company with a launch sitein New Zealand, is also considering dis-patching a mission as soon as 2023. Per-haps it won’t take decades after all. 7

Sugar cane contains around 10% sugar.But that means it contains around 90%

non-sugar—the material known as bagasse(pictured) which remains once the canehas been pulverised and the sugar-bearingjuice squeezed out of it. World productionof cane sugar was 185m tonnes in 2017. Thatresults in a lot of bagasse.

At the moment, most of this is burned.Often, it fuels local generators that powerthe mills, so it is not wasted. But Zhu Hon-gli, a mechanical engineer at NortheasternUniversity in Boston, thinks it can be put tobetter use. As she and her colleagues de-scribe in Matter this week, with a bit oftweaking bagasse makes an excellent—andbiodegradable—replacement for the plas-tic used for disposable food containerssuch as coffee cups.

Dr Zhu is not the first person to have thisidea. But previous attempts tended not tosurvive contact with liquids. She thoughtshe could overcome that by spiking thesugar cane pulp with another biodegrad-able material. She knew from previous re-search that the main reason past efforts fellto pieces when wet is that bagasse is com-posed of short fibres which are unable tooverlap sufficiently to confer resilience onthe finished product. She therefore soughtto insert a suitably long-fibred substance.

Bamboo seemed to fit the bill. It growsquickly, degrades readily and has appropri-ately long fibres. And it worked. When theresearchers blended a small amount ofbamboo pulp into bagasse, they found thatthe result had a strong interweaving ofshort and long fibres. As a bonus, they alsodiscovered that the hot pressing used aspart of the process had mobilised some ofthe lignin in the fibres, and that this stiff,water-repelling material was now acting asan adhesive that bound the fibres together.

To put their new material through itspaces, Dr Zhu and her colleagues firstpoured hot oil onto it and found that, rath-er than penetrating the material, as itwould have with previous bagasse pro-ducts, the oil was repelled by their inven-tion. They also found that when they madea cup out of the stuff and filled it with waterheated almost to boiling point, the cup re-mained intact for more than two hours.Though this is not as long as a plastic cupwould last (it would survive indefinitely) itis long enough for all practical purposes.Moreover, the new material is twice asstrong as the plastic used to make cups, andis definitely biodegradable. When Dr Zhuburied a cup made out of it in the ground,half of it rotted away within two months,and she reckons six months would haveseen it gone completely.

Last, but by no means least, she esti-mates that cups made from the new mate-rial would cost $2,333 a tonne. That is halfthe $4,750 a tonne cost of biodegradablecups made from polylactic acid (fermentedplant starch), and only slightly more thanthe $2,177 a tonne that it takes to make plas-tic cups. Overall, then, Dr Zhu argues thatbagasse is an obvious choice for makingcoffee cups, straws, disposable plates,lightweight cutlery and so on. Once used,these could be dumped in landfills with aclear conscience. 7

How to kill two environmental birdswith one stone

Materials science

Would you likesugar cane in that?

Waste not, want not

Supported by

A whole new (contactless) world 2-day virtual event, December 8th-9th 2020

As the pandemic accelerates our digital-transformation agendas, how do we now navigate the new challenges this presents? Join us as we explore how various industries are reimagining themselves in a new contactless world.

The rise of digital identity

Register freeScan the QR code or simply visit bit.ly/EconContactlessWorld

John HalamkaPresident Mayo Clinic Platform

Megan Jones BellChief strategy and science o� cerHeadspace

Sheila NixPresidentTusk Philanthropies

Siim SikkutGovernment chief information o� cer, deputy secretary-general of IT and telecom Republic of Estonia

Ariane GorinPresidentExpedia Business Services

Nik StoronskyChief executiveRevolut

The Economist November 14th 2020 75

1

On june 7th this year Edward Colstonplunged, periwig first, into the waters

of Bristol harbour. It was an incongruousscene: at least until recently, Britons im-mortalised in bronze were rarely toppled ordrowned by mobs. Part of the shock of thisimage, and part of its power, was to see afigure dressed in gentleman’s breeches anda frock-coat being treated as a criminal.

The Victorians who put up this statuehad burnished Colston as a philanthropist.And this was true: he had given Bristol, hishome city, schools and almshouses. But hedid other things too, which the statue andits plaque downplayed. During his decadeon the board of the Royal African Companyin the late 17th century, it trafficked 84,000slaves from Africa to the Americas. An esti-mated 19,000 died en route.

If statues can be misleading, so can per-ceptions of entire historical periods. TheVictorians dressed Colston in an air of

unimpeachable respectability; similarly,modern Britain has cloaked the country’srole in the slave trade in a haze of selectivememory. It has long celebrated WilliamWilberforce and his “Saints”, the groupwho fought to abolish slavery. David Cam-eron, a former prime minister, once saidthat one of Britain’s “proud achievements”was its “role in ending slavery”.

Like some others, the country is ratherless keen to remember its sinners. Twotimely books, by the historians PadraicScanlan and Michael Taylor, set out toweave a more accurate, less flattering ver-sion of this story. Take the idea that Britainworked to reduce slavery from 1807, whenthe act that abolished the slave trade in theBritish Empire was passed. That is true. It isequally true that until that date Britain didmuch to make it thrive. Of the more than6m enslaved Africans transported acrossthe Atlantic, it is thought that 2.5m werepacked into British ships.

Or take the widespread but mistakennotion that the act of 1807 outlawed the in-stitution of slavery itself. It did not: itstopped British slaving. In the flesh—andthis was an argument of flesh—the differ-

ence was infinitely bigger than it seems onthe page. Chains that bound people beforethe vote held firm after it. The 700,000souls who had been enslaved in the WestIndies remained enslaved, and tormented,for decades.

