How technology is transforming educationThe future of learningJULY 22ND–28TH 2017

Why Trump hurts Kushner

Britain’s Brexit fiasco

Corporate China: the state strikes back

A special report on India and Pakistan

What if your car could spot road hazards for you?

HYUNDAI is a registered trademark of Hyundai Motor Company. All rights reserved. ©2017 Hyundai Motor Company.

This is Hyundai giving drivers a glimpse into the future of mobility, where autonomous cars will be safer and smarter than ever.

The Economist July 22nd 2017 5

Daily analysis and opinion tosupplement the print edition, plusaudio and video, and a daily chartEconomist.com

E-mail: newsletters andmobile editionEconomist.com/email

Print edition: available online by7pm London time each ThursdayEconomist.com/print

Audio edition: available online to download each FridayEconomist.com/audioedition

The Economist online

Volume 424 Number 9050

Published since September 1843to take part in "a severe contest between intelligence, which presses forward, and an unworthy, timid ignorance obstructing our progress."

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

Contents continues overleaf

Contents

1

American health care Withtheir replacement plan stalled,Republicans must now makethe Affordable Care Act work:leader, page 11. They controlevery level of government, butcan Republicans get anythingdone? Page 25. The ideologybehind the failing health-carebill, page 26

On the coverTogether, technology andteachers can revampschools: leader, page 9.Education technology ischanging what happenswhen a child goes to school,page 16

7 The world this week

Leaders9 Education technology

Brain gains10 Britain and the EU

Facing up to Brexit11 American health care

Revive, don’t repeal11 Economic reform in China

Unnatural selection12 Helping fragile

democraciesWhy monitors matter

Letters14 On students, China, Willy

Brandt, America, drugs,Taiwan, book titles

Briefing16 Edtech

Machine learning

Asia19 South-East Asia

More money, less freedom20 Religion in Indonesia

Borneo again21 Inequality in South Korea

Degrees of disenchantment22 Banyan

Fighting jihadists in thePhilippines

China23 Debt fears

Cause for optimism24 Succession politics

A sudden purge24 Last rites for Liu Xiaobo

Stifled laments

United States25 Congress

Can’t live with or without it26 Republican ideas

Re-redistribute27 Voting laws

Kris Kobach’s crusade28 California

Paris-on-sea29 Cities

School for mayors29 Presidential

appointmentsThe missing government

30 LexingtonGerrymander v Terminator

The Americas31 NAFTA

Trump’s plans for hisneighbours

32 BelloThe long economic squeeze

33 Che GuevaraLocal anti-hero

33 Sex workers in ColombiaFleeing Venezuela

Middle East and Africa35 China in Africa

A thousand golden stars36 Nigerian politics

Who will succeed Buhari?37 Arab media

Exodus and the airwaves37 Syria

All quiet on the southernfront?

38 Drugs in the Middle EastCaptured by Captagon

Special report: India andPakistanHissing cousinsAfter page 38

Brexit As long as thegovernment is in denial aboutBrexit’s trade-offs, Britainfaces disaster: leader, page 10.Britain cannot expect an à lacarte Brexit, page 43. Britishpolitics has become scarily bad-tempered: Bagehot, page 46

Election monitoring Foreignobservers and local citizen-watchers need respect,encouragement and cash:leader, page 12. New methodsand technology can makeelections fairer. But it is stillhard to dislodge an incumbentwho is determined to cheat,page 47

© 2017 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 orotherwise, without the prior permission of The Economist Newspaper Limited. Published every week, except for a year-end double issue, by The Economist Newspaper Limited. The Economist is a registered trademark of The Economist Newspaper Limited.Publisher: The Economist. Printed by Times Printers (in Singapore).

M.C.I. (P) No.030/09/2016 PPS 677/11/2012(022861)

PEFC certified

This copy of The Economistis printed on paper sourcedfrom sustainably managedforests, recycled and controlledsources certified by PEFCwww.pefc.orgPEFC/01-31-162

Principal commercial offices:25 St James’s Street, London sw1a 1hgTel: +44 20 7830 7000

Rue de l’Athénée 321206 Geneva, SwitzerlandTel: +41 22 566 2470

750 3rd Avenue, 5th Floor, New York, NY 10017 Tel: +1 212 541 0500

1301 Cityplaza Four,12 Taikoo Wan Road, Taikoo Shing, Hong KongTel: +852 2585 3888

Other commercial offices:Chicago, Dubai, Frankfurt, Los Angeles,Paris, San Francisco and Singapore

6 Contents The Economist July 22nd 2017

Subscription for 1 year (51 issues)Print onlyAustralia A$465China CNY 2,300Hong Kong & Macau HK$2,300India 10,000Japan Yen 44,300Korea KRW 375,000Malaysia RM 780New Zealand NZ$530Singapore & Brunei S$425Taiwan NT$9,000Thailand US$300Other countries Contact us as above

Subscription serviceFor our full range of subscription offers, including digital only or print and digital combined visitEconomist.com/offersYou can subscribe or renew your subscription by mail, telephone or fax at the details below:Telephone: +65 6534 5166 Facsimile: +65 6534 5066Web: Economist.com/offersE-mail: Asia@subscriptions.economist.comPost: The Economist Subscription Centre, Tanjong Pagar Post Office PO Box 671 Singapore 910817

Conflicts of interest JaredKushner’s White House jobcould harm both his firm andtrust in policymaking, page 49.Six months into his presidencyDonald Trump’s conflicts ofinterest look worse, and hishandling of them lessprincipled, even than manyexpected, page 50

Chinese state enterprisesGovernment-ownedbusinesses are becomingmore, not less, important.That is bad for China and theworld: leader, page 11.Reforms meant to fix China’sailing state-owned firmsinstead have emboldenedthem, page 55

Special report Seventy yearsafter their acrimonious split,India and Pakistan remain atdaggers drawn. See ourspecial report, after page 38

Gene drives A promising toolfor dealing with pests andpathogens runs into an oldenemy, page 61

Europe39 Italy’s migrant surge

Unwelcome choices40 The French army

General v president40 Russia’s pricey stadiums

Extra time and punishment41 Populism in Poland

Dependant judiciary42 Charlemagne

Jitters over Macron

Britain43 Britain and the EU

The six flavours of Brexit44 Public opinion

Softening?46 Bagehot

Bad-tempered Britain

International47 Spreading democracy

How to unrig an election

Business49 The Trump family (1)

After a Kushy landing50 The Trump family (2)

Not one to avoid a conflict52 3D printing at home

Model citizens52 Brazil’s labour reform

Bye-bye, Benito53 Exorcists

Who you gonna call?54 Schumpeter

Reinventing Uber

Finance and economics55 China Inc

Reinstatement58 Africa’s savings and

credit co-operativesFixing the roof

58 Private equityKKR’s succession plan

59 ButtonwoodThe bonds that break

60 Free exchangeExplaining populism

Science and technology61 Gene drives

Resistance is inevitable62 Artificial intelligence

Admiring the scenery64 Volcanology

A song of ice and fire

Books and arts65 Soviet history

The war for memory66 Hunter-gatherer

economicsLiving off the land

66 Colonial atrocitiesHearing their cries

67 Victorian historySummer of ’58

67 Alexander CalderSculpture in motion

68 JohnsonThe Americanisms arecoming!

70 Economic and financialindicatorsStatistics on 42 economies,plus a closer look atcigarette prices

Obituary72 Maryam Mirzakhani

Adding up

The Economist July 22nd 2017 7

1

In one of the most stunningfailures ofan Americangoverning party to get its signa-ture legislation passed inCongress, the Republicanhealth-care bill in the Senatestalled, after more Republicansenators said they would notsupport it. The party has spentseven years vowing to over-turn and replace Obamacarewith its own health-care plan.Donald Trump’s call for hisparty to go ahead and repealObamacare anyway was metwith little enthusiasm. TheDemocrats urged the Repub-licans to co-operate with themon fixing Obamacare’s flaws.

John McCain has been diag-nosed with brain cancer. MrMcCain is a widely respectedsenator on both sides of theaisle. The 80-year-old Repub-lican, who ran as the party’spresidential candidate againstBarackObama in 2008, isconsulting with doctors aboutwhen he can return to work.

The Trump administrationannounced that it would allowmore visas for foreign work-ers in seasonal jobs in order tohelp businesses that can’t fillvacancies. The announcementwas seen by some as being atodds with Mr Trump’s cam-paign pledge to put Americanworkers first.

Mr Trump said he intended tonominate Jon Huntsman asAmerica’s ambassador toRussia. Mr Huntsman is amoderate Republican, a one-time governor ofUtah and aformer ambassador to China.He ran unsuccessfully for theparty’s nomination forpresident in 2012.

The year of living dangerouslyMakhosi Khoza, an MP fromSouth Africa’s ruling AfricanNational Congress, called herparty’s leader, President JacobZuma, “a disgrace”. She imme-diately received death threatsand has been given round-the-clocksecurity.

The Trump administrationcancelled a programme thatarmed and trained moderateSyrian rebels fighting theAssad regime. The programmewas introduced in 2013 andwas never very effective, butthe Russians had alwaysopposed it.

Palestinian youths rioted inEast Jerusalem over tightersecurity measures at TempleMount. The new measures area response to the fatal shootingof two Israeli policemen,which closed the TempleMount compound for the firsttime in decades.

Saudi Arabia and the UnitedArab Emirates watered downa list ofdemands they aremaking ofQatar, its fellowGulfstate on which it hasimposed a partial blockadesince last month. The step wasapparently aimed at gettingout of the crisis they havecreated.

The Saudi government took infor questioning a woman whohad allowed herself to befilmed dressed in a miniskirtand crop-top, and withuncovered hair.

The popular vote

More than 7.5m Venezuelans,about a third of the electorate,voted in a referendum organ-ised by the opposition to theauthoritarian regime. Nearly100% ofvoters rejected a plan

by the president, Nicolás Ma-duro, to convene a constituentassembly to rewrite the consti-tution. The government saidthe referendum was illegal.

The American trade repre-sentative, Robert Lighthizer,outlined the Trump adminis-tration’s goals for renegotiatingthe North American Free-Trade Agreement withCanada and Mexico. He calledfor a reduction in the Ameri-can trade deficit with its part-ners, stronger rules oforiginfor goods that can be tradedduty-free within North Ameri-ca and changes to NAFTA’sdispute-resolution process.

A judge in Peru ordered thepre-trial detention ofOllantaHumala, a former president,and his wife. A prosecutor hasaccused the couple of taking a$3m illegal donation during apresidential election campaignin 2011. The couple, whoturned themselves in, denywrongdoing.

We don’t swear allegianceA court in Hong Kong ruledthat four pro-democracy law-makers should be expelledfrom the legislature for failingto take their oaths in a “sincereand solemn” manner. Thecourt had similarly disbarredtwo other opposition legisla-tors in November. Their sup-porters accuse the governmentin Beijing oforchestrating thecases against them.

The Chinese governmentarranged a funeral ceremonyfor Liu Xiaobo, a Nobel peace-prize winner who died of livercancer while serving an 11-yearsentence for subversion. Onlyfamily members and securityagents were allowed to attend.Mr Liu’s ashes were depositedat sea. Censors deleted condo-lences from social media.

The Communist Party boss ofthe Chinese region ofChong-qing, Sun Zhengcai, was dis-missed and placed underinvestigation for violatingparty rules. Mr Sun had beenconsidered as a possible suc-cessor to Xi Jinping, who, if hefollows convention, will stepdown as the party’s leader in

2022. An ally ofMr Xi, ChenMin’er, tookover as Chong-qing’s party chief.

The government of Indonesiaused new powers to ban Hiz-but Tahrir, a group whichadvocates the creation ofanIslamic caliphate, for under-mining the constitution.

A private jet bringing AbdulRashid Dostum, the vice-president ofAfghanistan,home from Turkey, was turnedaway by the authorities whenit tried to land in the Afghancity ofMazar-i-Sharif. MrDostum, who has fallen outwith the president, AshrafGhani, is organising a newopposition coalition.

Moon Jae-in, the president ofSouth Korea, proposed talkswith North Korea in order toreduce tensions at the borderand reunite families separatedby the Korean war.

Legal wrangling

The European Commissionhinted it may take actionagainst Poland ifplannedchanges to the judiciary goahead. The ruling Law andJustice party has already putthe constitutional tribunalunder control of the executiveand now plans to overhaul thesupreme court. Thousands ofPoles took to the streets toprotest against the power grab.

General Pierre de Villiersresigned as the head ofFrance’s armed forces in avery public spat with Emman-uel Macron, the new president,over the defence budget. MrMacron reminded a gatheringofarmy chiefs that “I am yourleader”. He described the newarmy chief, General FrançoisLecointre, as a “hero”.

Politics

The world this week

8 The world this week The Economist July 22nd 2017

Other economic data and newscan be found on pages 70-71

KKR promoted two executives,Joseph Bae and Scott Nuttall, tosenior leadership positions ina succession plan that pavesthe way for the eventual retire-ment of its two remainingfounders, Henry Kravis andGeorge Roberts. It is the biggestoverhaul to the private-equityfirm’s management sinceJerome Kohlberg, the otherfounder, left in 1987.

The chiefexecutive ofAkzoNobel stood down withimmediate effect because ofhealth issues. Ton Büchner hadrecently defended the Dutchpaint and chemicals companyfrom a combative takeover bidlaunched by PPG, an Americanrival. The three-month tusslehad prompted a campaign byone ofAkzo’s biggest share-holders to sack the chairmanfor not considering PPG’s offer.

America’s big banks reportedtheir earnings for the secondquarter. Low market volatilityhit revenues from trading,though this was somewhatoffset by income from risinginterest rates. Net income atJPMorgan Chase came in at$7bn, its best-ever quarterlyprofit. BankofAmerica, Mor-gan Stanley and Wells Fargoalso saw profits climb, to$5.3bn, $1.8bn and $5.8bnrespectively; Citigroup’s in-come dipped a bit, to $3.9bn.Goldman Sachs suffered a 40%slump in revenues from trad-ing; its profit slid to $1.8bn.

Storing is not boringIn Asia’s biggest buy-out todate, a Chinese consortiumoffered S$16bn ($11.6bn) forGlobal Logistic Properties,which is based in Singaporeand is one of the world’s big-gest warehousing companies.The growth ofe-commerce inAsia has increased the demandfor warehouse space.

China’s economy grew by6.9% in the second quartercompared with the same threemonths last year. That wasbetter than had been expectedand above the annual target of“around 6.5%” set by the gov-

ernment earlier this year.Separate data showed steelproduction at a record in June.That gave American and Chi-nese officials something tochew on as they met in Wash-ington for inconclusive bilat-eral talks.

Dalian Wanda, a Chineseconglomerate, rejigged anagreement to sell its hotels andtourism projects to SunacChina, a property developer,after credit-ratings agenciesraised concerns about thefinancing. Dalian will insteadsell the hotels to a propertydeveloper in Guangzhou, andSunac will buy the tourismassets. The share prices ofWanda-controlled companiesand ofSunac sankamid re-ports that the Chinese govern-ment was scrutinising bothfirms’ heavy debt load.

Keen as mustardMcCormick& Company, anAmerican producer ofspicesand herbs that counts ThaiKitchen and Schwartz amongits labels, offered to pay $4.2bnfor the food business ofReck-itt Benckiser, a British con-sumer-goods group that isrefocusing its business on itsother products. McCormickgains control ofbrands such asFrench’s mustard and Frank’sRedHot sauce in the deal.

Britain’s annual inflation ratedropped slightly in June to2.6%, reversing the trend ofaccelerating prices since thevote last June to leave the EU.The figure was a surprise:analysts had expected anincrease ofnearly 3%. Thefourth successive monthly fallin transport costs, especiallymotor fuels, was the biggestfactor behind the drop. Lowerinflation eases the pressure onthe BankofEngland to raiseinterest rates for the first timesince 2007.

The British government pro-posed that the state pensionage should increase from 67 to68 between 2037 and 2039,seven years earlier thanplanned. The change willaffect workers born between1970 and 1978, who will have towait an extra year to claimtheir state pension. The ad-justment is designed to keepcosts under control.

The Vision Fund, a $93bn fundset up by SoftBank, announcedits first investments in techstartups. The beneficiariesincluded a firm that is devel-oping technology to growcrops indoors and a roboticscompany. The disbursementscame in the weekthat Ameri-ca’s technology industry roseabove the stockmarket peak ithad reached during the dot-com bubble in 2000, as mea-sured by the S&P 500 IT index.

The number ofworldwidesubscribers to Netflix crossedthe 100m markfor the firsttime, to 104m. In another first,just over halfof the video-streaming service’s subscriberslive outside the United States.

The great firewall of ChinaChina’s internet censors par-tially blocked WhatsApp, thelatest move in a broad crack-down on foreign media.WhatsApp’s users woke to findthey were unable to sendimages, including those ofWinnie the Pooh, who wasalso banned in China thisweek in response to aninternet meme that has goneviral comparing the winsomebear to the country’s president,Xi Jinping.

Business British inflation

Source: ONS

Consumer prices% change on a year earlier

BREXIT VOTE

2015 16 170

1

2

3

The Economist July 22nd 2017 9

IN 1953 B.F. Skinner visited hisdaughter’s maths class. The

Harvard psychologist found ev-ery pupil learning the same top-ic in the same way at the samespeed. A few days later he builthis first “teaching machine”,which let children tackle ques-

tions at their own pace. By the mid-1960s similar gizmos werebeing flogged by door-to-door salesmen. Within a few years,though, enthusiasm for them had fizzled out.

Since then education technology (edtech) has repeated thecycle of hype and flop, even as computers have reshaped al-most every otherpart of life. One reason is the conservatism ofteachers and their unions. But another is that the brain-stretch-ing potential ofedtech has remained unproven.

Today, however, Skinner’s heirs are forcing the sceptics tothink again (see page 16). Backed by billionaire techies such asMark Zuckerberg and Bill Gates, schools around the world areusing new software to “personalise” learning. This could helphundreds of millions of children stuck in dismal classes—butonly if edtech boosters can resist the temptation to reviveharmful ideas about how children learn. To succeed, edtechmust be at the service of teaching, not the other way around.

Pencils downThe conventional model of schooling emerged in Prussia inthe 18th century. Alternatives have so far failed to teach asmany children as efficiently. Classrooms, hierarchical year-groups, standardised curriculums and fixed timetables are stillthe norm for most of the world’s nearly1.5bn schoolchildren.

Too many do not reach their potential. In poor countriesonly a quarter of secondary schoolchildren acquire at least abasic knowledge of maths, reading and science. Even in themostly rich countries of the OECD about 30% of teenagers failto reach proficiency in at least one of these subjects.

That share has remained almost unchanged over the past 15years, during which billions have been spent on IT in schools.By2012 there wasone computer forevery two pupils in severalrich countries. Australia had more computers than pupils.Handled poorly, devices can distract. A Portuguese study from2010 found that schools with slow broadband and a ban onsites such as YouTube had better results than high-tech ones.

What matters is how edtech is used. One way it can help isthrough bespoke instruction. Ever since Philip II of Macedonhired Aristotle to prepare his son Alexander for Greatness, richparents have paid for tutors. Reformers from São Paulo toStockholm think that edtech can put individual attentionwithin reach ofall pupils. American schoolsare embracing themodel most readily. Athird ofpupilsare in a school district thathas pledged to introduce “personalised, digital learning”. Themethods of groups like Summit Public Schools, whose soft-ware waswritten fornothingbyFacebookengineers, are beingcopied by hundreds ofschools.

In India, where about halfofchildren leave primary schoolunable to read a simple text, the curriculum goes over many

pupils’ heads. “Adaptive” software such as Mindspark canwork out what a child knows and pose questions accordingly.A recent paper found that Indian children using Mindsparkafter school made some of the largest gains in maths and read-ing ofany education study in poor countries.

The other way edtech can aid learning is by making schoolsmore productive. In California schools are using software tooverhaul the conventional model. Instead of textbooks, pupilshave “playlists”, which they use to access online lessons andtake tests. The software assesses children’s progress, lighteningteachers’ marking load and giving them insight on their pupils.Saved teachers’ time is allocated to other tasks, such as foster-ing pupils’ social skills or one-on-one tuition. A study in 2015suggested that children in early adopters of this model scorebetter in tests than their peers at other schools.

Pay attention at the backSuch innovation is welcome. But making the best of edtechmeans getting several things right. First, “personalised learn-ing” must follow the evidence on how children learn. It mustnot be an excuse to revive pseudoscientific ideas such as“learning styles”: the theory that each child has a particularway of taking in information. Such nonsense leads to schemeslike Brain Gym, an “educational kinesiology” programmeonce backed by the British government, which claimed thatsome pupils should stretch, bend and emit an “energy yawn”while doing their sums.

A less consequential falsehood is that technology meanschildren do not need to learn facts or learn from a teacher—in-stead they can just use Google. Some educationalists go fur-ther, arguing that facts get in the way ofskills such as creativityand critical thinking. The opposite is true. Amemory crammedwith knowledge enables these talents. William Shakespearewas drilled in Latin phrases and grammatical rules and yet hepenned a few decent plays. In 2015 a vast study of1,200 educa-tion meta-analyses found that, of the 20 most effective ways ofboosting learning, nearly all relied on the craft ofa teacher.

The second imperative is to make sure that edtech narrows,rather than widens, inequalities in education. Here there aregrounds for optimism. Some of the pioneering schools areprivate ones in Silicon Valley. But many more are run by char-ter-school groups teaching mostly poor pupils, such as Rocket-ship and Achievement First—or Summit, where 99% of gradu-ating pupils go on to university and laggards make the mostprogress relative to their peers in normal classes. A similar pat-tern can be observed outside America. In studies of edtech inIndia by J-PAL, a research group, the biggest beneficiaries arechildren using software to receive remedial education.

Third, the potential for edtech will be realised only if teach-ers embrace it. They are right to ask for evidence that productswork. But scepticism should not turn into Luddism. A goodmodel is São Paulo, where teachershave welcomed Geekie, anadaptive-software company, into public schools.

In 1984 Skinner called opposition to technology the“shame” of education. Given what edtech promises today,closed-mindedness has no place in the classroom. 7

Brain gains

Together, technologyand teachers can revamp schools

Leaders

10 Leaders The Economist July 22nd 2017

CRISIS? What crisis? So manyhave been triggered in Brit-

ain by the vote a year ago toleave the European Union that itis hard to keep track. Just lastmonth Theresa May was re-duced from unassailable ironlady to just-about-managing mi-

nority prime minister. Her cabinet is engaged in open warfareas rivals position themselves to replace her. The Labour Party,which hasbeen taken overbya hard-left admirerofHugo Chá-vez, is ahead in the polls. Meanwhile a neurotic pro-Brexitpress shrieks that anyone who voices doubts about the coun-try’s direction is an unpatriotic traitor. Britain is having a verypublic nervous breakdown.

The chaos at the heart ofgovernment hardly bodes well forthe exit negotiations with the EU, which turned to detailedmatters this week and need to conclude in autumn 2018. Butthe day-to-day disorder masks a bigger problem. Despite thefrantic political activity in Westminster—the briefing, back-stabbing and plotting—the country has made remarkably littleprogress since the referendum in deciding what form Brexitshould take. All versions, however“hard” or“soft”, have draw-backs (see page 43). YetBritain’s leadershave scarcelyacknowl-edged that exit will involve compromises, let alone how dam-aging they are likely to be. The longer they fail to face up toBrexit’s painful trade-offs, the more brutal will be the eventualreckoning with reality.

Winging itIn the 13 months since the referendum, the awesome complex-ity of ending a 44-year political and economic union has be-come clear. Britain’s position on everything from mackerelstocks to nuclear waste is being worked out by a civil servicewhose headcount has fallen by nearly a quarter in the pastdecade and which has not negotiated a trade deal of its own ina generation. Responsibility for Brexit is shared—or, rather,fought over and sometimes dropped—by several different de-partments. Initially Britain’s decision not to publish a detailednegotiating position, as the EU had, was put down to its desireto avoid giving away its hand. It now seems that Britain trig-gered exit talks before working out where it stood. The head ofitspublic-spendingwatchdogsaid recently thatwhen he askedministers for their plan he was given only “vague” assurances;he fears the whole thing could fall apart “at the first tap”.

As the scale of the taskhas become apparent, so has the dif-ficulty of Britain’s position. Before the referendum MichaelGove, a leading Brexiteer in the cabinet, predicted that, “Theday after we vote to leave, we hold all the cards.” It is not turn-ing out like that. So far, where there has been disagreementBritain has given way. The talks will be sequenced along thelines suggested by the EU. Britain has conceded that it will payan exit bill, contrary to its foreign secretary’s suggestion only aweekago that Eurocrats could “go whistle” for their money.

The hobbled Mrs May has appealed to other parties tocome forward with ideas on how to make Brexit work. Labour,

which can hardly believe that it is within sight of installing aradical socialist prime minister in 10 Downing Street, is unsur-prisingly more interested in provoking an election. But cross-party gangs of Remainer MPs are planning to add amend-ments to legislation, forcing the government to try to maintainmembership ofEuratom, for instance, which governs the tran-sit of radioactive material in Europe. Even within the govern-ment, the prime minister’s lackofgrip means that cabinet min-isters have started openly disagreeingabout what shape Brexitshould take. Philip Hammond, the chancellor, hasbeen snipedat because he supports a long transition period to make Brexitgo smoothly—a sensible idea which is viewed with suspicionby some Brexiteers, who fear the transition stage could be-come permanent.

The reopening of the debate is welcome, since the hard exitproposed in Mrs May’s rejected manifesto would have beenneedlessly damaging. But there is a lack of realism on all sidesabout what Britain’s limited options involve. There are manyways to leave the EU, and none is free of problems. The moreBritain aims to preserve its economic relationship with thecontinent, the more it will have to follow rules set by foreignpoliticians and enforced by foreign judges (including on thesensitive issue of freedom of movement). The more control itdemands over its borders and laws, the harder it will find it todo business with its biggest market. It is not unpatriotic to befrank about these trade-offs. Indeed, it is more unpatriotic tokid voters into thinking that Brexit has no drawbacks at all.

The government has not published any estimates ofthe im-pact of the various types of Brexit since the referendum, butacademic studies suggest that even the “softest” option—Nor-wegian-style membership of the European Economic Area—would cut trade by at least 20% over ten years, whereas the“hardest” exit, reverting to trade on the World Trade Organisa-tion’s terms, would reduce trade by 40% and cut annual in-come per person by 2.6%. As the economy weakens, these con-cerns will weigh more heavily. Britain’s economy is growingmore slowly than that of any other member of the EU. Theelection showed that its voters are sick of austerity. Our ownpolling finds that, when forced to choose, a majority now fa-vours a soft Brexit, inside the single market (see page 44).

Back in playA febrile mood in the country, and the power vacuum inDowning Street, mean that all options are back on the table.This is panicking people on both sides of the debate. Somehardline Brexiteers are agitating again for Britain to walk awayfrom the negotiations with no deal, before voters have achange of heart. Some Remainers are stepping up calls for asecond referendum, to give the countrya route outof the deep-ening mess. As the negotiations blunder on and the deadlinedraws nearer, such talkwill become only more fevered.

So it is all the more crucial that all sides face up to the realand painful trade-offs that Brexit entails. The longer Britainkeeps its head in the sand, the more likely it is to end up withno deal, and no preparations for the consequences. Thatwould bring a crisis ofa new order ofmagnitude. 7

Britain and the EU

Facing up to Brexit

As long as the government stays in denial about Brexit’s drawbacks, Britain is on course fordisaster

The Economist July 22nd 2017 Leaders 11

1

ONLY a madman wouldbuild America’s health-

care system from scratch. Its mixof private insurance, govern-ment-provided care and endlessregulations is complicated, ex-pensive and fails many vulner-able Americans. The Affordable

Care Act, Barack Obama’s health-care law, is part of the mess.Yet those who passed it knew it was a grubby compromise. InAmerica’s divided government, they reasoned, politiciansmust build on what already exists.

Following the travails this week of their latest attempts to“repeal and replace” Obamacare, Republicans must come to asimilar realisation (see page 25). They are too divided to sweepaway the status quo. Rand Paul, one of four senators whothreatened to bring down the Senate bill, compared its contin-uation ofparts ofObamacare to “German national socialism”.He wants to get government out of health markets. Susan Col-lins, another rebel, thinks the bill cuts Medicaid, government-provided health insurance for the poor, too deeply. These fac-tions are unlikely to agree, however long the Republican lead-ership tries to find a compromise. One conservative gambit—torepeal Obamacare and worryabout replacing it later—is a reck-less gamble that would inflict crippling uncertainty on thehealth industry and those who rely on it.

Get over the nameRepublicans have long spoken as if Obamacare is a burninghouse; those inside must be rescued, even if it means taking anaxe to the walls. But it is a fallacious argument designed to pro-vide political cover to a Senate bill that is more about reducingredistribution than rescuing Obamacare’s customers from di-saster (see page 26). The law’s problems are real, but fixable—

more like a leaky roof and botched plumbing than a fire. Theholes can still be patched up, in three steps.

First, more states should emulate Alaska, Minnesota andOregon, and start reinsurance programmes to pay the highestmedical costs incurred on Obamacare’s insurance exchanges.Because the law forbids discrimination against those with pre-existing health conditions, the exchanges contain many sicklypatients. As a result, premiums and deductibles have soaredfor the 9m buyers who earn too much to receive governmentsubsidies. They foot much of the bill for Obamacare’s generos-ity. Meanwhile, 155m other Americans enjoy a tax breakon theplans they get from their employers, which are often cheaperanyway. Reinsurance programmes would bring premiumsdown and begin to redress the imbalance. If it can get its act to-gether, Congress could stump up some cash to help.

Second, states should open government contracts for pro-grammes like Medicaid only to insurers that take part in the ex-changes. Those insurersare likely to applybecause Medicaid ismuch larger than the market for individuals. Such rules, al-ready in place in New York and Nevada, will help stem theflow offirms abandoning the exchanges, which has left a thirdofcounties with only one insurer.

Finally, the Trump administration must fulfil the federalgovernment’s responsibilities under Obamacare. That meansenforcing its rules, such as a fine for those who choose not tobuy health insurance. It also means paying the subsidies thatunderpin the system, something the president has been un-willing to do, thus deepening the problems on the exchanges.And it means seeking congressional approval for them to allayconcerns that such payments are unconstitutional.

Without a plausible replacement, killing offObamacare, byrepeal or by neglect, would be grossly irresponsible. Madden-ing as the system is, Republicans now have a responsibility tomake it work. 7

American health care

Revive, don’t repeal

Federal health-care lawUS, preference, % polled July 2017

0 20 40 60 80 100

All adults

Democrats

Republicans

Obamacare Republican planOther/don’t know

With health-care reform stalled, Republicans must nowmake the Affordable Care Act work

THE 40-year process of re-forming China’s economy

has seen occasional retreats. Butthe general trajectory hasseemed plain enough: towards agreater role for market forces.Since the early 1980s, privatebusiness has grown far faster

and been much more profitable than the state sector. Back thenstate companies were responsible for roughly four-fifths ofoutput; now they account for less than a fifth.

President Xi Jinping’s commitment in 2013 to give marketforces “a decisive role” in allocating resources seemed to pre-

sage more of the same. Yet the retreat of state-owned enter-prises (SOEs) has stalled, and in some respects gone into re-verse. China still has more than 150,000 SOEs. Their share ofindustrial assetshoversstubbornlynear40%. Theyaccount forabout half of bank credit, and when the economy slows thestate presses them to spend more. Since 2015 investment bySOEs has outpaced that by private firms (see page 55).

Mr Xi remains well aware of the need for reform; on July15th he repeated warnings about indebtedness at SOEs. Butonly some of the initiatives rolled out on his watch are aimedat slimming the state sector. Two of them point in another dir-ection entirely. One is the mergingofcompetingSOEs. The armofthe government responsible for lookingafter these firmshas

Economic reform in China

Unnatural selection

Chinese corporate debtLiabilities as % of equity

100

150

200

2003 05 10 15

Non-state-controlled

State-controlled

Government-owned businesses are becoming more, not less important. That is bad forChina and the world

12 Leaders The Economist July 22nd 2017

2 engineered mergers of ports, railway-equipment makers andshipping companies; a vast chemicals combination isplanned. Such deals often seem intended to spawn nationalchampions, not to pare overcapacity.

The other disturbing trend is the proliferation of “state cap-ital investment and operation” companies (SCIOs). The statehas thus far tended to dominate in heavy industries, transportand energy, leaving private firms to forge ahead in technology.SCIOs will, in part, function like state-run private-equity fundswhose remit is to extend the reach of government. Provincialgovernments have published plans to push funds into areassuch as biotechnology and cloud computing.

The entrenchment of state firms brings dangers both forChina and for the wider world. Domestically, evidence showsthat SOEs underperform private businesses. A bigger role forthem will mean more inefficiency and slower growth over thelong term. State enterprises are also a principal culprit in thealarming build-up of corporate debt in China (nearly 170% ofGDP at the end of last year). The IMF estimates that reform ofSOEs could bring a $1trn economic dividend over the course ofa decade. Their persistence will impose concomitant costs.

SOEs also riskprovoking a backlash as they target increased

foreign sales. With their opaque finances and domestic priv-ileges, Chinese state enterprises are easily accused of havingunfair advantages when they venture abroad. That couldnourish protectionist sentiment, or prompt other countries toincrease state support for their own firms.

Beat the retreatOptimists hope for a repeat of a familiar pattern, where a per-iod of retrenchment is followed by a spurt of reform. In thisnarrative, progress will be made again after the party’s five-yearly congress this autumn, when Mr Xi will have a freerhand to pursue reforms. Sadly, that is wishful thinking.Strengthening the SOEs is consistent with Mr Xi’s belief intighter state control of just about every aspect of society. A reg-ulatory clampdown on bank lending to big companies, for ex-ample, is a way not just to clean up shadowy financial prac-tices but to influence how private firms spend their cash.

Previous leaders have managed the tension between a lib-eralising economy and an obsession with stability through amix of rapid growth and political repression. Mr Xi does notwant to change that recipe. But he is doing something moreradical: reversing the state’s retreat from the economy. 7

NO ONE batted an eyelid ear-lier this year when Turk-

menistan’s strongman, Gurban-guly Berdimuhamedov, was“re-elected” with nearly 98% ofthe vote. Why, one wonders, didhe botherwith an election at all?Yet in a growing number of frag-

ile new democracies, especially in Africa, where similarly ab-surd results were once common, elections have become genu-ine. Since 1991 incumbent governments or leaders have beenousted at the ballot box at least 45 times, most recently in Ni-geria, Ghana, the Gambia and Lesotho.

Nerves still jangle at election time, especially when the out-come is likely to be close, patronage and corruption are perva-sive, and rigging and violence have blighted previous ballots.A fraudulent election can tarnish a country’s reputation,threaten its stability, and deter investment and aid.

Kenya, whose voters go to the polls on August 8th, is justsuch a case. Violence after an election in 2007 left at least1,300dead and 700,000 displaced. The country is the economic andstrategic hub ofeast Africa, so a credible election this time mat-tersnotonly to Kenyansbut to manybeyond theirborders. For-eign and local observers will be vital to ensuring a clean con-test in such a “transitional democracy” (see page 47).

Beat the cheatIn the bad old days no one (except the hapless citizens of thecountries concerned) seemed to care much if elections wererigged, provided they were more or less peaceful. Internation-al monitors would swan in a few days before the poll and—more negligently—fly out again a day or two after it, often de-

claring the election to have been “free and fair” because theyhad seen voters cast their ballots without violence. No matterthat fraud and bad blood often increase after polling day.

The likes of Robert Mugabe in Zimbabwe prefer monitorsfrom the African Union, who in the past have endorsed sus-pect results (they have recently become a bit more rigorous).More ambitious places, such as Kenya and Ghana, crave theimprimatur of the European Union and respected Americanoutfits, notably the National Democratic Institute, the Interna-tional Republican Institute and the Carter Centre.

Nowadays foreign monitoring teams start to arrive a goodmonth before the big day and stay for at least a month after it.The outsiders help in several ways. They provide expertise ontechnology, especially concerning the registration of votersand the method of vote-counting. Monitors also help co-ordi-nate “parallel vote tabulation”, whereby samples ofthe resultsfrom randomly selected polling stations are collected and pre-sented quickly to prevent fraud in the later counting process.Crucially, foreign monitors support local watchdogs who domost of the workand face the greatest risks.

Foreigners alone cannot ensure fair elections. They rely onthe co-operation of local governments, to gain access to the en-tire process, including the voters’ register. But they can raise thebaragainst rigging. Beyond constraining the incumbents’ pow-er, their scrutiny can build popular trust in the elections—andmake it easier for losers to accept defeat.

It isan expensive business, butworthwhile. Worryingly, theTrump administration is trying to slash the State Department’sbudget which helps support democracy, including electionmonitors. Congress is right to resist such cuts. Fair electionsmake Africa more stable. Givingup on them spreadsanger andpoison around the world. 7

Helping fragile democracies

Why monitors matter

Foreign observers and local citizen-watchers can make the difference between a fairelection and a disaster

14 The Economist July 22nd 2017

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

Student numbers

Contrary to received wisdom,the overall number ofuniversi-ty students has fallen, notrisen, in England since the risein tuition fees (“Fees high, foesfume”, July 8th). The numberin full-time study has grown,but there has been a 43%decline in part-time students,typically older learners whotend to be more price sensitiveand debt averse than theirfull-time counterparts. Datafrom the Higher EducationStatistics Agency suggest therewere 172,000 fewer undergrad-uate students in total at Englishhigher-education institutionsin 2015-16 than in 2011-12, theyear before tuition fees rose.There were also 13,500 fewerstudents from poor areas, notmore, as is generally claimed.

The disastrous collapse ofpart-time study matters be-cause it can affect social mobil-ity and improvements to eco-nomic productivity. All thepolitical parties went into theelection promising to champi-on lifelong learning. All thosein power have a responsibilityto make good on that promise.GUY MALLISONDirector of strategyOpen UniversityMilton Keynes, Buckinghamshire

Censorship in China

It was strange to read about thedeath ofLiu Xiaobo, China’sforemost political dissident,only in foreign newspapers(“China’s conscience”, July15th). But this is a countrywhere strange things happenall the time. This summer,foreign television shows andfilms have mysteriouslydisappeared from almost allthe popular video-streamingsites. Western talkshows have

been banned. Since June socialplatforms have been proddingtheir users to register their realnames.

Before it was deleted, Iwatched a biopic ofAung SanSuu Kyi (using a pseudonym toavoid the censor). When shewas in confinement for beingMyanmar’s conscience, MsSuu Kyi wrote “Freedom fromFear”. I wonder ifLiu Xiaobogot a chance to do the same.We are often told by thegovernment that the West’sinfluence will corrupt us anddamage the younger gener-ation. The truth is we fear thegovernment more than anyoutside influence.LU YANHANSuzhou, China

Correcting a correction

You were too eager to correctyourself regarding WillyBrandt’s wartime exile (Correc-tion in the July 8th editionconcerning Helmut Kohl’sObituary in the June 24thissue). There were two parts tohis exile from Nazi Germany.Before the war he was in Nor-way, but when Norway wasoccupied Brandt managed toescape to Sweden, where heremained until the fightingfinished. So you got it right thefirst time by stating that hiswartime exile was in Sweden. JEAN GUILLLuxembourg City

Why Trump succeeds

Regarding your special reporton Donald Trump’s America(July1st), in “Strangers in TheirOwn Land”, Arlie RussellHochschild provides a meta-phorical story as an insightinto the roots ofAmericanpopulism. The AmericanDream is just over the hill andeveryone is in line, but the lineis moving slower than it usedto. At the very point that theline begins to slow, women,blacks and other minoritiesbegin to cut in line. Not onlythat, but the federal govern-ment helps them cut in line.When those already in linecomplain, they are calledrednecks, white trash andBible-thumpers. They becomeangry.

Affirmative action is hugelyunpopular with white voters.Cutting in line violates a fun-damental sense of justice.Republicans have run againstaffirmative action for decadesand yet done very little tochange the policies. Then MrTrump arrives and beratesmainstream Republicans,humiliating them in thedebates, which become some-thing akin to a professionalwrestling match. The backlashagainst affirmative action isgathering strength and clarity.This is the result of tellingwhite Americans that identitypolitics is an issue of justice,just not for them.MARK WOLFGRAMVisiting fellowCarleton UniversityOttawa

The battle forBaltimore

Your article about the risingtide ofhomicides in Baltimorecalled for better policing andschools, and fewer drugs (“Onmurderous streets”, July1st).Yet the one biggest change thatcould help the city, and the restofAmerica, would be to endthe insane war on drugs itself.The policy’s vast economicand human costs might bejustified if it reduced the harmofdrugs. But it does the oppo-site, wreaking devastation, asin Baltimore.

The violence is a conse-quence ofgiving criminalscontrol of the drug trade, sothey battle over turf. The illicithigh prices force many addictsinto crime to finance theirhabit. Around 50,000 Ameri-cans die annually from over-doses. All this could be elimi-nated ifa fraction of thebillions wasted on the faileddrug war were instead spenton treating addicts compas-sionately rather than puni-tively, and making drugs legal,regulated and safe.FRANK ROBINSONAlbany, New York

Taiwan’s diplomacy

I read Ma Ying-jeou’s com-ments on Panama’s regrettabledecision to breakdiplomaticties with Taiwan (Letters, July1st). I must reiterate that the

Taiwanese governmentrespects the historical fact ofthe 1992 meeting with Beijingand remains dedicated tomaintaining the status quo ofpeace, stability and predictablecross-Strait relations.

However, it is also crucialthat these relations proceed onthe basis ofequality and pari-ty, and that both sides takemeasures to promote construc-tive exchanges and dialoguewhen developing a stablepartnership for the region.

As President Tsai Ing-wenstressed, although Taiwan haslost a diplomatic ally, ourrefusal to engage in diplomaticbidding wars will not change.Taiwan will not revert to theold path ofconfrontation. TheRepublic ofChina (Taiwan)exists and will not go away,and neither will its values andstanding in the internationalcommunity. DAVID LINRepresentative Taipei Representative Office inthe UKLondon

Dream titles

The Books and arts section inthe July1st edition drew myattention to a puzzling trend inbookpublishing: the length-ening ofbooktitles. RichardReeves’s 26-word monster—“Dream Hoarders: How theAmerican Upper Middle ClassIs Leaving Everyone Else in theDust, Why That Is a Problem,and What to Do about It”—isillustrative rather than record-breaking.

Presumably this trend hassomething to do with selectionalgorithms, that electronicversion ofDarwinian theory. Ioffer to any commissioningeditor my modest proposal:“BookTitles: The Long and theShort of It, why Subtitles Mat-ter, and What Should be Doneto Reverse the Trend”.TUDOR RICKARDSManchester 7

Letters

15

The Economist July 22nd 2017

The European Agency for Safety and Health at Work (EU-OSHA) is a

decentralized Agency of the European Union, established in 1994 and based

in Bilbao (Spain). Further information on EU-OSHA activities can be found on

our website: http://osha.europa.eu.

EU-OSHA is inviting applications for the following position:

HEAD OF UNIT RESOURCE AND SERVICE CENTRE (AD 10)

The Agency is looking for a candidate with a solid background in administration

and resource management to fulfi l a strategic role within the Agency. As

a member of the Agency’s management group, directly reporting to the

Director, the jobholder will lead the Resource and Service Centre Unit, which

provides essential support services for the operations of the Agency. These

include: human resources, fi nance, budget, accounting, documentation and

general services.

As a ‘knowledge’ organisation, it is essential that EU-OSHA is able to recruit

highly qualifi ed staff and offer them a supportive, learning environment that

allows them to realise their potential and make a visible contribution to the

Agency’s mission.

EU-OSHA offers a long-term contract (three-year renewable) with an

attractive salary package based on the EU staff regulations system at AD

10 level.

EU-OSHA is an equal opportunity employer and strongly encourages

applications from all candidates who fulfi l the eligibility criteria and interested

in the position.

Full details can be found athttps://osha.europa.eu/en/about-eu-osha/careers

Applications must be sent to recruitment@osha.europa.eu by no later than

04/09/2017 at 13h00 noon, Central European Time (CET).

Executive Focus

16 The Economist July 22nd 2017

1

FORa ten-year-old, Amartya isa thought-ful chap. One Monday morning at the

Khan Lab School (KLS) in Mountain View,California, he explains that his maths is“pretty strong” but he needs to workon hiswriting. Not to worry, though; Amartyahas a plan. He will practise grammar on-line, book a slot with an English teacherand consult his mentor. Later he will e-mail your correspondent to ask for help,too.

This is the sortofpluckKLS produces. Itspupils do not have homework or reportcards or spend all day in classrooms. Theyare not stratified by age; they share com-mon spaces as they pursue individualgoals and schedules, using software builtby in-house developers to take tests andwatch video lessons from the school’s sis-ter organisation, Khan Academy, whichmakes online tutorials. Half the teachersact like tutors, helping with academicwork. The rest mentor pupils in charactertraits such as curiosity and self-awareness.

The idea ofusing technology to revampeducation is not new. In 1928, Sidney Pres-sey, a psychologist, invented a “teachingmachine” which he imagined “freeing...teacherand pupil from educational drud-gery”. The automaton had a paper drumdisplaying multiple-choice questions.Pressing the right key moved the drum on,

yielding sweets for smarty-pants. Despite its sugar-coated bait, Pressey’s

teaching machine went the way of mostsuch technology. It did not live up to thehype. Since then a succession of inven-tions promising to overhaul schools hasdone no such thing. Information technol-ogy has reshaped other sectors; it has hadlittle impact on education.

This has not been forwant ofhardware.In 1984, the year the first Macintosh waslaunched, American schools averaged onecomputerforevery125 pupils. By2012 therewere five for every nine. But this big bangin access to IT had “little or no positive ef-fect” on outcomes such as test scores, ac-cording to an analysis oftrials from aroundthe world published last year by GeorgeBulman and Robert Fairlie of the Universi-ty ofCalifornia. In 2015 the OECD found nolink between what countries spend on ITin schools and their 15-year-olds’ abilitiesin maths, science and reading.

Now, though, the stasis is finally start-ing to shift, for two reasons. The first is that“edtech” is increasingly able to interactwith students in sophisticated ways. Re-cent studies show that software which im-itates the responsive role of a tutor ratherthan just cranking out questions and an-swers can indeed accelerate children’slearning. The second reason is the experi-

ence of a growing number of schools, likeKLS, which are not just bolting edtech ontothe existing way of doing things but usingthe new software to change how pupilsand teachers spend their time. Both, itseems, get more productive. For many de-cades educational innovators have happi-ly anticipated the end of “factory model”,whereby children of the same age learnfrom the same teacher in broadly the sameway, yet the model endures. Now, at leastin some places, its days seem numbered.

Investors, both philanthropic and oth-erwise, are excited. Edtech is one of the pri-orities of the investment fund set up byMark Zuckerberg and his wife, the ChanZuckerberg Initiative (CZI). He wants mostAmerican schools to adopt the new sortsof education it promises within a decade—and then help spread it worldwide. Thecombined value of the North Americanand European edtech markets (includingfurther and higher education as well asschools) is set to growfrom $75bn in 2014 to$120bn in 2019, according to Technavio, aresearch firm.

Research in two fields is shaping thenew technology. Artificial intelligence (AI)is letting machines learn about the pupilsusing them by studying the data producedin the process. And research drawing onpsychology, cognitive science and otherdisciplines is providing practical insightinto the “science of learning”.

The late American psychologist Benja-min Bloom convinced many educational-ists that overcoming the failings of the fac-tory model required making groupinstruction more like personal tuition—which his studies showed to be the mosteffective form of teaching. “Adaptive learn-

Machine learning

BANGALORE AND THE SAN FRANCISCO BAY AREA

Education technology is changing what happens when a child goes to school

Briefing Edtech

The Economist July 22nd 2017 Briefing Edtech 17

1

2 ing” software, first developed by computerscientists in the 1970s, aspires to mimic tu-ition’s one-on-one strengths. Such pro-grams use pupils’ answers to inform theirchoice of subsequent questions, adjustingthe difficulty as they go along.

Machine learning, a branch of AI thatallows computers to pick up on patternsthey were not explicitly programmed toperceive, lends itself well to this approach.But it is not essential. Mindspark, devel-oped by Educational Initiatives, an Indiancompany, simply draws on a bank of45,000 questions and the 2m answers gen-erated every day. Its developers have antic-ipated common mistakes, using more thana decade’s worth ofpupil data and writtencode to diagnose the errors. For example,children often say that 3.27 is greater than3.3, or 4.56 is greater than 4.9; the reason isthat they are seeing the “27” and the “56”after the decimal points as being largerthan the “3” and the “9”, an error known as“whole number thinking”. Mindsparkwillpick up on this pattern of error and recom-mend specific remedial exercises.

