America the petrostate

China meets Taiwan

Activist shareholders are back
The new biotech boom
FEBRUARY 15TH– 21ST 2014 Economist.com Towards a better condom

The
parable of
Argentina
What other countries
can learn from a century
of decline

Contents
5 The world this week
Leaders
7 Government
The parable of Argentina
8 Shareholder activism
Corporate upgraders
8 Geopolitics
The petrostate of America
9 Central banks
Fixing forward guidance
10 Britain’s floods
Canute Cameron
On the cover
Argentina’s century of Letters
decline holds lessons for too
12 On car safety, Cyprus, the
many of its peers: leader,
NHS, Pete Seeger, beauty,
page 7. In 1914 its economy
food, trains, Congress
had grown faster than
America’s for four decades
and its people were richer Briefing
than the Germans. What went 17 The tragedy of Argentina
wrong? Pages 17-20
A century of decline
The Economist online Asia
Daily analysis and opinion from
21 Pakistan’s economy
our 19 blogs, plus audio and video
The Urdu rate of growth
content, debates and a daily chart 22 Politics in India
Economist.com/blogs Warm-shouldering
E-mail: newsletters and 22 Running Aceh
mobile edition Laying down God’s law
Economist.com/email 23 Malaysia’s Sarawak
Print edition: available online by Last of the rajahs
7pm London time each Thursday 24 Japan’s cuisines
Economist.com/print Acquired taste
Audio edition: available online 26 Banyan
to download each Friday America loses its
Economist.com/audioedition
rebalance
China
27 Cross-strait relations
Symbolism as substance
Volume 410 Number 8874 28 Academic freedom
Don’t think, just teach
First published in September 1843
to take part in "a severe contest between 28 The trade balance
intelligence, which presses forward, and
an unworthy, timid ignorance obstructing
A number of great import
our progress."
Editorial offices in London and also:
United States
Atlanta, Beijing, Berlin, Brussels, Cairo,
Chicago, Hong Kong, Johannesburg, Los Angeles, 29 The economics of
Mexico City, Moscow, New Delhi, New York, Paris,
San Francisco, São Paulo, Singapore, Tokyo, shale oil
Washington DC Saudi America
31 New Republican ideas
Hell, maybe
31 How to date a supermodel
The curse of misleading
headlines
The Economist February 15th 2014 3
32 Health policy
Obamacare delayed
32 Charter schools
Killing the golden goose
33 New Orleans politics
Countertop corruption
34 Lexington
Florida pensioners and
pork
The Americas America the petrostate
35 Governing Mexico The fracking revolution is
All the president’s men good for the country and the
world. The benefits would be
36 Brazilian energy
Rain-checked even bigger if Barack Obama
got his energy policies right:
36 Canada’s budget
leader, page 8. The economics
Something doesn’t add up
of shale oil, page 29. America’s
37 Bello
economy has been hit hard by
Time to hug a Cuban
unemployment, page 63
Middle East and Africa
39 Zimbabwe’s economy
Sliding backwards again
40 Central African Republic
Sectarian slaughter
41 Nigeria’s image in Africa
Big country, thin skin
41 Syria’s Palestinians
No more a haven
42 The Arab lands’ Jews
They lost out, too Taiwan and China Officials
from the two sides meet, for the
Europe first time, page 27. A crackdown
43 Putin and the media on China’s free-thinking
academics, page 28
Dreams about Russia
44 Censorship in Turkey
Web conspiracies
45 French reforms
Taxi wars
45 Dutch angst
We need to talk about
Europe
46 Protests in Bosnia
On fire
46 The Cyprus problem
A glimmer of hope
47 Charlemagne Britain’s floods They are not
Switzerland’s crossbow David Cameron’s fault: leader,
page 10. Extraordinary
weather has made people
better neighbours, page 49
1 Contents continues overleaf
4 Contents The Economist February 15th 2014

Britain 66 South Korea’s housing

market
49 The floods Lumping it
High water everywhere
67 Credit-card fraud
50 Interest rates Skimming off the top
Forward progress
67 Western Union
52 Bagehot Finance in purgatory
The British Vikings
68 Free exchange
Central-bank co-ordination
International
53 Medical tourism Science and technology
Activist shareholders Next week
Médecine avec frontières
Investors like Carl Icahn have 73 Condom technology We publish a special report
changed. So should the rules 54 Online drug-dealing Sheathing Cupid’s arrow on companies and the state.
that constrain them: leader, The Silk Road, reborn Their relationship is becoming
74 Automated construction
page 8. The pressure on 54 Valentine’s Day ’Bot the builder increasingly antagonistic,
companies from activist Love’s enemies says Philip Coggan. But the
shareholders continues to 75 Cancer
two sides should not overdo
grow, page 55 Secondary goals
it: they need each other
Business
55 Corporate governance Obituary
Anything you can do, Subscription service
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56. How the pharmaceutical 60 E-commerce in China Hong Kong & Macau HK$2,000
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63 Unemployment in Obituary
America Principal commercial offices:
Closing the gap 86 Shirley Temple
25 St James’s Street, London sw1a 1hg
A walk on the bright side Tel: 020 7830 7000
64 Buttonwood
Growth and returns Rue de l’Athénée 32
1206 Geneva, Switzerland
65 German courts and Tel: 41 22 566 2470
the ECB 750 3rd Avenue, 5th Floor, New York, NY 10017
Condoms The oldest artificial It isn’t over Tel: 1 212 541 0500
contraceptive may be ripe for 65 Investment banks 60/F Central Plaza
a makeover, page 73. Europe and America 18 Harbour Road, Wanchai, Hong Kong
Tel: 852 2585 3888
Meanwhile Valentine’s Day is
under threat, page 54 Other commercial offices:
Chicago, Dubai, Frankfurt, Los Angeles,
Paris, San Francisco and Singapore

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The world this week
Politics
To the delight of populists and
the horror of the European
Union, Switzerland voted in
favour of quotas for EU mi-
grants. The referendum was
passed by a thin margin, but
means free movement for EU
citizens into Switzerland is no
longer guaranteed. It also puts
into question Swiss access to
the EU single market. Ger-
many’s foreign minister, Frank-
Walter Steinmeier, criticised
the vote, and said that “cherry-
picking with the EU is not a
sustainable strategy”.
Britain’s immigration minister
resigned after it emerged that
he employed a cleaner at his
London home who is not
entitled to work in the country.
Mark Harper had spearheaded
the government’s campaigns
to crack down on illegal work-
ers and to deter legal European
migrants from coming to
Britain.
Scotland’s Nationalists ac-
cused the three main political
parties in Britain of “bullying”
as they formally ruled out a
currency union should Scots
vote for independence in
September’s referendum.
Campaigning on the pro-
union side has stepped up
markedly over the past few
weeks, amid concern that the
pro-independence movement
is gathering steam (though it is
still behind in the polls).
François Hollande, the presi-
dent of France, was welcomed
warmly on a state visit to
America. Previous grievances,
such as France’s opposition to
the Iraq war, were not men-
tioned. Mr Hollande flew solo
following his break-up from
Valérie Trierweiler. He was
seated at a function between
Barack and Michelle Obama,
who declared “we love our
French friends.”
After a breakdown in negotia-
tions 18 months ago, the
Greek-Cypriot and Turkish-
Cypriot leaders at last started
talking again at a UN com-
pound in Nicosia about how to
end the island’s division, in
place since 1974.
The long haul
Another round of talks
involving representatives of
Syria’s government and oppo-
sition took place in Geneva.
Little progress was visible,
though hundreds of civilians
were evacuated under a recent
truce from the rebel-held and
long-besieged part of the city
of Homs.
Sectarian mayhem in the
Central African Republic
persisted, prompting a French
general recently in charge of
the peacekeeping force there to
say it should be much rein-
forced if it is to have a chance
of restoring peace.
Open to suggestions
The EU agreed to launch talks
on a new trade-and-invest-
ment deal with Cuba. The
talks may begin next month
and are partly designed to
encourage the island’s reforms
and promote human rights.
Leaders of the Pacific Alliance
countries—the trade bloc’s
members are Chile, Colombia,
Mexico and Peru—signed an
agreement scrapping the bulk
of tariffs on goods and services
traded between them. The
deal reinforced the contrast
between the Alliance and
Mercosur, Latin America’s
other big trade group, which is
far more protectionist.
The Economist February 15th 2014 5
At least two people died dur-
ing an anti-government de-
monstration in Caracas, the
capital of Venezuela. Violence
also marred protests in other
parts of the country, as dis-
content grows with the regime
of Nicolás Maduro, the coun-
try’s president.
Canada’s ruling Conserva-
tives unveiled a budget that
would cut the deficit further in
the 2014-15 fiscal year and yield
a surplus the following year.
Stephen Harper, the prime
minister, has made balancing
the budget a priority in ad-
vance of elections in 2015.
It’s taken only 65 years…
China and Taiwan held their
first high-level talks since the
end of the Chinese civil war in
1949. The two most senior
cross-strait officials from each
side met in the Chinese city of
Nanjing in what is widely seen
as a confidence-building exer-
cise. In the past, all talks have
gone through quasi-official
organisations.
Thailand’s constitutional
court rejected an opposition
request to annul the general
election that was held on
February 2nd. The opposition,
which wants Yingluck Shi-
nawatra to resign as prime
minister, disrupted the elec-
tion and then claimed the poll
violated the constitution be-
cause it was not completed in
one day. Voting is scheduled to
be held in April in constituen-
cies where polling was thrown
into disarray on February 2nd.
Senior diplomats from North
and South Korea held talks,
hastily set up at the North’s
suggestion. They got nowhere,
but promised a second round
of discussions. John Kerry,
America’s secretary of state,
visited South Korea amid
protests from the North about
the South’s forthcoming mil-
itary exercises with America.
America criticised Afghani-
stan’s decision to release 65
prisoners from the high-securi-
ty Bagram prison, alleging that
some of them were hardened
terrorists. Afghanistan says
Bagram is a “Taliban-making
factory” that radicalises ordin-
ary inmates. The UN reported
that Afghan civilian casualties
rose 7% last year, to 3,000.
Yoichi Masuzoe cruised to
victory to become governor of
Tokyo. He was backed by
Shinzo Abe, Japan’s prime
minister, and favours restarting
Japan’s nuclear reactors, which
have been shuttered since the
2011 earthquake and tsunami.
A brave man
John Boehner, the Republican
Speaker of America’s House of
Representatives, helped push
through a vote to raise the
federal debt ceiling, which
passed without any conditions
attached. The bill was sup-
ported by 28 Republicans and
was notable for avoiding the
Tea Party-infused dramas that
have marked negotiations over
the federal debt since 2009.
America’s Justice Department
issued an edict to its staff to
recognise same-sex marriage
“as broadly as possible” under
federal law. The policy will
give gay couples the same
rights as straight ones, so that,
for example, gay spouses can
refuse to testify against their
husbands or wives.
Robert Hoffman, a former
cryptology technician in the
American navy, was sen-
tenced to 30 years in prison for
attempting to sell secrets to FBI
agents posing as Russian
operatives.
Ray Nagin, who was mayor of
New Orleans when Hurri-
cane Katrina struck in 2005,
was found guilty of accepting
bribes from contractors. He is
the first mayor to be convicted
for corruption in New Orleans,
which has a reputation for
flamboyant graft. 1
6 The world this week
Business
Mark Carney, the governor of
the Bank of England, dumped
the “forward guidance” that
connected decisions on
interest rates to Britain’s
unemployment rate, which
has dropped much faster than
the bank forecast. Facing down
criticism of his policy, Mr
Carney said that forward
guidance is “working” and that
“uncertainty about interest
rates has fallen.” The bank will
consider a broader range of
indicators in its future guid-
ance. It is not expected to raise
rates for at least a year.
Steady as she goes
Markets responded positively
to Janet Yellen’s first testimo-
ny to Congress as chairman of
the Federal Reserve. She de-
fended the Fed’s “tapering” of
its asset-buying programme
with confidence and predicted
it would continue throughout
the year, though she was “sur-
prised” by weak recent data
from the labour market. Em-
ployers added just 113,000 jobs
to the payrolls in January, far
below expectations.
Portugal’s latest sale of long-
term bonds at auction was
almost three times oversub-
scribed. Portugal hopes to
follow Ireland and make a
clean exit from its bail-out
programme this year.
Barclays was criticised for
increasing its bonus pool by
10%, despite reporting a 32%
drop in annual pre-tax profit,
to $5.2 billion. Antony Jenkins,
who took over from Bob Dia-
mond as chief executive pro-
mising a new era, defended the
bonuses as necessary to retain
talent in a highly competitive
market. Profit at its investment
bank fell by 37% last year;
bonuses rose by 13%. Barclays
is shedding thousands of jobs.
BNP Paribas said it had found
“a significant volume of trans-
actions” over the years that
may have broken the rules
under American sanctions-
policy. The French bank set
aside $1.1 billion for potential
fines in its quarterly earnings.
Carl Icahn, a renowned activ-
ist investor, ended his cam-
paign to get Apple to buy back
more of its shares, after an
investment consultancy ad-
vised against it. Mr Icahn had
wanted Apple to spend $50
billion on repurchases; it has
stumped up only $14 billion.
Opinion is divided over the
role of Mr Icahn (and activist
investors in general). Some see
his interventions as undermin-
ing long-term performance;
others see them as an essential
check on entrenched and
imperious managers.
After six months of specu-
lation Comcast emerged as
the winner in the battle to take
over Time Warner Cable. The
deal to combine America’s
largest and second-largest
cable-TV providers will come
under intense scrutiny from
antitrust regulators.
Making Hay
The success of Supercell, a
Finnish developer of games for
mobile devices, was under-
scored when its annual profit
soared 810%, to $464m. Super-
cell has published just two
games, “Hay Day” and “Clash
of Clans”, that are free to
download but charge users
who want to increase the pace
of play. It is launching a third
game, “Boom Beach”.
A political row erupted in
Australia about Toyota’s
decision to shut its operations
in the country in 2017. That will
bring an end to Australian
carmaking: Ford and General
Motors’ Holden division are
also closing down. The govern-
ment pointed to carworkers’
demands, but Toyota said it
never blamed the union, and
instead cited other factors,
such as the strength of the
Australian dollar.
Tokyo yo-yo
Bitcoin price
Mt.Gox exchange, $
FM A M J J A S O N D J F
2013
Source: Bitcoincharts.com
Bitcoin’s reputation as the
virtual currency of the future
was further dented when Mt.
Gox, an online exchange based
in Tokyo, halted withdrawals,
saying it had detected a glitch
that suggested someone had
hacked into its system to make
transactions disappear. A few
days later two European
Bitcoin exchanges reported a
similar “transaction malleabil-
ity” issue.
The Economist February 15th 2014
It emerged that Britain’s Seri-
ous Fraud Office had searched
several addresses in London
and arrested two people in
relation to its investigation into
alleged bribery by employees
of Rolls-Royce. In 2012 the
aerospace company provided
information to the SFO about
“allegations of malpractice in
Indonesia and China”.
Nestlé, a Swiss food group,
sold back 8% of the 29% stake it
held in L’Oréal to the French
cosmetics company. As part of
the deal Nestlé gains full
control of Galderma, which
makes treatments for skin
1,200 conditions. This will become
1,000 the core of a new subsidiary,
800 Nestlé Skin Health, that will
600
focus on the growing business
400
200
of “nutricosmetics”.
0
Starbucks did not see the
2014
funny side when a television
comedian opened Dumb
Starbucks, a coffee shop in Los
Angeles that mimicked the
original in close detail, but
inserted the word “dumb” in
front of various items on the
menu and gave beverages new
names, such as Wuppy Duppy
Latte. It was promptly shut
down because it did not have a
permit to sell drinks.
Other economic data and news
can be found on pages 84-85

Leaders
The parable of Argentina
There are lessons for many governments from one country’s 100 years of decline
A CENTURY ago, when Har-
rods decided to set up its
first overseas emporium, it
chose Buenos Aires. In 1914 Ar-
gentina stood out as the country
of the future. Its economy had
grown faster than America’s
over the previous four decades.
Its GDP per head was higher than Germany’s, France’s or Ita-
ly’s. It boasted wonderfully fertile agricultural land, a sunny
climate, a new democracy (universal male suffrage was intro-
duced in 1912), an educated population and the world’s most
erotic dance. Immigrants tangoed in from everywhere. For the
young and ambitious, the choice between Argentina and Cali-
fornia was a hard one.
There are still many things to love about Argentina, from
the glorious wilds of Patagonia to the world’s best footballer,
Lionel Messi. The Argentines remain perhaps the best-looking
people on the planet. But their country is a wreck. Harrods
closed in 1998. Argentina is once again at the centre of an
emerging-market crisis. This one can be blamed on the incom-
petence of the president, Cristina Fernández, but she is merely
the latest in a succession of economically illiterate populists,
stretching back to Juan and Eva (Evita) Perón, and before. For-
get about competing with the Germans. The Chileans and
Uruguayans, the locals Argentines used to look down on, are
now richer. Children from both those countries—and Brazil
and Mexico too—do better in international education tests.
Why dwell on a single national tragedy? When people con-
sider the worst that could happen to their country, they think
of totalitarianism. Given communism’s failure, that fate no
longer seems likely. If Indonesia were to boil over, its citizens
would hardly turn to North Korea as a model; the govern-
ments in Madrid or Athens are not citing Lenin as the answer
to their euro travails. The real danger is inadvertently becom-
ing the Argentina of the 21st century. Slipping casually into
steady decline would not be hard. Extremism is not a neces-
sary ingredient, at least not much of it: weak institutions, nativ-
ist politicians, lazy dependence on a few assets and a persis-
tent refusal to confront reality will do the trick.
All through my wild days, my mad existence
As in any other country, Argentina’s story is unique. It has had
bad luck. Its export-fuelled economy was battered by the pro-
tectionism of the interwar years. It relied too heavily on Britain
as a trading partner. The Peróns were unusually seductive pop-
ulists. Like most of Latin America, Argentina embraced the
Washington consensus in favour of open markets and privati-
sation in the 1990s and it pegged the peso to the dollar. But the
crunch, when it came in 2001, was particularly savage—and left
the Argentines permanently suspicious of liberal reform.
Ill fortune is not the only culprit, though (see pages17-20). In
its economy, its politics, and its reluctance to reform, Argenti-
na’s decline has been largely self-inflicted.
Commodities, Argentina’s great strength in 1914, became a
curse. A century ago the country was an early adopter of new
The Economist February 15th 2014 7
technology—refrigeration of meat exports was the killer app of
its day—but it never tried to add value to its food (even today, its
cooking is based on taking the world’s best meat and burning
it). The Peróns built a closed economy that protected its ineffi-
cient industries; Chile’s generals opened up in the 1970s and
pulled ahead. Argentina’s protectionism has undermined
Mercosur, the local trade pact. Ms Fernández’s government
does not just impose tariffs on imports; it taxes farm exports.
Argentina did not build the institutions needed to protect
its young democracy from its army, so the country became
prone to coups. Unlike Australia, another commodity-rich
country, Argentina did not develop strong political parties de-
termined to build and share wealth: its politics was captured
by the Peróns and focused on personalities and influence. Its
Supreme Court has been repeatedly tampered with. Political
interference has destroyed the credibility of its statistical office.
Graft is endemic: the country ranks a shoddy 106th in Transpa-
rency International’s corruption index. Building institutions is
a dull, slow business. Argentine leaders prefer the quick fix—of
charismatic leaders, miracle tariffs and currency pegs, rather
than, say, a thorough reform of the country’s schools.
They are not the solutions they promised to be
Argentina’s decline has been seductively gradual. Despite
dreadful periods, such as the 1970s, it has suffered nothing as
monumental as Mao or Stalin. Throughout its decline, the ca-
fés of Buenos Aires have continued to serve espressos and
medialunas. That makes its disease especially dangerous.
The rich world is not immune. California is in one of its sta-
ble phases, but it is not clear that it has quit its addiction to
quick fixes through referendums, and its government still hob-
bles its private sector. On Europe’s southern fringe, both gov-
ernment and business have avoided reality with Argentine
disdain. Italy’s petulant demand that rating agencies should
take into account its “cultural wealth”, instead of looking too
closely at its dodgy government finances, sounded like Ms Fer-
nández. The European Union protects Spain or Greece from
spiralling off into autarky. But what if the euro zone broke up?
The bigger danger, however, lies in the emerging world,
where uninterrupted progress to prosperity is beginning to be
seen as unstoppable. Too many countries have surged forward
on commodity exports, but neglected their institutions. With
China less hungry for raw materials, their weaknesses could
be exposed just as Argentina’s was. Populism stalks many
emerging countries: constitutions are being stretched. Over-
reliant on oil and gas, ruled by kleptocrats and equipped with
a dangerously high self-regard, Russia ticks many boxes. But
even Brazil has flirted with economic nationalism, while, in
Turkey, the autocratic Recep Tayyip Erdogan is blending Evita
with Islam. In too many parts of emerging Asia, including Chi-
na and India, crony capitalism remains the order of the day. In-
equality is feeding the same anger that produced the Peróns.
The lesson from the parable of Argentina is that good gov-
ernment matters. Perhaps it has been learned. But the chances
are that in 100 years’ time the world will look back at another
Argentina—a country of the future that got stuck in the past. 7
8 Leaders
Shareholder activism
Corporate upgraders
America should make life easier, not harder, for activist investors
“I F YOU want a friend on
Wall Street, get a dog,” Carl
Icahn once quipped. At the time
his habit of buying shares in a
company and picking a fight
with management had got him
ostracised as a “corporate raid-
er” and “greenmailer”. Oliver
Stone borrowed the canine quip for Gordon Gekko, the cold-
hearted protagonist of the film “Wall Street”.
Today, Mr Icahn does not need the dog: his conduct is ap-
plauded by such pillars of the establishment as the head of the
Securities and Exchange Commission, the main regulator of
America’s financial markets: Mary Jo White believes that
shareholder activism has lost its “distinctly negative connota-
tion”. That is partly because rule changes have made activism
easier and therefore more commonplace. Nor is it restricted to
America: shareholder activism is gaining in popularity around
the world, in places such as Japan and continental Europe,
where it was once unknown.
Not everybody is pleased. Managers, who seldom like in-
vestors trying to push them around, mutter about dirty tricks,
to do with short-selling and rumour-mongering: those must
be proved in court. A better criticism is that activists, who tend
to hold shares for relatively brief periods and then pocket the
profits of their intervention, force managers to drive up their
share prices in the short term at the expense of their firms’
long-term health. There is a push to roll back recent rule-
changes that have increased the opportunity for shareholders
to vote, and fierce resistance to proposals to allow share-
holders to nominate or vote against individual ones.
For sure, activist shareholders are not always right. Bill Ack-
man of Pershing Square did J.C. Penney, an enfeebled chain of
clothing stores, no favours when he chivvied it to adopt his ill-
Geopolitics
The petrostate of America
The energy boom is good for America and the world. It would be nice if Barack Obama helped a bit
“R ISE early, work hard, strike
oil.” The late oil baron J.
Paul Getty’s formula for success
is working rather well for Amer-
ica, which may already have
surpassed Russia as the world’s
largest producer of oil and gas
(see page 29). By 2020 it should
have overtaken Saudi Arabia as the largest pumper of oil, the
more valuable fuel. By then the “fracking” revolution—a clever
way of extracting oil and gas from shale deposits—should have
added 2-4% to American GDP and created twice as many jobs
than carmaking provides today.
The Economist February 15th 2014
fated plan to revive it. But recent academic studies suggest that,
by and large, activists are good for companies. An analysis of
around 2,000 interventions in America during 1994-2007
found not only that the share prices and operating perfor-
mance of the firms involved improved over the five years after
the intervention, but also that the improvement was greatest
towards the end of the five-year period. The firms activists tar-
geted tended to be underperforming relative to their industry.
These results hold true for the two sorts of activism that tend to
be criticised most: actions designed to increase a firm’s lever-
age, such as taking on more debt or using cash to buy back
shares, and actions that are especially hostile to a firm’s cur-
rent management.
Recent high-profile cases support the academics. Activist in-
vestors led to new management being brought in at Yahoo,
whose share price has since doubled, and encouraged the de-
parture of Steve Ballmer from Microsoft, whose share price is
higher than at any time since the dotcom bubble burst. Mr
Icahn forced Apple to hand back to investors some of its $160
billion cash pile. Even Tim Cook, the company’s boss, now ad-
mits that the firm does not have enough decent investment op-
portunities to absorb it.
Stop taking the tablets
Rather than making life harder for activists, America’s regula-
tors should make it easier. They could adopt Britain’s practice
of allowing activists to call a shareholder meeting at which in-
dividual board members can be voted out. “Poison pills” that
are triggered when activists buy shares should be banned.
On the whole, Mr Icahn and his imitators help to improve
corporate performance by stirring up much-needed debate
about strategy and leadership, just as in democracies the gov-
ernment of a country is improved by the existence of an effec-
tive opposition. That is a respectable calling. 7
All this is a credit to American ingenuity. Commodities
have been a mixed blessing for other countries (see our leader
on Argentina). But this oil boom is earned: it owes less to geo-
logical luck than enterprise, ready finance and dazzling tech-
nology. America’s energy firms have invested in new ways of
pumping out hydrocarbons that everyone knew were there
but could not extract economically. The new oilfields in Texas
and North Dakota resemble high-tech factories. “Directional”
drills guided by satellite technology bore miles down, turn,
bore miles to the side and hit a target no bigger than a truck
wheel. Thousands ofgallons ofwater are then injected to open
hairline cracks in the rock, and the oil and gas are sucked out.
From the point of view of the rest of the world, the new 1
 The Economist February 15th 2014
2 American petrostate is useful. Fracking provides a source of
energy that is not only new but also relatively clean, cheap and
without political strings. It should reduce the dependence on
dirty fuels, such as coal, and extortionate suppliers, such as
Russia. Moreover, fracking is unusually flexible. Setting up an
oil rig in the Gulf of Mexico can take years. But America’s frack-
ers can sink wells and start pumping within weeks. So if the oil
price spikes, they drill more wells. If it falls, they let old ones
run down. In theory, fracking should make future oil shocks
less severe, because American producers can respond quickly.
Fracking all over the world
Some foreign-policy wonks argue that this dramatic change in
America’s fortunes argues for a fundamental change in the
country’s foreign policy. If America can produce its own oil,
they argue, why waste so much blood and treasure policing
the Middle East? Yet even if it were politically sensible for
America to disengage from the world—which this newspaper
does not believe it is—the economic logic is flawed. The price of
oil depends on global supply and demand, so Middle Eastern
producers will remain vital for the foreseeable future. It is in
the superpower’s interest to keep Gulf sea lanes open (and not
to invite China to do the job instead).
Although America’s foreign policy should not change, its
energy policy should. Its ban on the export of crude oil, for in-
stance, dating from the 1970s, was intended to secure supplies
for American consumers. But its main effect is to hand a wind-
fall to refiners, who buy oil cheaply and sell petrol at the global
price. Barack Obama should lift it so that newly fracked oil can
be sold wherever it makes the most cash. And he should ap-
Central banks
Fixing forward guidance
The Bank of England is doing a better job at explaining its intentions than the Federal Reserve
Unemployment rate
%
F EW central bankers have
more faith in the power of
their own pronouncements
8.5
United States
8.0 than Mark Carney and Janet Yel-
Britain
7.5 len. Both the smooth-talking go-
7.0
6.5 vernor of the Bank of England
and the new chairman of the
2012 13 14
Federal Reserve are strong advo-
cates of “forward guidance”—the idea that central banks can
influence monetary conditions today by making commit-
ments about how they will behave tomorrow. Mr Carney pio-
neered the approach while he was head of the Bank of Cana-
da. Before her promotion, Ms Yellen pushed for ever clearer
public statements about the Fed’s future actions. Today both
are grappling with an awkward problem: the strategy they
have championed is not working as expected. So far, Mr Car-
ney is doing a better job of dealing with the consequences.
To prop up lacklustre recoveries, both central banks adopt-
ed an unusually explicit form of forward guidance. They
promised not to consider raising short-term interest rates until
unemployment fell to a specific threshold: 6.5% in America
and 7% in Britain. When these pledges were made (in Decem-
ber 2012 and August 2013 respectively), the jobless rate in both
places was far higher and expected to fall slowly. Forward guid-
Leaders 9
prove the Keystone XL pipeline, which would carry oil from
Canada’s tar sands to American refineries; an exhaustive offi-
cial study has deemed the project environmentally sound.
America does not ban the export ofnatural gas, but it makes
getting permits insanely slow. Fracking has made gas extraor-
dinarily cheap in America. In Asia it sells for more than triple
the price; in Europe, double. Even allowing for the hefty cost of
liquefying it and shipping it, there are huge profits to be made
from this spread. The main beneficiaries ofthe complicated ex-
port-permit regime are American petrochemical firms, which
love cheap gas and lobby for it.
Mr Obama should ignore them. Gas exports could generate
tankerloads of cash. To the extent that they displace coal, they
would be good for the environment. And they could pay for-
eign-policy dividends, such as offering Europeans an alterna-
tive to Russian gas and so reducing Vladimir Putin’s power to
bully his neighbours. Allowing exports might cause America’s
domestic gas prices to rise a little, but it would also make Amer-
ican frackers pump more of it, cushioning the blow.
A world in which the leading petrostate is a liberal democ-
racy has much to recommend it. But perhaps the biggest poten-
tial benefit of America’s energy boom is its example. Shale oil
and gas deposits are common in many countries. In some they
may be inaccessible, either because of geology or because of
environmental fears: but in most they go unexploited because
governments have not followed America’s example in grant-
ing mineral rights to individual landowners, so that the com-
munities most disrupted by fracking are also enriched by it. Be-
come a champion of a global fracking revolution, Mr Obama,
and the world could look on America very differently. 7
ance was, in effect, a promise to keep rates low for a long time.
Reality did not oblige. For different reasons—oddly poor
productivity growth in Britain and large numbers of workers
dropping out of the labour force in America (see page 63)—the
jobless rate has tumbled unexpectedly fast on both sides of the
Atlantic. As a result, both central banks are within a whisker of
their thresholds, even though inflation is falling, wage growth
is flat and the recoveries in both countries are fragile. So nei-
ther central bank is about to raise interest rates. But instead of
clarifying their intentions, the unemployment thresholds are
now muddying them.
Going forward
The pair have responded in different ways. The Fed has down-
played, but not abandoned, its magic number. Its monetary-
policy committee now says that rate rises will not be consid-
ered until well after joblessness is below 6.5%. In her first testi-
mony to Congress this week Ms Yellen said she would also
take into account other measures, such as the number of long-
term unemployed and the share of workers who wanted full-
time jobs but could not find them. But she offered no details on
what would constitute an adequate improvement.
Mr Carney, in contrast, wheeled out a whole new frame-
work on February 12th. “Forward guidance II” scraps the un- 1
10 Leaders
2 employment threshold. Instead, there is an extensive new ex-
planation of the central bank’s plans (see page 50). He says
there is still “spare capacity” in the British economy (some
1-1.5% of GDP). Mr Carney’s goal is to get rid of this slack within
the next two to three years. Interest rates will not start to rise
until the economy is running closer to full tilt, and when they
do rise it will be slowly, ending up below 5%.
Which approach is better? The vagueness of Ms Yellen’s po-
sition has defanged her critics; the absence of numbers means
she can claim the Fed’s policy is still intact. By contrast, Mr Car-
ney’s much starker volte-face has been condemned by some as
a credibility-sapping shambles. After failing miserably with
his unemployment measure, the complaint goes, the governor
has adopted a notion of “spare capacity” which will probably
misfire too (and which the man on the street will not under-
stand anyway).
Britain’s floods
Canute Cameron
The prime minister’s response to the floods has been patchy; but it is wrong to blame him for them
“B IBLICAL”—that is how Da-
vid Cameron described
the floods spreading misery
through southern England.
Thousands of hectares of farm-
land have been under water for
weeks and over 5,000 houses
abandoned. Local railways are
damaged and their services in chaos. Soldiers have been de-
ployed to leafy Thames-side suburbs, where looters were ru-
moured to be splashing through abandoned stockbrokers’ pal-
aces. The prime minister was scarcely exaggerating; yet his
recourse to scripture also invited the uncomfortable question
of who, exactly, is to blame.
The question matters to Mr Cameron. His reputation for
competence underpins his party’s electoral chances. He may
be able to brush off the councillor from the UK Independence
Party who saw the floods as divine retribution for the prime
minister’s successful campaign to legalise gay marriage. But
British newspapers are full of semi-submerged people blam-
ing his government for their plight: 73% of Britons support a
Daily Mail campaign to divert money to flood victims from Mr
Cameron’s unloved foreign-aid budget. There is even an echo
of the opprobrium thrown at George Bush for his useless re-
sponse to Hurricane Katrina.
Some ofthese recriminations are justified. In 2009 the Envi-
ronment Agency, which is charged with keeping water in its
proper place, requested an annual increase in spending on
flood defences. This was not unreasonable: more people are
living in flood-prone areas, and global warming is likely to lead
to more extreme weather. The agency’s budget for capital ex-
penditure has instead been cut by 28%. The extra cash now
promised must be spent on repairing damaged defences, not
investing in new ones. It was a failure characteristic of a gov-
ernment that has too often sacrificed long-term spending on
infrastructure to the exigencies of short-term belt-tightening.
The government’s initial response to the disaster was also
poor. Mr Cameron implied the flooding on the Somerset Lev-
The Economist February 15th 2014
This newspaper begs to differ. The first iteration of forward
guidance in Britain did not fail. Even ifMr Carney’s economists
forecast the jobless rate poorly, the guidance itself convinced
businesses and investors that rates would not rise soon, de-
spite the recent acceleration in Britain’s growth rate. Financial
markets now expect interest rates to start rising in April 2015.
Without forward guidance they would have expected a move
far sooner.
The Bank of England’s new framework sends a clearer mes-
sage to the markets than the Federal Reserve does, largely be-
cause it is much more detailed. Investors now have informa-
tion about the likely scale and speed of rate rises in Britain,
both areas on which America’s central bank is now less specif-
ic. In the longer term that clarity should be an advantage for Mr
Carney—providing, of course, that this time his forecasters
have got their sums right. 7
els, an area of land below sea-level, had been exacerbated by a
decision to stop dredging the man-made rivers that drain it.
That suggested the last, Labour, government was to blame. Yet
dredging would at best (and at huge expense) have mitigated
the flooding only a bit. The Environment Agency is right to give
low priority to protecting farmland. Towns are more valuable.
Torn between conflicting desires to appear in control of the
calamity and blameless for the suffering, other ministers
blathered. Eric Pickles, the communities secretary, sniped at
the Environment Agency—which is led, not coincidentally, by
Lord Smith, a Labour Party grandee. Other Tories unconvinc-
ingly blamed their usual bogeys: the European Union, on the
basis of one directive or other, and the Liberal Democrats, their
main rival in the south-west. For a government that takes pride
in its efficiency, this was a shambles—and one seized on not
just by Labour but by Mr Cameron’s many enemies in the
press and his own party.
It never rains but it pours
How much this will hurt Mr Cameron electorally is unclear:
most of the flooded areas are safe Tory seats. But the scale of
the opprobrium is wildly unfair. That is partly because Mr
Cameron has got his act together, promising the acceleration of
insurance payouts, giving affected companies more time to
meet tax obligations and stopping the ministerial blather.
But the bigger reason is simple: in this instance virtually all
the blame should fall not on the government but on that other
British bugbear, the weather. Recent weeks have been the wet-
test in a century. A giant storm surge and some of the biggest
waves on record have contributed to a triple whammy of flash
floods, waterlogging and burst riverbanks. Even if Mr Camer-
on had the wisdom of Solomon and the wealth of Croesus, he
could not have prevented the flooding. With climate science
indicating that future inundations are more likely, Britons will
therefore have to assume more responsibility for their own
property. Anyone tempted to build or buy a house on a flood-
plain or low-lying sea front should think again. And on this
subject, at least, they should stop blaming Mr Cameron. 7
12
Letters
Car protection
SIR — Your leader on what to
do about the rise in road
deaths in the developing world
was wrong to suggest that
“strict vehicle standards are
pricey” (“Reinventing the
wheel”, January 25th). Vehicle
safety is affordable and more
achievable than ever before.
The UN has a framework of
minimum safety standards,
including front and side crash
tests, that are not costly to
implement: the frontal-impact
standard can be passed simply
by adding an airbag on the
driver’s side.
It is now also far less expen-
sive to provide car-body shells
that will protect passengers in
a crash at the standard test
speed of 56kph (35mph). These
improvements are achievable
at unit costs of less than $100
and will become even cheaper
as economies of scale are
gained in a globalised industry.
Frankly, it is scandalous that
any new cars are being built
below these standards, but this
is all too common in rapidly
motorising developing coun-
tries, where the UN regulations
are often not applied. Our
partner car-assessment pro-
grammes in Asia and Latin
America continue to find
substandard “zero-star” cars in
their independent crash tests.
Hopefully by the end of the
UN Decade of Action for Road
Safety all new passenger cars
will meet the minimum crash-
test standards. That really will
help to reinvent the wheel.
DAVID WARD
Secretary-general
Global New Car Assessment
Programme
London
SIR — Kenya piloted a low-cost
scheme that placed stickers in
the country’s ubiquitous
matatus, or minibuses, urging
passengers to speak up against
reckless driving. Vehicles that
were offered the stickers saw a
50% reduction in total acci-
dents compared with a control
group. There was an even
larger fall of 60% in accidents
that cause injuries or fatalities.
This intervention offered
extraordinary value for money.
Measured by the cost per year
of healthy life saved it was
cheaper than childhood
immunisation. The increase in
road deaths requires a broad
range of responses; passenger
empowerment should
definitely be among them.
JAMES HABYARIMANA
WILLIAM JACK
Georgetown University
Washington, DC
Talking about Cyprus
SIR — The recent letter from the
Greek-Cypriot high commis-
sioner left me dismayed (Feb-
ruary 1st). There is an obvious
disagreement between the
two sides in Cyprus about the
interpretation of historical
events. Turkey did not invade
Cyprus, but exercised its rights
and obligations under the 1960
Treaty of Guarantee to protect
the Turkish-Cypriot people
and to stop the annexation of
the island to Greece. It is dis-
heartening that the Greek-
Cypriots are addressing Turkey
and putting it under the spot-
light rather than trying to
resolve disputed issues togeth-
er with the Turkish-Cypriots.
Had the Greek-Cypriots
voted yes for the Annan Plan,
as the Turkish-Cypriots did, all
the issues, including the open-
ing of Turkish ports and the
solution for Maras/Varosha,
would have been resolved a
decade ago.
But it is never too late.
Turkey and the Turkish-Cypri-
ots are committed to a compre-
hensive settlement. We urge
the Greek-Cypriots to
concentrate on the negotia-
tions and address the issues
there, rather than stipulating
preconditions and trying to
resolve issues away from the
negotiating table.
OYA TUNCALI
Representative of the Turkish
Republic of Northern Cyprus
London
A role for private provision
SIR — Bagehot rightly high-
lighted the “unaffordable
rising demand” on Britain’s
National Health Service (Janu-
ary 18th). However, the politics
of the NHS is preventing a
crucial extra step towards
affordable health care:
independent health-care firms
The Economist February 15th 2014
working with the NHS to
generate capacity and
investment and relieve pres-
sure on the health service.
The latest Care Quality
Commission report found that
private, not-for-profit and
charitable health-care
institutions supply high quali-
ty, safe, innovative care to
patients. The huge challenges
that lie ahead for the NHS can
only be met through creative
thinking and by taking bold
decisions.
FIONA BOOTH
Chief executive
Association of Independent
Healthcare Organisations
London
A man for all seasons
SIR — You made much of Pete
Seeger’s slowness to condemn
the Soviet Union (“Bolshie
with a banjo”, February 1st).
His politics were of the far left,
but he was primarily a mu-
sician who fought for civil,
racial and labour rights, all of
which I am sure you would
agree fell on the right side of
history. He was hardly a cold-
war warrior.
I don’t recall your report on
the death of Milton Friedman
giving any weight to his failure
to condemn Pinochet’s brutal
regime in Chile (“A heavy-
weight champ, at five foot
two”, November 25th 2006).
DAN LILOT
Mountain View, California
Political beauties
SIR — The Economist has a
record of lookism, describing
Nelson Mandela as “hand-
some”, praising Enrique Peña
Nieto’s “boyish good looks”
and Justin Trudeau’s “good
looks”. In 2007 you told us that
Ségolène Royal, the Socialist
candidate for president in
France, “has the press drool-
ing” and called her “dazzling”
and “radiant”.
Yet you got all tetchy about
“beauty-pageant style conde-
scension” directed towards
Cathy McMorris Rodgers, a
Republican congresswoman,
even taking offence that John
Boehner, the Speaker of the
House, described her as “most
importantly, a mom” (“More
than a mom”, February 1st).
However, her official biogra-
phy emphasises that she has
three children and brags that
she is the only woman to have
given birth three times while
serving in Congress.
Being a mother is vital to
her personal and political
identity. Modern women insist
on being able to define them-
selves. So it is Mr Boehner who
is the real feminist for describ-
ing her the way she wants to be
described.
PHIL CHRISTENSON
Washington, DC
Where’s the beef?
SIR — “Hail, the Swabian
housewife” (February 1st)
mentioned Maultaschen, a
dish adapted from “Italian
ravioli”. There is an interesting
legend behind the food. It is
said to have been created by
monks in an effort to hide meat
(inside the pasta parcels) from
God’s eye on meatless Fridays
and in particular on Good
Friday. Hence its colloquial
name Herrgottsbescheiberle in
Swabian: “little God-cheaters”.
KILIAN STRAUSS
Tübingen, Germany
Train of thought
SIR – I was encouraged to read
in the executive-focus
advertisement section in your
January 25th issue that the first
skill required for the job of
executive director at the
European Railway Agency is a
“proven track record”.
PHILIP CURRAH
Vancouver
On another planet
SIR — I see that NASA spent
$3m studying Congress (“Dr
No retires”, January 25th). Did
it find any sign of intelligent
life?
DANIEL OLIVE
London 7
Letters are welcome and should be
addressed to the Editor at
The Economist, 25 St James’s Street,
London sw1A 1hg
E-mail: letters@economist.com
Fax: 020 7839 4092
More letters are available at:
Economist.com/letters
 13
Executive Focus
Be part of the growth
Recruitment of a Managing Director