Traditional accounts of Britain’s role inslavery culminate with Wilberforce andthat act. These two are just getting going.Mr Taylor’s book, “The Interest”, switchesthe focus from the saints to the sinners. Histitle derives from the West India Interest, alobbying group of planters and politicians,publishers and intellectuals, which dog-gedly opposed abolition. Support for slav-ery pervaded British society. Viscount Nel-son declared himself a “firm friend” to thecolonies. The Duke of Wellington toiled tofrustrate abolitionists. The celebrated car-toonist George Cruikshank caricaturedthem. John Murray, a publishing houseknown today for introducing Jane Austento the world, was so famous for pro-slaveryarguments that its Quarterly Review was de-scribed as “one of the most effective andmischievous props” of the system.

Out of sightMr Scanlan’s book, “Slave Empire”, concen-trates on the financial benefits that slaversreaped. This harvest by no means endedwith abolition. The £20m in compensationthat was eventually paid by the British gov-ernment to slavers for the loss of their hu-man property was a vast sum, equating to40% of the state’s annual expenditure atthe time. Until the banking bail-out of2008, it was the largest specific payout in

Home truths

The human stain

Two new books spell out Britain’s role in the transatlantic slave trade

Slave Empire. By Padraic Scanlan.Robinson; 464 pages; £25The Interest. By Michael Taylor. BodleyHead; 400 pages; £20

Books & arts

76 Chinatown chic

77 Diagnosing American society

77 Billy Wilder’s story

78 Johnson: Language and evolution

Also in this section

76 Books & arts The Economist November 14th 2020

2 British history; the loan it required waspaid off only in 2015. The money providedthe seed capital for mines, banks, railwaysand more. Britain’s liberal, free-trade em-pire was, in part, built on human bondage.

Slavers gained not just gold but a finegilding from their trade. Many were men ofstatus and consequence. Joshua Reynoldspainted them; Eton educated them; societyopened its doors for them. Until this year,Colston had not only his statue but a fleetof institutions named after him. Even to-day scholars at Oxford study in the Cod-rington Library in All Souls College, en-dowed by the Codrington family whoowned plantations in Barbados. The great-grandfathers of George Orwell and GrahamGreene were slaveholders. After emancipa-tion, Orwell’s received £4,000 in compen-sation for the 218 slaves he had owned,which Mr Taylor describes as “a perversionof justice that would have fitted seamlesslyinto the Orwellian canon”.

“Slave Empire” is lucid, elegant and fo-rensic. It deals with appalling horrors incool and convincing prose. “The Interest”is more impassioned. Mr Taylor can tell astory superbly and has a fine eye for detail(George IV, readers learn, breakfasted onpigeon and beef-steak pie, washed downwith champagne, port, wine and brandy).His argument is a potent and necessarycorrective to a cosy national myth. But hiswriting can be a distraction, peppered as itis with phrases such as “bogus nonsense”and “twisted logic”. Such caustic judg-ments may be correct but they are superflu-ous. An argument of this gravity does notrequire such flourishes.

It never did. One of the most strikingthings about Britain’s debates over slaveryis how unemotional many of the most in-fluential texts were. Take the basic ques-tion of how slaves in the West Indies weretreated. As in the United States, British abo-litionists and slavers had for years quar-relled bitterly over this, the latter paintingan image of paradise, the former of hell.There was stalemate.

Then, in 1789, the Board of Trade pub-lished a damning report on slavery, filledwith statistics and testimony of the tor-tures inflicted on slaves. “It is no uncom-mon thing”, the document recorded, “for aNegro to lie by a Week after Punishment.”More damning still was the mass of datapublished in the Anti-Slavery Monthly Re-porter, which sold 1.7m copies in six years.You can read its findings now, online.

Even at a distance of almost two centu-ries, they make appalling reading: “39lashes”; “three or four hundred lashes”; “onher bared body fifty-eight lashes of the cartwhip”. On and on go the accounts, unemo-tional, unsparing, utterly unpardon-able—50 lashes, 49 more. This was notrhetoric. It was cruelty, quantified. And lit-tle was more persuasive. 7

Len wuey chew’s look involves alayered mash-up of florals and plaids

of a kind you might spot on a couturier’scatwalk. Her runway is a steep hill in SanFrancisco’s Chinatown, which she nego-tiates with a pink-and-blue cane. Herhusband, Buck, favours white gloves andloud ties festooned with parrots or but-terflies. In their winningly garish outfits,the nonagenarian couple embody athrifty yet exuberant way of life.

On every bench in PortsmouthSquare, Chinatown’s outdoor livingroom, elderly people in bright plumagechat, play cards and practise tai chi.Fuchsia scarves top crocheted vests;paisley sweaters wrap formal stripedshirts. Jade accessories glint. Impishlystylish, this venerable crowd is “Chi-natown Pretty”, in the words of a newbook devoted to their sartorial flair.

Valerie Luu, a writer, and Andrio Lo, aphotographer, spotted their first “pohpoh hou leng”—“pretty grandma” inCantonese—six years ago. A blog and aphotography show in a Chinatown alleyfollowed. Their book collects portraitsfrom six North American Chinatowns,including Chicago, New York, Los Ange-les, Oakland and Vancouver. But theirheart remains in San Francisco, home ofAmerica’s oldest, densest Chinatown.