Newer programmes being developedaround the world use machine learning tofind pupil-specific patterns of error andstrength. Leading American brands in-clude ALEKS, Knewton and DreamBoxLearning. Siyavula Practice, a South Afri-can product, is used by more than 32,000pupils in 388 schools to teach maths andscience. Geekie has been used by 415,000pupils in São Paulo’s public schools, andby many more at home. Byju’s, another In-dian education company, received $50m inan investment round led by CZI in 2016. InChina 17zuoye (“homework together”)uses voice-recognition software to helpstudents learn English. If a child says “sev-en potato”, or “nine apple”, 17zuoye will of-fer help with plural nouns.

Rapid progress in speech recognitionand generation may take such ideas fur-ther. Researchers at the ArticuLab at Car-negie Mellon University have used voice-recognition technology to develop Alex, a“virtual peer”, who talks to children in avernacular that makes them feel morecomfortable in class. Their findings suggestthat some black children learn sciencequicker when they interact with a virtualpeer using African-American vernacularthan one speaking with a standard dialect.

Some of these companies pay close at-tention to the science of learning. Siyav-ula’s algorithms adjust its questioning sothatusersget the rightanswerabout 70% ofthe time. That is roughly the success rate, itsays, that neither bores nor deflates learn-ers. ALEKS, meanwhile, eschews multiple-choice questions. Instead it requires usersto type responses—a more taxing method.Both productsperiodically return to topics;studies suggest “interleaved” practicehelps facts stick.

A forthcoming paper by Philip Oreo-

poulos and Andre Nickow for J-PAL, agroup at MIT which looks for evidenceabout what actually works when it comesto alleviating poverty, reviews dozens ofrandomised controlled trials involving ed-tech. In nearly all the 41studies which com-pared pupils using adaptive software withpeers who were taught by conventionalmeans the software-assisted branch gothigher scores. In most studies, languagescores were higher, too. “There are notmany other interventions with credibleevidence showing these kinds of effects,”says Mr Oreopoulos (see chart).

One study in the J-PAL review is a paperby Karthik Muralidharan, Alejandro Gani-mian and Abhijeet Singh, which looks atan Indian after-school scheme where chil-dren used Mindspark for 4.5 months. Theyfound that the progress made in languageand maths by those pupils was greaterthan in almost any study of education inpoor countries—and for a fraction of thecostofattendinga government-run school.

In part this is a function of a low base-line. Indian curriculums are far too ambi-tious, artefacts of an era when schoolswere the preserve of the elite, and at anygiven time a quarter of the teachers will beabsent. About half of India’s ten-year-oldscannot read a paragraph meant for seven-year-olds. One particularly encouragingaspect of the study was that it seemed toshow those least-well-served by the cur-rent dispensation benefiting most—thepoorest performers saw larger improve-ments than those who had previouslybeen getting by.

Analysing published studies may notgive a full picture of the field’s progress: asin many areas of research, studies withambiguous or negative results may nevermake it to publication. It is also much hard-er to judge the technology in softer sub-jects—fields where mimicing a tutor is un-doubtedly harder. How to improve theargument of a history essay is not some-

thing edtech easily grasps, anymore than itcould advise on the use of humour in adrama class. But it can still help teachers’assessments in these fields. No More Mark-ing, a British company, shows teacherspaired excerpts from pupils’ essays andasks them to decide which is better; withenough such comparisons its “compara-tive judgment” algorithms can then rankthe pupils. The method saves teachers’time and helps pupils, too. They are lesslikely to suffer because a teacher is hungry,or tired, by the time of the last essay.

No dark sarcasmIt isalso worth noting that the same systemcan showdifferenteffects in different trials.A study published in 2014 found that pu-pils using Teach to One: Math learned fast-er than the national average, according to astandardised test. But research that cameout a year later could reach no conclusionsas to its impact. A study of another system,DreamBox Learning software, found thatits impact differed from school to school.When it was used for 60 to 90 minutes aweek, as its producers intended, and theirsuggestionsas to howto get the most outofit were followed, it had much bettereffects.

Seeing Teach to One: Math in action un-derlines how much change is needed tomake it work—which may explain why itdoes less well in some studies than others.When pupils at the Ascend School in Oak-land arrive for their daily hour and a halfof maths, they look up at monitors resem-bling airport information screens whichtell them what and how they will learn to-day. One child is to work on geometry in agroup; another will take algebra questionson his laptop. Three teachers walk aroundthe open space, checking on pupils’ pro-gress. At the end ofthe session pupils take ashort test, which is used by developers atNew Classrooms, the charity behind Teachto One, to set children’s schedules for thenext day. Wendy Baty, the school’s head of

Making a difference

Source: J-PAL North America *Average of range

Improvement in mathsStandard deviations

0 0.1 0.2 0.3 0.4 0.5Computer-aided learning interventionsRemedial games, year 2 (2007)

Tech-aided after-school scheme (2016)

Remedial games, year 1 (2007)

After-school revision software (2008)

Other interventionsIntensive tutoring including cognitive behavioural therapy* (2014)

Class size reduction (1995)

Prolonging the school day* (2014)

Intensive tutoring* (2015)

Cost perstudent

per year, $Small Encouraging Large Very large

15

180

15

Algebra software (2002) na

40

4,400

na

Remedial group instruction (2007) 2.25

na

3,800

India United States

18 Briefing Edtech The Economist July 22nd 2017

2 maths, isan enthusiast; she says that pupilsreceive feedback that “even the best teach-ercould notprovide to all ofthe class”. Sev-eral pupils say they like that they can learnat their own pace. But others admit to find-ing the experience confusing.

Rather than working for a few hours ina conventional school, other reformers areopening their own. AltSchool is one of va-rious comprehensive attempts to use ed-tech to provide a form of “personalisedlearning”—thus slotting it into a traditionthat reachesbackto Jean-JacquesRousseauand Maria Montessori. Founded by MaxVentilla, a former Google engineer, it isbacked by, amongothers, CZI and the Omi-dyar Network, set up by Pierre Omidyar,the eBay founder. At each of AltSchool’sseven “lab schools” in California and NewYork, pupils consult two pieces of softwareon their tablets. The first is the “portrait”: arecord of a child’s progress in academicsubjects and social skills. (One measure iswhether children can “respond with won-derment and awe”.) The second is the“playlist”, which is where pupils gain ac-cess to material and complete work.

Perhaps surprisingly, and reassuringly,for a school so dependent on software,screen time is limited to no more than20-30% of the day. The emphasis on projectwork means pupils collaborate with eachother. At the Yerba Buena AltSchool, in SanFrancisco, Hugo, 12, explains that he learnsmore from his peers here than at his oldschool. Teachers at AltSchool say they savetime by not marking or planning lessons.Instead they analyse data on pupils’ por-traits and tutor them on individual pro-blems. Hugo says “I feel like the teachershere really know me.”

Giving children such attention is notcheap. Hugo’s parents pay $27,000 peryear, more than twice the average spend-ing per pupil in OECD countries. That doesnot mean that the software AltSchool is de-veloping will be particularly expensive.But overall cost is definitely an issue. Manyof the public schools trying to combine ed-tech and personalised learning are sup-ported by philanthropic organisationssuch as the Gates Foundation. A study lastyear of early adopters by the Centre on Re-inventing Public Education at the Universi-ty of Washington, also partly funded bythe Gates Foundation, concluded thatthose schools’ “long-term financial stabil-ity is still unclear”.

Arguably the most influential attemptto find out whether high-tech personalisedlearning can both work and be afforded atscale is that of Summit Public Schools, apublicly funded network of 11 schools inCalifornia and Washington which servemostly poor, often Latino students; 130more “partner schools” across 27 states useSummit’s software and get training fromSummit staff. Its platform was built probono by Facebookengineers.

Andrew Goldin, Summit’s chief ofschools, argues that the Summit LearningPlatform lets pupils learn more efficientlythan they do when led through every les-son by a teacher: “Children don’t need tobe walked through every step.” That givesthem more time to spend on projects,which take up halfofthe school day, and tobe mentored by teachers.

Some information firstThis sort of personalised learning has itscritics. Putting students in charge of howfast they learn worries some cognitive sci-entists. “Our minds are not built to think,”argues Benjamin Riley of Deans for Im-pact, a charity championing the science oflearning. Thinking hard about things doesnot come naturally, and if schools make iteasy to avoid thinking, some children willdo so. Another criticism is that peopleneed a ready store of facts if they are to de-velop many forms of creativity and criticalthinking (an insight championed by one ofthe early giants of AI, Herbert Simon). AsDaniel Willingham of the University ofVirginia puts it: “knowledge is cumula-tive”. In the always Googleable world oftablet and phone, it could be tempting forchildren not to fill that store, and for theirteachers not to worry too much.

Giving children more control over theirlearning, Mr Goldin argues, motivatesthem; if pupils do not grasp the basics theycannot participate in projects. He alsopoints to Summit’s results. About two-thirds of pupils score as well or better in anationwide maths test than demographywould predict. In 2015, 93% of pupils whoentered Summit went on to graduate, tenpercentage points more than in compara-

ble neighbouring schools. Of those gradu-ates 99% got to university.

Achievement First, a group of 34schools on America’s east coast which isfamed for tough discipline, is testing a simi-lar model. So too are schools in cities likeChicago, New York and Boston. More than3,000 superintendents (the officials whorun America’s school districts), represent-ing about one-third of pupils at publicschools, have signed a pledge to “transi-tion” to “personalised, digital learning”.

How well the model will work when itspreads is unclear. In 2015, the RAND Cor-poration, a think-tank, published the mostthorough study yet of schools using high-tech personalised learning. It comparedtest resultsofpupilsat62 such schoolswiththose of similar pupils at ordinary schools.The former made greater progress, espe-cially those who started near the bottomof the class.

The report is widely cited by advocatesof personalised learning. Mr Zuckerberguses it to claim that: “We know that perso-nalised learning is way better.” That is astretch ofyogicproportions. The results arefrom early adopters of the model, withhighly motivated teachers. And the RANDresearcherswere notable to workout whatit was schools were doing to gain their re-sults. Without that understanding expand-ing the model will be tricky. A furtherRAND report, released on July11th, reiterat-ed these concerns.

Teachers may be more sceptical awayfrom Silicon Valley. And parents may bemore concerned about privacy. Machine-learning software has an incentive to ac-crue data; they make predictions more ac-curate. New platforms contain accounts ofa child’s abilities far more detailed thanany report card.

Supporters and sceptics of the newmodel will continue to argue. But bothsides are guilty of caricaturing the other.Techies can make it seem as if teachers inordinary schools talk to every pupil in theexact same way. They do not; studies re-peatedly show that teachers use “differen-tiated instruction” among pupils of differ-ent abilities, even if they cannot offerone-on-one attention.

But schoolsusingpersonalised learningare not anarchic playgrounds. Pupils mayhave more power but they do not havecomplete control. “Unadulterated choice isnot good,” says Aylon Samouha of Tran-scend Education, a charity. “You need stan-dards and structure.”

If schools can combine personalisationand rigour it is hard to imagine pupils fail-ing to benefit. Education software is notmaking teaching obsolete. If anything it ismaking the craft of teaching more impor-tant. Thatwould be good newsforthe staff-room and the classroom. For as 12-year-oldHugo observes, “too many teachers arejust trying to get to the end of the day.” 7

The Economist July 22nd 2017 19

For daily analysis and debate on Asia, visit

Economist.com/asia

1

THE young woman with the micro-phone cajoles, hectors and wheedles

customers with the breathless enthusiasmof a livestock auctioneer at a county fair.She is standing behind a table stacked highwith blue jeans; most of the milling crowdis dressed in lungyis, Myanmar’s skirt-likenational dress. The fancy mall aroundthem is anchored by a huge departmentstore, dotted with banks and mobile-phone stalls and topped by a cinema andvideo arcade.

Myanmar has been growing so fast—byan average of 7.5% a year for the past fiveyears—that the boom is reverberating inMae Sot, just across the border in Thailand.Two years ago, says a longtime resident,the site of the mall was a swamp, and MaeSot was a poky little border town with twosmall grocery stores. Today huge super-markets, car dealers, electronics outletsand farm-equipment showrooms line thewide new road from the border into town,patronised by a steady stream of Burmeseshoppers. Skeletons of future apartmentblocks loom; the Thai government is build-ing a new international airport. The AsianDevelopment Bank (ADB) forecasts thatMyanmar’s growth will hit 8% next year.

The region is full of such stories. Cam-bodia, Laos, the Philippines and Vietnamhave been growing only slightly more

nally communist Laos and Vietnam andautarkic Myanmar all embraced free mar-kets, up to a point. The days of nationalisa-tion and central planning seem to be over.In much of the region inefficient and codd-led state-owned businesses endure, andrent-seeking, corruption and protection-ism are all more common than theyshouldbe. But across South-East Asia, liberal eco-nomics has won the argument.

Politically, however, the region is mov-ing in the opposite direction. The Asian cri-sis may have brought huge economic hard-ship, but it did at least unseat Suharto,Indonesia’s strongman of 32 years, and in-stigate political reforms elsewhere. In theyears that followed, imperfect democra-cies in Malaysia, the Philippines and Thai-land appeared to be gaining strength. AndMyanmar, after years of isolation and re-pression, embarked on an unexpectedtransition to democracy.

But hoped-for openings never came inLaos and Vietnam, where the CommunistParty has always been nakedly repressive.Singapore remains an illiberal, albeit effec-tive, technocracy. The leaders of Malaysiaand Cambodia, Najib Razak and Hun Sen,have proved depressingly adept at lockingup critics and persecuting opponents.Cambodia’s most prominent oppositionpolitician, Sam Rainsy, lives in exile toavoid imprisonment for a spurious convic-tion for defamation. Opposition figures inMalaysia find themselves in court on char-ges as varied as corruption and sodomy.

The junta that seized power in Thailandthree years ago promises an election nextyear. Even in the unlikely event that it isfree and fair, the constitution—which thearmy wrote and the new king signed inMay—creates a junta-led Senate, imposes

slowly. Overall, the ten countries of the As-sociation of South-East Asian Nations(ASEAN) grew at an annual rate of 5% overthe past five years: not quite as fast as Chi-na or India, but much faster than Europe,Japan or America. The region’s 625m-oddpeople are growing richer and better edu-cated; they will live longer, healthier andmore prosperous lives than their parents.Of course, plenty of poverty remains—most people in Myanmar are still subsis-tence farmers—but the region’s economictrends are promising.

Back from the redIt was not always obvious that the South-East Asian economies would do so well.Only a generation ago Myanmar was cutoff from the world by despotic generals;Cambodia’s 25-year-old civil war was stillsputtering; and Vietnam was only just be-ginning to experiment with some timidmarket reforms. The wealthier countries inthe region, meanwhile, had seen theireconomies, and the underlying models ofgrowth, shattered by the Asian financialcrisis of1997.

The crisis proved salutary. Indonesia,the Philippines and Thailand all adoptedsounder macroeconomic policies andmade some effort to curb the cronyism thathad accompanied earlier growth. Nomi-

South-East Asia

More money, less freedom

MAE SOT

The region’s future looks prosperous but illiberal

AsiaAlso in this section

20 Intolerance in Indonesia

21 A push for fairness in South Korea

22 Banyan: Fighting jihadists in thePhilippines

20 Asia The Economist July 22nd 2017

1

2 the generals’ 20-year plan on the countryand provides ample grounds to removeany elected leader whom the army findslacking. All this is designed to prevent vot-ers from electing the “wrong” leaders, inthe army’s view, as they have done at ev-ery opportunity over the past15 years.

Democratic institutions are not yetquite that weak in the region’s two biggestcountries, Indonesia and the Philippines,but in both liberals have more cause forfear than hope. Filipino voters, justifiablyfrustrated by the way that a few prominentfamilies dominate politics, and by how re-cent economic growth has failed to reducethe high poverty rate, elected Rodrigo Du-terte as president last year. Alone amongthe five candidates, he seemed to careaboutordinarypeople; hisbrutal anti-drugcampaign has appalled foreigners but ispopular at home.

Mr Duterte reminisces fondly about thedictatorship of Ferdinand Marcos andseems to crave dictatorial power himself.He has declared martial law on the south-ern island of Mindanao (see Banyan), andoften muses about doing the same nation-ally. He veers between indifference andhostility to troublesome principles such asdue process, the separation of powers andthe rule of law—all of which need shoringup, not weakening.

An election for governor of Jakarta inApril, meanwhile, has harmed Indonesia’sreputation for religious tolerance (see nextstory). Islamist agitators campaignedagainst the Christian incumbent, BasukiTjahaja Purnama, falsely claiming that hehad insulted the Koran. Anies Baswedan,one ofhis rivals, embraced their shamelessattempt to stir up sectarian tension, andwon. Prabowo Subianto, a tub-thumpingnationalist who lost the presidential elec-tion in 2014, backed MrBaswedan. The fearis that Mr Prabowo, inspired by Mr Baswe-dan’s success, will try to foster similar divi-sions at the national level.

But it is Myanmar that most encapsu-lates the region’s democratic reversal.When the army ceded power last year toAung San Suu Kyi, its Nobel-prize-winningopponent of 30 years, expectations wereastronomically high, even though the con-stitution the generals had written severelylimited herpowers. Thathasmade her gov-ernment’s craven and repressive acts allthe more bewildering. It has charged morereporters with defamation than did hermilitary-backed predecessor. She has beenshamefully silent about the continuingpersecution of the Rohingya, a Muslim mi-nority, not even admitting, let alone tryingto stop, the army’s well-documented cam-paign of rape, murder and destructionagainst Rohingya villages. It does not helpthat since Donald Trump became presi-dent, America, long the loudest championof liberal values in the region, has more orless let the subject drop. 7

CORNELIS, the 63-year-old governor ofWest Kalimantan, a province in Indo-

nesian Borneo, is relaxing in jeans and astained white vest at a table piled withkrupuk crackers and other local snacks.Portraits of the governor and his wife pos-ing with prize-winning vegetables (bothare keen gardeners) decorate the walls ofthe family home in Ngabang, a town in thehills four hours’ drive from Pontianak, theprovincial capital. But so do crucifixes andChristian figurines—and it is Mr Cornelis’sreligion, more than anything else, that hasmade him the latest lightning rod for the Is-lamic Defenders Front (FPI), an Islamistvigilante group.

Around 90% of Indonesia’s 260m peo-ple are Muslim, but beyond the island ofJava the population is much more mixed.Minorities watched with dismay as FPIand other Islamist groups turned on Ba-suki Tjahaja Purnama, the Christian andethnic-Chinese governor of Jakarta, Indo-nesia’s capital, over cooked-up claims thathe had insulted the Koran. Mr Basuki,known as Ahok, was defeated by a Muslimcandidate in an election in April. Soonafter a court sentenced him to prison fortwo years for blasphemy.

The government saw all this as an as-sault on Indonesia’s national motto—“Un-ity in diversity”—and on the five principles(known as pancasila) underpinning theconstitution, which protects five officiallyrecognised religions (Islam, Christianity,Hinduism, Buddhism and Confucianism).Joko Widodo, known as Jokowi, Indone-sia’s mild-mannered president, has said

that he will “crush” groups that imperilpancasila. On July 10th he signed a decreeallowing the government to ban organisa-tions with goals at odds with the constitu-tion. On July 19th he duly banned HizbutTahrir, an outfit that campaigns for an Is-lamic caliphate. Rizieq Shihab, FPI’s leader,is lingering in Saudi Arabia after prosecu-tors charged him over sexually explicitmessages that he is alleged to have ex-changed with a woman on WhatsApp.(The law in question was passed at the in-sistence of religious parties in 2008.)

In West Kalimantan, however, the Is-lamists are on the march. They want tomake sure that MrCornelis, who must stepdown next year having served the maxi-mum two terms, is succeeded by a Muslim.Sixty percent of West Kalimantan’s 4.4mpeople are Muslim, but Mr Cornelis is oneof 1.5m Christians, most of them from theDayakethnic group.

Mr Shihab has denounced Mr Cornelisas a kafir, or infidel. Mr Cornelis, askedwhat he thinks of FPI, stubs out a clove cig-arette in an overflowing ashtray and says,“They are not welcome here. If they dare tocome, we will butcher them.” Such talk isespecially alarming in Kalimantan, wherethousands were killed in fighting (pic-tured) between Dayaks and Muslim mi-grants from the island of Madura between1996 and 2001. Attackers beheaded theirenemies and even ate theirorgans in ghast-ly rituals. Back then, the Dayaks alliedthemselves with the Malays, a Muslim eth-nic group, suggesting that the conflict wasnot about religion. But these days the di-

Religion in Indonesia

Borneo again

NGABANG, WEST KALIMANTAN

Islamist vigilantes open a new front in theirwaron tolerance

The Economist July 22nd 2017 Asia 21

2 viding line seems to be primarily betweenChristians and Muslims.

Speaking at a traditional Dayak long-house in the centre of Pontianak, not farfrom a shiny new “mega mall” that housesStarbucks, Wagamama and other Westernchains, Kristianus Atok says that the cam-paign against Ahok shocked local people.“Ifwe don’t stand together the Dayaks willbe marginalised,” he concludes. As a mem-ber of a Dayak cultural organisation, MrAtok travels regularly to remote corners ofBorneo. Before the campaign againstAhok, relations between the communitieshad been good, he says. But lately there hasbeen less mixing between them and peo-ple are frightened once again: “Everythingis broken.”

It is not just Dayaks who are anxious.Subro, a Madurese member of NahdlatulUlama, a huge and moderate Muslim civicgroup, fled pogroms elsewhere in West Ka-limantan in 1999. He now lives with hisfamily on the edge of Pontianak, in an areawhere many displaced Madurese were re-settled. Defaced posters of Mr Shihab line

the bumpy road that leads to his home. “AsMadurese, we are worried because therewere bad days before,” he says.

In January an Islamist preacher from Ja-karta, Tengku Zulkarnain, attempted to ad-dress a rally in Sintang, deep in West Kali-mantan’s forests, but angry Dayaktribesmen brandishingswords chased himoff. Local Muslim groups took offence.They organised a protest in Pontianak inMay on the same day as an annual Dayakfestival. Happily, the police managed tokeep the rival groups apart.

Agus Setiadji is the 33-year-old leaderofthe United Malay People, one of the maingroups behind the protest in Pontianak. Hewears a traditional head-kerchief and ablackT-shirt displaying two daggers abovethe slogan, “We are proud to be Malay”. MrSetiadji complains that the Malays havebeen sidelined by Mr Cornelis. Govern-ment jobs and funds have gone only to theDayaks, he says. Mr Setiadji predicts that ifconflict comes, it will be worse than any-thing West Kalimantan has seen before:“We are ready for war.” 7

“IF YOU don’t have the ability thenblame your parents,” wrote Jung

Yoo-ra on social media in 2014, after beingaccepted into a prestigious university. Hermother, it turns out, had gone to greatlengths to secure a spot for her, inducingEhwa Women’s University to alter its ad-missions policy in a manner tailor-madefor Ms Jung. Last month a court ruled thatthe nine people involved in this subterfugehad fundamentally shaken the “values offairness that prop up our society”. Aboveall, the “feelings of emptiness and betrayalthey caused in hardworking students”could not be excused.

University was once seen as a source ofsocial mobility in South Korea. But so im-portant is the right degree to a student’sprospects in life that rich families beganspending heavily on coaching to improvetheir children’s chances, leaving poorerfamilies behind. By 2007 over three-quar-ters of students were receiving some formof private tuition, spawning a maximabout the three necessities to win a place ata good university: “father’s wealth, moth-er’s information, child’s stamina”. A reportby the ministry of education found that in2016 households with monthly incomes of7m won ($6,230) or more were spending443,000 won a month on private educa-

tion, nine times as much as families bring-ing in 1m won or less.

Many South Koreans believe that therich and influential do not just spend moreon education, they also manipulate thesystem, as Ms Jung’s mother, a close friendof the previous president, did so spectacu-larly. According to the Pew Research Cen-tre, a think-tank, only a fifth of those aged18-33 believe that working hard brings suc-cess. An ever-growing dictionary of slang

attests to the perception: people speak ofusing “back” (backing, or connections) toget jobs; when Ms Jung refused to return toSouth Korea to face charges related to heruniversity admission, the local pressdubbed it a “gold-spoon escape”. And 34%of young people say they feel “isolationdue to academic cliques” at work.

The unfairness is all the more gallingbecause of the fierce competition for jobs.This year there were 36 applicants for ev-ery job, up from 32 two years ago. Youthunemployment reached a record 12% earli-er this year.

Frustrated young people are starting tospeak out. The activists of a group calledHidden Bagrun a small yearly campaign to“reject university entrance”, trying to per-suade people to boycott the whole process.At a recent film festival in Seoul, HiddenBag provided “healing kits” for young peo-ple wishing to challenge “never-endingcompetition” and “education-based lim-its”. Colourful sweets, packaged to looklike medicine, were handed out to stu-dents to encourage them to take a stand.Some were labelled “courage”, others“strength”. By spurning the rat race, theyhope to raise “fundamental questions”about prevailingvalues. Fewer than 70% ofschool leavers went on to university lastyear, the lowest level in almost 20 years.

Moon Jae-in, the president since May,has pledged that under his administration“the thickness of a parent’s purse” will notdetermine their children’s prospects. Thisweek an MP from his party introduced leg-islation to extend the “blind hiring” pro-cess used in the civil service, whereby ap-plicants are judged only on standardisedexams, not on their academic record, tostate-owned firmsaswell. The bill’s authoris also proposing an amendment based onanother oddity of Ms Jung’s admission:she scored badly in her written exam, butwas given full marks for the interview. Theamendment would require all universityinterviews to be recorded or minuted fortransparency. Blame Ms Jung’s parents. 7

Inequality in South Korea

Degrees of disenchantment

Seoul

Young people are losing faith in an elitist education system

Universital values

22 Asia The Economist July 22nd 2017

THE Philippine army has been fighting for two full months totake back control of the southern city of Marawi from a viol-

ent and determined coalition of jihadist groups. The battle forMarawi, a mainly Muslim city of 200,000 with a lush lakesidesettingand a proud sense of its culture, erupted when the govern-ment got word that Isnilon Hapilon was hiding there. Mr Hapi-lon, a leader of a notorious kidnap-for-ransom gang, Abu Sayyaf,pledged allegiance to Islamic State (IS) three years ago. In return,IS declared him the “emir” ofthe Philippine province ofits caliph-ate. When the armed forces went to arrest him, up to 700 fightersemerged out of nowhere and, in the name of IS, seized the city.Ominously, foreign fighters and even veterans of Mosul arethought to be involved, includingmilitants from Chechnya, Indo-nesia, Malaysia and Saudi Arabia.

The army has fought back hard, claiming to have killed 411combatants. Its spokesman, Brigadier-General Restituto Padilla,now talks of “mopping up”, with the remaining insurgentspenned into an area of a square kilometre, encompassing thecommercial district. But the militants do not scruple to use hu-man shields—dozens of civilians have already died, and 300 arethought still to be trapped. That limits the army’s room formanoeuvre.

The army, too, has taken losses: nearly 100 soldiers killed andover 850 wounded out of a force of about 3,000. In Marawi thisweek it was clear the battle was far from over, with new units ar-riving in the city and helicopter gunships flying in for an after-noon attack, the thump of their rotors briefly drowning out therattle ofmachineguns and the snap ofsniper fire.

The outcome is not in doubt. But President Rodrigo Duterte’srecent predictions of a swift victory were far from the mark.Meanwhile, evacuees languish in their tens of thousands in dirtycamps. A growing number realise they have no home to returnto—much of the city has been flattened.

The Philippines has had its share of conflict, particularly inMindanao, a poor and restive southern island that is home tomost Filipino Muslims. But this is the heaviest urban fightingsince the second world war. Marawi came as a shock. Wheneverone orotherofa welterofbandit groupsdeclared an IS affiliation,the authorities had tended to dismiss it as boastful self-branding.

The Maute group is a case in point. It is based in Lanao del Sur,the province ofwhich Marawi is the capital. Even after it pledgedallegiance to IS in 2015, many mistook it for a low-grade familymafia, with links to Marawi’s former mayor, Solitario Ali, whomMr Duterte has denounced as a drug lord.

Yet both Omar Maute (said by the army to be dead) and hisbrother, Abdullah, had studied in the Middle East. They had linkswith jihadists in Indonesia. At home, they even recruited fromamong faculty and students at Mindanao State University in Ma-rawi. The Maute group put up over half the fighters who seizedMarawi, all the while advertising its role on social media. All thissuggests unusual sophistication and strength.

MrHapilon is now thought to be injured and sheltering in Ma-rawi’s biggest mosque (which the army is reluctant to attack, fear-ing a propaganda disaster). Abdullah Maute still seems to be inMarawi too, while his parents have been caught trying to escape.Some hope this will prove to be the end of the Maute gang and ofMr Hapilon.

Perhaps. But theirpropaganda is already painting the city’s de-struction as the army’s fault. The dead jihadists leave behind or-phans to be fed a diet of revenge. The pestilent, overcrowded pri-sons of the Philippines and Indonesia will continue as primerecruiting grounds for extremism. Meanwhile, that the Mautes,Abu Sayyaf and two smaller groups were able together to seize amedium-sized city shows how IS ideology can unite disparategroups to devastating effect. That IS is nearing its end in the Mid-dle East should not be misconstrued. The wilds of Mindanao of-fer a destination for retreating jihadists. For young South-EastAsian extremists, says Sidney Jones of the Institute for PolicyAnalysis of Conflict in Jakarta, Marawi “has put the Philippineson the map”.

Mindanao’s the timeAnd so Mr Duterte will not lack reasons to extend the 60-day im-position of martial law in Mindanao that is about to expire. Hesuggests keeping it till the end of the year, but some allies arguefor five years, till the end of his term. More will become clear inhis annual state of the nation address on July 24th. The army saysmartial law makes it easier to conduct house-to-house searchesand seize weapons. It insists it has no wish to govern—suspectsare handed over to civilian courts. But opposition politicians andcivil-society groups say martial law undermines accountabilityin a region desperately short of it—and raises questions about thelong-term intentions ofMr Duterte, an avowed authoritarian.

Martial law will surely complicate the broader “peace pro-cess” in Mindanao. In 1996 the government struck a deal withMuslim separatists to create an autonomous region in the Mus-lim-majority areas of the island; it broke down five years later. In2014 a similar deal was struck with the Moro Islamic LiberationFront (MILF), the region’s main insurgent group. As a measure ofits commitment to peace, the MILF has been working to get hu-manitarian supplies to Marawi’s residents and to broker the re-lease ofcivilians still stuck in the battle zone.

Mr Duterte supports autonomy, but has muddied the processwith vague proposals on federalism. Meanwhile, the MILF’s in-ability to head offthe fighting in Marawi, even though manyofitsmembers have relatives in the Maute group, has undermined itsauthority. Some of the MILF’s younger members are said to bedisaffected with its ageing leadership. When the battle for Ma-rawi ends, the war for hearts and minds begins. 7

Mosul in Mindanao

Defeating Islamist insurgents in battle is not the same as winning the war

Banyan

The Economist July 22nd 2017 23

1

For daily analysis and debate on China, visit

Economist.com/china

“COASTER through the Clouds” inNanchang, a city in the southern

province of Jiangxi, is China’s tallest andfastest rollercoaster (see picture). It carriesterrified customers up to heights of 78 me-tres and down again at speeds reaching130kph. The ride towers above an amuse-ment park built by Dalian Wanda, a Chi-nese property-and-entertainment con-glomerate, which has aspired to outdoDisney’s resort in Shanghai.

But this month the group said it wasselling13 such projectsand 77 hotels to rivaldevelopers. It would use the proceeds, itsowner said, to repay loans. Last monthChina’s regulator asked banks to providemore details about their overseas loans toWanda. Standard & Poor’s said it would re-assess the group’s credit rating, noting thatthe abrupt sale of assets had raised ques-tions about Wanda’s strategy and finances.

Wanda is the most prominent of Chi-na’s highly geared companies, of whichthere are many. Corporate liabilities, in-cluding those of state-owned enterprises,amounted to 166% of GDP at the end of2016, according to a measure by the Bankfor International Settlements (BIS). Add inrapidly growing household debt and thetotal was over 210%, unusually high for anemerging economy.

Some of the increase in credit may be awelcome resultofbetteraccess to it. Econo-mists expect credit to grow as a share ofGDP asa countrydevelops, butwhen loan-making quickens, opening up a gap be-

They created a new cabinet-level commit-tee to beef up their efforts. Just as impor-tantly, Xi Jinping, China’s president, gave aspeech at the meeting that was toughenough on the topic of credit-tightening tosend stocks tumbling the next day.

On a rollercoaster, riders climb up-wards slowly, their suspense building,then plunge downwards quickly, theirstomachs lagging a little behind. In its de-leveraging efforts, China’s governmenthopes to do the opposite. Ithasallowed thecountry’s liabilities to mount quickly. Nowit wants them to plateau ordrop gently (rel-ative to the size of China’s economy), leav-ing stomachs unchurned.

Some thinkthiswill be impossible. Chi-na’s growth is increasingly dependent oncredit, they argue. Therefore if credit slows,China’s growth must falter. But recent datasuggest the relationship between creditand growth is far from mechanical. Al-though lending growth has slowed, Chi-na’s nominal GDP growth has quickened:it grew by over 11% in the first half of 2017,compared with the same period a year ear-lier. In the second half of 2015 nominalgrowth was just 6.5%.

That combination of slowing credit,quickening growth and rising inflation hasalready had a notable effect on China’sdebt ratios. The official measure of broadcredit (often called “total social financing”)declined slightly, as a percentage of GDP, inthe second quarter. And the frighteningcredit gap has narrowed dramatically.From its peak of around 30% of GDP lastyear, it has fallen to only 19% at the end ofJune 2017, by The Economist’s reckoning.

Churls will point out that these credittotals leave out explicit government debt.China’s ministry of finance has proppedup growth through fiscal easing and re-placed some bank lending with local-gov-ernment bonds. But local-bond issuancehas declined considerably in recent quar-

tween the prior trend and actual levels,they begin to get scared (see chart). A creditgap above 10% of GDP has presaged finan-cial distress in the past, says the BIS. Lastyear it reported that China’s gap hadreached about 30% of GDP, the highest inthe world. Credit was lost in the clouds.

Since then the authorities have showngreater determination to curb financialrisks. The People’sBankofChina, the coun-try’s central bank, allowed the interest rateat which banks lend to each other to rise.And China’s financial regulators have car-ried out “supervisory tightening”, says TaoWang of UBS, a bank—fleshing out existingrules and enforcing them more tightly. OnJuly 14th and 15th China’s regulators, in-cluding the central bank, came together fora five-yearly “financial work conference”.

The economy

The debt rollercoaster

HONG KONG

Reining in credit growth maynot be as scary as some people fear

ChinaAlso in this section

24 A young hopeful is purged

24 Punished for being a dissident’s wife

White-knuckle territory

Sources: BIS; PBoC; SAFE; The Economist

China, private non-financial sector credit% of GDP

2005 07 09 11 13 15 17

100

150

200

250

Credit gap

Trend

Actual

24 China The Economist July 22nd 2017

2 ters. And the debt burden will be much saf-er if it is carried by the government, whichhas the power to taxand print money, rath-er than by individual companies.

Sceptics will point out correctly thatChina’s tightening is still new. It may be toosoon to see its full impacton growth. Butal-though the stockofcredithasdeclined (as apercentage of GDP) only in the most recentquarter, the flow of credit has been shrink-ing year-on-year for longer, according to

the BIS measure. It is the expansion or con-traction of this credit flow, not a rise or fallin the stock, that should affect GDP growth.

At the recent conference, Mr Xi urgedlenders to serve the “real” economy ratherthan make speculative deals. That wouldhelp credit to contribute more directly toGDP. Rollercoasters rise and fall but usuallyend up back where they began. Credit, onthe other hand, should be a vehicle of eco-nomic progress, not a circular thrill ride. 7

The Chinese government got rid of Liu Xiaobo in hugger-mugger. After arranging a shortmemorial service for the Nobel peace-prize laureate (family members and secret policeonly), it hastily took the group out to sea to deposit his ashes. Mr Liu’s elder brotherthanked the Communist Party for carrying out the family’s wishes. But nothing washeard from his widow, Liu Xia (pictured on the boat). She remains under housearrest—guilty by association. In a letter to her from his deathbed, Mr Liu praised her“calmness that confronts suffering”. Tributes to him could only be oblique. Tens ofthousands shared online a Taiwanese pop song. Its first verse runs: “You disappearedfrom the far end of the sea…. I wanted to say something but didn’t know where to start.I just bury you in the bottom of my heart.” Despite no-holds-barred censorship ofeverything connected with Mr Liu, this eulogy slipped through the censors’ net.

Their virtues we write in water

IN 2012 Bo Xilai, the Communist Partyleader of Chongqing, a region in the

south-west, was stripped of his post, ex-pelled from the party and later jailed. MrBo’s downfall cleared the way for Xi Jin-ping, his rival, to become the country’sleader. On July 15th lightning struck again.Sun Zhengcai, who had succeeded Mr Boin Chongqing following a brief interreg-num, was sacked.

Acloud appeared overMrSun in Febru-ary, when party investigators accused himof failing to clear Mr Bo’s “toxic residue”.Now Mr Sun is said to be under investiga-tion for violating party rules. His offencesare unclear, but he might become the firstserving member of the ruling Politburo tobe booted out of that body since Mr Bo. MrSun is the Politburo’s youngest memberand had been considered a possible suc-cessor to Mr Xi. Not since the 1980s hassomeone being groomed in this way beenso unceremoniously purged.

Earlier expulsions from the Politburo(this would be the fourth in over two de-cades) resulted from eruptions of high-lev-el infighting. Mr Sun’s downfall appears toreflect something different: Mr Xi’s me-thodical ascendancy. The president did notappoint Mr Sun, nor was Mr Sun close tohim. But the new chief of Chongqing,Chen Min’er, is Mr Xi’s man. The twoworked together between 2002 and 2007when the president was party boss in Zhe-jiang, a coastal province. Mr Chen’s ap-pointment is the culmination of a sweep-ing reshuffle that has seen Mr Xi appoint orpromote almost all ofChina’s 31provincialparty chiefs in the past18 months.

There has been no overt opposition toMrXi’samassingofever-greaterpower. Of-ficials queue up to praise him, while criticsare reduced to posting online pictures ofWinnie-the-Pooh, whom the presidentsupposedly resembles. Such images wereduly banned by China’s censors this week.

But disquiet about Mr Xi’s grip hasturned the unlikely figure of Guo Wengui,a Chinese billionaire who lives in exile inNew York, into a person of political signif-icance. In a series of tweets that are eagerlydiscussed in China (and indignantly dis-missed by the state-run media), Mr Guohas thrown explosive and unproven accu-sations against the family ofMr Xi’s closestally, Wang Qishan, who is leading an anti-corruption campaign. Mr Guo, who also

called Mr Sun “a genius among geniuses”(perhaps hastening his fate), has his sup-porters. Police recently arrested two peo-ple in the aviation industry who allegedlyprovided Mr Guo with information fromHainan Airlines about well-connectedpassengers. The carrier isowned byHNA, aconglomerate at the centre of Mr Guo’sclaims about Mr Wang’s family. HNA is su-ing Mr Guo for defamation.

Mr Guo’s assertions do not seem tohave damaged Mr Wang. On July 17th along article by Mr Wang in the party’s flag-ship newspaper, People’s Daily, de-nounced “insufficient efforts to strictly en-force party discipline.” It does not sound asif his authority is weakening, thoughwhether he will stay in office after a five-yearly party congress due this autumn isanother matter. According to the party’sunwritten rules he should retire (he is 69).

The bigger question is how long Mr Xiwill stay on. By convention, he should stepdown as general secretary in 2022. His like-ly successor would be expected to emergeat the party congress. Getting rid of Mr Sundoubtless makes it easier for Mr Xi to pickwhomever he chooses. But his power isnow so great that it is getting harder toimagine anyone else in charge. Odds aregrowing that he will try to keep his jobafter 2022, or appoint a placeman and ruleChina from behind the scenes. He wouldhardly be the first leader to do that. 7

Politics

Sun’s out

BEIJING

Apotential successor to Xi Jinping is purged

The Economist July 22nd 2017 25

For daily analysis and debate on America, visit

Economist.com/unitedstatesEconomist.com/blogs/democracyinamerica

1

GRAPPLING to comprehend DonaldTrump’s populist seizure of their

party, some Republicans predicted itwould re-emerge as a champion of work-ing-class whites. Others expected MrTrump to drop his proletarian shtick andhelp deliver the tax cuts they had alwaysdreamed of. Republican senators’ failure torepeal Obamacare, a long-promised partof that tax-cutting hope, suggests the partyis no closer to working out who it repre-sents, or what it is for. Republicans are incontrol of every lever of government inWashington, but so internallydivided as toappear incapable ofgoverning.

The attempt to repeal Barack Obama’shealth-care regime—which Republicancongressmen had for seven years decriedas an existential threat to America—reached the Senate after an earlier sham-bles in the House of Representatives. TheHouse repeal bill was passed in May, at thesecond attempt, despite having been re-jected by 20 Republican congressmen. Itwould have slashed Medicaid—govern-ment-provided medical insurance for thehard-up, which was expanded under Oba-macare—and abolished a stipulation thateveryone must have medical coverage.Senate Republicans promptly binned it;Conservatives said it left too much of Oba-macare intact, while moderates objected

in 32m more uninsured by 2026, as well asleading to skyrocketing premiums. Aver-age premiums for individuals bought onthe exchanges Obamacare sets up wouldincrease by 25% next year and then 50% by2020, according to the CBO. Three moder-ate senators, Ms Collins, Shelley MooreCapito of West Virginia and Lisa Murkow-ski of Alaska, slammed the ruse. “I did notcome to Washington to hurt people,” MrsCapito tweeted.

This debacle will have big conse-quences, not least for health care. Havingseemingly failed to repeal Obamacare,moderate Republicans want Mr McCon-nell to find a bipartisan way to address itsshortcomings, including shallow insur-ance markets and risingpremiums formid-dle-class policy holders. Fury on the leftwith Mr McConnell’s divisive tacticswould not make that easy. Even so, a Re-publican senator claimed to know of tenDemocratic senators ready to deal, and thefact that ten Democrats are up for re-elec-tion next year in states that voted for MrTrump, including Indiana and West Virgin-ia, makes that plausible.

Yet Mr McConnell, though not opposedto a bipartisan fix, may have more pressingconcerns. He has always seemed less inter-ested in health-care reform than in the fil-lip scrapping Obamacare might providefor the wider conservative agenda—espe-cially its cherished tax cuts, part-funded bythe $772bn Mr McConnell hoped to cutfrom Medicaid. With a series of unavoid-able distractions looming—including bud-get negotiations and an impending fiscalcrunch, which Congress must raise thedebt ceiling to resolve—he may now preferto drop health care and move on to tax. Butthat effort, in which he faces another intra-

to the fact that it threatened to deprive 23mpeople of medical insurance over a de-cade. ButSenate Republicans’ own propos-als, contained in two draft bills hatched,with telling secrecy, by Mitch McConnell,the Republican leader, were little better.

According to the Congressional BudgetOffice (CBO), the second iteration, whichstalled on July17th, would have resulted in22m fewer insured within a decade. Bothbills were wildly unpopular—only 17% ap-proved of the second. They were opposedby both moderate Republicans, led by Su-san Collins of Maine, and conservatives,led by Rand Paul of Kentucky. Given thatMr McConnell could afford to lose nomore than two votes to maintain hisparty’s majority, a vote on the bill waspostponed after John McCain ofArizona, atwo-time presidential candidate, wasforced to undergo eye surgery for what lat-er turned out to be brain cancer. The bill’sfate was sealed when two more conserva-tives, Jerry Moran of Kansas and Mike LeeofUtah, came out against it nonetheless.

Capito said kaputThere followed an effort, ordered by MrTrump and dolefully launched by MrMcConnell, to repeal Obamacare withouthaving an alternative in place. The CBO es-timates that a straight repeal would result

Republicans and Obamacare

Can’t live with or without it

WASHINGTON, DC

Internal division does not hurt Republicans in elections. Governing is different

United StatesAlso in this section

26 Republican ideas

27 The voter-fraud commission

28 California caps and trades

29 School for mayors

29 Presidential appointments

30 Lexington: Gerrymander vTerminator

26 United States The Economist July 22nd 2017

2 party battle, between fiscal conservativesopposed to unfunded tax cuts and moreprofligate sorts, has also got harder. MrMcConnell’s authority, which is largelybased on his reputation for skilful deal-making, has been damaged.

Whatever he decides, support from MrTrump, whose standing with his Republi-can colleagues is even more diminished,will be fickle. Having promised two yearsago to replace Obamacare with “some-thing terrific”, Mr Trump appears to havemade little progress in working out the de-tails. Depending on who he was speakingto, the president has oscillated betweenpraising his party’s health-care plans andderiding them as “mean”. After being sub-ject to the president’s periodic attempts torally support for the various repeal bills,some perplexed lawmakers suggested MrTrump did not seem to understand them.Nor, it appears, has Mr Trump masteredsome basic details ofhow Congress works.In a recent tweet, he called on Mr McCon-nell to scrap the legislative filibuster in or-der to pass health-care and tax reform. Yetas the Republican leader was pursuingboth through budget rules, which requireonly a simple majority, the filibuster wasno obstacle to him.

Having fulminated against Obamacarefor so long, Republicans in Congressshould not have needed the president totell them what to replace it with. At thesame time, partisanship has made it sohard to pass bold legislation of any kind,even with an astute, well-briefed presidentproviding impetus, it may be almost im-possible without this. Reassuringly for MrMcConnell and his counterpart in theHouse, Paul Ryan, Mr Trump is said to betaking a greater interest in their tax plans.Yet it is not clearhe is capable of the kind ofsustained effort and skilful deal-makingpassing them would require. The likeliestoutcome remainsa temporarypersonal in-come-tax cut and a reduction in corporaterates (though probably not to the 15% levelthe White House wants).

Naturally, Mr Trump, who recentlyclaimed to have “passed more legislation”than any of his predecessors, though hehas in fact signed not a single bill of note,does not acknowledge his failure. “I thinkwe’re probably in that position wherewe’ll let Obamacare fail,” he said. “We’renot going to own it. I’m not going to own it.I can tell you the Republicans are not goingto own it.” In fact they do own it and, giventhe alternative plans Mr McConnell had inmind, that is probably a good thing for hisparty. With an approval rating ofover 50%,Obamacare is considerably more popularthan the Republicans. As they contemplatethis latest trauma—the rejection by votersand collapse of a health-care reform thatwas foryears theirmost fervent ambition—Republicans, omnipotent but unloved,need to reflect on why that is. 7

REPUBLICANS presented their efforts tooverhaul the Affordable Care Act,

which flopped this week, as a necessary re-sponse to a failing law. They frequently saythe individual market, in which those whodo not get health insurance through theiremployers can buy it for themselves, is col-lapsing. Premiums rose by an average of22% in 2017. So many insurers have givenup on the market that about a third ofcounties have only one left; 38 are at risk ofhaving no insurer for 2018, according to theKaiserFamily Foundation, a think-tank. Yetthe Republican bill is not a technocratic fixfor these problems. Rather, it is an attemptto enforce conservative thinking on healthcare. And it is failingpartlybecause ofideo-logical faultlines in the party.

To see this, start with the fact that thebill makes the individual market weaker,not stronger. It abolishes the individualmandate—the requirement that everyonewho can afford insurance must buy it—andmakes subsidies for low- and middle-in-come buyers less generous. The Congres-sional Budget Office (CBO) forecast that thefirst version ofthe Senate’s bill would havereduced enrolment in the individual mar-ket in 2018 byovera third—a more dramaticcollapse than anything seen to date.

Next, consider the changes to the billmade by Senator Ted Cruz of Texas. His“Consumer Freedom Option” would al-low insurers to sell almost completely de-

regulated plans, so longas they continue tooffer some that followed Obamacare’srules. This is an attackon the redistributioninherent in the law. By forcing all plans tocover certain things—such as treatment formental health—Obamacare ensures thatthose who fall victim to such conditions, orwho already have them, pay the same forinsurance as everybody else. Their medi-cal costs are spread around.

Mr Cruz sees this as an unwarranted in-cursion into consumers’ freedom ofchoice. His amendment would lead manyhealthy people to buy cheap plans cover-ing little. If they then contracted a condi-tion which their plan did not cover, theywould have to wait six months before re-turning to the Obamacare exchange. Be-cause the exchange would contain mostlysicklypeople, premiumswould rocket. Theplan is akin to allowing consumers to buycheaper cars without seat belts, with theadded side-effect of pushing the price ofcars that keep them much higher.

Some redistribution would live on.Poor buyers would still have their premi-ums capped. And the bill stumps up$182bn over a decade which states coulduse to subsidise the exchanges. But thisvexes purists. Rand Paul, one of the foursenators who is standing in the way of thebill’s progress, describes it as a “giant insur-ance bail-out superfund”.