The National Social Security Fund (NSSF) is National Saving Scheme mandated by Government through the National Social Security Fund Act to provide
social security services to private sector employees in Uganda. NSSF is also licensed by the Uganda Retirement Benefits Regulatory Authority as a Retirement
Benefits Scheme. NSSF is the largest social security services provider in Uganda covering all employees in the private sector working in enterprises that have
five or more workers who are not covered by the Public service pension scheme. NSSF’s membership is now over 1.3 million members. The Pension sector
is going through major regulatory changes which will lead to a significant impact on employees working with NSSF.

NSSF has positioned itself as a dynamic and customer-centric company to continue delivering quality services to the standards of the private sector. Growing
at Ugx 50 billion a month plus current assets standing at Ugx 3 (three) trillion and with opportunities that the new social security legislation will present, the
Fund is positioning itself to remain the leading social security provider of choice.

It is in this regard that NSSF is now searching for an exceptional leader with the right competencies and high levels of proven integrity to manage the fund and
drive it towards achieving its strategic objectives. NSSF is looking for a leader who is highly capable of managing change and transformation. The position
to be filled is the Managing Director.

Job Title: Managing Director
Reports to: Board of Directors
Job Summary:
To drive the strategic direction of the Fund, managing all aspects of the
Fund, and create and oversee the successful implementation of the Fund’s
long and short term strategic plans aimed at delivering increased value to
the members.
Key responsibilities
• Provides overall business strategic leadership and execution to achieve
sustainable growth and profitability of the Fund;
• Plays a leading role in coordinating and communicating all business
activities;
• Directs the Fund’s management of financial and operations systems,
procedures and controls;
• Provides strategic direction on new investment, business opportunities
and initiatives over the long run;
• Advises the Board on business plans and operational issues and
communicates and lead implementation of the Board’s decision;
• Directs and monitors performance of the Fund’s operational areas
against agreed performance targets;
• Maintains and develops organisational culture, values and reputation
with all staff, customers, suppliers, partners and regulatory bodies;
• Augments relationships with local and global business partners;
• Promotes sound corporate governance and ethical standards at all
levels within the organization;
• Develops and manages complex relationships with all stakeholders,
including government, regulatory authorities and employers;
• Acts as a catalyst for change with specific accountability for ensuring
the development of sound business development strategies and
structures that support the Fund’s corporate and strategic objectives;
• Provides overall leadership for the Fund, motivates and inspires Heads
of Departments to deliver best value and manage their service area,
people and budgets;
• Promotes performance, risk and financial management culture in order
to drive the continuous improvement in corporate governance and
service delivery, efficiency and value for money; and
• Promotes effective people management and provides developmental
mentoring and coaching for his/her direct reports.
Person specifications
The successful candidate will have:
• High level of strategic and leadership abilities, confident and capable of
leading and developing teams of experienced professionals;
• Strong organisational and time management skills;
• High levels of change and transformation skills;
• Proven track record of delivering results in an organization of a
comparable size, scope and complexity;
• Strong knowledge and hands on experience of financial products,
including mutual funds, hedge funds, derivatives, swaps and other
structured products;
• Familiarity with the current global and local regulatory environment
for investment funds as well as a demonstrated ability to keep on top of
developments in the pension sector globally;
• Ability to analyse complex statistical data and present information, both
verbally and in writing in a clear and concise manner;
• Good and resilient negotiator with sound judgement and a
demonstrated understanding of corporate governance and ethics; and
• Evidence of ability to interact, relate to, work with and support the
activities of the fund’s highly qualified staff and Board members is
desirable.
We are looking for a candidate who holds a Bachelors degree in
Commerce, Accounting, Finance, Business Administration, or any other
related discipline from a recognized university plus a Masters degree
in a Business management related field. A professional qualification in
any of the above related fields with a recognized body will be an added
advantage. The candidate must have not less than 10 years’ working
experience at a Head of Department or Directorate level in a large
financial services related organisation of international repute, 5 of which
should be at CEO level. Senior management experience in managing
investment and implementing investment systems and procedures will
be desirable. Experience in managing large and complex business
organisations with a big workforce whose skills are diverse, familiarity with
the current global and local regulatory environment for investment funds
as well as a demonstrated ability to keep on top of developments in the
pension sector globally will be desirable.
The successful candidate shall have proven moral character, integrity and
well demonstrated leadership skills.
If you believe you fit the required profile, please send your
application in confidence to the address below by close of business
Friday 7th March 2014. Please send your curriculum vitae (by post or
email) containing details of your qualifications, experience, present
position, current and expected remuneration as well as copies
of professional/academic certificates. Include day and evening
telephone numbers, e-mail address, names and addresses of three
references to:
The People and Change Division
PricewaterhouseCoopers Limited
1 Colville Street
P.O. Box 8053 Kampala, Uganda
E-mail: hr.s@ug.pwc.com
Only short listed candidates will be contacted.
© 2014 PricewaterhouseCoopers Limited. All rights reserved. PricewaterhouseCoopers
refers to the network of member firms of PricewaterhouseCoopers International
Limited, each of which is a separate and independent legal entity.

The Economist February 15th 2014

14
Executive Focus

The Economist February 15th 2014

 15
Executive Focus

The Economist February 15th 2014

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 The Economist February 15th 2014 17
Briefing The tragedy of Argentina

growth in the past century—not least dur-

A century of decline ing the commodity boom of the past ten
years—and its people remain wealthier
than most Latin Americans, its standing as
one of the world’s most vibrant economies
is a distant memory (see chart1). Its income
per head is now 43% of those same 16 rich
BUENOS AIRES
economies; it trails Chile and Uruguay in
One hundred years ago Argentina was the future. What went wrong?
its own back yard.

W HEN the residents of Buenos Aires

want to change the pesos they do not
trust into the dollars they do, they go to a
flocked to find work on the fertile pampas,
where crops and cattle were propelling Ar-
gentina’s expansion. In 1914 half of Buenos
The political symptoms of decline are
also clear. If Argentina appeared to enjoy
stability in the pre-war era, its history since
cueva, or “cave”, an office that acts as a front Aires’s population was foreign-born. then has been marked by a succession of
for a thriving illegal exchange market. In The country ranked among the ten rich- military coups. The first came in 1930; oth-
one cueva near Florida Street, a pedestrian est in the world, after the likes of Australia, ers followed in 1943, 1955, 1962, 1966 and
thoroughfare in the centre of the city, piles Britain and the United States, but ahead of 1976. The election of 1989 marked the first
of pesos from previous transactions lie on France, Germany and Italy. Its income per time in more than 60 years that a civilian
a table. A courier is getting ready to carry head was 92% of the average of 16 rich president had handed power to an elected
the notes to safety-deposit boxes. economies. From this vantage point, it successor.
This smallish cueva handles transac- looked down its nose at its neighbours: It is now more than 30 years since the
tions worth $50,000-75,000 a day. Fear of Brazil’s population was less than a quarter end of military dictatorship, but democra-
inflation and of further depreciation of the as well-off. cy has not yet led to stability. Argentines
peso, which fell by more than 20% in Janu- It never got better than this. Although reach for the metaphor of the “pendulum”
ary, will keep demand for dollars high. Argentina has had periods of robust to describe the swings of the past three de- 1
Few other ways of making money are this
good. “Modern Argentina does not offer
The wrong trajectory 1
what you could call an institutional ca- Brazil Italy Germany France
reer,” says one cueva owner. Argentina’s GDP per person as % of GDP per person in: Japan Britain Australia US
As the couriers carry their bundles OECD average*
around Buenos Aires, they pass grand 500
buildings like the Teatro Colón, an opera
400
house that opened in 1908, and the Retiro
railway station, completed in 1915. These 300
are emblems of Argentina’s Belle Époque,
the period before the outbreak of the first 200
world war when the country could claim 100
to be the world’s true land of opportunity.
In the 43 years leading up to 1914, GDP had 0
grown at an annual rate of 6%, the fastest 1900 10 20 30 40 50 60 70 80 90 2000 10
recorded in the world. The country was a *Of 16 OECD countries: Australia, Austria, Belgium, Britain, Canada, Denmark, Finland, France,
Source: Maddison Project Germany, Italy, Japan, Netherlands, Norway, Sweden, Switzerland, United States
magnet for European immigrants, who
18 Briefing The tragedy of Argentina
Steady as she goes
OTTAWA CONFERENCE ESTABLISHING
Argentina’s GDP
PREFERENTIAL TRADE ACCORDS BETWEEN
% change on previous year BRITAIN AND THE COMMONWEALTH
FIRST PRESIDENTIAL ELECTION
UNDER UNIVERSAL
MALE SUFFRAGE
MILITARY COUP
1901 10 20
Sources: Maddison Project; IMF
2 cades: from loose economic policies in the
1980s to Washington-consensus liberalisa-
tion in the 1990s and back again under the
presidency of Néstor Kirchner and now his
widow, Cristina Fernández de Kirchner.
But the image of a pendulum does not do
justice to the whiplashing of the economy
(see chart 2)—the repeated recessions of the
1970s and 1980s, the hyperinflation of
1989-90, the economic crisis of 2001 and
now the possibility of another crisis to
come. Argentina is a long way from the tur-
moil of 2001 but today’s mix of rising
prices, wage pressures and the mistrust of
the peso have nasty echoes of the past.
Internationally, too, Argentina has lost
its way. It has shut itself out of global capi-
tal markets, although negotiations are un-
der way to restructure its debts with the
Paris Club of international creditors. Brazil,
hardly a free-trade paragon, is pressing Ar-
gentina to open its borders; once it would
have been the other way round. “Only
people this sophisticated could create a
mess this big,” runs a Brazilian joke that
plays on Argentines’ enduring sense of be-
ing special.
One hundred years of ineptitude
The country’s dramatic decline has long
puzzled economists. Simon Kuznets, a No-
bel laureate, is supposed to have remarked:
“There are four kinds of countries in the
world: developed countries, undeveloped
countries, Japan and Argentina.” Other
countries have since managed to copy Ja-
pan’s rapid industrialisation; Argentina re-
mains in a class of its own. There is no
shortage of candidates for the moment
when the country started to go wrong.
There was the shock of the first world war
and the Depression to an open trading
economy; or the coup of 1930; or Argenti-
na’s neutrality in the second world war,
which put it at odds with America, the new
superpower. There was the rise of Juan
Domingo Perón, the towering figure of
20th-century Argentina, who took power
in 1946. Others reckon that things really
went downhill between 1975 and 1990.
No one theory solves the puzzle. “If a
guy has been hit by 700,000 bullets it’s
RESTORATION OF DEMOCRACY AND ELECTION RÚA RESIGNS, REPLACED
AND ELECTION OF RAÚL ALFONSÍN OF CARLOS MENEM BY EDUARDO DUHALDE
DEATH OF EVA PERÓN FALKLANDS (MALVINAS) WAR
ELECTION OF JUAN PERÓN ELECTED PRESIDENT
DOMINGO PERÓN FOR THIRD TIME
MILITARY COUP
MILITARY COUP
MILITARY COUP
30 40 50 60
hard to work out which one of them killed
him,” says Rafael di Tella, who has co-
edited a forthcoming book on Argentina’s
decline. But three deep-lying explanations
help to illuminate the country’s diminish-
ment. Firstly, Argentina may have been
rich 100 years ago but it was not modern.
That made adjustment hard when exter-
nal shocks hit. The second theory stresses
the role of trade policy. Third, when it
needed to change, Argentina lacked the in-
stitutions to create successful policies.
Take each in turn. The first explanation
is that Argentina was rich in 1914 because
of commodities; its industrial base was
only weakly developed. Filipe Campante
and Edward Glaeser of Harvard University
compared Buenos Aires before the first
world war with Chicago, another great
shipment hub for meat and grains. They
found that whereas literacy rates stood at
95% in Chicago in 1895, less than three-
quarters of porteños, as residents of Bue-
nos Aires are known, knew how to read
and write.
The landowners who made Argentina
rich were not so bothered about educating
it: cheap labour was what counted. That at-
titude prevailed into the 1940s, when Ar-
gentina had among the highest rates of
primary-school enrolment in the world
and among the lowest rates of secondary-
school attendance. Primary school was
important to create a sense of citizenship,
says Axel Rivas of CIPPEC, a think-tank. But
only the elite needed to be well educated.
Without a good education system, Ar-
gentina struggled to create competitive in-
dustries. It had benefited from technology
in its Belle Époque period. Railways trans-
formed the economics of agriculture and
refrigerated shipping made it possible to
export meat on an unprecedented scale:
between 1900 and 1916 Argentine exports
of frozen beef rose from 26,000 tonnes to
411,000 tonnes a year. But Argentina main-
ly consumed technology from abroad rath-
er than inventing its own.
Technological innovation needs not
only educated people but access to money.
Argentina’s golden age was largely foreign-
funded. Half of the country’s capital stock
The Economist February 15th 2014
HYPERINFLATION ECONOMIC CRISIS; DE LA
2
CRISTINA
FERNÁNDEZ
FERNANDO DE ELECTED
DEATH OF LA RÚA ELECTED 20
PRESIDENT NÉSTOR CRISTINA
PERÓN KIRCHNER FERNÁNDEZ
PESO PEGGED ELECTED RE-ELECTED 15
TO DOLLAR
10
5
+
0
–
MILITARY COUP
MILITARY COUP
5
10
15
70 80 90 2000 10 13*
*Estimate
was in foreign hands in 1913, further expos-
ing it to external shocks. Low levels of do-
mestic savings can in part be explained by
demography: large numbers of immi-
grants with dependent children spent
money rather than saving it.
Traders of the lost past
Argentina had become rich by making a
triple bet on agriculture, open markets and
Britain, then the world’s pre-eminent pow-
er and its biggest trading partner. If that bet
turned sour, it would require a severe ad-
justment. External shocks duly material-
ised, which leads to the second theory for
Argentine decline: trade policy.
The first world war delivered the initial
blow to trade. It also put a lasting dent in
levels of investment. In a foreshadowing
of the 2007-08 global financial crisis, for-
eign capital headed for home and local
banks struggled to fill the gap. Next came
the Depression, which crushed the open
trading system on which Argentina de-
pended; Argentina raised import tariffs
from an average of 16.7% in 1930 to 28.7% in
1933. Reliance on Britain, another country
in decline, backfired as Argentina’s fa-
voured export market signed preferential
deals with Commonwealth countries.
Indeed, one way to thinkabout Argenti-
na in the 20th century is as being out of
sync with the rest of the world. It was the
model for export-led growth when the
open trading system collapsed. After the
second world war, when the rich world be-
gan its slow return to free trade with the ne-
gotiation of the General Agreement on Ta-
riffs and Trade in 1947, Argentina had
become a more closed economy—and it
kept moving in that direction under Perón.
An institution to control foreign trade was
created in 1946; an existing policy of import
substitution deepened; the share of trade
as a percentage of GDP continued to fall.
These autarkic policies had deep roots.
Many saw the interests of Argentina’s food
exporters as being at odds with those of
workers. High food prices meant big profits
for farmers but empty stomachs for ordin-
ary Argentines. Open borders increased
farmers’ takings but sharpened competi- 1
20 Briefing The tragedy of Argentina
2 tion from abroad for domestic industry.
The pampas were divided up less equally
than farmland in places like the United
States or Australia: the incomes of the rich-
est 1% of Argentines were strongly correlat-
ed with the exports of crops and livestock.
As the urban, working-class population
swelled, so did the constituency suscepti-
ble to Perón’s promise to support industry
and strengthen workers’ rights.
There have been periods of liberalisa-
tion since, but interventionism retains its
allure. “One-third of the country—the com-
modities industry, engineers and regional
industries like wine and tourism—is ready
to compete,” says Sergio Berensztein, a po-
litical analyst. “Two-thirds are not.”
The divide between farmers and work-
ers endures. Heavy export taxes on crops
allow the state to top up its dwindling for-
eign-exchange reserves; limits on wheat
exports create surpluses that drive down
local prices. But they also dissuade farmers
from planting more land, enabling other
countries to steal market share. The per-
verse effects ofintervention have been am-
ply demonstrated in the Kirchner era: ac-
cording to the US Department of
Agriculture, Argentina was the world’s
fourth-largest exporter of wheat in 2006.
By 2013 it had dropped to tenth place. “The
Argentine model of100 years ago—produc-
ing as much as you can—is the one others
now follow,” laments Luis Miguel Etche-
vehere, the president of the Rural Society
of Argentina, a farmers’ lobby.
Distribution centre
Some commodity-rich economies have re-
solved these tensions. Australia, for exam-
ple, shared many of the traits of early 20th-
century Argentina: lots of commodities, a
history of immigration and remoteness
from big industrial centres. Yet it managed
to develop a broader-based economy than
Argentina and grew faster. Between 1929
and 1975 Australian income per person in-
creased at an average annual rate of 0.96%,
compared with 0.67% in Argentina.
Australia had some big advantages: the
price of minerals does not affect domestic
consumers in the same way as the price of
food, for instance. But it also had the insti-
tutions to balance competing interests: a
democracy in which the working class was
represented; an apprenticeship system; an
independent TariffBoard to advise the gov-
ernment on trade. Argentina had not
evolved this political apparatus, despite an
early move to universal male suffrage in
1912. The third theory for Argentine decline
points to the lack of institutions to develop
long-term state policies—what Argentines
call política de Estado.
The constant interruptions to democra-
cy are not the only manifestation of this in-
stitutional weakness. The Supreme Court
has been overhauled several times since
Perón first changed its membership in 1946.
Presidents have a habit of tinkering with
the constitution to allow them to serve
more terms: Ms Fernández was heading
this way before poor mid-term election re-
sults last year weakened her position.
Property rights are insecure: ask Repsol,
the Spanish firm whose stake in YPF, an Ar-
gentine oil company, was nationalised in
2012. Statistics cannot be trusted: Argenti-
na was due this week to unveil new infla-
tion data in a bid to avoid censure from the
IMF for its wildly undercooked previous
estimates. Budgets can be changed at will
by the executive. Roberto Lavagna, a for-
mer economy minister, would like to see a
requirement for parliamentary approval
of budget amendments.
The next century
First, Argentina has to get out of its mess.
Keen to husband its stock of foreign re-
serves and to close the gap between the of-
ficial and unofficial exchange rates, the
central bank allowed the peso to slide last
month. To prevent the depreciation from
fuelling inflation expectations, it has raised
interest rates. But further tightening will be
needed. Rates remain negative in real
terms; upcoming wage negotiations will
be a test of how serious the government is
about controlling spending.
Ms Fernández will probably struggle on
until the 2015 presidential election, which
optimists see as a turning-point. Economic
wobbles before the election may discredit
Peronism’s claim to be the party of strong
government. But Peronism is a remarkably
plastic political concept, capable of pro-
ducing both the neoliberal policies over-
seen by Carlos Menem in the 1990s and the
redistributive policies of the Kirchners.
The idea of a party that pays the price of
bad policies does not seem to apply.
Short-termism is embedded in the sys-
tem. Money is concentrated in the centre,
and the path to power goes via subsidies
Yesterday’s news
The Economist February 15th 2014
and splurging: the Kirchners are only the
latest culprits, turning a fiscal surplus of 2%
of GDP in 2005 into an estimated 2% deficit
last year. “We have spent 50 years thinking
about maintaining government spending,
not about investing to grow,” says Fernan-
do de la Rúa, a former president who re-
signed during the 2001 crisis.
This short-termism distinguishes Ar-
gentina from other Latin American coun-
tries that have suffered institutional break-
downs. Chile’s military dictatorship was a
catastrophic fracture with democracy but
it introduced long-lasting reforms. Mexi-
co’s Institutional Revolutionary Party gov-
erned steadily for most ofthe 20th century.
“In Argentina institution-building has tak-
en the form of very quick and clientilist re-
distribution,” says Daron Acemoglu of the
Massachusetts Institute of Technology.
It will take an unusual politician to
change Argentina’s institutions, especially
if another commodities windfall eases the
pressure to reform. The country’s Vaca
Muerta (“Dead Cow”) shale-oil and gas-
field is estimated to be the world’s third-
largest. If Argentina can attract foreign cap-
ital, the money could start flowing within a
decade. “Vaca Muerta gives us huge capaci-
ty to recover and huge opportunity to
make mistakes,” says Mr Lavagna.
Argentines themselves must also
change. The Kirchners’ redistributive poli-
cies have helped the poor, but goodies
such as energy subsidies have been doled
out to people who do not really need them.
Persuading the population to embrace the
concept of necessary pain will be difficult.
That is partly because the experience ofthe
1990s discredited liberal reforms in the
eyes of many Argentines. But it is also be-
cause reform requires them to confront
their own unprecedented decline. No oth-
er country came so close to joining the rich
world, only to slip back. Understanding
why is the first step to a better future. 7