Five thousand souls, a big chunk ofthem elderly, are crammed into 30 city

blocks. Many emigrated from China longago, have endured war, revolution andexile and now subsist on fixed incomesin single rooms. Around a third live inpoverty. Yet their neighbourhood burstswith colour. Look past the tourists andpagodas, and Chinatown resembles abustling, open-air senior centre, thedenizens of which pay close attention totheir clothes. “Going out is dressing up,”Feng Luen Feng, 77, tells the authors.

The eclectic outfits are pragmatic. Inthe city’s foggy, unpredictable climate, itpays to wear several layers—sometimesup to seven or eight, plus a hat or two.Beyond the insulation, though, thefashions speak volumes about the com-munity’s resourcefulness and joie devivre. In his bright red suit, for instance,You Tian Wu has been a Chinatownfixture, sometimes seen wearing twobow ties above a Windsor knot. Dressingto the nines on a tight budget is a matterof pride. “When you’re young you don’thave to care about fashion,” says Mr Wu,82. “But when you’re old, you have to.”

Each garment tells a story. Some werestitched in Hong Kong decades ago;others have been sewn or patched athome, or were handed up or down. Onelady sports a hot pink backpack over atailored blue skirt-suit. Another’s socksbear the slogan “My favourite salad iswine”. The styles may not be to every-one’s taste. But as surrounding neigh-bourhoods become ever more costly andgentrified, this frugality and grit are botha sign and a means of survival.

Fashion statementsStreet style

Chinatown Pretty. By Andria Lo andValerie Luu. Chronicle Books; 224 pages;$24.95 and £18.99

The Economist November 14th 2020 Books & arts 77

1

The rancour of American politics, saythese two distinguished scholars, is a

symptom of an even deeper malaise. Rob-ert Putnam charts a rise in economic in-equalities, cultural tribalism and frayed so-cial connections since the1960s—when, herecalls, the spirit of solidarity and reformwas by contrast strong. Michael Sandel fo-cuses on the meritocratic rat-race and itsjustifications, which create, in his words,“hubris among the successful and resent-ment among the disadvantaged”.

Both blame the ills they identify onwidespread acceptance of egotistical go-getting at a cost to common purpose. Theirbleak picture of private indifference topublic welfare prompts an equally sweep-ing solution. America needs nothing less,they think, than a recovery of communityand rededication to the common good.

Mr Putnam, a political scientist, is well-known for “Bowling Alone” (2000), whichreported a drop of clubbability in a nationof joiners. Written with Shaylyn RomneyGarrett, “The Upswing” is a reprise that an-swers critics and laments a yet broader re-treat to private concerns. It offers a histori-cal account of trends in public commit-ment over 120 years.

The narrative arc is simple. A dog-eat-dog Gilded Age at the end of the 19th cen-tury prompted ever greater social engage-ment and reform in three stages—Progres-sivism, the New Deal and the 1960s. Soon,however, dog-eat-dogism returned and isnow again uppermost. To support thatanalysis, a mass of survey data and statis-tics is mapped onto what Mr Putnam calls“I-we-I” curves, which show a rise and fallin economic equality, political co-opera-tion, social solidarity and a sense of sharedAmerican culture.

“The Upswing” ranges widely, yet itsscrupulous survey-mining and curve-fit-ting is not wholly persuasive, or indeednecessary. Up on the latest research andimpeccably open to counterargument, MrPutnam tends to take away with one studywhat he has just offered with another. Aheartfelt communitarian essay, “What ailsAmerica”, without the social-science appa-ratus, might have been just as convincing.

Mr Sandel’s focus is tighter. His target is

meritocratic society and the ideal it aims torealise, equality of opportunity. For trueegalitarians, who want fairer outcomes, auniform starting line has always seemed afudge. To some rugged conservatives, pro-mising equal opportunity is necessary lip-service to unmeetable popular demands.Mr Sandel, a political philosopher, ends upon the fence. He is not an out-and-outegalitarian, but nor does he dismiss hopesfor some degree of genuine civic equality.

He recognises that gauges of perfor-mance and success often measure thewrong things—or measure the right thingsbadly. His critique of over-reliance on pa-per credentials in hiring and universityplacements is telling. (Similar flaws ofranking mania in medicine, policing,schooling and the armed forces were ex-pertly exposed in Jerry Muller’s “The Ty-ranny of Metrics”.) Mr Sandel’s larger con-cern, however, is not whether achievementis properly calibrated but whether its re-

wards are rightly merited. As he says, thatethical question runs back to theologicaldisputes about the arbitrariness or earna-bility of God’s grace. These days, free-mar-keteers and redistributionists tussle overwhether and how to offset the lottery of tal-ent and energy that underlies supposedlymerited rewards.

Like Mr Putnam’s, the solutions Mr San-del suggests call for profound changes inprevailing attitudes: acknowledgment ofluck in the share-out of rewards, recogni-tion that all work has dignity, new commit-ment to the public good, and readiness toargue such matters out in a healthier, moredeliberative democracy. A sceptic mayshare the pair’s concerns about Americansociety yet wonder if, in such a vigorouslycompetitive, capitalist place, those pro-found changes in thinking are probable.And whether, given how long the argu-ments over unmerited disadvantage havelasted, they are likely to end soon. 7

American society

All for one

The Upswing. By Robert Putnam andShaylyn Romney Garrett. Simon & Schuster;480 pages; $32.50. Swift Press; £25The Tyranny of Merit. By Michael Sandel.Farrar, Straus and Giroux; 288 pages; $28.Allen Lane; £20

In the summer of 1977 an internationalfilm crew descended on the sleepy Greek

island of Lefkada, temporarily casting itinto chaos. Billy Wilder (pictured), the leg-endary director of “Sunset Boulevard” and“Some Like It Hot”, had chosen it as the lo-cation for key scenes in what would be hispenultimate movie, “Fedora”. In Jonathan

Coe’s mischievous and inventive re-enact-ment, this film about a reclusive, fadingstar is, at heart, as much about the end ofHollywood’s Golden Age as the ephemeralnature of youth and fame.