The problem is that conservatives aredivided over whether the government hasany business at all in health-care markets.All agree that Obamacare’s high premiumsare a problem. They fall on a small numberofbuyers who earn too much to qualify fortheir subsidies. Many of them are self-em-ployed and therefore part ofa key Republi-can constituency. The 155m Americanswho get insurance from their employersdo not have to bear the same costs. But thequestion is: who should? The right of theparty’s answer is that the sick people mustpay for themselves. Mr Paul says healthcare is a “market item” that should not besubsidised. But most Republican plans,like the Senate bill, steer some taxpayercash towards the 20% of Americans whoincur 82% ofhealth costs.

Changes to redistribution in the indi-vidual market are somewhat hidden. Butthe bill’s cuts to Medicaid, health insur-ance for the poor, are in plain sight. TheCBO thinks they would leave 15m fewerpeople enrolled in Medicaid than wouldbe under the current law by 2026. Republi-cans find these cuts hard to defend, oftendenying they exist. Susan Collins, anotherRepublican rebel in the Senate, thinks theyare too deep—the polar opposite of MrPaul’s objection. Most Americans worryabout increased government spending butnevertheless think the government shouldensure everyone has health insurance. Re-publicans are divided and confused overthe extent to which they agree. 7

Republican ideas

Re-redistribute

WASHINGTON, DC

The ideology behind the Republicans’health-care bill

Oath keepers in the Senate

The Economist July 22nd 2017 United States 27

1

“SPRECHEN Sie Deutsch?” asks Kris Ko-bach. Sitting at his office desk sur-

rounded by family photos of his wife andfive daughters, the Kansas secretary ofstate explains (in German) that he pickedup the language when conductingresearchon the influence of referendums on Swit-zerland’s political system for a thesis atBritain’s Oxford University in the late1980s. Mr Kobach became interested inelectoral law during his Swiss research, aninterest which subsequently developedinto a fixation with voter fraud. He is also,after successfully lobbying Kansas’s gover-nor to change the rules, the only secretaryof state in the land with the power to pros-ecute people for it.

Mr Kobach’s other favourite topic is ille-gal immigration, which he became inter-ested in at Yale Law School. An avid debat-er, he joined a panel on California’sProposition 187, a ballot initiative passed in1994 denying government services to ille-gal immigrants. Mr Kobach fervently de-fended Prop 187, caring little that it was anunpopular stance at the elite Ivy Leagueschool. “He came across as a cultural war-rior,” says Jed Shugerman at Fordham LawSchool, who was among the standing-room only audience ofaround 300. Mr Ko-bach’s rhetoric, says Mr Shugerman, wasmuch more nativist and anti-immigrantthan was the norm among most conserva-tives at the time.

Today Mr Kobach has a national plat-form for his two fixations, which come to-

gether in an effort to detect voter fraud bynon-citizens (or aliens, as he refers tothem). He is vice-chair of the advisorycommission on election integrity, chairedby Mike Pence, the vice-president, and es-tablished by President Donald Trumpthrough an executive order in May. It metofficially for the first time on July 19th.

During the election campaign, MrTrump became a fervent proponent of theidea that America suffers from widespreadvoter fraud. He claimed that if he lost itwould be because the election was taintedby millions of fraudulent votes, many ofthem cast by illegal immigrants (Mr Ko-bach advises the president on immigrationpolicy too). After he won, Mr Trump didnot let the idea go, declaring that he wouldhave won the popular vote had 3m-5mvotes not been cast illegally. The commis-sion, set up to investigate what seems to bea non-problem, has a budget of$500,000.

The usual suspectsResearch reports collected for years by theBrennan Centre for Justice at the New YorkUniversity School of Law show that voterfraud in general and by non-citizens in par-ticular is extraordinarily rare. In his ownstate, Mr Kobach has prosecuted just ninecases ofvoter fraud ofwhich only one wasa foreigner, a Peruvian who was in the pro-cess of becoming an American citizenwhen he voted. (Mr Kobach says that heknows of another 128 cases in Kansas buthe cannotgo after them because ofthe stat-

ute of limitations.) “Why would an undoc-umented immigrant riskdeportation and afine by voting, especially as immigrationofficials regularly check electoral rolls?”asks Justin Levitt at Loyola Law School, au-thor ofone of the Brennan Centre reports.

To counter the consensus among politi-cal scientists that voter fraud is very rare,Mr Kobach and other believers in wide-spread fraud cite a paper by Jesse Richmanand others at Virginia’s Old DominionUniversity, which shows up to 15% of non-citizens surveyed voted at the presidentialelection in 2008. The controversial study,published in 2014, relied on just 339 respon-dents. The authors of that report warnedthat, “it is impossible to tell for certainwhether the non-citizens who respondedto the survey were representative of thebroader population of non-citizens.” MrKobach hired Mr Richman to look at Kan-sas, where he used a grand total of 37 re-spondents to come up with the figure ofmore than 18,000 non-citizen voters.

Mr Trump’s commission on election in-tegrity got off to a rocky start. On June 28thit sent out letters to all 50 states demandingdata on their voters that are publicly avail-able under the laws of the respective state,including names, dates of birth, politicalparty, last fourdigitsoftheirSocial Securitynumber, voter history from 2006, felonyconvictions and more. An outcry ensued,in Republican and Democratic states alike.“They can go jump in the Gulf of Mexicoand Mississippi is a great state to launchfrom,” fumed Delbert Hosemann, the Re-publican secretary of state in Mississippi.Terry McAuliffe, the Democratic governorof Virginia, said he had no intention ofhonouring the commission’s request.Fourteen states, including California andKentucky, flat-out refused to respond to theletter, saysMrKobach. Another16 said theyare reviewing the letter, whereas 20 saidthey would comply by sending publiclyavailable data.

The commission was also hit by threelawsuits, filed separately by the AmericanCivil Liberties Union, the Lawyers’ Com-mittee for Civil Rights Under Law and Pub-lic Citizen. They claim the purported mis-sion of the commission is a sham, and thatits true goal is to introduce stringent qualifi-cationson votingthatwould mainlydisen-franchise minority voters. The ElectronicPrivacy Information Centre filed a suit onJuly 3rd, claiming the commission’s re-quest violates the E-Government Act of2002, which obliges the government to as-sess the consequences of its actions public-ly before seeking personal informationstored electronically.

On July 13th the White House released112 pages with over 30,000 public com-ments on the Trump-Pence commission,nearlyall ofthem negative orsarcastic. “Hi,I voted in all 50 states. Just wanted you toknow. Love, Beau in Oklahoma,” reads

Voting laws

Kris Kobach’s crusade

TOPEKA, KANSAS

Aftera vehement backlash, the future ofDonald Trump’s election-fraudcommission is uncertain

28 United States The Economist July 22nd 2017

2 one. “I am ashamed that my taxpayer dol-larsare beingused forsuch purposes,” saysanother. A Californian applauds his state’sdecision to refuse to comply with the com-mission’s request: “your lack of integrityand refusal to acknowledge basic facts un-dermines our democracy.”

The commission has temporarily halt-ed its request for information. Mr Kobachsays he now intends to try to persuade thestates that refused to comply with his re-quest. He says that he only asked for infor-mation that is publicly available, so statescan leave blank whatever data is private intheir jurisdiction. He admits that he shouldhave made clear that the information willbe destroyed once the commission finish-es its work. He also insists that the much-maligned commission is in fact bipartisan.It is led by two Republicans and consists ofseven Republicans (four of them promi-nent proponents of the voter-fraud story,such as Hans von Spakovsky, a lawyer)and five hitherto obscure Democrats.

Despite the setbacks, voting-rights ac-tivists remain deeply concerned about thecommission. “It is still a dangerous vehiclefor voter suppression,” says Vanita Gupta,a former head of the Department of Jus-tice’s civil-rights division. In Coloradomore than 3,000 voters worried about thedata requests have already withdrawntheir registration. Thousands more coulddrop off the electoral rolls. Mr Kobachhopes to nationalise his Interstate VoterRegistration Crosscheck Programme,which brings 27 Republican states togetherin Kansas to compare voter rolls, says MsGupta. Such a matching programme ap-pears to be a reasonable exercise, but a re-cent study by Stanford University foundthatMrKobach’sprogramme had 200 falsepositives for every double voting-registra-tion. Most of the false alarms were minor-ities because, according to census data,those with names such as Hernandez, Gar-cia orKim are over-represented in the mostcommon last names.

The fate of the commission will be im-portant for Mr Kobach’s political future,too. He is running for governor of Kansasnext year, hoping to replace Sam Brown-back, the staggeringly unpopular Republi-can governor who recently made head-lines when his experiments with deep taxcuts were ended by lawmakers from hisown party. “I am not Brownback’s politicalheir,” says Mr Kobach. He agrees with histax cuts but he would have combinedthem with more cuts in spending. He isalso more pro-gun than the governor, hesays, and more hardline on immigration,promising to end sanctuary policies inKansas. According to Kansas Speaks, a re-cent opinion survey by the Fort Hays StateUniversity, Mr Kobach has the highestname recognition of nine of the state’sprominent politicians—but he also re-ceived the lowest rating. 7

VOTING to extend California’s cap-and-trade programme an extra decade to

2030 was a tough decision for Devon Ma-this, a Republican assemblyman who rep-resents a large swathe of the state’s fertileCentral Valley. Though once embraced byRonald Reagan, George H.W. Bush andGeorge W. Bush, cap-and-trade schemeshave come to be seen by Republicans as ex-emplifying government overreach. On theother hand, agricultural business ownersin Mr Mathis’s district flooded him withletters in support of cap-and-trade, whichthey thought would be better than thestate’s alternative plans for reducing CO2

emissions. Mr Mathis was so torn aboutthe choice he sought out his pastor to prayabout it. On July 17th when the vote washeld, he opted to support the extension.

Cap-and-trade programmes work bysetting a limit (or cap) on how much CO2

individual companies can emit. Business-es that pollute less than the cap can sell (ortrade) their excess allowance to those thatpollute more. The roots of California’sscheme, which is the world’s third largestafter the European Union’s and South Ko-rea’s, go back to 2006, when Assembly Bill32 (AB 32) was passed. In that measure, leg-islators committed to cutting California’sgreenhouse-gasemissions to 1990 levelsby2020—a reduction of roughly 30%, to 431mmetric tonnes of emissions. To meet thatgoal, the state’s Air Resources Board (ARB)

pushed a number of initiatives that includ-ed a cap-and-trade programme, which itimplemented in early 2013.

Since it is relatively new, distinguishingthe impact of California’s cap-and-tradeprogramme from its other initiatives ongreenhouse gases is difficult. Californiaalso has a Low Carbon Fuel Standard,which requires petroleum producers to re-duce the share of CO2 in their fuels, and anAdvanced Clean Cars Programme, a pack-age of regulations to reduce pollution fromcars. The Environmental Defence Fund, acharity, estimated in 2011 that cap-and-trade would account for 20% of the pollu-tion cuts required by AB 32.

Altogether, the state is making progress.State-wide emissions peaked in 2004 andhave since declined by10%. The ARB foundthat greenhouse-gas emissions fell by 1.5mmetric tonnes between 2014 and 2015,which is equivalent to removing 300,000vehicles from California’s (often congest-ed) roads for a year.

Last year the Democratic-dominatedlegislature set a more demanding emis-sions reduction target: 40% below1990 lev-els by 2030. Cap-and-trade is seen as thekey to reaching that, but before this week’svote its future was uncertain. Over the pastfour years the ARB has faced several law-suits over cap-and-trade. Plaintiffs in thesuits argue the system functions as a tax.Since it was not approved by two-thirds ofthe state legislature—the legal threshold forcreating new taxes in California—theyclaim it is unconstitutional.

California’s state government has so farprevailed in court. But to quash such dis-putes for good Jerry Brown, California’sgovernor, needed to convince a superma-jority of legislators (two-thirds) to extendcap-and-trade to 2030. In the run up to thevote, Mr Brown gave a typically Brownianspeech to a state Senate committee: “Whatam I? 79? Do I have five years more?” heshouted. “This isn’t for me. I’m gonna bedead. It’s for you and it’s damn real.”

Mr Mathis was one of eight Republicanstate legislators to support the cap-and-trade extension, giving the measure itstwo-thirds majority. Such bipartisan col-laborationsare rare—especiallyon climate-change, over which the electorate is starklydivided. A survey published by Pew Re-search Centre in October 2016 suggestedthat only 18% of conservative Republicansbelieve climate scientists understand“very well” whether climate change is oc-curring, compared with 68% of liberalDemocrats. While these divisions persistin the Golden State, there is broader sup-port overall for climate policies, says MarkBaldassare, the president of the Public Poli-cy Institute of California, a think-tank.When he polled Californians in July 2016,81% of adults saw global warming as a“very” or “somewhat” serious threat to thestate’s economy and quality of life. 7

California

Paris-on-sea

LOS ANGELES

The Golden State pushes on with plansto reduce greenhouse-gas emissions

LA’s trading floor

The Economist July 22nd 2017 United States 29

“I LITERALLY went home every nightfor the first three months and said,

“Oh, my God, what have I gotten myselfinto?’,” Boston’s mayor, Marty Walsh, re-cently told the Boston Globe. Jorge Elorza,Providence’s mayor, remembers sitting inhis office after he was sworn in and won-dering “how do we begin?” Many mayorsare skilled campaigners, but being in officerequires a different set of qualities. AndyBurnham, Greater Manchester’s mayorand one ofthe attendees, was in post just14days when his city endured a terrorist at-tack. American companies spend around$15bn a year in leadership development,but there is little, if any, training for public-sector chiefexecutives.

Michael Bloomberg, New York’s formermayor, hopes to change that. Thanks to a$32m gift his charity, Bloomberg Philan-thropies, along with Harvard’s Businessand Kennedy Schools, has created a year-long programme designed for servingmayors. The inaugural cohortbegan study-ing on July 17th. Forty mayors, 30 of themfrom American cities, including the may-ors of Philadelphia, Baltimore, Phoenixand Mobile, spent three days back atschool in New York.

This being Harvard, the mayors lookedat case studies, on subjects from a sand-wich-shop keeper in Amsterdam who wasstruggling to navigate his city’s bureauc-racy, to the use of data in a blight-strickencity in Massachusetts. John Giles, mayor ofMesa, Arizona, took pages and pages ofnotes. The school for mayors is not aboutpromoting any particular policy, thoughsome of Mr Bloomberg’s grander accom-plishments, such as the new Cornell Tech’sapplied sciences campus, and the HighLine, an elevated park which helped sparkdevelopment in a neglected part ofthe city,were presented as examples. Instead, theprogramme is more about how to thinklike a CEO. In Providence, says Mr Elorza,the pervading culture used to be that youhad to know a guy to get things done. Hestreamlined permitting, reducing the num-ber of application forms from 44 to nine.He copied from other cities, installing a 311system, a municipal customer-service linelike the one in NewYork, and appointed aninnovation officer, as Pittsburgh has, to tryto change the government’s culture.

Government does not need to be runlike a business, but the curriculum devel-opers thought that mayors could benefitfrom expertise supplied by academics and

by actual managers. Running a city is hard-er than running a company, says MrBloomberg: the media spotlight is glaring,pressure from unionised workforces canmake it hard to cut even bad programmesand regulation can throttle innovation.

The sessions, staged in a Harvard class-room-like setting, with tiered desks in a u-shape, were closed to the press. But duringbreaks the mayors asked each other fortheir takes on issues like drug legalisation.Some Democratic mayors in Republicanstates admitted the battle to curb guns waslost. Others talked about growing inequali-ty in their cities. Mayors from all over theworld complained about the uselessness

of the federal government.Mr Bloomberg reckons there is a sense

of urgency in cities over the lack of leader-ship comingfrom the federal and state gov-ernments. Meanwhile, mayors are findingthat their responsibilities extend beyondpolicing and filling potholes. One mayorrecalled a constituent coming to him formarital advice. Mayors are also having toface national and international problemsthat go beyond their formal authority, suchas immigration and climate change. Thereare three major political parties in the Un-ited States, says Mr Elorza: Republicans,Democrats and mayors. And mayors donot have time for ideological disputes. 7

Cities

School for mayors

NEW YORK

NewYork’s formermayorfunds a classforotherhizzoners

Presidential appointments

The missing government

IT IS almost as ifRepublicans did notcontrol both Congress and the White

House. President Donald Trump hasstruggled to carry out one ofhis basicduties, which is to fill government posts.The president blames supposedly obsti-nate Senate Democrats, against whom heregularly rages on Twitter. “Dems aretaking forever to approve my people,including Ambassadors. They are noth-ing but OBSTRUCTIONISTS! Want ap-provals”, he fumed on June 5th. “Theycan’t win so all they do is slow down &obstruct!”, he added on July11th.

Mr Trump’s administration has yet toget around to nominating many of theofficials who run the federal government.Up until July15th, Mr Trump had put 210names to the Senate for consideration,according to numbers provided by thePartnership for Public Service, a non-partisan group that tracks bureaucratichiring. The data do not count military orjudicial appointments. At the same pointin their presidencies, BarackObama hadput forward 369 names, George W. Bushhad 315 and Bill Clinton had 275.

It is true that the Senate has taken, onaverage, 45 days to confirm one ofMrTrump’s nominees compared with 37days to confirm one ofMr Obama’s. Thatdifference does not account for the vastdiscrepancy in confirmations—49 for MrTrump compared with 203 for Mr Obamaby July 2009. Part of the problem is thatthe majority ofMr Trump’s nomineeswere submitted in the past two months—while the Senate was consumed with ahealth-care bill to replace Obamacare.

Transitions ofpower are messy: a newadministration must pick4,000 newpolitical appointees, nearly1,200 ofwhom must be confirmed by the Senate.Neglecting to do so leaves hollowed-outagencies without critical staff. At the StateDepartment only two of26 senior postshave been filled. Twenty-two of the 24unfilled posts, like under-secretary forarms control, do not yet have a nominee.Important ambassadorial postings, likein Saudi Arabia and South Korea, areunfilled. Things are only a little better atthe Department ofDefence, where justfive of18 senior posts have been filled.

Presidential lethargy, not Democratic obstinacy, is to blame

Bill Clinton (1993) GGeorge W. Bush (2001) Barack Obama (2009) ldDonald Trump (2017)

FJ M A M J J FJJ M A M JJ JJ FJJ M A M JJ JJ FJJ M A M JJ JJ0

100

50

200

300

150

250

350

0

100

50

200

300

150

250

350

Source: Partnership For Public Service *Excludes military and judicial appointments as well as hold-overs

Step upUnited States, presidential nominations submitted to Senate in first six months of term*

Nominations

of which:confirmed

30 United States The Economist July 22nd 2017

SHORTLY after winning election as governor of California in2003, Arnold Schwarzenegger watched leaders from the state

legislature stage a spittle-flecked, chair-toppling fight in his office.“I don’t know if the drama was meant forme because I was new,”he recalls in an interview, miming open-mouthed astonishment.Abigger shockcame hours later. Two ofthe combatants, one a Re-publican, the other a Democrat, telephoned him from a bar. Sure,we fight about things in the daytime, the pair told the governor, aRepublican who won as an action-man outsider in a Democraticstate. But with night falling the party bosses wanted Mr Schwarz-enegger to know their shared view of his proposal to have elec-toral districtsdrawn byan independentpanel, rather than bypol-iticians. A “horrible” idea that would cost incumbent memberstheir seats, they growled. “Just kill this,” he remembers hearing.

It took Mr Schwarzenegger and allies several attempts to out-wit California’s political establishment, but in 2008 and 2010 vot-erspassed ballotpropositions thathanded the power to drawdis-tricts for the state legislature and for Congress to an independentbody with no partisan majority, and including such folk as farm-ers and business-owners. In 2010 Californians also approved a“top-two primary” system, under which all voters—rather thanparty stalwarts—may pick candidates for state and federal dis-tricts, with the highest-scoringpairproceedingto the general elec-tion, even if they are from the same party. The explicit aim is togive candidates an incentive to woo broad coalitions that crossparty lines, rather than merely fire up hard-core partisans.

Six years after leaving the governorship Mr Schwarzeneggercould be forgiven for shunning politics. His offices in Santa Moni-ca, a few blocks from the gym where he maintains his hewn-oakphysique, would make a cosy retreat: there are film posters andbody-building awards, framed photographs of him with PopeFrancis and sundry presidents, works of art by Andy Warhol andothers, and many movie props, including a life-sized crocodilebeneath his pool table. He cut a lonely figure in the 2016 election,as an environmentally conscious, socially liberal, pro-immigra-tion Republican. He backed Governor John Kasich of Ohio, thelone moderate in the Republican presidential primary. He haspublicly chided President Donald Trump over climate change.

Instead of hiding, Mr Schwarzenegger is in the thick of a na-

tionwide campaign against gerrymandering—when parties drawelectoral districts to give their side an unfairadvantage. The causehas momentum behind it. There are campaigns to put redistrict-ingreform on the ballot in Michigan, Missouri and Ohio, and law-suits are in progress from North Carolina to Maryland (whereDemocrats are accused of outrageous gerrymandering). MrSchwarzenegger has committed to match donations to a fundthat will help Common Cause, an open-government group, par-ticipate in a case at the Supreme Court challenging maps drawnby Wisconsin Republicans. The Wisconsin case will see reform-ers citing a new tool, the “efficiency gap”, intended to give courtsan objective way to spot gerrymandering. To simplify, the mea-sure counts wasted votes cast for each party, in hopelessly hostileor inefficiently super-safe districts, and identifies states whereone party receives many more such votes (as in Wisconsin).

Mr Schwarzenegger has recorded a short video explainingwhat he concedes is the “very dry” subject ofgerrymandering. Init, the actorcompares the respective popularityofCongress, cock-roaches and herpes, while noting that “the former Soviet Politbu-ro had more turnover” than pre-reform California, which be-tween 2002 and 2010 held 265 congressional races, of which justone saw a seat change its party control. His arguments are rein-forced by film clips in which he variously looks startled, resoluteor blows things up. The video has been viewed 25m times.

Political professionals can be a bit sniffy about gerrymander-ing’s importance as an explanation for government dysfunction.They note the way that Americans of like mind increasingly flocktogether, with the result that even when districts are drawn to re-spect county or community boundaries, Democrats will bepacked into cities, while Republicans dominate rural areas. Instates which have adopted non-partisan districting, such as Cali-fornia and Arizona, seats still rarely change hands.

The former Terminator can hold his own with wonkish scep-tics. The Schwarzenegger Institute at the University of SouthernCalifornia, founded to promote “post-partisanship”, commis-sioned studies that found that after the 2012 election California’sstate legislators had more moderate voting records, while its can-didates are unusually responsive to supporters ofa rival party.

Time fora workoutMr Schwarzenegger does not deny self-sorting effects: of courseCalifornian districts become more liberal near the ocean, he says.But they are still home to some conservatives, just as some liber-als live inland, and previously such voters were not counted.Strikingly, hismain concern isnotDemocratsorRepublicans “get-ting the shaft” in this or that state. His interest is in boosting politi-cal performance everywhere. Uncompetitive districts make leg-islators less effective, he says: to be precise, he comparespoliticians in gerrymandered seats to “overweight” people whoshould “go to the fucking gym”. As a governor he saw ultra-safelegislators in thrall to activists who controlled their re-selectionas candidates, long before they faced general elections. He be-came convinced that if districts held just 10-15% more voters fromthe opposing party, incumbents’ calculations would change.

Gerrymandering is a 200-year-old “screw-up”, notes MrSchwarzenegger, and mustbe fixed patiently, state-by-state. He re-members when bodybuilders were thought stupid or narcissis-tic, or to be “suffering from some complex”. Now hotels on everycontinent have gyms with weights. Make the right case for com-petition, fitness and performance, and minds can be changed. 7

Gerrymander v Terminator

Arnold Schwarzenegger lends some muscle to a campaign formore competitive politics

Lexington

The Economist July 22nd 2017 31

1

FOR months President Donald Trumphas veered between threatening to ter-

minate the North American Free-TradeAgreement (NAFTA) and merely proposingto bring it “up to date”. On July17th, in a let-ter to Congress, the United States trade rep-resentative, Robert Lighthizer, made theadministration’s intentions clearer. Theyare closer to revision than destruction,which is a relief for Mexico and Canada,the United States’ NAFTA partners. Butalongside conventional-sounding negoti-atingobjectivesare flashesofTrumpian ag-gression and hints that the United Stateswill demand painful changes to the deal.

The stakes are high. A quarter of Ameri-can trade in goods and services is withMexico and Canada. The three economiestend to grow or shrink together and haveintegrated supply chains. Fears that theUnited Stateswould abandon NAFTA havecaused volatility in the markets for theMexican peso and Canadian dollar, andtalkofpossible recessions.

Mr Lighthizer’s letter, published at thestart of what Mr Trump billed as “made inAmerica” week, calmed those fears. Theadministration has been tamed by work-ing through Congress. The smaller NAFTApartners made Herculean lobbying effortsto defend the agreement. Canadian minis-ters bombarded American governors withvisits. On July 14th Canada’s prime minis-ter, Justin Trudeau, appealed to governorsin a speech to protect “our shared North

Some of Mr Lighthizer’s ideas are po-tentially ambitious but vague. He wants to“strengthen the rules of origin” that set outhow much North American content a pro-duct needs to cross borders duty-free. Thatcould be a tweak, or it could be a big dis-ruption to trade among members ofNAFTA. There is talk of ensuring throughan “appropriate mechanism” that NAFTAcountries do not manipulate their curren-cies. But that could impinge on Americanmonetary policy.

Where Mr Lighthizer’s goals are themost Trumpian, they will face the fiercestresistance. Reflecting the president’s obses-sion with the United States’ trade deficit,the document’s first objective is to reducedeficitswith otherNAFTA countries. This isbarmy; trade deals do not determine defi-cits. The Mexican government’s responsehas been to argue that the standard num-bers neither reflect flows in the value eachcountry sends across borders nor the bil-lions of dollars that Mexicans spend whenthey shop in the United States. Canada,whose trade surpluswith the United Statesin goods is smaller than Mexico’s, is wait-ing to see how the Trump administrationproposes to reduce it. If the United Statesinsists, for example, on allowing countriesto block trade if their deficits get too large,the talks could take an angry turn.

Another worry is the administration’sapproach to trade remedies, ie, the dutiesthat governments can apply if an industryis “injured” by imports. Under NAFTA,Mexico and Canada get special treatment.The United Stateshas to crossa higher legalthreshold to apply defensive safeguardson their exports than it does on those ofother countries. In addition, under chapter19 of the agreement, disputes betweenNAFTA partners over other remedies go toa NAFTA court. The Trump administration,which regards the authority of foreign

American home”. A path to a renegotiatedagreement is in sight, but it will be rocky.

The new deal MrLighthizerhas in mindborrows from the Trans-Pacific Partnership(TPP), the Obama administration’s dealwith 11 Latin American and Asian coun-tries, which in effect updated NAFTA. Butone of Mr Trump’s first acts in office was towithdraw from it. Like the TPP, the pro-posed NAFTA 2 would bring protectionsfor workers and the environment “into thecore of the agreement”.

The letter drops some of the most con-tentious items from an earlier Americanwishlist. There is no mention, for example,of addressing the Trump administration’sgrievance that Mexico charges value-add-ed tax on imports.

NAFTA

Redesigning the North American home

WASHINGTON, DC

Canada and Mexico face a tricky renegotiation of their trade agreement with theUnited States

The AmericasAlso in this section

32 Bello: The long economic squeeze

33 Che Guevara, local anti-hero

33 Cutting hair in Venezuela, turningtricks in Colombia

Zone defence

Source: Chad P. Bown, Peterson Institute forInternational Economics

US imports subject to defensive duties, %

0

2

4

6

8

10

1994 2000 05 10 16

China

Canada andMexico

Rest of world

32 The Americas The Economist July 22nd 2017

2

SCAN the Latin American newspapersand it is hard to find much sign of a con-

vincing economic recovery. True, Brazil’sindustrial production is perking up after atwo-year slump. Mexico’s energy reformis starting to pay off, at last, with a big newoil discovery by an international consor-tium. And Peruvian restaurateurs cele-brated “National Char-roasted Chicken”day on July16th, hoping to dispatch a mil-lion birds, up from last year’s 720,000.

Otherwise, animal spirits are in shortsupply. After five years of decelerationand one of recession, Latin Americashould register modest economic growthof1-1.5% this year, according to forecasters.The picture varies from country to coun-try. The return to aggregate growth islargely thanks to Brazil and Argentina,which are comingout ofrecessions. Vene-zuela’s economy is collapsing. Mexico,Chile, Colombia and Peru are expandingat a sluggish rate of 2-3%. Only in CentralAmerica, the Dominican Republic andBolivia is growth a respectable 4% or so.

What makes this particularly worry-ing is that external conditions are general-ly favourable. The world economy is pick-ing up speed. The United States andChina, the region’s biggest trading part-ners, are growing nicely. Financiers lookfavourably on Latin American govern-ments and companies, as Argentina’s re-cent launch ofa 100-year bond illustrated.

So why is the region still so off-colour?One answer is that adjusting to the end ofthe commodity boom, which benefitedSouth America particularly, has taken lon-ger than expected. Between 2003 and2010 China’s industrialisation boosteddemand for minerals, oil and foodstuffs.Commodity prices fell steadily between2010 and 2015. As export revenue shrank,the region’s currencies weakened, curb-ing imports and pushing up inflation.

The good news is that in many coun-tries this external adjustment wentsmoothly and is largely over. The region’scurrent-account deficit narrowed by 1.4percentage points ofGDP last year (to 2.1%).Inflation is falling swiftly, allowing centralbanks to cut interest rates (see chart). Thatoffers hope ofa pickup in growth in 2018.

But Latin America also faces a fiscalsqueeze. The commodity boom temporar-ily boosted tax revenues. Too many gov-ernments spent, rather than invested orsaved, this windfall. The primary fiscaldeficit (ie, before interest payments) in theregion as a whole increased from 0.2% ofGDP in 2013 to 2.6% last year. In otherwords, public debt is rising. Many govern-ments have started to retrench. Few are in aposition to prime the pump of recovery.

There is a second factor slowing the re-bound: political uncertainty. That startswith Donald Trump. While he has agreedto renegotiate, rather than scrap, the NorthAmerican Free-Trade Agreement with

Mexico and Canada, he continues tothreaten to impose protectionist mea-sures, discourage investment south of theRio Grande and deport millions of Mexi-cans and Central Americans. So far Mexi-co’s economy has held up better thanfeared: the peso is stronger now than itwas before Mr Trump’s election last No-vember. The annual growth rate was 2.7%in the first quarter of this year. But Mexicois living from month to month.

The second doubt concerns domesticpolitics. Latin America will not return tofaster growth unless it does more to solvethe structural problems that hold it back.They include inadequate infrastructure,poor-quality schooling, badly designedtaxes and regulations that hobble busi-ness. Fixing these requires persuasiveleadership. But in the larger countries, theonly president who is even moderatelypopular is Mauricio Macri of Argentina.In Brazil, Michel Temer has an approvalrating of 7% and may be evicted from of-fice because ofcorruption allegations.

Between November of this year andOctober 2018, Chile, Colombia, Mexicoand Brazil all face presidential elections(while Argentina has an important mid-term congressional election thisOctober).These contests will take place amid popu-lar disillusion with politicians, causedpartly by corruption. In each, there issome risk that a populist could triumph.

No wonder investment remains de-pressed. Growth thisyear iscoming main-ly from a small recovery in exports andfrom import substitution. The first taskfacing governments is to provide invest-ors, both local and foreign, with a reason-able degree of policy certainty. More thanis usually the case, for insights on theireconomic prospects, Latin Americansshould turn to political scientists ratherthan to economists.

The long squeeze

Room for improvement

Source: IMF

Latin America and the Caribbean

% change on a year earlier

Primary fiscal balance, % of GDP

FORECAST

FORECAST

3

0

3

6

+

–

2010 11 12 13 14 15 16 17 18

GDP

Consumer prices

32101

+

–

2010 11 12 13 14 15 16 17 18

Bello

Latin America’s commodity hangoverhas been compounded by political uncertainty

judges as an infringement of sovereignty,has both provisions in its sights.

This will provoke a battle. Negotiationson a free-trade agreement between Cana-da and the United States, which came be-fore NAFTA, nearly broke down in 1987 be-cause the United States refused torelinquish the option to impose retaliatoryduties. A clause like chapter 19 was a com-promise that saved the deal (“you can haveyour goddamn dispute-settlement mecha-nism,” grumbled James Baker, then theAmerican treasury secretary).

Canada, and now Mexico, want it morethan ever. The United States is threatening

to impose trade barriers against othercountries to protect such industries assteel. It is fighting with Canada about soft-wood lumber, aerospace and paper. With-out a panel to rule speedily on disputes,and protection against trade remedies,NAFTA’s smaller members will be morevulnerable to the punishment that the Un-ited States metes out to other trading part-ners (see chart on previous page).

While seeking more protection for theUnited States, Mr Lighthizer is pushingCanada and Mexico to lower their tradebarriers. His letter aims at protected Cana-dian sectors such as telecoms and financial

services (and, less explicitly, dairy andpoultry farming). Mexico, the target of MrTrump’s abuse on the campaign trail,seems to get offmore lightly.

Negotiations are due to begin on Au-gust 16th. The United States’ partners arepreparing defences and counter-demands.Mexico’s businesses are thinking abouthow to change their supply chains in casethe deal blows up. Canada is pushing foraccess to contracts awarded by Americanstates and cities, which Mr Lighthizerwants to keep out ofNAFTA 2. Expect plen-ty of squabbling in the North Americanhome. 7

The Economist July 22nd 2017 The Americas 33

CHE GUEVARA was born in Rosario,then Argentina’s second-largest city, in

1928 but did not stay long. Less than a yearlater his family moved away. Yet his birth-place has not forgotten the left’s warrior-saint. A red banner marks the posh apart-ment blockwhere he was born. A four-me-tre-high (13-foot) bronze statue stands inChe Guevara Square. The city council fi-nances CELChe, a centre devoted to thestudy ofhis life, and celebrates “Che week”around his birthday in June. CELChe willstage a concert to commemorate the 50thanniversary ofhis death on October 9th.

Not everyone in Rosario thinks the be-reted revolutionary, who was captured bysoldiers in Bolivia and killed on the ordersof the country’s pro-American dictator, de-serves such reverence. Fundación Bases, aliberal think-tank based in the city, haslaunched a petition to persuade the citycouncil to remove the monuments. Themartyr was himself a killer, says FrancoMartín López, the institute’s director. Gue-vara wassecond-in-command to Fidel Cas-tro, whose Cuban revolution killed morethan 10,000 people. “No one here has anyidea about the massacres committed dur-ing the revolution,” Mr López laments.

Under the motto “a murderer doesn’tdeserve state tributes”, Mr López’s founda-tion has produced videos to educate Ar-gentines, and rosarinos in particular. Oneshows a clip ofGuevara promising to “con-tinue the firing squads for as long as neces-sary” in a speech to the UN General As-sembly in 1964. In another, a narrator readsout the accusatory suicide note of Rei-naldo Arenas, a gay novelist who died in1990 after suffering decades of persecutionby Cuba’s government. Mr López is look-ing for a sympathetic councillor to presentthe petition on the anniversary of Gueva-ra’s death. More than 3,000 people havesigned it since its launch on May 2nd.

It is unlikely to persuade the council,which has been controlled by the SocialistParty since 1989. Norberto Galiotti, the ci-gar-smoking secretary of Rosario’s Com-munist Party, regards the foundation’scampaign as a part of a pernicious effort toerase Che from history, led by the coun-try’s centre-right president, Mauricio Ma-cri. After he took office in 2015 he removeda portrait of Che hung in the presidentialpalace by his populist predecessor, Cris-tina Fernández de Kirchner. Mr Galiottisuspects liberals are envious of Che’s post-humous charisma. “You don’t see many

kids walking around with MargaretThatcher T-shirts,” he observes.

Mr López does not expect the monu-ments to come down. “The real objective isto raise awareness of the issue and start adebate,” he says. But some ofChe’s fansarenot interested in dialogue. FundaciónBases dropped plans to show the videoson screens in Rosario because the advertis-ing firm that operated them was “worriedpeople would smash them”, says Mr Ló-pez. Che would have been pleased. 7

Che Guevara

Local anti-hero

ROSARIO

A liberal think-tankchallenges the cultofa left-wing revolutionary

Hard to erase

ON SATURDAYnight in Parque Pobladoin Medellín, young people gather to

drink, smoke and chat. Barbara and hercousin Sophia have more serious business:they hope to make enough money fromsellingsexto live decentlyafterfleeing Ven-ezuela, where survival is a struggle.

Barbara, who is 27, prefers her formeroccupation as the owner of a nail and hairbusiness in Caracas, Venezuela’s capital.But polish and shampoo are as hard to findas food and medicine, and so she has cometo Medellín. In an hour a sex worker canmake the equivalent of a month’s mini-mum wage in Venezuela. Colombian pe-sos “are worth something”, unlike Venezu-ela’s debauched currency, the bolívar,Barbara says. “At least here one can eatbreakfast and lunch.”

Some 4,500 Venezuelan prostitutes arethought to be working in Colombia; thetrade is legal in both countries. But until re-cently they were often rounded up by po-lice and deported back to Venezuela by thebusload. That changed in April, when Co-lombia’s constitutional court ruled thatVenezuelan sex workers are entitled towork visas. Mass deportations violate in-ternational human-rights law, it said. “Oneshould weigh up the reasons they decidedto come to Colombia...and the specific situ-ation they would face in Venezuela werethey to be returned,” said the ruling.

The case has its origins in Chinácota, atiny town an hour’s drive from the bordercity of Cúcuta. Last year the town’s mayorclosed down the Taberna Barlovento, a barthat also serves as a brothel, saying it vio-lated zoning rules. Along with beverages,the bar offers four bedrooms just bigenough to fit a mattress or two. Founded in1935, the bar is a Chinácota institution, saysNelcy Esperanza Delgado, its owner.

When the mayor shut Ms Delgadodown, she fought back in court. She andthe prostitutes who worked there, includ-ing four Venezuelans, had no other in-come, she said. Closing Taberna Barlo-vento violated their right to work. Thecourt agreed, and the bar reopened.

The ruling is likely to encourage Vene-zuelans who ply other trades. Daniel Pagésof the Association of Venezuelans in Co-lombia estimates that 1.5m of his country-men are in Colombia, about 40% of themwithout proper papers. The sex workersare joined by electricians, mechanics, em-panada vendors—all of whom are seekinga way to cope with their country’s short-ages and queues, and an inflation rate ex-pected to exceed 700% this year. Many ofthem commute daily from Venezuela.They could use the court’s ruling on sexworkers to argue that they, too, are entitledto workvisas, says Andrés Delgado Gil, thelawyer who argued Ms Delgado’s case.

Colombiansalongthe borderare accus-tomed to Venezuelans streaming across,but the area’s sex workers do not relish thecompetition. Venezuelans charge theequivalent of $10-13 for a 20-minute ses-sion; the Colombian rate is around $13-17.Colombians complain that they are beingforced to cut their prices. While Colombiais El Dorado compared with Venezuela,economic growth is slow and the unem-ployment rate is 9.4%. Colombians haven’tforgotten that in 2015 Venezuela’s presi-dent, NicolásMaduro, blamed them for theshortages and deported 1,100. Many fordedrivers on their way back to Colombia.

While the law is becoming more wel-coming to desperate Venezuelans, Colom-bians are growing increasingly nervousabout the influx. Barbara thinks othercountries offer bigger opportunities. She isplanning to move on to Ecuador, wherecustomers pay in American dollars. 7

Sex workers in Colombia

From cutting hairto turning tricksMEDELLÍN

Venezuelans fleeing poverty get theright to workas prostitutes

LE STUDIO PARMIGIANI Jardins du Palais Royal125 – 126 Galerie de Valois, Paris 1er

Tel. +33 (0) 1 40 13 93 93

LE STUDIO PARMIGIANI Miami Design District 140 N.E. 39th Street, PC #108, Miami, FLTel. +1 786 615 96 56

ATELIER PARMIGIANI97 Mount Street, MayfairLondon W1K 2TDTel. +44 (0) 20 7495 5172

Were there to be only oneToric ChronomètreManufactured entirely in Switzerlandparmigiani.com

The Economist July 22nd 2017 35

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

Economist.com/world/middle-east-africa

1

IN CRISP white uniforms and standing toattention beneath a fluttering red flag

with five golden stars, the sailors on boardthe People’s Liberation Army ships settingsail for Djibouti on July11th represent a sig-nificant step for China. When they arrivethey will open the Middle Kingdom’s firstmilitary base abroad since the Korean war.

It is a canny first foray. China has pre-pared the ground with low-key deploy-mentsofblue-helmeted troops to UN oper-ations in places such as South Sudan. Andit has placed the base in a country that islikely to cause the least offence.

America already has a large airfield andnaval station in Djibouti. From there it con-ducts counter-terrorism operations, andwatches the Gulf of Aden and the Red Sea,both much used by smugglers traffickingdrugs, weapons and people. And China’smain regional rival, India, cannot arguethat the installation representsa significantprojection of power into an ocean it re-gards as its own. The base will mostly be alogistics hub for a naval squadron Chinahas long sailed in these waters, escortingcommercial vessels. Still, the hoisting of ared flag over African soil will be the mostvisible sign yet of China’s growing asser-tiveness on a continent that was once theplayground ofSoviet and Western powers.

The base represents but the tip of a fast-growing bamboo shoot. The next segmentdown is a vast effort aimed at enhancing

with varying degrees of success. In SouthAfrica, for instance, more than half of themembers of the executive committee ofthe ruling African National Congress haveattended such schools in China, a countrythe party calls its “guiding lodestar”.

China is, like the West, strategic aboutthe ways in which it doles out aid. A studyby AidData, a project based at the Collegeof William and Mary in Virginia, foundthat countries that vote with China in theUN General Assembly get considerablymore money than those that do not.

China has also spread its influence inless visible ways. Victoria Breeze and Na-than Moore at Michigan State Universityreckon that in 2014 the number of Africanstudents in China surpassed the numberstudying in either Britain or America, thetraditional destinations for English-speak-ers (France still beats all three, however).Much of the growth is because China hasgiven tens of thousands of scholarships toAfrican students, the academics say. If ef-forts such as these are aimed at burnishingChina’s image, then they are working.Afrobarometer, a polling firm, found that63% of people in 36 African countries con-sider China to be a positive influence. Nev-ertheless, it also found that African peoplestill think China’s development modelranks second after America’s.

That may change in time, since by farthe main part of China’s involvement inAfrica is in business. In the past decade,Chinese loans and contractors have, quiteliterally, reshaped much of the continent’sinfrastructure, paying for and buildingnew ports, roads and railways. In manycases, this has been matched by invest-ments in mines and manufacturing plants,shopping centres and corner stores. Thescale and extent of China’s business inter-ests are easily visible, whether in a hotel in

China’s soft power in Africa and at pro-moting the so-called “China model” of au-thoritarian, state-driven development as acounter to Western efforts to spread liberaldemocratic capitalism. Much of this isdone through political training pro-grammes whereby members of ruling par-ties, labour unions and ministries are tak-en to China to meet the members of theChinese Communist Party. Its best studentis Ethiopia, where the ruling EPRDF partyhascopied much ofwhat ithas seen in Chi-na, tightly controlling business and invest-ment, and imitating China’s Central PartySchool and party cadre system.

China’s attempts at spreading its viewof the world go far beyond Ethiopia, albeit

China in Africa

A thousand golden stars

ACCRA

China is making its presence felt across the continent in ways big and small

Middle East and AfricaAlso in this section

36 Succession politics in Nigeria

37 Arab media move to London

37 A ceasefire in Syria

38 Drugs in the Middle East

Across the board

Source: American Enterprise Institute

Chinese investments and contracts in AfricaBy sector, $bn

*To May

0

10

20

30

40

50

2005 07 09 11 13 15 17*

EnergyTransport Real estate

MetalsUtilitiesTechnology

Other

36 Middle East and Africa The Economist July 22nd 2017

2 Rwanda, where the writing on all the fit-tings, from elevators to shampoo dispens-ers, is Chinese; or at a roundabout in cen-tral Accra, where a crew of Chineselabourers are repairing the road.

This flow of Chinese money and work-ers has prompted some to gush that Chinais becoming Africa’s most important eco-nomic partner, and others to fret that it isthe new colonial master. In a recent reportMcKinsey, a consulting firm, looked at fivemeasures of Africa’s economic connectionwith the world: trade, investment stock, in-vestment growth, infrastructure financingand aid. It found that China is among thetop four partners in each of these. “No oth-er country matches this depth and breadthofengagement,” it enthused.

Yet others are more sceptical, arguingthat many overestimate the sums that Chi-na is investing in or lending to Africa, be-cause they add up pledges rather than ac-tual flows. A close parsing of the data byDavid Dollar, an economist, finds that Chi-na accounts for only about 5% of all exist-ing investment in Africa, and a similarshare of new investments. America’s in-vestment stock is twice as much.

“The notion thatChina hasprovided anoverwhelming amount of finance and isbuying up the whole continent is inaccu-rate,” he argues. That matches with workby Deborah Brautigam, who leads the Chi-na Africa Research Initiative at Johns Hop-kins University. She found that little morethan half of announced Chinese loans toAfrica actually materialised.

Yet look beyond official loans or thework of big Chinese state-owned compa-nies, and there are signs of a deeper Chi-nese involvement. McKinsey’s work sug-gests that there are as many as 10,000Chinese companies operating in Africa,90% of them privately owned. Many alsoreported earning juicy returns, in somecases enough to pay back their invest-ments in less than a year. Many said theyplanned to keep investing because of theplentiful opportunities to make money.

Yet even as those small firms makemoney, it is far less certain that Chinese in-vestments in big infrastructure such as therailway line linking Mombasa’s port andNairobi in Kenya will ever show a return;there is even less chance of recovering thecash sunk by Chinese state-owned firmsinto poorly governed places such as Ango-la and the Democratic Republic of Congo.In this China seems to be repeating manyof the mistakes made by Western donorsand investors in the 1970s, when moneyflowed into big African infrastructure pro-jects that neverproduced the expected eco-nomic gains. In a decade or so China mayfind itself in the position the West once did,of having to write off many of their loansto African governments. Unless of coursethose sleek navy ships in Djibouti are everput to use collecting overdue debts. 7

POLITICS is the survival of the fittest,and Nigeria is no exception. “The Hye-

nas and the Jackals will soon be sent out ofthe kingdom,” the first lady, Aisha Buhari,wrote on Facebook on July 10th, in re-sponse to a senatorwho had described herhusband as “the absent Lion King”. Mu-hammadu Buhari has been in London be-ing treated for a mysterious illness sinceMay 7th, after spending a seven-week stintthere earlier this year. His only recent com-munication has been a few written state-ments mourning deceased politicians.

Despite many rumours, Mr Buhari isprobably not dead himself. The vice-presi-dent (and acting president), Yemi Osin-bajo, rushed to London for a few hours lastweek. On his return he said hisbosswas re-covering fast and would be back “veryshortly”. But the beasts are circling, in theexpectation that itwill be one ofthem whogets to contest the next presidential elec-tion, due in February 2019.

Mr Osinbajo, who was previously La-gos state’s attorney-general, will automati-cally take over if the president resigns or isdeclared incapacitated. His “godfather”,Bola Tinubu, is probably the most power-ful politician in Nigeria’s south-west (MrTinubu, a Muslim, had to forgo the vice-presidency before the 2015 election as itwas deemed politically toxic for both

names on a ticket to be of the same reli-gion). Mr Osinbajo, a Christian pastor whohas said he is on loan from his church, hasalso been cultivatinghisown brand. Whenon tour he makes sure to be photographedchatting with market traders, hugging chil-dren and flying in for the funerals of de-parted politicians. “The fact that he is per-ceived as someone who is very loyal toBuhari definitely helps him,” says ChrisNgwodo, an analyst.

However, northern politicians willwant one of their own to step in to any va-cancy. There is an unwritten rule that thepresidency rotates between north andsouth, and the northerner Mr Buhari hasonly served two out of his potential eightyears (assuming he were to be re-elected).

The reform-minded governor of Ka-duna state, Nasir El-Rufai, was once seen asMr Buhari’s heir. But his intolerance of dis-sent, including the banning of a Shia orga-nisation after at least 347 of its memberswere massacred by the army in December2015, has seen him fall from favour. Chris-tians, meanwhile, accuse Mr El-Rufai ofsiding with Muslim herders over lethalclashes with farmers in southern Kaduna.

Atiku Abubakar, a wealthy former vice-president, is likely to contest any primaryof the ruling All Progressives Congress(APC) party. However, he is dogged by cor-ruption allegations and has already rununsuccessfully for president four times.

Another possible candidate is the Sen-ate president, Bukola Saraki. The formergovernor of Kwara, a state in Nigeria’s“Middle Belt”, was not the APC’s choice tolead parliament. He was nonetheless elect-ed with the backing of opposition partysenators in June 2015. “He’s about as savvyas they come,” says a ruling party source.