Asia
Pakistan’s economy
The Urdu rate of growth
LAHORE
Slowly, the lights may be coming on again
E VEN the swankiest chandelier is not
much use these days without electric-
ity. Just as Shahbaz Sharif explains Paki-
stan’s new energy policy, his Lahore home
plunges into darkness, briefly hiding him,
his oil paintings and a fine china tea set.
Has Punjab’s chief minister staged a black-
out for dramatic effect? Laughing, he de-
nies it: power cuts are routine. City dwell-
ers endure as much as ten hours of cuts a
day; villagers are usually without power
for much longer. On occasion, supply has
fallen 40% short of national demand.
Chronic electricity shortages vie with
some heavyweight contenders to top the
list of Pakistan’s biggest problems. Mr Sha-
rif’s brother is the prime minister, Nawaz
Sharif, who won a general election last
year promising to fix the country’s electric-
ity mess. Without reliable power, Pakistan
will struggle to lift a dismally low rate of
economic growth—just 2.9% a year on aver-
age for the past five years, not much more
than the 2% annual growth of the popula-
tion, now 186m-strong. Thanks to a stag-
nant economy, millions of young Paki-
stanis are without jobs or regular incomes,
especially in the burgeoning cities. Poverty
and bleak prospects must surely be con-
tributing to the extremist violence that
daily rocks the country.
Fixing the mess means cutting through
immense and intertwined problems. Priv-
ate power firms produce much less than
they could, because the state purchaser
does not always pay them. In turn, electric-
ity consumers, among them the federal
and provincial governments, do not pay
the state purchaser. It creates a “circular
debt”, which reached $5 billion at its peak.
The government last year said that it had,
in effect, cleared that debt. But the IMF, for
one, warns that it can build up again.
Shahbaz Sharif, who has a national role
helping the prime minister on economic
policy, says that many consumers continue
to pilfer electricity and gas. Some, such as
some madrassas (religious schools), refuse
to pay even a fraction of their bills, confi-
dent that no one would dare cut them off.
Liquefied natural gas (LNG), a growing por-
tion of Pakistan’s energy mix, sells at a
sixth of its import price. A plan to raise resi-
Not so energetic
GDP per person, current $, ’000
Sri Lanka
India
Pakistan
Bangladesh
**
1995 2000 05 10
*Estimate
†Forecast
Source: IMF World Economic Outlook
The Economist February 15th 2014 21
Also in this section
22 Indian politics
22 Indonesia’s Aceh province
23 Malaysia’s Sarawak
24 Japan’s cuisines
26 Banyan: America loses its rebalance
For daily analysis and debate on Asia, visit
Economist.com/asia
Economist.com/blogs/banyan
dential electricity tariffs was scrapped in
October after judges objected. That ruling
may be revisited now that a populist chief
justice has retired.
Consumers might be keener to pay if
only they got more in return. State-run gen-
eration and distribution companies are so
ill-managed that the Punjabi cities of Guj-
ranwala and Faisalabad run at 10% capaci-
ty. The government’s response is to order
the urgent sale of 31 energy and other busi-
nesses.
Fixing dysfunctional energy firms
would do most to unleash the country’s
economic potential, says Mohammad Zu-
bair, the privatisation minister, parachuted
in from IBM. Management by state firms is
“a disaster”. He talks of gross overstaffing,
incompetent engineers and poor financial
control. Combined annual losses at all
state-run companies have reached $4.7 bil-
lion, equivalent to a third of all tax rev-
enue. Private investors must be found to
take over, Mr Zubair says, because “the gov-
ernment can’t spend more”.
The biggest task, however, is to change
the country’s ill-judged energy mix. About
a third of its electricity comes from oil-fired
power stations. Many were commissioned
in the late 1980s, when crude oil was cheap.
With oil now over $100 a barrel, they are
desperately expensive. Pakistan spends
over $14 billion a year importing oil and
3.5
other energy products, a big hard-currency
3.0 bill. Another third of energy comes from
2.5 gas, much of it also imported. Reliance on
2.0 imports will certainly grow. Three new
1.5
LNG import terminals are to be built by
2016, raising capacity by half. And the gov-
1.0
ernment this week again confirmed grand
0.5 plans to bring in natural gas across the bor-
der from Iran (and perhaps, in turn, to ex-
0
14† port some of it to India). But that will re-
main a pipe-dream for as long as the
United States, Pakistan’s biggest donor, is 1
22 Asia
2 opposed to it. In any case a major pipeline
would be vulnerable to violent groups, in-
cluding Baluchi separatists and the Taliban
outfits increasingly active in the south.
Other options exist. Billions of tonnes
of coal reserves sit in Sindh province, yet
coal accounts for a tiny part of electricity
generation. A new plan orders several new
coal-fired stations, with Chinese money
and help, but even then fuel would be im-
ported from Malaysia. China is also lend-
ing money to expand the civil nuclear pro-
gramme. In November the prime minister
inaugurated a $10 billion, 2200MW nuc-
lear plant to be built by 2019, for Karachi, a
Indian politics
Warm-shouldering
DELHI
More accommodation of a controversial but rising figure
I T WAS almost a Valentine’s day date.
On February 13th America’s ambassa-
dor to India, Nancy Powell, visited Na-
rendra Modi, the chief minister of Guja-
rat, at his home in Gandhinagar. He gave
her roses. It got political classes gossiping.
No more will diplomats isolate the divi-
sive leader of the Bharatiya Janata Party
(BJP). America had been most outspoken
in pinning on Mr Modi responsibility for
sectarian riots in 2002 that killed over
1,000 people, mostly Muslims. In 2005 it
rescinded his visa to travel to the United
States. Western ambassadors long cold-
shouldered the Hindu nationalist.
Officially, what has changed is that a
court in December cleared Mr Modi of
possibly the last legal challenge over the
riots. America is now ready to engage
him with talks on doing business in
Gujarat. But what matters is national
politics. The ruling Congress is a busted
flush. A general election is due in May,
Modi is coming up roses
city of18m; understandably, there are wor-
ries about safety. New plans for solar parks
and more hydropower are also trumpeted.
Nothing will fix Pakistan’s energy pro-
blems quickly. Long blackouts are certain
when temperatures rise again this sum-
mer, but gains could show in about three
years—in time for the next election. Mu-
hammad Mansha, an industrialist and
Pakistan’s richest man, is optimistic that
the government’s attempts to grapple with
the power sector will boost business confi-
dence and the economy more widely. Chi-
nese investment in the garment industry is
a shot in the arm, as is the removal of im-
and everything points to the BJP doing
best. It makes sense to adjust to Mr Modi
now, as the BJP's candidate to be prime
minister. Envoys from Britain and the rest
of Europe ended their unofficial boycott
of him over a year ago.
Other long-term critics of Mr Modi
have also been making accommoda-
tions. In the past few months a few prom-
inent critics, such as the former editor of
the Hindu newspaper and a columnist
with a news magazine, were eased from
their jobs. Journalists in some television
newsrooms say that the wider corporate
interests of their owners preclude strong
attacks on the man who may soon be
prime minister.
It is not clear whether similar logic
explains why Penguin India, after four
years of defending itself in civil and
criminal cases, this week reportedly
decided to pulp all copies of a contro-
versial book about Hindu culture. “The
Hindus”, by Wendy Doniger, an academ-
ic at Chicago University, had provoked
Hindu nationalists in India and an in-
creasingly angry and outspoken diaspora
in America. They claimed her psychoan-
alytical approach was flawed and voy-
euristic, and had somehow hurt the
feelings of hundreds of millions.
Yet the book had earned decent re-
views. The author herself blames Indian
law for making religious offence a crimi-
nal rather than a civil matter. She also
warns that the incident bodes ill for free
speech in a “worsening” political climate.
Too few politicians defend liberal values
consistently, preferring to court the votes
of supposedly offended members of a
particular caste or religious or regional
group. Those who campaigned against
“The Hindus” now say they want other
books by Ms Doniger withdrawn, and
school textbooks rethought. 7
The Economist February 15th 2014
port tariffs on Pakistani garments going to
the European Union. The EIU, a sister com-
pany to The Economist, predicts annual
GDP growth of nearly 4% a year until 2018.
Mr Mansha sees other hopeful signs,
particularly in Pakistan’s abysmally
skimpy trade with India. His cement com-
pany’s exports of 700 tonnes a day to India
are up from 300 tonnes a year ago, and he
expects that to double again. On February
14th India’s commerce minister, Anand
Sharma, was due in Lahore for a joint an-
nouncement to open the land border to
cargo for 24 hours a day and to allow con-
tainer transport—though he cancelled the
trip at the last minute. Currently the border
is open only during daylight, and—aston-
ishingly—much is unloaded and loaded
onto fresh lorries on the backs of porters. If
the myriad restrictions went, a Delhi think-
tank says, bilateral trade could quickly rise
tenfold, from just $2.6 billion a year.
One day cross-border trade in energy
could follow. Hydropower in disputed
Kashmiri territories, for example, would
be best exploited if India and Pakistan co-
operated. India has offered to extend its
electricity grid across the border in Punjab
and to arrange gas imports for Pakistan,
though so far nothing has come of it. Paki-
stan, in turn, could export coal to India, a
hungry consumer of the stuff. Huge mutu-
al gains in energy co-operation are to be
had—if only the two countries were seri-
ous about achieving them. 7
Indonesia’s Aceh province
Laying down
God’s law
JAKARTA
Politics, as much as faith, is behind a
harder line
A CEH, at the far west of the Indonesian
archipelago, is proud of its reputation
for piety. In 2001 it became the only prov-
ince in Indonesia authorised to introduce
sharia Islamic law as part of “special au-
tonomy” aimed at ending a long-running
separatist war. The provincial parliament
passed laws against drinking, gambling
and “seclusion”—being alone with some-
one from the other sex. An Islamic police
force modelled on Iran’s “vice and virtue”
patrols started to round up women for not
covering their heads or for wearing trou-
sers that were too tight. The first public can-
ing took place in 2005. Now Aceh has taken
another controversial step, by telling
everyone to follow sharia—Muslim and
non-Muslim alike.
This all follows from a criminal code
which Aceh’s outgoing parliament passed
back in 2009, increasing the number of of-
fences under sharia and introducing much 1
 The Economist February 15th 2014
Here come the seclusion-exclusion police
2 stiffer penalties, such as death by stoning
for adulterers. Aceh’s then governor, Ir-
wandi Yusuf, refused to sign the code. But
in December the present governor, Zaini
Abdullah, signed into law a revised ver-
sion. This month the local authorities sent
it to Jakarta, the capital, for approval. Al-
though legislators watered down the origi-
nal code—dropping the death-by-stoning
penalty, for example—they insist it must be
followed by everyone in Aceh, regardless
of religion. Non-Muslims who are charged
with offences not criminalised by national
laws will be tried by sharia courts.
Aceh is a far cry from, say, the Taliban’s
brutish former rule in Afghanistan. Am-
nesty International counted at least 45 can-
ings in 2012—still relatively few in a prov-
ince of 5m. And those flogged in Aceh are
fully clothed, providing them with some
protection. But the province is enforcing
sharia more strictly as religious conserva-
tives become more powerful, says Andreas
Harsono of Human Rights Watch. Mean-
while, town mayors and district chiefs are
passing more sharia by-laws, which often
discriminate against women. Religious mi-
norities face growing persecution, too.
Forcing Christians and followers of oth-
er non-Muslim faiths to abide by sharia
seems to fly in the face of Islamic teachings.
Even the secretary-general of Aceh’s own
clerics association, Faisal Ali, says it shows
that legislators have a poor understanding
of Islam. Moreover, the code seems at odds
with Indonesia’s constitutionally en-
shrined precept of “unity in diversity”. The
1945 constitution guarantees freedom of re-
ligion for six officially recognised faiths.
The home ministry in Jakarta has 60 days
to accept or reject the code.
Politics as much as religious conviction
plays its part. Indonesia holds a parliamen-
tary election in April and a presidential
one in July. The five-year term of Aceh’s
own parliament also ends this year. Mr
Abdullah and local legislators may hope to
consolidate their positions by presenting
themselves as pious Muslims standing up
to Jakarta, the old adversary in Aceh’s 29-
year separatist struggle which ended in
2005. It would not be the first time that pol-
iticians have exploited religion for their
own worldly ends. 7
Malaysia’s Sarawak
Last of the rajahs
KUALA LUMPUR
A powerful chief minister bows out—or
does he?
F EW of Asia’s elected leaders have en-
joyed the power of Abdul Taib Mah-
mud, the chief minister of Sarawak. For 33
years he lorded it over this Malaysian state
on the island of Borneo, once densely for-
ested and still rich in oil. Mr Taib was an ap-
propriate successor to generations of the
British Brooke family, who ran the territory
as their own monarchy for a century from
1841. They were known as the White Ra-
jahs. Their 77-year-old, white-haired mod-
ern equivalent, Mr Taib, will officially retire
on February 28th, passing the job to a
hand-picked successor, Adenan Saten. Mr
Taib, though, will probably get another
comfortable job himself, retaining much
influence.
Few have contributed more, for better
and for worse, to the course of modern Ma-
laysian history. Mr Taib has played a cru-
cial role in keeping the Barisan Nasional
(BN) coalition in power—it has ruled ever
since Malaysia won independence from
Britain in 1957. The two former British pos-
Asia 23
sessions on Borneo, Sabah and Sarawak,
joined the new federation of Malaysia in
1963 (together with Singapore, which
dropped out two years later). Ever since,
east Malaysia has supplied the oil and
votes that the BN needs.
Oil revenues have fuelled the country’s
breakneck development, while the votes
have kept the coalition’s stranglehold on
federal power even as its share of the vote
has dropped steeply over time in peninsu-
lar Malaysia. Gerrymandering by the BN
means that Sabah and Sarawak, largely ru-
ral and sparsely inhabited, fill almost a
quarter of the federal parliament’s seats,
out of all proportion to their populations.
Mr Taib has secured the vote every time.
The 25 seats out of a possible 31 that his
own political machine, allied to the BN,
won in the general election last year was,
with the seats that the BN’s allies won in
Sabah, the difference between the co-
alition holding on to power and electoral
humiliation.
His electoral muscle has given Mr Taib
disproportionate political clout. He has
run Sarawak single-handedly, with little
accounting to anyone. His supporters cred-
it him with presiding over an era of unpar-
alleled development, transforming a dis-
ease-ridden backwater into a relatively
modern state and well-known tourist des-
tination. He has also used his clout with
the central government to insist upon an
impressive degree of local autonomy for
Sarawak, thus preserving its special ethnic
and religious make-up in the federation.
In Sarawak Malays are only the third-
largest ethnic group. About 40 ethnic
groups make up the largest proportion of
the population, of which the indigenous
Iban is the biggest. The second-biggest
group are ethnic Chinese. Mr Taib himself
comes from the Melanau, accounting for
about 6% of the population. Sarawak also
boasts a variety of religions, and there are
more Christians than Muslims. While pre-
serving this diversity, Mr Taib has also mas-
tered and exploited ethnic divisions to
build his political base, a process greased
by cash at election time to persuade people
to vote the right way. 1
PHILIPPINES
ACEH M A L A Y S I SABAH
Kuala Lumpur A
SARAWAK
Singapore
SU
BORNEO
M
AT
RA
I N D O N E S I A
Jakarta
INDIAN OCEAN
1,000 km
24 Asia
2 But for all the chief minister’s insistence
on Sarawak’s exceptionalism, legions of
critics argue that it was a smokescreen for
his administration and its friends to exploit
the country. Mr Taib, who drives around in
a Rolls-Royce and flies by private jet, has for
several years been under investigation by
the country’s anti-graft agency. Environ-
mentalists say that under him Sarawak has
lost nine-tenths of its virgin rainforest,
most of it converted into lucrative palm-oil
concessions. This has resulted in a huge
loss in biodiversity.
Widespread deforestation has resulted
in numerous battles over indigenous land
rights. Local Iban have suffered from the
bulldozing and development of their lands
by state-backed logging companies and
have sought redress in the courts. A Malay-
sian expert on indigenous land rights, Col-
in Nicholas, says at least 200 such cases are
Japan’s cuisines
Acquired taste
TOKYO
The establishment is becoming more relaxed about foreign influences on the
country’s food
W ITH three Michelin stars to his name,
Master Hachiro Mizutani is one of
the world’s finest sushi chefs. He is as confi-
dent of the future of Japanese cuisine as he
is at manipulating the morsels of mackerel,
flounder and tuna perched on rice which
draw a steady flow of devotees to his res-
taurant in Tokyo’s Ginza district. Young
Japanese may be eating more Western
food, he says, but they always return to
healthier home fare as they get older. Like-
wise, foreigners start with ersatz conveyor-
belt sushi outside Japan, but soon hunger
for the real thing—Tokyo’s genius take on
fast food.
It is a far cry from the near-paranoia
over the country’s cuisine expressed by
some until recently. In 2006-07 the farm
and fisheries ministry came up with a
scheme to send out so-called sushi police
abroad to uncover bastardisations of clas-
sic Japanese dishes. For a self-styled Japa-
nese restaurant in Colorado to put sushi on
the menu alongside Korean-style barbe-
cued beef was seen as a particular outrage.
The government scrapped the scheme,
rightly fearing a backlash. Food fascism is
absurd. Much fare that is seen as quintes-
sentially Japanese has foreign origins.
Pork- and vegetable-filled gyoza dump-
lings, served up in massive quantities by
Japanese housewives, are essentially Chi-
nese jiaozi, popularised in Japan during its
occupation of Manchuria from 1931. Japa-
nese ramen restaurants are all the rage in
London and New York, but the noodles are
now working their way through the courts
in Sarawak. Non-governmental organisa-
tions say that, in this regard, the chief min-
ister has been more foe than friend to the
Iban and other ethnic groups.
Some argue that, with Mr Taib stepping
down, the BN might try to exert more direct
control over politics in Sarawak, as they
have in Sabah. But Mr Taib will probably
become the state governor. This is a largely
ceremonial role, like that of a royal sultan
in peninsular Malay states. But from this
position he will retain plenty of influence
over Sarawak; it is unlikely that anything
very much will change. What is more, in
his new role Mr Taib could well enjoy im-
munity from prosecution, although the ex-
act legal position is unclear. Either way,
Tian Chua, of the opposition Democratic
Action Party, says that Mr Taib has become
the “Vladimir Putin of Sarawak”. 7
Chinese: lamian, meaning pulled noodles.
As for that Japanese national dish, katsu
kare, a deep-fried breaded pork cutlet in a
slather of curry sauce on a mound of rice: it
is true that the monstrosity exists in no oth-
er country, but it could not have come
about had not the Chinese introduced
pork to the Japanese diet, and the English
curry powder.
With Tokyo restaurants now bagging
more Michelin stars than London and New
York together, even the bureaucrats are re-
Chef Murata is getting a gaijin to make it next time
The Economist February 15th 2014
laxing their vigilance. When two years ago
the government applied to UNESCO for
washoku, Japan’s traditional food culture,
based on the seasons, to be granted the sta-
tus of “intangible cultural heritage”, it ac-
knowledged that foreigners have influ-
enced and recreated the country’s cuisines.
The era of the sushi police is over, promises
Yoshihiro Murata, a Kyoto-based chef who
led the effort. Just as washoku won UNES-
CO designation in December, Mr Murata’s
restaurant, Kikunoi, was about to accept its
first foreign trainee chef. Until now, Japan
has granted working visas to overseas
chefs only to make foreign food. Now it
wants them to train in Japanese cuisine.
Only French and Mexican cuisines are
similarly honoured by UNESCO, along
with the Mediterranean diet and Turkish
kashkek, a ceremonial dish made of meat
and wheat. The new status will help Japan
to export its food. Daisuke Matsuda, owner
of a shop selling tamagoyaki, or egg rolls,
outside Tsukiji fish market in Tokyo, ex-
pects them now to become far better
known around the world.
But one change at home still worries To-
kyo’s sushi chefs. They buy their ingredi-
ents at Tsukiji, the world’s biggest fish mar-
ket and the city’s last tangible link with a
vibrant mercantile past. The government
plans to shift trading to a landfill site in To-
kyo Bay that once housed a dirty gasworks,
letting in the property developers once the
market has moved. The chefs fear that,
even after a supposed clean-up, their fish
could be contaminated by the benzene
that has leached into the site. The current
market, with a warren of surrounding
shops selling everything from sea grapes to
kitchen knives, is a huge draw for visitors,
further spreading Japan’s food culture.
Conserving Tsukiji, says Mr Mizutani, is far
more important for the future of washoku
than UNESCO’s recognition. 7
26 Asia
Banyan Losing its rebalance
Things in Asia are not going America’s way
J OHN KERRY, America’s secretary of state, set off this week on a
tour that takes him to China, South Korea, Indonesia and Abu
Dhabi. Rightly sensitive to the charge that Barack Obama’s ad-
ministration is neglectful of Asia, officials are keen to remind the
world that this is Mr Kerry’s fifth trip to North-East and South-East
Asia in a year. He in particular has been criticised in the region for
being too preoccupied with peacemaking in the Middle East to
pursue the “pivot” or “rebalancing” to Asia announced in the
president’s first term. And despite his air miles, American diplo-
macy in Asia is not going well. Relations with the emerging pow-
er, China, remain fraught; the United States is at odds on impor-
tant issues with its biggest regional ally, Japan; and its efforts to
forge a new regional trade agreement have missed deadlines.
Some Asian diplomats blame the perception of American dis-
engagement for China’s recent assertiveness in pressing its claims
in territorial disputes in the region. Mr Obama sent the wrong sig-
nal, they say, by pulling out of two summits in South-East Asia
last October because his government was partly shut down.
Whatever the cause, one effect of China’s alleged assertiveness is
to stymie the broad-based, co-operative relationship that Ameri-
ca and China say they want. Instead, meetings are overshadowed
by regional tensions, and in particular the worry that Japan and
China may clash as both patrol around the disputed Senkaku or
Diaoyu islands by sea and air. America says it takes no position
on the islands’ sovereignty, but regards them as under Japanese
administration and so covered by its security treaty with Japan.
This month a senior American official again criticised China’s
unilateral declaration in November of an Air Defence Identifica-
tion Zone (ADIZ) over a part of the East China Sea that includes
the disputed islands. He warned China that declaring another
ADIZ over the South China Sea, where it also disputes territory
with Taiwan and four South-East Asian countries, might prompt
a redeployment of American forces. And Daniel Russel, an assis-
tant secretary of state, laid into the “nine-dashed line”, which
China points to in maps from the 1940s as giving it sovereignty
over almost the whole of the South China Sea. He said it has no
legal status under the United Nations Convention on the Law of
the Sea. (Chinese officials may think this a bit rich, since America,
unlike China, has never ratified the convention, but then China
The Economist February 15th 2014
seems not to want to limit its claim by citing the law.)
China rejects American criticism, which it believes embold-
ens the countries that challenge its claims. It was outraged earlier
this month when Benigno Aquino, the Philippines’ president,
compared the world’s passivity in the face of Chinese encroach-
ments in the South China Sea to the territorial appeasement of
Nazi Germany in the 1930s. The Philippines is another American
treaty ally, though in contrast to its promises to Japan, America
has made clear its guarantee does not cover areas under dispute
with China (and others).
Similarly, China’s official news agency, Xinhua, has accused
America of continuing “to spoil troublemaking Japan”. For China
the decision by Shinzo Abe, Japan’s prime minister, to visit To-
kyo’s Yasukuni shrine in December, where war criminals are
among those honoured, was proof of his government’s unrepen-
tant attitude to Japan’s imperialist past and of its intention to re-
vive Japanese military glory. Then this month one ofMr Abe’s ap-
pointments as a governor of the state broadcaster, NHK, claimed
that the Nanjing massacre, an atrocity perpetrated by Japanese
soldiers in 1937, was a fabrication.
For America, all of this is a headache. It would like Japan to
bear more of the burden of regional security, and it applauds Mr
Abe’s wish to reinterpret Japan’s pacifist constitution to allow the
country more military latitude. America also needs Mr Abe’s sup-
port in a years-long effort to relocate a controversial American air-
base on the island ofOkinawa. But it deplores the tendency ofthe
Japanese right to dismiss any criticism of Japan’s war record as
“victors’ justice”. Mr Obama is to visit Japan (as well as Malaysia,
the Philippines and South Korea) in April. In Japan, he will have
to find a way to distance America from Mr Abe’s revisionism. If
he is too hard on Mr Abe, however, America could hand China
the diplomatic prize of an open rift between the treaty allies.
Already American strategy in the region is undermined by the
terrible relations between Japan and South Korea, which is even
more sensitive to Japanese attempts to rewrite history. Yet North
Korea, despite a little flurry of friendly gestures this week, is an
ever-present, nuclear-armed threat to regional security. Indeed,
worries about the stability ofits regime are mounting. It would be
in the interests of America, China, Japan and South Korea alike to
agree on a strategy for dealing with the North. But they are too
busy disagreeing among themselves.
On the slow track?
The Obama administration is still struggling to convince Asia that
its pivot amounts to much. The policy has entailed some lofty
rhetoric about America’s Pacific destiny, much shuttling by se-
nior officials, some modest military redeployments and—with
greater emphasis in recent months as it has seemed closer to fru-
ition—the Trans-Pacific Partnership (TPP), an ambitious trade
agreement involving America, Japan and ten other countries (not
including China), together accounting for a third of global trade.
Having missed the goal of finalising the TPP in 2013, negotia-
tors are due to gather in Singapore on February 22nd for another
try. They would be given a boost if Mr Obama’s team had “fast-
track” authority to reach a deal that could not then be unpicked
line by line in Congress. But winning congressional approval for
fast trackis looking difficult. Mr Obama’s aides say he is still intent
on trying. Many in Asia, still unconvinced that “America’s first Pa-
cific president” is really committed to his country’s leading role in
the region, will want to see how hard. 7

China
Cross-strait relations
Symbolism as substance
BEIJING
Chinese and Taiwanese government officials meet for the first time, but China still
worries about the future
T HERE were no flags and no titles on the
nameplates. There could be no sugges-
tion that the meeting was of equals, as one
side imagined, nor that it was of a suppli-
cant greeting his master, as the other
would prefer to believe. But on February
11th, in the Chinese city of Nanjing, the
heads of Taiwan’s Mainland Affairs Coun-
cil, Wang Yu-chi (pictured, left), and Chi-
na’s Taiwan Affairs Office, Zhang Zhijun,
shook hands and sat down for talks. Lead-
ers of the two sides have met before but
this was the first formal meeting between
ministers in their government capacities
since China and Taiwan split in 1949.
As jets have scrambled over the East
China Sea and fishing boats have faced off
in the South China Sea, Taiwan since 2008
has been an island of comparative calm.
Relations between the governments of Tai-
wan and China, once the most strained in
the region, have achieved a remarkable
stability. The meeting of the two sides was
an attempt to keep it so, especially with the
prospect of change ahead. The party that
rules Taiwan, the Kuomintang (KMT), faces
the possibility of losses in local elections
this year and of losing the presidency in
2016. Chinese leaders see time running out
to consolidate the improved relationship.
The meeting itselfwas a photo opportu-
nity, more symbolic than substantive. The
governments have co-operated more fruit-
fully on trade, direct flights and tourism
through quasi-official organisations. In
spite of shared linguistic and cultural ties,
trust remains low after more than six de-
cades of enmity. (Taiwan rejects the Com-
munist Party’s claim to sovereignty over
the island.) But symbolism is a form of sub-
stance and, for a difficult relationship in a
tense part of the world, the meeting has
added to the recent sense of stability.
Both sides have been wary of talks at
such an official level. China’s leaders are
loth to take any step that could be seen to
legitimise Taiwan’s government. The Tai-
wanese president, Ma Ying-jeou, has ar-
gued for engagement since taking power in
2008, after eight years of rocky cross-strait
relations under the Democratic Progres-
sive Party (DPP) president, Chen Shui-bian.
But Mr Ma has to walk a fine line between
maintaining relations with China that
boost Taiwan’s economy and being seen to
sell out to the mainland, a prospect that
worries even KMT supporters who back
eventual reunion with China.
Mr Ma’s policy of engagement with
China has been an economic boon for Tai-
wan. Almost 3m mainland Chinese visited
Taiwan in 2013, up from just 300,000 in
2008. Most of them flew direct from the
mainland under new agreements struck in
Mr Ma’s first year in office. Cross-strait
trade has risen by more than 50% since
2008, to $197 billion in 2013. Taiwan’s trade
surplus with China was $116 billion in 2013.
Yet Mr Ma’s approval rating is low (at
one time as low as 9%), partly because of
The Economist February 15th 2014 27
Also in this section
28 Academic freedom
28 Tourism and the trade balance
For daily analysis and debate on China, visit
Economist.com/china
Economist.com/blogs/analects
domestic blunders on issues such as pen-
sions and energy pricing, partly because of
a sluggish economy. And waiting in the
wings is the DPP. If it gains control of Tai-
wan’s legislature and the presidency in
2016, it is likely to take a more hostile line
towards the mainland. The island has
made small gains in its campaign for more
international space—in 2009 it won ob-
server status at the World Health Organisa-
tion, but has failed to achieve the same in
other multilateral settings, including UN
talks on climate change. Su Tseng-chang,
chairman of the DPP, says he wants a great-
er role for the island. He recently compared
Taiwan to a bird that would fly away if any-
one tried to grab it.
In contrast, China’s president, Xi Jin-
ping, at a regional forum in Bali in October
said that the Taiwan issue could not be put
off indefinitely, raising concerns that Chi-
na’s increasing assertiveness in the region
might be brought to bear on Taiwan. But
Mr Xi’s predecessors found that did not
work. In the run-up to Taiwan’s first demo-
cratic elections in 1996, China lobbed un-
armed missiles into the waters near the is-
land, but its intimidation backfired as
Taiwanese voted for a fiercely anti-China
candidate. The biggest deterrent to cross-
strait dialogue continues to be the biggest
difference between the two societies: Tai-
wanese leaders are constrained by the will
of the Taiwanese people.
So China is in a bind. If it pushes too
hard, then the Taiwanese push back. If it
does not push, there is a risk that Taiwan
will assert a separate identity more clearly.
At the meeting on February 11th Mr Zhang,
the Chinese official, said, “As long as we
are on the right path, the destination will
not be far.” The problem is that the two
sides do not have the same destination in
mind. So, for now, Chinese leaders will
have to make do with symbolism. 7
28 China
Academic freedom
Don’t think,
just teach
SHANGHAI
The party purges free thinkers but can it
contain free thinking?
A MOTTO of Peking University, one of
China’s leading academic institutions,
is “freedom of thought and an all-embrac-
ing attitude”. But in recent months it was
not all-embracing enough to allow Xia Ye-
liang, an outspoken economics professor,
to keep his job. Economics was not the sub-
ject on which Mr Xia was most forthright.
He was a signatory ofCharter 08, a petition
drawn up in 2008 that called for sweeping
political change, and he was known for his
liberal political views. (Another signatory
of the charter was Liu Xiaobo, who won
the Nobel peace prize in 2010 and is now
serving an 11-year jail term for subversion.)
Mr Xia was dismissed in October, accused
of being a poor teacher. Unable to find an-
other post in China, this month he took up
a position as a visiting fellow at the Cato In-
stitute, a think-tank in Washington, DC.
Mr Xia’s case is part of a wider clamp-
down on free-thinking intellectuals. In De-
cember Zhang Xuezhong, a legal scholar,
was dismissed from East China University
of Political Science and Law in Shanghai
after he published a series of articles de-
fending the provisions of China’s constitu-
tion. State media called such views a West-
ern plot to overthrow the party. Also in
December, Chen Hongguo, an academic at
the Northwest University of Politics and
Law in Xi’an, resigned. The university had
objected, among other things, to his hold-
ing salons that discussed texts by Western
philosophers such as John Stuart Mill.
China’s continued modernisation has
meant that students are more open to
Western influences and have more social
and economic freedoms than ever before.
They tweet, blog and talk freely about all
but the most sensitive topics. That has
made the clampdown on their teachers
even more jarring. The Communist Party,
concerned that it is losing control, has is-
sued a number of political directives ban-
ning liberal topics in the classroom. “Since
Xi Jinping came into power [as party chief]
he has tried to control everything, learning
the means from Mao Zedong,” said Mr Xia.
“It is a great regression.”
The crackdown has also been aimed at
activists among ethnic minorities. Ilham
Tohti, an economist at the Central Univer-
sity for Nationalities in Beijing, was de-
tained on January 15th. Mr Tohti is a mem-
ber of the ethnic Uighur minority, a
Muslim group in China’s north-west,
many of whom believe their land has been
occupied by the Chinese. He is accused of
Tourism and the trade balance
A number of great import
HONG KONG
China has the world’s biggest trade deficit—in services
N
OT long ago, China’s cheap currency
and its large current-account surplus
were the biggest controversies in global
economics. American policymakers
accused China of manipulating its cur-
rency for competitive gain and flew to
Beijing to convey their displeasure. Some
commentators blamed the global fi-
nancial crisis on China’s surplus and its
accumulation of safe American bonds,
which encouraged America’s financial
industry to invent lucrative, but toxic,
substitutes. After the crisis, they then
blamed China’s surplus for America’s
failure to export its way out of trouble.
The controversy has never entirely
disappeared, but it has diminished.
Having peaked at over10% of GDP in
2007 (see chart), the surplus narrowed to
just over 2% of GDP ($189 billion) last year,
according to figures released last week.
China’s exports of goods vastly exceeded
its imports, as always. But this imbalance
was partially offset by another compo-
nent of trade: services. At $122 billion in
2013, China’s services deficit is by far the
biggest in the world.
What lies behind this big gap? One
industry stands out: tourism. Five years
ago, China earned a surplus from cross-
border travel. Visitors from outside the
Sur-minus
China’s current-account surplus:
as % of GDP $bn
12 480
10 400
8 320
6 240
4 160
2 80
0 0
200304 05 06 07 08 09 10 11 12 13
Source: SAFE
spreading separatist thought and inciting
ethnic hatred. On February 7th Radio Free
Asia, a radio network sponsored by the
American government, released an inter-
view with Mr Tohti from before he was de-
tained. In it he denied any association with
a terrorist group and spoke of his fears, ask-
ing for the interview to be released if he
were detained: “The number of police offi-
cers around me has gradually increased,”
he said. “I am almost confident that the
Chinese government is trying to get rid of
The Economist February 15th 2014
mainland spent more in China than the
mainland’s own travellers spent over-
seas. But the number of arrivals fell last
year by 2.5%. Meanwhile the number of
China’s outbound tourists rose by 18%. As
a result, China’s deficit in travel spending
rose to $80 billion in 2013, points out
Thilo Hanemann of the Rhodium Group,
a research firm.
Such trends suggest that China’s
surplus could narrow further. Zhang
Zhiwei of Nomura thinks it will drop to
0.4% of GDP by 2015. This will be helped
by a less competitive yuan. Last year
China’s exchange rate, weighted by trade
and adjusted for inflation, rose by over
7%, according to the Bank for Internation-
al Settlements. Only the Icelandic krona
and Israeli shekel rose more. The yuan’s
rise is even more dramatic when com-
pared with the countries it competes
against in world markets. Their cur-
rencies have mostly plunged since Amer-
ica’s Federal Reserve said it would slow
down its asset purchases. China’s has
continued to strengthen.
Yet despite these trends, China’s
surplus can still generate disagreement.
Stephen Green of Standard Chartered
predicts that it will widen again in 2014,
helped by an increase in global demand.
Strong export figures in January seem to
support this view, assuming the numbers
were not flattered by faulty invoicing and
a rush to fulfil orders before the Chinese
New Year. Mr Green argues that the
surplus will increase to 3.6% of China’s
GDP this year. That does not sound too
dramatic. But, as he points out, China’s
economy is now far bigger than it was
when it was causing so much interna-
tional consternation. Thus a surplus
worth 3.6% of GDP this year could be
bigger in dollar terms than the 10% sur-
plus in 2007. In other words, he writes,
2014 is likely to be the year when China’s
balance of payments re-emerges as a
problem for the world.
me this time.” He said he had only ever ad-
vocated human and legal rights and equal-
ity for Uighurs.
Mr Zhang, the legal scholar, sees his
own dismissal as a scare tactic that will fail
in the long term as the dissonance grows
between politics and everyday life. “When
there are many people who are…waiting
to stand up, crackdown measures will only
make people angry,” he says. That may be
so, but for now, on the surface at least, the
party appears to be in control. 7