Mr Coe’s novels typically fuse politics,satire and the passage of time. This onedraws heavily on factual accounts of Wild-er and his associates but places a fictitiousoutsider at the heart of the story. Calista isan aspiring young composer brought up byher bohemian parents in a shabby flat in

Hollywood fiction

Ready for his close-up

Mr Wilder and Me. By Jonathan Coe.Viking; 256 pages; £16.99

A novel reimagines the life and work of a legendary film director

Nobody’s perfect

78 Books & arts The Economist November 14th 2020

2

Johnson On natural declension

The evolution of language mirrors the evolution of species

“Because politics.” “Latinx.”“Doomscrolling.” Language is

developing all the time, as new usageslike these arise and old ones disappear.One common way to describe this pro-cess is to say that “language evolves”. It isan apt formulation, for there is a deepand revealing relationship betweenlinguistic change and biological evolu-tion—along with some big differences.

Linguists today aim to apply methodsfrom other sciences to messy socialphenomena. But the influence once ranthe other way, with discoveries in lin-guistic history leaving a mark on evolu-tionary theory. In the late 18th centuryWilliam Jones, a British judge in Calcut-ta, concluded that Sanskrit’s similarity toLatin and Greek was too great to attributeto mere chance. He proposed a parentlanguage, the descendants of whichincluded Sanskrit, Greek, Latin, Persianand other European tongues. Like Co-lumbus, he was not the first to get there,but he made the revelation famous.

As Jones’s findings were elaborated bythe philologists who came after him,they also came to the attention of ayoung Charles Darwin. As early as 1837,looking at the evidence that wildly differ-ent languages had once diverged from asingle parent, he wrote to his sister thatmankind must have been around muchlonger than the Bible allowed. In 1871 hemade the parallel between languagedivergence and evolution more specific,writing in “The Descent of Man” that “theformation of different languages and ofdistinct species, and the proofs that bothhave been developed through a gradualprocess, are curiously the same.” Onelanguage giving birth to both Hindi andEnglish was not so extraordinary if yougave tiny changes time to accrete.

Speciation—the emergence of dis-

words from old pieces (as in “doom-scrolling”) may all baffle the uninitiated.As tweaks of these and other kindsmount up in one group, its speakersgradually lose the ability to conversewith another—as two speciating pop-ulations begin to lose the ability to mate.

Mark Pagel of Reading University hasmade a list of other compelling parallelsbetween the two processes. Like genes,he notes, words are “discrete, heritableunits”. The replication of dna is akin tolanguage teaching. Physical fossils re-semble ancient texts. And so on. Butthere are contrasts, too, perhaps thebiggest being that the chief driver ofbiological evolution—natural selec-tion—is mostly absent in language.

Nature is red in tooth and claw: amaladaptive mutation can get you killed.Language doesn’t quite work that way.For the most part, changes don’t takehold because they help you avoid a pred-ator, but because they help people com-municate. For that, they have to be adopt-ed by others at the same time—whichmay happen for reasons that have little todo with “fitness”. A celebrity’s coinageswill take off quicker than those of a bril-liant basement neologist not becausethey are superior, but because the starhas more Twitter followers.

There is, though, a final, importantoverlap between the two kinds of evolu-tion. In a common visual depiction of theascent of man, an ape gradually becomesa human through a series of intermedi-ate steps. That gives the impression thatevolution is a process of ever increasingsophistication. Not always: rather, or-ganisms, like languages, change to fittheir environments. They may not al-ways become more refined. But neither—despite the incessant chorus of grum-bles—are they in decline.

tinct species—offers one of the closestparallels between linguistic and biologicalevolution. Darwin found that finchesseparated on different Galapagos islandshad developed into different species, andworked out why. When a homogenouspopulation is split, each subset will beaffected by its own genetic changes. Thosethat contribute, even a little bit, to survivalwill tend to become more prevalentthrough the process of natural selection.When such changes accumulate, you nolonger have two populations of a singlespecies, but two different species.

Two linguistic populations separatedby enough distance, or by a physical barri-er such as a mountain range, can undergo asimilar experience. Random alter-ations—to pronunciation, the meaning ofwords or grammar—are often so small thatno one notices them as they are happen-ing. Over the course of many generations,for instance, a t sound might become an s.Or take the terms in the opening lines ofthis column: using “because” as a preposi-tion, shedding grammatical gender (as“Latinx” purports to do) or forging new

Athens. She first encounters Wilder whiletravelling around America in 1976; later hehires her to act as an interpreter and secre-tary for “Fedora”.

She and the production move fromGreece to the final shoot in West Germany.A lack of American backing had meantWilder, an Austrian-born Jew, was obligedto turn to German investors. In a dramaticand ingenious scene, Mr Coe grafts thetranscript of an actual interview with thedirector onto a swanky dinner in a Munichhotel. Wilder’s reflections in the interviewon the fate of his relatives under Nazism

become a biting rebuttal of a Holocaust-de-nying guest.

Calista narrates the novel, largely inflashback from the present day. Now a mar-ried woman with twin daughters, she givesa retrospective view of her own life as wellas insights into the enigmatic Wilder, whorails against the “kids with beards” (a newgeneration of film-makers such as MartinScorsese and Steven Spielberg). Thus “MrWilder and Me” is also a coming-of-agestory, in which the first sip of a martini is,for the unworldly Calista, “like a gentle slapin the face to bring you round after a faint”.