But the northern elites reportedly donot see Mr Saraki as one of them. Andthough a tribunal recently threw out a caseaccusing the politician, who owns a multi-million-pound house in London, of notproperly declaring all his assets, the gov-ernment is appealing.

If Mr Buhari is too ill to rule but refuses(or is unable) to resign, government minis-ters and a medical panel set up by Mr Sa-raki would have to agree to remove him.The president of the Senate could strike adeal to become Mr Osinbajo’s deputy, saysMatthew Page, a former American dip-lomat. Orhe could wait for the presidentialprimaries in 2019, and run himself. The hy-enas are not short ofoptions. 7

Nigerian politics

The lion at bay

ABUJA

Would-be successors to the ailing president are circling

Osinbajo the loyal

The Economist July 22nd 2017 Middle East and Africa 37

1

FORtwo yearsGhanem al Masariral-Do-sari, a Saudi satirist, has fronted an on-

line comic look at the news in a showcalled “Fadfada” (Natter), which pokes funat his kingdom’s royal highnesses. He por-trays the young crown prince and de factoruler, Muhammad bin Salman, in nappies,and calls him “al-dub al-dasher”, looselytranslated as “fat crumpet”. His YouTubechannel attracts millions of followers,most of them Saudi. “Back home, I’d havelost my head,” he says. But Mr Dosaribroadcasts from the safety of a north Lon-don suburb, he hopes out of reach of theroyal sword.

Ever since the leading pan-Arab news-paper, Asharq al-Awsat, launched in Britainin 1978, London has served as an Arab me-dia hub. Fleeing the censors at home, jour-nalists found freedom in exile. Fresh crack-downs, censorship and war are againrejuvenating their ranks.

As part of its campaign against Qatar,Saudi Arabia has demanded the closure ofthe popular satellite channel it funds, Al Ja-zeera, and threatened anyone tweeting insympathy with five years’ imprisonmentor a huge fine. The United Arab Emiratesupped the punishment to 15 years.

Oman has jailed editors. Last month,Bahrain shut down its last independentnewspaper, Al-Wasat. A satellite channellaunched in Bahrain closed on its first dayafter interviewing a Shia dissident. JamalKhashoggi, a veteran Saudi journalist andits general manager, is one of hundredsbanned by his government from speakingabout Qatar, or in his case anything else.He has opted for exile in the West.

A decade ago, Arabic media was return-ing home from exile, lured by the openingof glitzy “media cities” and promises ofArab glasnost. MBC, a popular London-based satellite channel, moved to Dubai.Edgy new channels like Al Jazeera, Al Ara-biya and Sky News Arabia launched in theGulf. But in 2011 the Arab spring erupted,and Arab despots responded by muzzlingtheir critics.

Al Jazeera, which amplified cries for re-gime change, both peaceful and not, facedthe sheikhs’ particular ire. When the clo-sure of bureaus and Egypt’s jailing of jour-nalists failed to induce its compliance, Gulfgovernments signed an agreement withQatar in 2013 to curb its media. Al Jazeeraduly suspended its Egyptian arm, and aftera temporary blackout, blamed on techni-cal difficulties, briefly broadcast from Lon-

don. Qatar moved new operations off-shore. Al-Araby al-Jadeed (the New Arab)was launched in west London, along withwebsites such as Arabi21 and the Arabicversion of Huffington Post. London, saysan Al Jazeera journalist, remains the chan-nel’s backup, should, for instance, the Sau-dis or Emiratis invade.

London’s calling is a tradition. SinceKarl Marx, it has been a favoured home todissidents. British judges have repeatedlyruled against the repatriation of activists.Britain has resisted Emirati pressure to banthe Muslim Brotherhood and hosts manymore senior Brotherhood figures than Qa-tar does. Scores of Shia activists houndedout of Bahrain have settled in Britain, andbeam their protests back to the Gulf. Sub-ject to a Jordanian campaign to ban themacross the Arab world, Mashrou Leila, aLebanese indyband whose lyricsflout sex-ual and political taboos, launched its latestalbum in London. An Arab arts festival,Shubbak, offers a platform to human rightsactivists, like the Egyptian author, BasmaAbdelaziz, fearful of talking at home. Talkofa new independent paper is afoot.

Even so, the despots have long arms.Gulf governments fund their own mediaoutlets in London, lure journalists to theirranks, and then call the tune. Asharq al-Aw-sat, acquired in 2015 by the Saudi crownprince, has become its master’s voice. An-other London-based Saudi-owned publi-cation, Al-Hayat, was once lauded as themost professional of Arab newspapers,but now tends to toe the line. On July 18thhecklers supporting Egypt’s president,Abdel-Fattah al-Sisi, tried to drown out adebate on Al Jazeera ata journalists’ club inLondon. And Mr Dosari remains cageyabouthisaddress. In 1987 the greatestPales-tinian cartoonist, Naji al-Ali, was fatallyshot on London’s streets. 7

Arab media

Exodus and theairwaves

London is again becoming the Arabworld’s media capital

WHEN a group of teenage boysscrawled “down with the regime” on

their school wall they lit the powder thatignited Syria’s civil war. Ever since theirtorture at the handsofstate-security agentsin March 2011, the boys’ home city ofDeraahas become synonymous with the rebel-lion to overthrow the regime of Bashar al-Assad. But Deraa may yet turn out to be theplace where dreams of overthrowing theregime finally die.

The guns fell silent over the batteredcity at noon on July 9th as a ceasefire bro-kered by Russia and America came intoforce. The truce, announced by PresidentsDonald Trump and Vladimir Putin aftertheir first meeting, is the latest in a string offailed attempts by the two powers to quellmore than six years of violence that haskilled perhaps 400,000 people. Its success,if it lasts, may open the door to deeper co-operation between America and Russia.That could lead to a kind of peace, but atthe price ofwhat may be a lasting carve-upof Syria into zones controlled by differentforeign powers, which will in all probabili-ty leave MrAssad in place on the populouscoastal west of the country.

It is unclear whether the ceasefire willwork this time. Months of secret meetingsbetween American, Russian and Jordani-an officials in Amman have produced adeal that lacks teeth. Russia says it will de-ploy troops to police the ceasefire zone,which covers three southern regions thatabut the borders with Israel and Jordan.American diplomats say the make-up ofany ground force is still being discussed.

Syria

All quiet on thesouthern front?BEIRUT

The latest ceasefire will test Russia’sability to rein backits allies

Al Tanfbase

Beirut

Syria

Nabatiye et Tahta

Al LadhiqiyahDayr az Zawr

As Suwayda

Al Hasaka

Ar Raqqah

Ar Rutbah

man Sanliurfa

Ad Nabk

bk

nia

Mardin

Manbij

As Salt

Beirut

Tarsus

Haifa

Hims

Kilis

June 18th: US plane sdown Syrian air forcenear Tabqa, Syria

MQay

S Y R I A

I R A QSuwaida

Quneitra

Amman

Deirez-Zor

Raqqa

Palmyra

Aleppo

Homs

Deraa

Euphrates

GolanHeights

T U R K E Y

J O R D A NISRAEL

LEBANON

Med

iter

rane

an S

ea

Areas of control, July 2017

Sources: Institute for the Study of War; Russian Defence Ministry

Syrian government

“De-escalation” zones

Islamic State Kurds Contested

Sparsely populated

Rebels Rebels/Turkish troops

100 km

38 Middle East and Africa The Economist July 22nd 2017

2 The truce hasheld so farbut, like past deals,may quickly fall apart without a way to en-force it. Rushed out to give the two presi-dents something to announce at their firstmeeting, the ceasefire appears premature.

The geography and make-up of the re-gion covered by the ceasefire may, how-ever, help it last. The area—Deraa, the prov-ince of Quneitra and parts of Suwaidaprovince—is smaller than regions coveredin the past. There are also fewer extremiststo spoil the truce, and fewer rebel factionsto pressure into abiding by it. The rebels inthe south are also lessfierce: Jordan keepsagrip on those fighting the Syrian army andIranian-backed militias seeking to pushinto areas near its borders.

The ceasefire is a result ofRussian plansto wind down the war. Since January Mos-cow has led talks with Turkey and Iran,which back opposing sides in the conflict,to establish four “de-escalation zones”where rebels and the regime will stop kill-ing each other. The aim is to have each onepoliced by different foreign powers. Amer-

ica’s rush to cut a deal with Russia in thesouth, the first of the zones to be demarcat-ed, is partly a test ofMoscow’s sincerity.

Mr Assad is sitting pretty in Damascus.If the ceasefire holds, it will partly be be-cause the Syrian president and his Iranianbackers see a chance to solidify their gains,drive rebels from otherpartsofthe countryand race American-backed forces for con-trol of the oil-rich lands still occupied by Is-lamic State in the east. America’s secretaryof state, Rex Tillerson, says America “seesno long-term role for the Assad family”.But removing the dictator, who has repeat-edly vowed to reclaim every inch of terri-tory lost during the war, will be impossiblewithout the consent of Iran and Russia.

If anything has remained constant inAmerica’s approach to the Syrian conflictover the past year, it is its faith in Russia tobring the fighting to a close and keep Iran incheck. Mr Tillerson believes the warringparties are “tired” and “weary” of the con-flict. The coming weeks will establish howfanciful this reading is. 7

THE traditional way is not always themost successful. Saudi Arabian border

guards this month arrested a Sudaneseman accused of smuggling more than halfa million drug tablets into the kingdomfrom Jordan on the back of a camel. Just astastes in food and drinkvaryfrom region toregion, so do preferences for drugs. Theone the Sudanese man was allegedly traf-ficking, known as Captagon, is the Arabianpeninsula’s most popular illegal drug. TrueCaptagon (genericname: fenethylline) wasproduced as a treatment for attention defi-cit hyperactivity disorder. Americabanned it in 1981after its addictive and oth-er pernicious characteristics became clear.Most other countries have followed suit.

The pills flooding into Saudi Arabia andother Gulf states sometimes have a feneth-ylline base. But many are simply ‘uppers’,or amphetamine-type stimulants (ATS).And some of what is sold under the poeticstreet name of Abu Hilalain (Father of theTwo Crescent Moons: an allusion to the en-twining Cs on each pill) contains little butconcentrated caffeine.

The market is huge. According to theUN’s latest World Drugs Report, in 2015 theSaudi authorities seized more than 11tonnes of ATS, excluding Ecstasy. That waslower than the figure for 2014, but still al-most a third as much as in America, with a

population ten times greater. Elsewhere inthe region, demand appears to be soaring.In March the director-general of the UAE’sAnti-Narcotics Department, ColonelSaeed al-Suwaidi, said seizures of Capta-gon, real and fake, and crystal meth, had al-most quadrupled last year.

Identifyingthe origin ofsynthetic drugsis difficult: unlike plant-based ones, theyseldom have unique properties. And pseu-do-Captagon often travels to the Gulf bytortuous routes: French customs officialswho this year seized 750,000 pills smug-gled from Lebanon found they were tohave been shipped to Saudi Arabia via the

Czech Republic and Turkey. Fake Captagonis known to be produced in south-easternEurope. War-torn Syria has also become asource. Rival combatants have profitedfrom “taxing” manufacturers and traffick-ers. But an investigation by the Institute forMiddle East Studies at George WashingtonUniversity concluded in 2015 that the onlyfaction systematically involved in produc-ing the drug was Hezbollah, an Iranian-backed Lebanese militia. Rogue membersof the Assad regime and the Free SyrianArmy were also manufacturing it, but nei-ther of the most extreme jihadist factions,Islamic State (IS) or Jabhat al-Nusrah (nowJabhat Fatah al-Sham), was found to beprofiting from Captagon. Indeed, IS has ex-ecuted alleged drug traffickers and de-stroyed narcotics-manufacturing plants.

Still, one of the reputed effects of genu-ine Captagon is to reduce compassion andthere has been recurrent speculation thatIS feeds it to its militants. A captured teen-age IS fighter told CNN in 2014 he had beengiven pills “that would make you go to bat-tle not caring if you live or die”. Captagoncame under particular suspicion after theParis attacks of 2015. Several eyewitnessescommented on the emotionless stares andzombie-like movements of the killers. Buttoxicological examinations reportedlyfound no evidence they had taken drugsbeforehand. A study last year concludedthat the only drug that could be firmlylinked to IS was Tramadol, an opoid.

The Koran deplores “intoxicants”. Sowhy are so many inhabitants of some ofthe Middle East’s most God-fearing statesgetting high on Captagon? Users includeparty-goers, slimmerswho take the drug asan appetite suppressant, and others suchas students and lorry drivers who want tostay awake for long periods. Justin Thom-as, a Briton who lectures on psychology atZayed University in Abu Dhabi, says manyusers believe (or pretend to themselves)that it is a medication, a myth reinforced bysome producers, who market the drug inblister packs. “This pseudo-medical ve-neer protects the user from feeling they areinvolved in an activity that is haram (for-bidden by the Koran),” he says. 7

Drugs in the Middle East

Captured by Captagon

ROME

A newdrug ofchoice, forbidden ornot

Not the real thing

July 22nd 2017

S P E C I A L R E P O R T

I N D I A A N D PA K I S TA N

Hissing cousins

The Economist July 22nd 2017 3

INDIA AND PAKIS TANSPECIAL REPOR T

A list of sources is atEconomist.com/specialreports

CONTENT S

5 History of the conflictPost-partum depression

6 KashmirVale of darkness

7 IndiaThe elephant in its labyrinth

8 PakistanThe pushmi-pullyu

10 ChinaOne Lifebelt, One Road

11 Prospects for peaceDon’t hold your breath

1

EVERY AFTERNOON AT sunset, at a point midway along the arrow-straight road between Amritsar and Lahore, rival squads of splendidlyuniformed soldiers strut and stomp a 17th-century British military drillknown as Beating Retreat (pictured). Barked commands, fierce glares andpreposterously high kicks all signal violent intent. But then, lovingly andin unison, the enemies lower their national flags. Opposing guardsmencurtly shake hands, and the border gates roll shut for the night.

As India and Pakistan celebrate their twin 70th birthday this Au-gust, the frontier post ofWagah reflects the profound dysfunction in theirrelations. On its side Pakistan has built a multi-tiered amphitheatre forthe boisterous crowds that come to watch the show. The Indians, no less

rowdy, have gone one better witha half-stadium for 15,000. But thenumber of travellers who actuallycross the border here rarely ex-ceeds a few hundred a week.

Wagah’s silly hats andwalks serve a serious function.The cuckoo-clock regularity ofthe show; the choreographedcomplicity between the twosides; and the fact that the sol-diers and crowds look, act andtalk very much the same—all thishas the reassuring feel of a sport-ing rivalry between teams. Nomatter how bad things get be-tween us, the ritual seems to say,we know it is just a game. Alas,the game between India andPakistan hasoften turned serious.

After the exhaustion of thesecond world war Britain wasfaced with two claimants to itsrestless Indian empire, a hugemasala of ethnic, linguistic and

religious groups (half of which was administered directly and half as“princely states” under565 hereditary rulers subject to the British crown).Just about everyone wanted independence. But whereas the CongressParty ofMahatma Gandhi envisioned a unified federal state, the MuslimLeague of Muhammad Ali Jinnah argued that the subcontinent’s 30%Muslim minority constituted a separate nation that risked oppressionunder a Hindu majority. Communal riots prompted Britain’s last viceroy,Lord Mountbatten, to make a hasty decision. He split the country intwo—or rather three, since the new state ofPakistan came in two parts, di-vided by the 2,000km (1,240-mile) expanse of the new state of India.

When the two new states were proclaimed in mid-August 1947, itwas hoped the partition would be orderly. Lines had been drawn onmaps, and detailed lists of personnel and assets, down to the instru-ments in army bands, had been assigned to each side. But the plans im-mediately went awry in a vast, messy and violent exchange of popula-tions that left at least1m dead and 15m uprooted from their homes.

Within months a more formal war had erupted. It ended by tearingthe former princely state of Kashmir in two, making its 750km-long por-tion of the border a perpetual subject of dispute. Twice more, in 1965 and

Hissing cousins

Three score and ten years after their acrimonious split, India andPakistan remain at daggers drawn. Max Rodenbeck asks if they canever make up

ACKNOWLEDGMENT SMany people helped in the prep-aration of this report. Apart fromthose mentioned in the text, theauthor would particularly like tothank Mallika Ahluwalia, AttiqAhmed, Razi Ahmed, Aitzaz Ahsan,Cyril Almeida, Yacoob Khan Bangash,Mirza Ashraf Beg, Bim Bissell, NaritaFarhan, Shehryar Fazli, AbbasHassan, Khurram Husain, JugnuMohsin, Ahmed and Angeles Rashid,Najam Sethi, Fatma Shah, Malvikaand Tejbir Singh, Mir Mohammad AliTalpur, Khawaja Maaz Tariq, Zia UrRehman, Milan Vaishnav and OmarWaraich.

Missing map? Sadly, India censors maps that show the current effective border, insisting instead that only its full territorial claims be shown.It is more intolerant on this issue than either China or Pakistan. Indian readers will therefore probably be deprived of the maps on the second and fourth pages of this special report. Unlike their government, we think our Indian readers can face political reality. Those who want to see an accurate depiction of the various territorial claims can do so using our interactive map atEconomist.com/asianborders

4 The Economist July 22nd 2017

SPECIAL REPOR TINDIA AND PAKIS TAN

2

1

1971, India and Pakistan fought full-blown if mercifully briefwars. The second of those, with India supporting a guerrilla in-surgency in the Bengali-speakingextremity ofEast Pakistan, gaverise to yet another proud new country, Bangladesh; but not be-fore at leasthalfa million civilianshad died asWest Pakistan bru-tally tried to put down the revolt.

Even periods of relative peace have not been especiallypeaceful. In the 1990s Pakistan backed a guerrilla insurgency inIndian Kashmir in which at least40,000 people lost their lives. In1999 Pakistani troops captured some mountain peaks in the Kar-gil region, which India clawed back in high-altitude battles. Aceasefire in Kashmir that has held since 2003 has not stoppedPakistan-sponsored groupsfrom strikingrepeatedly inside India.Pakistan claims that India, too, has covertly sponsored subver-sive groups.

Analysts discern a pattern in this mutual harassment:whenever politicians on both sides inch towards peace, some-thing nasty seems to happen. Typically, these cycles start with anattackon Indian soldiers in Kashmirby infiltrators from Pakistan,triggering Indian artillery strikes, which prod the Pakistanis to re-spond in kind. After a few weeks things will calm down.

Just such a cycle started in late 2015, prompted, perhaps, bya surprise visit to the home of the Pakistani prime minister, Na-waz Sharif, by his Indian counterpart, Narendra Modi. Hopesraised by this overture dimmed within days when jihadist infil-trators attacked an Indian airbase. Another suicide squad struckan Indian army camp near the border, killing 19 soldiers. Facedwith public outrage, Mr Modi ordered a far harder response thanusual, sending commando teams into Pakistan. In the past, Indiahad keptquiet even when ithitback, leavingroom forPakistan toclimb down. This time Mr Modi’s government moved to isolatePakistan diplomatically, rebuffed behind-the-scenes efforts tocalm tensions and sent unprovoked blasts offire across the Kash-mir border.

India’s loss of patience is under-standable. It has a population six timesPakistan’s and an economy eight times asbig, yet it finds itself being provoked farmore often than it does the provoking.When Mr Modi’s Hindu-nationalist Bha-ratiya Janata Party (BJP) came to power in2014, it promised to put muscle into In-dia’s traditionally limp foreign policy. “In-dia for the first time is being proactive, notjust responding,” says Sushant Singh, amilitary historian and journalist. “This isa huge shift.”

Yet Mr Modi’s pugnacity raises therisk of a dangerous escalation. “After aroutine operation, the adversary may ormay not escalate; aftera publicised opera-tion he will have only one option: to esca-late,” writes Pratap Bhanu Mehta, one ofIndia’s more thoughtful intellectuals.

Whether India and Pakistan arereckless enough to come to serious blowswould not matter so much if they simplyfielded conventional armies. But they areequipped with more than 100 nuclearwarheads apiece, along with the missilesto deliver them. Since both countries re-vealed their nuclear hands in the 1990s,optimists who thought that a “balance ofterror” would encourage them to be moremoderate have been proved only partial-

ly right. Indians complain of being blackmailed: Pakistan knowsthat the risk of nuclear escalation stops its neighbours from re-spondingmore robustly to itsprovocations. Worryingly, Pakistanalso rejects the nuclear doctrine of no first use. Instead, it hasmoved to deploy less powerful nuclear warheads as battlefieldweapons, despite the risk that fallout from their use might harmits own civilians.

India does espouse a no-first-use nuclear doctrine, but itsmilitary planning is said to include a scenario of a massive con-ventional blitzkrieg aimed at seizing chunks of enemy territoryand crushing Pakistan’s offensive capacity before it can respond.India’s arsenal includes the hypersonic Brahmos III, the world’sfastest cruise missile, which can precisely deliver a 300kg pay-load to any target in Pakistan. An air-launched version couldreach Islamabad in two minutes, and Lahore in less than one.And in a grim calculation, India, with four times Pakistan’s terri-

A F G H A N I S T A N

P A K I S T A N

I N D I AM Y A N M A R

BANGLADESH

BHUTAN

C H I N A

SRI LANKA

IslamabadRawalpindi

GwadarKarachi

Quetta Multan

Lahore

Abbottabad Srinagar

Vishakhapatnam

Ahmednagar

Hyderabad

NewDelhi

Dhaka

Bangalore

Coimbatore

Varanasi

Chennai

Mumbai

Mysore

BhopalKolkata

Surat

Gilgit

Amritsar

Pune

LucknowJaipur

Ahmedabad IndoreNagpur

Patna

JHARKHANDCH

HAT

T ISG

ARH

BALOCHISTAN UT TARPRADESH

T I B E T

X I N J I A N G

Q I N G H A I

SINDH

PUNJAB

KERALA

BIHAR

JAMMU &KASHMIR(administered by India)

KASHMIR (administered by Pakistan)

RAJASTHAN

GUJARAT

PUNJAB

TAMILNADU

N E P A L

A r a b i a nS e a

B a y o fB e n g a l

500 km

INDIA

EASTPAKISTAN

BURMASIKKIMWEST

PAKISTAN

KASHMIR

British IndiaAt partition, 1947

GDP, % change on a year earlier

15

10

5

0

5

10

15

+

–

1961 70 80 90 2000 10 16

India

Pakistan

Bangladesh

*Forecast †Per day, 2011 internationalprices at purchasing-power parity

Compare and contrast

Sources: IMF; World Bank

Population living on less than $1.90†

As % of total populationGDP, % increase on a year earlier

IndiaPakistan Bangladesh

0

2

4

6

8

10

2000 05 10 15 17*0

10

20

30

40

1995 2000 05 10 13

The Economist July 22nd 2017 5

2

1

tory, sees itselfas better able to absorb a nuclear strike. Alarmists will probably be proved wrong. Both countries

are prone to sabre-rattling theatrics, but they are well aware thatthe price of full-blown war would be appalling. And despite theuncertainties generated by the rise ofChina, the continuing trou-bles in Afghanistan and the incalculability of Donald Trump’sAmerica, the international community still seems likely to beable to pull Pakistan and India apart ifneed be.

As this special report will argue, though, both Pakistan andIndia should more openly acknowledge the costs, to themselvesand to the wider region, of their seven decades of bitter separa-tion. These include not only what they have had to spend, inlives and treasure, on waging war and maintaining militaryreadinessovergenerations, but the immense opportunity costofforgoing fruitful exchanges between parts of the same subconti-nental space that in the past have always been open to each oth-er. Trade between the two rivals adds up to barely $2.5bn a year.

Perpetual enmity has also distorted internal politics, espe-cially in Pakistan, where overweening generals have repeatedlysabotaged democracy in the name of national security. Pakistanhas suffered culturally, too; barred from its natural subcontinen-tal hinterland, it has opened instead to the Arab world, and to theinfluence of less syncretic and tolerant forms of Islam. For India,enmity with Pakistan has fostered a tilt away from secular valuestowards a more strident identity politics.

Reflexive fear of India prompts Pakistan’s generals to med-dle in Afghanistan, which they see as a strategic backyard whereno foreign powercan be allowed to linger. In turn, India, becauseof the constant aggravation from Pakistan, has become bad-tem-pered with its smaller neighbours. Small wonder that intra-re-gional trade makes up barely 5% of the subcontinent’s overalltrade, compared with more than a quarter in South-East Asia.And it is no surprise that Pakistan has opened its arms to China,which is offering finance, trade and superpower patronage.

This special report will seek to unravel the causes of this ir-rational enmity, and to explore the contrasting internal dynam-ics in both countries that sustain it. It will examine new factors inthis complex geopolitical board game, such as the rise of China.And it will consider what might be done to nudge the two rivalsaway from the vicious circle that binds them. 7

YOUNGER INDIANS AND Pakistanis tend to assume theircountries were born enemies. Only the old recall that until

their teenage years they were quite friendly. Ties ofkinship werestrong. India and Pakistan had inherited the same laws and insti-tutions, and both were poor, multilingual and multi-ethnic.Their elites shared similar aspirations and spoke the same lan-guage, English, in addition to others that spanned the border,such as Urdu and Punjabi.

Pakistan’s gaunt, chain-smoking founding father, Muham-mad Ali Jinnah, insisted that Muslims constitute a separate na-tion, but envisioned a secular state. He was no Sunni majoritar-ian. The Jinnah family were Ismailis, a subsect of Islam’s smallerShia branch. His foreign minister was an Ahmadi, another small

sect that some Muslims regard as heretical. His law minister wasa Hindu, and both his second wife and his personal doctor wereZoroastrians. Jinnah owned a luxurious mansion in Bombay,where he spent most ofhis youth and career.

In the 1950s India and Pakistan amicably settled the trickyproblem of properties abandoned by millions of refugees. In1960 they signed a complex deal to share the waters of the Indusriver, Pakistan’s lifeline; it has stuck ever since. Pakistan’s nation-al cricket team toured India in 1952 and 1960-61; the Indian onewent to Pakistan in 1954-55. Until 1965 citizens of either countrywho wanted to visit the other could get visas on arrival.

There are many reasons why the ungainly twins driftedapart. In the initial division of spoils, India got more of the mon-ey. It also got land that Pakistan laid claim to. The big, rich prince-ly state of Hyderabad and the tiny one of Junagadh had Muslimrulers but mostly Hindu subjects, and they were a longway fromthe rest ofPakistan, so India annexed them. Jammu and Kashmirpresented the opposite problem: a Hindu rulerwith mostly Mus-lim subjects. In late 1947 Pakistan sent guerrilla fighters to stir aMuslim uprising. The Maharaja invited Indian troops who eject-ed the intruders. The territory has been a bone of contentionever since (see box, next page).

As the two countries matured, their political systems di-verged. “They got the generals, we got the bureaucrats,” is howIndian wits put it. With a single brief interruption, India has sus-tained a noisy, wobbly and messy democracy. Its elected leaders,backed up by a powerful civil service and buffered by the sheersize and diversity of the country, have kept the army in check.Not so Pakistan.

The British Raj recruited hardest among the supposedly“martial races” of northern India, and deployed soldiers mostheavily on the troubled Afghan frontier. So Pakistan, with a fifthof India’s population at partition, inherited 30% of the Indianarmy, 40% ofthe navy and 20% ofthe air force. Military spendingate up three-quarters of Pakistan’s first budget in 1948, notes Hu-sain Haqqani, a Pakistani diplomat and author. The share hasdropped, but Pakistan still has an oversized, pampered army.

Split in two, with the bulk of India in the middle, in the1950s the country felt vulnerable. It was not surprising that Paki-

History of the conflict

Post-partumdepression

Unhappy together, unhappy apart

Unquiet Jammu

6 The Economist July 22nd 2017

SPECIAL REPOR TINDIA AND PAKIS TAN

2 stan should fall into the cold-war embrace of America, whichshowered it with surplus weaponry from the Korean war. Butthe bonanza made the generals overconfident. In 1958 they top-pled the civilian government. They began to dream of gainingfull strategic parity with their much larger neighbour, but theylacked public backingforbigger spendingand indefinite militaryrule. This they achieved by setting up India as a threat to the na-tion. In 1965 Pakistan again sent guerrillas into Kashmir. Indiastruck back across the international border farther south. Aftersome weeks of fighting both countries signed a truce. Pakistangained nothing, but its army had proved that India was indeedan existential danger.

Five years later East Pakistan was growing restless. As asmall guerrilla campaign grew in strength, with covert Indianhelp, Pakistan’s army launched a counter-insurgency so brutaland indiscriminate that it provoked a far bigger uprising. Indiaformally entered the conflict in December 1971. In just 13 days itsarmy, with the Bengali rebels, defeated Pakistan and took 90,000prisoners. Bangladesh had won its independence.

The Bangladesh debacle carried the disgraced Pakistani

army out of power, but only until the next military coup, in 1977.For his first two years in power General Muhammad Zia ul-Haqremained an international outcast. But when Russia invaded Af-ghanistan at the end of1979, Pakistan gained an avalanche of aidfrom America and its allies, particularly Saudi Arabia.

General Zia tilted Pakistan sharply away from Jinnah’sdreamy secularism. Yet in many ways his embrace of conserva-tive Sunni orthodoxy reflected tensions inherent in Pakistan’s“Islamic” identity. Even before he imposed a panoply of shariapunishments, Pakistan was renamed as an Islamic Republic in1956, the Ahmadi minority was officially branded as non-Mus-lims in 1974, and alcohol was banned in 1977.

General Zia died in a mysterious plane crash in 1988, theyear the Soviet Union withdrew from Afghanistan. But althoughPakistan nominally returned to civilian rule, there was no realoversight over the sprawling military establishment. The army’sinfluence and the tentacles of the intelligence apparatus reachedinto the press, the courts, universities and private business. Bol-stered by continued American support, the Pakistani army hasbeen free to indulge its obsession with India ever since. 7

LOUIS JOXE, THE French statesman whosigned the peace agreement ending Algeria’sbloody war of independence, later reflectedthat it was the magnificence of the country’slandscape that intoxicated France. “It wentto our heads,” he said. Kashmir has a similareffect. Juxtaposed with the torrid flatness ofthe vast north Indian plain, its cool greenhighlands exert a magical pull. “We aretwisted and coated in this beastly beauty,”laments Aijaz Hussain, a grizzled journalist inSrinagar. “In a way it holds us hostage.”

History has not been kind to Kashmir.In 1846, after the British had defeated theSikh empire that then ruled the Indian north,a vast chunk of it was sold to the Dogra familyfor 7.5m rupees. So was born the princelystate of Jammu and Kashmir. One of themany odd satrapies under the British Raj, itsrulers were Hindu but their subjects mostlyMuslim, particularly in the Vale of Kashmir.This was the jewel in the turban: a rich,well-watered upland plateau the size of alarge English county whose people spoketheir own language, Koshur.

At partition a century later, both newcountries staked a claim to the state. Itsmaharaja dithered, toying with indepen-dence. Pakistan pre-empted him by sendingarmed “volunteers” to foment an uprising,for surely his Muslim subjects longed to jointheir new motherland. In lowland Jammusome Muslim-majority areas joined Pakistan,and tens of thousands of Muslims fled there.But the Vale did not rise up, even when themaharaja signed away his inheritance,

inviting India to oust the invaders. The brief war that followed left Paki-

stan with a slice of Jammu and a sliver ofKashmir, along with Gilgit-Baltistan, a vasttract of spectacular mountains. India keptthe mostly Hindu rest of Jammu, the Valeitself and the desert-like fastness of Ladakh.The UN suggested they both pull back theirtroops and hold a plebiscite. When Pakistanbalked at withdrawing, India used this as anexcuse to avoid a vote. And so things havestood, uncomfortably and with intermittentviolence, until now.

While India and Pakistan spar, it is theKashmiris who suffer. Some more than oth-ers: Jammu and Ladakh are loyally Indian,and in truth the Kashmiris of Pakistan havefew links left with their cousins across the

Vale of darkness

Kashmir is trapped in a tragic cycle

border. The trouble lies with the 7m inhabit-ants of the Vale, who have chafed at India’smix of democratic carrot and military stick.“They treat us like a servant in a Brahminkitchen, who has to be scolded twice a day tobe kept in line,” says Mr Hussain.

Yet Pakistan is no better. Repeatingtheir folly and expecting a different outcome,the generals have kept sending waves ofarmed “volunteers”. India, forced to main-tain a huge garrison on permanent alert,hunts the intruders as terrorists, tramplingon ordinary Kashmiris as it does so.

Public opinion on both sides remains ina state of agitation. Pakistanis see the Valeas a stolen inheritance, and pity the poorKashmiris who, in fact, enjoy greater free-doms than they do. India—particularly nowunder the Hindu-nationalist BJP—resents itsbeautiful “crown” being inhabited by traitorsand ingrates, as it sees them. Since themid-1980s political turmoil has killed at least44,000 in the Vale, and sadly forced the flightof its ancient 150,000-strong Hindu minor-ity. The violence peaked in the early 2000s,and eventually fell to a tenth of that level,but in a renewed bout since last year morethan 400 people have died. “Whether byintent or de facto, there has repeatedly beencollusion between India and Pakistan overKashmir, mainly to deny a voice to the Kash-miris themselves,” says Siddiq Wahid, aKashmiri historian. As for the Vale, the fewcredible polls suggest its people want neitherIndia nor Pakistan but simply freedom,whatever that may mean.

P A K I S T A N

I N D I A

Delhi

Area heldby China,

claimedby India

Disputedborder

Area ceded byPakistan to China,claimed by India

C H I N A

JAMMU &KASHMIR

(administered by India)

K A S H M I R (administered by

Pakistan)

Islamabad

Kabul

TAJIKISTAN

NEPAL

Peshawar

AFGHAN-ISTAN

Lahore Amritsar

Kashmir Valley

P U N J A B

LadakhJammu

Srinagar

Gilgit

Line of control

250 km

The Economist July 22nd 2017 7

INDIA AND PAKIS TAN

1

SPECIAL REPOR T

“WE USED TO make fun of Indians,” recalls Deepak Per-wani with a wistful grin. “They had no concept ofa deodor-

ant; they wore polyester!” Fashionably stubbled and sporting acrisp white shirt and jeans, the Pakistani designer gestures to-wards the racks of sumptuous dresses in his Karachi showroomto make his point. Then he frowns. “We had big cars and Cokeand Pepsi when they just had Limca and Thums Up; but Indiawas self-reliant, and in the end they were right.”

Mr Perwani is proud of his country, even if it has oftentreated people of his Hindu faith badly. But like many Pakistanishe is keenly aware that the dowdy, ambling giant next door nowmoves at a far brisker pace. For the first half of their 70-year sib-ling rivalry it was Pakistan that made the bigger strides. Perhapsbecause ithad less in the wayofindustryor infrastructure to startwith, itwasmore energetic in buildingthem up. But in all but twoof the past 25 years India’s GDP has grown faster; a decade ago itsurpassed Pakistan’s on a per-head basis, and the gap has relent-lessly widened.

Indians are justly pleased with their progress, though theytend not to compare themselves with Pakistan but instead, aspir-ationally, with China. Yet most economists would contest MrPerwani’s judgment. India’s post-independence self-reliancemodel may have brought pride but not prosperity. That began toarrive only when the old model, the “Licence Raj” of state plan-ning and a closed economy, tipped India into financial crisis inthe late 1980s. Since then successive governments have chipped

away layers of rules that had“protected”, but also stifled, In-dia’s economy.

There is no doubting In-dia’s dynamism today. For ex-ample, in the early 1990s itmade fewer than 2m motor-bikes a year. Now it is theworld’s biggest producer, mak-ing 20m new two-wheelers ayear, 18m for domestic con-sumption and 2m for export.Domestic air traffic has dou-bled in the past decade. In 2016the numberofpassengers grewby 23%, prompting Indian air-lines to order more than 1,000new aircraft. India’s softwareand services exports have near-ly quadrupled over the past ten years, to $117bn a year. And inFebruary ISRO, the national space agency, lifted a record 104 sat-ellites into orbit in a single launch, using an Indian-made rocket.

In May 2014 the BJP won a landslide election victory withpromises of a smaller, cleaner and more effective state. The newgovernment trumpeted programmes to supercharge foreign in-vestment, support industry and deliver better services. Cor-porate India lapped it up. In a country inured to the conventionthat India’s economy “grows at night while the governmentsleeps”, in the words of the writer Gurcharan Das, a strong, ac-tive, right-wing government seemed just what was needed.

But where’s the beef?Three years later Mr Modi remains electorally invincible.

The political opposition has been scattered to India’s provincesas the BJP’s electoral juggernaut has rumbled from victory to vic-tory in the populous centre. The government remains relentlessin its self-promotion. In terms of economic performance, how-ever, it looks as patchy as its predecessors. At the higher levelsthere is less corruption, critics concede, and some long-awaitedlaws have finally passed. But there have been few big, boldmoves for reform, such as privatising the state-owned institu-tions that control 70% of banking (and have piled up colossalportfoliosofrotten loans). Amuch-touted goodsand services tax(GST) rolled out this month usefully replaces a welter of centraland state duties with a unified national tax, and should raise ex-tra revenue. But the government’s mandarins went for an over-complicated structure that will tax, for instance, different sweetsand snacks at different rates: 5% for rosogolla and gulab jamun,12% for both plain and stuffed kachori, 18% for sweets containingsaffron or having a silver coating, and 28% for anything choco-late-covered. Australia, with a far more orderly economy, im-poses a flat10% GST.

When Mr Modi’s government has been bold, it has oftencharged in the wrong direction. Even government supportersnow admit that its snap decision, in November 2016, to attack“black money” by scrapping the 86% of currency held in higher-value notes was a costly flop. A promise to waive farmers’ debtshelped the BJP to an electoral victory in India’s most populousstate, Uttar Pradesh, in March. But this generosity has inevitablyencouraged farmers everywhere to demand the same, which bysome estimates could cost some $40bn.

In yet another sudden decision, Mr Modi’s government inMay decreed what amounted to a ban on livestockmarkets. Thiswas explained as a humane intervention to prevent cruelty toanimals, but was widely seen as a sop to the BJP’s conservative

India

The elephant in itslabyrinthIndia is becoming more nationalist and moreauthoritarian

Vrooming

Sources: Society of Indian AutomobileManufacturers; Pakistan AutomotiveManufacturers Association

Domesticsales, m

0

3

6

9

12

15

18

2008 10 12 14 16 17

IndiaCars

Pakistan

Motorbikes

Modi in victory mode

8 The Economist July 22nd 2017

SPECIAL REPOR TINDIA AND PAKIS TAN

2

1

north Indian Hindu base, which abhors the slaughter of cows.This cast a shadow over India’s largely Muslim-run and highlysuccessful $4bn buffalo-meat-export business. And the govern-ment did not seem to have considered the impact on the 2.5mpeople working in related trades, from leather shoes to cricketballs. (However, in mid-July India’s supreme court ordered athree-month stay on the market ban.)

All this has accelerated a slide in domestic investment, es-pecially in manufacturing. This does not mean that India’s econ-omyis in serious trouble; its scale and diversity, its human capitaland its momentum all point to stronger growth in the mediumterm. What worries India’s chattering classes more is Mr Modi’sapparent inclination, in advance of the next national election in2019, to pander to his party’s nationalist, conservative Hindubase rather than to India’s merchant classes. “He has lost interestin reform,” laments a Delhi businessman who voted for the BJPin 2014. “His constituency is too broad, and he’s decided thatpopulism is what wins votes.”

Sectarian and caste tensions have risen, for which the BJPbears considerable responsibility. In election campaigns, andparticularly in its successful pitch to Uttar Pradesh’s 220m peo-ple, the party has harped on its predecessors’ supposed “ap-peasement” of minority groups. In fact, India’s 14% Muslim mi-nority is, by most measures, little better off than the 17% who aredalits (the lowest caste, formerly known as untouchables). Butthat does not seem to matter. Indian Muslims feel they are beingpenalised for having dominated India in the past.

After his party’s election victory in Uttar Pradesh, Mr Modiappointed as its chief minister a saffron-robed priest, Yogi Adit-yanath, who sponsors a right-wing Hindu youth movement.State police now harass non-vegetarian restaurants and Muslimswho have allegedly seduced Hindu girls, but pay scant heed toincidents such as an attack in May by upper-caste Thakurs onlow-caste dalits that left one person dead and dozens of housestorched. Elsewhere in India, cow “protection” vigilantes have re-peatedly attacked Muslims suspected of slaughtering cattle, of-ten with fatal consequences. The response from BJP-run stategovernments has been muted at best.

Mr Modi’s government has pursued a Hindu-nationalistagenda in other ways, too. Religious conservatives have quietlydisplaced India’s old, privileged secular elite at the helm of uni-versities and other state institutions. The BJP has so far made lessheadway with plans to reform the judiciary, which remainswary ofexecutive influence, but it has had some success with thepress, much of which is owned by big business conglomerateskeen to toe the government’s line. Indian television, in particular,has been infected by a style of hyperbolic ranting that makessome debate programmes hard to watch. Media that remain crit-ical of the government have faced problems ranging from with-drawal ofgovernment advertising to spurious tax raids, lawsuitson the basis ofantiquated rules and harassment on social mediaby legions ofpro-government trolls.

India’s press remains diverse, exuberant and healthily in-quisitive, but journalists now fear being branded “anti-national”for suggesting such things as less harsh means of calming Kash-mir, or a more accommodating policy towards China. The sensethat space for public discussion is closing up is so strong that doz-ens of retired officials from the elite Indian Administrative Ser-vice issued a public letter in June warningagainst “risingauthori-tarianism and majoritarianism that does not allow for reasoneddebate, discussion and dissent”.

Other Indians have a simpler way of voicing their worries.“It’s ironic,” sighs a Delhi dinner hostess. “We’ve come all thisway in the world, and have a strong leader and a strong govern-ment, but thiscountry is lookingmore and more like Pakistan.” 7

RAJA UMAR KHATTAB speaks softly and carefully: “Iwould not say Karachi is a safe city, but it is better now than

before.” Seven years ago, the police compound that houses hiswood-panelled office, with its photos of three different Pakistanipresidents decorating him for courage in the line of duty, was hitby a truck bomb that left a 12-metre-wide blast crater and 20dead. The diagonal scaron MrKhattab’sneckisanotherstory; as-sassins had planted a bomb near his house. Such are the hazardsof heading the elite counter-terror force in a steamy metropolisof20m with a reputation as the most dangerous city in Asia.

Ordinary crime is not so bad in Karachi. The trouble is anexplosive ethnic and sectarian mix, spiked with every flavour ofradical Islam, primed by repeated waves of rural refugees, andinflamed by law-enforcement tactics such as the “encounter”, adisturbingly common event where the official report says thevictim died in an exchange of fire, but oddly enough his handsare tied and no police suffered a scratch. In each oftwo bigwavesof bloodletting, in the early 1990s and again from 2007 to 2013,perhaps10,000 people were murdered in the city. The worst epi-sodes involved not terrorists but rival parties vying for control oflocal government.

Things are improving. Mr Khattab notes that there havebeen no bombings in Karachi since his team busted a terroristbomb factory last year. Politically motivated deaths have fallensteeply, from 2,029 in 2014 to 474 in 2016 and a mere 89 in the firstquarter of 2017. One reason is the deployment since 2013 of theRangers, a tough paramilitary force that has used overwhelmingfirepower, plus encounters, to arouse fear. “They don’t have fam-ilies here like we do,” explains Mr Khattab.

Karachi does feel relaxed, if slightly battered. Shops stay

Pakistan

The pushmi-pullyu

Politicians pull in one direction, the army in the other

The Economist July 22nd 2017 9

INDIA AND PAKIS TAN

2

1

SPECIAL REPOR T

open late, and on its bustling streets women mingle more com-fortably with men than in strait-laced Lahore, Pakistan’s inlandmetropolis 1,000km to the north. For those who live in the portcity’s expansive seaside suburbs, there are further compensa-tions: big houses with poolside bars, bevies of servants and, be-hind high walls and security guards, night spots as fancy as anyin Dubai or Mumbai.

Pakistan has far fewer billionaires than India does, but feu-dal habits are more ingrained. Miftah Ismail, chairman of theBoard of Investment, reckons that the country, with a workforceof65m, has around 10m domestic servants. “People talkabout Is-lam and forget about class motivation,” says Aatish Taseer, aNew York-based writer who is half Indian, halfPakistani. “You’dthink they would have done away with caste since everyone’sMuslim, but it lurks everywhere just below the surface.”

One caste that does nicely is the army. Officially, Pakistan’sannual defence spending runs to a modest $8bn, or 2.6% of GDP,but that does not include officers’ generous pensions, which ac-cording to SIPRI, a Swedish think-tank, push the total closer to4%. Further spending may be hidden in Pakistan’s unusuallylarge budget allocations for contingent liabilities. A range of in-dustries owned by the armed forces, as well as ofarmy-operatedtrusts such as the Fauji Foundation, a holding group with de-clared assets of$3.3bn in 2015, also fall outside the budget.

The army is Pakistan’s biggest property developer, too. ItsDefence Housing Authorities own large tracts of prime land inevery city, including 35 square kilometres along Karachi’s water-front and a chunkofLahore’s exclusive eastern suburbs amount-ing to a quarter of the city’s area, complete with golf clubs, shop-ping malls and business parks. “They treat us very well here, yousee,” says a former general, explaining why he retired to Lahorerather than join some ofhis family in England.

Such privilege also explains the army’s interest in sustain-ing the sense of threat, and in keeping Pakistan’s politicians incheck. There are manywaysofdoingthis. Political parties—manyof which are said to have been incubated by the army for thispurpose—tend to pander to the army. The police and courts keepa respectful distance. And the army’s media wing exerts a pow-erful influence on the press. Whereas some private television

channels are seen as eager mouthpieces, others face pressuresthat range from reprimands on the phone to threats and unfortu-nate incidents.

Given the opacity and unaccountability of the “deep state,”it is not surprising that many Pakistanis see its hand behind theproliferation of extremist religious groups. In response to terro-rist attacks such as one on a boys’ school in Peshawar in 2014 thatleft 141 dead, the army has increasingly taken the offensiveagainst groups that challenge the state. But other, equally radicaloutfits that direct violence at foreign enemies or at perceived do-mestic troublemakers continue to evade punishment. In private,journalists and politicians worry that harsh laws making blas-phemypunishable bydeath, which have inspired more than onemurderous vigilante attack, are being left in place to discouragedissent in general.

Crack of DawnIn the face ofsuch constraints, Pakistan’spublic life remains

remarkably vibrant. Indian journalists expressed grudging ad-miration last year when Dawn, a Pakistani English-languagedaily, published embarrassing details of a closed meeting be-tween top military and civilian leaders. The politicians werequoted as warning the generals that Pakistan risked diplomaticisolation if the army did not rein in specific extremist groups.

An equally telling exchange came in April this year whenNawaz Sharif, the prime minister, fired a top adviser in an appar-ent gesture to placate the army over what had become known asthe Dawn leaks. The general in charge of the army’s public rela-tions riposted with a curt tweet saying thiswasnotgood enough.Much of Pakistan’s press angrily declared that the army shouldanswer to elected leaders, not the other way around. A week lat-er the general withdrew his tweet.

Still, in the test of wills between civilians and the armedforces, it is the generals who retain the upper hand. The army hasnot taken action against the militants named in the Dawn leaksbut has come up with a counter-narrative, suggesting the breachproves that civilians cannot be trusted with state secrets. Mr Sha-rif, for his part, remains vulnerable. He faces ongoing investiga-tions into evidence, leaked in the Panama papers that exposeddetails of thousands of offshore bank accounts, that his familybought luxury properties in London.

Mr Sharif’s centre-right party is still widely expected tohold on to power in elections due next year. It has a virtualstranglehold on the Punjab, home to nearly half the country’spopulation. The rival centre-left Pakistan Peoples Party remainsstrong in the second-most-populous province, Sindh, but hasbeen tarnished by corruption charges. A relative upstart, thePakistan Tehreek-e-Insaf or PTI, led by Imran Khan, does well inKhyber-Pakhtunkhwa, a largely Pashto-speaking province. Butdespite Mr Khan’s cricket-star appeal and his anti-corruptionplatform, his party has made little headway elsewhere. A dozensmaller parties represent particular ethnic or religious groups.

So after 70 years as a nation Pakistan still lacks a truly na-

Be prepared

Sources: IISS; SIPRI

Military capabilities, 2016Armed forces Pakistan India

Active, m 0.7 1.4Reserves, m na 1.2Paramilitary, m 0.3 1.4

Nuclear warheads 110-130 100-120

Defence budget, $ (% of GDP) 7.5bn (2.6) 51.1bn (2.3)

Karachidoes feelrelaxed, ifslightlybattered.Shops stayopen late,and on itsbustlingstreetswomenminglecomfortablywith men

10 The Economist July 22nd 2017

SPECIAL REPOR TINDIA AND PAKIS TAN

2

1

tional party. Provincial identities remain strong, and years of in-terference by the deep state, including three periods of direct mil-itary rule, have stunted the country’s political evolution.“Democracy isall aboutconflict, so to make itworkyou need me-diating institutions,” says Ayesha Jalal, a historian at Tufts Uni-versity. “This is where Pakistan is truly lacking.” The country re-mains a collection of provinces speaking different languages, intheory united by Islam but in fact held together by the army.