United States
The economics of shale oil
Saudi America
MIDLAND, TEXAS
The benefits of shale oil are bigger than many Americans realise. Policy has yet to
catch up
D ENNIS LITHGOW is an oil man, but
sees himself as a manufacturer. His
factory is a vast expanse of brushland in
west Texas. His assembly line is hundreds
of brightly painted oil pumps spaced out
like a city grid, interspersed with identical
clusters of tanks for storage and separation.
Through the windscreen of his truck he
points out two massive drilling rigs on the
horizon and a third about to be erected.
Less than 90 days after they punch through
the earth, oil will start to flow.
What if they’re dry? “We don’t drill dry
holes here,” says Mr Lithgow, an executive
for Pioneer Natural Resources, a Texan oil
firm. In the conventional oil business, the
riskiest thing is finding the stuff. The “tight
oil” business, by contrast, is about deposits
people have known about for decades but
The shale gale Crude oil production
Barrels per day, m of which: tight oil*
United States
FORECAST
1990 95 2000 05 10 15
Source: International Energy Agency
previously could not extract economically.
Pioneer’s ranch sits at the centre of the
Permian Basin, a prehistoric sea that, along
with Eagle Ford in south Texas and North
Dakota’s Bakken, are the biggest sources of
tight oil, a broad category for the dense
rocks, such as shale, that usually sit be-
neath the reservoirs that contain conven-
tional oil. Since 2008 tight-oil production
in America has soared from 600,000 to
3.5m barrels per day (see chart 1). Thanks to
tight oil and natural gas from shale, fossil
fuels are contributing ever more to eco-
nomic growth: 0.3 points last year alone,
according to J.P. Morgan, and 0.1 to 0.2 a
year to the end of 2020, according to the Pe-
terson Institute, a think-tank. Upscale fur-
niture stores and luxury-car dealerships
have sprung up in Midland since the boom
began. Mr Lithgow has truck drivers who
earn $80,000 a year. Local oil-service firms
1
have been known to hire fast-food workers
on the spot. In all, the unconventional-en-
ergy boom will create up to 1.7m new jobs
by 2020, predicts McKinsey, a consultancy.
10
And that is only part ofthe story. Anoth-
8 er benefit of tight oil is that it is much more
6 responsive to world prices. Some econo-
mists think this could turn America into a
4 40
swing producer, helping to moderate the
2 booms and busts of the global market.
Pioneer is rapidly boosting production.
0 But Scott Sheffield, the company’s boss,
20 24
worries that in a few years he will run out
*Including shale
of customers; America has prohibited the
The Economist February 15th 2014 29
Also in this section
31 The party of no says maybe
31 How to date a supermodel
32 Obamacare delayed again
32 New York v poor kids
33 Ray Nagin convicted
34 Lexington: Florida pensioners and
pork
For daily analysis and debate on America, visit
Economist.com/unitedstates
Economist.com/blogs/democracyinamerica
export ofcrude oil since the 1970s. At $100 a
barrel, the price of West Texas Intermedi-
ate (the most popular benchmark for
American oil) is comfortably above the
break-even cost of tight oil. But the pros-
pect of a glut has futures pricing it at $20
less in 2018. “There will be a lot less oil-
drilling when you take $20 out of every-
body’s margin,” says Mr Sheffield.
Until the early 1970s, America was the
world’s largest oil producer and the Texas
Railroad Commission stabilised world
prices by dictating how much the state’s
producers could pump. When Arab states
slapped an oil embargo on Israel’s Western
allies after the six-day war in 1967, Texas
cushioned the blow by allowing a massive
production boost.
But rising consumption and declining
production eroded the state’s spare capaci-
ty, and in March 1972 Texas called for flat-
out production. “This is a damn historic oc-
casion and a sad occasion,” the Texas Rail-
road Commission’s chairman declared.
When Arab producers imposed another
embargo the next year, prices rocketed.
America had lost the role of world price ar-
biter to OPEC, a cartel dominated by des- 1
2
Quick hit v slow burn
Typical production curves of
different kinds of oil well
Peak production=100%
Tight-oil well* Conventional well
100
80
60
20
0
0 5 10 15 20 25
Years
Source: International Energy Agency *Including shale
30 United States
2 potic regimes. American politicians tried
desperately to curb consumption (for ex-
ample, by lowering speed limits) and to
conserve supplies (by banning crude-oil
exports in 1975).
American production declined steadily
from a peak of 9.6m barrels a day in 1970 to
under 5m in 2008. About then, indepen-
dent producers began adapting the new
technologies of hydraulic fracturing
(“fracking”) and horizontal drilling, first
used to tap shale gas, to oil. Total American
production has since risen to 7.4m barrels a
day, and the Energy Information Adminis-
tration, a federal monitor, reckons it will re-
turn to its 1970 record by 2019. The Interna-
tional Energy Agency is more bullish; it
reckons that by 2020 America will have
displaced Saudi Arabia as the world’s big-
gest producer, pumping11.6m barrels a day.
Besides directly creating new jobs and
income, the fossil-fuels boom could help
growth by reducing America’s vulnerabili-
ty to oil-price swings, in two ways. First, as
production rises and imports shrink, more
of the cash that leaves consumers’ pockets
when the oil price rises will return to
American rather than foreign producers.
David Woo of Bank of America/Merrill
Lynch notes that America’s petroleum def-
icit has narrowed to 1.7% of GDP while Eu-
rope’s has widened to nearly 4%, which
seems to have made both the dollar and
the economy less sensitive to oil prices.
The second channel lies in the econom-
ics of shale. Oil flows relatively easily
through the porous rocks that make up a
conventional reservoir, so a conventional
well can tap a large area. As a result, the
volume of oil pumped each day declines
slowly, on average at 6% per year. By con-
trast, oil flows much more sluggishly
through impermeable tight rock. A well
will tap a much smaller area and produc-
tion declines quite rapidly, typically by
30% a year for the first few years (see chart 2
on previous page). Maintaining a field’s
production levels means constant drilling.
The International Energy Agency reckons
maintaining production at 1m barrels per
day in the Bakken requires 2,500 new
wells a year; a large conventional field in
southern Iraq needs just 60.
This all means that when oil prices rise,
producers can quickly drill more holes and
ramp up supply. When prices fall, they sim-
ply stop drilling, and production soon de-
clines. In early 2009, after prices collapsed
with the global financial crisis, Pioneer
shut down all its drilling in the Permian Ba-
sin. Within six months, output in the affect-
ed areas dropped by 13%.
Bob McNally of Rapidan Group, an in-
dustry consultant, predicts that America
could be “force-marched” back to the stabi-
lising role it played in the 1960s, this time
responding to the market’s invisible hand
rather than government diktat. Will that
work in practice? It may already have done
Where frackers frack
Biggest tight-oil production basins
Bakken
MT
ND
NM
TX
Permian Basin
Eagle Ford
Tight-oil production
Barrels per day, m,
from:
Eagle Ford
Bakken
Permian Basin
2000 02 04 06 08 10 12 13
Sources: Energy Information Administration;
International Energy Agency
so. Since 2008, the Peterson Institute notes,
turmoil in Sudan, sanctions on Iran and
declining North Sea output have taken a lot
of oil off the market. Without America,
which accounted for half of the growth in
global output over that period, Persian
Gulf producers might not have been able
to make up for the loss. Prices could have
risen sharply, hurting consumers every-
where. Yet they did not.
Oil firms try not to over-react to short-
term price fluctuations, of course. Capital,
equipment and labour all cost money, so
they try to ramp up production only in re-
sponse to what they think will be long-
term shifts in the oil price.
The ban on crude-oil exports hurts pro-
ducers and makes it harder for America to
become a swing supplier. Light, sweet (ie,
low-sulphur) West Texas Intermediate al-
ready trades at a discount of $8 to Brent, its
global peer. That is due mostly to transport
and storage bottlenecks in America, but in-
creasingly the export ban makes a differ-
ence. In recent decades American refiners
have reconfigured themselves to handle
the heavier, sour oil imported from Mexi-
Frackin’ the Bakken
The Economist February 15th 2014
co, Venezuela and Canada’s tar sands, leav-
ing them with less capacity for refining
tight oil, which is light and sweet.
The oil price at which shale producers
break even ranges from $60 in the Bakken
to $80 in Eagle Ford, reckons Michael Co-
hen of Barclays, a bank. If exports yielded
an extra $1 to $1.30 a barrel, he estimates
that might raise total output by as much as
200,000 barrels per year.
If the ban were lifted, crude-oil exports
1.2 could start more or less straight away. The
1.0 necessary pipes and tankers are mostly
there already. But the political debate is
0.8
only in its infancy. By law the president can
0.6 allow exports he considers in the national
0.4
interest. Barack Obama has yet to express a
view on the ban. Legislators from non-oil-
0.2 producing states are wary. “For me the lit-
0 mus test is how middle-class families will
be affected,” says Ron Wyden, the Demo-
cratic chairman of the Senate energy and
natural resources committee.
The main beneficiaries of the ban are
the refiners. They buy light, sweet Ameri-
can crude for less than the global price,
turn it into petrol and then sell that at the
global price. Exports of refined petroleum
products are not banned, and have, unsur-
prisingly, soared.
Defenders of the ban (including, natu-
rally, some refiners) claim that if America
exported more oil, Saudi Arabia would re-
duce its own output. Prices to American
consumers would not fall, they say, and
might even rise. Historical evidence says
otherwise, however. When Congress al-
lowed Alaska to export crude oil in 1995, its
west-coast customers did not pay any
more for petrol, diesel or jet fuel.
Oil producers would obviously benefit
from lifting the ban. So might other Ameri-
cans, in less obvious ways. A global oil
market that fully included America would
be more stable, more diversified and less
dependent on OPEC or Russia. The geopo-
litical dividends could be hefty. As Pio-
neer’s Mr Sheffield notes, “It’s hard to be-
lieve we’re asking the Japanese to stop
taking Iranian crude, but we won’t ship
them any crude ourselves.” 7
 The Economist February 15th 2014
The Republicans
Hell, maybe
WASHINGTON, DC
The “party of no” is offering some fresh
ideas
T HE House passed a bill on February
11th to raise the debt ceiling (the legal
limit to how much America may borrow)
without conditions attached. The Senate
followed suit the next day. With luck, this
marks the end of congressional games of
chicken over whether America will de-
fault on its debts and torpedo the world
economy. It also made the Republican
Party look less like a protest movement
and more like a part of the government,
which in fact it is.
Many Republicans are coming round to
the view that they need to be more than
“the party of no”. On February 10th Heri-
tage Action, a ferocious conservative cam-
paign group, held a day-long jamboree of
policy ideas. Speaker after speaker talked
about how important it was to put forward
fresh proposals. The notion that policies
formulated by Ronald Reagan may need
some tweaking 40 years later has also
gained ground. “To many Americans to-
day, especially to the underprivileged and
middle-class, or those who have come of
age or immigrated since Reagan left office,
the Republican Party may not seem to have
much of a relevant reform message at all,”
said Mike Lee, a senator from Utah, in a
barely reported speech before Christmas.
Blocking schemes that come from the
president or from the Senate, where Demo-
crats have a majority, has an obvious ap-
peal for a party whose unifying idea is that
government is too big. “Hell no” may also
prove to be a workable strategy in this
year’s mid-term elections, which are likely
to be low-turnout affairs that reward inten-
sity of feeling. Moreover, recent examples
of naysaying, such as the postponing of
immigration reform and the refusal to ex-
tend unemployment benefits, suggest that
the party is not ready to question many of
its core beliefs. Yet some Republicans who
represent purplish states or have national
ambitions are doing just that.
Marco Rubio, a senator from Florida,
has proposed rolling the federal govern-
ment’s many anti-poverty programmes
into a single fund, to be spent by states on
plans of their own design. Paul Ryan, a con-
gressman from Wisconsin, has made ad-
miring noises about Britain’s universal
credit, an attempt to simplify welfare pay-
ments and reduce the high effective mar-
ginal tax rates that claimants face when
their earnings rise. At the moment the
earned-income tax credit, a negative in-
come tax that boosts the earnings of ill-
paid parents, does little for the childless.
Senator Rubio has also proposed a wage
subsidy for low-paying jobs which, unlike
the earned-income tax credit, would treat
people with and without children equally.
John Thune, a senator from South Da-
kota, has proposed replacing the extension
of unemployment insurance with a pay-
roll tax holiday for companies that hire the
long-term unemployed. He also favours a
scheme to lend $10,000 to people in this
category to help them to move somewhere
where they can find a job. These ideas bor-
row from work by Kevin Hassett of the
American Enterprise Institute, a think-
Campaign advertising
How to date a supermodel
NEW YORK
The curse of misleading headlines
I F YOU bother to read this article, you
will see it is clearly about politics. But if
you just glance at the headline, you might
form a different impression. The same is
true of several campaign websites
created by the National Republican
Congressional Committee (NRCC).
One trumpets “John Tierney for Con-
gress” and displays a nice photo of Mr
Tierney, a Democrat standing for election
in Massachusetts. The text makes it obvi-
ous that its authors disapprove of Mr
Tierney. They call him “one of the most
extreme and partisan members of Con-
gress” whose votes “harm middle-class
families saving for retirement”. They also
link his family to “an illegal international
gambling operation in Antigua”. Atten-
tive voters would never imagine that the
big “DONATE” icon at the bottom is solic-
iting funds to support Mr Tierney.
But what of inattentive voters? Or
those in a hurry? Or the short-sighted?
They might easily end up funding the
side they dislike. Republicans have
United States 31
tank, who suggests that the federal govern-
ment act as an employer of last resort and
hire people who have been out of the la-
bour market for a long time.
If one thread runs through these ideas,
it is this: that getting people back to work at
a time of high unemployment may require
more than just cuts to benefits, and that
lower taxes and deregulation may not im-
prove wages for low earners on their own.
This willingness to interfere with markets
extends to health-care policy, the area
where there is most disagreement be-
tween Republicans and Democrats. Lan-
hee Chen of Stanford University reckons
that the Obamacare fight has improved the
quality of Republican counter-proposals,
which now aim to cover pre-existing medi-
cal conditions, reduce costs and extend
coverage—as Obamacare is meant to do.
The urge to say no to everything is still
strong. A reminder of that came when the
Senate Conservatives Fund, a campaign
group which has spent $8m already in this
electoral cycle, responded to the passage of
the debt-ceiling bill in the House by an-
nouncing its intention to replace John
Boehner, the most senior Republican in
Congress, as Speaker. “Successful political
movements”, says Senator Lee, “are about
identifying converts, not heretics.” By that
measure the Republicans still have some
way to go. But at least the arguments the
party is having with itself have become
more adventurous. 7
bought up hundreds of web addresses
with Democratic candidates’ names and
set up at least 18 websites that look sup-
portive at first glance but then lambast
the candidate. The NRCC insists that this
is perfectly normal electioneering, and
that the truth needs to be told about how
these particular Democrats are bankrupt-
ing America. If, perish the thought, any-
one were to donate by mistake, the NRCC
says it will return the cash.
America’s election laws are often
confusing. But the bar on “unauthorised”
parties using a candidate’s name unless
“the title clearly and unambiguously
shows opposition to the named candi-
date” seems clear. Still, Paul S. Ryan of the
Campaign Legal Centre, a watchdog (not
the Paul Ryan who was Mitt Romney’s
running-mate) doubts that the Federal
Election Commission will do anything
about these websites before the election.
It is “ineffective by design,” Mr Ryan says;
“Even on the best of days, the wheels of
the FEC grind slowly.”
32 United States
Obamacare
The law’s delay
NEW YORK
Re-writing health reform on the fly
T HE Affordable Care Act remains Barack
Obama’s biggest domestic achieve-
ment. So it seems odd that Mr Obama con-
tinues to delay its implementation. Next
year the law was to have required firms to
offer affordable coverage to all full-time
workers. Now, many companies won’t
have to, the Treasury announced on Febru-
ary 10th. Democrats call this flexibility,
cheering that the White House is finding
clever ways to ease America’s concerns
about this confusing law. Republicans de-
cry the president’s unilateral re-writing of
statutes as lawless.
Democrats’ pitch for Obamacare was
always somewhat inconsistent. They said
it would transform American health care,
but not too much. There would be new
rules for insurers and a new way of buying
coverage, through online shopping sites
called exchanges. But those who liked their
insurance could keep it, Mr Obama repeat-
edly promised. The government would
not take over health care; employers
would continue to sponsor insurance for
their workers.
As Obamacare’s big provisions take ef-
fect, they are indeed transforming Ameri-
ca’s insurance market. On February 12th
the health department announced that,
from October through January, nearly 3.3m
people signed up for private coverage
through the exchanges. However, the law
also creates losers, and Mr Obama is furi-
ously tinkering to appease them.
In some instances, his tinkering may
undermine his own goals. Amid public
fury over the cancellation of some insur-
ance plans, the health department in De-
cember announced that individuals
whose old plans were scrapped would, for
one year, be exempt from Obamacare’s
mandate to have insurance or pay a fine.
The mandate exists to make healthy peo-
ple buy coverage, so their premiums will
offset the cost of insuring the ill. The delay
may prompt many healthy people to put
off signing up for coverage. That, in turn,
would leave insurers with too many sick,
expensive patients, which would drive up
insurance prices in the future.
The delay of the employer mandate is
another attempt to placate opponents. The
change seems unlikely to derail Obama-
care. However it is unlikely to win Mr
Obama political points, either. Obamacare
required that employers with 50 or more
workers offer affordable coverage in 2014
or pay a penalty. Companies that don’t
cover all their staff, such as hotels, loudly
grumbled about this rule. In July the Trea-
sury postponed the mandate to 2015. Now
firms with 50-99 workers will not have to
meet the requirement until 2016. Bigger
employers must cover 70% of full-time
workers next year, then 95% in 2016.
The announcement will not change
most firms’ plans, says Tracy Watts of Mer-
cer, a consultancy. Some 91% of employers
with 50-199 workers already offer insur-
ance, as do 99% of firms with 200 or more
workers, according to the Kaiser Family
Foundation, a research outfit. However for
some businesses, such as restaurants, the
change may offer real relief. The Treasury
even allowed that it might further post-
pone the employer mandate: “As these
limited transition rules take effect, we will
consider whether it is necessary to further
extend any of them beyond 2015.”
All these contortions will exacerbate
Democrats’ political problems. Republi-
cans are preparing to wage an election
campaign based largely on complaints
about Obamacare. John Boehner, the
Speaker of the House, said it was unfair to
postpone the mandate for employers but
not for individuals. Democrats are keen to
placate the law’s many critics, but it is not
getting any easier. 7
The Economist February 15th 2014
Charter schools
Killing the golden
goose
CHICAGO AND NEW YORK
Charter schools are working, but New
York’s mayor wants to stop them
O F THE 658 schools in Chicago, only 126
are charter schools—publicly funded
but independently run and largely free of
union rules. Fifteen more are due to open
this year. More notable, though, is that four
of the most recently-approved charters are
in areas where the city recently decided to
close 49 public schools—the largest round
of such closures in America’s history.
Most of the closed schools served poor
black children, and were in parts of the city
with a shrinking population. The city gov-
ernment argued that these schools were
under-used, and that closing them would
save $233m that could be reinvested. So it
has been: in new science labs, computers,
wireless, libraries, art rooms and air condi-
tioning in the charters that took in children
from the closed schools.
Charters have worked well in Chicago.
Most parents like them, and Mayor Rahm
Emanuel and the Board of Education are
behind them. The Noble Network, which
already runs 14 charter high schools, has
just been given permission to open two
new ones. Around 36% of the 9,000, most-
ly poor, children enrolled with Noble can
expect to graduate from college, compared
with 11% for this income bracket city-wide.
A 2013 study by Stanford University
found that the typical Illinois charter pupil
(most of them in Chicago) gained two
weeks of additional learning in reading,
and a month in maths, over their counter-
parts in traditional public schools. One city
network of charters, Youth Connection, is
credited with reducing Chicago’s dropout
rate by 7% in a decade. Overall, however,
the city’s public schools are in a sorry state:
51,000 out of 240,000 elementary-school
pupils did not meet state reading standards
in 2013.
Some will always argue that charters
cream off the brighter children and leave
sink schools, deprived of resources, be-
hind. The teachers’ unions hate charter
schools because they are non-unionised.
So they remain a rarity nationwide, with
only 5% of children enrolled in them. But a
PDK/Gallup poll last year found that 70%
of Americans support them. Small won-
der: a study of charter high schools in Flori-
da found that they boosted pupils’ earning
power in later life by more than 10%.
Intriguingly, alongside the growth in
popularity of charter schools, support is
weakening for the sorts of restrictive la-
bour rules that have long been demanded
by teachers’ unions in public schools. A 1
 The Economist February 15th 2014
Down with good schools, says New York’s mayor
2 survey in 2013 by the Chicago Tribune and
the Joyce Foundation found that locals
want good teachers to be paid more and
the least effective to be shown the door. Al-
most half of them thought teachers should
not even be allowed to strike. Most also
wanted it to be easier for charters to ex-
pand, especially in areas with bad schools.
According to the National Alliance for
Public Charter Schools (NAPCS), enrol-
ment has grown by 80% in the past five
years. The keenest cities are New Orleans
(79% of children in charters), Detroit (51%)
and the District of Columbia (43%). New-
ark is keen to expand its system. Los Ange-
les and New York, the biggest school dis-
tricts, are enrolling the largest numbers.
Or they were. But New York’s new
mayor, Bill de Blasio, a union-backed
Democrat, wants to hobble charters. First,
he intends to curb their growth. On Janu-
ary 31st Carmen Fariña, his schools chan-
cellor, announced a plan to divert $210m
earmarked for charter schools to help pay
for pre-kindergarten teaching. She also an-
nounced that, in future, every expansion
plan will be reviewed—even those that are
long settled, such as the plan of Success
Academies, with the largest network in the
city, to open ten more schools in August.
Mr de Blasio wants to charge charters
rent if they are sharing space with the 1.1m
pupils in district schools. Because charters
receive no state funding for facility costs
and rents in the Big Apple are so high, Mi-
chael Bloomberg, Mr de Blasio’s predeces-
sor, allowed them free use of under-uti-
lised space in traditional public schools. Of
the 183 charters in New York City, 115 are
“co-located”, sharing canteens, libraries
and gyms. If they were suddenly charged
rent, many would struggle. The 68 charters
not sharing space with a district school
have to fork out an average of $515,137 for fa-
cilities each year. The Manhattan Institute,
a conservative think-tank, calculates that
charging rent could force 71% of co-located
charters into deficit.
These new policies are likely to be un-
popular. New York City’s charter schools
generally outperform their neighbouring
district schools. In some cases charters
have not merely closed the racial achieve-
ment gap, but actually reversed it. Most
New Orleans politics
Countertop corruption
NEW ORLEANS
Ray Nagin is, amazingly, the first New Orleans mayor convicted of graft
G IVEN New Orleans’ reputation, it
seems odd that Ray Nagin was the
city’s first mayor to be charged with
accepting bribes. On February 12th he
was convicted on 20 counts; jurors exon-
erated him only of one. Mr Nagin, a
Democrat who won global notoriety for
his inept response to Hurricane Katrina
in 2005, left office under a cloud in 2010,
mostly because voters were fed up with
his erratic personality and judgment.
The charges against him were filed last
year. They were pedestrian, even pica-
yune: he solicited bribes. He defended
them during his trial as “investments” in
a granite-countertop firm he had started
with his grown-up sons. Mr Nagin
thought the granite business would
boom after Katrina, since 80% of the
city’s residents needed to rebuild. Yet his
firm, Stone Age, foundered, and he
leaned on city contractors to prop it up.
He also squeezed Home Depot, a retail
giant, in 2007 when it was looking to
build a store in New Orleans. Home
Depot wound up hiring the Nagin family
firm as an exclusive countertop installer
for several stores.
Mr Nagin portrayed himself as a patsy
United States 33
New Yorkers want more of them.
Parents, particularly those in high-risk
areas, want choice. Demand for charter-
school places outstrips available slots; en-
try is by lottery, and some 50,000 children
are on waiting lists. Before the election,
20,000 parents, children and teachers
marched across the Brooklyn Bridge to
City Hall in support of charter schools.
Many in the charter world hope Mr de Bla-
sio will back down, though the rhetoric
from City Hall is not encouraging.
As controversy swirls, pupils in Bronx 2,
a charter school in the South Bronx, are get-
ting on with their education. Some are
step-dancing. Down the hall, seven-year-
olds lead group discussions in reading
class. One little fellow ably explains what
the word “regret” means. Bronx 2, part of
the Success Academies network, serves
black and Latino children from mostly
low-income families. Its pupils did extraor-
dinarily well in the 2013 state examina-
tions—97% passed mathematics and 77%
passed English. The school ranked third in
the state, even beating children in well-
heeled Scarsdale, a well-to-do New York
City suburb. Bronx 2 shares space with PS
55, a traditional district public school
where only 3% of pupils passed English
and only 14% passed maths. 7
The Big Sleazy
for witnesses who agreed to testify
against him in exchange for the promise
of leniency. But the jury didn’t buy it, not
least because the prosecution’s case was
corroborated by several witnesses who
had no motive to preserve themselves.
His sentencing is months away, but a stiff
one is likely. Mr Nagin blamed his law-
yers, his accountants, his secretaries and
even his sons; but the jury blamed him.
34 United States
Lexington Of pensioners and pork
Lessons from a bellwether congressional race in Florida
L ATE last year Florida’s 13th congressional district—a sprawl of
mobile-home parks, retirement villages and strip malls,
fringed by Gulf coast beaches—lost its congressman, Bill Young.
The Republican’s death, after 42 years of service, left a void. But in
truth, the district had been in a form of mourning since 2010: a
year that saw a ban on the “earmarks” that enabled Mr Young to
channel hundreds of millions of dollars to his district and state.
Dry numbers cannot convey the Babylonian scope of his
works. Military bases and weapons factories rose from Florida’s
swamps at his command. After storms, he had the Army Corps of
Engineers “renourish” beaches with the finest white sand. He
widened highways, expanded hospitals for children and ex-ser-
vicemen and poured taxpayers’ cash into such causes as the Uni-
versity of South Florida (USF) and national bone-marrow regis-
tries. A grateful Florida placed his name on a marine-science
complex, a military cadets’ centre, a National Guard armoury, a
veterans’ hospital and a mid-sized reservoir.
Mr Young’s death triggered a special election to be held on
March 11th. Pundits see the race as a trial run for campaign themes
that will dominate November’s congressional elections. Sure
enough, Democrats are busy pummelling the Republican candi-
date, David Jolly, as a shill for special interests (he is a lobbyist,
after years as an aide to Mr Young). When not running ads calling
him “Lobbyist David Jolly”, Democrats and allies call him an ex-
tremist, noting his opposition to abortion in most cases and stern
views on immigration. Not to be outdone, Republicans and con-
servative groups are buying up millions of dollars of TV airtime,
bashing his Democratic opponent, Alex Sink, as a backer of
“Obama’s reckless agenda”, meaning above all Obamacare.
There is a logic to such hardball tactics. The 13th is that mod-
ern-day rarity, a swing district, whose voters elected Mr Young 22
times but narrowly plumped for Barack Obama in his two presi-
dential elections. Victory there would give either party bragging
rights, though Democrats have more to lose after fielding a much
better-known candidate (Ms Sink, a former banker, narrowly lost
the 2010 Florida’s governor’s race). A win by Mr Jolly would be
seized on as evidence that Republicans can ride distrust of Mr
Obama and his health law to a banner year in 2014.
Yet it is underselling this special election to treat it merely as a
The Economist February 15th 2014
rehearsal for November. Mr Young’s fiefdom is interesting in its
own right. The area has been sending Republicans to Congress
since the 1950s, well before other bits of the state, notes Darryl
Paulson ofUSF. That was made possible by migration into the dis-
trict by northern businessmen and midwestern retirees: stolid
Rotarians and Chamber of Commerce types, rather than the fiery
southern conservatives found elsewhere in Florida. The district is
unusually elderly: voters aged 61 and over cast 40% of all ballots
in the 2012 general election (nationally, that age-group cast 30% of
all votes). It is strikingly dependent on federal funding, and not
just because of its old folk, defence contractors and veterans’ hos-
pital. Many locals own properties covered by subsidised federal
flood insurance, and live in terror of a 2012 law (now partly de-
layed) that would allow many premiums to rise closer to market
rates—ie, to make people with beachfront homes pay the full cost
of them rather than dumping the bill on taxpayers.
All that prompts nostalgia for the Young era. At a recent gath-
ering for Democratic-voting business owners at a local café, a ho-
tel boss, Gary Renfrow, urged Ms Sink to keep beaches topped up
with federal sand. An insurance broker, Eric Greene, wanted cash
for roads. In contrast, government came in for much abuse at a Re-
publican fundraiser for Mr Jolly, held at a waterfront grill,
though—Lexington noticed—guests seemed more tolerant of the
government’s money, when heading their way. A tax adviser,
Paul Bedinghaus, denounced Mr Obama for telling businesses to
provide health insurance and pay workers a minimum wage
rather than “what they’re worth”. A defence consultant, Walter
McCracken, demanded lower taxes and less “government impo-
sition” in his life. Yet both men trenchantly defended Mr Young’s
earmarks, calling them money “coming back to the district”.
There was wide agreement among guests that Washington
(while in many respects a spendthrift fount of tyranny) should
bankroll Floridians’ flood insurance.
Spending on you: waste. On me: an investment in the future
In the face of such voters, both candidates pander. They agree
that flood-insurance prices should not rise while cheaper alterna-
tives are sought. Both reject the idea that urgent reforms are need-
ed to keep Social Security (public pensions) solvent—that might
alarm the many pensioners whose votes they need.
Mr Jolly dubs himself a “Bill Young Republican”. Defending
his profession to a gathering of building contractors, he called
himself an expert in fighting for their interests: “We have 435 lob-
byists up in Washington, DC, and they’re called members of Con-
gress,” he argues. “They’re all lobbying for their districts.”
Ms Sink is less polished: for all her experience she does a good
impression of someone being forced to campaign at gunpoint.
Stressing bipartisanship, she grimaces when asked if she would
welcome a visit by Mr Obama, saying she wants to run on “local
issues”. To her credit, she has mounted a more robust defence of
Obamacare than many Democrats, vowing to fix rather than re-
peal the law and accusing Mr Jolly of wanting to go back to letting
insurance companies “do whatever they want”. But after listing
Obamacare’s pros and cons, she sadly notes: “It took me five min-
utes to explain that. It doesn’t lend itself to soundbites.”
If the special election does not seem very uplifting, with its
wildly entitled voters and pandering candidates, contemplate
this: by 2030, much of America will be as old as Florida is today. If
rational spending seems a hard sell now, just wait until more
places vote like the Sunshine State. 7