To appear knowledgeable on set, she mem-orises and quotes every entry in “Halli-well’s Film Guide”, accidentally finding hervocation as a composer of scores.

Mr Coe has drawn on real-life memoriesof the production, including those of Wild-er’s actual personal assistant, to create thecomposite figure of Calista. “Fedora”flopped on its release in 1978; the New YorkTimes thought it had “the resonance of anepitaph”. It is now widely recognised as anartistic masterpiece about the illusion ofcinema itself. In his finely tuned novel MrCoe has done it, and its director, justice. 7

79

Property

Courses

80 The Economist November 14th 2020

Economic data

Gross domestic product Consumer prices Unemployment Current-account Budget Interest rates Currency units % change on year ago % change on year ago rate balance balance 10-yr gov't bonds change on per $ % change latest quarter* 2020† latest 2020† % % of GDP, 2020† % of GDP, 2020† latest,% year ago, bp Nov 11th on year ago

United States -2.9 Q3 33.1 -4.6 1.4 Sep 1.1 6.9 Oct -2.2 -15.3 1.0 -96.0 -China 4.9 Q3 11.2 1.8 0.5 Oct 2.9 4.2 Q3§ 1.7 -5.6 3.1 §§ 6.0 6.62 5.9Japan -9.9 Q2 -28.1 -6.4 0.1 Sep 0.2 3.0 Sep 2.6 -11.3 nil -8.0 106 3.3Britain -9.6 Q3 78.0 -10.6 0.5 Sep 0.6 4.8 Aug†† -1.5 -18.9 0.4 -38.0 0.76 2.6Canada -13.0 Q2 -38.7 -5.8 0.5 Sep 0.7 8.9 Oct -2.1 -13.0 0.8 -81.0 1.31 0.8Euro area -4.3 Q3 61.1 -8.3 -0.3 Oct 0.3 8.3 Sep 2.2 -9.0 -0.5 -26.0 0.85 7.1Austria -14.3 Q2 -38.2 -6.4 1.5 Sep 1.1 5.5 Sep 1.0 -7.4 -0.4 -35.0 0.85 7.1Belgium -5.1 Q3 50.2 -8.1 0.7 Oct 0.4 5.2 Sep -1.6 -9.6 -0.3 -36.0 0.85 7.1France -4.3 Q3 95.4 -10.1 nil Oct 0.7 7.9 Sep -1.6 -10.4 -0.3 -28.0 0.85 7.1Germany -4.2 Q3 37.2 -5.8 -0.2 Oct 0.5 4.5 Sep 5.5 -7.2 -0.5 -26.0 0.85 7.1Greece -15.3 Q2 -45.4 -8.5 -1.8 Oct -1.0 16.8 Aug -2.9 -7.5 0.9 -46.0 0.85 7.1Italy -4.7 Q3 81.8 -10.0 -0.3 Oct -0.1 9.6 Sep 2.5 -11.0 0.7 -66.0 0.85 7.1Netherlands -9.4 Q2 -30.0 -6.0 1.2 Oct 1.1 3.8 Mar 7.0 -6.0 -0.5 -32.0 0.85 7.1Spain -8.7 Q3 85.5 -12.7 -0.8 Oct -0.3 16.5 Sep 0.5 -12.3 0.1 -25.0 0.85 7.1Czech Republic -10.8 Q2 27.2 -7.0 2.9 Oct 3.2 2.8 Sep‡ -0.5 -7.7 1.2 -42.0 22.5 2.9Denmark -7.6 Q2 -24.6 -4.0 0.4 Oct 0.4 4.8 Sep 10.0 -6.3 -0.4 -17.0 6.33 7.0Norway -4.7 Q2 -19.0 -3.5 1.7 Oct 1.4 5.3 Aug‡‡ 1.8 -0.9 0.8 -75.0 9.09 0.6Poland -8.0 Q2 -31.4 -4.0 3.0 Oct 3.4 6.1 Sep§ 2.8 -11.3 1.3 -90.0 3.81 1.6Russia -8.0 Q2 na -4.4 4.0 Oct 3.3 6.3 Sep§ 1.9 -4.1 6.1 -49.0 77.0 -17.1Sweden -4.1 Q3 18.3 -3.8 0.4 Sep 0.4 8.3 Sep§ 4.5 -4.1 0.1 1.0 8.66 12.1Switzerland -8.3 Q2 -26.1 -4.1 -0.6 Oct -0.9 3.3 Oct 9.0 -4.6 -0.4 -1.0 0.92 7.6Turkey -9.9 Q2 na -3.9 11.9 Oct 11.7 13.2 Aug§ -4.1 -5.6 12.4 17.0 7.82 -26.2Australia -6.3 Q2 -25.2 -4.5 0.7 Q3 0.3 6.9 Sep 1.3 -7.6 1.0 -30.0 1.38 5.8Hong Kong -3.4 Q3 12.6 -4.2 -2.3 Sep 0.9 6.4 Sep‡‡ 4.4 -5.8 0.7 -106 7.75 1.0India -23.9 Q2 -69.4 -9.8 7.3 Sep 6.5 7.0 Oct 0.7 -7.8 5.9 -66.0 74.4 -3.9Indonesia -3.5 Q3 na -2.2 1.4 Oct 1.9 7.1 Q3§ -1.8 -7.1 6.3 -72.0 14,085 -0.2Malaysia -17.1 Q2 na -8.0 -1.4 Sep -1.1 4.6 Sep§ 2.1 -8.1 2.7 -75.0 4.13 0.2Pakistan 0.5 2020** na -2.8 8.9 Oct 9.8 5.8 2018 -0.4 -8.0 9.9 ††† -148 158 -1.9Philippines -11.5 Q3 36.0 -6.1 2.5 Oct 2.4 10.0 Q3§ 0.9 -7.9 3.0 -158 48.3 5.4Singapore -7.0 Q3 35.4 -6.0 nil Sep -0.4 3.6 Q3 18.0 -13.9 0.9 -87.0 1.35 0.7South Korea -1.3 Q3 7.9 -1.5 0.1 Oct 0.5 3.7 Oct§ 3.0 -5.8 1.7 -13.0 1,110 5.1Taiwan 3.3 Q3 18.9 -0.2 -0.2 Oct -0.3 3.8 Sep 12.3 -1.5 0.3 -40.0 28.5 6.7Thailand -12.2 Q2 -33.4 -5.9 -0.5 Oct -0.8 1.9 Aug§ 3.1 -6.4 1.2 -40.0 30.3 0.2Argentina -19.1 Q2 -50.7 -11.3 36.6 Sep‡ 42.0 13.1 Q2§ 2.4 -9.2 na -464 79.5 -25.0Brazil -11.4 Q2 -33.5 -5.2 3.9 Oct 3.1 14.4 Aug§‡‡ -0.4 -15.9 2.0 -260 5.39 -23.0Chile -14.1 Q2 -43.3 -5.9 2.9 Oct 2.9 12.3 Sep§‡‡ 0.2 -8.9 2.6 -61.0 758 0.1Colombia -15.5 Q2 -47.6 -7.3 1.7 Oct 2.6 15.8 Sep§ -4.6 -8.8 5.0 -94.0 3,635 -8.1Mexico -8.6 Q3 57.4 -9.1 4.1 Oct 3.4 3.3 Mar 1.8 -5.3 5.7 -112 20.6 -7.1Peru -30.2 Q2 -72.1 -13.0 1.7 Oct 1.8 15.5 Sep§ -1.1 -9.2 3.9 -25.0 3.62 -6.9Egypt -1.7 Q2 na 3.6 4.6 Oct 4.7 9.6 Q2§ -3.4 -9.4 na nil 15.6 3.3Israel -6.7 Q2 -28.8 -5.7 -0.7 Sep -1.0 4.7 Sep 3.4 -10.4 0.8 -10.0 3.38 3.5Saudi Arabia 0.3 2019 na -5.2 5.7 Sep 3.4 9.0 Q2 -3.9 -10.9 na nil 3.75 nilSouth Africa -17.1 Q2 -51.0 -7.7 2.9 Sep 3.5 23.3 Q2§ -2.1 -16.0 8.8 35.0 15.7 -5.3