This means that Pakistan is unlikely to change. Its economywill continue to underperform and its society will remain con-servative. The rich will continue to hide behind high walls.“There maybe green shoots, but theyare notgreen enough ornu-merous enough to last,” concludes an experienced Pakistanijournalist. No wonder that many of his countrymen are placinghigh hopes on the great dragon peering down from the north. 7

MOVE OVER, DUBAI. Some day soon, cruise ships will dis-gorge frolicking pensioners not by the palm-fringed Persian

Gulfbut on the balmy Pakistan Riviera. From the muddy delta ofthe Indus to the barren Baloch coast, a twinkling constellation ofattractions is set to rise: luxury hotels, water parks, golf courses,health spas, yacht harbours, night clubs, the works. To top it all,this “vacation product” will be developed in such a way that “Is-lamic culture, historical culture, folk culture and marine cultureshall all be integrated.”

Or so promises a prospectus, drafted for the Chinese gov-ernment by the China Development Bank, that sets out a de-tailed vision of the China-Pakistan Economic Corridor (CPEC).Billed as a flagship of China’s $900bn One Belt, One Road initia-tive to build an Asia-wide infrastructure system tying Chinamore firmly to its markets, CPEC promises to inject some $60bnof Chinese investment into Pakistan. More than half is ear-marked for power generation, but there is plenty left over forroads, seaports, airports, fibre-optic cables, cement factories,agro-industry and tourism.

For a country that has struggled to nudge its capital-invest-ment ratio to 15% of GDP—compared with around 30% for Indiaand 28% for Bangladesh in recent years—this gush of Chinesemoney comes as a godsend. Not only does it promise to energisethe economy and fix such problems as chronic power shortages;it represents a strategic insurance policy against India. China haslong been Pakistan’s chiefarms supplier, and has quietly provid-ed diplomatic cover and technical aid for its nuclear programme.As Chinese officials are fond of saying, China is an “all-weatherfriend”—unlike America, which has lavished some $78bn in eco-nomic and military aid on Pakistan since independence, but per-iodically gets stingy when Islamabad fails to curb terrorists.

Yet when Dawn, a Karachi daily, published excerpts fromthe CPEC plan in May, many Pakistanis were perturbed by whatthey read. Among other things, the plan envisages a big role inPakistan’s agriculture for the Xinjiang Production and Construc-tion Corps (XPCC), an arm ofChina’s defence ministry that sincethe 1950s has spearheaded the settlement of Han Chinese in thewestern border region. It is administratively autonomous, run-

ning whole cities as well as giant farms and industries, and is re-sponsible for about 3m people, organised in army-style units.Military training comes in handy when Xinjiang’s Muslim Turk-ic-speaking Uighur natives grow restless. “There is a hue and cryhere when some town in Switzerland limits the size of minarets,but not a peep when China bans Muslim names, or limits thelength ofbeards in Xinjiang,” notes a Pakistani journalist.

Mega megawattsWith solar power now cheaper than coal and gas, ques-

tions have been raised about China’s gung-ho investment in tra-ditional thermal plants. Two 1,100MW nuclear reactors that Chi-nese engineers are building west of Karachi have raisedenvironmental concerns. The giant seaside complex is just 30kmfrom the centre of one of the world’s biggest and most denselypopulated cities. This particular reactor design has never beenbuilt on such a scale, and the power plants happen to sit atop theMakran Trench, a major faultline prone to severe earthquakes. InNovember1945 a tsunami struck the coast nearby, washing away4,000 people.

Factory owners are already complaining that a free-tradedeal with China signed in 2007 has made their goods uncompet-itive, and now economists fear that Pakistan may be mortgagingits future to Chinese finance. Other recipients of Chinese aid,such as Sri Lanka, have found themselves struggling to servicetheir debts. “Whether those billions come in loans or FDI, theoutflow will start within four or five years of the inflow,” saysKaiser Bengali, a Karachi-based development economist. “It’s ablueprint as clear as can be for colonisation.”

Pakistani officials scoff at such qualms. The documentleaked by Dawn dates from 2015 and has since been revised, saysAhsan Iqbal, the planning minister; and the Karachi nuclearpower station is being built to stringent safety standards. “Thoseclubs and casinos are not happening,” says Miftah Ismail, the in-vestment minister. “And we are not just going to hand over landto the Chinese.”

India views China’s spreading footprints next door withdismay. Officials put on a brave face. The Chinese are naive, saysome, and will end up getting stung by Pakistan’s generals just asthe Americans did. Others hope that once China discovers howfarPakistan’sdeep state is entwined with Islamist radical groups,it will show less patience than the Americans.

Privately, however, Indian officials worry that Pakistan’snew patron may play the same role as America once inadver-tently did, or as Pakistan’s nuclear deterrent still does: to allow

China

One Lifebelt, One Road

A leg-up from Pakistan’s all-weather friend

Land route“One Belt”

China-Pakistan

Sea route“One Road”

MalaccaStrait

I N D I A N O C E A N

SouthChina

Sea

Beijing

Tehran

Mombasa

Kolkata

Mumbai

Karachi

SingaporeColombo

Djibouti

Guangzhou

Chongqing Fuzhou

Xi’an

Urumqi

Kashgar

GwadarDubai

BishkekIstanbul

H

I M A L A Y A S

ArabianSea

SuezCanal

Economic corridors as planned by China

LandChina-Pakistan

Sea

Sources: Reuters; Digital SilkRoad Project; Project Cargo

Network; The Economist 1,500 km

The Economist July 22nd 2017 11

INDIA AND PAKIS TAN

2

1

SPECIAL REPOR T

FOR TWO COUNTRIES so much at odds, India and Paki-stan remain remarkably alike. When their national cricket

teams clashed in June at the Oval, a hallowed ground in London,passions on both sides ran equally high. The star-studded Indianteam was tipped to win, but when Pakistan bowled out India’stop players in short order, millions of Pakistani mobile phonesgloated with snaps of a spectator at the match wearing a T-shirtinscribed “Winner takes Kashmir”. In Kashmir itself, revellers litthe night sky with firecrackers. Outsiders mistake the Kashmiris’tradition of cheering Pakistan as a sign of love; in fact they areteasing the half-million Indian soldiers encamped in the Vale.

Even after 70 years as an independent country, India hasstill not quite gelled into a unified nation, and Kashmir is not theonly chronic hotspot. Insurrections have simmered in India’s re-mote, neglected north-east for decades, and Maoist guerrillas

who started fighting in the1960s still rattle tribal regionsin the eastern states of Jhar-khand and Chhattisgarh.

Pakistan is no better. Itsofficials gleefully condemn In-dia’s abuses in Kashmir. But onone day last winter when Paki-stani newspapers ran big head-lines about a single civiliandeath in the Indian-adminis-tered Vale, a curt army commu-niqué was relegated to smallerprint: “Over100 terrorists havebeen killed since last night.”The deaths were widely seenas revenge for the murder bysuicide-bomb, a day earlier, ofsome 90 worshippers at a Sufi shrine, one of many attacks bySunni extremists. In the past decade Pakistan has suffered about55,000 casualties from terror-related violence, a third of them ci-vilians. Whatever India’s troubles in Kashmir, they pale next tosuch murderousattackson targets rangingfrom Pakistani school-children to Shia Muslims.

Whereas India’s men in uniform face intense scrutiny inKashmir, Pakistan enjoys a far freer hand. In trying to stamp outterrorism along its north-west frontier, its army has demolishedwhole villages. Balochistan, a province of rugged deserts thattakes up 43% of Pakistan’s area, has been in sporadic revolt sinceindependence; one local NGO estimates the number of suspect-ed separatists kidnapped by security forces there from the highhundreds up to 18,000. In 2016 alone,728 people across Pakistansuffered “enforced disappearance”, as counted by the commis-sion of inquiry that investigates them. Some reappear alive andwell, others as roadside corpses. The state flatly denies any un-pleasantness. In a meeting at the Pakistani senate in December, aformer interior minister insisted that the culprits in Balochistanare Indian agents disguised in Pakistani uniform.

On other shortcomings the countries are more evenlymatched. Both have greatly underinvested in education andhealth, for example, forcing even the poorest to resort to privateschools and hospitals. The formal economy generates few jobs;in Pakistan 73% of the non-farm workforce is off the books, in In-dia over 80%. Both countries have made great strides in reducingpoverty but remain starkly unequal, and indeed are becomingmore so. In 2016 just 1% of Indians owned more than 58% of thecountry’s wealth, up from a 37% share in 2000. Earnings areskewed geographically, too: India’s richest states enjoy fourtimes the income per person of its poorest, Bihar. In the smallertowns ofPakistan’s Balochistan over 90% of the population livesin poverty, compared with only10% in Lahore.

On the harder-to-measure index of intolerance, on whichPakistan used to be well ahead, India is beginning to catch up.Since the 1980sPakistan hasseen more than 60 extra-judicial kill-ings of supposed blasphemers. The death in April of MashalKhan, a Pakistani college student brutally lynched by his fellowstudents after being spuriously tagged as a blasphemer, madeglobal headlines. Yet when Farook Hameed, a 31-year-old fatherof two in the Indian city of Coimbatore, was hacked to death bychildhood friends for having repudiated Islam and declaredhimself an atheist, there was little reaction from abroad. Ha-meed’s death was a rare exception; Indian Islam remains rela-tively diverse and tolerant. Yet the government’s failure to curbmurderous cow vigilantes or online trolls who brand dissent astreason, even as it uses state institutions to harass critics, means

Prospects for peace

Don’t hold your breath

To forge a better relationship, both countries need totackle their problems at home

Calming down

Source: SouthAsia TerrorismPortal

*Civilians, securityforces and terrorists

†To July 2nd

Deaths from terror-relatedviolence*, ’000

India

Pakistan

0

2

4

6

8

10

12

2003 10 15 17†

Pakistan to sustain the awkward status quo. “Indian leaders havealways calculated that sooner or later Pakistan would have toseeka normal relationship with us,” says AshokMalikof the Ob-server Research Foundation, a Delhi think-tank. “CPEC givesthem a new narrative: it puts them in China’s sphere.”

Diplomatically, India has taken a tough line on China’s re-gional initiatives. The CPEC road, it claims, runs through disput-ed territory in Pakistan-held Kashmir. India hasalso sharply criti-cised China’s broader, pan-Asian Belt and Road Initiative as aboondoggle that will trap smaller countries in debt.

India and China have had cool but calm relations sincetheir brief border war in 1962. Each country claims territory theother holds. India’s continued hosting of the Dalai Lama, whofled into exile in 1959, riles Beijing. For its part, India objects toChina’s occasional use of its diplomatic clout, bolstered by a per-manent seat on the UN Security Council, to block its ambitions.“Our economy is growing faster and our population is about toovertake theirs,” says an Indian diplomat, “But they still treat uslike some poor, skinny appendage to Asia.”

Even so, the virtually impenetrable barrier of the Himala-yas has generally allowed the rivals to agree to disagree. Bilateraltrade is around $80bn a year, five times as much as China’s tradewith Pakistan; China is India’s leading trade partner.

India is trying to preserve its own sphere of influence inSouth Asia through projects such as building roads and bridgesin Bangladesh, hydroelectric plants in Nepal and ports and rail-ways in Sri Lanka. But it struggles to match the largesse of China,which not only has a GDP five times India’s but also a leadershipthat does not have to answer to voters. Last October Xi Jinping,on the firstvisit to Bangladesh bya Chinese president in 30 years,pledged $24bn in loans, credits and infrastructure projects. Indiaresponded with a generous new aid package of its own.

In its effort to remain a strong, independent player, India istrying to perform a fine balancing act. But Dhruva Jaishankar ofthe Brookings Institution, a think-tank, reckons China may notbe taking much notice: “When they talk about how America hasdeclined and this has become a multipolar world, what they ac-tually mean is, China is the new pole.” 7

nity enjoyed by extremistgroups that terrorise their ownfellow citizens. And Pakistan’spoliticians need a more solidbase of popular consent. Oneway to achieve that would be todivide provinces into more effi-cient and representative units.Karachi, a huge, polyglot tradingcity built up from waves of refu-gees, is an uncomfortable ap-pendage to the rural, backwardSindhi-speaking province ofSindh. Punjab is too dominant.

India, too, could do withsplitting giant states such as Ut-tar Pradesh into more manage-able units. That would meanmore frequent but less distract-ing elections, allowing the rul-ing party at the centre to get onwith runningthe country. Divid-ing Jammu and Kashmir wouldend the pretence that lowlandHindus and highland Muslimsform a cohesive whole, and givethe distinct people of the Vale aclearer voice in their future. Inprivate, many of them say theywould be happiest inside ademocratic, secular India thatacknowledges that they are dif-ferent and treats them with dignity.

If India and Pakistan were more confident in themselves,they would be less worried by the normal human exchanges be-tween countries that underpin peaceful relations. Instead, whentensions have heightened in recent months Pakistan has bannedIndian films, while India has abruptly sent home Pakistanischoolchildren on a goodwill tourand denied visas to Pakistanisseeking medical care. Such pettiness is destructive.

Sadly, reconciliation may becomeeven harder as time goes by. For young In-dians in Kolkata or Bangalore, Pakistan isno longer viewed as a lost cousin but sim-ply as a particularly bothersome distantneighbour. Younger Pakistanis follow thenews from India more closely, but are in-creasingly alienated by their neighbour’srightward, Muslim-bashing drift.

The ruling establishments in bothcountries find that mutual enmity servestheir interests better than friendshipwould. Shifting geopolitics has nothelped. India had hoped that its growingeconomy and stronger ties with Americawould make a more isolated Pakistankeener for reconciliation, but China hasmoved nimbly into the breach, and so farlooks set to entrench the differences be-tween India and Pakistan further.

Seventy years ago the Pakistani poetFaiz Ahmed Faiz lamented the sufferingand unfulfilled promise of partition thus:“This is not the dawn we longed for.”Alas, that dawn has yet to arrive. 7

12 The Economist July 22nd 2017

SPECIAL REPOR TINDIA AND PAKIS TAN

Offer to readers Reprints of this special report are available. A minimum order of five copies is required.Please contact: Jill Kaletha at Foster Printing Tel: +1 866 879 9144 Ext: 168 e-mail: jillk@fosterprinting.com

Corporate offerCorporate orders of 100 copies or more are available. We also offer a customisation service. Please contact us to discuss your requirements.Tel: +44 (0)20 7576 8148e-mail: rights@economist.com

For more information on how to order special reports, reprints or any copyright queries you may have, please contact:

The Rights and Syndication Department20 Cabot SquareLondon E14 4QWTel: +44 (0)20 7576 8148Fax: +44 (0)20 7576 8492e-mail: rights@economist.comwww.economist.com/rights

Future special reports

Previous special reports and a list of forthcoming ones can be found online: economist.com/specialreports

France September 30th The world economy October 7thE-commerce October 28th

2 there is less space for free expression. Communal aggression in India has left Muslims and other

minorities feeling increasingly vulnerable, but it seems to helpwin votes. The shifting electoral tide suggests a gradual transfor-mation of India’s underlying sense of national destiny, from be-ing a pluralist country enriched by diversity to becoming a morenarrowly defined Hindu rashtra, or state, in much the same waythat secular Pakistan became an “Islamic” state. This is verymuch the vision of the Hindu nationalist groups whose zeal un-derpins the BJP’s success; not coincidentally, their intellectualevolution shows striking parallels with Islamist groups such asthe Muslim Brotherhood.

In some ways, the two countries seem to be goading eachother to become more aggressive. “We used to think partitionwas a terrible mistake,” admits a liberal-minded historian in La-hore. “But with Modi in power it looks more and more like Jin-nah had it right all along.” In the same way, ever more Indianshave begun to conflate their enemies: Pakistanis, Kashmiris andMuslims in general, they feel, do not belong in their country.

India and Pakistan are unlikely to resolve their differencesin the foreseeable future. On the contrary, impending elections,in Pakistan next year and in India in 2019, will make thingsworse: there are votes in taking a tough approach to the enemy.This does not mean that reconciliation is impossible, but that itwill need to come through building up trust in a slow, ploddingwayrather than through some sudden diplomaticbreakthrough.And the most obvious way to foster mutual trust is for both sidesto start solving their own problems at home.

Peace begins at homeThatmeans, firstofall, creatingstronger, more confident de-

mocracies. Both countries urgently need to attend to their crum-bling institutions, most importantly their underfunded, unre-formed systems of justice and education. They also need boldelectoral reforms. Political funding in both countries is opaque,and the first-past-the-post system can produce conspicuouslyunfair results.

In Pakistan, elected leaders need to gain fuller control of thelevers of power, and ultimately to put the soldiers back in theirbarracks. It would help, too, if the generals were to end the impu-

WhenIndia’s andPakistan’snationalcricketteamsclashed atLondon’sOval,passions onboth sidesran equallyhigh

The Economist July 22nd 2017 39

For daily analysis and debate on Europe, visit

Economist.com/europe

1

THE encampment has no name, no wa-ter, no electricity and no right to be

where it is: an abandoned bus park in adesolate stretch of scrub, east of the Tibur-tina railway station in Rome. Most of theAfricans dotted across the asphalt in tentsor sprawled on mattresses in the enervat-ing heat of a Roman summer have no per-mission to be there either. Many comestraight off the boat, says Andrea Costa,head of Baobab Experience, the NGO run-ning the camp: “For them, this is just the lat-est stage in a journey that may alreadyhave taken two years.”

So far this year, the number of migrantsarriving in Italy by sea is up by17% over thesame period in 2016, to 93,335. Unlike theSyrians who poured across the Aegean in2015, most of them are fleeing not from waror persecution, but for economic reasons.They do not qualify for humanitarian pro-tection, and in most cases do not want toremain in Italy, but to move on to countrieswith better grey-market jobs.

Under the European Union’s Dublinregulation of 2013, the country where asy-lum-seekers first land is usually the onethat should deal with them. Others are al-lowed to send them back to that state.Many of those in the camp are among theso-called dublinati (“Dublinated ones”),who have tried to leave Italy and been re-turned—many of them intercepted at theFrench frontier where stricter controlswere imposed last year. “We have some

when exceptional numbers are picked upat sea, and for Italy’s EU partners to takemore of those it already hosts. He alsowants international action to stem theflow though Libya.

At Italy’s request, the member states ofthe EU’s border agency, Frontex, met inWarsaw on July 11th to discuss changingthe rules that govern Triton, the agency’ssearch-and-rescue operation in the centralMediterranean. The following day MrGentiloni lobbied the leaders of Franceand Germany at a summit in Trieste. OnJuly 13th the interior minister, Marco Min-niti, flew to Libya to meet the mayors oftowns on the coast and the southern bor-der. Officials in Rome are working on acode of conduct for NGOs helping withsearch and rescue, some of which havebeen accused of entering Libyan waters intheir eagerness to save migrant lives—claims they deny. And on July18th, a juniorforeign minister, Mario Giro, reiterated athreat (disowned by some colleagues) to is-sue emergency visas that would allow mi-grants to travel anywhere in the EU’s pass-port-free Schengen zone.

So far, neither bluster nor entreaty hassucceeded. A review of the Triton treatywas agreed upon, but with no guarantee itwill be altered to Italy’s satisfaction.

One of Italy’s biggest handicaps is afeeling in other capitals that, because of amix of soft-heartedness and negligence, ithas made itselfa “soft touch” for economicmigrants. An action plan issued by theEuropean Commission this month is strik-ingly critical. It urges Italy to extend deten-tion on arrival (currently limited to 72hours), do more to persuade migrants toagree to be sent back to their home coun-tries, speed up asylum procedures and beless generous in offering protection.

For example, this year has brought a cu-rious surge in the number of Bangladeshis

who have been turned back three, fourtimes,” says Mr Costa.

Carlotta Sami ofUNHCR, the UN’s refu-gee agency, estimates that more than170,000 migrants are in Italian receptioncentres or are being housed by local au-thorities. The French blockade is one rea-son for the growing build-up. Others in-clude the increase in arrivals and morerigorous identification, such as taking fin-gerprints, which blocks migrants from ap-plying for asylum in other countries.

As the logjam grows, there have beenprotests in partsofItaly. And with a generalelection due by May, Paolo Gentiloni, theprime minister, cannot ignore the discon-tent. His government wants neighbouringcountries to accept migrant rescue boats

Italy’s migrant surge

Unwelcome choices

ROME

Most Mediterranean migrants noware economic, and Italy does not know what todo with them

EuropeAlso in this section

40 France and its army

40 Russia’s pricey stadiums

41 Populism in Poland

42 Charlemagne: Jitters over Macron

Ebb and flood

Source: IOM

Italy, migrant arrivals by sea, ’000

2014 15 16 170

5

10

15

20

25

30

40 Europe The Economist July 22nd 2017

1

2 arriving in Italy. They formed the biggestgroup after Nigerians. That may be relatedto the fact that in 2016, the last year forwhich figures are available, Italian tribu-nals extended some form of protection to24% of applicants from Bangladesh, a poorcountry but scarcely Syria.

Italy has one of the world’s lowest birthrates, and few countries are in greater needof immigrants. But an influx of undocu-mented migrants, many of whom end upidling in illegal makeshift camps, is no wayto deal with that issue. For Italians, theMediterranean migration crisis representsa humanitarian burden. Geography hassaddled them with the problem, and theirgovernments’ disorganisation has exacer-bated it. Their fellow EU members are noteager to help out. 7

Floating odds

Source: Italian Interior Ministry *To end of June

Italy, asylum applicationsBy country of origin, 2017*’000

0 3 6 9 12 15

Nigeria

Bangladesh

Gambia

Pakistan

Senegal

Ivory Coast

Guinea

Mali

Ghana

Eritrea

Ukraine

Syria

Applicants grantedsome form of protection

2016, % of total

25

24

30

37

25

31

29

44

31

78

56

98

Russia’s pricey stadiums

Extra time and punishment

FROM a boat cruising past the southbankof the Neva in St Petersburg,

passing the baroque facades of the Win-ter Palace and the gilded dome ofStIsaac’s cathedral, it can seem as if the 19thcentury never ended in Russia. But turnto the river’s north side and you will seesomething much more futuristic: Krestov-sky stadium, a Japanese-designed foot-ball arena nicknamed “the spaceship”. InJune and July the newly opened stadiumhosted several matches of the Confeder-ations Cup, a second-tier tournament,meant to serve as a dress rehearsal forRussia’s hosting of the FIFA World Cupnext year (and, unavoidably, won byGermany’s B team). Russians are hopingthe competition itselfworks out betterthan the preparations. Krestovsky stadi-um was completed eight years behindschedule and 540% over budget.

The scandals that have plagued theproject since construction started in 2007have made it a symbol of the corruptionin Vladimir Putin’s Russia. A formervice-governor of the region has beencharged with taking a $351,000 kickbackto award the stadium’s lighting contract.Western newspapers report that thebuilders made extensive use of forcedlabour by North Korean workers.

Meanwhile, the building had to beredesigned. Engineers feared that a com-bination ofheavy snow and high windscould cause the roof to fall in. The pitch

was torn up and replaced after failing aninspection by FIFA, international foot-ball’s governing body. When the groundwas finally finished, some players lovedit: Michael Boxall, a New Zealand defend-er, termed it “top-notch”. Yet certainopinions in football matter more thanother ones. A Portuguese forward calledit “a difficult pitch where the grass wassomewhat too long”; unfortunately forthe Russian groundskeeper, that for-ward’s name was Cristiano Ronaldo.

The problems echo those of the Win-ter Olympics that Russia hosted in 2014 inSochi, the cost ofwhich eventually ex-ceeded 1.5tn roubles ($25bn). In 2015 theregional government ofKrasnodaragreed to spend a further 3bn roubles toconvert its Winter Olympic stadium intoa football venue by removing the roof.The job was finished five months late,and although the stadium will host someWorld Cup matches, no home team hasbeen found to play there afterwards.

Mr Putin is unlikely to lose sleep overhis stadiums’ bloated budgets. He iscertain to be re-elected president nextyear. But in protests organised in June byhis chiefopponent, Aleksei Navalny, tensof thousands ofdemonstrators across thecountry chanted “corruption steals ourfuture”. Mr Putin hopes the World Cupwill distract Russians from corruption.Debacles like Krestovsky stadium mayinstead focus their attention on it.

ST PETERSBURG

Corruption in football-stadium projects has Russian fans crying foul

FOR a president usually eager to get thedrama ofpolitics right, Emmanuel Mac-

ron’s provocation of an open confronta-tion with his armed forces this month wasa notable stumble. On July14th he celebrat-ed Bastille Day, riding in an open-top mili-tary jeep on the Champs-ElyséesalongsidePierre de Villiers, the chief of the armedforces, before reviewing a parade with hisguest of honour, Donald Trump. Five dayslater the furious general quit, saying hecould no longer “guarantee” the means toprotect France and sustain its ambition.

The affair has become Mr Macron’s firstserious leadership test. He is likely to extri-

cate himself, says François Heisbourg, aFrench security analyst, but the spat was“avoidable, at least in terms of theatre”.

The root of the dispute was money.General de Villiers, in office since 2014, wasreappointed for another year on June 30th.He expected the military budget of €33bn($38bn) to be maintained, and was reas-sured by Mr Macron’s campaign talk ofraising it from 1.8% to 2% of GDP by 2025.Then, this month, the government realisedthat its promises both to cut taxes and tolimit the fiscal deficit to 3% of GDP entailedspending cuts this year. After the generalheard his budget would fall by €850m, hetold parliamentarians on July 12th that hewould not allow himself to “get screwed”.

That broke with a military tradition ofkeeping mum on public affairs, whichgives the army its nickname of la grandemuette (“the big mute”). When the generaladded, in a social-media post, that no onedeserves to be followed blindly, it chal-lenged Mr Macron’s assertive image, saysDominique Moïsi of Institut Montaigne, a

think-tank. The president retreated a bit,promising the armed forces an extra €1.5bnfor 2018. But at a gathering of militarychiefs on July 13th he called the general’sbehaviour “undignified” and told the menin uniform: “I am your leader.” It was per-haps inevitable the general would quit, but25,000 people have signed a petition de-manding that Mr Macron apologise.

Mr Macron won’t dream of doing that,but he might ask how the scrap could havebeen avoided. The government could havebeen clearer about its spending plans fromthe start. Now it faces the headache of find-ing the promised additional funds for thearmed forces. This year’s cuts, which delayequipment purchases, look wrong-head-ed: the armed forces lack, for example,fighter planes for training pilots, says Fab-rice Pothier, of the International Institutefor Strategic Studies, a think-tank. But per-sonnel have already been slashed to thebone, leaving little else to cut.

Mr Macron is betting that faster eco-nomic growth will pay for more spending,

France and its army

Stumbling into afightPARIS

Emmanuel Macron faces an earlyleadership test as his army chiefquits

The Economist July 22nd 2017 Europe 41

2 eventually. He certainly remains ambi-tious abroad: his affable talk with MrTrump ofFranco-American military co-op-eration in the Middle East reflected his goalthatFrance should be Europe’s leadingmil-itary power. He has also made clear thatFrance will preserve its “full spectrum” ofarmed services, meaning it can deploysubmarines, fighter aircraft and nuclearweapons, and can intervene with soldiersat a distance.

Potentially, the army’s large domesticrole could be trimmed. Operation Senti-nelle, in force since the terrorist attacks inParis in 2015, requires as many as 10,000soldiers to be deployed to patrol citystreets and guard schools. The mission,

part ofa state ofemergency, was supposedto be temporary. Instead it has dragged on,and become the French army’s biggest op-eration anywhere in the world. Last yearGeneral de Villiers said the army was oper-ating “at its limit” because of it.

MrMacron’sgovernmenthaspromisedto end the state of emergency, once parlia-ment agrees to a permanent law tostrengthen domestic security. In theory,strongerpolice forces could take over sometasks from the armed forces. The incomingchief of the armed services, General Fran-çois Lecointre, will have to get to grips withthat—after he completes his first job: reach-ing an understanding with France’s pricklyyoung president. 7

CHOPIN played in the background and,as night fell, the crowd on the square

in front of the Supreme Court in Warsawsang the Polish national anthem. Someoneprojected “This is our court” onto thebuilding’s wall. Two weeks earlier, in thesame square, Donald Trump had hailedPoland’s role in the defence ofWestern val-ues. But for the demonstrators who turnedout on July 16th to protest against changesto the judicial system by the governingLaw and Justice (PiS) party, it was thosevery values that were under threat.

Since taking power in 2015, PiS has setabout dismantling the country’s checksand balances. It has reduced the publicbroadcaster to a propaganda organ, packedthe civil service with loyalists and purgedmuch of the army’s leadership. It has un-dermined the independence ofthe judicia-ry by stacking the Constitutional Tribunalwith its cronies. In response, the EuropeanCommission warned Poland’s govern-ment last year that such changes pose “asystemic risk to the rule of law”.

On July 12th PiS stepped up its effort tosubjugate the legal system to politicians’control with two new laws. Members ofthe National Judicial Council, the bodythat chooses judges, will henceforth be se-lected by parliament instead of by otherjudges. The minister of justice can now ap-point and dismiss the heads of lowercourts. A third bill, if signed into law,would allow the minister to sack everymember of the Supreme Court. Amongother responsibilities, that court rules onthe validity of elections. Unexpectedly,Andrzej Duda, Poland’s president, threat-ened to veto the bill, but with a few

amendments it is now likely to pass.Jaroslaw Kaczynski, PiS’s boss and the

country’s de facto leader, accuses Poland’scourts of being “subordinated to foreignforces” and beset by a “collapse of moralprinciples”. He also calls them a “strong-hold of post-communists”, referring toPiS’s claim that Polish liberals have secretties to the former communist regime. Thereforms, he said, were needed to speed upproceedings and restore public confidence.

In fact, Polish courts are not especiallyslow. Critics believe PiS simply wants tostuff them with judges who will rubber-stamp its policies. From now on, judgeswill owe their careers to the governingparty. “It’s shockingly brazen,” says KimLane Scheppele, a sociologist at Princeton

University who has analysed similarchanges in Hungary.

Polls show that 76% of Poles oppose apoliticised judiciary, as the protests in War-saw and other cities attested. The frontpage of Dziennik Gazeta Prawna, a daily,pictured Mr Kaczynski and two shadows;the title read: “The three branches of gov-ernment”. Outside parliament last week-end, one man brandished a handmadeplacard quoting Montesquieu. Anothercarried a copy of the constitution. “It hasno meaning now,” said his wife. State tele-vision, meanwhile, described the protestsas a “coup”. In a rant in parliament on July18th, Mr Kaczynski even accused the oppo-sition of murdering his brother, who diedin a plane crash in 2010.

The European Commission dutifullyexpressed concern over the new laws.There is some talk of imposing sanctionson Poland. But Mr Kaczynski has drawnlessons from Hungary, where Viktor Or-ban, the autocratic prime minister, has re-written the constitution and tightened thescrews on civil society with little troublefrom the European Union. “Kaczynski haslearned from Orban that if you changefacts on the ground, the commission can’tget its head around it in time,” says MsScheppele. The EU has launched infringe-ment procedures against Hungary, but themost serious sanctions, contained in Arti-cle 7 of the EU treaty, require a unanimousvote in the European Council. Polandwould probably veto any effort to invokethem against Hungary, and vice versa.

Yet unlike Hungary, where Mr Orban’sparty enjoys a crushing majority, Poland ispolitically divided. PiS won just 37.5% ofthe vote in 2015. Civil society remainsstrong, and the government responds topublic pressure: last year it backed downfrom a strict abortion law when faced withmassive protests. The independence of Po-land’s judiciary may depend on howstrongly Poles want to keep it. 7

Populism in Poland

Dependant judiciary

WARSAW

Defying the EU, the Lawand Justice party puts the courts underpolitical control

The opposition tests its candle power

42 Europe The Economist July 22nd 2017

LIFE comes at you fast in the European Union. Barely a year ago,with the wounds from the refugee crisis still gaping, Donald

Tusk, the president of the European Council, could be heardwarning that a British vote to quit the EU threatened to bringabout the collapse ofwestern civilisation. In halfthe countriesonthe continent, snarling populists eager for European disintegra-tion were terrifying the pro-EU establishment.

Yet over the past few months, gloom has turned to sunshine.In June Mr Tusk declared that he had never felt so optimisticabout the EU. Much of the credit goes to Emmanuel Macron.France’s newly minted president has lifted pro-Europeans’ spiritsnot only by winningelection wrapped in the EU flagbut by doingso in revolutionary fashion, emerging from nowhere to humbleFrance’s old parties (as well as Marine Le Pen, the nationalist whostalked Eurocrats’ nightmares for months). Rarely do members ofthe European establishment get to feel like insurgents.

Some of the optimism needs tempering. Leave aside the factthat none of Europe’s recent emergencies has been properlyfixed, from Greece’s economy, on an IV drip of endless bail-outs,to the migrants streaming across the Mediterranean. Mr Macronis certainly brimming with ideas to reform the euro zone as thecore of the EU—from a common investment budget to the estab-lishment ofa parliament and a finance minister. But he has less tosay on matters that encompass all EU members, notably the sin-gle market. Hailed as the saviour of Europe in some parts of thecontinent, elsewhere Mr Macron is quickly proving divisive. Thenew man in the Elysée seems to be pushing old French ideas.

Take EU labour policy. Perhaps to sugar the pill of the reformshe wants French unions to swallow, MrMacron promises to tight-en EU ruleson the payand conditionsofEuropeansworking tem-porarily in other countries. To eastern European governmentsthat looks like a bid to keep their low-cost workers out ofthe high-paid west, recalling the old French paranoia over “Polish plumb-ers”. Mr Macron’s recent charge that some countries treat the EUlike a “supermarket” so unnerved the Visegrad four (the CzechRepublic, Hungary, Poland and Slovakia) that they hastily createdworking groups with France to plead their cases.

That may be just the start. Mr Macron wants a Europe that“protects” citizens, a phrase that implies any number of policies,

from co-ordinated minimum wages to prohibitions on “socialdumping” and harmonised tax rules. Fans of such ideas tend tosit inside the euro zone. Until recently Britain would try to pre-vent the euro zone from pre-cooking such deals and presentingthem to the rest of the EU as faits accomplis. This helped smoothdivisions between the euro-zone “ins” and the “outs”. But Brexitleaves those outside the euro without a champion. Officials inBrussels note that after Britain leaves, the 19-member currencyarea will account for 85% of the EU’s economy. This is a none-too-subtle way of locating the EU’s “core”.

The idea of Kerneuropa (“core Europe”) has a long pedigree.First pushed years ago by Wolfgang Schäuble, Germany’s currentfinance minister, and later taken up by Nicolas Sarkozy, one ofMrMacron’spredecessors, itwasadvanced asa tool to manage an in-creasingly unwieldy EU. Today a core Europe built around theeuro zone could find itselfcollaboratingon thornynon-economicissues too, such as quotas for redistributing refugees. Should MrMacron get his wishes for institutional changes to the euro zone,its political heft could leave the gaggle of non-members lookinglike an afterthought. To western European countries interested inmore integration, this “multi-speed” Europe holds appeal. Buteastern European governments detest the idea offormal consign-ment to a second class. “Eitherwe get in the integration express orwe’ll be stuck in the depot on the second track,” said Robert Fico,Slovakia’s prime minister, last month.

Wedged apartIf some eastern countries struggle to make themselves heard, itcan be their own fault. Governments like Poland’s sabotage theirown case when they promulgate lurid horror stories about mi-grants or, worse, undermine the democratic values to which theysigned up as EU members. Moderate governments that may sym-pathise with their arguments on the single market will recoilfrom association with countries in the grip ofpopulism.

Several have joined Mr Macron in wondering out loud howcountries that defy the EU’s principles might be sanctioned, per-haps by cutting the generous subsidies they receive. If such coun-tries continue to drift away from the EU’s fundamental values,others will be more likely to plough on with their ideas for inte-gration and leave the stragglers behind.

The divides are not always clear-cut: Slovakia, Slovenia andthe Baltic states are euro members, and dislike being lumped inwith the more intransigenteasterners. Othersmaysoon face hardchoices, such as the Czech Republic, which sends over 60% of itsexports to the euro zone. Germany will have to play a vital bridg-ing role between a resurgent France, with which it can strike adeal on euro-zone reforms, and the eastern European countriesplugged into its supply chains through the single market. AngelaMerkel, who grew up on the wrongside ofthe Berlin Wall, will bereluctant to entrench division within Europe. But the chancellor’sdemand thatall EU countriesaccepta quota ofrefugeescreates itsown European wedge.

Eurocrats will head offto their summerbreaks more confidentthan they have been for years. Two cheers, then, for Mr Macron.But by restoring Europeans’ hopes that there is life in their flag-ging project, the president is bringing to the surface tensions thatlay dormant during the crisis years. The result could be a well-or-ganised Europe running at different speeds. Handled badly, itmay resemble a cacophonous mess. Of the many tests before theFrench president, this is among the largest. 7

Sea change

Emmanuel Macron is both revitalising the European Union, and dividing it

Charlemagne

The Economist July 22nd 2017 43

For daily analysis and debate on Britain, visit

Economist.com/britain

1

JUST over a year has passed since Britainvoted to leave the European Union andTheresa May subsequently became

prime minister. Nearly four months haveelapsed since Mrs May invoked Article 50ofthe EU treaty, settinga two-yeardeadlinefor Brexit that will expire on March 30th2019. The clock is ticking. And at first blushthere has been much activity: a big speechby Mrs May at Lancaster House in January;several government white papers; bills in-troduced in Parliament; and the start offor-mal Brexit negotiations in Brussels.

Yet for all this activity, almost no pro-gress has been made towards deciding theform that Brexit should take. That is largelybecause the government is ambiguousover what it wants. Even issues thatseemed settled in the Lancaster Housespeech have resurfaced since Mrs May losther slim parliamentary majority in a snapelection she called for June 8th.

This is the political backdrop to theBrexit talks in Brussels. The second roundstarted this week between negotiatingteams led for the EU by Michel Barnier, theEuropean Commission’s point man, andfor Britain by David Davis, the Brexit secre-tary. Mr Barnier, who has a mandate ap-proved by European governments, is fo-cusing on the terms of the Article 50divorce: specifically, the rights of EU citi-

Yet Mrs May’s election setback hasraised questions over whether her hardBrexit should be softened. Although La-bour’s leader, Jeremy Corbyn, backs end-ing free movement, his manifesto alsotalked ofkeeping all the benefits of the sin-gle market. A week ago he refused to ruleout staying in the single market after all.Meanwhile some ministers think the cus-tomsunion should be rethought. The latestrowisoverEuratom, Europe’satomic-ener-gy treaty, which Britain will leave on exit-ing the EU, but which some Tory MPs thinkit should rejoin as an associate.

Mrs May’s lack of a majority in eitherhouse means that the role of Parliament,which had been sidelined, will be crucial.The government has just published its EUwithdrawal bill and is promising at leastseven other Brexit bills, ranging from im-migration and agriculture to trade and cus-toms. Getting all these through unamend-ed will be extremely difficult. OppositionMPs talk of fighting the government all theway, with the help ofperhaps a dozen Toryrebels, rather as happened to John Majorwhen he was trying to ratify the Maastrichttreaty in the 1990s. There is no clear parlia-mentary majority for a hard Brexit, so de-livering one will be very challenging, tosay the least.

The cake problemWhy is there so much confusion? One an-swer is simply that extracting Britain froma 44-year marriage is horrendously com-plex. But the deeper point is that voterswere never told the truth about the trade-offs inherent in Mrs May’s version ofBrexit. Brexiteers promised that, in thewords of Boris Johnson, now the foreignsecretary, Britain could have its cake and

zens in Britain and vice versa, howto avoida border between Northern Ireland andthe Irish republic, and Britain’s exit bill.

Only when he can report “sufficientprogress” on these will he be allowed tostart discussing the long-term trade rela-tionship between Britain and the EU. Andmaking progress will not be easy. An initialBritish offer to give EU citizens broadly thesame rights as Britons was met with com-plaints that it was insufficiently generous.The Irish border question, which has beenelevated to top-level diplomatic talks, hasno obvious answer. And although Britainhas conceded that it faces an exit bill, itssize is highly contentious. This week’sround of talks concluded with little pro-gress on any of the three main topics.

It is the long-term relationship that mat-ters most. Because Mrs May and Mr Davisinsist that the only interpretation of the ref-erendum is that Britons voted to take backcontrol of borders, laws and money, theyare pursuing what is known as a hardBrexit: Britain must leave both the EU’s sin-gle market and its customs union, end freemovement of people from the EU and es-cape from the oversight of the EU’s su-preme court, the European Court of Justice(ECJ). Instead it will forge a “deep and spe-cial partnership” with the EU, including acomprehensive free-trade deal.

Britain and the European Union

The six flavours of Brexit

The EU offers manymenus, from Norwegian to Turkish. But Britain cannot expectto choose à la carte

BritainAlso in this section

44 Public opinion

46 Bagehot: Bad-tempered Britain

44 Britain The Economist July 22nd 2017

1

2 eat it. It would be possible, they claimed, toescape EU regulation and the ECJ, leave thesingle market, walkawayfrom the customsunion and save £350m ($450m) a week inbudget contributions—while still retainingthe benefits of being an integral part of theworld’s biggest trade block.

This misleadingclaim explains why theother 27 EU countries were apprehensiveabout the government’s approach toBrexit. Although they preferred Mrs May,who campaigned on the Remain side, toother Tories, they also knew that her mainexperience ofthe EU came in 2013, when ashome secretary she negotiated Britain’sopt-out from a raft of justice and home af-fairs measures and then chose which onesto opt back into. That cherry-picking ap-proach was quite specific to that particulardossier; it cannot be done by a countryturning its back on the club altogether. TheEU 27 are determined to stop any attemptat repeating it with Brexit.

Talk by various ministers in London ofno deal being better than a bad deal alsowent down badly in Brussels. A Brexitwithout a deal would certainly be bad forthe EU. But it would be much worse forBritain: goods would back up with no cus-toms agreement, air travel would stopwithout an aviation deal, tariffs and non-tariffbarrierswould appearovernight. TheEU also frets over Mrs May’s belief that herpredecessor, David Cameron, failed to winenough concessions in his EU negotiationsbecause ofhis unwillingness to walkaway.In Brussels, the bargainingpower is seen asbeing on the EU’s side, not least because ofArticle 50’s two-year deadline.

Menu by menuThis is reflected in the EU’s approach toBrexit, which is to insist that future rela-tions must follow one of a number offixed-price menus. Each menu has advan-tages and disadvantages; each has a fewside dishes that can be added at the mar-gin. But what is not permitted is to go à lacarte. Mr Barnier underlined this recentlywhen he declared that it was not possibleto leave the single market but retain all itsbenefits, nor to quit the customs union butkeep frictionless trade.

The first menu is full membership,which the Brexit referendum rejected. Sec-ond is membership of the European Eco-nomicArea (EEA), which linksNorway, Ice-land and Liechtenstein to the EU. EEAmembers are fully integrated into the EU’ssingle market for most goods and services,but not for agriculture and fisheries. Theyare not in a customs union with the EU,which allows them to strike free-tradedeals with third countries, although thismeans their exports are also subject torules-of-origin inspection. But single-mar-ket rules require them to accept the EU’sfour freedoms of movement of goods, ser-vices, capital and, crucially, people. They

also have to observe laws which they haveno say in making and which (at least im-plicitly) are enforced by European judges.And they make contributions to the EUbudgetalmostas large asBritain’s, on a per-person basis.

The third menu is a Swiss one. Alongwith Norway, Iceland and Liechtenstein,Switzerland is a member of the EuropeanFree Trade Association (EFTA), but it is notin the EEA. It has two sets of complex bilat-eral dealswith the EU thatgive itprivileged

access to the single market for goods,though not for agriculture. But it is outsidethe market for most services (including fi-nancial services). It is also outside the cus-toms union. It too has to observe the freemovement of people, and to accept mostsingle-market laws. And it makes a big con-tribution to the EU budget.

Mrs May’s insistence on taking backcontrol ofborders, laws and money meansthat she has ruled out both these menus.Yet some frills could be attached to makeeither more appealing. EEA countries havean “emergency brake” to block the freemovement of people, though it has neverbeen used. Liechtenstein is allowed to setquotas for EU migrants. The Swiss are not,but they may be allowed to ensure thatmost jobs are offered first to Swiss citizens.As for budget payments, they are smallerthan for full members and are mostlydressed up as research funds or aid to east-ern Europe. But Britain would struggle toget a deal like that of Switzerland. The EUdislikes the complexity ofthe arrangementand would be unlikely to replicate it for thefar bigger British economy.

The fourth menu might be called Turk-ish. Like San Marino and Andorra, Turkeyis not in the EEA, EFTA or the single market,but it has formed a customs union with theEU for non-agricultural goods trade. Thisforces Turkey to apply common externaltariffs fixed by the EU, but that brings theadvantage that there are no barriers orrules-of-origin checks on exports to the EU.If Britain were to form a customs unionwith the EU, it could try to add some ser-vices as well (Turkey and the EU are negoti-ating an upgrade of their own customs un-ion to do just that). The advantage of beingin a customs union but not the single mar-ket is that it dispenses with the EU’s fourfreedoms, budget contributions and theECJ. Itwould also prevent the return of cus-toms controls at the Irish border.

The main disadvantage of the customs-union option is that it precludes free-tradedeals for goods with third countries. In ef-fect, it would do Liam Fox, the internation-al-trade secretary, out of a job. Yet some ar-gue that barrier-free trade in goods withthe EU is worth more than any number ofhypothetical future free-trade deals withthird countries being touted by Dr Fox. Toquote the words of one MP, “We exportmore to Ireland than we do to China, al-most twice as much to Belgium as we do toIndia and nearly three times as much toSweden as we do to Brazil. It is not realisticto think we could just replace Europeantrade with these new markets.” This wasMrs May, speaking in April 2016.

Fifth is the menu that the prime minis-ter herself favours: a deep and comprehen-sive free-trade deal. Examples include theassociation agreement with Ukraine andtwo simpler trade deals with Canada andJapan, the latter not yet concluded. This

Public opinion

Softening?

AYEAR on from the referendum, fewBritons have changed their minds

about whether to stay or go. Polls findthat, were there another vote, the resultwould be similar to the 52:48 split lastJune. They also show that most Remain-ers concede that Brexit should go ahead.

What sort ofBrexit, though? Thereferendum provides a mandate forneither the hard nor the soft type, sinceBrexiteers claimed both that free move-ment would end, which implies a hardexit, and that Britain would stay in thesingle market, which suggests a soft one.

A poll for The Economist by YouGovfinds that of those who voted Leave, 69%now favour hard Brexit and 24% prefersoft (3% have switched to Remain and 4%don’t know). The hard approach takenby Theresa May is therefore in line withthe desire ofmost Leavers.

But what ifRemainers’ views areconsidered? Forced to choose betweenhard and soft Brexit, 81% opt for soft,against15% for hard. The upshot is that,among voters at large, soft Brexit beatshard Brexit by 52% to 44%. Few have it astheir first choice, but it is the one optionthat commands a reluctant majority.

Most want to stay in the single market

Brexit means...

Source: YouGov*Of those surveyed expressinga preference for Remain/Leave

Britain, preferences for type of exit from the EU*By vote in EU referendum, % responding

Referendum vote, June 23rd 2016

Current preference, July 10th–11th 2017 Don’tknow

Remain 48 Leave 52

Soft Brexit 52 Hard Brexit 44 4

The Economist July 22nd 2017 Britain 45

2 would preserve tariff-free access for mostgoods and could even cover some services(though not usually financial services). Itwould mean no free movement, no auto-matic adoption of EU regulations andprobably no ECJ, though some dispute-res-olution mechanism would be needed. Thedisadvantage is that free trade is not thesame as frictionless trade. There would becustoms controls and rules-of-originchecks, many services would not be cov-ered and there would be non-tariffbarriersthanks to differential regulation.

The final menu, which would also belikely in the end to follow from no deal, isto revert to trading with the EU underWorld Trade Organisation rules. This is nottotally straightforward, because althoughBritain is a WTO member its tariff and im-port schedule is set via the EU, and havinga schedule of its own would require divid-ing up the EU’s import quotas for thingslike New Zealand butter. Trading on WTOterms implies small tariffs on goods suchas cars and pharmaceuticals and largerones on farm products. It does not coverservices. Non-tariffbarriers would remain.And there is the WTO’s most-favoured-na-tion principle, which allows discrimina-tory trade practices only in an approvedfree-trade area. This means that, if Britainand the EU agreed to avoid mutual 10% ta-riffs on cars, they would have to offer thesame deal to other countries.