The Americas
Governing Mexico
All the president’s men
APATZINGÁN
Enrique Peña Nieto dusts off an old manual for imposing order
T HREE brotherhoods are struggling for
control of Apatzingán, a dusty town in
the south-western Mexican state of Mi-
choacán. One is deadly: the Knights Tem-
plar drug gang. One espouses vigilantism:
the armed “self-defence” militias who on
February 8th helped drive the Templars
out of their stronghold. The third is the
most powerful: a young and preppy group
of federal-government employees sent in
by President Enrique Peña Nieto to retake
control of Michoacán after tension be-
tween Knights Templars and vigilantes
threatened to spin out of control.
Many of this third group served under
Mr Peña when he was governor of the state
of Mexico in 2005-11. They have known
each other for years and banter like friends
at a tennis club. Their insertion into Mi-
choacán reflects a wider trend in Mexican
politics: the resurrection of an old but ef-
fective style of presidential rule.
After 12 years of an increasingly chaotic
decentralisation of power while Mr Peña’s
Institutional Revolutionary Party (PRI) was
in opposition, the president is now seeking
to restore the balance. In Michoacán he has
imposed his authority in a way not seen
since then President Carlos Salinas de Gor-
tari sought to neutralise the indigenous Za-
patista uprising in the southern state of
Chiapas in 1994.
He has appointed a commissioner, 38-
year-old Alfredo Castillo, who talks airily
of the sovereignty of Michoacán and the
autonomy of its PRI governor, but in prac-
tice calls the shots. The state’s attorney-
general and head of public security have
been replaced by subalterns of Mr Castillo
from when he worked under Mr Peña in
the state of Mexico. Most of the six deputy
attorneys-general and some of the 200 fed-
eral law-enforcement officials drafted into
police functions are Mr Castillo’s (and
hence the president’s) men and women.
On February 4th Mr Peña took a leaf
from Mr Salinas’s book by announcing a 45
billion peso ($3.4 billion) investment
splurge in Michoacán. (It emerged only lat-
er, sotto voce, that almost half of this was al-
ready in the 2014 federal budget.) At the
same time he created what may become a
parallel government in the state, ordering
all ministers to appoint a high-level repre-
sentative to Michoacán.
Mr Peña once wrote a university thesis
on the historical power of the Mexican
presidency, or presidencialismo. He has nei-
ther the clout nor the notoriety of some of
his PRI predecessors during the period of
the party’s stranglehold. “He’s attempting
to go back to a strong presidential regime
under more democratic circumstances.
Most Mexicans approve,” says Jorge Casta-
ñeda, a former foreign minister.
The federal intervention in Michoacán
has so far been positive. But the inclination
to assert control and throw money at a pro-
blem whenever protests flare is an old PRI
habit that can be counterproductive. The
The Economist February 15th 2014 35
Also in this section
36 Brazil’s energy crunch
36 Canada’s broken budget process
37 Bello: Encouraging reform in Cuba
For daily analysis and debate on the Americas, visit
Economist.com/americas
implicit lesson for other states, Mr Casta-
ñeda says, is “Let’s get us some guns and
dress up like vigilantes and we too can get
some more money.” Another potential
problem is what Ernesto López Portillo, a
security specialist, calls “the paradox of in-
tervention”. It could allow state govern-
ments to slacken their own efforts to create
effective law-enforcement institutions.
Mr Castillo insists that his relations
with the government of Michoacán in-
volve “co-ordination…not subordina-
tion”. But Mr Peña’s attempts to impose
discipline on regional governments go be-
yond Michoacán. Since he took office in
2012, states have been bypassed in the pay-
ment of teachers, had ceilings put on their
debt capacity, and been urged to align their
security plans with the interior ministry.
For most of the governors, who are
from the PRI, this is a return to business as
usual. Under the presidential system in the
20th century, they were accustomed to tak-
ing orders from the top. What is different
now, says Sergio Aguayo of El Colegio de
México, a university, is that as the state gov-
ernments’ budgets and autonomy in-
creased during Mexico’s democratic transi-
tion, so did the power of organised crime
to undermine all authority.
In Michoacán this has forced Mr Peña’s
men to make some unusual compromises.
Federal troops and police retook Apatzin-
gán with the help of militiamen, some of
whom carried illegal assault weapons. As
Mr Castillo discovered when he was
filmed in talks with a vigilante once sus-
pected of drug links, some may have shad-
owy backgrounds. He hopes that as they
are gradually drafted into a new rural po-
lice force, the bad ones will be weeded out.
For the time being, the violence-weary citi-
zens of Michoacán appear prepared to give
the new gang, and Mr Peña’s style of presi-
dencialismo, the benefit of the doubt. 7
36 The Americas
Brazilian energy
Rain-checked
SÃO PAULO
A parched southern summer may cause
an electricity crisis
P RAYING to St Peter is not much of an en-
ergy policy. Yet that is what Brazil’s gov-
ernment seems to be doing by counting on
rain—which, according to folklore, São Pe-
dro dispenses at the pearly gates—to sort
out a looming electricity crisis.
Hydropower generates 80% of Brazil’s
electricity. Typically, reservoirs fill up in the
rainy season, from December to March,
and are depleted in the dry southern win-
ter. This year St Peter has skimped. Brazil
experienced the second-driest January in
80 years. On February10th the water levels
in the south-east and centre-west, home to
70% of the country’s reservoirs and half its
people, dipped below 37% of capacity, the
lowest since 2001. With no rain in sight,
they are set to drop further.
Meanwhile consumption has soared.
In January Brazilians used 10% more ener-
gy than in the same period in 2013. Peak de-
mand reached an all-time high of 86GW
on February 6th.
Weather and wealth help to explain ris-
ing consumption: the hottest summer in
living memory coupled with higher in-
comes means more Brazilians are seeking
respite from the heat with power-hungry
air-conditioners. But government policy is
also responsible. In 2012 President Dilma
Rousseff pledged to slash energy bills by a
fifth. To this end she offered to renew oper-
ating concessions that were due to expire
in 2015-17 on the condition that utilities cut
tariffs and channelled cheap power to
households, industry and small firms.
Not all utilities agreed to these terms.
But many did. The resulting surge in de-
mand, combined with a crimped hydro-
power supply, has forced many distribu-
tors to buy dearer energy from oil- or
gas-fired plants at rising spot-market prices.
Fitch, a ratings agency, warned on Febru-
ary 6th of the pressures on some utilities
unless the government tides them over, as
it is expected to do. That could end up hurt-
ing Brazil’s own credit rating. In 2013 simi-
lar stopgaps cost the treasury 9 billion reais
($3.7 billion). It has set aside the same
amount this year, but on February 11th the
National Electrical Energy Agency, which
regulates the industry, said an additional
5.6 billion reais would be needed. Either
that, or bills must rise by 4.6%.
The energy ministry insists that Brazil
enjoys a “structural surplus”: its total in-
stalled energy capacity of 126.7GW far ex-
ceeds demand, which has averaged
66.8GW since the start of the year. But in-
stalled capacity is not the same as “assured
energy”, the minimum amount of energy
that will be produced on average, come
what may. This number stood at just 63GW
in December (see chart). Given the unusu-
al weather, says Arthur Ramos of Booz &
Co, a consultancy, “no one knows how
much power is really guaranteed.” He
thinks the government should not rule out
rationing—especially with the spike in de-
mand that is likely during the football
World Cup later this year.
Brazil’s electricity grid is more resilient
than it was in 2001, when the government
was last forced to ration energy. Fossil fuels
and nuclear power now provide a fifth of
the energy mix, up from 6% in 2000. Still,
analysts now put the risk of brownouts at
over 20%, well above the 5% that the na-
tional-grid operator thinks tolerable.
The construction of new power lines is
beset by delays. Ready plants lie idle for
want of connections to the network. With
the system operating close to the limit, says
Claudio Sales of Instituto Acende Brasil, a
think-tank, any glitch can lead to chaos. On
February 4th, 6m people suffered black-
outs after an important north-south inter-
connection failed. Aécio Neves, one of Ms
At the limit
Brazil’s power, GW
Installed capacity Average
of which: Assured* consumption
140
120
100
80
60
40
20
0 accrual accounting, which recognises rev-
D J F M A M J J A S O N D
2012 2013
Sources: CCEE; MME; ONS *Minimum available at all times
The Economist February 15th 2014
Rousseff’s likely rivals in October’s presi-
dential election, was quickto point out that
things would have been worse but for Bra-
zil’s sluggish economy. Industry used just
0.6% more energy in 2013 than in 2012.
Ms Rousseff, who launched her re-elec-
tion bid on February 10th, is unlikely to re-
nege on her promise and let electricity
prices rise. That would curb demand but
stoke already-high inflation—as well as
voters’ wrath. On the other hand, neither
does she want a reprise of the 2002 elec-
tion, when brownouts helped her own
Workers’ Party boot out the incumbent.
Over to you, St Peter. 7
Canada’s budget
Something doesn’t
add up
Toronto
The process for approving the budget is
broken
C ENTRAL to the sovereignty of parlia-
ment is that it, not the executive,
should ultimately control the public purse.
Jim Flaherty, Canada’s finance minister,
appeared to adhere to this principle when
he presented a budget on February 11th
which showed that the deficit, which
reached a whopping C$55.6 billion ($48.6
billion) in 2009, will be eliminated next
year and transformed into a surplus of
C$6.4 billion during the 2015-16 fiscal year,
just in time for an election.
The leaders of the opposition parties
did their bit by criticising the budget. So
will Canadian MPs in the coming weeks as
they debate and vote on budget-imple-
mentation bills and spending estimates.
So much for appearances. Like many fi-
nance ministers in parliamentary democ-
racies, Mr Flaherty knows the Conserva-
tive majority in the House of Commons
will approve his revenue and spending
plans even if they don’t understand them.
But Canada’s budget process is designed to
hamper rigorous scrutiny. Before he
stepped down last year as the country’s
first parliamentary-budget officer, Kevin
Page said most MPs and civil servants
would agree that “the system is broken”.
The opposition parties blame the ruling
Conservatives for the mess, but things
started to go awry when the Liberals were
in power. Unlike the Australian govern-
ment, which presents its budget and its
spending estimates on the same day, the
government in Canada presents these doc-
uments separately. In 2003 a Liberal fi-
nance minister changed the budget to full
enues and costs when they are earned and
incurred. But the more detailed spending
estimates were still accounted for on a cash 1
 The Economist February 15th 2014
2 basis, which registers when money is actu-
ally paid in and out. As a result, some of the
figures Mr Flaherty mentioned in his bud-
get speech will appear as different
amounts in the spending estimates. Some
will not appear at all. A reconciliation of
the two sets of figures no longer appears.
Scrutiny is further hampered by the
government’s taste for omnibus bills that
lump legislative changes stemming from
the budget together with other measures it
seeks. Stephen Harper, the prime minister,
railed against Liberal omnibus bills in op-
position but has taken them to new ex-
tremes in office. The 2010 budget-imple-
Bello Time to hug a Cuban
A rush to embrace a fading outpost of communism
H OW best to speed change in Cuba?
The past few weeks have brought
three different answers to that question,
from the United States, the European Un-
ion and Latin America.
For more than 50 years the official
American answer has been to try to as-
phyxiate Cuban communism through an
economic embargo, and to encourage in-
ternal dissent. It was policy as tantrum, a
counterproductive failure. Change is
coming to Cuba—but from the top, not be-
low. Since replacing his elder brother, Fi-
del, as Cuba’s president in 2008, Raúl Cas-
tro has unleashed economic reforms
which, while officially aimed at “updat-
ing socialism”, are in practice introducing
elements of capitalism. Some 450,000
Cubans work in a budding private sector
of farmers, co-operatives and small firms.
Across the Florida Straits, the changes
are causing long-monolithic support for
the embargo to crumble. A poll taken in
the United States for the Atlantic Council,
a think-tank, published on February 11th
found that 56% of respondents favoured
normalising relations with Cuba. Days
earlier Alfonso “Alfy” Fanjul, the patri-
arch of a pre-revolutionary sugar dynasty
and long a pillar of anti-Castro Miami,
told the Washington Post that he had
made two trips to his homeland, talked to
Cuban officials and would invest in Cuba
“under the right circumstances”.
Barack Obama, who briefly shook
Raúl’s hand at Nelson Mandela’s funeral
in December, has lifted some restrictions
on travel and remittances to the island.
Many observers expect him to take fur-
ther steps in that direction and to revoke
Cuba’s anachronistic designation as a
state sponsor of terrorism—once Novem-
ber’s mid-term elections are out of the
way. But only the United States Congress
can fully dismantle the embargo.
mentation bill, for example, came in at 883
pages and 2,221 clauses, all of which were
supposed to be reviewed by MPs.
Few people noticed in time in 2007
when the government took away parlia-
ment’s power to authorise borrowing and
gave it to the cabinet—because the move
was buried in an omnibus bill. (The para-
lysing stand-offs over the debt ceiling in the
United States can no longer happen in
Canada.) The second of two omnibus bills
in 2013 contained changes to the way Su-
preme Court justices are selected, an inclu-
sion some thought was illegal because it
was not mentioned in the budget and had
On February 10th the European Union,
whose members maintain economic ties
with Cuba, announced that it wants to
start talks on a “political dialogue and co-
operation agreement”. In practice many of
its members have already sloughed off a
“common position” adopted in 1996, a
kind of embargo-lite that predicated closer
links on promoting a transition to democ-
racy. The EU was at pains to stress that this
was not really a policy change, but it is.
One thing the EU will keep doing is to
complain about the lackofhuman rights in
Cuba. Latin America has already stopped
bothering. Last month Raúl hosted a gath-
ering of the Confederation of Latin Ameri-
can and Caribbean States (CELAC), a body
set up in 2011explicitly to include Cuba and
exclude the United States. In Havana the
bloc’s leaders signed a declaration that
stated that regional integration should “re-
spect…the sovereign right of each of our
peoples to choose its own form of political
and economic organisation”.
Many Latin American leaders see being
friendly to the Castros as a cost-free way of
showing that they no longer take political
direction from Washington, DC, let alone
The Americas 37
no fiscal impact.
There is no shortage of ideas on how to
improve the budget process. When first
elected, Mr Harper appointed a parliamen-
tary-budget officer to help guide MPs
through the fiscal quagmire. But the officer
does not report directly to parliament, and
Mr Harper’s government has resisted his
appeals for information. Jean-Denis Fre-
chette, who replaced Mr Page, has resorted
to filing access-to-information requests in
an unsuccessful bid to find out the details
of C$5.2 billion-worth of spending cuts an-
nounced in the 2012 budget. So much for
sovereignty. 7
Miami. (A handful would like to go fur-
ther and be like the Castros.) Yet their dec-
laration was a cavalier disavowal of the
democracy clauses inserted into many re-
gional agreements over the past two de-
cades. It smacked of double standards: so
quick to condemn dictatorships of the
right, today’s crop of centre-left leaders
are happy to give the Castros a free pass.
Oddly this rush to hug a Cuban comes
as reform shows signs of stalling. The
pace of private-sector job creation has
slowed. The government has shut down
private cinemas; it has ejected several
Western businessmen. A special eco-
nomic zone at a new Brazilian-built port
at Mariel has yet to attract foreign inves-
tors, because of the restrictions they still
face. Many Cubans felt insulted when
they were granted permission to buy new
cars—at astronomical prices.
The aim of the reforms is to allow the
private sector to create the wealth that the
state can’t. But the Communist bureauc-
racy still resists the notion that this has to
involve creating wealthy people. If Raúl
were to die before the reforms have
created a broad coalition of winners,
there would be a risk of backsliding.
In fact, the key to speeding change in
Cuba probably lies in Caracas. Thanks to
an alliance forged by Fidel and Hugo Chá-
vez, Venezuelan aid accounts for around
15% of Cuba’s GDP. Years of misrule have
brought Venezuela to the verge of an eco-
nomic implosion. It is the fear of losing
Venezuelan petrodollars, as well as ap-
prehension about the “biological factor”
(as Cubans call the death of the elderly
Castros), that drives the island’s halting
process of change. For other powers the
best way to help is through efforts that
support Cuba’s budding capitalism with-
out offering the Castros any political en-
dorsement.
 DEBT MANAGEMENT OFFICE
NIGERIA
REQUEST FOR PROPOSAL FOR BOOKRUNNERS FOR A DIASPORA BOND TO BE ISSUED IN THE
INTERNATIONAL CAPITAL MARKET BY THE FEDERAL REPUBLIC OF NIGERIA
1.0 Introduction
The Debt Management Office (DMO), on behalf of the Federal Republic of Nigeria (“FRN”)
seeks to issue a Diaspora Bond (“Diaspora Bond” or “Transaction”) for an amount of about
USD100 million to raise funds from Nigerians in Diaspora (the “Diaspora”) for the purpose of
financing capital projects while also, providing an opportunity for the Diaspora to participate
in the development of Nigeria.
For this purpose, the DMO wishes to appoint international and Nigerian bank(s) to act as
Bookrunners for the Offering. The Bookrunners will be appointed separately by the FRN but
will be required to work together and coordinate with the already appointed Financial and
Legal Advisers to ensure a successful Offering.
The intention is to register the proposed Diaspora Bond with the United States of America’s
Securities and Exchange Commission and to apply for the Diaspora Bond to be admitted to
trading on a major European Stock Exchange.
2.0 Scope of Work
The Bookrunners shall be expected to render the following services:
a) Prepare the Marketing and Distribution Strategies for the Transaction which would
include investor locations, best means for reaching the investors, as well as timing for
the Issuance;
b) Market the Diaspora Bond to target investors;
c) Secure wide subscription across various investor groups within relevant markets;
d) Collaborate with the DMO and the Advisers involved in the Transaction to ensure a
successful issuance;
e) Launch and Price the Transaction;
f) Provide the DMO and the Financial Advisers with regular updates on the demand
received and the orders collected from investors;
g) Actively manage the Bookbuilding process;
h) Manage the settlement and closing mechanics for the Transaction;
i) Provide post-Issuance support and liquidity for the Diaspora Bond in the secondary market;
j) Ensure compliance with all applicable laws for marketing and offering the Diaspora
Bond in the relevant jurisdictions; and,
k) Provide any other service that may be required for the successful issuance of the
Diaspora Bond.
3.0 Request for Proposal Procedures
Proposals must be prepared in the English Language and Bids are to be submitted
separately by interested Bidders. Joint Bids would not be allowed. All Bidders are to further
note the following:
a) The responses to this Request For Proposal should be submitted in two (2) separate
sealed envelopes, as set out below:
i. The Technical Bid which should be submitted in seven (7) hard copies;
ii. The Financial Bid which should be submitted in seven (7) hard copies;
b) Electronic submissions will not be accepted;
c) Bidders should ensure that their Bids are duly acknowledged by the DMO at the time of
submission;
d) All Bids are to be submitted to the following address:
The Director General,
Debt Management Office,
The Presidency,
First Floor, NDIC Building,
Plot 447/448, Constitution Avenue,
Central Business District,
Abuja, Nigeria.
e) All Bids must be received latest by 12.00 noon (Nigeria Time) on March 10, 2014. The
DMO reserves the right to reject any proposal not received by this time and in the form
prescribed by this Request For Proposal;
f) The Technical Bids will be opened at 1.00 p.m. on March 10, 2014. In accordance
with the provisions of the Public Procurement Act, 2007. Bidders are encouraged to be
represented at the opening of Bids;
g) Bids that do not meet the Requirements specified in Section 4.0 shall be rejected;
h) All Bidders will be notified within (2) working days of the Bid Opening through electronic
or physical mails if their Bids were accepted for further evaluation or rejected;
i) Bidders whose Bids are accepted for further evaluation will be invited for Interviews at a
date and venue to be advised by the DMO;
j) Bidders who are unsuccessful after the evaluation of their Technical Bids will be advised
within two (2) working days of the evaluation;
k) The Financial Bids will be opened once a shortlist of prospective Bookrunners has been
compiled on the basis of the evaluation of Technical Bids and the Interviews; and,
l) The Financial Bids of all the unsuccessful Bidders will be returned un-opened to their
respective addresses.
4.0 Requirements for the Technical and Financial Bids
Technical Bid
A. All Technical Bids should contain the following in the minimum:
i. Company profile, including registered address and contact email address;
ii. Evidence of registration with the relevant regulatory or supervisory authorities in the
United Kingdom, United States of America and any other jurisdiction.
B. In addition, Bids from International and Nigerian Banks should include:
i. For the International Banks:
a) A list of major cities in Europe, the United States of America and any other jurisdiction
with a diaspora population where they are present and/or have distribution capabilities;
b) Evidence of regulatory approvals to sell securities to both retail and institutional investors
in relevant jurisdictions. This includes, for the United States: the United States Securities
and Exchange Commission and for the United Kingdom: the Financial Conduct Authority
and Prudential Regulation Authority, as applicable; and
c) Minimum of two investment grade ratings from internationally recognised rating agencies.
ii. For the Nigerian Banks:
a. List of countries other than Nigeria with a diaspora population where the entity is present,
indicating if it has full-fledged operations or Representative Offices;
b. Evidence of the relevant Bank’s (i.e. at the group and/or bank, subsidiary or affiliate
level as applicable) regulatory approvals to sell securities to both retail and institutional
investors in relevant jurisdictions. This includes, for the United States: the United States
Securities and Exchange Commission or for the United Kingdom: the Financial Conduct
Authority and Prudential Regulation Authority, as applicable;
c. Minimum of two credit ratings not below BB- or its equivalent from internationally re-
cognised rating agencies or rating agencies approved by the Nigerian Securities and
Exchange Commission;
d. Registration and experience with an International Money Transfer Agency such as Western
Union Money Transfer and Moneygram Money Transfer; and,
e. Evidence of existing structures and data on Private Banking and Wealth Management
operations would be an added advantage.
C. Verifiable track record and distribution capabilities, including, where applicable:
i. Information on previous instances in which it acted as bookrunner on internationally
issued Emerging Markets sovereign bonds;
ii. Information on previous instances in which it was involved in the distribution of securities
to retail investors;
iii. Details of the size and scope of the firm’s distribution strengths (sales force, branch
offices and trading by number and relevant location);
iv. Evidence of knowledge of the Nigerian Diaspora;
v. Trading volumes in Emerging Markets sovereign bonds.
D. An indicative Marketing Strategy and Plan in not more than five (5) pages (Power Point)
showing how the bank would seek to ensure successful distribution of the Diaspora Bond
in a timely manner; and,
E. Any other evidence which it believes demonstrates its ability to successfully sell and distribute
the Diaspora Bond.
Financial Bid
Bidders should provide a quote for the Bookrunner Fees, expressed as a percentage of the total
Offer Size, along with a list of other applicable Expenses that they believe will be required to
carry out the successful Issuance of the Diaspora Bond. The Fees will be subject to all applicable
Nigerian taxes. Further, the international bank should quote in United States Dollars and the
Nigerian Bank in the Nigerian Currency (Naira).
Bidders should note that:
a) The cost for any party that may be engaged by them towards the discharge of their
function as Bookrunner shall be for their own account; and,
b) The actual Fees and Expenses to be paid may be subject to negotiation at the discretion
of the DMO.
5.0 Enquiries
Prospective Bidders that require clarification on any part of this Request for Proposal may wish
to direct requests to: enquiries@dmo.gov.ng
IMPORTANT NOTICES
a) Nothing in this advertisement shall be construed to be a commitment on the part of the
DMO to appoint Bookrunners or to issue Diaspora Bonds; nor shall it entitle any Bidder
to make any claim whatsoever and seek indemnity from the DMO by virtue of the Bidder
having responded to this Request For Proposal.
b) No costs associated with responding to this Request for Proposal or attending Interviews
will be reimbursed.
c) The information contained herein shall not constitute an offer to sell or the solicitation of
an offer to buy, nor shall there be any sale of the Diaspora Bonds referred to herein in any
jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration,
exemption from registration or qualification under the securities laws of any such jurisdiction.
Debt Management Office
The Presidency,
Plot 447/448, Constitution Avenue,
Central Business District,
P.M.B. 532 Garki, Abuja, Nigeria.
Email: enquiries@dmo.gov.ng
Website: www.dmo.gov.ng
classified@eqcp.com

Middle East and Africa
Zimbabwe’s economy
Sliding backwards again
HARARE
Robert Mugabe’s government, free of its coalition partner, risks driving the country
back down a road to poverty and despair
T HE potholes on Melbourne Road in
Southerton, an industrial district of Ha-
rare, Zimbabwe’s capital, are bone-jarring.
A van outside the J. Lyons factory, a surviv-
ing outpost of a once-grand British com-
pany, is being loaded with jars of pro-
cessed food. Otherwise the street is quiet.
The offices next door have whitewashed
windows; the gates of the factory opposite
are firmly shut. The empty buildings be-
long to Reckitt Benckiser, an Anglo-Dutch
company whose brands, including Dettol
disinfectant and Nugget shoe polish, span
60 countries—but no longer Zimbabwe.
The Reckitt factory there closed before
Christmas and has not reopened. Many
other local firms have done the same.
The closures are just one sign that the
economic recovery is stalling. This began
in 2009 when the worthless Zimbabwe
dollar was replaced by a multi-currency
system based largely on the American dol-
lar. But in the run-up to Christmas some
banks were forced to put limits on cash
withdrawals. SABMiller says lager sales
tumbled by 25% in the year to the fourth
quarter, as beer-drinkers switched to
cheaper brews based on sorghum. Con-
sumers started to feel the pinch in the sec-
ond half of last year, says Albert Katsande
of OK Zimbabwe, a big retailer. Prices are
being cut to encourage shoppers to spend
more. A country ravaged by hyperinfla-
tion, which officially reached 500 trillion
per cent in 2008, may soon have deflation.
The rot set in around the time of elec-
tions, in July, which gave a thumping vic-
tory to Robert Mugabe’s Zanu-PF party and
brought an end to its four-year coalition
with the Movement for Democratic
Change (MDC). Observers reckon that the
result was largely achieved by a massive
but cleverly contrived fraud, in particular
through the manipulation of the voters’
roll to exclude people likely to back the
MDC. But factory closures, angry queues at
banks and wilting sales offer a harder-to-
rig verdict on the new government.
Most harmful is its pledge, under the ru-
bric of “indigenisation”, to force all foreign-
and white-owned businesses to cede a 51%
stake to black Zimbabweans. This is chas-
ing away foreign capital. A 26% pay rise for
civil servants will further strain public fi-
nances already stretched by dwindling tax
revenue. And the government’s growing
list ofunpaid bills is restricting the precious
cash-flow of private businesses.
Nor is there much faith in policymak-
ers. Mr Mugabe appointed a cabinet in
September after a delay of six weeks. Its
make-up was shaped more by a need to
balance factions within Zanu-PF than by
the needs of the country. The new finance
minister, Patrick Chinamasa, delayed his
annual budget until December, then jaun-
tily forecast growth at 6.1% of GDP in 2014
after a 3.4% increase last year. Yet in reality
the economy was probably flat in 2013 and
is unlikely to do much better, says John
The Economist February 15th 2014 39
Also in this section
40 Chaos in the Central African Republic
41 Nigeria’s bad image
41 Syria’s Palestinians flee, too
42 Jewish refugees from Arab lands
For daily analysis and debate on the Middle East
and Africa, visit
Economist.com/world/middle-east-africa
Robertson, an independent local econo-
mist. Moreover, it seemed clear from the
budget statement that, despite the pleas of
local businessmen, there would be little
flexibility in the application of the indige-
nisation laws.
In any case, the legacy ofhyperinflation
limits Zimbabwe’s choices. The factories in
Southerton have out-of-date machinery
because industry could scarcely invest for
the long term when its costs were spiralling
upwards. The switch to the American dol-
lar brought stability, but at a cost. As the
dollar rises in value against other curren-
cies in the region, such as South Africa’s
rand, it makes Zimbabwean business less
competitive. Banks have no reliable back-
stop because Zimbabwe no longer prints
the money it uses. Savers will commit their
money to deposits of 90 days at most.
Banks can safely lend for long enough to fi-
nance a grocer’s turnover, but not to retool
a factory or build a hotel.
The supermarket shelves are still full,
but two-thirds of goods are imported. Ex-
port revenue does not come close to cover-
ing the import bill. The current-account
deficit last year was around 23% of GDP, ac-
cording to the budget statement, and was
funded by a mix of remittances, foreign aid
and hot money lured by the high interest
rates offered by some banks. Dollars have
become scarcer, in part, because those
sources are less forthcoming. Remittances
from the millions of Zimbabweans who
workin South Africa are likely to shrink be-
cause of the stagnating economy down
there. Western governments are charier
about dishing out aid that goes through a
government they cannot trust. And the
flow of hot money has slowed because of
bad debts in locally owned banks.
Zimbabwe needs long-term capital to
upgrade its factories, roads and power sta-
tions. Meagre local savings means this 1
40 Middle East and Africa The Economist February 15th 2014

2 must come from abroad. A group of busi-

nessmen recently toured Europe to woo in-
vestors. “In all locations, indigenisation is
the number one issue,” says Charles
Msipa, head of the Confederation of Zim-
babwe Industries, who led the delegation.
Companies, he says, are loth to invest in
ventures they cannot control. Foreign busi-
nessmen fear they will not be able to claim
an adequate share of the profit.
A stamp of approval from the IMF
would make foreigners more comfortable,
says Mr Msipa. But a staff-monitored pro-
gramme has already had to be extended by
six months because of missed deadlines
by the government, including a promise to
account more clearly for revenue from
state-owned diamond mines. A deal to
clear Zimbabwe’s huge foreign debts, in-
cluding money owed to the World Bank
and IMF, seems impossibly distant.
But without it there can be no large-
scale official borrowing by the govern- The Central African Republic
ment. Mr Chinamasa recently went to Chi-
na to drum up cash, but returned empty-
handed. China, on the business front, is
Sectarian savagery
proving no softer a touch than the West.
Fears are growing of a new fiscal crisis and
even of a return of the Zimbabwe dollar, if
ABUJA
the government can find no other way to
The situation is still out of control, as Christian militiamen (pictured above) hunt
keep itself going than printing money.
down Muslims
So Mr Mugabe and his government are
stuck. Tendai Biti, who was the MDC’s aus-
tere and widely respected finance minister
in the coalition government, says there are
U NRELENTING religious violence
across the Central African Republic
(CAR) is forcing Muslims out of the country
The CAR has been in chaos since Mus-
lim rebels seized power a year ago and
then lost it around December as Christian
easy fixes for the economy’s troubles: “Talk in droves. Aid agencies are now warning militias fought back. French troops strug-
to the West; balance the books; and man- that an exodus of Muslim traders and cat- gled to hold the ring, and the governments
age expectations to instil confidence.” tle-herders could lead to catastrophic fam- of neighbouring countries called for the
But such strictures are unlikely to be ac- ine and economic collapse. “Traders have coup leader, Michel Djotodia, to go—which
cepted by Mr Mugabe, who turns 90 this mostly left as there is little security at the he did. Since then, revenge attacks on the
month and whose health is again a source markets, the cattle-herders have fled to the Muslim minority community, including
of frenzied speculation. He has been little bush so there is very little meat, making it summary executions, torture and looting,
seen in public at home in the past few extremely expensive for us to buy. With have become more common. Muslim resi-
months, but is often in Singapore, where few means of making money, we are in dents have fled many north-western
he is thought to receive medical treatment. trouble,” said Elodie Nguerele, a Christian towns, such as Bossangoa and Bouca,
who teaches in Bangui, the capital. where there had been a sizeable and well-
Waiting for the old man to go Less than a quarter of the wholesalers established Muslim presence.
His death may open a path to reform. But who import food from neighbouring coun- The advent last month of a new presi-
the infighting that is likely to ensue could tries remain in Bangui, according to aid dent, Catherine Samba-Panza, selected by
be bitter and disruptive. Joice Mujuru, the agencies. Attacks on Muslims may encour- an assembly, raised hopes of peace. But
vice-president, and Emmerson Mnan- age the rest to flee. Residents in Bangui say sectarian attacks have persisted. Human
gagwa, the justice minister who served for that supplies of sugar and flour are critical- Rights Watch, a New York-based pressure
many years as head of security, are the ly short. The prices for staples are soaring. group, reported earlier this month that a
leading contenders for the crown, but oth- According to the UN, 1.3m of the country’s man suspected of being a Muslim rebel
ers may join the fray. Mrs Mujuru is consid- 4.6m people need food aid urgently. fighter had been lynched by uniformed
ered more amenable to an opening to the military officers. Residents in the capital re-
West and to reconciliation with the MDC, port that armed violence has slid into gen-
A

which is why it is widely assumed that the SUDAN eral lawlessness. Robberies are on the rise.
RI

CHAD
GE

death of her husband, Solomon Mujuru, a “The situation for Muslims remains
NI

former head of the army, two-and-a-half very bad and most are now fleeing to Chad
SOUTH
years ago in a fire was at the hands of a CENTRAL and Cameroon,” says Peter Bouckaert,
N

SUDAN
OO

hardline Zanu-PF faction. Bouca AFRICAN emergencies director at Human Rights

ER

Diplomats and businessmen now tend Bossangoa REPUBLIC Watch, adding that entire Muslim districts
CAM

to rule out any real political or economic Bangui in the capital have been abandoned. Tens
progress until Mr Mugabe dies. “We are of thousands of Muslims are said to have
E

just waiting for him to go,” says one of fled. The rest may follow soon, Mr Bouck-
ILL
ZAV O-

CONGO
BR CONG

them. “Until then, everything is on hold.” GABON aert says. Armed Muslim commanders
Meanwhile, the country is in danger of and fighters are regrouping in north-east-
AZ