Source: Haver Analytics. *% change on previous quarter, annual rate. †The Economist Intelligence Unit estimate/forecast. §Not seasonally adjusted. ‡New series. **Year ending June. ††Latest 3 months. ‡‡3-month moving average. §§5-year yield. †††Dollar-denominated bonds.

Commodities

The Economist commodity-price index % change on2015=100 Nov 3rd Nov 10th* month year

Dollar IndexAll Items 128.0 132.3 3.2 21.4Food 105.3 109.8 4.9 12.2Industrials All 149.2 153.2 2.2 28.5Non-food agriculturals 106.5 108.8 5.0 12.4Metals 161.9 166.4 1.6 32.1

Sterling IndexAll items 149.5 152.4 1.2 17.6

Euro IndexAll items 121.0 124.1 2.6 13.1

Gold$ per oz 1,905.1 1,884.6 -0.4 29.9

Brent$ per barrel 39.8 43.7 2.8 -30.5

Sources: Bloomberg; CME Group; Cotlook; Refinitiv Datastream; Fastmarkets; FT; ICCO; ICO; ISO; Live Rice Index; LME; NZ Wool Services; Thompson Lloyd & Ewart; Urner Barry; WSJ. *Provisional.

Markets % change on: % change on:

Index one Dec 31st index one Dec 31stIn local currency Nov 11th week 2019 Nov 11th week 2019

United States S&P 500 3,572.7 3.8 10.6United States NAScomp 11,786.4 1.7 31.4China Shanghai Comp 3,342.2 2.0 9.6China Shenzhen Comp 2,264.0 0.1 31.4Japan Nikkei 225 25,349.6 7.0 7.2Japan Topix 1,729.1 6.3 0.4Britain FTSE 100 6,382.1 8.5 -15.4Canada S&P TSX 16,774.1 4.8 -1.7Euro area EURO STOXX 50 3,467.3 9.7 -7.4France CAC 40 5,445.2 10.6 -8.9Germany DAX* 13,216.2 7.2 -0.2Italy FTSE/MIB 20,993.0 8.4 -10.7Netherlands AEX 599.2 6.0 -0.9Spain IBEX 35 7,793.7 14.9 -18.4Poland WIG 51,280.0 8.4 -11.3Russia RTS, $ terms 1,233.8 11.3 -20.3Switzerland SMI 10,532.3 2.4 -0.8Turkey BIST 1,279.2 9.6 11.8Australia All Ord. 6,651.1 6.2 -2.2Hong Kong Hang Seng 26,227.0 5.4 -7.0India BSE 43,593.7 7.3 5.7Indonesia IDX 5,509.5 7.9 -12.5Malaysia KLSE 1,570.1 7.2 -1.2