It will cost youThe Brexit menus share two characteris-tics. One is that, except for the EEA option,they would take time, perhaps severalyears, to negotiate.

The second is that all would imposelosses on the economy. Brexiteers rejectedthe Treasury’s projections for the cost ofBrexit last year as “project fear”. But theCentre for Economic Performance at theLondon School of Economics has remod-elled the trade consequences. It concludesthat the hardest form of Brexit, a reversionto WTO terms, would cut trade by 40%over ten years and reduce annual incomeperperson by2.6%. Asofterversion like theNorwegian model would cut trade by20-25% and reduce annual incomes by1.3%.And these are just static effects. Therewould also be dynamic negative effectsfrom lower investmentand slowerproduc-tivity growth.

Britons are unprepared for such a hit totheir incomes. And the more distant Brit-ain’s relationship with the EU, the biggerthe income loss. This is a crucial trade-offthat Mrs May’s government has been re-luctant to acknowledge. Britons face achoice: to minimise losses from Brexit, theymust cede some sovereignty to the EU,while to maximise freedom from Brussels,they must accept a larger drop in incomes.

What makes this choice harder is thestate of the economy. Immediately after

the referendum Brexiteers crowed that thedoomsters were wrong: the economy hadnot suffered and confidence remainedhigh. Yet in the first quarter of 2017 Britainfell from being one of the fastest-growingeconomies in the EU to the slowest-grow-ing, partly because of uncertainties overBrexit. Higher inflation, caused in part by afall in the pound, is eating into real in-comes. It is no wonder that Philip Ham-mond, the chancellor, is demanding thatthe economy should be given higher prior-ity in the Brexit negotiations. Labour is alsoarguing for a “jobs first” Brexit.

Nor is trade with the EU the only pro-blem. Before even getting into new tradedeals, Dr Fox must find a way to replicatethe 35 free-trade agreements that Britaincurrently has via the EU with 53 countries.The rawarithmetic is that some 44% ofBrit-ish exports go to the EU, 16% to countrieswith which the EU already has a free-tradedeal and about 20% to America. DonaldTrump may have promised an early dealwith Britain, but experience shows it willbe neither easy nor quick—and Mr Trumpmay then be long gone.

Third countries need to know the termsof Britain’s trade with the EU before mak-ing bilateral deals. Monique Ebell of theNational Institute of Economic and SocialResearch, a think-tank, calculates thatdowngradingfrom single-marketmember-ship to a free-trade deal with the EU wouldreduce British trade by about a fifth, where-as free-trade dealswith the fourBRIC coun-triesplusAmerica, Canada, Australia, NewZealand, Indonesia and South Africa com-bined would boost it by just 5%.

Next is the question of EU regulators, ofwhich Euratom is but one. Some 35 EU reg-ulatory bodies govern such things as medi-cines, aviation safety, environmental rules,financial services and phytosanitary stan-

dards. All come under the ECJ, so if that re-mains a red line for Mrs May Britain mustset up a new set of regulators of its own.These would largely have to replicate theEU’s rules to maintain regulatory equiva-lence. Most companies prefer to stick withthe system they know, and many fear thatsetting up British regulators would notonly take time and money but also forcethem to obey two lots of rules, not one.

There is much else to do. Sorting outwhat powers repatriated from Brusselsshould go to the devolved administrationswill be testing; the Scots say they mighthold up the EU withdrawal bill, and La-bour supports them. Hundreds of treatieson matters ranging from air transport todata sharing must be renegotiated withthird countries. Ways must be found to co-operate in scientific research, foreign poli-cy, defence, security, counter-terrorism andintelligence. All of these raise yet again theissue of the ECJ, which has jurisdictionover data-sharing and various justice andhome-affairs measures, including the Euro-pean arrest warrant.

Sic transit gloriaOne conclusion is that all this cannot pos-sibly be dealt with by March 2019. To givethe European Parliament time to ratify theArticle 50 divorce, its terms must be agreedby around October 2018. Businesses thathave to plan ahead, such as airlines, needcertainty long before that. Without a dealallowing them to fly after Brexit, airlinesmight have to stop selling advance tickets.Banks and others want to know the rulesthey will face by next spring. And thatpoints to something else, which has longbeen assumed in Brussels and is slowly be-ing accepted in London: that there must bea transition period after March 30th 2019.

Yet it will not be simple to arrange one,because negotiators will want to know theultimate destination, at least in principle,before agreeing the terms for a transition.Business lobbies and, quietly, the Treasury,are pushing to stay in both the single mar-ket and the customs union during transi-tion, to minimise disruption. The simplestidea would be to prolong the status quo forthree or four years, but that would not sat-isfy those who are keen to get on with leav-ing. An alternative might be temporaryEEA membership, but Brexiteers might fearthat the temporary arrangement wouldbecome permanent.

Transition will be key to making Brexitless disruptive. But on its own it will not re-solve the dilemmas facing the govern-ment. For that, more honesty, less inclina-tion to tar any critics as seeking to subvertdemocracy and greater readiness to ac-knowledge Brexit’s trade-offs are required.One other thing is certain: those who saidthe only way to take the EU offBritain’s po-litical agenda was to have a referendumhave been proved utterly wrong. 7

46 Britain The Economist July 22nd 2017

THE end of the current parliamentary session, on July 20th, is agood time to reflect on the mood of British politics. Several

things catch the attention: anxiety about the future, exasperationat the childish antics ofseniorpoliticians, confusion about Brexit.But the most striking thing is anger. Politicians are angry witheach other. The public is angry with politicians. The internetthrobs with vitriol. American historians have dubbed the periodafter the war of1812 “the era ofgood feelings”. The current periodin British politics could be dubbed the era ofbad feelings.

Thisweekthe cabinet infightingbecame so vicious thatThere-sa May, the prime minister, was forced to tell her ministers to shutup or ship out. Even more disturbing is a surge in violent threats.A year after the murder of Jo Cox, a Labour MP, by a far-right ex-tremist, politicians of all stripes say that they fear for their safety,such is the intensity of the insults they face. The threats extend tojournalists. The BBC was reportedly obliged to provide its politi-cal editor, Laura Kuenssberg, with personal security.

The worst of it is directed at women and minorities. Diane Ab-bott, Britain’s first black female MP, told Parliament that she hadreceived tweets saying that she should be hanged “if they couldfind a tree big enough to take the fat bitch’s weight.” During theelection campaign, Labour supporters in Bristol unveiled a ban-nerofMrs May wearingStarofDavid earrings. Many ofthe abus-ers regard criticism of their loathsome behaviour as an invitationto redouble their efforts. When Yvette Cooper, a Labour MP, gavea speech condemning the culture of abuse, she was accused ofbeing a “bully”, a “saboteur” and, worst ofall, a “Tory”.

Britain is not unique in all this. Donald Trump has ushered inan era of bad feelings in America that is even more unpleasant.The runner-up for France’s presidency, Marine Le Pen, leads a xe-nophobic party. Supporters of Turkey’s ruling party use onlinebots to harass reporters. Britain has experienced other spasms ofpolitical rage in recent decades, particularly over MargaretThatcher’s breaking of the miners’ strike and Tony Blair’s supportfor the Iraq war. But none of this diminishes the seriousness ofBritain’s current problems. Its mood is darkening as that of Eu-rope is lightening. And it is engaged in history-shaping negotia-tions with the European Union that can be saved from disasteronly with the help ofclear heads and reasoned debate.

Why has British politics become so unpleasant? The answerto almost everything these days is Brexit, which has split thecountry and inflamed opinion. But Brexit is a symptom as wellas a cause. Britain is suffering from a malign combination of eco-nomic disruption and stagnation. Smart machines are eliminat-ing some jobs, reorganising others and spreading anxiety. Aver-age payhasdeclined bysome 7% since the financial crisisof 2008.People might be willing to accept disruption if it were accompa-nied by improvements in living standards, or perhaps to toleratestagnant living standards if they were accompanied by stability.But the combination of the two is uniquely dangerous, unleash-ing a wave ofpopulism that is gaining momentum.

Populists rage against the centrist establishment for failing tokeep its promise of crisis-free growth (remember when GordonBrown claimed to have abolished the boom-and-bust cycle?).And they demonise anybody who stands in their way as traitorsto be crushed rather than as erring colleagues to be persuaded.Two cabinet ministers, Andrea Leadsom and Liam Fox, havequestioned the patriotism of people who raise doubts aboutBrexit. The Daily Mail dubbed three High Court judges “enemiesof the people” after they ruled against the government in a Brexit-related case. Internet trolls have suggested that Blairites in the La-bour Party (some of whom happen to be Jewish) should be sub-jected to “the final solution”.

Two things are strengthening the poison. The first is the exis-tence of sharp divisions within each of Britain’s main politicalparties. The Tories’ long civil war over Europe has entered an al-most surreal phase. Rival factions brief against each other in thenewspapers, talkabout releasing scandalous personal tittle-tattleand even threaten to kick each other “in the balls”. Labour is en-during a soft coup. Emboldened by Jeremy Corbyn’s better-than-expected performance in the general election, the hard-left isthreatening to deselect moderate MPs such as Luciana Berger, themember for Liverpool Wavertree, who has been subjected to aco-ordinated campaign ofanti-Semitic and misogynistic abuse.

The second is the internet. Social media provide platforms formonomaniacs who previously raged in the privacy of their bed-sits. People who might hesitate to berate their fellow citizens inperson show no such qualms when it comes to sounding offagainst virtual targets. Bad-tempered tweets, dashed off in sec-onds, elicit bad-tempered responses, creating a culture ofvitriol.

Days of rageNastiness can be found at both ends of Britain’s political spec-trum. But there is little doubt that the co-ordinated attacks areworse on the left. The Alt-Left is to Britain what the Alt-Right is toAmerica. “Assomeone on the centre-left, there’sa huge differencebetween the abuse I get from right and left,” the New Statesman’sHelen Lewis tweets. “The right doesn’t put the hours in.” The leftis more likely to use nastiness as a political tool. Mr Corbyn’s fac-tion ofLabour seems happy to work with the sort ofpeople whocarry banners displaying Mrs May’s severed head. John McDon-nell, the shadow chancellor, urged people to take part in a “day ofrage” against the result of a general election in which his partywon 55 fewer seats than the Tories. He has also repeatedly usedthe word “murder” to describe the Grenfell Tower disaster.

The great achievement of parliamentary democracy is that ittakes potentially violent political conflicts and civilises them.That achievement is now threatened—not just by foam-fleckedmaniacs in bedsits, but by some of the highest in the land. 7

Get stuffed

British politics has become dangerouslybad-tempered

Bagehot

The Economist July 22nd 2017 47

1

TO BE a democracy takes more than freeelections. But no democracy can thrive

without them. In some places votes aretravesties, with incumbents sweeping theboard; in others, free elections are en-trenched. It is places in between—wheremultiparty elections are relatively new, theresult is uncertain and the incumbents’willingness to accept defeat cannot be pre-sumed—where there is most to play for.

Hope is strongest in various of sub-Sa-haran Africa’s 48 countries. Not until 1991,in Benin and then Zambia, did the regionsee peaceful ejections of incumbent rulersat the ballot box (the long-democratic is-land of Mauritius excepted). Africa hasnow had decent transitions via elections atleast 45 times. Plenty have slid back: inZambia last year Edgar Lungu, the incum-bent, passed the winning 50% mark by asuspiciously thin margin of0.35%. His chal-lenger, Hakainde Hichilema, was laterjailed after his car convoy failed to giveway to the president’s. But note recent bigsuccesses. Elections in Nigeria in 2015 andGhana last year saw incumbents fall. InJanuary a Gambian dictator had to acceptthe voters’ will. In June Lesotho’s primeminister more graciously bowed out.

Next up is Kenya, on August 8th. It is thecommercial, diplomatic and strategic hubof east Africa, yet its post-colonial multi-party elections, held only since 1992, havebeen fraught. Post-election violence in

press thumb or finger on a tablet (shownon next page). Up come matching namesand photographs. Officials in the pollingstations will adjudicate in case of glitches.Votes are cast on printed ballot papers,once an identity is confirmed. The presi-dential result must be announced withinseven days. If no one wins more than 50%,a run-off must be held within a month. (In2013 suspicions rose when Uhuru Kenyattasqueaked past that mark by a mere fewthousand votes, though he probably didgenuinely win the first round.)

Last time half of the much clunkier de-vices in use failed to workon the day. With-in a few hours most of their batteries hadrun out; this time polling stations will havespares. Kenya’s mobile-network providersare co-operating; 3G covers only 78% of thecountry’s territory but 98% of the stationsare in range, says Mr Chiloba, and satellitephones may serve the few that are not.

By July 2nd about half of the 120m bal-lot papers for the six sets of elections (in-cluding for governors of 47 counties andfor women’s special representation) hadbeen printed, though a last-minute snaghas arisen. On July 7th the high court ac-cepted the main opposition party’s bid tonullify the tender for printing the ballotsfor the presidency amid accusations thatthe printing contract had been improperlyawarded. If the commission’s appeal fails,a new printer will be needed in a hurry.

Each party and candidate will be enti-tled to put agents in polling stations tooversee the count, which will be transmit-ted electronically and also manually toone of 290 constituency stations. The su-preme court has decided that, once the re-sult has been declared there, it cannot bechanged at the counting headquarters. InKenya and elsewhere, much fiddling hashappened centrally. So this ruling is hugely

2007 left at least 1,300 dead and 700,000displaced. That poll and the following one,in 2013, are widely thought to have beenflawed. This time both Kenyans and for-eigners are trying to ensure a fair contest.Procedures for ensuring cleaner elections,some using improved technology, will beon trial. If they work well, hope for fragileyoung democracies everywhere will beboosted. Failure, meanwhile, would be feltas a blow in Kenya and beyond.

This year’s nail-biterAccording to Ezra Chiloba, CEO of Kenya’sIndependent Electoral and BoundariesCommission, preparations are far betterthis time than last. AsubsidiaryofSafran, aFrench firm best known for aerospacetechnology, has delivered 45,000 tablets tocheck biometric voter identification at the40,833 polling stations and to prevent mul-tiple voting. Around 360,000 officials havebeen hired and trained to staff them andoversee the count. The voters’ register of19.6m has been vetted by KPMG, an inter-national auditor. No one claims it is per-fect: births and deaths often go unrecordedin Kenya’s remote places. “But if the voterID works itdoesn’tmatterhowbad the vot-ers’ roll is,” says Don Bisson of the CarterCentre, which is monitoring the elections.“Dead people don’t have voter biomet-rics,” says an official of the commission.

To prove their identities, voters must

Spreading democracy

How to unrig an election

NAIROBI

Newmethods and technologycan make elections fairer. But it is still hard todislodge an incumbent who is determined to cheat

International

48 International The Economist July 22nd 2017

2 positive, says a leading observer. (By con-trast in Zimbabwe in 2008, when RobertMugabe lost the first round of a presiden-tial election, his election commission inthe capital sat on the ballots for weeks be-fore declaring that the challenger had nar-rowly missed the 50% mark that wouldhave given him outright victory. Such le-thal violence followed that he withdrew.)

Anothervital safeguard is “parallel votetabulation” (PVT), whereby party agentsand independent observers can witnessthe count in randomly selected polling sta-tions and announce each result, whichwill be agreed upon, photographed bysmartphone and transmitted. Elsewhere,and in Kenya in 2013, PVT has been veryclose to the final result (see chart), makingit far harder for an incumbent to inflate histally, at least by a large amount. “PVT is ahighly effective checkon the electoral com-missions,” says an expert from the Interna-tional Foundation for Electoral Systems(IFES). It is thought to have been vital forensuring fairness in Ghana and Nigeria.Kenya’s main opposition leader, Raila Od-inga, says he will put five agents in each ofthe polling stations. Even just one in eachwould be a boon.

The independence of the electoral com-mission and the integrity of the supremecourt as arbiter of disputes are crucial for adecent election. Monitors have become apowerful force, too. In Kenya the most seri-ous are from the European Union, the Car-ter Centre and the National Democratic In-stitute, an American organisation. TheCommonwealth and African Union arealso sending teams. Among the heavy-weights lendingextra credibility are ThaboMbeki, South Africa’s ex-president, for theAU; John Mahama, Ghana’s recently de-feated president, for the Commonwealth;and John Kerry, America’s former secre-tary ofstate, for the Carter Centre.

Just as vital is that local citizens play apart in oversight. In Kenya the ElectionsObservation Group, an umbrella of 19 in-dependent outfits, including church andhuman-rights groups, is set to send 6,000watchers into the polling stations, com-pared with a few hundred foreign ones.

And yet…If this all sounds too good to be true, it maybe. Nic Cheeseman of Birmingham Uni-versity, an experton elections in Africa, haswarned against what he calls the “fetishi-sation” of technology. “In some cases thecomplexity of digital processes may actu-ally renderelectionsmore opaque and vul-nerable to manipulation—or at least thesuspicion of manipulation,” he has writ-ten. Election machines in Ghana in 2012failed more often where no observerswerepresent, suggesting tampering with the in-tention of forcing a fallback onto the moreeasily fiddled manual system. Technologycan even facilitate fraud. In Azerbaijan in

2013, the election commission accidentallyjumped the gun by releasing an electroni-cally verified result—a day before the vote.

“You can’t digitise integrity,” says JohnGithongo, a veteran Kenyan anti-corrup-tion campaigner, implying that the corruptpoliticians who still dominate the coun-try’s politics will not let technology get inthe way of fiddling the result if it goesagainst them. “The manual count is defini-tive,” says one foreign observer. “The elec-tronic one is a backup”—and should not beconsidered a fail-safe. Yet paper ballots arealways liable to be lost, stuffed or falsified.

The register, too, can be manipulated,for example by signing up under-age peo-ple in areas where the government is pop-ular or by making it harder for officials toregister voters where opposition is stron-gest. KPMG has recently expressed anxietyabout loopholes. In countries where trustin authority is low, and fear is high, votersmay even thinkthat technology will let thegovernment know how they voted.

Above all, technology cannot preventsome pervasive forms of election-rigging.Incumbents in Africa won 88% of directpresidential elections since multipartyelections became common a generationago until 2010, says Mr Cheeseman. Thatwas partly by using state resources to out-spend the opposition, often commandeer-ing the civil service and sometimes thearmy. In Uganda the perennial challenger,Kizza Besigye, has repeatedly been arrest-ed during campaigns. Incumbents oftenensure biased media coverage. Technologycannot stop vote-buying or bribery.

“I don’t thinktechnologywill everguar-antee credible elections,” says one of theworld’s most experienced monitors, whodoesnotwish to be named. “The best it cando is increase the transparency and ac-countability of the data. By exposing thedata to broaderscrutiny there is some hopeofcreatingbroaderacceptance ofclose out-comes.” PVT, for instance, depends on reli-able technology.

Dispatching party agents to every Ken-

yan polling station will be hard. “Youwon’t find many Luos [who overwhelm-ingly back Mr Odinga’s coalition] wantingto be sent as agents to polling stations inthe heartland of the Kikuyus [where theirleader, Mr Kenyatta, will prevail]—or viceversa,” says a white farmer. “They’d bechased out or murdered.” It is unlikely thatMr Odinga will be able to put an agent inall 41,000 polling stations, let alone five ineach. Nor are foreigners likely to observepolling stations in parts of the north-east,where Somali terrorism may be a threat.

Mr Odinga’s campaign has made muchof accusations of unfairness, sighs a West-ern ambassador. It is widely believed thatMr Odinga was robbed of victory in 2007,and that in 2013 he genuinely trailed in thefirst round but probably not by so muchthat Mr Kenyatta truly won outright. Thistime at virtually every step he has accusedthe authorities and commission of biasagainsthim, implying, for instance, that theprinters are likely to print extra papers toaid ballot-stuffing, or that the returning of-ficers are likely to be government stooges.

Good losers requiredIn the end, an unrigged election requiresthe protagonists’ goodwill and willingnessto accept defeat. Mr Kenyatta may be sin-cere in saying he will step down ifhe loses.But it is widely surmised that the Kikuyuold guard would stop atnothingto keep MrOdinga out ofpower. “The one thingwe allhope for,” says a foreign monitor, “is thatthe margin of victory, one way or another,will be wide.” Alas, it may be close.

It is in transitional democracies—coun-tries struggling to embed a tradition of fairpolls—that trust and transparency are mostneeded. In countries where the incumbentblatantly fixes the vote, nobody botherswith the effort that is going into Kenya’spoll. If it is fair and peaceful, like Ghana’slast year, itwill marka massive advance foreast African democracy. Though a largedose of scepticism is warranted, it is still ahopeful moment. Hold your breath. 7

Watch them like hawks

Sources: CODEO; CCMG; ELOG; Project 2011 Swift Count; NDI

Selected presidential elections, % of vote won

4030 50 60

KenyattaOdinga

Actualresult

Kenya, 2013

HichilemaLunguZambia, 2016

Akufo-AddoMahama

Ghana, 2016

BuhariJonathanNigeria, 2011

Parallel VoteTabulation result

Margin oferror

Thumbs up for a fair vote

The Economist July 22nd 2017 49

For daily coverage of business, visit

Economist.com/business-finance

1

WHEN the deal was struck just over adecade ago, for $1.8bn, 666 Fifth Ave-

nue, a 41-storey Manhattan skyscraper, be-came the most expensive office buildingever sold in America. Now it is in limbo,awaiting billions of dollars of investmentto rebuild it and raise it almost twice ashigh. Across the Hudson River, anotherhunt for money is under way, to build aproperty called One Journal Square in Jer-sey City. In June a property-investingstart-up called Cadre attracted financialbacking from Silicon Valley luminaries in-cluding Andreessen Horowitz, a venture-capital company.

The thread linking these ventures is Ja-red Kushner, Donald Trump’s senior advis-er and son-in-law, whose family business,like that of the president, is in property. MrKushner helped conceive all three projects.He has a “passive ownership interest” inCadre (meaning he is not actively involvedin its management). His family co-owns666 Fifth Avenue and One Journal Square.

Unlike the president, Mr Kushner is notexempt from federal conflict-of-interestlaws. He has taken steps to distance him-self from his wide-ranging property busi-ness. Kushner Companies, a complex en-terprise that is made up of dozens oflimited-liability companies, or LLCs, hasmore than 20,000 flats and 13m square feet(1.2m square metres) of commercial spaceacross six states. Before joining the Trumpadministration he stepped down as the

and office rents fell with it. The companywent on to sell 666 Fifth’s prime retailspace to a Spanish firm, Inditex, owner ofZara, and other investors. It also refinancedits debt in a transaction in 2011 that gave a49.5% stake to Vornado, a real-estate invest-ment trust founded by Steven Roth, a long-time partner ofMr Trump.

For a while the company’s appetite forbig acquisitions declined. But in 2011, with666 Fifth refinanced, Mr Kushner beganbuying again (see chart on next page), ac-cording to Real Capital Analytics, a datafirm. His targets included modest residen-tial buildings in lower Manhattan and inMidwestern cities such as Toledo and Ak-ron. He envisaged bigger developments,too, including One Journal Square and an-other in Brooklyn, now called Panorama,for its views of the Manhattan skyline.

Now that Mr Kushner is in the WhiteHouse, two questions preoccupy observ-ers. First, is his family business benefitingfinancially from his role and from his prox-imity to the president? Second, is he con-flicted despite the steps he has taken to ad-here to federal law?

Start with the question of financialbenefits. This is a pivotal moment for thefirm. It is seeking tenants forPanorama andnew loans for a residential building alongJersey City’s waterfront (in both of whichMr Kushner still has a stake). More impor-tant, it is also looking for investors for 666Fifth Avenue and One Journal Square (inwhich Mr Kushner does not have a stake).But the scrutiny that has accompanied MrKushner’s White House role appears to behindering, not helping.

In January the New York Times reportedthat Kushner Companies was seeking equ-ity capital for 666 Fifth from Anbang, oneof China’s biggest insurers, which has tiesto Beijing’s political elite. At the moment666 Fifth Avenue’s debt—of $1.4bn, accord-

head of Kushner Companies and sold hisstake in several properties, including 666Fifth Avenue and One Journal Square.

Yet Mr Kushner kept his stake in manyof the LLCs that make up the business. Hestill has a passive ownership interest inabout 90% of his holdings in property,worth up to $408m, according to his disclo-sures. His father, Charles Kushner (photo-graphed with his son, above), has a big roleat Kushner Companies. Jared Kushner’sstakes in 666 Fifth Avenue and One Jour-nal Square went into trusts owned by hisfamily. Alonglistoflendersand partners tothe family business could benefit fromWhite House policies.

Property fightsJared Kushner is the chief architect ofKushner Companies in its current form.His grandfather, Joseph Kushner, a Holo-caust survivor, developed garden apart-ments in New Jersey. Charles Kushnerfounded the business called KushnerCompanies in 1985 and led it until beingconvicted for tax evasion, illegal campaigndonations and tampering with a witness.Jared Kushner was 24 in 2005 when his fa-ther went to prison; the next year hebought the New York Observer, a newspa-per, and went to workrestoringhis family’sreputation. But the bigger transformationcame later in 2006, when Kushner Compa-nies said it would buy 666 Fifth Avenue.

The financial market quickly plunged

The Trump family’s businesses (1)

Searching for a Kushy landing

NEW YORK

In the first of two articles on the Trump family’s firms, we examine how JaredKushner’s White House job could harm both his firm and trust in policymaking

BusinessAlso in this section

50 The Trump family’s businesses (2)

52 3D printing at home

52 Brazil’s hopeful labour reform

53 Profiting from the paranormal

54 Schumpeter: Reinventing Uber

50 Business The Economist July 22nd 2017

1

2 ing to Vornado’s recent filings—eclipses thevalue of the office building itself, says JedReagan of Green Street, a research firm.That is partly Kushner Companies’ owndoing, because of the price it paid and be-cause it is intentionally letting the buildingslowly empty of its office tenants so it canbe rebuilt. The newdesign, created by ZahaHadid, an architect who died last year,would include a hotel, luxurious flats, newspace for shops and would cost $7.5bn.

The talks with Anbang fell apart inMarch amid protests from ethics expertsand from Democrats, who fretted aboutconflicts of interest and threats to nationalsecurity. Another avenue also recentlyclosed. For over two years, Kushner Com-panies has talked to Sheikh Hamad bin Jas-sim al-Thani, an eminent Qatari, about in-vesting in 666 Fifth. This month TheIntercept, a news site, reported that HBJ, ashe is known, had agreed to invest $500m ifMr Kushner could raise other money else-where. Kushner Companies confirmed onJuly 11th that talks had recently ended andthat it is reassessing the financing structureof the redevelopment project.

Some speculate that Mr Kushner haslooked elsewhere, too. In December hemet with the head of a government-owned Russian bank that is subject toAmerican sanctions. Vnesheconombanksaid it was a business meeting. The WhiteHouse said that Mr Kushner was “acting inhis capacity as a transition official”.

The proposed One Journal Square de-velopment has also hit trouble. In May Ni-cole Meyer, Mr Kushner’s sister, courtedChinese investors as part of America’s“EB-5” visa programme, which offers apath to citizenship for certain investors. InBeijing Ms Meyer touted One JournalSquare, explained Mr Kushner’s new rolein Washington and said the building“means a lot to me and my entire family”.That sparked accusations that the familywas exploiting Mr Kushner’s public role.Kushner Companies apologised “if thatmention of her brother was in any way in-terpreted as an attempt to lure investors”.

On May 7th Jersey City’s mayor, StevenFulop, said the project would not receivethe tax breaks and bonds that KushnerCompanies had sought. The city might nothave granted them in any circumstance—the Kushners had asked for a particularlygenerous package. But Mr Fulop, a Demo-crat, and city councilmen are up for re-elec-tion, and Mr Trump received just14% of thecity’s vote in November. Kushner Compa-nies had already lost its anchor tenant, We-Work, a shared-office company.

If Kushner Companies is not yet bene-fiting from proximity to the presidency, thepotential for conflicts remains enormous.Corporate-tax reform would have a size-able impact on property firms, for exam-ple. Mr Trump has said he wants a 15% cor-porate tax to apply to pass-through

entities, which would include the LLCsthat comprise much of the Kushner busi-nesses (and Mr Trump’s as well). Loosen-ing of financial regulation, expected underMr Trump, ought to benefit lenders toKushner Companies. Citigroup, for exam-ple, recently provided $425m to refinanceone of its projects in Brooklyn. Blackstone,which lent $375m for Panorama, is raisingan infrastructure fund that might be ex-pected to find investment opportunities inMr Trump’s infrastructure plan. And so on.

Richard Painter, the chief ethics lawyerunder President George W. Bush, says thatsome of this “stinks to high heaven”. That

does not mean that Mr Kushner has or islikely to violate any law. The rules govern-ing conflicts of interest bar him from “per-sonally or substantially” participating inmatters with a “direct and predictable” ef-fect on his finances. But policies that bene-fit Mr Kushner’s parents or Kushner Com-panies’ partners may be allowed,depending on circumstances. “That’s thegrey area,” says Larry Noble of the Cam-paign Legal Centre in Washington, DC.

What seems to have developed, in sum,is a lose-lose situation. Mr Trump’s presi-dency appears to be doing Kushner Com-panies as much harm as good. If potentialbusiness partners continue to be wary ofthe scrutiny that comes with involvementwith a firm bearing his name, Mr Kushnermight end up having to choose betweenhis property interests and his public role.

Yet the list of potential conflicts is solong that public confidence in policymak-ing is at risk. A White House spokesmansays Mr Kushner will recuse himself in anymatter with “a direct and predictable ef-fect” on entities in which he retains a finan-cial interest. Those issues include EB-5 fi-nancing and affordable housing, he notes.But the White House has not published acomplete list of matters in which MrKushner would decline to participate. Andno such list is planned. 7

The sky’s no limit

Source: RealCapital Analytics

*Deals worth at least $2.5m†To June 27th

Kushner Companies, investment activity*, $bn

Buys 666 FifthAvenue, Manhattan

2

1

0

1

2

+

–

2001 03 05 07 09 11 13 15 17†

Acquisition Disposal

Net investment

“PRETTY close to a laughing stock.”That is Walter Shaub’s verdict on

America’s standing in the world, at leastfrom an ethics point of view, under Presi-dent Donald Trump. Mr Shaub’s viewcounts: he stepped down this week ashead of the Office of Government Ethics, afederal watchdog.

He is leaving his job six months early,frustrated at the president’s failure to sepa-rate himself from his businesses, at WhiteHouse foot-dragging on disclosing ethicswaivers forstaff, at its failure to admonish aTrump adviser who plugged the family’sproducts in an interview, and more. “It’shard for the United States to pursue inter-national anticorruption and ethics initia-tives when we’re not even keeping ourown side of the street clean,” Mr Shaubtold the New York Times.

No American leader has ever enteredoffice with such wide business interests asMr Trump. In the context of the country’scorporate landscape, his group is small,mostly domestic and rather mediocre, but

encompasses hundreds of firms that runhotels, golf courses, licensing agreements,merchandise deals and more, in over twodozen countries. Keeping tabs on the po-tential for self-dealing is “a monumentaltask”, says Kathleen Clark, an ethics expertat Washington University. In some areas,particularly abroad, increased scrutiny ap-pears to be making deals harder to pull off.But in others, such as his American hotelsand golf clubs, Mr Trump already appearsto be monetising the presidency.

On becoming president, Mr Trump puthis businesses in a trust. But it is run by twoofhis sons, Eric and Donald junior, and it is“revocable”, meaning its provisions can bechanged at any time. Eric has since said hewill update his father with profit reports,even though Mr Trump pledged not to talkbusiness with his children while in office.MrTrump, the Trump Organisation and hisdaughter, Ivanka, who owns a fashionbusiness and is a White House adviser,have all hired ethics advisers to reviewdeals for potential problems. But how the

The Trump family’s businesses (2)

Not one to avoid a conflict

Sixmonths into his presidency Donald Trump’s conflicts of interest lookworse,and his handling of them less principled, even than many expected

The Economist July 22nd 2017 Business 51

2 process works is opaque. Mr Shaub was unimpressed by Mr

Trump’s appearances at his own for-profitproperties, which he has visited more than40 times as president—most recently to at-tend the US Women’s Open, held thismonth at one of his golf clubs, in New Jer-sey. The visits serve as a form ofmarketing,and his firm has not been shy about cash-ing in. Mar-a-Lago, a Trump resort in Flori-da where the president hosts other worldleaders, doubled its initial fee for newmembers to $200,000 after the election.The club made a profit of$37m in the latestreporting period (January 2016-spring2017), compared with $15.5m in 2014-15.

When Eric Trump opened a golf courseat Turnberry in Scotland in June, he saidhis family had “made Turnberry greatagain”. Staff wore “Make Turnberry greatagain” hats—a reference to Mr Trump’scampaign slogan and, critics say, an at-tempt to cash in on his political power. Ericrecently said: “Our brand is the hottest ithas ever been…the stars have all aligned.”

American golf courses have benefitedfrom at leastone ofMrTrump’spolicydeci-sions: his move to scrap a proposed envi-ronmental rule crafted to protect drinking-water supplies. The national golf-courseassociation had long lobbied to have theregulation ditched, arguing it could have “adevastating economic impact”.

With some Trump projects, the benefitscould flow the other way, from business topolitics. Take a network of budget hotels,branded “American Idea”, dreamed up bythe Trump sons on the campaign trail lastyear. They have signed letters of intentwith developers in numerous cities, in-cludingfour in Mississippi. Bringing jobs toRepublican-leaning states that are strug-gling economically could further boostsupport for the president in such places.

Mr Trump’s appointments also causeconcern. He has picked Lynne Patton, a for-merevent-planner for the family, to run theDepartment of Housing and Urban Devel-opment’s regional office covering NewYork. In that role Ms Patton will overseeStarrett City, a housingdevelopment that ispart-owned by the Trump Organisationand that receives federal subsidies.

Foreign deals are no less troubling. Theethics plan laid out by Mr Trump in Janu-ary promised no new foreign contractsduring his presidency. But his companywill press ahead with projects already inthe works. There are many: an estimated159 of the 565 Trump firms do businessabroad. Some license the Trump name forskyscrapers and hotels, often to politicallyconnected local partners.

An example of how such deals raisequestions about Mr Trump’s motives is thecurrent Gulf spat over Qatar’s alleged sup-port for terrorists. Mr Trump has firmlybacked Saudi Arabia, the United ArabEmirates and others in their boycott of

their neighbour. It is reasonable to ask if itis a coincidence thathe has strongbusinessties with the Saudis and Emiratis but fewwith Qatar. Saudis are big buyers ofTrumpapartments, and the kingdom is investing$20bn in an American infrastructure fund.A Trump-branded golf course in the UAEmade Mr Trump as much as $10m in2015-16. By contrast, Mr Trump’s past effortsto break into Qatar have failed.

Tracking such business relationships isnot easy because of the opacity of MrTrump’s holdings. He makes liberal use ofLLCs—anonymous shell companies thatdo not have to publish financial informa-tion—often in complex combinations withregular corporations. He has refused topublish his tax returns.

A fog surrounds those doing businesswith the Trumps, too. Many have grownless transparent of late. An investigation byUSA Today found that the percentage ofbuyers of Trump condos structuring theirpurchases through LLCs has jumped fromsingle digits to two-thirds. Suppliers arescuttling into the shadows, too. Those ship-pinggoods to Ivanka’s businesses in Amer-ica typically identified themselves on billsof lading before the Trump presidency.Now they usually do not.

The Trumps’ fallbackposition is that, le-

gally speaking, it is impossible for the presi-dent to be conflicted because he is exemptfrom ethics laws. The thinking when Con-gress blessed this exemption, in the 1980s,was that the president’s remit is so broadthat any policy decision could pose a po-tential conflict. Nevertheless, some see av-enues ofattack. Several lawsuits, includingone from Democratic lawmakers, accuseMrTrump ofcausingharm by violating theconstitution’s Emoluments Clause, whichforbids American officeholders from ac-cepting money from foreign governments.One way he allegedly does so is by accept-ing payments from diplomats at his hotels.

The lawsuits particularly focus on thenewly refurbished Trump InternationalHotel in Washington, DC. Owned by thefederal government, the hotel’s leaseagreement includes a provision barringelected officials from holding an interest.But the General Services Administration,which manages federal property, ruled inMarch that Mr Trump’s 60-year lease onthe hotel did not breach that requirementsince the property had been placed in atrust (as long as he received no proceedswhile president). Having initially said itwould donate all hotel profits from foreignofficials to the Treasury, the Trump Organi-sation now says requiring such guests toidentify themselves would be “impracti-cal” and “diminish the guest experience”.

UnpresidentedIt remains unclear whether controversialtransactions such as these will add greatlyto the Trump empire’s profits. Deals are of-ten smaller than you might imagine: thedeveloper behind Trump Tower in Mum-bai, founded by a member of India’s rulingparty, paid just $5m for the licence. Somedeals are being scrapped under scruti-ny—as was the case, in January, with a tow-er in the BlackSea resort ofBatumi.

Moreover, forces beyond Mr Trump’scontrol are likely to have a bigger impacton his businesses’ profits than conflicteddealmaking. A recent analysis of his prop-erties by Bloomberg found that his threeflagship office blocks in Manhattan—Trump Tower, 40 Wall Street and 1290 Ave-nue ofthe Americas—are making lessmon-ey than envisaged when loans were is-sued, because of the softening of the NewYork office market. The combined presentvalue of the three blocks has fallen by anestimated $380m over the past year.

Mr Shaub believes that Mr Trump hasrejected ethical norms embraced by allother administrations since the 1970s. Herecommends several changes to federallaw, including greater powers for the over-sight office and stricter disclosure rules.Rightly so. Whether or not Mr Trump’sgroup benefits materially from his spell inoffice, any doubt over whether policies arecrafted with the American people in mindor his own bottom line is corrosive. 7

Pricing power

Source: The Economist

United States, average daily room-rate% change on a year earlier

Donald Trump winspresidential election

2016 201740

20

0

20

40

+

–

Other four- to five-star hotelsTrump hotels

Golf conflict

52 Business The Economist July 22nd 2017

1

GROOT, a character from Disney’s film“Guardians of the Galaxy”, is usually

mass-produced by the entertainment com-pany as a small, collectable figurine andsold by retailers such as Toys “R” Us. Butjust before the release of the second film inthe franchise earlier this year, Byambasu-ren Erdenejargal, a Mongolian enthusiast,noticed that people in a 3D-printing groupon Facebook were searching for a comput-er model of Groot. So Mr Erdenejargal de-cided to create one. He spent four days per-fecting the design and its printabilitybefore uploading his creation to Thingi-verse, an online 3D-printing communitybased in NewYork. Hisdigital model of thearboreal creature has since been down-loaded (and probably printed in physicalform) over 75,000 times.

Fans of popular TV programmes andfilms have long used arts and crafts to ex-press their attachment to fictional charac-ters. Etsy, an online marketplace for artisa-nal products, is full of HarryPotter-inspired golden-snitch charms. Buta combination of 3D modelling, scanningand cheap 3D printers allows fans to repro-duce items like never before.

At Thingiverse, one of many such sites,people downloaded 6.6m ready-to-3D-print designs in the 30 days to July 11th.Globally, over 424,000 desktop 3D printerscosting under $5,000 were purchased in2016, according to Wohlers, an Americanconsultancy. As the 3D-printing communi-ty grows, companies that own well-known brands, such as media firms, arehaving to pay closer attention.

Some firms are taking a hard line

againstpeople copying theirproducts. Oneoption is to send intellectual-property“takedown” notices requiring people to re-move their digital models from the inter-net. HBO, a subscription-TV firm owned byTime Warner, recently sent such a notice toa Thingiverse user who had 3D-printed anIron Throne iPhone holder, in homage toits series “Game ofThrones”.

Disney thinks it has a way to foil com-puter scanners, which can generate a digi-tal model of an item, by adding reflectivematerial to its plastic products. But likesome other firms, it is also experimentingwith the technology itself. In 2016 it startedselling its own 3D-printed versions of itsStar Wars characters through Shapeways,an American online 3D-printing service,which allows goods to be printed on de-mand when ordered by people withouttheir own 3D printers.

Other companies are using 3D-printingproviders to create merchandise for them,too. Universal Studios, owned by Com-cast, a media conglomerate, is workingwith Sculpteo, a French 3D-printing ser-vice. Clément Moreau, Sculpteo’s chief ex-ecutive, worked with the studio to create acustomisable 3D-printed version ofthe De-Lorean time-travel car for the 30th anniver-sary of its1985 film “Back to the Future”. Al-though Sculpteo is responsible for printingthe cars, being able to customise its designgives fans greater control.

Skoda, a Czech carmaker owned byVolkswagen, is also working with Sculpteoto offer its customers small, personalisedmodels of their own vehicles. Indeed, al-though only a fifth of Sculpteo’s total or-ders come from individuals wanting 3D-printing services, about half of the items itmakes end up in the hands of consumers.That shows companies are using 3D print-ingasa manufacturingprocessand not justas a way to make prototypes.

Some brands are interacting more di-rectly with modellers. A firm called MyMi-niFactory, which is based in London,

works on behalf of brands to source high-quality 3D digital models from individualsfor corporate websites. This avoids valu-able IP being displayed next to crummymodels that may well fall apart whenprinted. Agustin Flowalistik, a Spanish 3Dmodeller, has collaborated with Capcom,a Japanese video-game firm, through My-MiniFactory. One of his most notable fancreations, however, is a series of nine geo-metric models of Pokémon created for lastyear’s 20th anniversary of the franchise,which is co-owned by Nintendo, anotherJapanese firm. Uploaded to Thingiverse,his models have now been downloadedhundreds of thousands of times in total. 7

3D printing and brands

Model citizens

The spread of3D printing createsintellectual-propertyheadaches

New modelling army

Sources: Thingiverse; Wohlers Associates

Active 3D-printing users on Thingiverse, mSelected countries, 30 days to July 11th, 2017

0 0.2 0.4 0.6 0.8 1.0

United States

Germany

Britain

France

Canada

Spain

Australia

Russia

Italy

Brazil

424,0003D desktop

printers sold in2016 worldwide

Do try this at home

IN THE litany of bosses’ gripes about Bra-zil’s inclement business climate, rigid la-

bour laws vie for pride of place with itsconvoluted tax laws and its licensing rules(on everything from health and safety toprotection of cultural heritage). No won-der: Brazil ranks a miserable 117th out of138countries on labour-market efficiency, ac-cording to the World Economic Forum. Itsrigid labour law was transplanted from Be-nito Mussolini’s Italy in 1943. Employersfind it thoroughly unsuited to a moderneconomy and cheered on July 13th, whenthe president, Michel Temer, signed intolaw the biggest overhaul of the unwieldystatute in 50 years.

The reform is a big victory for the un-popular Mr Temer, who is under investiga-tion in a corruption scandal (he denieswrongdoing). It introduces more flexible

Brazil’s labour reform

Bye-bye, Benito

SÃO PAULO

An overhaul ofMussolini-era labourlaws should encourage job creation

The Economist July 22nd 2017 Business 53

2

Soul traders

Who you gonna call?

FOR A man poised for combat with evilspirits, Philippe Moscato looks re-

markably at ease. In casual clothes andchatting about the tools ofhis trade—a“Vogel” crystal, compass, steel crucifix,pendulum and bag ofsalt from Jerusa-lem—he says he can deliver unreal re-sults. Hired to exorcise an apartment in awealthy district ofcentral Paris, he pre-dicts that the air will change. In the win-ter, he says, the owners will no longerneed their central heating, the result ofbeneficial vibrations.

Mr Moscato’s work involves firstwaggling a pendulum, supposedly toassess the flat’s readiness, then lighting acandle, reciting from an exorcism man-ual, before blessing salty water that hesplashes in every room. As he sprinkles,he delivers a flow of incantations. For anhour’s workhe pockets €155 ($178). He hasrequests three or four times a week tode-spookproperty, and exorcises a per-son on average once a week. Paris, Lyonand the French Riviera are the areas mostcontaminated by bad spirits, he says.Demand for ghostbusting fluctuates.Following terrorist attacks in France andBelgium, late in 2015 and early in 2016,respectively, Mr Moscato said he had “anincredible avalanche” of requests.

Alessandra Nucci, a writer on Catho-lic affairs, says that there are more andmore “independent operators” like MrMoscato in Europe. The church has ne-glected exorcisms for a long time, shesays, despite strong demand from thepublic for them. There are some 100exorcist priests licensed by the church inFrance, according to the InternationalAssociation ofExorcists in Rome, butmost are inactive.

Another independent operator, Gré-gory Noel, makes a speciality ofexorcis-ing farms. For up to €500 a pop, Jean

Clément provides a ceremony to releaseharmful “waves”. A third, Jean de Para-col, in southern France, markets a serviceto help small businesses that have beenblighted by blackmagic. Gabriel Des-préaux, near to Paris, says he has prac-tised for decades but only started charg-ing a fee two years ago. He now works asmany as15 hours a day dealing withclients. In a good month his business isgenerating €12,000 before tax.

What might explain rising demand?Television programmes that depict exor-cism, notably imports from America suchas Fox’s “The Exorcist”, may play a part.The relative ease offinding practitionersonline is also a factor. Word-of-mouthrecommendations from satisfied custom-ers matter, too. The owner of the Parisapartment is reluctant to say ifher experi-ment helped to improve the air. “Thewhole thing is freakish, but just by believ-ing, it might make a difference,” she says.Then, as Mr Moscato leaves, a sunbeamsuddenly lights up her apartment.

PARIS

The Catholic church has left a big gap in the exorcism market

working hours, eases restrictions on part-time work, relaxes how workers can divvyup their holidays and cuts the statutorylunch hour to 30 minutes. It also scrapsdues that all employees must pay to theircompany’sdesignated union, regardless ofwhether or not they are members. Just asimportant, collective agreements betweenemployers and workers will overrulemany of the labour code’s provisions.

Once the new rules take effect in fourmonths’ time, they will be valid for exist-ing employment contracts, not just newones. Mr Temer hopes they will dent Bra-zil’s unemployment rate, stuck above 13%after a three-year recession.

Bosses are ecstatic about the changes.The National Confederation of Industrysaid that the reform represents “longed-forprogress”. Banco Santander, a Spanish-owned bank, said it reckons the reformcould eventually lead to the creation of2.3m new jobs.

Small firms also have much to gain. Thenew rules “formalise what we now do in-formally”, enthuses a São Paulo caterer.The “bank” of actual hours worked by hercooks and waiters, necessary in a businesswhere inflexible nine-to-five contractsmake little sense, will now be legal. An ex-ecutive at a European multinational saysthat an unofficial spreadsheet that keepstrackofhis employees’ real time off, whichhe confesses to maintaining alongside anofficial tally ofemployees’ annual 30 vaca-tion days, can also be consigned to thedustbin. (The old law said that leave had tobe split into at most two segments, withone holiday lasting at least 20 days.)

Such ruses have been common in Bra-zilian workplaces, but are risky. Employeeswho leave or are laid off regularly sue em-ployers over the slightest of transgressionsof the labour code, spurred on by litigiouslawyers. Last year Brazil’s labour courtsheard nearly 4m cases (see chart), mostlybroughtbyaggrieved workers. Fines leviedon firms totalled 24bn reais ($7bn).

The reform ought to reduce such legalrisks, which can afflict firms whether theyobserve the rules or not. Gabriel Margu-lies, whose company, UnderMe, produces

50,000 pairs of undergarments a month,says he will at last be able to grant requeststo staff who would prefer, say, to go homeearly in exchange for a shorter lunch break.Until now he has declined for fearof losingin court. That has not stopped former em-ployees from suing in the hope that Brazil’sfamously worker-friendly judges side withthem. Even unsuccessful suits are an un-welcome distraction from running a busi-ness, Mr Margulies laments.

Maurício Guidi of Pinheiro Neto, a firmof lawyers, observes that the reform mighteven change this confrontational work-place culture into a more consensual one.

But it remains to be seen how the labourunionswill react, notesMarcelo Silva, vice-chairman of Magazine Luiza, a big retailer.The main union confederations have con-demned the reform. They fume about theloss ofrevenue from dues. To placate them,Mr Temer has hinted he may amend the re-form by decree, which is subject to a sim-ple up-or-down vote in Congress, in orderto phase out the obligatory dues gradually(and possibly water down some other pro-visions). But he cannot go too far. The onlyway for the scandal-hit president to keephis job may be to help some of his 13.8munemployed compatriots find work. 7

Labour pains

Source: Pinheiro Neto Advogados

Brazil, labour lawsuits, m

0

1

2

3

4

2011 12 13 14 15 16

New cases Rulings

54 Business The Economist July 22nd 2017

IT IS said that Travis Kalanick, who resigned as Uber’s boss lastmonth, hasbeen readingShakespeare’s “HenryV”. Prince Hal’s

transformation, from wastrel prince to sober monarch, is doubt-less one he would like to emulate. But as a guide to the ride-hail-ing firm’s financial dilemma, “Macbeth” is the best play. This lineespecially resonates: “I am in blood stepp’d in so far that, should Iwade no more, returning were as tedious as go o’er.”