500 km
sliding even further into penury. 7 ern towns, where they are continuing to 1
 The Economist February 15th 2014
2 carry out brutal attacks against civilians.
Despite the presence of regional troops
and French forces, who badly need and are
expecting reinforcements, the bloodshed
is still spreading. A former French com-
mander said that thousands more interna-
tional and French troops would be needed,
otherwise chaos would prevail, especially
beyond the capital and the country’s main
arterial roads to Cameroon and Chad.
Fatou Bensouda, chief prosecutor at the
International Criminal Court at The
Hague, has opened a preliminary investi-
gation into crimes against humanity in the
CAR. Mrs Bensouda said the incidents she
was looking into included “hundreds of
killings, acts of rape and sexual slavery, de-
struction of property, pillaging, torture,
forced displacement and recruitment and
use of children in hostilities”. In many inci-
dents, she noted, “victims appeared to
have been deliberately targeted on reli-
gious grounds.” 7
Nigeria’s image in Africa
Big country, thin
skin
NAIROBI
Nigeria’s president bemoans the
negative image of his country. How odd
I T WAS meant to be a friendly occasion
earlier this month at State House in Nige-
ria’s capital, Abuja, where the president,
Goodluck Jonathan, would thank foreign
diplomats for their work. But he could not
help himself, instead unleashing an angry
broadside. Foreign representatives, he
said, should correct what he deemed to be
misconceptions abroad about his country.
“The knowledge you have acquired here
should be used positively to help us as you
go back home,” he told the departing Ital-
Goodluck Jonathan wags a finger at doubting diplomats
ian ambassador.
Few diplomats dispute that Nigeria is
generally seen in a poor light by outsiders.
It is a leader in advance-fee fraud over the
internet, known globally as “419” after the
relevant (and rarely enforced) section of
Nigeria’s criminal code. Corruption is so
endemic that many visitors pay their first
bribe before they have even left the air-
port. Boko Haram, an Islamist extremist
group, has kidnapped and killed numer-
ous foreigners and has bombed the UN of-
fice in Abuja. Most of its victims are ordin-
ary Nigerians, but other groups have
kidnapped foreign oil men. One former
British government minister estimated
that 70% of all Nigerian visa applications
are fraudulent. Nigerian peacekeepers on
UN missions are often known for the effi-
ciency with which they loot the places
they are supposed to protect.
Reactions in the rest of Africa to Mr Jon-
athan’s exhortation to foreign diplomats
were predictably hostile. One caller on a
Kenyan radio talk show called Nigerians
“wordy, needy and domineering”. That
seems unfair. As Africa’s most populous
country, and arguably its most dynamic,
Nigeria is bound to upset others. Its busi-
nessmen compete fiercely across the conti-
nent. Its “Nollywood” film industry
swamps neighbours with cheap but popu-
lar fare. Aliko Dangote, a Nigerian often
called Africa’s richest man, dominates the
cement business. South Africa, long the
continent’s economic and political power-
house, is in danger of losing that title to Ni-
geria, thanks in part to the west African
country’s ebullient energy.
Many Nigerians swat away criticism as
misrepresentation. Their government vig-
orously objected to a negative portrayal in
the 2009 sci-fi film “District 9”, which
showed a Nigerian resident in Johannes-
burg selling weapons to invading aliens
and offering them prostitutes. Ministers in
Abuja were so upset that they hired a pub-
Middle East and Africa 41
lic- relations firm to “undo the damage”.
The best way to do that is surely for Mr
Jonathan and his government to tackle
their country’s manifold real-life pro-
blems. Last year the central bank’s well-re-
garded governor, Lamido Sanusi, told the
president that $20 billion was missing
from the accounts of the oil ministry—this
in a country where most ofits170m citizens
live on less than $2 a day. Mr Jonathan
called the claim “spurious” and tried to
sack the governor, who refused to go.
Corruption poisons almost all institu-
tions capable of making Nigeria work well.
The World Bank has estimated that since
independence half a century ago at least
$400 billion has gone missing from gov-
ernment coffers. How is no great secret.
Many examples are well known. Princess
Stella Oduah, the aviation minister, recent-
ly used official funds to buy two armoured
BMWs for $1.4m—small beer by the stan-
dards of some other ministers. After a pub-
lic outcry, she was sacked on February 12th.
Such retribution in Nigerian politics is still
most unusual. 7
Syria’s Palestinians
No more a haven
AMMAN
Palestinians in Syria have had enough
F OR six decades, Yarmouk, a district on
the southern edge of Damascus, was
Palestine’s capital in exile. The largest of 59
refugee camps dating back to the exodus of
Palestinians from their homeland in 1948, it
was bustling and stable. It was also where
Palestinians were best integrated into a
host country, with equal rights while pre-
serving a corner of Palestine in Syria. Lo-
cals who moved into the camp and its sur-
roundings, boosting its population from
160,000 to at least 500,000, picked up Pal-
estinian accents.
When Syria’s civil war erupted, Yar-
mouk was neutral, but staying above the
fray soon proved impossible. Rebels saw it
as a southern gateway into Damascus,
whereas government forces deemed it a
bulwark. Both treated Palestinian civilians
as unwanted guests occupying their battle-
ground.
As the rebels poured in, the regime put
Yarmouk under siege, erecting checkpoints
around it. Later they sealed Yarmouk’s
gates altogether, pounding rebel positions.
As the rebels got desperate, suspected col-
laborators with the regime were hanged at
the behest of sharia courts. Most camp resi-
dents fled, but the 18,000 with nowhere to
go burned their furniture to cook cats, dogs
and donkeys, a practice that a local imam 1
42 Middle East and Africa
Nowhere to go
2 licensed for want of alternative food.
After seven months of siege, the gov-
ernment and the rebels have agreed to a
tentative ceasefire. In part brokered by offi-
cials under the aegis of Mahmoud Abbas,
the president of the Palestinian Authority
in the Israeli-controlled West Bank, the
agreement provides for all sides to with-
draw forces and to let a committee repre-
senting a spectrum of Palestinian factions
fill the vacuum. Fatah, the largest group, is
now celebrating its official resumption of
responsibilities in Syria after an absence of
30 years, since the Assad presidencies offa-
ther and son previously supported rival
groups, including Hamas, the Palestinians’
main Islamist one, which opposes Fatah.
Little is left to go back to. Aid workers
entering the ruins say most of the camp is
rubble. Many boys there have rickets, the
result of gross malnutrition. Residents’
hands are charred from trying to warm
themselves over flames. Sporadic clashes
and sniping still halt the fitful flow of relief.
Palestinians long clung to Syria as a life
raft. In camps in Lebanon they suffered
massacres. At various times they were ex-
pelled from Iraq and Kuwait. Israel subject-
ed them to occupation. But Syria at least of-
fered sanctuary in lieu of a homeland.
Most of Yarmouk’s Palestinians have pre-
ferred displacement within Syria to flight
abroad, in part because neighbouring gov-
ernments do not want them. Although UN
officials estimate that half of Syria’s
500,000-odd Palestinians have lost their
homes, only 15% have moved abroad.
Recently, however, that has begun to
change. Boats of refugees and economic
migrants in the Mediterranean heading for
Europe have contained rising numbers of
Palestinians from Syria. Conditions have
become so bad that the people of Yarmouk
have been fleeing the country altogether. If
only, Palestinians wish, they had a home-
land of their own to go to. 7
Jewish refugees from Arab lands
Don’t forget what we lost, too
JERUSALEM
Compensation for Jews pushed out of Arab lands may become yet another issue
M UCH as Palestinian refugees and their
offspring remember the orange
groves and cinemas they lost in Jaffa when
Israel was born in 1948, Jews who once
lived in Iraq recite the qasidas—lyrical Ara-
bic poetry—and recall the time when most
of Iraq’s banks and transport companies
were run by Jews. “Iraq has gone downhill
since they forced us out,” sighs a professor
at a gathering of academics of Iraqi origin
at Or Yehuda, a Tel Aviv suburb, slipping
into Arabic. “Mubki, lamentable.”
American officials are unclear on the
subject of whether they have formally
raised the issue of Jews driven out of Arab
lands as part of their proposed framework
to establish an international fund to com-
pensate Palestinians who fled the new
state of Israel in 1948. But leaders of Israel’s
Sephardic Jews (most of whom came from
Arab lands) criticise their own negotiators
for not raising the issue more forcefully.
“Why does Israel ask for compensation
for Holocaust victims but not for the Jews
from the Arab world?” asks Levana Zamir,
leader of an association for Egyptian Jews
in Israel. “Because our leaders are Ashke-
nazi [European Jews], and we are Mizra-
him [Orientals],” she says. “We had anoth-
er kind of Shoah [Holocaust]. A million
Jews [from Arab lands] lost everything.”
Tzipi Livni, Israel’s chief negotiator, an
Ashkenazi, fears that adding such topics
could complicate to distraction efforts to
resolve matters arising from Israel’s occu-
Among the Muslims
Jewish residents in mainly Muslim countries
1948, ’000 (Total 899,000)
0 50 100 150 200
Morocco*
Iraq
Algeria
Iran
Egypt
Tunisia
Turkey
Yemen†
Libya
Syria
Lebanon
Afghanistan
Other
*Included Spanish territories and Tangier
†Included Aden
Source: World Jewish Congress
The Economist February 15th 2014
pation of the Gaza Strip and the West Bank
after the six-day Arab-Israeli war of 1967.
For some Israelis, that may be just the idea.
Binyamin Netanyahu, Israel’s prime minis-
ter, has repeatedly raised the issue, appar-
ently to offset any claims for compensation
from the Palestinians uprooted in 1948,
750,000 of whom fled abroad and 150,000
of whom were displaced within what be-
came Israel. Mr Netanyahu’s ministry for
senior citizens has opened a hotline for
claimants to register lost property in the
Arab and Muslim world (including Turkey
and Iran), which, campaigners argue, will
exceed the price-tag of between $20 billion
and $100 billion which Israeli officials pri-
vately put on Palestinian claims.
Palestinians are as sceptical as Ms Livni
about recognising a Jewish nakba (or catas-
trophe, the word Palestinians use to de-
scribe what happened in 1948). It would
merely add more knots, they say, to the tan-
gle of negotiations. In any event, Israel’s Zi-
onist leaders promoted the idea of Jews
finding their real home, thus never consid-
ering them refugees. To bolster their fledg-
ling state, they sent agents from Mossad,
their foreign intelligence service, to “in-
gather” Jews with airlifts from the Arab
world. Fearing another post-war slaughter,
Zionist spokesmen campaigned for “their
quicktransfer…to the new Jewish state”, as
the New York Times reported at the time.
Despite the complications, though, a
compensation scheme for Israel’s Mizra-
him could give the negotiations a political
boost. Making up an estimated 55% of Is-
raeli Jews, Mizrahim have tended to vote
for right-wing parties loth to cut a deal that
would bring about a Palestinian state,
250 partly because they still harbour griev-
ances over their own dispossession after
1948. Turning them into stakeholders could
raise the number of Israelis voting for a set-
tlement in a referendum. “Of course, we
would support it, if our rights are recog-
nised,” says Shmuel Moreh, an Iraqi-born
professor of Arabic literature at Israel’s He-
brew University, who forsook his Baghdad
home laden with silver chandeliers for a
tent in Or Yehuda, when the suburb was
just a muddy camp for Jewish exiles.
Compensation for Jewish as well as
Arab victims of Israel’s creation could also
help pave a way to Israel’s normalisation
with the Arab world, says Ehud Eiran, an
Israeli academic, just as Germany’s com-
pensation scheme for Holocaust victims
improved Israel’s relations with Europe. 7
 The Economist February 15th 2014 43
Europe
Putin and the media Also in this section

Dreams about Russia 44 Censorship in Turkey

45 French reforms
45 Dutch angst
46 Protests in Bosnia
MOSCOW AND SOCHI 46 The Cyprus problem
Beyond the spectacle of the Sochi Olympics is a crackdown on Russia’s media
47 Charlemagne: Switzerland’s

T HE opening ceremony of the Sochi with Russia Today, a foreign-language pro-

Olympics on February 7th had pa- paganda channel. The consolidation of
nache. A troika of light floated above the media assets coincides with the vaunting
crossbow

stage, colourful domes of St Basil’s lifted of traditional values and the penalising of by his own appearances. Marginal in size,
into the air and a magical dance from “War free speech. it captured the spirit of the young, creative
and Peace” gave way to a study of the Bol- On the eve of the Olympics, Mr Kise- Moscow types who protested against the
shevik revolution drowned in red light. lev’s masters launched a campaign against Kremlin in December 2011. But its reach
The “Dream about Russia” show, produced Dozhd, a private cable and internet TV grew fast to 18m homes, including many
by Konstantin Ernst, the head of Russia’s channel. The brainchild of Natalia Sin- outside Moscow.
Channel One, with the help of American deeva, a 42-year-old media entrepreneur, it Recently Kremlin propagandists have
technicians, conjured up a modern, so- is financed by her husband, Alexander Vi- unleashed a hate-campaign against
phisticated European country proud of its nokurov. “I wanted to create a channel for Dozhd. Cable-TV operators have been in-
culture and its history: “the country I want people like us,” says Ms Sindeeva. Its structed to drop it from their packages, de-
to live in,” tweeted Ksenia Sobchak, a so- young journalists rejected everything Mr priving the channel of advertising rev-
cialite and journalist. Kiselev stands for. It came on air in 2010, enues. The trigger for the crackdown was
But there was a glitch: one of the five during the presidency of Dmitry Medve- probably Dozhd’s reports ofa luxury coun-
snowflakes did not unfold into an Olym- dev (now prime minister), who endorsed it try estate belonging to Vyacheslav Volo-
pic ring. The response of state tele- din, deputy head of the Kremlin ad-
vision was immediate and telling: ministration, as well as of protests
instead of letting the mishap pass, in Ukraine. But, as Ms Sindeeva
the live feed was instantly replaced says, what irritated the Kremlin
with a recording from a rehearsal. most was Dozhd’s independence.
This substitution of reality is just Although the state formally con-
one measure that gives the Russian trols only two main broadcasters,
media a whiff of Orwell’s “1984”. many private ones come directly or
Just as Vladimir Putin’s greatest indirectly under a media empire of
project has been protected from ter- Yury Kovalchuk, a friend of Mr Pu-
rorist attack by a “ring of steel”, so tin. Besides National Media Group,
the president himself is protected which has stakes in three TV chan-
from political subversion by a vir- nels, including 25% of Channel
tual “ring of steel” surrounding the One, Mr Kovalchuk also has a large
media. Channel One has re- indirect stake in Gazprom Media,
branded itself as “First Olympic” Russia’s largest media group, which
and dressed its presenters in Rus- owns five television channels, sev-
sian sports uniforms. Any critic of eral radio stations and a publishing
the Olympics has been branded an company. Gazprom Media’s struc-
enemy. Editors have been warned ture is complex: it is 100%-owned
that carping reports would threat- by Gazprom bank, almost half of
en their publication’s survival. which belongs to Gazprom’s pen-
In the run-up to the Olympics sion fund. Most of this is managed
the state-dominated media have by a firm linked to Mr Kovalchuk.
been purged. A wave of consolida- Companies linked to Mr Koval-
tion began with RIA Novosti, the chuk also control most television
state news agency, which was al- advertising. In 2010 he bought Vid-
ways loyal to the Kremlin but in a eo International, Russia’s largest ad-
subtly intelligent way. Svetlana Mi- vertising agency. Gazprom Media
ronyuk spent ten years reviving the and Video International account
RIA Novosti brand and turning it for two-thirds of the country’s tele-
into a modern multi-language ser- vision-advertising market. Until re-
vice that tried to project an image of cently Mr Kovalchuk played almost
Russia similar to the one in the So- no role in Gazprom Media, but he
chi opening ceremony. But in De- has recently been more active, say
cember she was replaced by Dmi- insiders. He was involved in the ap-
try Kiselev, a television presenter pointment of Mikhail Lesin, a foun-
whose venomous anti-American der of Video International, as head
and homophobic rants would have of Gazprom Media.
been extreme even in Soviet times. Mr Lesin is no stranger to Gaz-
RIA Novosti itself has been lumped Now you see it, now you still see it prom Media assets. Most of them, 1
44 Europe
2 including NTV, were seized from Vladimir
Gusinsky, a media tycoon who created
them and then fled the country after Mr
Putin’s arrival in the Kremlin in 2000. Mr
Lesin, then minister for press and mass
communications, endorsed a secret agree-
ment under which Mr Gusinsky was made
to sell his assets to Gazprom in exchange
for his own freedom and safety. The agree-
ment served as evidence in the European
Court of Human Rights that the attacks on
Mr Gusinsky were politically motivated
and in breach of the European convention.
As head of Gazprom Media, Mr Lesin last
autumn negotiated the purchase of media
assets from Vladimir Potanin, another Yelt-
sin-era oligarch.
One radio station, Echo Moskvy, which
is two-thirds owned by Gazprom Media
and one-third by Mr Gusinsky’s American
firm, has kept its independence, largely
thanks to the personal relationship of its
editor, Alexei Venediktov, with Mr Putin.
But this may soon come to an end. Next
weekGazprom Media will hold an extraor-
dinary shareholder meeting that could re-
place Echo’s long-serving chief executive
with one of Mr Lesin’s protégés. Tellingly,
Echo Moskvy has come under fire for a
blog on its website comparing the Sochi
Olympics to the 1936 Berlin Olympics. Us-
ing classic Soviet language, deputies from
the ruling United Russia party have de-
nounced this as part of an “anti-Sochi cam-
paign unleashed in the Western media”.
The state is also strengthening its grip
on the internet. One of the country’s most
popular social networks, V Kontakte, has
been taken over by a Kremlin-friendly oli-
garch, Alisher Usmanov. A new law, hastily
pushed through the Duma, allows Russian
authorities to block internet sites without a
court order on the grounds of vaguely de-
fined “extremism”.
As somebody who lived through the
end of the Soviet Union, Mr Putin is well
aware of the dangers of a free media. The
Soviet Union was supported by repression
and ideology. Once these twin pillars were
removed it came tumbling down. Mr Pu-
tin’s main instrument of governance has
been money that bought loyalty. But with
the economy slowing and the currency
wobbling, Mr Putin is now trying to rein-
force his position.
The media can create and hunt enemies
both in the country and abroad, blaming
Russia’s troubles on traitors and ill-wish-
ers. Meeting a public council in Sochi, Mr
Putin likened Western criticism of Russia
to the “deterrence theory aimed at hinder-
ing the development of the Soviet Union.
Now we are seeing the same thing.” The
Sochi Olympics were meant to mobilise
the Russian people for a new struggle. But,
without a freer media, the sophisticated
and civilised country unveiled in the open-
ing ceremony will remain as its title sug-
gests: a dream. 7
Censorship in Turkey
Web conspiracies
ISTANBUL
A bill imposing restrictions on the internet presents Turkey’s president with a
dilemma
W ILL he or won’t he? All eyes are on
Turkey’s president, Abdullah Gul, a
co-founder with the prime minister, Recep
Tayyip Erdogan, of the ruling Justice and
Development (AK) party. A bill imposing
drastic curbs on the internet, which critics
say would put Turkey on a par with Iran
and China, has been rammed through the
AK-dominated parliament, to howls of
protest from the opposition and the Euro-
pean Union. The bill lets Turkey’s telecom-
munications authority (TIB) block any
website without first seeking a court rul-
ing. It also allows TIB arbitrarily to efface
“offensive” content without users being
any the wiser. And it obliges internet-ser-
vice providers to store all data on web us-
ers’ activities for two years and to give their
profiles to the authorities on demand.
Pressure is mounting on Mr Gul, an
avid user of Twitter, not to sign the bill.
“Stand tall,” appealed Cuneyt Ozdemir, a
current-affairs host at CNN Turk. “The last
thing Turkey needs right now is more cen-
sorship,” said Emma Sinclair-Webb of Hu-
man Rights Watch, a New York-based lob-
by group. The government says the law is
needed to defend “the sanctity of personal
privacy”. Some AK deputies have suggest-
ed that its critics are acting on behalf of a
“pornography lobby”. More probably, its
aim is to stop a slew of secretly taped re-
cordings, compiled by prosecutors to docu-
ment the bribery, tender-rigging and mon-
ey-laundering charges being levelled
Banging the drum for the internet
The Economist February 15th 2014
against AK ministers and their relations,
from being accessed online.
Mr Gul, who has tried to balance his
democratic credentials with his political
ambitions, is in a bind. His position has be-
come trickier since anti-government prot-
ests erupted over Istanbul’s Gezi Park last
summer. At the height of the unrest Mr Gul
made a few noises reminding the govern-
ment that democracy was not just about
the ballot box. But critics say he ought to
have been firmer in the face of unfettered
police brutality that left five people dead
and thousands wounded.
Mr Gul’s term expires in August, and it
is widely assumed that he would like to
swap jobs with Mr Erdogan. But the impe-
rious Mr Erdogan would prefer a more pli-
ant successor so that he can continue to call
the shots from Cankaya Palace. If Mr Gul
vetoes the internet law, Mr Erdogan could
tout this as “proof” that the president is sid-
ing with Fethullah Gulen, an influential
cleric based in Pennsylvania. Mr Erdogan
insists that Mr Gulen is behind a global
plot to overthrow him. Although he has
yet to offer evidence, he is threatening to
prosecute the Gulenists on conspiracy
charges. In an ominous sign, Mahir Zeyna-
lov, an Azerbaijani journalist who writes
for an English-language daily owned by
Gulenists, was deported last week for
tweeting critical stories about Mr Erdogan.
Mr Gul did not utter a peep.
If Mr Gul signs the internet-censorship
bill, it will dent his global standing. It may
also reduce his chances of being re-elected
as president in the event that Mr Erdogan
decides instead to run for the premiership
for a fourth time. Mr Erdogan has already
hinted that he may rewrite the internal
party rules that bar him from a fourth term.
As the sleaze allegations against AK contin-
ue to pile up, his dreams of becoming Tur-
key’s first popularly elected president are
beginning to fade. Re-election to the Turk-
ish parliament would give Mr Erdogan im-
munity against prosecution.
Opinion polls suggest that AK contin-
ues to command 40-50% support among
Turkish voters. But another leaked conver-
sation between Mr Erdogan’s son, Bilal,
and a senior television and newspaper
editor, in which they discuss fiddling the
results of an opinion poll, has cast a further
shadow. An unfazed Mr Erdogan has ad-
mitted that he telephoned the same editor
to complain about giving Devlet Bahceli, a
far-right rival, too much airtime. 7
 The Economist February 15th 2014
French reforms
Taxi wars
PARIS
A case study of vested interests trying to
fight off new competitors
“P ARIS is the only city in the world
where it is hard to find a taxi.” So in
2008 said an embarrassed Nicolas Sarkozy,
then France’s president, exasperated by the
near-impossibility of hailing a cab on the
capital’s streets. He vowed to fix the pro-
blem, but backed down after cabbies
blocked the streets during days of protest.
Six years on, his Socialist successor, Fran-
çois Hollande, is again facing up to taxi
drivers, this time as incumbents try to keep
out smartphone-enabled private cabs.
In rolling strikes this week, scores of li-
censed taxi drivers jammed the traffic by
blocking intermittently the ring-road or pé-
riphérique, access to airports and the Place
de la Concorde. Their gripe? The emer-
gence of new private cab services, known
as voitures de tourisme avec chauffeur,
which can be ordered via a mobile app.
With 17,600 licensed taxis, the Paris region
is not far off London’s total of 22,000 black
cabs. But the French capital has a dearth of
minicabs: just a few thousand, against
50,000 in London. Until recently, it has
been all but impossible in Paris to pre-book
reasonably priced, fixed-fare trips.
The arrival of start-ups such as Snap-
Car, AlloCab or Uber, a San Francisco-
based operator, which supply a clean car
and a friendly ride at a click, has been a rev-
elation. Their growth was unleashed by a
2009 law, originally meant to deregulate
the chauffeured-car tourist market. This
was far from the wholesale liberalisation
of the taxi industry Mr Sarkozy had once
sought: his adviser, Jacques Attali, wanted
up to 60,000 taxis and cabs on the Paris
streets. And taxis still have a monopoly on
kerbside hailing. Yet the new operators
have shaken up the market and enraged
Dutch angst
We need to talk about Europe
A report on the benefits of leaving is flawed, but it ignites a new debate
L EAVING the European Union would
save every Dutch household €9,800
($13,400) a year by 2035, claims Capital
Economics, a London consultancy, in a
report commissioned by Geert Wilders’
far-right PVV party. Mr Wilders calls this
“the best news in years”, painting a pic-
ture of a country freed from the choke-
hold of Brussels, mass migration and
high taxes, and enjoying more trade,
more jobs and a booming economy.
The report lists the benefits of depar-
ture, or “Nexit”: lower business costs
because of less regulation; no more net
payments to the EU; a doubling of the
share of trade with emerging markets;
faster economic recovery. The only cost is
the transition from the euro to a new
guilder, and this is “modest and manage-
able”. The report concludes that Dutch
GDP would be 10-13% higher by 2035.
This finds a receptive audience among
those Dutch who are looking for scape-
goats. Unemployment has doubled since
2008 and the economy is flat. A recent
poll finds a majority of Dutch voters in
favour of leaving the EU if that would
lead to more jobs and growth. The PVV is
leading in opinion polls before the Euro-
pean elections in May.
Yet there are problems with the Capi-
tal Economics report. The idea that the
economy would miraculously recover if
freed from the European Central Bank’s
policies ignores the structural failings
that hold it back. The assumption that
having the guilder would allow a much
looser monetary policy is, at best, ques-
tionable. And it defies political reality to
imagine that the post-Nexit Netherlands
would enjoy virtually cost-free access to
the EU’s single market, which takes 75% of
Dutch exports. Norway and Switzerland
taxi drivers. Incumbents’ licences, the
numbers of which are limited, now trade
for around €200,000 ($270,000). The taxi
lobby argues that drivers’ livelihoods are
under threat from the competition. Last
month the protests turned nasty when
some of Uber’s cars were smashed up.
Despite his new pro-reform image, Mr
Hollande’s approach has scarcely been
start-up-friendly. Beginning in January the
government imposed on private cabs a 15-
minute wait before picking up passengers,
but this decree has been suspended by the
State Council, the highest administrative
court. In response to the protests, the gov-
ernment has appointed a Socialist deputy
as a mediator. He accused the Sarkozy gov-
Europe 45
both pay for the privilege and have to
comply with most EU laws and regu-
lations; the latest Swiss vote for quotas on
EU migration threatens the entire rela-
tionship (see Charlemagne).
Despite its flaws, the report fires a
welcome starting-gun for a debate about
what is good and bad about the EU. Some
66% of the Dutch feel their “No” vote in
the 2005 referendum on the EU constitu-
tion was largely ignored. If regulation
costs as much as the report claims, and if
the ECB’s monetary policy is too restric-
tive, both should be changed. Defenders
of the EU also need to stress its less tangi-
ble benefits, such as peace, shared in-
terests and the boost to the fight against
cross-border crime.
Like many Europeans, the Dutch ask
why jobs are scarce, why they cannot sell
their houses and why life is so expensive.
Mr Wilders has a simple answer. Those
who disagree must work to convince
voters that Nexit would be a disaster.
Give and take
Net EU budget contribution per person, 2012, €
Net national contribution as % of GDP
400 300 200 100 + 0 – 100 200
Germany -0.45
Netherlands -0.39
France -0.40
Britain -0.38
Italy -0.32
Norway* -0.03
Switzerland* -0.02
Spain 0.39
Poland 3.20
Sources: European *Net contributions to budget
Commission; Eurostat; programmes in which non-EU
Directorate-General for budget countries participate
ernment of “lighting a powder keg” by
starting deregulation in the first place.
For their part, the start-ups want the de-
cree outlawed. The competition authority
was against it on the grounds that it would
make consumers worse off. This is a novel
argument in a country where producer
lobbies are powerful and the state is un-
comfortable about technology disrupting
markets. Now that Parisians have begun to
see how nice and convenient cabs can be,
attitudes may change. “People in France
are fed up with monopolies,” argues
Pierre-Dimitri Gore-Coty, head of Uber in
France. “The French now realise that in real
life more competition brings innovation
and improves the level of service.” 7
46 Europe
Protests in Bosnia
On fire
The latest troubles in Bosnia may wake up the country’s inept leaders
“W HY is there no sex in state firms
and government offices?” de-
mands a Bosnian protester in a clip that
has gone viral. The answer: rampant nepo-
tism means everyone is related. Protests
that began in the northern city of Tuzla on
February 4th have spread across the coun-
try. They may fizzle, but they might just sig-
nal the beginning of the end of Bosnia’s
post-war system of governance.
The protests in Tuzla were started by
workers from five privatised companies
that went bust after they had been stripped
of their assets. By February 8th the protests
had spread and violence had broken out.
Several government offices, including the
presidential building in Sarajevo, were set
on fire. The violence and beatings by the
police were widely condemned. But as Da-
mir Arsenijevic, an activist in Tuzla, com-
ments: “Tough luck.” The damage caused is
nothing, he says, compared with the “bil-
lions stolen from people”, by Bosnia’s poli-
ticians. In Tuzla and three other regions the
leadership has quit.
It is not surprising that Bosnians are an-
gry. Eighteen years after the end of the war
the people are poor, the politicians are rich
and corruption is rife. To get a job as a
cleaner in the hospital in Tuzla, the current
bribe is said to be €2,000 ($2,700). For a job
in one of the country’s main telephone
companies it is €10,000. The unemploy-
ment rate stands at 27.5%—though the black
economy helps the jobless get by.
Part of the problem is the legacy of the
Dayton peace deal that ended Bosnia’s
war in 1995. The country is divided into
two “entities” (plus an autonomous dis-
trict, Brcko). The Bosniak-Croat Federation
is itself divided into ten cantons that com-
pete with local governments. The result is a
system that pays large salaries to politi-
C R O A T I A
BRCKO
REPUBLIKA
Banja SRPSKA
Luka
Tuzla
B O S N I A
SERBIA
Srebrenica
BOSNIAK-CROAT Sarajevo
FEDERATION
Mostar
MON TE N E G RO
Adriatic Podgorica
Sea
cians and civil servants in a country of just
3.8m which, some say, needs only a mayor.
Most of the protests have been in Bos-
niak areas. Politicians are lashing out at
“hooligans” and concocting conspiracy
theories in which mysterious agents whip
up trouble on the orders of foreigners or
other ethnic groups. Yet Mladen Bosic,
leader ofthe opposition party in Republika
Srpska, the other, mainly Serb, part of the
country, says its government and president
“are shoving their heads into the ground
and acting like ostriches” if they deny that
people are even more disgruntled than in
the Bosniak-Croat zone. Small groups prot-
The Cyprus problem
A glimmer of hope
ATHENS
Yet another round of talks to reunify the divided island begins
A FTER years of foot-dragging by Greek-
Cypriot leaders, who have been
keener to block Turkey’s efforts to join the
European Union than to end the island’s
40-year division, new talks on reunifying
Cyprus are to start. Unlike his predeces-
sors, President Nicos Anastasiades wants
a deal with Dervis Eroglu, his Turkish-
Cypriot counterpart. According to a
“road-map” put forward by the two men
when they met on the UN’s “green line”
on February 11th, the two communities
would unite under a confederation but
run their affairs as “constituent states”.
So far, so good. But can tricky issues
like property and security, which have
sunk previous talks, be resolved this
time? It helps that the Americans are
involved; they have prodded officials in
Ankara and Nicosia to back the new
proposal. The talks will be held as usual
100 km under UN sponsorship. For the first time
the two leaders insist that they want to
see results and aim to reach a deal “as
Belgrade
soon as possible”.
Recent discoveries of gas in the east-
ern Mediterranean could be a catalyst for
building an energy partnership that
would include Turkey, say the Ameri-
cans. The simplest way of getting the gas
to energy-hungry Europe would be
through a pipeline to Turkey. (A Greek-
Cypriot plan to build a gas terminal on
KOS.
Cyprus and an undersea pipeline to
Crete, Greece and Italy, is seen as expen-
ALBANIA
The Economist February 15th 2014
esting in Republika Srpska have been in-
timidated by Serb nationalists.
So far protesters have been resolutely
anti-nationalist. Now something extraor-
dinary is happening. Led by Tuzla, so-
called “plenums” of fed-up citizens, unem-
ployed workers and intellectuals are
springing up to make political demands.
On February 11th elected members of Tu-
zla’s cantonal assembly met its plenum to
discuss the idea of a government of non-
party experts. In the ethnically divided city
of Mostar, Croats and Bosniaks are also
working together in a plenum.
If the plenums take root, if new leaders
emerge and if they focus on realistic de-
mands, something might really change.
Over the past few years leaders in Bosnia
have endlessly debated minor constitu-
tional tweaks while managing to avoid de-
bate about economic and social reforms.
“It is not going to be the same old story any
more,” insists Mr Arsenijevic. It may be too
early to talkofa Bosnian spring, but it is still
only February. 7
sive and impracticable.) Three-way co-
operation could also reduce instability in
a fractious region.
The road-map is already known in
Nicosia as the “Obama plan”—a nod to
the Annan plan, named after the UN
secretary-general, Kofi Annan, which was
rejected by Greek-Cypriots just days
before Cyprus joined the European
Union in 2004. That meant the Turkish-
Cypriots were excluded from the benefits
of membership, even though they had
backed the plan in a separate vote. Mr
Anastasiades, leader of the conservative
Democratic Rally party, was the only
heavyweight Greek-Cypriot politician to
back the Annan plan. This time he has
Akel, Cyprus’s communists, on his side.
Together, the two parties could win a
referendum on the Obama plan.
Cyprus is still reeling from last year’s
bank collapse in which many depositors
lost big chunks of their savings. Capital
controls remain in place under the terms
of a €10 billion bail-out by the EU and
IMF, putting a squeeze on business. GDP
shrank by 6% in 2013 and unemployment
is at a record 17%. Reunification should
speed recovery and promote faster
growth. Yet the mood remains cautious:
after all, this is the fifth or sixth round of
talks. One Nicosia businessman recalls
the words of a British diplomat, David
Hannay: “Nobody ever lost money bet-
ting against a Cyprus solution.”
 The Economist February 15th 2014
Charlemagne Switzerland’s crossbow
The referendum on Europe's freedom of movement will have big consequences
T HE Swiss have had a reputation for doughty independence
since the days of William Tell. He was made to shoot an apple
off his son’s head with his crossbow; in revenge, he killed the ty-
rannical overlord and ignited a successful revolt against the Habs-
burgs. This week the bolt struck at the European Union, when the
Swiss voted for restrictions on Europe’s much-cherished free
movement of people. To surging anti-EU and anti-immigrant par-
ties, the referendum on February 9th was a victory for Switzer-
land’s “braggart spirit of freedom”, as Friedrich Schiller called it in
his play about Tell. The Swiss government and business elite
have been transfixed by a decision both opposed. The European
establishment is scrambling to respond.
Switzerland is a member neither of the EU nor of the looser
European Economic Area (EEA) that includes Norway, Iceland
and Liechtenstein. Nevertheless a web of more than 100 bilateral
treaties binds the Swiss tightly into the “four freedoms” of move-
ment underpinning the EU’s single market: of goods, services,
people and capital. The repudiation of any one of these puts in
question Switzerland’s ability to benefit from the others. And the
vote has an impact well beyond the Alps.
To begin with, it confirms EU leaders’ fear of referendums.
They also worry that it might inspire radicals of left and right who
are expected to do well in May’s European election. In Britain,
France and the Netherlands polls suggest populists may come
first or second. In Norway (a member of the EEA, but not the EU),
the right-wing Freedom Party, part of the ruling coalition, wants a
referendum to curb immigration. François Fillon, a former French
prime minister, is among those wanting to emulate the Swiss in
placing annual limits on immigrants. The fate of Switzerland also
has implications for David Cameron, who wants to renegotiate
Britain’s membership of the EU and put the result to a referen-
dum by 2017. Curbing the freedom of movement has become one
of his demands. British Eurosceptics see Switzerland as an exam-
ple of how Britain could thrive outside the EU.
So the EU’s leaders face a dilemma. Should they come down
hard on the Swiss, make an example of them to uphold a funda-
mental EU principle and tell them (and the British) that they can-
not cherry-pick EU membership? Or should they act softly for
fear of causing a populist avalanche? For now the tactic has been
Europe 47
to threaten worrying but still-unspecified “consequences”, while
avoiding a full-blown confrontation. One reason to wait is that,
although Swiss voters have spoken, their precise wishes on sever-
al complex issues can only be guessed at. The Swiss federal gov-
ernment has three years to turn the constitutional amendment
into legislation setting quotas for immigrants, regardless of na-
tionality, including cross-border commuters.
The drama will be played out over several acts. The immedi-
ate questions are whether the existing freedom to work in Swit-
zerland will be extended to the newest EU member, Croatia, and
whether transitional quotas on migrants from most of the EU will
be scrapped, as planned, this year. The referendum forbids the
government from concluding contrary treaties, so it will probably
not dare to sign a new protocol to include Croatia. That means it
will almost certainly be shut out of the EU’s Erasmus programme
of student exchanges between European universities and from
Horizon 2020, the EU’s scientific-research programme which
benefits Swiss establishments.
The second act will concern negotiations on an “institutional
framework” between Switzerland and the EU to strengthen the
monitoring and enforcement of single-market rules. This is a de-
mand from Brussels, and a prerequisite for plans to incorporate
Switzerland fully into the EU’s electricity market. Talks on both
have now been suspended.
The climax will come when the Swiss government drafts its
new laws by the end of the year. It has some wiggle-room, as quo-
tas should take account of the “global economic interests of Swit-
zerland”. The Swiss could, in theory, set a higher ceiling than the
current level of immigration; or they could set an overall cap
without specifying one for EU citizens. But the likeliest outcome is
that the Swiss will, sooner or later, breach the freedom of move-
ment provisions agreed in 1999. Under a guillotine clause, such a
breach would annul six other economic agreements struck at the
time. Other accords such as Switzerland’s participation in the
Schengen passport-free travel zone may also come apart.
Schiller’s verdict
Far from firing a crossbow-shot for freedom, Swiss voters have
ended up harming themselves. Their economy is far more depen-
dent on trade with the EU than vice versa; their world-leading
companies rely on skilled foreign workers; and proportionately
more Swiss live in the EU than the other way around. It is also
hard to feel sorry for wealthy Swiss, who seem keener to take Eu-
rope’s tax-dodging money than its people. For the most part the
Swiss gripe is not about poor, distant immigrants but about rich
neighbours driving up house prices and clogging the motorways.
The referendum was won only narrowly, with a majority of
50.3%, and revealed the country’s dividing lines. French-speaking
cantons voted against the referendum, while German- and Ital-
ian-speaking ones mostly voted for; cities were against, while ru-
ral communities little affected by immigrants were in favour.
The EU should not treat the vote as an act of treason, but nei-
ther should Eurosceptics celebrate too soon. It is one thing for the
Swiss to reject the rules of a club they refused to join; another for
EU countries to wreck their own union. Schiller put it starkly: Tell
shot the cruel Austrian governor in self-defence, but the killing of
the emperor by his nephew, Duke John, was murder, a “crime of
blood-imbued ambition”. 7
Economist.com/blogs/charlemagne
 The Economist February 15th 2014 49
Britain
Also in this section
50 Another crack at forward guidance
52 Bagehot: The British Vikings

For daily analysis and debate on Britain, visit

Economist.com/britain

The floods Sturdy of the Somerset drainage board.