Pakistan KSE 41,197.3 2.3 1.1Singapore STI 2,713.3 7.8 -15.8South Korea KOSPI 2,485.9 5.5 13.1Taiwan TWI 13,262.2 3.1 10.5Thailand SET 1,345.3 10.1 -14.8Argentina MERV 51,435.0 9.4 23.4Brazil BVSP 104,808.8 7.1 -9.4Mexico IPC 40,859.0 9.0 -6.2Egypt EGX 30 10,997.7 4.2 -21.2Israel TA-125 1,465.9 3.9 -9.3Saudi Arabia Tadawul 8,449.7 4.5 0.7South Africa JSE AS 57,607.3 7.4 0.9World, dev'd MSCI 2,528.2 4.6 7.2Emerging markets MSCI 1,178.9 3.8 5.8

US corporate bonds, spread over Treasuries Dec 31stBasis points latest 2019

Investment grade 152 141High-yield 486 449

Sources: Refinitiv Datastream; Standard & Poor's Global Fixed IncomeResearch. *Total return index.

For more countries and additional data, visitEconomist.com/indicators

Economic & financial indicators

Sources: US Census Bureau; Decision Desk HQ; Pew Research Centre; The Economist *Counties with over 95% of votes reported

Predicted change in margin of victory: +4 Dem Predicted change in margin of victory: +4 Rep Predicted change in margin of victory: +10 Dem2016 +17 Dem 2020 +21 Dem 2016 +38 Dem 2016 +36 Rep2020 +34 Dem 2020 +26 Rep

Actual change in margin of victory Actual change in margin of victory Actual change in margin of victory

White college-educated voters, % White voters without degrees, %Hispanic voters, %

-40

-30

-20

-10

0

10

20

0 20 40 60 0 20 40 60 80 100

-40

-30

-20

-10

0

10

20

30

0 20 40 60 80 100

→ Polls expected whites without college degrees to drift back towards the Democrats. They stuck with Donald Trump

United States presidential elections 2016-20, change in Democraticvote margin predicted by Pew v county results*, percentage points

White college-educated voters White voters without degreesHispanic voters

Total votes, m

0.51.02.0

↓ A lot more Republican than in 2016↑ More Democratic than in 2016 ↓ Slightly more Republican than in 2016

Miami-Dade,Florida

Indianapolissuburbs

Laredo,Texas

The Economist November 14th 2020 81

For the second presidential election in arow, polls underestimated support for

Donald Trump and the Republicans. Instates that have mostly finished countingvotes, the error of an average of presiden-tial polls released during the final twoweeks of the campaign was 5.5 percentagepoints, nearly double the average miss of3.1 percentage points registered in 2000-16.Moreover, whereas both major candidatesin 2016 benefited from state-level errors—Hillary Clinton won California by sevenpoints more than pollsters expected—thisyear, virtually all of the misfires were un-derestimating support for Mr Trump.

What went wrong? Exit polls do not pro-vide a trustworthy answer: their estimatesof vote margins within each demographiccategory, as well as the share of the elector-ate each group represents, are often biasedand differ vastly from other sources. The fi-nal analysis will have to wait until all bal-lots are counted and rigorous post-electionstudies can be conducted. However, statis-

ticians can unearth promising clues by ex-ploring the relationships between officialvote totals in counties where tabulation isnearly complete and those areas’ demo-graphic makeup. These data show that MrBiden failed to realise one of his centralelectoral promises: clawing back some ofDemocrats’ recent losses among white vot-ers without college degrees.

Among the most reliable analyses of theelection of 2016 is a study published by thePew Research Centre, a polling and re-search organisation, which surveyed 3,000voters confirmed to have cast ballots thatyear. Pew also published a nationwide pollthis October, making possible direct com-parisons of how voting intentions hadchanged within each demographic group.

Pew found that Mr Trump had made in-roads with black and Hispanic voters, trim-ming his deficits with these groups by fourpercentage points, while suffering an off-setting four-point decline among college-educated whites. However, most of Mr Bi-den’s predicted gains relative to Mrs Clin-ton came from whites without degrees: hewas expected to reduce Mr Trump’s marginwith such voters by ten percentage points.

The county-level data affirm some ofthese findings. Places with lots of college-educated whites, particularly in suburbs,did indeed swing towards Mr Biden thisyear—a trend that will probably make him

the first Democrat to win Georgia or Arizo-na since Bill Clinton. Similarly, Mr Trumpfared far better in majority-Hispanic coun-ties than he did in 2016, padding his advan-tages over Mr Biden in Florida and Texas.

However, there was scant evidence thatwhite voters without degrees preferred MrBiden to Mrs Clinton. Mr Trump’s marginsof victory in white working-class countiesthis year were just as large on average, andin some places even bigger, than in 2016. Asa result, Mr Biden had to rely mostly on hisstrength in affluent suburbs to rebuildDemocrats’ “blue wall” of Wisconsin,Michigan and Pennsylvania. He won thesestates by far smaller margins than pollstersexpected, and just barely squeaked by inWisconsin, the decisive state in the elec-toral college in both 2016 and 2020.

So far, most attention has focused on MrTrump’s gains among Hispanics, which ap-pear to have been even greater than pollsforesaw. However, the durability of hisedge among less-educated whites, a muchlarger group than Hispanics, is far moreelectorally consequential. No one knowshow much of this affinity is specific to MrTrump, and how much will carry over toother Republican candidates. The party’selectoral future depends largely on its abil-ity to keep these supporters, while makingitself more palatable to the college-educat-ed white voters who have abandoned it. 7

Once more, less-educated whitesspurned the Democratic nominee

Déjà vu all over again

Polling in AmericaGraphic detail

82 The Economist November 14th 2020

As a boy he invented a pop-up toaster. He blew a hole in the floorof the breakfast room while conducting a chemistry experi-

ment in the family basement in northern Toronto. And when, atSunday school, he queried whether what the Bible claimed was ac-tually true, he was promptly sent home. His parents never knewwhat he might do next. When they took him to Toronto GeneralHospital for psychological testing, all they learned was that he wasterrifically bright—his iq was 168, higher than Albert Einstein’s isthought to have been. At least his high school had the right idea.They let him bunk off class and teach himself, coming in only to dohis exams.