Uber has bled money for years in an attempt to become theabsolute ruler of its industry. Once Mr Kalanick’s replacement isfound, voices will whisper that the firm, like Macbeth himself, isin too deep to alter course. But the new boss must change Uberfrom a company that sacrifices anything for its ambitions, to onewhich has a realistic valuation and uses resources efficiently.

Its product is elegantly simple. Uber makes a market betweendrivers and passengers and takes a cut of about a fifth of the fare.The more people use its service, the better it functions, with lowerwaiting periods for passengers, and better use of drivers’ time.Some 55m people in 574 cities use it every month. Underlyingsales were $4bn in 2016, over double what they were the year be-fore (all figures exclude Uber’s Chinese arm, which it sold to a lo-cal rival, Didi Chuxing, last year). Uber’s main trouble is high ex-pectations. Its supporters think it will become the next Alphabetor Facebook. At its last funding round in 2016 (it is private), inves-tors valued it at a whopping $68bn.

But the next boss will have to deal with an income statementthat is scarier than the Thane of Cawdor. Underlying pre-taxlosses were $3bn-3.5bn last year and about $800m in the most re-cent quarter. Some $1bn-2bn of last year’s red ink was because ofsubsidies that Uber paid to drivers and passengers to draw themto its platform. At least another $1bn went on overheads and ondeveloping driverless cars; money is also being splashed on anew food-delivery venture and a plan to build flying cars.

To put its 2016 loss in perspective, that number was larger thanthe cumulative loss made by Silicon Valley’s least profit-con-scious big company—Amazon—in 1995-2002. Measured by sales,Uber is the world’s 1,158th-biggest firm. Judged by cash losses, itranks in the top 20. It is now eight years old, but still probablyyears away from being stable enough to make an initial public of-fering of shares. In contrast, Amazon went public at the age of

three, Alphabet at six and Facebookat eight.Investors rationalise its valuation by assuming that in the long

run it will be highly profitable, with a dominant share of a largemarket. In 2014 Bill Gurley, a well-known tech investor who wasthen an Uber director, estimated that the pool of consumerspending that it could try and capture might be over $1trn, withride-hailing and ride-sharing replacing car ownership. Todaymany Silicon Valley types think that estimate is too conservative.

But a discounted cashflow model gives a sense of the leap offaith thatUber’svaluation requires. Afteradjustingfor its net cashof $5bn and for its stake in Didi, worth $6bn, you have to believethat its sales will increase tenfold by 2026. Operating marginswould have to rise to 25%, from about -80% today.

That is a huge stretch. Admittedly, Amazon and Alphabet, twoof history’s most successful firms, both grew their sales at leastthat quickly in the decade after they reached Uber’s level, and Fa-cebook is likely to as well. But over the same periods these firms’operatingmargins show an total average rise ofonly one percent-age point. Put simply, Uberfinds itdesperatelyhard to make mon-ey. It is not clear that it breaks even reliably across the group ofcit-ies where it has been active for longest.

So the new chief executive will have to deliver a bleak mes-sage; that ride-hailing is locked in a vicious circle. Low prices andhigh subsidies lead to losses, so firms must raise capital contin-ually, requiring them to exhibit rising valuations. To justify thesethey must frequently enter new cities and dream up new pro-ducts. Even more speculative capital is then drawn in by the pa-per gains seemingly on offer. In the past year, ten of Uber’s com-petitors, such as Lyft in America and Grab in South-East Asia,have together raised or are raising, roughly $11bn. That will beused to finance still more price wars to win market share.

Double, double toil and troubleUber is on course to use up its existing cash and credit lines inthree years. Its next boss must break the cycle before then by cut-tingsubsidies and talkingdown its valuation. It could lose marketshare and may need to exit scores ofcities. On July13th it said thatit will merge its operations in Russia with a competitor. Similardeals need to follow. Although Uber should continue to invest indriverless cars, some of its more experimental “moon shot” pro-jects will probably be for the chop. Its investors, including Gold-man Sachs, Saudi Arabia’s government and Jay-Z, a rapper, couldface paper losses. Staffpaid in stockwill be furious.

Yet over time the aim should be a firm with a lower marketshare of a more stable industry. Successful, dominant firms, suchas Google and AT&T, don’t seek absolute monopolies by killingoffweaker rivals. They allow them enough space to plod on. Thatlowers the risk of antitrust problems and deters new entrants. Bysignalling that Uber’s valuation is too high its new boss wouldknock valuations across the ride-hailing industry and slow theflood ofspeculative capital—in the end, a good thing.

Once the losses abate, the priority should be to create a more“capital light” model. Perhaps Uber could license its brand andtechnology to local partners in some markets. It could concen-trate subsidies on customers who sign up to long-term contracts.The biggest impediment may be Mr Kalanick. With allies, he stillcontrols a significant share, probably a majority, of the com-pany’s voting rights. Anyone taking on tech’s toughest job musthave the inner steel to confront him. They should remember an-other quote from the bard; “I must be cruel only to be kind.” 7

Reinventing Uber

An action plan for the ride-sharing firm’s next chiefexecutive

Schumpeter

The Economist July 22nd 2017 55

For daily analysis and debate on economics, visit

Economist.com/economics

1

ACCORDING to company lore, YunnanBaiyao, a musty-smelling medical

powder, played a vital role during the LongMarch. As China’s Communist troops fledfrom attacks in the 1930s, trekking thou-sands of miles to a new base, they spreadits yellow granules on their wounds tostanch bleeding. To this day, instructionson the Yunnan Baiyao bottle recommendapplication after being shot or stabbed.Many Chinese households keep some instock to deal with more run-of-the-millcuts. But the government has recently putits maker into service to treat a differentkind of ailment: the financial weakness ofstate-owned enterprises (SOEs).

Yunnan Baiyao has emerged as aposter-child of China’s new round of SOEreform. The company, previously ownedby the south-western province of Yunnan,sold a 50% stake to a private investorearlierthis year. The same firm had tried to buy aslice of Yunnan Baiyao in 2009 but wasblocked. Its success this time has been heldup in the official press as proof that a pushto overhaul sluggish state companies is atlast gaining momentum under Xi Jinping,China’s president.

But formanyinvestorsand analysts, theYunnan Baiyao case proves just the oppo-site: that SOE reforms are stuck in a rut. Thesale, after all, left half the company in statehands. And a traditional Chinese medicalpowder is far removed from industriessuch as energy and finance, which the gov-

pand the Chinese economy by nearly 10%,or about $1trn, over the next decade.

The fate of China’s state firms is also aglobal concern. By international stan-dards, they are already massive. China’s200 biggest SOEs account for 18% of globalrevenues of integrated oil and gas compa-nies, 6% in carmaking and 5% in construc-tion (see chart 2). A series of mega-mergerscurrently under way is concentrating evenmore power in the hands of a few, givingthem the heft to barge into new markets.For foreign firms this can smack of unfaircompetition, as if they are fighting againstthe Chinese state. The temptation for othercountries to block foreign investments bySOEs will only increase, setting the stagefor bitter disputes.

Market failureBack in 2013 Mr Xi seemed to grasp thatchange wasneeded. He vowed thatmarketforces would play a “decisive role” in allo-cating resources and declared that reformofSOEswasa priority. Although a big-bangprivatisation was never on the cards, thehope was that the government wouldmake SOEs better run, more competitiveand less coddled. There has been a bewil-dering array of directives and pilot pro-grammes since then but little real progress.The fear is that the reforms, taken together,not only fail to solve the most pressing pro-blems, but might even be aggravatingthem. SOEs are getting bigger, not smaller;their management has become more con-servative; and their deficiencies are begin-ning to infect the economy more widely.

Keeping track of all the different experi-ments that fall under the heading of “SOEreform” is a full-time job. When MrXi put iton the agenda in 2013, the governmentbroke it down into 34 separate initiatives,farmed out to different departments andagencies. It has since published at least 36

ernment deems strategic and is less willingto open to private capital.

It is hard to overstate the importance ofgetting SOE reforms right. In the 1980s,when China was starting to open to theworld, the state sector dominated its econ-omy, accounting for nearly four-fifths ofoutput. A big factor behind China’s re-markable growth since then has been therelative decline of SOEs, to the point thatthey account for less than a fifth of outputtoday. As state firms stood still, a vibrantprivate sector sprouted around them.

Over the past few years the state sectorhas, by several measures, stopped shrink-ing. There are still more than 150,000 SOEsin operation, two-thirds owned by localgovernments and the rest under centralcontrol. Private firms are much more pro-ductive, but state firms gobble up a dispro-portionate share of resources. They takeabout half of all bank loans and are themain culprits behind China’s big increasein corporate debt. Since 2015 investment bySOEs has grown faster than private-sectorinvestment, reversinga decades-long trend(see chart1on next page).

For China this has the makings of a da-magingcycle. Asgrowth slows, the govern-ment leans on SOEs to spend more; but thisdrives up their debt further and so weighson the economy. Putting a stop to this se-quence is vital for China if it is to becomewealthy. The IMF estimates that an ambi-tious programme of SOE reform could ex-

China Inc

Reinstatement

SHANGHAI

Reforms meant to fixChina’s ailing government-owned firms instead haveemboldened them

Finance and economicsAlso in this section

58 Africa’s credit unions

58 KKR’s succession plan

59 Buttonwood: The bonds that break

60 Free exchange: The rise of populism

56 Finance and economics The Economist July 22nd 2017

1

2 supplementary documents and launchedreform trials at 21different firms. Provincesand cities have followed up with dozens ofplans, guidelines and trials of their own.

Some promising ideas are afoot. Afteryears ofdiscussion, China has started to letstate firms award shares to employees aspart of their pay packages. SOEs had triedsuch schemes in the 1980s and 1990s, butthe government stopped them, fearing thatsenior executives were siphoning off stateassets, much like Russia’s oligarchs.

Shanghai International Port Group(SIPG), a city-owned firm, is one of thecompanies pioneering employee owner-ship ofshares. It also demonstrateshow lo-cal SOEs, though smaller than their nation-al peers, are often huge themselves: SIPG isthe principal operator of Shanghai’s cargoport, the world’s busiest. In June 2015, as afirst step, it allocated 1.8% of companyshares to employees; some 16,000 of its22,000 employees now hold a stake. DingXiangming, vice-president of the portgroup, believes he is already seeing results.“Workers are more focused on our com-pany’s growth,” he says.

Public and privateShanghai is also an example of how partsof the country can outpace others in SOEreform. Last August the People’s Daily, theCommunist Party’s main newspaper,hailed the city as a model for other localgovernments. Shanghai moved quickly toclassify its SOEs as either commercial (eg,SAIC Motor) or in public service (eg, Shang-hai Metro). This isa distinction that the cen-tral government wants to see applied na-tionwide, so that companies classified ascommercial can be treated more like priv-ate firms. Shanghai’s commercial SOEshave more leeway to hire managers fromthe private sector and to pay market rates.

Another potentially promising idea is“mixed-ownership reform”, a fancy termfor allowing SOEs to sell stakes to privateinvestors, as in the case of Yunnan Baiyao.The thinking is that private shareholderswill demand more from SOEs, especially iftheir investment is combined with a seaton the board. As a concept it is not new:many big SOEs have been listed on thestockmarket since the early 2000s, attract-ing outside investors. But Cao Zhilong ofShanghai United, a law firm, thinks thisround of mixed-ownership reform couldlead to bigger deals: “The word privatisa-tion is not used. It is too sensitive. But thestate can sell a majority.”

At national level, the mixed-ownershiptrials have been disappointing. The state ismainly selling minority stakes in the sub-sidiaries of large groups, such as a 45%share in the logistics arm of China EasternAirlines, a deal completed in June. But forlocal SOEs, outright salesare easier. Tuopai,a small town in Sichuan, sold a majoritystake in its struggling liquor company to a

Chinese private-equity firm last year. Thechange in culture is already apparent. Thecompany has rolled out slick new advertsand uses designerbottles instead ofthe oldones with ill-fitting labels. It has also cutabout a third of production staff to makeway for more automation, the kind of un-popular decision that a government-owned company is loth to make.

In general, though, such deals are rare.This cannot just be blamed on the govern-ment; a basic dynamic is also at work.“Profitable SOEs don’t want to sell to out-sidersand no one wants to buya strugglingSOE,” says Hong Liang ofEverbright Law.

What can be blamed on the govern-ment are conflicting messages. Less notedat the time of Mr Xi’s 2013 pronouncementabout market forces, but more glaring now,was his declaration that SOEs should con-tinue to play a dominant role in the econ-omy. The implication is that he wants statefirms to be better run—hence the emphasison the market—but only so that they betterserve the party by helping it to manage theeconomy at home and carry China’s flaginto foreign territory. Mr Xi has made thispoint in increasingly strident terms. At ameeting on SOEs last October he devotedhis comments not to reform but to the ne-cessity of strengthening the party’s grip.“The party’s leadership of SOEs is a majorpolitical principle, and that principle mustbe insisted on,” he said.

People who work in and with SOEs re-port a palpable change in atmosphere inrecent years. “Party officials are not thesame as the technocrats who used to runthe SOEs,” says a top banker. “They don’ttake risks. Doing nothing is what’s safe.”Some of the most capable employees areleaving SOEs altogether. Political educa-tion, always a part of life in state firms, hasbeen stepped up. One manager who re-cently quit a big state bank said that a cam-paign exhorting workers to study the partyconstitution had been unusually intense.

At the same time the government hascapped pay for senior executives, con-cerned that they were getting more thangovernment employees of equivalentranks, stoking resentment. Yet on an inter-

national basis, SOE bosses are dramatical-ly underpaid. The president ofPetroChina,the country’s biggest oil company, earned774,000 yuan ($112,000) in 2016; the CEO ofChevron, a firm of roughly the same mar-ket value, pulled in a handsome $24.7m.

Signs suggest that after seeing moralesuffer without any improvement in perfor-mance, the party is rethinkingat least someof its policies. A senior official in charge ofsupervising SOEs said in June that it wouldbe wise to delegate power to companyboards, giving them more say over long-term planning and hiring decisions. Li Ke-qiang, China’s prime minister, told a meet-ing of 100 leading executives in April thatthe government might try to implement asystem of performance-linked pay at bigstate firms. At a conference on July15th, MrXi said it was vital that SOEs reduce theirexcessive debts (see chart 3 on next page).

But Mr Xi’s emphasis on party leader-ship has also created cover for those seek-ing to defend and even expand state pow-er. The most important role in this is playedby SASAC, the arm of the government thatoversees most SOEs. It has pushed for thecreation of bigger “national champions”under its control. It has combined China’stwo biggest railway-equipment makersand its two biggest shipping groups, and isreportedlyworkingto knot together its twobiggest chemical producers. Medium-sizedcompanies, too, have seen plenty of suchactivity, affecting property, ports, cementand more.

Some mergers make sense: for instance,the steel sector is highly fragmented, a re-sult of local protectionism. But most com-binations look more dubious, becausestate firms are already oversized. The aver-age SOE has about 13 times more assetsthan the average private-sector firm, ac-cording to World Bank estimates. What ismore, in many industries, the only compe-tition faced by state firms is from otherstate firms. Indeed, part of the rationale forthe mergers is to prevent SOEs from buttingup against each other as they go abroad to

1On the rebound

Source: CEIC *13-month centred moving average

China, state-controlled firms’ share of fixed-asset investment*, %

2004 06 08 10 12 14 160

10

20

30

40

50

60

2Things of state

Sources: S&P Capital IQ; The Economist

China, 200 biggest state-controlled firms’ share of global market, by revenue, %

0 5 10 15 20Integrated oil and gas

Diversified banks

Coal

Electric utilities

Steel

Carmakers

GoldAerospace and defence

Metals and mining

2008 2015

The Economist July 22nd 2017 Finance and economics 57

2 win business, as had happened with rail-way-equipment makers.

In the 1990s, when SOE reforms began,the vision was of the state controllingwhole industries but with the companiesin them battlingeach other to promote bet-ter management. The imperfections of thisscheme are clear, judging by weak returnsin the state sector. But the government’s re-sponse is to create even bigger monsters.Chinese economists have described themas “red zaibatsu”, a reference to Japan’ssprawling, slow-moving conglomerates.Yanmei Xie of Gavekal Dragonomics, a re-search firm, is even blunter: policymakers“are trying to create conglomerates thatcan dominate domestic and internationalmarkets through sheer size”.

The risk is that such supersized SOEscould hurt the global economy. In a paperpublished earlier this year, CarolineFreund and Dario Sidhu of the Peterson In-stitute of International Economics, a think-tank, argued that businesses around theworld were operating in more fragmentedenvironments, with the exception of sec-tors in which Chinese SOEshave large foot-prints. In these sectors, such as mining andcivil engineering, concentration has in-creased as China’s state firms have bulkedup. Normally, it is the most productivecompanies that grow the fastest. China’sSOEs, by contrast, are much less efficientthan their international counterparts, evenwhen they are growing more quickly, ac-cording to Ms Freund and Mr Sidhu.

The business of stateThe saving grace in the past was that thevast majority of SOE business was withinChina. That is changing: industries fromconstruction to steel to railways are look-ingabroad. The “One Belt, One Road” strat-egy—the core ofMr Xi’s foreign policy—hasmade foreign expansion an explicit part oftheir mandate. The danger is not just thatthey will elbow Chinese private-sectorcompetitors aside but that in doing so, theywill provoke a backlash. Big firms in othercountries will demand state backing in or-der to level the playing field. Foreign regu-lators, already wary of Chinese capital,will turn more hostile. The drift away fromfree trade could easily gather steam.

This is not the only worry. One of thekeys to China’s economic rise hitherto hasbeen its success in restricting the sprawl ofstate firms. They control the commandingheights of the economy, from transporta-tion to power, but have largely been con-fined to these sectors. Hard-charging entre-preneurs have been free to break into newbusinesses around them. The manufactur-ers that led China’s export assault on glo-bal markets were private. The tech firmsthat dominate the internet are private. Therestaurants, cafés and shops that line citystreets are private.

This model still works, for now. Within

the MSCI index of large listed Chinesefirms, the state accounts for more than 80%of market capitalisation in sectors such asenergy, industry and utilities, according toMorgan Stanley. But the state accounts for40% or less of market value among con-sumer, health-care and IT companies, saysthe bank. With these newer sectors grow-ing far more quickly than smoke-stack in-dustries, private companies may well con-tinue to outflankSOEs.

There is a big looming worry, however.One aspect of SOE reform is in fact makingquick progress: the creation of what areknown as “state capital investment andoperation” companies (SCIOs), to helpmanage existing state assets and invest innew ones. This initially looked like part ofthe solution for China. It borrows an ap-proach honed in Singapore, where Tema-sek, a government-owned holding com-pany, manages a portfolio ofstate firms butdoes not meddle in their operations, apartfrom demanding that they deliver good re-turns. It is now clear that this is not whatChina has in mind. Government officialssay that SCIOs should not seek to makemoney in their investments; rather, theyare meant to be more like “policy funds”,seeding firms and industries with govern-ment cash or money raised from SOE divi-dends without worrying about profit.

The other striking feature of SCIOs isthat they are expressly enjoined to break

into new high-tech sectors. Provincial gov-ernments around the country have pub-lished plans over the past two years inwhich they promise to guide more than80% of their funds into infrastructure, pub-lic services and, crucially, “strategic emerg-ing industries”, a category that refers tonew energy, biotechnology and IT, amongother areas. The upshot is that SCIOs,armed with cheap capital, seem set on ex-panding the state’s reach into the privatesector. “We should anticipate the emer-gence of literally thousands of well-re-sourced SCIOs,” says Barry Naughton atthe University ofCalifornia in San Diego.

State-backed private-equity funds,which can be seen as forerunners to the in-vestment function of the SCIOs, are al-readymakinga big impact. To give three ex-amples from last year: the city ofShenzhenlaunched a 150bn yuan fund; Jiangxi, a rel-atively poor central province, created a100bn yuan fund; and the city of Chengduset up a 40bn yuan fund. This influx ofcash is pushing up valuations. Bain & Co, aconsultancy, calculates that private-equitydeals in China were priced last year at afrothy 26-times earnings before interest,tax, depreciation and amortisation, com-pared with ten times in America. The statemay turn out to be a wise investor but ex-perience suggests otherwise. More likely,the state will crowd out private investors,hogging capital and allocating it poorly.

The outcome does not have to be thisbleak. Optimists still thinkthat MrXi couldspring a surprise after a big CommunistParty congress later this year. With his au-thority firmly entrenched, he might feelemboldened to unleash the market forcesthat he spoke of four years ago. But basedon his rhetoric and actions so far, this lookslike wishful thinking. SOEs, far from re-treating, are on the march, drawing on gov-ernment support to compensate for theirweakness. They are making conquests athome and abroad. Cutting state firmsdown to size and opening them up to com-petition ought to be the point of SOE re-form. Instead, China is beefing them upand driving them into new territory. 7

3Borrowing binge

Source: Wind Info

China, companies’ liabilities as % of equity

100

120

140

160

180

2003 05 07 09 11 13 15

Non-state-controlled

State-controlled

Can anything cure China’s SOEs?

58 Finance and economics The Economist July 22nd 2017

1

THE most recent time Moses Kibet Bie-gon needed a quick loan was when his

roof blew away. He got one from the Imar-isha Savings and Credit Co-operative, inKericho in western Kenya. Imarisha chan-nels the savings of its 57,000 members intoloans for school fees, business projects or,in Mr Biegon’s case, roof repairs. It runs afund to help with medical bills. And it paysdividends to its members from its invest-ments, which include a shopping plazathat it opened last year.

Savings and credit co-operatives (SAC-COs) like Imarisha are the African versionof credit unions: member-owned co-ops,usually organised around a community orworkplace. Some are rural self-help groupswith a few dozen members and a safe.Others have branch networks and mobileapps. The largest SACCOs rival banks;Mwalimu National, which serves Kenyanteachers, has even bought one.

The co-operative model brings “a morehumane face” to finance, argues RobertShibutse, Mwalimu’s boss. But SACCOs arenot just a cuddly sideshow. In Kenya,where they are strongest, they providemore loans for land, housing, educationand agriculture than banks or microfi-nance institutions. The World Bank esti-mates that SACCOs and other co-opera-tives account for over 90% of all housingcredit in the country. In Rwanda they at-tract twice as many savers as banks. Mem-bership is growing in Ghana and Tanzania.

SACCOs can be generous lenders, inpart because their members are often col-leagues or neighbours. That makes it easierto judge risks, urge repayment and servethe folk that banks tend to shun. They fill a“vacuum” in rural areas, says Lance Kashu-gyera, who leads a Ugandan governmentproject on financial inclusion. In KenyaSACCOs typically offer better interest ratesthan banks. But members can view a loanas a right and are often allowed to borrowup to three times their savings. In 2016 thelargestKenyan SACCOshad loan-to-depos-it ratios of 109%, meaning they had to useother sources of funding than their mem-bers. “The demand for credit is high, butthe savings culture is poor,” laments an of-ficer at a Ugandan SACCO.

In Uganda the greatestdangerhas comefrom politicians bearing gifts. In 2005 thegovernment promised “a SACCO in everysub-county”, backed up with donationsand cheap credit. Local bigshots hastilyformed co-ops to get their hands on the

money. Members saw loans as a handoutfrom the ruling party and made little effortto repay. When the cash ran out, SACCOsfailed. “They were a bit political,” sighsJames Lubambo, an official in Iganga dis-trict, reeling off the names of 11 local SAC-COs that have recently collapsed.

Indeed, the state of SACCOs often re-flects a country’s politics. After a poorshowing in Kampala in last year’s elec-tions, Yoweri Museveni, Uganda’s presi-dent, has personally delivered 100m shil-

ling ($28,000) cheques to SACCOs in thecity. In Rwanda, bycontrast, an efficient butoverbearing government has built a suc-cessful SACCO sector from scratch—even ifa quarter of members felt obliged to joinout of a sense of civic duty, according toone survey.

There are better ways for governmentsto help. One is by plugging the yawninggaps in regulation, which in some coun-tries bundles SACCOs together with other,non-financial co-operatives. Occasionaltales of failure and fraud also do little forpublic confidence. In 2010 Kenya created anew regulator for the largest “deposit-tak-ing” SACCOs: it is gradually enforcing capi-tal requirements, but remains hugely un-der-resourced. Uganda brought in a newset of rules on July1st, after more than a de-cade of discussion. It is also running a sev-en-yearprojectwhich, amongother things,will train leaders in small rural SACCOs tomanage savings and credit better.

There are other challenges. KenyanSACCOs face a squeeze as a rate cap onbank loans intensifies competition for themost creditworthy borrowers. And theywill need to adapt to mobile banking,which is helping banks reach customersthat SACCOs could once keep to them-selves. But the co-operative model remainsdistinctive. Mr Biegon doubts that a bankwould have financed his roof repairs. TheSACCO, he says, is “our hope”. 7

Africa’s savings and credit co-operatives

Fixing the roof

KERICHO AND KAMPALA

Credit unions in Africa need regulation,not handouts

Striking a co-operative note

IN MOST four-decade-old firms run bygreying co-founders, investors would

have long since demanded clarity on suc-cession. But private equity works different-ly: the industry has been dominated by itspioneers ever since its origins in the 1970s.So an announcement on July17th about itsfuture leadership by KKR, one of theworld’s largest private-equity firms, puts ita step ahead ofits rivals. Itsaim of ensuringthat the firm has the right structure in place“for decades to come” is not obviouslyshared across the industry.

KKR has been run since 1976 by two ofits founders, Henry Kravis and GeorgeRoberts (both in their early 70s). They arestaying on as co-chairmen and co-chief ex-ecutives but with less of a day-to-day role.Lining up behind them are a pair of 40-somethings, Joe Bae and Scott Nuttall, whowill join the board and take the titles of co-president and co-chiefoperating officer.

Such explicit, public succession plan-

ning is unusual. Stephen Schwarzman, theboss and co-founder of Blackstone, theworld’s largest private-equity firm, hashinted that Jonathan Gray, head ofits prop-erty arm, could succeed him. But the chiefsof other behemoths, such as Leon Black ofApollo, orDavid Rubenstein, William Con-way and Daniel D’Aniello, the trio behindand atop Carlyle, have largely kept silentabout their heirs. So too have the bosses ofmany smaller firms.

Public reticence does not necessarilyimply a lackofplanning. Most private-equ-ity firms are private partnerships and donot face the level of scrutiny accorded topublicly listed firms like KKR. But there isoften pressure to reveal succession plansfrom investors who are committing capitalthat could be tied up for ten years or more.

Not having a scheme for a smooth tran-sition of power carries risk in all business-es. But the potential for acrimonious dis-putes, not least over money, is particularly

Private equity

Stepping up to the plate

NEW YORK

KKR lays out a succession plan in an industry still largely unprepared for the future

The Economist July 22nd 2017 Finance and economics 59

2

GOOD generalsknowthat the nextwarwill be fought with different weap-

ons and tactics from the last. Similarly, fi-nancial regulators are right to worry thatthe next crisis may not resemble the creditcrunch of2007-08.

The last crisis arose from the interac-tion between the market for mortgage-backed securities and the banking sys-tem. As investors became unsure of thebanks’ exposure to bad debts, they cutback on their lending to the sector, caus-ing a liquidity squeeze. Since then, centralbanks have insisted that commercialbanks improve their capital ratios to en-sure they are less vulnerable.

Might the next crisis originate not inthe banking system, but in the bond mar-ket? That is the subject of a new paper*from the BankofEngland. The worry cen-tres on the “liquidity mismatch” betweenmutual funds, which offer instant re-demption to their clients, and the cor-porate-bond market, where many securi-ties may be hard to trade in a crisis. Thedanger is that forced selling, to returnmoney to investors, leads to big falls inbond prices, creating a feedback loop.

If that concern seems fanciful, thinkback to the summer of 2016, when Britishmutual property funds had to suspend re-demptions in the wake of the EU referen-dum vote. Fund managers simply couldnot sell properties fast enough to pay offtheir investors.

The corporate-bond market is a partic-ularconcern because it is much less liquidthan the equities market. That liquidityhas fallen in recent years, because bankshave become less willing to act as market-makers. This reluctance is rooted in theregulations imposed after the last crisis,which require banks to hold more capital.

The Bank of England’s study focusedon European mutual funds that own in-

vestment-grade bonds (the safest catego-ry). Since 2005, the worst month for re-demptions in this sector occurred inOctober 2008, when outflows reached theequivalent of 1% of assets under manage-ment each week. The sell-off was accom-panied by a rise in bond spreads—the gapbetween the yield on investment-gradebonds and that on government debt—ofaround a percentage point.

Some of that increase was obviouslycaused bya deterioration in the economy—investors realised that bond issuers weremore likely to default. But the bankreckonsthataround halfthe shiftwas the result ofadecline in liquidity. In other words, bondinvestors demanded a higher yield to com-pensate them for the difficulty they mightface in selling their holdings.

The bankreckons that, ifa 1% outflow ofmutual-fund assets happened today, thenEuropean investment-grade spreadswould rise, for liquidity reasons alone, byaround four-tenths of a percentage point.That may not sound much, but it is arounda third of the average spread since 2000.

What if the sell-off is greater than it wasin 2008? After all, near-zero rates on cash

must have pushed a lot of investors intocorporate-bond funds in recent years.Some of those investors may be usingbond funds as “rainy day” money andwill thus be reluctant to sit tight if theirsavings are losing value.

Others could step in to buy the bonds.Long-term holders like pension funds andinsurance companies are obvious candi-dates to do so, although they tend to beslow to react. Hedge funds are more nim-ble bargain-hunters but they often de-pend on financing from the banks, andthat may not be available in a crisis.

Finally, the banks themselves couldstep in, but they face capital charges ontheir market-making activities. The mo-ment could come, the bank suggests,when “dealers reach the limit of their ca-pacity to absorb those asset sales”. Thiswould be the “market-breaking point”.And that stage could be reached when re-demptions equal 1.3% of net assets of cor-porate-bond funds—in other words, only30% higher than during the 2008 crisis.

A sell-offin corporate bonds ought notto be as damagingas the mortgage-relatedcrisis of 2008. Investors don’t tend to useborrowed money to buy such bonds, andthe big asset-management companiesdon’t back funds with their own capital.Corporate bonds also comprise only asmall part of most portfolios. But it couldstill be traumatic ifbond funds need to besuspended. That could undermine retailinvestors’ confidence in the liquidity ofthe mutual funds on which many dependfor their retirement income. The bank isright to be alert to the risks.

The bonds that breakButtonwood

A sell-offofcorporate bonds could lead to a breaking-point for the market

..............................................................* “Simulating stress across the financial system: theresilience of corporate-bond markets and the role ofinvestment funds”, Financial Stability Paper No 42

Economist.com/blogs/buttonwood

high in private equity. In a recent analysisof over 700 firms, Josh Lerner and VictoriaIvashina of Harvard Business Schoolfound that compensation of partners inthe industry was inextricably tied, not toindividual investment success, but ratherto whether theywere there ata firm’sbirth.The average founderreceivesnearly20% ofall profits from “carried interest” and ownsa 31% stake in his firm; a non-founding se-nior partner gets on average only 11% ofprofits and owns less than 14% of the firm.

Such unequal arrangements can makea transition trickier. Reallocating profits ortransferring outsize ownership stakes to

other partners risks internal bickering. In2010 Justin Wender, the anointed succes-sor of John Castle, the founder ofan Amer-ican firm called Castle Harlan, left amid adispute about “future ownership”. Frictionover succession and profit-sharing at Char-terhouse, a British firm, came to light in2014 in the form of a lawsuit by a disgrun-tled former partner, who alleged, amongother things, that the firm tried to force himto sell his stake at an excessively low price.Charterhouse won the case.

Mr Lerner worries that a growing trendof exiting founders selling their stakes ex-ternally causes other problems, particular-

ly for private firms. If such firms are no lon-ger in the hands of those who make theprofits, for example, that may weaken thealignment of interests that has drivenmuch of the industry’s success.

All these concerns will come to a headwhen increasingnumbers offounders stepback. Large firms like KKR have diversebusinesses and big teams of executives;smaller counterparts, where power is con-centrated with individual founders, mayhave more trouble adjusting. All the morereason to follow KKR’s lead on leadership.Success and succession will become evermore intertwined. 7

60 Finance and economics The Economist July 22nd 2017

WITH the defeat of Marine Le Pen in her bid for the Frenchpresidency, establishment politicians in rich countries

breathed a sigh of relief. The fortunes of extremist candidateshave faltered since the populist surge that put Donald Trump intothe White House. But it is hard to be confident that this was popu-lism’s high-water mark without a better understanding of whatcaused the swell in the first place. The most convincing explana-tions suggest that populist upswings are not in the past.

It is tempting to dismiss the rise of radicalism as an inevitableafter-effect of the global financial crisis. Studies show that thevote shares of extreme parties, particularly on the right, tend toincrease in the years after a crisis. The Depression spawned someof the 20th century’s most dangerous and radical populist move-ments. But the factsdo notfit that storyprecisely. In Europe, forex-ample, populist parties have steadily won more voters since the1980s. What is more, populist rage is rarely focused on finance.Trade and immigration are more prominent targets. The clearestrecent manifestations of the populist surge—Mr Trump’s victoryand Brexit—have only an indirect link to the financial crisis.

Rival theories blame populism on deep cultural insecuritiesprompted by demographic and social change. In a forthcomingpaper Noam Gidron and Peter Hall reckon that right-wing politi-cal success is built on a decline in the subjective social status ofwhite men. Both economic hardship and relative improvementsin the perceived status ofother groups, such as women and racialminorities, seem to contribute to male insecurity. Around 2010American women without a college degree overtook similarlyeducated men when both self-assessed their place in the socialhierarchy. Men’s perception of their relative status has also fallenin Europe. The paper links declining status to support for right-wingpopulism. Yet this too seems only a partial explanation. Therecent rise in left-wing populism has been just as striking.

A third explanation is captured neatly in a new paper by DaniRodrik of Harvard University, who reckons that globalisation’srole cannot be ignored. He suggests that populism may becomemore attractive as global integration matures. Cutting tariffs bythat extra little bit yields much smaller increases in GDP than pre-vious reductionsand delivers lessperceptible consumer benefits;but such cuts continue to impose costs on vulnerable workers.

Eventually this asymmetry produces a backlash. The form it takes depends, however, on which sort of integra-

tion is the greatest local irritant. Frustration with trade and finan-cial integration often breeds left-wing populism, which feeds offclass divisions in society; Latin American populism tends to fallinto this category. When immigration is seen as the source of dis-ruption, right-wing populism, which exploits ethnic or religiousdivisions, is more common. In Europe, for example, populistshave been far more hostile to the free movement of people thanto open trade. But faced with both sorts of integration Europe hasproduced examples of each and America has sprouted compet-ing left-wing and right-wing populist leaders.

These hypotheses are plausible (and compatible). But they arestill incomplete. The rejection of established elites is perhaps thedefiningcharacteristic ofa populist movement, yet what is not al-ways clear is why mainstream parties should be so unresponsivein the face of discord. In another new paper, Luigi Guiso, HeliosHerrera, Massimo Morelli and Tommaso Sonno provide a cleverframework for answering that critical question. Establishmentparties, they suggest, cannot respond to supporters’ concerns be-cause of their respect for institutional constraints, like the rules ofthe European Union, or because of an unwillingness to breaknorms like repaying sovereign debt.

But keepingfaith with institutions can mean lettingdown vot-ers. When elected leaders fail to deliver hoped-for improve-ments, the public disengages. Depressed turnout is an opportuni-ty for political entrepreneurs. Almost invariably, the authorsargue, populists promise to relieve the stresses caused by institu-tional constraints. But the genre of populism depends on howturnout varies in some groups compared with others. If right-wing voters (such as older men) are less prone to sit out elections,then a populist candidate is more likely to be right-wing. Populistpolicies vary as a result: a left-wing firebrand might attack thebudget strictures imposed by European institutions, whereas aright-winger might focus on ending free movement of labour.

If there is anything that unites the policies of Mr Trump withBrexit and the beliefs of European populists, it is a promise tobreakfree ofconstraints. But a populist upswing propelled by un-happiness with established institutions raises an awkward ques-tion: if these institutions are worthwhile, why are people so frus-trated by them? The authors argue that populists highlight theshort-run advantages of wrecking institutions while downplay-ing the long-run consequences. That certainly describes thespendthrift recklessness of Hugo Chávez in Venezuela. To somedegree, “populism” is another word for heterodoxies that seemdoomed to fail.

I demand satisfactionPoliticians are shackled by all manner of things—from interna-tional institutions and the whims of capital markets to ideologi-cal commitments to particular theories of economic growth.Such constraints are not always sensible—think of the unforgiv-ing fetters of the gold standard, for example. But they are oftenvaluable and workingoutwhich do more harm than good is rare-ly easy. Unhappy voters put all of them at risk, however. And ifpoliticians cannot satisfy disenchanted citizens while operatingwithin established limits, then institution-smashing populistswill soon be on the march again. 7

Take back control

When elites appearpowerless to help, voters give populists a chance

Free exchange

Economist.com/blogs/freeexchange

The Economist July 22nd 2017 61

For daily analysis and debate on science andtechnology, visit

Economist.com/science

1

IT IS life’s lottery, blessing some and curs-ing others in equal number: the chance

of a sexually reproducing organism’s off-spring inheriting a particular version of agene from a particularparent is50%. Usual-ly. But there are exceptions. Gene drives arestretches of DNA that change those odds tofavour one parent’s version of a gene overthe other’s. That version will thus tend tospread through a population. If the oddsare stacked sufficiently in its favour it cando so fast and, within a few generations,become the only version of the gene inquestion that remains in circulation.

Researchers realised, soon after the dis-covery of gene drives half a century ago,that they might be forged into tools foreradicating diseases and pests. For exam-ple, a drive promulgating a genetic variantthat made mosquitoes unable to host theparasite that causes malaria could be usedto help eliminate the disease. If the propa-gating variant made female mosquitoessterile, it might provide a means to elimi-nate the troublesome insects themselves.

Engineering gene drives to do human-ity’s bidding in this way proved, however,devilishly difficult. The idea therefore lan-guished until 2015, when Valentino Gantzand Ethan Bier of the University ofCalifor-nia, San Diego, used CRISPR-Cas9, a recent-ly discovered gene-editing tool, to make agene drive that could be inserted any-

genes, and a piece of RNA, a chemical akinto DNA that is made up of similar geneticletters. This “guide” RNA will stickonly to asection of DNA with a letter-sequencecomplementary to its own. The enzyme isbound to the guide RNA. The guide RNA isbound to the DNA. Hence the enzyme re-cognises the DNA it has to cut, and snips itat the correct location. By inserting thegene for Cas9 into an organism, togetherwith genetic material that instructs a cell toproduce the correct guide RNA, biologistscan therefore use CRISPR-Cas9 to sever agenome at a specific point.

They can then insert at that point what-ever payload of other genes they mightlike—to modify mosquitoes so they cannottransmit diseases, say—knowing that thecell’s DNA-repair mechanisms will subse-quently kick in to repair the incisionaround the newly inserted genes.

Handily, the system works in any or-ganism, not just the bacteria in which Cas9is found naturally. To use it as a gene drive,all that is required is to include in the pay-load the genes for the CRISPR-Cas9 systemitself, and to ensure that some copies get in-serted into an organism’s germ cells—thosethat develop into sperm or eggs. This willmean that the gene drive is passed on to allof that organism’s offspring.

CRISPR-Cas9 gene drives have, though,a significant drawback. When the drivecuts the genome but fails, for some reason,to insert itself into the incision, the cell in-stead inserts new genetic letters to replacethose cut away by the enzyme before it re-joins the severed DNA strands. This pro-cess often changes the letter sequence atthe site. That means the guide RNA can nolonger recognise it. And that, in turn,means the organism (and its progeny) arenow resistant to the drive.

where in a target genome that they chose.Those findings sparked concerns about

the effects gene-drive-carrying organismscould have if they were ever to be releasedinto the world. For example, a gene drivethat somehow hopped from a target spe-cies into the genomes of other animalsmight wipe them out before anythingcould be done about it. A study publishedin PLOS Genetics, by Philipp Messer of Cor-nell University and his colleagues sug-gests, however, that those who would de-ploy gene drives against scourges such asmalaria face a more immediate hurdle:such drives simply may not work. Just asinsects and pathogens evolve resistance tonew pesticides and antibiotics, so genedrives, too, may provoke resistance—andmay do so far faster than many suspected.

Life finds a wayIn nature, elements of the CRISPR-Cas9system help bacteria to ward offviral infec-tions. Some viruses replicate themselvesby inserting their DNA into the genomes oftheir hosts. This hijacks a cell’s protein-making machinery, causing it to turn outcomponents fornew viruses. CRISPR-Cas9selectively excises such foreign DNA, elim-inating the invaders.

The excision mechanism consists oftwo molecules: an enzyme (Cas9) derivedfrom a bacterium called Streptococcus pyo-

Gene drives

Resistance is inevitable

A promising tool fordealing with pests and pathogens runs into an old enemy

Science and technologyAlso in this section

62 Computers and landscapes

64 Volcanoes and the weather

62 Science and technology The Economist July 22nd 2017

1

2 Dr Messer wanted to understand thisprocess. To do so, he and his colleagues ob-served the effects of introducing a CRISPR-Cas9 gene drive they had developed intofruitflies—insects commonly used in genet-ic studies.

Their drive’s payload was a gene thatencodes red fluorescent protein, a sub-stance normally found in a species of seaanemone. By further genetic tweaking, theresearchers arranged for this protein to beexpressed, in particular, in the insects’eyes. They thus knew that flies with fluo-rescent eyes carried their gene drive. Also,the guide RNA they selected meant thedrive inserted this payload into the middleof a gene named “yellow”, thus disruptingthat gene’s action. Flies which inherit a de-fective version of “yellow” have yellowbodies, rather than blackones.

After experiments with thousands offlies, DrMesserand his team found that thegene drive successfully inserted itself intothe insects’ DNA about half the time, pro-ducing flies with fluorescent eyes and yel-low bodies. The other half of the insectsnearly all had yellow bodies, but did nothave fluorescent eyes. That indicatedCRISPR-Cas9 had cut the DNA in the rightplace, thus disrupting the function of “yel-low”, but had failed to insert itself into theincision. Sequencing the genomes of theseflies confirmed that in virtually all casesthe consequence was a mutation that ren-dered the flies (and would have renderedany offspring) resistant to the gene drive.

Red signalThe team then repeated their experimentswith fruitfly lines from five continents.They found that the proportion of flies be-coming resistant to the drive varied fromabout60% down to 4%. Differences in resis-tance to the drive were not caused by anyinitial differences in the target sequence.That did not vary between the five lines.They must therefore have stemmed fromother (as yet unknown) genetic differencesbetween the flies. This isa worrybecause itsuggests that even if a drive works well inlaboratory animals, it may fail in the wildwhen it encounterspopulationswith high-er resistance. Getting to the bottom of whatis causing some lines to be more resistantthan others will be an important step to-wards the development ofgene drives thatcan spread traits through a species, DrMesser reckons.

Two further modifications of CRISPR-Cas9 gene drives may help. The first is toequip them with several guide RNAs, al-lowing Cas9 to cut chromosomes at morethan one place. An organism would haveto develop resistant DNA sequences at allof these to become fully immune to thedrive. Dr Messer and his colleagues havemade such a drive, containing two guideRNAs, and have found that it did indeedlower the proportion of flies that devel-

oped resistance—though estimates madewith computer models suggest this is stillnot enough for the drive to reach morethan about half the population.

The second approach is to put the driveinto the middle of a gene that, unlike “yel-low”, an organism needs to survive. Thismight be expected to disrupt the gene andkill the organism. But if the inserted DNAhas, at one end, a replica of the part of thedisrupted gene that has been displaced bythe insertion, this can meld seamlesslywith its counterpart in the animal, preserv-ing the gene’s function and Cas9’s ability

to recognise it. If the join is not seamless,though, the gene will fail and the animalwill die. Mutant genes resistant to the drivewill thus be unable to spread.

At least two groups, one based at Impe-rial College, in London, and the other atHarvard Universityand the MassachusettsInstitute of Technology, are working ondrives aimed at essential genes in mosqui-toes and which use multiple guide RNAs. Ifthey succeed, they will breathe new lifeinto the field. As Dr Messer observes, “it isdifficult to cheat evolution.” Whether it isimpossible to do so remains to be seen. 7

BEAUTY, proverbially, is in the eye of thebeholder. But surroundings matter. A

paper published two years ago in Naturefound a correlation between people’ssense of well-being and the “scenicness”of where they lived. The paper’s authorsmeasured scenicness by asking volunteersto play an online game called Scenic-or-Not, which invites participants to look atphotographs of neighbourhoods and ratetheir scenic value on a scale ofone to ten.

The correlation, the paper’s authorsfound, held true whether a neighbour-hood was urban, suburban or rural. It boreno relation to respondents’ social and eco-nomicstatus. Nordid levelsofairpollutionhave any influence on it. The authors alsodiscovered that differences in respondents’self-reported health were better explainedby the scenicness of where those respon-dents lived than by the amount of greenspace around them.

Pinningdown whatscenicnessactually

is, though, hasalwaysbeen a frustrating ex-ercise for scientific types. The team behindthat Nature paper, Chanuki Seresinhe andher colleagues at Warwick BusinessSchool, have nevertheless decided to havea go. And they think they have succeeded.As they report in Royal Society Open Sci-ence, they have adapted a computer pro-gram called Places to recognise beautifullandscapes, whether natural or artificial,using the criteria that a human beholderwould employ.

Places is a convolutional neural net-work (CNN), a type of program that canlearn to recognise features in sets of data,such as images, presented to it. CNNs oftenform the basis of face-recognition soft-ware. Places, though, as its name suggests,is optimised to recognise geographical fea-tures. Ms Seresinhe and her team taughtthe program to identify such things asmountains, beaches and fields, and va-rioussortsofbuildings, in pictures present-

Artificial intelligence

Admiring the scenery

Computeranalysis ofwhat people find scenic may help town planners

Can you tell a green field from a cold steel rail?

64 Science and technology The Economist July 22nd 2017

2 ed to it. Having done so, they then fed itwith 200,000 photos that had been as-sessed by players of Scenic-or-Not. Theprogram’s task was to work out, by analys-ing each photograph’s features in the con-text of its Scenic-or-Not ratings, what it isthat makes a landscape scenic.

Most of the results are not surprising.Lakes and horizons scored well. So did val-leys and snowy mountains. In artificiallandscapes castles, churches and cottageswere seen as scenic. Hospitals, garages andmotels not so much. Ms Seresinhe’s analy-sis did, however, confirm one importantbutnon-obviousfindingfrom herpreviousstudy. Green spaces are not, in and ofthemselves, scenic. To be so they need toinvolve contours and trees.

This observation plays into an idea pro-mulgated 30 years ago by Edward Wilson,an evolutionary biologist at Harvard Uni-

versity. He suggested that the sorts of land-scapes people prefer—and which theysculpt their parks and gardens to resem-ble—are those that echo the African savan-nahs in which Homo sapiens evolved.Gently undulating ground with a mixtureof trees, shrubs and open spaces, in otherwords (though, ideally, without the accom-panying dangerous wild animals).

In particular, the parks laid out by 18th-century European magnates often fit thesecriteria. And those parks are also repletewith follies—small buildings or imitationruins of the sort Ms Seresinhe’s work sug-gests people generally find scenic, too.There is a message here for town planners.Less grass and more trees and busheswould be welcome. And perhaps, also, theodd deliberate folly dotted around, as op-posed to the accidental follies thatmake upso much ofmodern architecture. 7

ITSEEMED like a curse. The summerof 821was wet, cold and yielded a poor har-

vest. Then winter came. Temperaturesplunged. Blizzards smothered towns andvillages. The Danube, the Rhine and theSeine—rivers that never froze—froze sohard that the ice covering them could becrossed not just on foot but by horse andcart. Nor did spring bring respite. Terriblehailstorms followed the snow. Plague andfamine followed the storms. The next fewwinters were worse. Fear stalked the land.Paschasius Radbertus, a monkofCorbie, inwhat is now northern France, wrote thatGod Himself was angry. Yet it was not Godthat wrought this destruction, according toUlf Büntgen of the University of Cam-bridge, but rather a volcano now calledKatla, on what was then an unknown is-land, now called Iceland.

At the moment Katla, one of Iceland’slargest volcanoes, located near the island’ssouthern tip, sleeps beneath 700 metres ofice. It has so slept, albeit fitfully, for almost100 years. Its last eruption big enough tobreakthrough the ice was in 1918. Ascore ofsuch ice-breaking awakenings have beenrecorded by Icelanders since the firstNorsemen settled there in 870. In 821, how-ever, Iceland was not on the Norsemen’shorizon. They were concentrating their ac-tivities on the lootable monasteries andvillages of coastal Europe. There is thus noman-made record of what Katla was up tothen. But Dr Büntgen thinks he has found anatural one. A memorandum of an erup-

tion that coincides with the events de-scribed by Radbertus is, he believes, writ-ten in a prehistoric forest.