Both the National Union of Farmers
High water everywhere and local MPs insist that Somerset’s water-
ways ought to have been dredged more
regularly: parts of one river there are down
to as little as two-thirds of its capacity in
the 1960s. But the sheer amount of rain
SHEPPERTON
makes it highly unlikely that dredging
Ordinary Britons have so far coped admirably with widespread flooding. But the
would have prevented, or even much de-
rain is still falling
layed, these floods. Dredging can make

J OHN LEE likes to tinker with vehicles: his

four-wheel-drive resembles a tractor
more than a car. “It’s watertight,” he
beams. For the past week he has been driv-
ing down sodden lanes in Surrey, south-
west of London, transporting people and
medicines. Flooding is a misery, but at least
it provides an opportunity to show off a set
of wheels.
Much of southern England is now sod-
den, and parts of the Thames Valley and
Somerset are simply underwater (see
map). In Shepperton, a town in Surrey, the
village green used for the summer fete is
best reached by canoe. In Devon a sea wall
has collapsed, shutting down a vital rail-
way link to the south-west. As The Econo-
mist went to press16 severe flood warnings
had been issued by the Environment Agen-
cy, a much-criticised quango that oversees
flood defence.
Floods are like snowflakes, says An-
drew McKenzie of the British Geological
Survey, a research body: none is quite like
another. Rivers can overflow, as in Somer-
set. Groundwater can flood, as in the
unusually prolonged, falling on 23 days out
of 31, a four-decade record. Rain continues
to fall on this sodden ground. As a result,
flooding worse, by conveying water to the
next town more quickly.
Meanwhile many flood defences are
the Thames river has been running high quietly doing their jobs fairly well. In
for longer than at any point since records Bridgwater, a town in Somerset, a robust
began in 1883. The calamitous floods that flood wall and large tidal enhancements
struck England in 1947, by contrast, were downstream have so far kept the peaks of
over much more quickly. high tide at bay. The Jubilee river, an over-
Fingers have been pointed at the gov- flow channel for the Thames that opened
ernment, for squeezing the Environment in 2002, is protecting parts of the south-
Agency’s budget. According to the Com- east. As some people in Surrey point out
mittee on Climate Change, an indepen- bitterly, the Thames Barrier has kept flood
dent body, government funding for flood water out of nearly all of London. By con-
management between 2011 and 2015 will trast, in 1947 about 27,000 houses in Britain
be less than in the previous four years, were reported flooded and perhaps a mil-
even in cash terms. The maintenance bud- lion Londoners lost their water supply. An-
get was cut particularly savagely, says Iain other flood in 1953 was even worse: a huge 1
Oxford 25 km
Flood warnings
(As of Feb 12th 2014) Jubilee
Somerset Levels Canvey
Henley-on-Thames GREATER LONDON Island
Source: Environment Agency
Maidenhead
s
WALES e t
KenHnAMP
Reading
BERKSHIRE Windsor Tha m e
Thames
SHIR
E N G L A E DNOW D
Shepperton Barrier
NS
S U R R E Y
Pa

Thames Valley. Tides can surge, inundating

s
Te
r re

Bridgwater
tt

villages, as they have in Lincolnshire. Rain S O M E R S E T Salisbury

hen

Tone
b le

can pound down too quickly to be ab-

Itc

n
am

Meo

sorbed. None of these is rare on its own. H

Avon

Southampton
But over the past two months Britain has D E V O N
been subject to the whole lot, often in com- Poole
bination, over a large area. Frome
English
Last month was the wettest January in Channel
southern England since 1910. The rain was
50 Britain
2 storm hit the east coast, killing 307 people.
Such events have been too easily forgot-
ten by a more transient society, argues Ter-
ry Marsh, a hydrologist. Flooding ought to
be an accepted, if very rare, part of life.
“Even in places called Watery Lane the
message is not absorbed,” he says. West of
London the Thames “is exercising its natu-
ral sovereignty,” he reckons.
The waterlogged will not be comforted
by that thought. Nor have politicians and
officials provided much cheer, or even clar-
ity, to local people. Despite many visits by
the prime minister and other politicians to
the Somerset Levels, residents there feel
out of the loop. The first public meeting in
Surrey was set up by Matthew Want, a resi-
dent, rather than by the council or the Envi-
ronment Agency. “Without us there would
be nothing,” says Jason McCarthy, another
mechanic in Shepperton who has been
driving damp locals to and fro.
Still, people have mostly coped well. It
helps that Surrey and Somerset are not
poor: locals know whom to ring to com-
Interest rates
Forward progress
Mark Carney has a second crack at forward guidance
L AST summer Mark Carney brought to
the Bank of England a winning smile
and the latest monetary fad. In an effort to
ginger up Britain’s weak recovery, the bank
unveiled “forward guidance”, modelled
on action taken by America’s Federal Re-
serve. Markets should not worry about a
looming rise in interest rates, the bank ex-
plained. So long as inflation and financial
markets behaved, its main policy rate
would not go up at least until the unem-
ployment rate, then 7.8%, fell to 7%.
The economy responded obligingly;
since August it has outperformed the Bank
of England’s projections on almost every
measure. Yet critics have hounded Mr Car-
ney, arguing that forward guidance has
failed and should be scrapped.
The bank’s latest inflation report, re-
leased on February 12th, judges what it
calls the “first phase” of forward guidance
to have been a clear success, despite hav-
ing been in place for only six months. A
majority of firms and households reported
greater confidence as a result of the policy,
according to figures in the report. Mr Car-
ney recounted with delight how thorough-
ly the British economy has exceeded ex-
pectations. The bank sees more good times
ahead. It now reckons Britain is on track for
roaring GDP growth of 3.4% in 2014, much
better than the 2.6% market consensus.
plain. Many are turning to social media.
Facebook groups act as message-boards,
with offers of spare rooms and dog-sitters
posted alongside updates on flooded
roads. A church in Shepperton has set up a
night shelter to rival the council-run one.
“Community looks after itself,” says Chris
Murdoch, who runs a maritime shop in
Surrey. Others have chipped in from far-
ther afield: Khalsa Aid, a charity run by
Sikhs from Slough, Birmingham and
Leicester, helped lay sandbags in Somerset.
Community spirit is going to have to
sustain the south for a long time yet. The
Met Office, Britain’s weather forecaster,
reckons the region will be battered by rain
over the next few weeks—though possibly
less frequently, or with more intervals be-
tween showers. Even if the rain stops the
floods could linger. In the damp year of
2001 places like Henley-on-Thames were
still flooded by the spring, says Mr Marsh.
And the inundation this year is much
heavier. All of which almost justifies a new
four-wheel-drive. 7
The bank’s main error, and the source
of most criticism, was one of prognostica-
tion. Unemployment tumbled much faster
than it had projected back in August (see
chart) and may already be below 7%. That,
in turn, led to charges that the bank gave a
misleading impression of how long rates
would remain low. Mr Carney’s defenders
Mark to market
The Economist February 15th 2014
Labouring under a misapprehension
Unemployment, %
Bank of England forecasts made in:
9
Actual
8
Aug 2013
7
Nov 2013
6
Feb 2014
5
2012 13 14 15 16
Sources: Bank of England; ONS
counter that markets displayed no such
confusion: despite a booming economy,
they seem to expect no rate rise until early
2015. Had the bank not promised to hold
rates, markets would surely be spying in-
creases any month now. Still, Mr Carney
seems determined to avoid relying so
heavily on one measure in future.
The bank’s new attempt to provide for-
ward guidance centres on a much broader
measure of economic health: “spare capac-
ity”, or room to raise GDP without sparking
higher inflation. The bank aims to elimi-
nate excess capacity within three years.
This new policy gives the bank some wig-
gle room, as it will publish its own esti-
mates of the remaining shortfall. Yet Mr
Carney seems to have outdone his peers at
other central banks in setting both a clear
destination for the economy and an ex-
pected time of arrival.
The unemployment rate will remain on
the bank’s dashboard; it is expected to fall
to between 6% and 6.5% as the economy
closes an estimated output gap of about
1-1.5% of GDP. (Longer working hours will
also help.) But more than a dozen other
measures, including wage growth and pro-
ductivity, will also be monitored for signs
that the bank has over- or underestimated
the economy’s potential.
Mr Carney also offered some hints
about the path of future interest-rate rises.
Spare capacity must fall more before the
first increase, he said—and the rise, when it
comes, will be gradual and contingent on
economic progress. Rates are likely to top
out at less than 5%. That is because global
headwinds, including weak demand and
busted balance-sheets, may crimp invest-
ment. No one should anticipate rates near
historically normal levels soon.
All this is not without risks. What the
Bank of England has given markets in de-
tail has come at the cost of simplicity: the
single point of focus the unemployment
threshold provided has been lost. Mr Car-
ney will nonetheless hope his intentions
are clear enough. “The MPC will not take
risks with the recovery,” he stressed, with
Canadian intensity. The bank must hope
British firms will bet on it. 7
52 Britain
Bagehot The British Vikings
Scotland’s independence referendum is more booty for the canny folk of Shetland and Orkney
S ONNY PRIEST, a brewer on the rocky isle of Unst, high in the
North Sea, says he knows what Scottish independence would
mean: higher taxes and more government meddling. The owner-
operator of the Valhalla brewery, barely a mile from Britain’s
most northerly point, in the Shetland Islands, has had enough of
both. What with beer duty at 20p (30 cents) a bottle and VAT at
20%, Mr Priest exports more of his yeasty brews to Norway than
to the British mainland, 200 miles to the south. “How otherwise
would Scotland pay for itself?” he asks, as a gale tries to tear off
his office roof. “Oil’s a finite reserve.”
For Alex Salmond, leader of the Scottish government in far-
away Edinburgh, Mr Priest’s critique is acutely awkward. Though
remote, Shetland, a low-lying, wind-seared archipelago, perhaps
best known for small horses and thick jerseys, is integral to his de-
sign for an independent Scotland, which Scottish residents will
vote on at a referendum in September. Beneath its choppy waters,
Shetland and, to a lesser extent, the nearby Orkney Islands har-
bour roughly a third of Britain’s North Sea oil reserve, upon
which Mr Salmond’s argument that Scots would do better solo
depends. Yet among the northern isles’ 45,000 crofters, fisher-
men and well-remunerated civil servants, most seem to consider
Scottish independence a rotten idea.
This is the view of the local intelligentsia; there is little polling
to support it. Though a Liberal Democrat redoubt, Orkney and
Shetland also saw a surprising late surge by Mr Salmond’s Scot-
tish National Party (SNP) in Scotland’s 2011 election. And it is re-
markable how absent from the islands—even more than else-
where in Scotland—is the unionist “Better Together” campaign.
All the same, on a Boswellian tour of the isles, hardly marred by
the high winds that threatened to blow his head off, Bagehot
struggled to find anyone who would frankly admit to being a
Scottish secessionist.
The inhabitants of the northern isles are—and not only be-
cause of oil—among Britain’s most self-confident, ingenious and
richer folk. This gives their views a weight beyond their numbers,
as was apparent last year after Shetland’s formidable Lib Dem
Scottish Parliament member, Tavish Scott, declared a plague on
both Edinburgh and Westminster. “This is the time to seize the op-
portunity for island home rule,” he said—mischievously. Despite
The Economist February 15th 2014
a dalliance with separatism during the 1970s, spurred by the dis-
covery of oil, few Shetland Islanders want to secede, which is
why Mr Scott then proceeded to explore an alternative: that, in
the event of Scottish secession, the northern isles might opt to
stay British. That was similarly far-fetched, yet succeeded in Mr
Scott’s primary objective of making life difficult for the SNP.
Given their own campaign for self-determination, the nation-
alists could hardly deny this right to the islands—especially as,
having been ruled by Nordic kings until the late 15th century, Shet-
land and Orkney share little of the Celtic culture that defines
much Scottish nationalism. They do not wear kilts or toss the ca-
ber. They also lack much sense of Scottish nationhood. Scottish
saltires are almost as hard to find on the islands as the union flag—
rather it is their own flags, Scandinavian-style crosses on blue and
red backgrounds, that billow from trawlers and flagstaffs. Be-
grudgingly, the SNP suggested the islanders should be free to set
their own course—and this has fuelled a fresh debate about devo-
lution which could have great consequences for them and other
local communities, however the referendum turns out.
The modest islanders gainsay their importance. Their political
representatives go further, claiming to be dreadfully marginal-
ised, which helps them secure fat subsidies for their ferries. But
the truth is that the islanders’ remoteness and seafaring history
have produced a remarkably resourceful culture. Some commen-
tators, with an eye to the less go-getting Hebrides, attribute this to
the northern isles’ Nordic background. Alistair Carmichael, the
Lib Dem MP for Orkney and Shetland, also notes that they, unlike
the western isles, were spared the tyrannies of large-scale land-
lordism and the Free Presbyterian Church. This helped foster an
independent spirit that was evident long before oil; until the late
19th century, an Orcadian diaspora ran much of Canada, through
its prominence in the Hudson Bay Company.
Indeed, it was this that enabled the islanders to drive a hard
revenue-sharing bargain with the oil industry, which underlies
their wealth. Both archipelagoes have excellent infrastructure
and public services and almost full employment. Shetland has
eight shiny leisure centres for its tiny population and a new,
world-class cultural venue; Orkney, which is only a little less rich,
is an emerging renewable energy hub.
Which of you shall we say doth love us most?
These strengths are manifest in a new campaign for greater au-
tonomy, “Our Islands, Our Future”, launched jointly by the local
authorities ofthe northern and western isles. Instigated by the ce-
rebral and resolute boss of Orkney council, Steven Heddle, the
campaigners have issued a list of stiff demands to the govern-
ments in Westminster and Edinburgh: among them greater con-
trol of the seabed at the expense of the Crown Estate, new grid
connections to the mainland to help export renewable energy,
and new fiscal arrangements to allow them a bigger share of rev-
enues from local industries. They will get some of this. Mr Carmi-
chael, who is also, conveniently, secretary of state for Scotland,
expects the government to make the islanders an offer, including
for a greater share of Crown Estate revenues, this spring.
If nothing else, then, this will be a lasting achievement of Scot-
land’s independence referendum. It will furnish a collection of
admirably canny and rather lucky islanders with an opportunity
to rule and enrich themselves further—providing an example
that all Britain’s remote communities may follow, if only they
can. High up in the North Sea, it was ever thus. 7

International
Medical tourism
Médecine avec frontières
Why health care has failed to globalise
C LARE MORRIS hardly noticed when
she tore the meniscus in her knee
while dancing. The pain started only when
she heard that repairing the damage at a
hospital in South Carolina, where she
lives, would cost $15,000. With limited in-
surance, she would have had to pay much
of that herself. But after shopping around
she found that she could have her knee re-
paired at a good hospital in Costa Rica for
$7,400—and take a holiday, too.
Just a decade ago, stories like hers
seemed to point to the future of health
care. If a person could save thousands by
shopping in the global health market, the
reasoning went, insurers and governments
could save billions. A knee replacement
costs $34,000 in America, but just $19,200
in Singapore, $11,500 in Thailand and
$9,500 in Costa Rica, according to Patients
Beyond Borders, a consultancy. Even with-
in Europe savings are to be found: a hip re-
placement is $4,000 cheaper in Spain than
in Britain.
In the mid-2000s American insurers set
out to find these savings by touring foreign
private hospitals. They found that many
were as good as their rich-world counter-
parts, and far cheaper. A big shake-up
seemed likely. In 2008 Deloitte predicted
an “explosive” boom in medical tourism,
saying that the number of Americans go-
ing abroad for health care would grow
more than tenfold by 2012.
It did not happen. Poor data were part
of the problem: whereas Deloitte counted
750,000 American medical tourists in
2007, McKinsey, another consultancy,
found at most10,000 a year later. It is gener-
ally agreed that the number of medical
tourists has grown since then—Thailand’s
Bumrungrad hospital, which is popular
with foreign patients, reports “steady
growth”. But the data are still fuzzy. Patients
Beyond Borders estimates that as many as
12m people globally now travel for care,
perhaps 1m of them Americans. Industry
insiders admit that growth has not
matched the initial heady expectations.
Patient interest also turned out to be
lower than predicted. Though some pa-
tients in the rich world seek out deals, most
receive adequate health care at a manage-
able price and would prefer to stay at
home. Potential savings are often insuffi-
cient to trump concerns about quality and
the lack of recourse if something goes
wrong. In 2008 Hannaford, an American
supermarket chain, offered to pay the full
cost of hip and knee replacements for its
employees, including travel and patients’
usual share—provided they would go to
Singapore. None took up the offer.
The predicted growth depended on
medical tourism evolving from an individ-
ual pursuit to a cost-saving measure em-
braced by insurers and governments. But
without reliable projections, insurers were
reluctant to invest in the idea, says Ruben
Toral, a health-care consultant. And cooler
The Economist February 15th 2014 53
Also in this section
54 Where to score drugs online
54 The war on Valentine’s Day
measures of the size of the opportunity
dimmed their ardour. In 2009 Arnold Mil-
stein of Stanford University estimated that
less than 2% of spending by American in-
surers went on the kind of non-urgent pro-
cedures that might be moved abroad.
The legwork required also turned out to
be formidable. Insurers had to choose for-
eign hospitals, negotiate contracts and
malpractice insurance, and arrange fol-
low-up care with American providers.
They also risked upsetting the locals who
would continue to take most of their cus-
tom. By the time the battle over Obama-
care distracted them from contemplating
transnational forays, most seemed to have
concluded that they would not be worth-
while anyway. Companion Global Health
Care, a subsidiary of Blue Cross Blue
Shield, is the only big medical-tourism off-
shoot of an American insurer.
Governments have shown a similar
lack of enthusiasm, perhaps because state
promotion of medical tourism is usually
seen as an admission of policy failure. In
2002 Britain allowed patients facing long
waits to seek treatment elsewhere in Eu-
rope. Liam Fox, the shadow health secre-
tary at the time, called the decision “hu-
miliating” and criticised the government
for not spending more at home. In Ger-
many patient advocates blame govern-
ment stinginess for the fact that some re-
tired people choose, for reasons of cost, to
live in eastern European care homes. Over-
all, only 1% of public health-care spending
in Europe now crosses borders.
But the mere possibility of medical tou-
rism is starting to change health care in un-
expected ways. The biggest gains have
gone not to patients, insurers or govern-
ments, but to hospitals, which have calcu-
lated that they could win more business by
reversing the trend and going abroad to
find patients. America’s Cleveland Clinic 1
54 International
2 will open a branch in Abu Dhabi next year.
(It already manages Sheikh Khalifa Medi-
cal City, a 750-bed hospital in Abu Dhabi.)
Singapore’s Parkway Health has set up
hospitals across Asia. India’s Apollo Hospi-
tals, a chain of private hospitals, has a
branch in Mauritius.
And though American firms and insur-
ers have mostly stopped scouring the
globe for bargains, some have negotiated
bulk rates with top-notch hospitals at
home. Lowes, a home-improvement firm,
offers workers all around the country in
need of cardiac care the option of going to
the Cleveland Clinic in Ohio. PepsiCo, a
food giant, made a deal with Johns Hop-
kins in Maryland. Other firms are said to
be working on similar schemes. The future
of medical tourism may be domestic rath-
er than long-haul. 7
Online drug dealing
The Silk Road,
reborn
It is still possible to get a line online
T HE Dread Pirate Roberts, a character in
William Goldman’s novel “The Prin-
cess Bride”, which was made into a cult
film, is not one man but several who take
the name in turn. It was also the nickname
of the creator of Silk Road, an online drug-
dealing website that was shut down in Oc-
tober by the FBI. On February 9th a date
was set for the trial of Ross Ulbricht, a 29-
year-old physics graduate from Austin, Tex-
as and, allegedly, the Dread Pirate Rob-
erts—at least for a time. Already Silk Road
2.0, complete with a new Dread Pirate Rob-
erts, is online and gaining market share.
The blade is for chopping cocaine
Two technologies have enabled drug
dealing to move online. The first is Tor, soft-
ware that bounces data around the world
untraceably, thereby making it possible to
hide where a website’s servers are. The sec-
ond is Bitcoin, an online “crypto-currency”
that lets buyers and sellers trade in close to
anonymity. Silk Road was the first site to
combine them into something usable. By
August 2012, just 18 months after it opened,
it was facilitating sales worth more than
$1m a month. Dealers across the world
sold all manner of illegal substances, usu-
ally delivered by post. On its forums, re-
views of sellers’ wares jostled with advice
on security and on the laundering of illicit-
ly obtained Bitcoins.
How Silk Road was taken down is not
clear. But Mr Ulbricht’s arrest warrant al-
leges that he ignored his own advice: that
he administered Silk Road through un-
encrypted connections, used his own
name on technical-support forums and ar-
ranged deals personally. It also claims he
ordered several assassinations (none of
which seems to have been carried out).
Some would-be successors of Silk Road
seem, if anything, even more amateurish.
In December Sheep closed after millions
of dollars of Bitcoin were stolen, possibly
by the founder. On February 12th Utopia,
which had been gaining market share, was
shut down by Dutch police. A third, Black
Market Reloaded, was closed by adminis-
trators worried about a security breach.
The most successful by far is Silk Road
2.0, a recreation of the original. Yet it, too,
has security flaws, says Nicolas Christin of
Carnegie Mellon University. In order to
launch quickly, it relied on administrators
and dealers from the original site. In De-
cember two alleged forum moderators it
inherited were arrested. New technology
cannot turn drug dealers into criminal ge-
niuses, but the Dread Pirate Roberts may
still have several incarnations to come. 7
The Economist February 15th 2014
Valentine’s Day
Love’s enemies
Unlikely allies unite against a holiday
W HAT do Russia’s Belgorod province
and some schools in Florida and
Connecticut have in common? They are
unlikely recruits to the war on Valen-
tine’s Day. In 2011 the governor of Belgo-
rod banned celebration of the holiday in
educational and cultural institutions on
the ground that it was inimical to Rus-
sian spirituality and morality. Last year
two schools in Orange County, Florida,
forbade Valentine’s gift-giving, citing
such reasons as the need to “maintain
instructional focus” and “avoid dis-
traction”. And this year a school in Con-
necticut wrote to parents to say it would
be replacing sweets and parties on Feb-
ruary 14th with healthy snacks and
academic activities.
This puts them all on the same side as
many Muslim countries that have
banned the celebration of Valentine’s
Day, among them Iran, Malaysia, Saudi
Arabia and Uzbekistan. Saudi Arabia has
gone so far as to ban all things red from
flowers and gift shops on the day—with
little effect other than to create a black
market for red roses. Tursunbai Bakir
uulu, a member of Kyrgyzstan’s parlia-
ment, recently urged his fellow legisla-
tors to adopt a ban, too, dubbing Valen-
tine’s Day a “holiday from the devil”.
Originally a Christian feast associat-
ed with several martyrs called Valentine,
February 14th soon entered folklore as
the day when birds chose their mates. In
1400 Charles VI of France picked the date
to propose a “High Court of Love”, dedi-
cated to matters of the heart. The passing
of love notes became fashionable in
England in the 1700s, and in 1797 “The
Young Man’s Valentine Writer” was
published, formalising a long tradition
of telling men how to woo. In 1913 Hall-
mark produced their first commercial
Valentine’s card. In the 1980s the dia-
mond industry followed florists and
chocolatiers, who had already marketed
Valentine’s Day as a moment to give (or
expect) a romantic gift.
What bothers some of Valentine’s
Day’s enemies is its Christian, or West-
ern, origins. For others the problem is the
incitement to commerciality, lewdness
or even unhealthy eating. But their battle
is doomed to failure. Valentine’s Day has
a conveniently unspecific origin myth. It
adds cheer to the post-Christmas slump.
It provides an opportunity to give and
get, and, for businesses, to profit. Though
hardly a platonic holiday, it is the Platon-
ic ideal of one.