Before he was able to graduate, though, he was hit by a car whileout riding his bike. For 13 months he lay in a full-body cast, beatingboredom by reading magic books, unpicking locks and turningcard tricks. His doctors thought he would never walk again, but heshowed them. And when he did he joined the carnival, where fortwo summers he called himself Prince Ibis and wore a black tur-ban. He was a small chap, secretly gay and distant from his father.Doing magic made him feel bigger, especially when two policemenwho recognised him showed him a pair of handcuffs. Could he getout of them? He could. They drove him to the local jail. Could hebreak out of there? He could—and did, 28 times over the years fromdifferent jails in Canada and America.

His ambition was to beat his hero, Harry Houdini. In 1956 he ap-peared on television, submerged for 104 minutes in a sealed metalbox at the bottom of a hotel swimming pool, which earned him hisfirst entry in the “Guinness Book of Records”. Houdini barely man-aged an hour and a half. A local newspaper in Quebec christened

him “L’Étonnant Randi”—the Amazing Randi. He liked it enough toadopt it as his stage name. In 1973 he went on tour with Alice Coo-per, the ghoul-eyed rock star; every night he decapitated him on-stage using a fake guillotine. Later he wriggled out of a straitjacketwhile suspended, in deep midwinter, over the Niagara Falls.

For all the trickery and sleight of hand, he always insisted thatmagicians were the most honest people in the world. They did ex-actly what they said they were going to do. It was the hucksters thatmade him mad: the hoodwinkers and bamboozlers, the cardsharps, cozeners and thimbleriggers. Pedlars of woo-woo, hecalled them. Perhaps he felt a growing need to live by the truth. Hewas 81 when he finally came out publicly, but when he was almost60 he fell in love with the man he would eventually marry and hegave up turning tricks of his own to focus on another line of workhe’d been developing: looking, with his insider’s eye, at how otherpeople worked their magic.

He could see through them, of course. He knew how. One of thefirst he had rumbled was an evangelical Christian healer called Pe-ter Popoff who liked to summon forth individuals from his congre-gation, and tell them they should throw away their crutches andwalk. God had told him they would be healed. On “The TonightShow”, Mr Randi played Johnny Carson a clip in which Mr Popoffappeared to know what each congregant was called and what ailedthem even though he’d never seen them before. And then he playedthe clip again, with the sound turned up, to show how an electricalscanner revealed Mr Popoff was wearing a secret earpiece and be-ing fed the information by his wife who was backstage. “Popoffsays God tells him these things,” he would later say. “Maybe hedoes. But I didn’t realise God used a frequency of 39.17 megahertzand had a voice exactly like Elizabeth Popoff’s.”

Time did not mellow him, as it does others. His ten books—onpsychics, faith healers, extrasensory perception and the mask ofNostradamus—were rambling, crotchety and filled with diagramsand long-winded explanations. He did not set out to be a debunker;that presupposed that something deserved to be debunked evenbefore it had been examined. He thought only that people shouldbe open-minded and willing to question what they saw beforethem. What he wanted most was to inspect and test every claimthat was presented to him. Over the years these numbered into thethousands. He offered a $1m reward to anyone who could produceevidence of paranormal powers under controlled conditions.Many tried, but none of them succeeded. He never paid out a cent.Nor did he lose a single libel action brought against him by the angry and the thwarted.

His most devoted adversary was a tall handsome Israeli, who arrived in America in the early 1970s, claiming to be able to bendspoons using psychokinesis, or mind power. With consummateshowmanship, Uri Geller travelled across the United States, insist-ing that he could read minds, foretell events and, with nothingmore than psychic energy, distort magnetic fields, streams of elec-trons and solid metallic objects. Even the venerable Stanford Re-search Institute was taken in. Shortly afterwards, Johnny Carsonagain asked Mr Randi for advice on how to test Mr Geller’s claims.Use only your own props, he said; nothing that Mr Geller couldhave had access to beforehand. As the cameras rolled and Mr Gellerrealised he was going to be put on the spot, any paranormal abili-ties he may have had simply vanished. “This scares me,” he said. “Idon’t feel strong.”

The uses of enchantment“The Truth about Uri Geller” was one of Mr Randi’s most popularbooks. Mr Geller never forgave his tormentor. At his death, hetweeted: “How sad that Randi died with hatred in his soul. Love toyou all.” Such pious glee would have delighted the little magicianwith the twinkling eyes. As he had said himself many times overthe years: “When I die I want to be cremated and I want my ashesblown into Uri Geller’s eyes.” 7

James Randi, magician and professional sceptic, died onOctober 20th, aged 92

The woo-woo catcher

James RandiObituary

fractal.ai

We understand that even good drivers have bad days.

For 150,000 drivers in India each year, their destinationbecomes all too fi nal. With road fatalities mounting atspeed, Fractal took action. Lives depended on it.

By blending AI with behavioral sciencewe were able to identify & predict blackspots,infl uence risk perception and change the way drivers think and behave.

On India’s National Highway 24, serious accidents have already fallen by 60% — but our journey is onlyjust beginning.

Fractal: we don’t tire of making positive change.

Brake Habits