Large volcanic eruptions can affect theweather. In particular they eject sulphurdioxide, which reacts with atmosphericgases to form sulphate aerosols that reflectsunlight back into space, cooling the air be-neath. That is well known. So the suspi-cion that what happened in the early 820swas precipitated by such an eruption hasbeen around for a long time.

This suspicion is backed up, moreover,by ice cores collected in Greenland. These

show a spike in sulphate levels in layerslaid down during those years. But the coresgive no hint of the volcano’s whereabouts,because sulphates from an eruption mixrapidly into the atmosphere and are soonspread evenly around Earth.

Things changed, though, in 2003, whenflooding exposed the forest which haspiqued Dr Büntgen’s interest. Preliminaryresearch suggested that the trees in it werealive duringthe 9th century. This led him toassemble a team ofphysicists, chemists, bi-ologists, historians and geographers to in-vestigate the matter, startingwith an analy-sisofthe buried trees’ annual growth rings.

In particular, the team searched forsigns of an ill-understood atomic markerfound in tree rings of a certain age from allaround the world. Rings that grew in 775,palaeobotanists have found, contain 20times the normal amount ofcarbon’s mostcommon radioactive isotope, 14C. Thatyear is also the date of an enigmatic eventrecorded in the Anglo-Saxon Chronicle, acollection of annals describing the historyof early England. This is the appearance ofa “red crucifix” in the heavens after sunset.The best modern guess is that the Chroni-cle’s writers were looking at an unusuallypowerful manifestation of the northernlights, and that the high 14C levels are a con-sequence of this isotope being generatedabundantly in the atmosphere by elevatedlevels of solar radiation, which also stimu-lated the auroras.

DrBüntgen and his colleagues searchedthe trees for this 14C spike—and they foundit. As they report in Geology, the spike ap-pears in rings that grew 47 years before theburial of the forest. That dates the cata-clysm which caused the burial to 822.

The cataclysm itself appears, from thedirection the knocked-over trees are point-ing in, to have been a flood resulting fromthe melting and sudden rupturing of Myr-dalsjokull, the glacier that overlies Katla.This glacier is 35km from the forest, so theflood in question must have been enor-mous. The forest’s fate, combined with theice-core data from Greenland, suggestsKatla was either erupting in 822, or haddone so recently, and thus weakened theglacier. Any eruption ofsufficient power toprovoke such a flood would also havebeen big enough to precipitate a tempo-rary change in the world’s climate of thesort that Radbertus reports.

Those of Norse descent who livedthrough the events of the 820s, would not,of course, have feared the anger of a godthey did not believe in. But they mighthave feared they were witnessing Fimbul-winter—three summerless years markingthe onset of Ragnarok, the twilight of theirown gods. Katla, however, ceased eruptingand both Ragnarok and the Day of Judg-ment were avoided. As for Radbertus, aquarter of a millennium later, in 1073, hewas canonised by Pope Gregory VII. 7

Volcanology

A song of ice and fire

Events in Iceland explain years offamine in Europe in the DarkAges

Katla boils over in 1918

The Economist July 22nd 2017 65

For daily analysis and debate on books, arts andculture, visit

Economist.com/culture

1

“IAM writing a book about war,” Svet-lana Alexievich noted in her diary in

1978. Russian does not have definite and in-definite articles, but Ms Alexievich, at thetime a 30-year-old Soviet author, born to aBelarusian father and a Ukrainian mother,did not need one. There was only one war,defining the country at the cost of 20mlives: the Great Patriotic War of1941-45.

There had been many accounts, but MsAlexievich’s “The Unwomanly Face ofWar”, published in 1985 and released thisweek in its first post-Soviet English edition,was unusual: an oral history told by wom-en who enlisted in the army straight afterschool, learning to kill and die before theylearned to live or give life. Some tales wereblood-curdling—like that of a 16-year-oldnurse who bit off the smashed arm of awounded soldier to save his life, and dayslater volunteered to execute those whohad fled the field. Other stories were heart-breaking, like that of a girl who first kissedher beloved man only when he was aboutto be buried.

The book was followed by other oralhistories of people caught in calamities:the Soviet invasion of Afghanistan, theChernobyl disaster, the collapse of the So-viet empire. In 2015 she won the Nobelprize in literature “for her polyphonic writ-ings”. For her, the nightmares of the 20thcentury made fiction impossible. “Nothingmay be invented...The witnesses must

rounded up and sent to a camp on the is-land of Valaam. Russian prisoners-of-warwere sent to the gulag as potential traitors.“Liberation” brought not freedom, but anew wave of repression and anti-Semiticcampaigns. “After the Victory everybodybecame silent. Silent and afraid, as beforethe war,” one man told Ms Alexievich.

Victory day—the only unifying andtruly national Soviet holiday—becamepart of the official calendar and mass cul-ture only in 1965. Leonid Brezhnev, the So-viet leaderfrom 1964 to 1982, sawthe warasthe main source of legitimacy fora stagnat-ing system, and covered himself in mili-tary medals: Hero of the Soviet Union, Or-der of Victory. Liberals and the Sovietapparatchiks fought over its memory, andMs Alexievich was on the front lines. Thebleeding memories of her witnessesclashed with the gloss and bombast of theofficial rhetoric. Her book was publishedwhen Mikhail Gorbachev came to power,hoping to put a human face on socialism.

Even so, the censor demanded cuts,such as the story ofa young partisan wom-an who drowned her crying baby to avoidalerting German soldiers. Those cuts arerestored in the new edition—as are her con-versations with the censor, who was par-ticularly scandalised by the description ofmenstruation on the battle front. “Whowill go to fight after such books?” the cen-sor demanded “You humiliate womenwith a primitive naturalism...You makethem into ordinary women, females.”

More important, the battle for memoryunfolded in the mindsofstorytellers them-selves. A woman who joined a tank bri-gade at16 tells Ms Alexievich “how it was”,only to follow her story a few weeks laterwith a letter that included an edit of thetranscript of their interview—with everyhuman detail crossed out. The suppression

speak,” she said in her acceptance speech.Her work has been called journalism orhistory, but it defies easy classification.

Ms Alexievich’s greatest talent may benot writing, but listening and getting wit-nesses to talk. The book is filled with morethan 200 voices. Yet, filtered by “the hu-man ear”, as she calls herself, they vary lit-tle in tone or rhetoric. Her book reflects anuneasy relationship between memory,which often involves mythologising, andhistory as a multitude of dimensions. Amemoir is not a reconstruction of the past,but a record of the time when the memoiris produced and of the mental state of theperson remembering. As such, Ms Alexie-vich’s book is a testimony to the late 1970sand early 1980s and the war for memorywhich she tookpart in.

The fight for memory began as soon asthe war stopped. Stalin feared the feelingsthe war awoke in his people. (“The onlytime we were free was during the war. Atthe front,” Ms Alexievich was told.) Re-minders of suffering were cleared off thestreets. Crippled veterans who pushedthemselves on self-made wheeled plat-forms with hands—if they had any—were

Soviet history

The war for memory

After the Great Patriotic Warcame the struggle to reckon with—andmanipulate—the stories

Books and artsAlso in this section

66 Lessons from hunter-gatherers

66 Italy’s massacre in Addis Ababa

67 Victorian history

67 Alexander Calder’s mobiles

68 Johnson: Americanisms

The Unwomanly Face of War. By SvetlanaAlexievich. Random House; 384 pages;$30. Penguin Modern Classics; 331 pages;£12.99

66 Books and arts The Economist July 22nd 2017

1

2

NEAR the village of Affile, on a pictur-esque hillside east of Rome, stands a

monument, unveiled in 2012 and builtwith public funds, to Rodolfo Graziani, oneof Mussolini’s most brilliant generals. Hewas a key figure in Italy’s brutal campaignsin Africa in the decade before the secondworld war.

Inside a roundabout in Addis Ababalies anothermonument. This giant obelisk,perhaps the Ethiopian capital’s finest pieceof public art, was donated by Josip Tito,then president of Yugoslavia, in 1955. Sixbronze reliefs depict a massacre, the worstin Ethiopian history, carried out by Italianforces during the occupation of 1936-41while Graziani was viceroy of Italy’s newcolony. According to the Ethiopian govern-ment, some 30,000 Ethiopians died duringthe campaign of terror in February1937.

Official Italian estimates usually num-ber between 600 and 2,000, but they arecertainly much too low. The most plausiblefigure, argues Ian Campbell in the firstcomprehensive account of the massacre,may be 20,000. In Italy Graziani’s greatcrime is seen as little more than a typicalEuropean colonial atrocity—no worse thanthe British at Amritsar, for instance, where1,000 people (according to India’s count)were slaughtered in 1919.

But, as Mr Campbell’s meticulous workmakes plain, this was no typical colonial

Colonial atrocities

Hearing their cries

The Addis Ababa Massacre: Italy’s NationalShame. By Ian Campbell. Hurst; 478 pages;£30. To be published in America by OxfordUniversity Press in August

Italy would rather not talk about it

of the human and the humane in peoplewas crucial to surviving Soviet life.

Having defeated fascism in Germany,the Soviet Union imported some of itsideas and practices, which bore fruits de-cades later. Waving the banners of the sec-ond world war and holding the photo-graphs of those who perished in itdefeating fascism, today’s Kremlin has re-stored Soviet symbols, declared the su-premacy of the state over the individualand annexed Crimea. Unleashing a waragainst Ukraine, Kremlin propaganda de-scribed Ukrainians who demanded digni-ty as “fascists” and Russian soldiers as“anti-fascist liberators”. The exploitationof the memory of the war has been thecentral element ofmodern Russian ideolo-gy. It is what makes Ms Alexievich’s workso relevant today. 7

IN JANUARY 1488, Bartolomeu Dias, aPortuguese explorer, rounded Africa’s

southern cape and put to shore to take onfood and water. There he found a group,smaller and lighter-skinned than the otherAfricans he had encountered, who, mysti-fied by the odd men appearing out of theinfinity of the sea, chased them back totheir boat under a hail ofarrows.

The exchange, notes James Suzman inhis new book “Affluence Without Abun-dance”, was a meeting of two distantbranches of the human family tree: Euro-peans descended from ancient tribes thatmigrated out of Africa, and people com-monly known as the San, who had calledsouthern Africa home for at least 150,000years. Just as important, the meeting repre-sented the collision of humanity’s mostancient and durable form of economic or-ganisation with its most powerful. The lat-ter, wielded by Europeans, has dominatedthe half millennium since that scrape onthe beach. But modern capitalist societiesmay have something to learn from theways of their ancient forebears.

Mr Suzman is an anthropologist whohas spent years studying the Bushmen ofthe Kalahari Desert: a San people related tothose who greeted Dias on the beach,some of whom maintain the hunting andgathering lifestyle that sustained them for150 millennia. But “Affluence WithoutAbundance” is not simply a description ofBushman life. Mr Suzman deftly weaveshis experiences and observations with les-

sons on human evolution, the history ofhuman migration and the fate of Africancommunities since the arrival of Euro-peans. The overarching aim of the book ismore ambitious still: to challenge the read-er’s ideas about both hunter-gatherer lifeand human nature.

Life spent hunting and gathering, whileoccasionally trying, was not a tale of con-stant toil and privation. Food could runshort during droughts or annual lean peri-ods, but reliance on a broad range of foodsources typically afforded such tribes a re-liable, well-balanced diet. Even around thearid Kalahari food is plentiful (at leastwhen the tribes are not forced to share theland with farmers and ranchers)—so muchso that the typical adult need work lessthan 20 hours per week.

The contrast with farming societies,which dominated history after the domes-tication of plants and animals about10,000 years ago, is stark. Farmed land ismore productive, which allowed the morepopulous farmers to push hunter-gather-ers offall but the most remote or inhospita-ble land. But farming societies dependheavily on a few staples, leaving thempoorly nourished and vulnerable to cropfailure. That high productivity also tookendless, mind-numbing work: to prepareand tend the fields, keep up the homesteadand defend the surpluses needed to feedeveryone from one harvest to the next.

Mr Suzman argues that the dramaticcultural shift resulting from the adoptionof agriculture gave rise to impulses thatpeople in modern rich countries, the heirsoffarmingsocieties, regard asnaturally hu-man—especially the insatiable desire to ac-cumulate. Farming teaches people to ac-cept inequality and to valorise work. Butfor the vast majority of human historythere was little point in accumulating,since most of what was needed could easi-ly be got from the surrounding environ-ment. Norwas there anythingheroicaboutwork; spending time getting more foodthan one could eat was a foolish waste.

Modern San struggle to cope in a mar-ket economy, thanks to this heritage (and toanti-San bigotry). Employers struggle tokeep them on the job: offered higherwagesthey work fewer hours rather than more.Yet Mr Suzman also reckons, after years ofstudying the Bushmen, that a world inwhich people work and worry less is pos-sible. Humanity spent many more thou-sands of years living that way than work-ing its fingers to the bone, after all.

It is a nice idea. But Mr Suzman’s re-counting of recent history makes clear thatmodern life is like ridinga bicycle, in whichstopping means toppling over. Havingcreated countless problems by turning toagriculture, rich societies have little choicebut to press on: working, striving and in-venting, even as this progress creates moreproblems in need ofsolving. 7

Hunter-gatherer economics

Living off the land

Affluence Without Abundance: TheDisappearing World of the Bushmen. ByJames Suzman. Bloomsbury; 297 pages; $29

The Economist July 22nd 2017 Books and arts 67

1

2

ALEXANDER CALDER (1898-1976), the in-ventor of those delicate, floating struc-

tures of wire and metal known as “mo-biles”, was not the first modern sculptor toset his works in motion. That distinctionmay belong to his friend Marcel Duchamp,who in 1913 mounted a bicycle wheel ontop ofa stool and called it art. But sculptorshave always played with movement,whether in medieval processions in whichthe statues of saints were carried throughthe streets, or in the Baroque works of GianLorenzo Bernini, whose spiralling compo-sitions invite the viewer to move aroundthem in order to appreciate forms unfold-ing in time as well as space. Sculpture is in-herently participatory, closer to the real,living world than painting. But no sculptorhas incorporated the fourth dimensionwith Calder’s intelligence, dedication andsly humour.

“Calder: Hypermobility”, at the Whit-ney Museum in New York until October23rd, chronicles the artist’s long investiga-tion of form in motion. It contains many ofthe classic mobiles, like “Hanging Spider”(pictured), a whimsical sky-borne filigreein black dancing on ambient currents, or“Blizzard (Roxbury Flurry)”, which cap-tures the subtle atmospheric effects of awinter storm in wire and metal.

The surprises here are the experimen-tal, motorised sculptures that precededthese classic, familiar works. Before he hitupon the happy notion ofallowing air cur-rents or a gentle touch to introduce move-ment, Calder activated his sculptures

Alexander Calder

Sculpture inmotion

The artist who put the fourthdimension at the heart ofhis work

Victorian history

Summer of ’58

IF YOU wanted to devote an entire bookto a year in Victorian Britain, 1858

would not be an obvious choice. Rose-mary Ashton, who has done just that,admits as much. No famous novel waspublished, and the government, likemany just before it, collapsed in a vote ofno confidence. Historians prefer1859:Charles Darwin published his “On theOrigin ofSpecies”, the Liberal Party wasfounded, and Dickens, Tennyson, Eliotand Mill all produced major works. 1861brought the death ofPrince Albert andQueen Victoria’s withdrawal from publiclife. So why1858?

Ms Ashton sees the year’s importancereflected in the lives of three Victorians.Benjamin Disraeli would have to waituntil 1868 to become prime minister. Buthis second run as chancellor, beginningin 1858, proved his worthiness as hesteered important bills through Parlia-ment, at times acting in place of the gout-ridden prime minister Lord Derby. Dick-ens began his popular reading tours,earning fantastic sums. And Darwin,after years ofpondering evolution, waspanicked into finalising his theory afterrealising that others were reaching con-

clusions similar to his.The book’s real strength is its descrip-

tion ofLondon quivering between mo-dernity and the darkages. Amid record-breaking heat and the stench ofa filthyThames, engineers proposed an im-proved sewer system, still believing the(soon to fall from favour) airborne theoryof infection. Laws making divorce easierwere accompanied by infamous cases inwhich husbands tried to have their wivesdeclared insane. While the governmentallowed the first non-Christians to sit inParliament, pious scientists vehementlyopposed Darwinian evolution.

Against this backdrop Ms Ashtonnarrates scandals ofhigh society, draw-ing on private correspondence and thepenny papers. A well-known doctor wasaccused ofan affair with a married pa-tient, preventing him from verifying hersanity in the divorce court (presided overby the wonderfully named Sir CresswellCresswell). A “hot headed and almostparanoid” Dickens, who tormented hiswife and resented his “numerous andexpensive family”, read rumours ofhisinfidelities in the press. The book focusesa bit too much on these squabbles, whenit could give more space to the comple-tion ofa transatlantic telegraph cable orthe downfall of the East India Company.But there is plenty to enjoy in this panora-ma ofVictorians in their heyday.

One Hot Summer: Dickens, Darwin,Disraeli and the Great Stink of 1858. ByRosemary Ashton. Yale University Press; 338pages; $30 and £25

atrocity. After a failed attempt on Grazia-ni’s life, the Italians’ bloody revenge lastedthree days. Led by the local “Blackshirts”—Mussolini’s paramilitaries, officially grant-ed carta bianca—regular soldiers, carabini-eri and perhaps more than half of AddisAbaba’s Italian civilians took part. In thisghoulish massacre, witnesses reportedcrushed babies, disembowelled pregnantwomen and the burning ofentire families.

Mr Campbell argues that this was a me-thodical effort to wipe out Ethiopian resis-tance to Italian rule, more like later Naziwar crimes than earlier colonial massa-cres. He charges both Graziani and the lo-cal Fascist Party leader, Guido Cortese,with personal responsibility. Though un-consciouswhen the killingbegan, Grazianitookcontrol ofthe subsequent reprisal exe-cutions, aimed in particular at eliminatingthe Ethiopian nobility and intelligentsia.

Graziani was never prosecuted forcrimes in Africa, though he was convictedforcollaboration with the Nazisand brieflyimprisoned. Britain, wary of setting awk-ward precedents, played an outsized role

in sheltering Italians with blood on theirhands. Mr Campbell cites a telegram writ-ten by Winston Churchill to his ambassa-dor in Rome in 1944, instructing him to pro-tect Marshal Badoglio, Italian commanderof the Ethiopian northern front, who usedpoison gas, and is considered the top warcriminal by Ethiopia.

Italy was never forced to reckon withFascism as Germany was with Nazism.Few post-war Italian historians ever tack-led the massacre. Those thatdid were oftendenounced as unpatriotic. Angelo DelBoca, writing in the 1960s, was accused bythe Italian army of being a “liar” for his re-search on Graziani’s crimes. When “Lionof the Desert”—a film depicting his actionsin Libya—was released in 1981, it was soonbanned, for damaging the honour of theItalian army. To this day Italian schoolchil-dren are not taught about the Addis Ababamassacre. Graziani is little known; his sinseven less so. Mr Campbell’s book will bewelcomed by the Ethiopian government,which has long argued that its citizens de-serve an apology. 7

68 Books and arts The Economist July 22nd 2017

2

PAUL REVERE’S ride through Concord,Massachusetts, warning that “the Brit-

ish are coming! The British are coming!”,is said to have saved America’s revolutionfrom an early defeat that could haveproved fatal. Much of the story, sadly forhis legend, ismyth. ButnowmanyBritonssuspect that British English is losing a warto the American kind. As with Revere’sride, it can be hard to winkle out the truth.

In 2011 the BBC published a broadsideby Matthew Engel, citing five commonAmericanisms, and inviting readers tosend in their own least-favourite ones.They did so with gusto, adding that theseYankeeisms made them “thoroughly dis-gusted” and the like. Mr Engel had hit anerve, and last month he published“That’s the Way it Crumbles”, a book be-moaning the Americanisation of BritishEnglish. He is at pains to say that he is notanti-American. He merely wants to pro-tect his country’s distinctive dialect.

But in that article from 2011, four offiveof Mr Engel’s “Americanisms” were, infact, ofBritish origin. So were many of theones readers sent in. “Gotten”, one wrote,“makes me shudder.” Yet it is the originalEnglish participle, replaced later in Britainby “got”. “Fall” for autumn and “mad” forangry, too, were born in England, beforefading there in the early modern era. MrEngel is more careful in the new book topoint out such round-trippers.

It is true that America is influencingBritish usage. “Smart” is increasingly de-scribing the intelligent as much as thewell dressed. (Never mind that “smart”first was used this way in Britain in 1571.)Many Britons prefer “movies” to “films”.And “fries” and “cookies” are now ap-pearing alongside “chips” and “biscuits”.But are they always replacing them?

No: “smart” is savvy, whereas “clever”is swotty. “Fries” are thin and crispy, and

“cookies” are American styles like choco-late-chip, notes Lynne Murphy, an Ameri-can linguist at Sussex University writingher own book about the relationship be-tween British and American English.“Movies” tend to come from Hollywood;“film” is still preferred for the latest grittycinema from Europe. In other words, theseAmericanisms are not an impoverishmentofBritish English. They are additions to it.

The traffic goes both ways: “scones”,both the things and the word, have madetheir way to America (though not the pro-nunciation: most Americans make itrhyme with “cones”). Ben Yagoda, anAmerican academic, keeps a website of“Not One-Off Britishisms” used by stylishYanks, from “ginger” hair to “nick” for“steal”. Mr Engel replies that these are lim-ited to intellectuals in America. American-isms, he says, are takingdeeperroot amongordinary Britons.

English has always sucked up words

from around the globe. Mr Engel’s fear isthat in the past half-century, one sourcehas come to dominate: America, thanksto its cultural, technological and politicalheft. But he goes even further in sayingthat, in a century, it is possible to imagine“American English absorb[ing] the Britishversion completely”.

This is—to use another Americanism—horsefeathers. American and British Eng-lish differ on many levels: spelling, pro-nunciation, vocabulary, style and gram-mar. Mr Engel focuses on showing thatsome British words are giving way to, ormaking room for, American alternatives.But these are a fraction of the huge vocab-ulary otherwise shared by the two dia-lects. It is easy to find a newspaper articlein which nota single word (spelling aside)is distinctly British or American. In otherdomains (recipes and car-parts, for exam-ple) differences are frequent. But these do-mains are local and personal, and highlyresistant to change.

Overall, British English is in rudehealth. Pronunciation differences affectvirtually every word, and British pronun-ciation is hardly convergingon American.The few grammatical differences (for ex-ample “I will” in America, versus “I willdo” in Britain) show little sign ofchangingeither. There is little appetite in Britain forAmerican spelling. And that ineffablequality of style makes articles by Britishor American writers distinct, even in theabsence ofobvious shibboleths.

American influence on global (not justBritish) English is rising. But varieties fromIreland to India to Australia retain a clearidentity. Even within America, local dia-lects, especially the southern one, are go-ing strong. All of these, and British Englishtoo, are constantly innovating. Mr Engel isright to dread a “linguistic monoculture”.He is wrong to think that it is likely.

The Americanisms are coming!Johnson

But British English is being influenced, not destroyed, by the American sort

through the less elegant expedient of jerry-rigged motors. These early works areclunky, quirky, infused with a Dadaist ir-reverence and sense ofplay. “Two Spheres”consists of white balls against a black pan-el, one slowly turning while the othermoves up and down. Both the forms andthe motions are simple to the point of ba-nality. But there is a revolution and a reve-lation lurking in these childlike ele-ments—a demonstration that theimmaterial stuff of time can be evokedthrough the most material of forms.

Calder’s work is a crucial link betweenhigh-modernist abstraction and today’s

performance and video art. Even at theirmost static, his works are theatrical, trans-forming the act ofseeing into an open-end-ed choreographed experience. The Whit-ney show stresses this aspect not only bydeploying an “activator” in the gallery togive his mobiles an occasional gentlenudge—but also by inviting contemporarymusicians, dancers and other performersto stage works inspired by the sculptures.

Calder’s fascination with alternativeexperiences included the element ofsound, as seen in “Red Disc and Gong”, amobile in which shifting air currents causea mallet to strike a gong at unpredictable

intervals, creating a minimalist music thatanticipates the chance-driven composi-tions of John Cage. Through this most eco-nomical of means, Calder vastly expandsthe expressive reach of the medium.

Over the decades, Calder’s reputationhas suffered from over-familiarity. Hisworks can feel too ingratiating, too crowd-pleasing, too user-friendly—the ubiquitousdécor of the corporate lobby and thechild’s nursery. “Calder: Hypermobility”reveals an artist no less delightful than theone of the popular imagination, but also apioneeringsculptorwho engineered a pro-found shift in this ancient practice. 7

69

The Economist July 22nd 2017

SERVICED OFFICES IN MALTA

For a physical presence in Malta dedicated co-working

desks, private offi ces and meeting rooms are available

to rent in the capital, Valletta.

Optional post scanning to individual online accounts.

Find us at www.GrandCentral.com.mt

The post of President of the European Patent Office falls vacant on 1 July 2018.

The President manages the Office, under powers laid down in the European Patent Convention (Article 10 EPC). The official languages of the European Patent Office are English, French and German.

Candidates must have a diploma of completed studies at university level and proven high-level management experience. Their past career in the private or public sector must give evidence of:

• in-depth understanding of the needs of an international organisation.

• thorough knowledge and proven practical application of modern management methods, including an outstanding ability to establish and foster social dialogue.

• a genuine aptitude for communication, negotiating skills and the ability to make their opinions count.

• an excellent command of at least one of the official languages.

Practical experience in patent matters, in-depth understanding of the patent system and knowledge of the European Patent Organisation would be an advantage.

The complete application fi les of the candidates must be sent to the Council Secretariat* to arrive by 14 September 2017 (date of receipt by the Secretariat). They must be submitted in one of the Organisation’s official languages. They must include a curriculum vitae showing nationality of at least one contracting state, official confi rmation of that state’s support, and a letter of motivation. The submission of any further items with a view to clarifying and supporting the application is at the candidate’s discretion.

The appointment will be made by the Administrative Council, in a decision taken under Article 11(1) EPC (the applicable majority being three-quarters of the votes of the contracting states represented and voting, in accordance with Article 35(2) EPC). External professional advice

may be used in the evaluation process.

The term of office is fi ve years, starting on 1 July 2018, and it may be renewed. The conditions of contract are subject to negotiation between the successful candidate and the Chairman of the Administrative Council, within a framework (model contract) set by the Council.

*Address:

Council Secretariat - Reference P2018 -

Isar building / Room 1041European Patent Organisation

80298 MunichGermany

E-mail: council@epo.org

PRESIDENT OF THE EUROPEAN PATENT OFFICE

To advertise within the classified section, contact:

United StatesRichard DexterTel: (212) 554-0662 richarddexter@economist.com

UK/EuropeAgne ZurauskaiteTel: (44-20) 7576 8152 agnezurauskaite@economist.com

Middle East & AfricaPhilip WrigleyTel: (44-20) 7576 8091 philipwrigley@economist.com

AsiaShanShan TeoTel: (+65) 6428 2673 shanshanteo@economist.com

Readers are recommendedto make appropriate enquiries and take appropriate advice before sending money, incurring any expense or entering into abinding commitment in relation to an advertisement.

The Economist Newspaper Limited shall not be liable to any person for loss or damage incurred or suffered as a result of his/her accepting or offering to accept an invitation contained in any advertisement published in The Economist.

Appointments

Courses

Business & Personal

Statistics on 42 economies,plus a closer look at ciga-rette prices

Economicdata

Economic data% change on year ago Budget Interest Industrial Current-account balance balance rates, % Gross domestic product production Consumer prices Unemployment latest 12 % of GDP % of GDP 10-year gov't Currency units, per $ latest qtr* 2017† latest latest 2017† rate, % months, $bn 2017† 2017† bonds, latest Jul 19th year ago

United States +2.1 Q1 +1.4 +2.2 +2.0 Jun +1.6 Jun +2.0 4.4 Jun -449.3 Q1 -2.6 -3.5 2.26 - -China +6.9 Q2 +7.0 +6.7 +7.6 Jun +1.5 Jun +2.0 4.0 Q1§ +169.5 Q1 +1.6 -4.1 3.57§§ 6.76 6.69Japan +1.3 Q1 +1.0 +1.3 +6.5 May +0.4 May +0.6 3.1 May +188.6 May +3.6 -5.1 0.11 112 106Britain +2.0 Q1 +0.8 +1.6 -0.3 May +2.6 Jun +2.7 4.5 Apr†† -99.8 Q1 -3.1 -3.6 1.30 0.77 0.76Canada +2.3 Q1 +3.7 +2.3 +5.7 Apr +1.3 May +1.8 6.5 Jun -48.4 Q1 -2.6 -2.4 1.90 1.26 1.30Euro area +1.9 Q1 +2.3 +1.9 +4.0 May +1.3 Jun +1.6 9.3 May +391.1 Apr +3.1 -1.4 0.55 0.87 0.91Austria +2.3 Q1 +5.7 +1.8 +3.3 Apr +1.9 Jun +2.0 5.4 May +6.4 Q1 +2.3 -1.1 0.72 0.87 0.91Belgium +1.6 Q1 +2.6 +1.6 +2.2 Apr +1.6 Jun +2.2 7.6 Mar -4.2 Mar +0.3 -2.3 0.84 0.87 0.91France +1.1 Q1 +1.9 +1.5 +3.2 May +0.7 Jun +1.2 9.6 May -22.4 May -1.2 -3.1 0.83 0.87 0.91Germany +1.7 Q1 +2.4 +1.8 +4.9 May +1.6 Jun +1.7 3.9 May‡ +272.4 May +8.0 +0.5 0.55 0.87 0.91Greece +0.8 Q1 +1.8 +1.0 +5.4 May +1.0 Jun +1.3 21.7 Apr -0.8 Apr -1.2 -1.3 5.26 0.87 0.91Italy +1.2 Q1 +1.8 +1.1 +2.8 May +1.2 Jun +1.4 11.3 May +48.6 Apr +2.1 -2.3 2.19 0.87 0.91Netherlands +3.2 Q1 +1.7 +2.2 +3.8 May +1.1 Jun +1.2 6.1 May +68.4 Q1 +9.4 +0.7 0.68 0.87 0.91Spain +3.0 Q1 +3.3 +2.9 +4.6 May +1.5 Jun +2.0 17.7 May +21.1 Apr +1.8 -3.3 1.65 0.87 0.91Czech Republic +4.0 Q1 +6.3 +3.0 +8.1 May +2.3 Jun +2.3 3.0 May‡ +1.4 Q1 +0.9 -0.5 0.92 22.6 24.5Denmark +3.6 Q1 +2.5 +1.6 +6.2 May +0.6 Jun +1.2 4.3 May +26.1 May +7.7 -0.6 0.66 6.46 6.76Norway +2.6 Q1 +0.9 +1.8 -1.4 May +1.9 Jun +2.4 4.6 Apr‡‡ +22.4 Q1 +7.6 +4.2 1.70 8.06 8.51Poland +4.4 Q1 +4.5 +3.6 +4.5 Jun +1.5 Jun +2.0 7.2 Jun§ -2.2 May -0.8 -2.8 3.28 3.66 3.98Russia +0.5 Q1 na +1.4 +3.6 Jun +4.4 Jun +4.2 5.1 Jun§ +33.6 Q2 +2.2 -2.2 8.13 59.1 63.4Sweden +2.2 Q1 +1.7 +2.6 +8.0 May +1.7 Jun +1.6 7.2 May§ +22.0 Q1 +4.8 +0.3 0.67 8.28 8.61Switzerland +1.1 Q1 +1.1 +1.4 -1.3 Q1 +0.2 Jun +0.5 3.2 Jun +73.6 Q1 +9.9 +0.2 0.01 0.95 0.99Turkey +5.0 Q1 na +3.4 +4.1 May +10.9 Jun +10.2 10.5 Apr§ -35.3 May -4.4 -2.3 10.50 3.52 3.03Australia +1.7 Q1 +1.1 +2.4 -0.8 Q1 +2.1 Q1 +2.2 5.6 Jun -25.0 Q1 -1.6 -1.8 2.67 1.26 1.34Hong Kong +4.3 Q1 +2.9 +3.0 +0.2 Q1 +2.0 May +1.6 3.1 Jun‡‡ +14.8 Q1 +6.6 +1.7 1.55 7.81 7.76India +6.1 Q1 +7.2 +7.1 +1.7 May +1.5 Jun +4.2 5.0 2015 -15.2 Q1 -1.2 -3.2 6.45 64.3 67.2Indonesia +5.0 Q1 na +5.2 +4.0 May +4.4 Jun +4.3 5.3 Q1§ -14.6 Q1 -1.7 -2.2 6.93 13,319 13,089Malaysia +5.6 Q1 na +5.2 +4.6 May +3.6 Jun +4.0 3.4 May§ +6.6 Q1 +3.6 -3.0 3.96 4.29 4.00Pakistan +5.7 2017** na +5.7 +6.3 May +3.9 Jun +4.8 5.9 2015 -9.2 Q1 -3.6 -4.5 8.93††† 105 105Philippines +6.4 Q1 +4.5 +6.5 +5.8 May +2.7 Jun +3.0 5.7 Q2§ -0.4 Mar +0.4 -2.8 4.65 50.9 46.9Singapore +2.5 Q2 +0.4 +2.9 +5.0 May +1.4 May +1.3 2.2 Q1 +59.0 Q1 +19.1 -1.0 2.08 1.37 1.35South Korea +3.0 Q1 +4.3 +2.6 +0.1 May +1.9 Jun +1.9 3.8 Jun§ +88.3 May +6.0 +0.9 2.26 1,121 1,136Taiwan +2.6 Q1 +3.8 +2.4 +0.8 May +1.0 Jun +0.5 3.8 May +69.1 Q1 +12.8 -0.9 1.07 30.4 32.0Thailand +3.3 Q1 +5.2 +3.4 +1.4 May nil Jun +0.7 1.3 May§ +45.1 Q1 +11.5 -2.3 2.33 33.6 34.9Argentina +0.3 Q1 +4.3 +2.5 -2.5 Oct +21.9 Jun‡ +24.2 9.2 Q1§ -16.8 Q1 -2.8 -5.9 na 17.4 15.3Brazil -0.4 Q1 +4.3 +0.6 +3.9 May +3.0 Jun +3.8 13.3 May§ -18.1 May -1.0 -7.8 9.39 3.16 3.28Chile +0.1 Q1 +0.7 +1.5 +0.1 May +1.7 Jun +2.8 7.0 May§‡‡ -5.0 Q1 -1.4 -2.7 4.23 654 651Colombia +1.1 Q1 -0.9 +2.0 -0.6 May +4.0 Jun +4.1 9.4 May§ -11.9 Q1 -3.6 -3.2 6.70 3,010 2,935Mexico +2.8 Q1 +2.7 +2.0 +1.0 May +6.3 Jun +5.4 3.5 May -22.0 Q1 -2.2 -1.9 6.82 17.5 18.6Venezuela -8.8 Q4~ -6.2 -7.0 na na +591 7.3 Apr§ -17.8 Q3~ -0.6 -19.6 11.02 10.0 9.99Egypt +4.3 Q1 na +3.5 +25.1 May +29.8 Jun +22.5 12.0 Q1§ -18.0 Q1 -5.8 -10.8 na 17.9 8.88Israel +4.0 Q1 +1.4 +3.7 +4.2 Apr -0.2 Jun +1.0 4.5 May +11.7 Q1 +3.9 -2.5 1.88 3.57 3.86Saudi Arabia +1.7 2016 na -0.5 na -0.4 Jun +2.2 5.6 2016 -1.0 Q1 +1.3 -7.4 3.68 3.75 3.75South Africa +1.0 Q1 -0.7 +0.7 -1.9 May +5.1 Jun +5.5 27.7 Q1§ -7.9 Q1 -3.2 -3.2 8.64 12.9 14.4Source: Haver Analytics. *% change on previous quarter, annual rate. †The Economist poll or Economist Intelligence Unit estimate/forecast. §Not seasonally adjusted. ‡New series. ~2014 **Year ending June. ††Latest 3 months. ‡‡3-month moving average. §§5-year yield. †††Dollar-denominated bonds.

70 The Economist July 22nd 2017Economic and financial indicators

The Economist July 22nd 2017 Economic and financial indicators 71

Indicators for more countries and additionalseries, go to: Economist.com/indicators

Othermarkets

Other markets % change on Dec 30th 2016 Index one in local in $ Jul 19th week currency termsUnited States (S&P 500) 2,473.8 +1.3 +10.5 +10.5United States (NAScomp) 6,385.0 +2.0 +18.6 +18.6China (SSEB, $ terms) 329.0 +0.3 -3.8 -3.8Japan (Topix) 1,621.9 +0.2 +6.8 +11.5Europe (FTSEurofirst 300) 1,513.7 -0.1 +6.0 +15.7World, dev'd (MSCI) 1,958.6 +1.3 +11.8 +11.8Emerging markets (MSCI) 1,060.1 +2.9 +22.9 +22.9World, all (MSCI) 476.7 +1.5 +13.0 +13.0World bonds (Citigroup) 930.8 +1.1 +5.3 +5.3EMBI+ (JPMorgan) 826.3 +0.7 +7.0 +7.0Hedge funds (HFRX) 1,242.1§ +0.2 +3.2 +3.2Volatility, US (VIX) 9.8 +10.3 +14.0 (levels)CDSs, Eur (iTRAXX)† 52.7 -4.6 -26.9 -20.2CDSs, N Am (CDX)† 57.5 -4.5 -15.2 -15.2Carbon trading (EU ETS) € 5.4 +0.6 -17.9 -10.4Sources: IHS Markit; Thomson Reuters. *Total return index. †Credit-default-swap spreads, basis points. §Jul 18th.

The Economist commodity-price index

The Economist commodity-price index2005=100 % change on one one Jul 11th Jul 18th* month year

Dollar IndexAll Items 145.1 144.4 +2.3 +4.0

Food 159.0 156.6 +2.1 -1.8

Industrials

All 130.6 131.7 +2.5 +12.2

Nfa† 130.7 131.6 +1.7 +4.6

Metals 130.6 131.8 +2.8 +15.8

Sterling IndexAll items 205.5 201.7 -0.9 +5.0

Euro IndexAll items 158.0 155.0 -1.7 -1.1

Gold$ per oz 1,210.7 1,242.0 -0.1 -6.7

West Texas Intermediate$ per barrel 45.0 46.4 +6.6 +3.9Sources: Bloomberg; CME Group; Cotlook; Darmenn & Curl; FT; ICCO;ICO; ISO; Live Rice Index; LME; NZ Wool Services; Thompson Lloyd & Ewart; Thomson Reuters; Urner Barry; WSJ. *Provisional †Non-food agriculturals.

Markets

Markets % change on Dec 30th 2016 Index one in local in $ Jul 19th week currency termsUnited States (DJIA) 21,640.8 +0.5 +9.5 +9.5China (SSEA) 3,383.8 +1.0 +4.1 +7.1Japan (Nikkei 225) 20,020.9 -0.4 +4.7 +9.4Britain (FTSE 100) 7,430.9 +0.2 +4.0 +9.8Canada (S&P TSX) 15,244.7 +0.7 -0.3 +6.2Euro area (FTSE Euro 100) 1,200.0 -0.3 +7.9 +17.8Euro area (EURO STOXX 50) 3,500.3 -0.4 +6.4 +16.2Austria (ATX) 3,193.3 +0.7 +22.0 +33.2Belgium (Bel 20) 3,901.4 +0.9 +8.2 +18.1France (CAC 40) 5,216.1 -0.1 +7.3 +17.2Germany (DAX)* 12,452.1 -1.4 +8.5 +18.4Greece (Athex Comp) 853.5 +1.2 +32.6 +44.8Italy (FTSE/MIB) 21,479.0 +0.2 +11.7 +21.9Netherlands (AEX) 524.3 +1.5 +8.5 +18.5Spain (Madrid SE) 1,066.2 +0.3 +13.0 +23.4Czech Republic (PX) 1,007.9 +0.9 +9.4 +23.7Denmark (OMXCB) 912.4 +0.5 +14.3 +24.8Hungary (BUX) 35,789.3 -0.2 +11.8 +23.1Norway (OSEAX) 796.1 +1.5 +4.1 +11.2Poland (WIG) 62,533.5 +1.5 +20.8 +38.0Russia (RTS, $ terms) 1,043.1 +1.7 -9.5 -9.5Sweden (OMXS30) 1,610.0 -2.5 +6.1 +16.4Switzerland (SMI) 9,024.3 +0.1 +9.8 +16.9Turkey (BIST) 107,417.5 +3.5 +37.5 +37.4Australia (All Ord.) 5,779.4 +1.1 +1.1 +11.4Hong Kong (Hang Seng) 26,672.2 +2.4 +21.2 +20.4India (BSE) 31,955.4 +0.5 +20.0 +26.6Indonesia (JSX) 5,806.7 -0.2 +9.6 +10.9Malaysia (KLSE) 1,757.3 nil +7.0 +12.0Pakistan (KSE) 45,418.7 +3.7 -5.0 -5.7Singapore (STI) 3,325.1 +3.6 +15.4 +21.9South Korea (KOSPI) 2,429.9 +1.6 +19.9 +29.2Taiwan (TWI) 10,506.1 +0.8 +13.5 +20.4Thailand (SET) 1,575.9 +0.1 +2.1 +8.8Argentina (MERV) 21,450.4 -3.6 +26.8 +15.7Brazil (BVSP) 65,179.9 +0.5 +8.2 +11.6Chile (IGPA) 25,150.2 +1.7 +21.3 +24.2Colombia (IGBC) 10,880.4 -2.2 +7.7 +7.4Mexico (IPC) 51,086.9 +0.5 +11.9 +31.7Venezuela (IBC) 131,324.1 +5.5 +314 naEgypt (EGX 30) 13,707.1 +0.1 +11.0 +12.1Israel (TA-125) 1,307.1 +0.4 +2.4 +10.4Saudi Arabia (Tadawul) 7,229.6 -1.1 -0.1 -0.1South Africa (JSE AS) 54,091.1 +2.2 +6.8 +12.9

Indicators for more countries and additionalseries, go to: Economist.com/indicators

Cigarette prices

Source: WHO*Most sold brand, weighted

average by number of smokers

Price of a pack of 20 cigarettes*, 2016$ at purchasing-power parity

0 2 4 6 8

Tobacco smokingprevalance among

adults, 2015, %

High-incomecountries 23

World 21

Middle-incomecountries 21

Low-incomecountries 13

excise taxOf which:

other taxes

The average price of a pack of cigarettes(adjusted for purchasing power) was$4.87 last year, according to the WorldHealth Organisation. Excise tax, value-added tax and custom duties account formost of the price variation around theworld: the non-tax share of the retailprice is fairly similar. In high-incomecountries, where cigarettes are mostexpensive, taxes make up on average 65%of the total price. Tax accounts for overhalf the price in almost 80% of high-income countries, compared with around50% of middle-income countries and lessthan 20% of low-income countries. TheWHO reckons there is ample scope to raisetaxes on tobacco products, which is alsothe best way to reduce consumption.

72 The Economist July 22nd 2017

IMAGINE a frictionless ball rollingaround a billiard table. Next, work out,

on variously shaped tables, which set ofricochets would merely repeat a pattern,and which would eventually cover thewhole surface. Full answers are still elu-sive, but it is the sort of mathematical puz-zle that outsiders can at least imagine.

By Maryam Mirzakhani’s standards,such problems were mundane. In herworld, the billiard tableswere abstract geo-metric objects which stretched andwarped. The problems involved not justone table but a “moduli space”, ofall possi-ble such surfaces. Fans called her work onthese mind-spinning abstractions the“theorem of the decade”.

Until the joy of maths claimed her, shewanted to be a novelist. Books cost next tonothing in the Iran of her childhood, andher earliest ambition was to read every-thing. Later, her maths had a literary tinge.She thrilled to the unfolding plot lines inthe problems she studied—though unlikein literature, she said, they evolved like livecharacters. “Just as you start getting toknowthem, you lookbackand realise yourfirst impression is mistaken.”

By her own account she was a “slow”mathematician, both in the time it took herto get started (her first teacher in Tehranthought she lacked aptitude) and in the

way she approached problems: teasingoutsolutions by doodling for hours on vastsheets of paper. These would swathe thefloor of their home, to the delight of hertoddler, and to the amused bewildermentof her tidy-minded Czech husband. Thepoint, she said, was not to write down allthe details, but to stay connected with theproblem. She also likened mathematicalinquiry to being lost in a forest, gatheringknowledge to come up with some newtricks, until you suddenly reach a hilltopand “see everything clearly”.

But she was quick on other fronts. En-couraged by her teachers and older broth-er, she soared through the Iranian educa-tion system. She was the first girl torepresent the country in the mathematicalOlympiad, winning gold medals in twosuccessive years. Her beloved abstract sur-faces can be described geometrically, withangles, lengths and areas, or algebraically,with equations. She was fluent in both: amathematical polyglot. She found it “re-freshing” to cross what she dismissed asthe “imaginary” boundaries between dif-ferent branches of the subject.

After Harvard and a stint at Princeton,she ended up at Stanford, winning theFields medal—broadly the maths equiva-lent of a Nobel prize—in 2014, the firstwoman to do so since its inception in 1936.

Her doctoral thesis alone was an academicearthquake, leading to papers published inthe three most-admired mathematicaljournals. Of her great breakthroughs, per-haps the most easily explained involveshyperbolic surfaces: roughly, doughnutswith two or more holes, but where eachpoint on the surface curves upwards, like asaddle. These exist, in theory, in infinite va-rieties. A big puzzle involves “geodesic”lines: the shortest distances between twosurface points. Some may be infinitelylong; others are “closed”, forming loopswith no endpoints. A fascinating and tinyhandful, known as “simple”, never crossthemselves. Her thesis revealed a formulafor how the number of simple closed geo-desics of a given length rose as that lengthincreased. Such work might seem abstruseto outsiders, but uses abound, from cos-mology to cryptography.

She belied stereotypes. To Americans,she had to explain that in her native Iran(unlike Saudi Arabia) women’s educationand careers were not just tolerated but en-couraged: her girls’ high school was run bya national organisation responsible forhothousing young talent. She was not onlythe first woman to win the Fields medal,but the first Iranian, making her a celebritythere. Some media flinched piously fromportraying her without a headscarf, a ta-boo which frayed after her death. Her mar-riage to a non-Muslim was not recognised,hampering family visits. Many also be-moaned her emigration, part of a debilitat-ing brain drain. She moved to America forpostgraduate study in 1999, a time when to-day’s anti-Muslim immigration policieswere unimaginable.

Drawing a lineShe quailed only before the limelight. Sheignored a friend’s e-mail telling her of theFields award, assuming it was a practicaljoke. In remission from the cancer thatwould eventually kill her, she worried thatchemotherapy had left her too weak to at-tend the awards ceremony.

Men have roughly five in every sixmaths-heavy academic jobs in America,part of a wider puzzle that neither naturenor nurture fully explains. One reasonmay be that maths talent and female fertil-ity flower in the same crucial years. She ac-knowledged the problem of discourage-ment, but resisted pressure to be a rolemodel; other women were doing greatthings too, and anyway research matteredmore. At conferences, female colleagues,working in pairs, helped her dodge mediainquiries. While one distracted the jour-nalist, the other let her ricochet to a morefamiliar plane ofbeing. 7

Adding up

Maryam Mirzakhani, the world’s leading female mathematician, died on July14th,aged 40

Obituary Maryam Mirzakhani

...............................................................Liu Xiaobo, the subject of the cover story in last week’sissue, died shortly after it went to press. The Chinesedissident’s obituary is at economist.com/liu

economistsubscriptions.com/1843

August/September issue on newsstands

July 26th

The award-winning magazine of ideas, lifestyle and culture

TURN ON, TUNE IN AND DROP BY THE OFFICE

Does lsd make you creative?

When Louis Vuitton and Supreme hooked upHow Sergei Shnurov rocks the Kremlin

Thomas Heatherwick’s amazing African gallery The man who collects stardust

Source: IDC “Worldwide SaaS Enterprise Applications Market Shares, 2015: The Top 15 by Buyer Size,” doc #US41913816, Dec. 2016; Table 4. For the purposes of this report, SaaS enterprise applications include the following application markets: CRM, engineering, ERP, operations and manufacturing, and SCM.

Copyright © 2017, Oracle and/or its affiliates. All rights reserved. Oracle and Java are registered trademarks of Oracle and/or its affiliates. Other names may be trademarks of their respective owners.

oracle.com/applicationsor call 1.800.ORACLE.1

SalesforceCloud12.4%

OracleCloud14.5%

#1 #2

1,000+ Employees Segment, 2015

Oracle #1SaaS EnterpriseApplications Revenue