Business
Corporate governance
Anything you can do, Icahn do better
NEW YORK
The pressure on companies from activist shareholders continues to grow
T IM COOK’S nightmare is over, but John
Donahoe’s has just begun. On Febru-
ary 10th Carl Icahn, the godfather of activ-
ist shareholders, ended his campaign to get
Mr Cook, the boss of Apple, to return some
of its $160 billion cash mountain to share-
holders through share buy-backs. Mr Icahn
declared victory, although Apple is not
handing back as much of its cash as he had
wanted. His next target is eBay, which he is
pressuring to spin off PayPal, its online-
payments business. Mr Donahoe, eBay’s
boss, has told Mr Icahn to get lost, but
surely knows he cannot brush off the pugi-
listic investor so easily.
A visit from an activist shareholder is
now a possibility for any publicly traded
company: if not the 77-year-old Mr Icahn,
then one of the growing army of younger
imitators he has inspired. Mr Cook was
first put under pressure to “stop hoarding
cash” last year by David Einhorn, boss of
Greenlight Capital, a hedge fund. Having
shaken up Yahoo’s management and strat-
egy in 2012, Dan Loeb and his fund, Third
Point, have turned their attention to Sony,
calling for it to separate its electronics and
entertainment arms; to Sotheby’s, an auc-
tion house they want to repurchase shares;
and to Dow Chemical, which they want to
shed its petrochemicals business.
Nelson Peltz, who has been a share-
holder activist almost as long as Mr Icahn,
last month joined the board ofMondelez, a
snacks business he had targeted. TCI, a
London-based fund run by Chris Hohn,
has rediscovered its activist mojo after hav-
ing been badly hurt by the financial crisis.
Last year it urged EADS (now Airbus
Group) to sell its military-planes business,
and took on the management of Japan To-
bacco. Steve Ballmer was helped on his
way out of Microsoft’s top job by ValueAct
Capital, run by Mason Morfit.
Last month Bill Ackman’s Pershing
Square made a tasty profit when Suntory
acquired Beam (the maker of Jim Beam
bourbon), which had been spun out of For-
tune Brands as a result of his activism. But
Mr Ackman has also demonstrated that ac-
tivists have no monopoly on wisdom: Ron
Johnson, the new boss he lobbied for J.C.
Penney to install in 2011, made things
worse at the struggling retailer, and lasted
just 17 months. Mr Ackman has been at log-
gerheads with Messrs Icahn and Loeb over
Herbalife, a nutritional-supplements busi-
ness. Mr Ackman has shorted its shares,
calling the firm a “pyramid scheme” (a
charge Herbalife denies). His rivals have
gone long on them. So far, Mr Ackman is
out of pocket.
The activists’ growing influence has
many causes, including rule changes that
have given shareholders more voting pow-
er and have made institutional investors
cast their votes more thoughtfully. Social
media have made it easier for activists to
mount a campaign: Mr Icahn now tweets
like a budgie on speed. And, says Bob
The Economist February 15th 2014 55
Also in this section
56 Biotechnology booms again
57 Indonesia’s desire to make planes
58 The death of Australian carmaking
58 Comcast wins the battle for TWC
59 Tough going in the circus business
60 China’s Amazon comes to market
61 Schumpeter: English as the world’s
business language
For daily analysis and debate on business and
our weekly “Money talks” podcast, visit
Economist.com/business-finance
Monks, a campaigner for shareholder
rights, Mr Icahn has had a huge impact by
“making it clear to the greediest people in
the world that you can make a lot of mon-
ey out of activism”.
It is the way these profits are made that
is the focus of the activists’ critics. Activists
usually buy a block of shares, make a pub-
lic call for change and lobby management
and other shareholders to implement it.
When they do, the activists sell at a profit.
Martin Lipton, a lawyer who has long
helped protect incumbent management,
not least by inventing the “poison pill”, a
potent defence against takeovers, argues
that activists encourage firms to do things
that boost their share price in the short run
but harm their long-term performance.
This critique has plenty of adherents, in
academia, business and government.
Where’s the evidence?
Yet empirical proof that activists exacer-
bate short-termism is strangely elusive. In-
deed, such evidence as there is suggests the
opposite. “The Long-Term Effects of Hedge-
Fund Activism”, a recent paper by Lucian
Bebchuk of Harvard Law School and oth-
ers, examined the roughly 2,000 interven-
tions at companies by activist funds from
1994 to 2007. Over the five years following
an intervention both the share price and
the operating performance of the target
company improved, on average. The oper-
ating performance got stronger towards
the end of the five-year period, not weaker.
This is the sort of evidence that has con-
vinced Mary Jo White, the chairman of
America’s Securities and Exchange Com-
mission, to argue in a recent speech that ac-
tivist shareholders should no longer be
automatically viewed negatively. These
days, she said, “There is widespread accep-
tance of many of the policy changes that
so-called ‘activists’ are seeking to effect.” 1
56 Business
2 A recent article in the Columbia Law Re-
view, “The Agency Costs of Agency Capi-
talism: Activist Investors and the Revalua-
tion of Governance Rights”, argues that the
activists have become a vital adjunct to the
institutional investors who own most
shares, and who are “willing to respond to
governance proposals but not to propose
them”. Activists have thus become “gover-
nance intermediaries”, who find under-
performing firms and offer their managers
and institutional shareholders “concrete
proposals for business strategy through
mechanisms less drastic than takeovers”.
So it is crucial, the authors argue, to pass
reforms that help the activists do their job.
Mr Lipton and others are pressing for a rule
change that would have the opposite ef-
fect, by obliging activists to disclose stakes
at a lower threshold (2% of a firm’s shares
rather than the current 5%) and more
quickly (within a day rather than the cur-
rent ten). That would force them to show
their hand before they had built a big
enough stake to make a decent profit if and
Biotechnology
Fever rising
There are reasons to hope that the latest biotech boom will not be followed by
another bust
A S INVESTORS and executives crammed
into a New York ballroom for a confer-
ence held this week by the Biotechnology
Industry Organisation, the mood was jit-
tery. The previous week eight biotech firms
had launched initial public offerings in
America, together raising more than
$500m. In a discussion panel on whether
the industry’s latest boom will last, a
prominent investor, Oleg Nodelman,
joked that he still had suitcases of cash for
any firm that wanted it.
Biotechnology is the creation of drugs
and other useful products by making use
of “nature’s toolkit”—that is, by adapting or
exploiting processes found in living organ-
isms. For example, Argos Therapeutics,
one of the latest batch of firms to raise
money, is working on ways to trigger pa-
tients’ own immune systems to fight kid-
ney cancer or HIV infection.
The industry has undergone cycles of
boom and bust since its inception in the
1970s, pioneered by firms such as Genen-
tech. (We review a new book about Vertex,
another early entrant, on page 78.) As the
chart shows, last year more biotech firms
joined American stockmarkets, raising
more money, than at any time since the
golden year of 2000. In the past 12 months,
even as the S&P 500 share index has risen
by 20%, shares in biotech firms have surged
when their proposals succeeded.
Boards have an obvious motive to back
curbs on troublesome activists. But a better
strategy—and one that big firms are in-
creasingly adopting—is to talk to them, con-
sider their ideas and even invite them or
their representatives to become directors,
as firms from Microsoft to Mondelez have
done. If a board’s strategy is in fact better
than that proposed by the activist, having
the debate in public may strengthen the in-
cumbent management, as happened
when activists took on firms such as AOL,
Target and Clorox.
Indra Nooyi, the boss of PepsiCo, chose
to work with Ralph Whitworth, a veteran
activist who took a stake in the company.
By doing so she was able to head off calls
for a break-up of the firm (led by Mr Peltz),
while still boosting its shares, thereby re-
storing her authority. Mr Donohoe’s en-
counter with Mr Icahn may prove less
nightmarish if he treats his ideas about
eBay on their merits rather than dismissing
them out of hand. 7
Bio-boom, bio-bust?
US biotech initial public offerings
Number Amount raised, $bn
70
60
50
40
30
20
10
0 0
1993 95 2000 05 10
Source: Stelios Papadopoulos, Exelixis
by almost three times as much.
One of the main causes for the millen-
nial boom was that investors, flush with
money they had made from internet firms,
became excited about the Human Ge-
nome Project. They hoped that this mas-
sive, government-backed effort to lay out
the entire genetic code of Homo sapiens
would lead to a proliferation of profitable
new treatments. Biotech’s flowering is tak-
ing some time, however. Biology is com-
plex. Drugs have a habit of being too toxic
or not working as well as they should.
Indeed, creating new drugs through
biotechnology is at the risky end of a busi-
The Economist February 15th 2014
ness in which superhuman stamina and
bottomless pockets are minimum require-
ments. The Boston Consulting Group reck-
ons that 90% of the money spent research-
ing new treatments, conventional or
biotech, goes on drugs that ultimately fail.
After spending as much as $2 billion, ac-
counting for all the failures, a company just
might have a medicine that works. But
then it must win the favour of the world’s
most stringent regulators, and convince
governments, insurers and patients that
the drug is worth paying for.
Overcome these obstacles, however,
and the returns can be fabulous. Stelios
Papadopolous, a veteran biotech investor,
argues that much of the recent rise in share
prices is due not to froth, but because the
industry is beginning to deliver promising
treatments. In December America’s Food
and Drug Administration (FDA) approved
Sovaldi, a treatment for hepatitis C. It could
now earn revenues of more than $3 billion
this year for its maker, Gilead, a biotech
firm from California. Biogen Idec, a firm
based in Massachusetts, is expected to
earn more than $1 billion a year from Tec-
fidera, a pill for multiple sclerosis that the
FDA approved last year. The firm’s shares
rose by almost 90% in 2013. But the ques-
tion is whether such triumphs are aberra-
tions or hints of other victories yet to come.
There are several reasons to hope that
even if the current share-price and IPO
frenzy subsides, biotech firms will contin-
ue to prosper. First, many smaller firms
have become the research engines for big-
ger ones, explains Kevin Starr of Third
Rock, a venture-capital firm. For example
Sanofi, a French pharmaceutical giant,
now depends on Regeneron, an American
biotech company, to help drive its growth.
7
This year alone, Sanofi will pump about $1
6 billion into Regeneron’s research pro-
5 gramme. The goal is not to “Sanofise” Rege-
4 neron or any other partner, says Christo-
3 pher Viehbacher, Sanofi’s chief executive.
Rather, it is to combine Regeneron’s capa-
2
bilities in researching new treatments with
1
Sanofi’s skill in bringing them to market.
Celgene, one of America’s larger bio-
13
tech firms, has a similar “distributed mod-
el” of research. It helps finance the scientif-
ic work at smaller companies, then usually
takes over a drug’s development as it
moves into clinical trials. Besides being
costly, these require expertise that younger,
smaller firms often lack.
Second—and more important—firms
are at last starting to reap the rewards of
studying the human genome. As research-
ers illuminate the underlying genetic
causes of a disease, they open up new
routes to developing treatments. For exam-
ple, Vertex has a drug to treat a subset of pa-
tients with cystic fibrosis, thanks to a better
understanding of the faulty gene that
causes it. Bluebird bio, one of Celgene’s
small partner firms, which Third Rock also 1
 The Economist February 15th 2014
2 financed, is working on a treatment for
sickle-cell disease that inserts into the pa-
tient’s blood cells a properly functioning
version of the faulty gene that causes the
inherited ailment.
Advances in genomics are making clini-
cal trials smaller and cheaper, since it is
now easier to identify which patients have
the specific genetic trait that a new drug is
aimed at. This makes it more worthwhile
to research diseases that are rare, and those
that have so far proved intractable. The
FDA gives special consideration to drugs
that treat such ailments, so companies can
expect a speedier path to approval.
Learning from mistakes
The venture capitalists who back biotech
firms are trying to avoid the mistakes they
made in the past. Index Ventures, based in
Geneva, does not shower companies with
cash to build lavish headquarters. Instead
it assembles a tiny team of scientists and
executives to oversee the research on a pro-
mising new line of treatment, outsourcing
the bulk of the work to external contrac-
tors. This makes the costs more predict-
Manufacturing in Indonesia
On a wing and a prayer
BANDUNG
A state aerospace firm risks forgetting the lessons of the Asian crisis
T HEY do not look much, but they are
largely responsible for saving Indone-
sia’s aviation industry. The ribs that fit into
a section of the wings on the Airbus A380,
the world’s largest passenger aircraft, are
made in a corner of the sprawling factory
of PT Dirgantara Indonesia (PTDI), in the Ja-
vanese city of Bandung. Along with anoth-
er part, they are flown to a second factory,
in Britain, where they are incorporated
into the A380’s wings, which are then sent
to France to be attached to the planes.
PTDI won the contract for the wing
parts in 2002, and the timing could not
have been better. The company, along with
much of the rest of Indonesian industry,
was still flat on its back following the Asian
financial crisis of 1997-98. PTDI’s revival
since then offers hope that the country’s
manufacturing sector can become compet-
itive, despite high costs, rigid labour laws
and poor infrastructure. But there are also
worries that the firm might take on the sort
of over-ambitious projects that brought it,
and the country, low in the first place.
Founded in 1976 as a state-owned com-
pany, in its first 20 years PTDI was a flag-
ship for Indonesia’s ambitions to become
one of Asia’s rapidly developing “tiger”
economies. Its main job was to produce
able. It also makes it easier for Index to halt
a project when it looks like failing.
Despite all these reasons for optimism,
there is no guarantee that the current
boom will last. In these sunny times, it is
tempting to forget the dark days that com-
panies have endured. “Twenty-five years
later,” quips Leonard Schleifer of Regene-
ron, “I’m an overnight success.” It is also
uncertain that insurers and governments
will continue to pay biotech firms’ high
prices. Vertex’s treatment for cystic fibrosis
costs a staggering $294,000 for each course.
The most important question is wheth-
er research has indeed become more pro-
ductive. More than 80% of those recently
polled by Mark Schoenebaum, an analyst
at ISI Group, said yes. Mr Schoenebaum
himself, however, is unconvinced. “I’m not
arguing definitively that it hasn’t hap-
pened,” he muses, “but I haven’t been en-
tirely persuaded.” There are no data yet, he
says, to draw firm conclusions. And for all
the advances in genomics, and the in-
creased sophistication of biotech firms
and their investors, there is still “a lot of
luck involved in R&D.” 7
prestige-enhancing aircraft, not to make
money. By the time the IMF helped to bail
out the country in 1997, PTDI had become a
chronic financial drain. It was forced to
cancel its main project, a turboprop pas-
senger plane called the N-250 (pictured), a
pet project of President Suharto and his
The pet project of two presidents
Business 57
technology minister, B.J. Habibie, who
later took over the presidency on Suharto’s
downfall. Most ofthe firm’s16,500 workers
lost their jobs. Two mouldering prototype
N-250s still sit in silent reproach on the as-
phalt outside the Bandung plant.
When the contract to make Airbus parts
came along, offering PTDI a lifeline, out
went grandiose ideas about building entire
aircraft from scratch, regardless of the cost.
Instead it would be more modest, focusing
on what would be “commercially success-
ful”, in the words of Sonny Saleh Ibrahim,
an engineer who spans both eras of the
company’s history.
That has meant building up a niche
business making parts for foreign planes. It
contributes both to civilian ones, like the
A380, and to military ones, like Airbus’s
C295 transporter and its Cougar helicopter.
(PTDI does still assemble a few aircraft for
the Indonesian armed forces.) The com-
pany’s order book has grown slowly but
steadily, and this year PTDI hopes to gener-
ate sales of 4.4 trillion rupiah ($365m).
PTDI is now more business-minded,
but it still owes some of its recent success to
official intervention. Having cleared
PTDI’s debts in 2007, two years ago the gov-
ernment invested another 1.4 trillion rupi-
ah to retool and restructure it. Although
PTDI insists that this was a “one-off”, the
money was part of a strategy to reorientate
the economy. The mineral-rich country
has done extremely well over the past de-
cade exporting coal and metal ores to Chi-
na and India. But officials such as the fi-
nance minister, Chatib Basri, argue that the
resources boom is over, and that Indonesia
now has to “shift into innovation and tech-
nology” to keep the economy growing at
its current lick of 6% a year. Thus, besides
introducing curbs on exports of unpro-
cessed metal ores, the government has
been giving tax incentives to companies to
invest in research and training. 1
58 Business
2 So PTDI once again finds itself in the
forefront of an industrial strategy, its role
this time being to lead Indonesia up the
value chain of manufacturing rather than
to produce subsidised white elephants.
Thus far, things look good: the company
will shortly begin assembling whole
planes on a commercial basis, with all pro-
duction of the C295 being shifted to Ban-
dung from an Airbus factory in Spain. Last
month PTDI won a $60.7m order from the
Philippine air force to supply two smaller
military transporters based on Airbus’s
C212. With these contracts Indonesia will
again join India, Japan and China in the ex-
clusive club of Asian planemakers.
However, another recent development
hints at a revival of past hubris. Last Sep-
tember PTDI signed a deal with a private
firm, RAI, which will design an updated
version of the old N-250, to be called the
R80 and to be assembled by PTDI. RAI is
part-owned by the Habibie family and run
by the ex-president’s son, Ilham, who is an
aeronautical engineer.
Advances in cabin design mean that
turboprops are no longer the noisy, bone-
rattling aircraft they once were. Moreover,
for short flights they can be more fuel-effi-
cient than jets. Mr Ibrahim of PTDI argues
that the R80 is “crucial” to the company’s
vision of becoming “the most advanced
turboprop manufacturer for small and me-
dium-sized aircraft in the world”. It is a
worthy ambition, but one shared by many
others, not least in China. Before Indonesia
slips back into the habit of splashing out
subsidies to promote prestigious indus-
tries, it should note that next door in Aus-
tralia, years of official efforts to keep the
carmaking industry alive have failed, as
the next article explains. 7
Carmaking in Australia
Driven away
SYDNEY
Toyota’s move to the off-ramp signals
the demise of a prized industry
W HEN Australia’s first locally made
car, a Holden FX, rolled off the pro-
duction line in 1948 it was greeted with an
excitement that befitted a symbol of a
youthful nation taking its place among ad-
vanced economies. Such was the enthusi-
asm for an indigenous car that around
18,000 punters paid deposits to buy one
without even seeing it.
Toyota’s announcement on February
10th that it would join Ford and Holden in
pulling out of carmaking in Australia, clos-
ing its assembly line in 2017, was greeted
with commensurate dismay. Yet beneath
the obligatory political blame-mongering
Holden’s golden days
was an acceptance that everything has
turned against carmaking in Australia.
The departure ofthe last big carmaker is
as inevitable as an argument at a barbecue
over the merits of a Ford versus a Holden.
Mitsubishi closed its plant in Adelaide six
years ago. The latest exodus began last
May, when Ford said it would go in 2016.
Holden, part of General Motors, said just
before Christmas that it would quit in 2017.
The industry has been in decline for
years. A decade ago Australia produced
400,000 cars a year; in 2013 it churned out
just over 200,000. Although Australians
bought a record 1.14m cars in 2013, the mar-
ket is small in global terms, and fragment-
ed, with the three most popular models
each clocking up just 40,000 sales. Sadly,
none of these was assembled at home.
Australia makes the wrong sort of mo-
tors. As in most rich countries, drivers in-
creasingly want smaller fuel-efficient vehi-
cles and fashionable SUVs. Of the six
models made in the country only two, the
Holden Cruze and the Ford Territory, fall
into these categories. For cheap mass-mar-
ket vehicles, on which profit margins are
slender, high-volume, low-cost production
is vital. But Australian factories are small:
the biggest, Toyota’s, makes just 100,000
cars a year. As a rule, plants making mass-
market vehicles need to turn out at least
200,000 a year to have a hope of making
them cheaply enough.
Australian plants lack economies of
scale but not employees with bulging
wage packets. Only German car workers
earn more. The lack of scale works its way
down to local component-makers. These
are also small by global standards, so parts
are pricey. The result, according to both
Ford and Holden, is that manufacturing
costs are four times those in Asia and even
twice European levels. That is a death sen-
tence in a global market with plenty of
The Economist February 15th 2014
spare capacity, even before considering the
added burden of Australia’s strong curren-
cy, buoyed by commodity exports. This
hits locally made cars’ competitiveness
both at home compared with imported
ones and abroad, where two-fifths of pro-
duction ends up.
Decades of generous state handouts
have “forestalled but not prevented” the
car industry’s problems, concluded a re-
cent report by the government’s Productiv-
ity Commission. Since it came to power
last September, the conservative adminis-
tration led by Tony Abbott has declined to
prop up struggling firms. It refused Hold-
en’s plea for more subsidies in December.
Last month it rejected an A$25m ($22.5m)
bail-out for SPC Ardmona, a fruit-canning
business that Australians regard with a
sentimentality matched only by that for
Holden. Mr Abbott says the role of creating
jobs belongs to business, not government.
One commentator lamented that Aus-
tralia will join Saudi Arabia as the only
G20 countries without a car industry. But
carmaking is a small and unprofitable part
of a shrinking manufacturing sector, em-
ploying relatively few, in an economy
dominated by services and resources. The
main damage caused by the carmakers’
departure is to Australians’ self-esteem. 7
Comcast and TWC
TV star
NEW YORK
A season finale for America’s
long-running cable drama
A ROUND four years ago Time Warner
Cable (TWC) was feeling alone and
unloved. It had been split off from its par-
ent company in order for Time Warner to
focus on its content businesses, and TWC
on lower-growth cable television. Recent-
ly, however, TWC has lived every over-
looked teen’s dream and been lavished
with attention. Charter, a rival cable firm,
pursued it for around eight months. In re-
cent days the drama had become more
tense, with Charter proposing a slate of di-
rectors to replace TWC’s board. Now an-
other admirer has come forward. On Feb-
ruary 13th, as we went to press, Comcast,
America’s largest cable firm, was expected
to bid around $159 a share for TWC, in an
all-stock deal worth around $45 billion.
That’s probably a wrap—as they say in a
more glamorous part of the media busi-
ness. Comcast has offered a price very
close to the one TWC had previously said it
wanted. Charter, which bid $132.50 a share
in January, is unlikely to offer more.
Comcast is already America’s largest ca-
ble operator, with around 22m subscribers. 1
 The Economist February 15th 2014
2 It is also, arguably, America’s most power-
ful media firm. Last year it completed a $28
billion deal to buy NBCUniversal from
General Electric, which brought it control
of a broadcast network, cable channels, a
film studio, theme parks and other assets.
Size brings clout, but it also attracts at-
tention. Regulators will scrutinise this deal
closely, especially because many Ameri-
cans already have a very limited choice of
pay-television providers in their area.
Comcast, which would have around 33m
subscribers after absorbing TWC, will re-
portedly agree to divest around 3m of
them, but regulators could ask for more.
Now that Comcast’s campaign for anti-
trust approval for its NBCU acquisition has
concluded successfully, it has plenty of
Washington lobbyists on its payroll wait-
ing for the next fight.
The most important plot line in the bat-
tle for control of TWC has been about con-
solidation in the cable industry. More heft
could help cable operators fend off satel-
lite-TV firms and wireless-broadband com-
panies, which have grabbed customers. In
theory, scale will also give cable operators
more power to negotiate with content
companies, which have been trying to ex-
tract higher fees for the right to carry their
channels. In the process, the margins for
selling these on to cable customers have
shrunk to around 50%, according to Todd
Juenger at Sanford C. Bernstein, a research
outfit. That is nothing to scoff at, but the
margins for broadband (which cable pro-
viders also sell, usually as a bundle with
TV) are a juicier100%.
John Malone, America’s “cable cow-
boy” whose firm, Liberty Media, owns a
stake in Charter, has been one of the most
outspoken advocates of consolidation.
However, in this instance another cable
conqueror has left Mr Malone and his stet-
Success without the stetson
One big deal after another
Comcast share price, $ COMPLETES BUYS
FAILED BID FOR DISNEY NBCU TAKEOVER TWC
BUYS CABLE JOINTLY BUYS
ASSETS OF AT&T ADELPHIA CABLE,
WITH TIME
WARNER CABLE
2000 02 04 06 08 10 12 14
Source: Thomson Reuters
son in the dust. Comcast, which was
founded in 1963, is based in un-glitzy Phila-
delphia and run by Brian Roberts, the quiet
but determined son of one of its founders
(pictured). It blends the humility of a firm
with roots in cable installation with the
hunger of an underdog determined to take
New York and Hollywood by storm. It has
not shied away from audacious deals, such
as an unsuccessful bid for Disney in 2004
(see chart). In 2009 Mr Roberts began chas-
ing NBCU, when it was priced relatively
cheaply. Even those who say there is not
much rationale in combining content pro-
duction with distribution say Mr Roberts
was brilliant to buy it, because he got such
a good deal.
Although Comcast is prepared to pay
high prices for good assets, once it gets
them it imposes financial discipline. Last
year it sent to Hollywood one of its trusted
TV executives, Jeff Shell, who has never
made a movie in his life, to run Universal,
NBCU’s film studio. Presumably it thought
he would keep costs under better control
than a conventional Hollywood boss.
Faced with the longer-term prospect of
Business 59
customers leaving it for alternative provid-
ers, Comcast is focusing on how to ensure
its television offerings are as attractive as
possible, especially given the high cost of
60
cable subscriptions. The firm has poured
50 resources into redesigning its user interface
to make channel-surfing easier. It has ex-
40
perimented with new features, such as al-
30 lowing its subscribers to buy films through
their set-top boxes, as opposed to just rent-
20 ing them, which it hopes will keep them
10 loyal. Comcast has also started to offer fea-
tures that let subscribers watch TV on the
0 go on laptops, tablets and smartphones
and access previously aired shows from
them, much like they can with online-vid-
eo services such as Netflix.
Comcast is “not the best at innovating,
but I could argue that they are the best at
scaling others’ innovations,” says Blair Lev-
in, a fellow at the Aspen Institute, a think-
tank. And with TWC in the bag, such scal-
ing will become even easier. 7
The circus business
Sunstroke
QUEBEC CITY
Cirque du Soleil may be struggling, but
the cluster around it is thriving
I N THE deconsecrated church of Saint-Es-
prit, jugglers toss fluorescent orange
clubs in front of the former altar, trapeze
artists soar under the gaze of stone saints
and wobbly unicyclists use two lines of re-
purposed pews as handrails. Declared sur-
plus to requirements after Quebeckers de-
serted Catholicism in droves, the church is
now the École de Cirque de Québec,
through which 20,000 aspiring entertain-
ers pass each year. The school’s director,
Yves Neveu, says only half-jokingly,
“Someone said the archbishop should be
jealous because I’m filling my church.”
Nearby Montreal boasts an even bigger
school for circus performers.
Although only a handful of students go
on to a career in the circus, the popularity
of the programmes offered to would-be ac-
robats, local children and even tourists off
cruise ships is the visible manifestation of
the circus craze that has gripped Quebec.
At its heart is the privately owned Cirque
du Soleil, started in 1984 by a troupe of stilt-
walkers from nearby Baie-Saint-Paul. It is
now one of Canada’s most important cul-
tural exports, employing 5,000 people at
eight permanent shows in Las Vegas and at
12 others that tour the world. In 2012 its
turnover was about C$1billion ($900m)—it
does not reveal its profits.
In 2005 this newspaper asked whether
Guy Laliberté, majority owner of the cir-
cus, could keep it flying. That question was 1
60 Business
No lions, no bearded ladies
2 raised again early last year when the com-
pany laid off 400 employees, mainly at its
head office in Montreal. The company has
blamed the strong Canadian dollar (which
has since weakened) and the after-effects
of the global recession, which hit sponsor-
ship income. It has launched a cost-cutting
drive but insists it is not in crisis.
However, the company that reinvented
the circus by eschewing traditional acts
such as lion tamers and bearded ladies,
and by targeting adults rather than chil-
dren, is certainly finding it tougher going
these days. It enjoyed early and rapid suc-
cess because it had created an uncontested
blue ocean in which to swim, according to
two management strategists from INSEAD
business school in France. “That ocean is
now full of sharks,” says Gilles Ste-Croix,
one of the original stilt-walkers, who is
now the company’s “artistic guide”.
Competition comes not just from older
circuses that have updated their acts, such
as Ringling Bros. and Barnum & Bailey, but
also from a trend in the arts to merge va-
rious disciplines, for instance by bringing
acrobats into operas.
Smaller rivals have also emerged from
the large shadow Cirque du Soleil casts in
Quebec. A troupe called “Les 7 doigts de la
main” set a box-office record at the Broad-
way theatre where they performed a show
called “Pippin”. Flip FabriQue, formed by a
group of friends just two years ago, is now
travelling the world. And Cirque Alfonse
toured Europe, Asia and America in 2013
with a truly Canadian spectacle called
“Timber!”, which features chainsaw-jug-
gling lumberjacks.
These newer outfits are both a source of
competition and collaboration for Cirque
du Soleil, with performers moving back
and forth. It also collaborates with notable
local talents, such as Robert LePage, a direc-
tor, playwright and actor whose company
Ex Machina is based in Quebec City. This
has reinforced what has become a Quebec
entertainment cluster.
Mr Neveu, a Cirque du Soleil alumnus,
thinks that rather than serving a spell with
his former employer, many of the students
at his school will go straight to work in one
of the many smaller troupes, which he
sees as a healthy trend. Even so, Cirque du
Soleil remains the sun around which all
the others are orbiting. 7
E-commerce in China
No profits, we
promise
SHANGHAI
JD, an e-commerce firm billed as
China’s Amazon, prepares an IPO
I T IS a rare corporate boss who vows to
make no profit for years. But that is pre-
cisely the strategy embraced by Richard
Liu, the chief executive of JD. A year and a
half ago, he declared that his Chinese e-
commerce firm would earn no gross profits
on electronic goods, which make up most
of its sales, for three years. He was even re-
ported to have threatened to sack any
salesman making a margin.
Yet Mr Liu secured more than $2 billion
in early funding from such celebrated in-
vestors as Prince Waleed Bin Talal of Saudi
Arabia and Sequoia Capital, an American
venture-capital outfit. He now wants for-
eigners to plough another $1.5 billion or so
into JD (previously known as 360buy) at its
forthcoming initial public offering in New
York. This seems cheeky, given that the
firm has been bleeding red ink. In 2012 its
The Economist February 15th 2014
net losses topped 1.7 billion yuan ($283m),
up from a loss of nearly 1.3 billion yuan a
year earlier. In the first three quarters oflast
year, it did make 60m yuan of profit—but
much of it from interest income. It has cash
and equivalents on hand of only $1.4 bil-
lion, whereas its accounts payable exceed
$1.7 billion. Given Mr Liu’s plans for further
expansion, its finances are unlikely to im-
prove soon.
Would any investor want to buy into
this promise of prosperity without palpa-
ble profits? Maybe. JD’s growth story is im-
pressive. Like Amazon, the American on-
line giant to which it is often compared
(since it offers its own range of goods as
well as offering a shopfront for third-party
sellers), JD is pursuing an “asset-heavy”
business model that puts scale and market-
share above short-term profits. On some
measures, it is working: JD is the second-
biggest competitor in the world’s biggest
e-commerce market, lagging only Alibaba.
The value of transactions handled by
JD exceeded 86 billion yuan during the first
three quarters of last year, up from 33 bil-
lion yuan in all of 2011. The first three quar-
ters of last year also saw the number of
active accounts rise to 35.8m, from 12.5m in
2011. JD now has 82 warehouses across Chi-
na, and over18,000 delivery staff.
Two big questions hang over the firm’s
future. One is whether the asset-heavy ap-
proach will pay off. Logistics infrastructure
in much of China remains quite primitive.
That means JD has to invest far more, pro-
portionately, to guarantee reliable and
timely deliveries in China than did Ama-
zon, which benefited from America’s rela-
tively good infrastructure.
JD also faces two formidable local rivals
with strong finances. One is Tencent, an in-
novative firm that makes most of its mon-
ey selling virtual goods to videogamers. Its
early efforts at e-commerce were a bust but
now this is a firm to watch. The reason is
WeChat, its wildly popular messaging app.
Tencent is cleverly using this free service as
a Trojan horse, exploiting its presence on
people’s smartphones to nudge them to
shop via its various online platforms.
The other rival is, of course, Alibaba.
The firm, which controls perhaps 80% of
all e-commerce in China, is expanding into
ancillary areas to fortify its position. It has
invested in social-messaging outfits,
launched online wealth-management ser-
vices and bought into a popular taxi-hail-
ing app. This week it launched a bid to win
control of AutoNavi, China’s biggest equiv-
alent to Google Maps.
JD’s rush to float, despite its meagre pro-
fits, is no accident. Alibaba is planning its
own IPO soon, and it could be huge: the
private sale of a stake in it this week values
the firm at around $130 billion. It is hard
enough trying to be the Amazon of China
without also having to live in the shadow
of Goliath. 7
 The Economist February 15th 2014
Schumpeter The English empire
A growing number of firms worldwide are adopting English as their official language
Y ANG YUANQING, Lenovo’s boss, hardly spoke a word of
English until he was about 40: he grew up in rural poverty and
read engineering at university. But when Lenovo bought IBM’s
personal-computer division in 2005 he decided to immerse him-
selfin English: he moved his family to North Carolina, hired a lan-
guage tutor and—the ultimate sacrifice—spent hours watching
cable-TV news. This week he was in São Paulo, Brazil, for a board
meeting and an earnings call: he conducted all his business in
English except for a briefing for the Chinese press.
Lenovo is one of a growing number of multinationals from
the non-Anglophone world that have made English their official
language. The fashion began in places with small populations
but global ambitions such as Singapore (which retained English
as its lingua franca when it left the British empire in 1963), the Nor-
dic countries and Switzerland. Goran Lindahl, a former boss of
ABB, a Swiss-Swedish engineering giant, once described its offi-
cial language as “poor English”. The practice spread to the big
European countries: numerous German and French multination-
als now use English in board meetings and official documents.
Audi may use a German phrase—Vorsprung durch Technik, or
progress through engineering—in its advertisements, but it is im-
possible to progress through its management ranks without good
English. When Christoph Franz became boss of Lufthansa in 2011
he made English its official language even though all but a hand-
ful of the airline’s 50 most senior managers were German.
The Académie française may be prickly about the advance of
English. But there is no real alternative as a global business lan-
guage. The most plausible contender, Mandarin Chinese, is one
of the world’s most difficult to master, and least computer-friend-
ly. It is not even universal in China: more than 400m people there
do not speak it.
Corporate English is now invading more difficult territory,
such as Japan. Rakuten, a cross between Amazon and eBay, and
Fast Retailing, which operates the Uniqlo fashion chain, were
among the first to switch. Now they are being joined by old-econ-
omy companies such as Honda, a carmaker, and Bridgestone, a
tyremaker. Chinese firms are proving harder to crack: they have a
huge internal market and are struggling to recruit competent
managers of any description, let alone English-speakers. But
Business 61
some are following Lenovo’s lead. Huawei has introduced Eng-
lish as a second language and encourages high-flyers to become
fluent. Around 300m Chinese are taking English lessons.
There are some obvious reasons why multinational compa-
nies want a lingua franca. Adopting English makes it easier to re-
cruit global stars (including board members), reach global mar-
kets, assemble global production teams and integrate foreign
acquisitions. Such steps are especially important to companies in
Japan, where the population is shrinking.
There are less obvious reasons too. Rakuten’s boss, Hiroshi
Mikitani, argues that English promotes free thinking because it is
free from the status distinctions which characterise Japanese and
other Asian languages. Antonella Mei-Pochtler of the Boston
Consulting Group notes that German firms get through their
business much faster in English than in laborious German. Eng-
lish can provide a neutral language in a merger: when Germany’s
Hoechst and France’s Rhône-Poulenc combined in 1999 to create
Aventis, they decided it would be run in English, in part to avoid
choosing between their respective languages.
Tsedal Neeley of Harvard Business School says that “English-
nisation”, a word she borrows from Mr Mikitani, can stir up a hor-
net’s nest of emotions. Slow learners lose their self-confidence,
worry about their job security, clam up in meetings or join a guer-
rilla resistance that conspires in its native language. Cliques of the
fluent and the non-fluent can develop. So can lawsuits: in 2004
workers at a French subsidiary of GE took it to court for requiring
them to read internal documents in English; the firm received a
hefty fine. In all, a policy designed to bring employees together
can all too easily have the opposite effect.
Ms Neeley argues that companies must think carefully about
implementing a policy that touches on so many emotions. Senior
managers should explain to employees why switching to English
is so important, provide them with classes and conversation
groups, and offer them incentives to improve their fluency, such
as foreign postings. Those who are already proficient in English
should speak more slowly and refrain from dominating conver-
sations. And managers must act as referees and enforcers, resolv-
ing conflicts and discouraging staff from reverting to their native
tongues. Mr Mikitani, who was a fluent English speaker himself,
at first told his employees to pay for their own lessons and gave
them two years to become fluent, on pain of demotion or even
dismissal. He later realised that he had been too harsh, and start-
ed providing lessons on company time.
Nuance and emotion, or waffle?
Intergovernmental bodies like the European Union, which em-
ploys a babbling army of translators costing $1.5 billion a year, are
obliged to pretend that there is no predominant global tongue.
But businesses worldwide are facing up to the reality that English
is the language on which the sun never sets. Still, Englishnisation
is not easy, even if handled well: the most proficient speakers can
still struggle to express nuance and emotion in a foreign tongue.
For this reason, native English speakers often assume that the
spread of their language in global corporate life confers an auto-
matic advantage on them. In fact it can easily encourage them to
rest on their laurels. Too many of them (especially Englishmen,
your columnist keeps being told) risk mistaking their fluency in
meetings for actual accomplishments. 7
Economist.com/blogs/schumpeter

Finance and economics
Unemployment in America
Closing the gap
America’s labour market has suffered permanent harm
I T TOOK barely a month for the bubble of
optimism that formed over the Ameri-
can economy at the start of the year to de-
flate. Job growth slowed sharply in Decem-
ber, and stayed weakin January, suggesting
more than bad weather was to blame.
The unemployment rate, though, tells a
much cheerier story: it dropped to 6.6% in
January from 7% in November. Indeed, it
could soon hit the Federal Reserve’s 6.5%
threshold at which it may consider raising
interest rates.
The jobless number has been sending a
strangely upbeat message about America’s
recovery for some years now. Yet the Fed
and other researchers have downplayed
its significance, linking the rate less to bu-
oyant demand for labour than to stagnant
supply, as discouraged workers stop hunt-
ing for jobs. On February 11th Janet Yellen,
in her inaugural appearance before Con-
gress as chairman of the Fed, called the re-
covery in the labour market “far from com-
plete” and averred that she would consider
“more than the unemployment rate” in de-
ciding when to declare it healed.
Listen to the numbers
Even so, recent research suggests the un-
employment rate is saying something im-
portant. It’s just that the message is a de-
pressing one: America’s labour supply
may be permanently stunted. If so that
would mean that the economy is operating
closer to potential—using all available capi-
tal and labour—than generally thought,
and that there is less downward pressure
on inflation than the Fed has assumed.
Figuring out the gap between actual
and potential output is tricky because po-
tential, always hard to discern, is more un-
certain than usual. In a recent report Lewis
Alexander of Nomura Securities, a bank,
calculated the output gap using three dif-
ferent labour market indicators (see chart).
The proportion of people with jobs
plunged from 63% of the population in late
2007 to below 59% in 2009. It has barely
budged since, suggesting the output gap
has not closed at all. The unemployment
rate, in contrast, is 1.1 percentage points
Clear as mud
How far the labour market is from full employment,
according to different indicators
Total unemployment, % of labour force
Short-term unemployment, % of labour force
Employment, % of population
FULL EMPLOYMENT
1990 95 2000 05 10
Source: Nomura
The Economist February 15th 2014 63
Also in this section
64 Buttonwood: The growth paradox
65 The German courts and the ECB
65 Europe’s sickly investment banks
66 South Korea’s housing market
67 Credit-card fraud in America
67 Western Union’s legal troubles
68 Free exchange: Central-bank
co-ordination
For daily analysis and debate on economics, visit
Economist.com/economics
above its estimated “natural rate” of 5.5%,
suggesting most of the output gap has dis-
appeared. Finally, if one looks just at those
who have been unemployed for less than
six months, the output gap appears to have
closed completely.
Deciding which measure to use in-
volves determining why so many people
have left the labour force. The labour par-
ticipation rate (measuring those in work or
looking for it) is down to 63% from 66% in
2007. The Congressional Budget Office
(CBO) attributes just a third of that de-
crease to discouraged workers who have
temporarily stopped looking for jobs. The
remainder it ascribes to demographics, as
ageing baby boomers retire early, or to peo-
ple who have gone jobless for so long they
have permanently given up looking. This
is one reason the CBO has sharply revised
down its estimate of America’s potential,
and with it, the size of the output gap,
which it now puts at a little over 4% of GDP.
Had its estimates of the economy’s poten-
tial not shrunk since 2008, that gap would
be more than 10% of GDP.
So if the unemployment rate is under-
stating the output gap, it is not by much. In-
deed, for the Fed’s purposes, it may even be
overstating the gap. That’s because the lon-
ger someone is unemployed, the less atten-
tion they get from recruiters and the less
vigorously they hunt for work. As a result
1 they are not much of a curb on wages.
+ In 2005 Ricardo Llaudes of the Euro-
0 pean Central Bank found that short-term
–
1 unemployment predicted inflation in
European economies better than total un-
2
employment. This was less true for Ameri-
3 ca, where short-term and long-term unem-
4 ployment have tended to move together.
But the two have recently parted ways,
5 with long-term unemployment declining
13
much more slowly.
Several researchers from the Federal Re- 1
64 Finance and economics
2 serve Bank of New York recently re-exam-
ined the relationship and found that short-
term unemployment better explained
why wage growth has not fallen further. To
be sure, inflation itself has fallen to a little
over 1%, well below the Fed’s 2% target. But
a report accompanying Ms Yellen’s testi-
mony attributed some of that to falling
commodity prices and a stronger dollar. It
noted that growth in wages has been weak
but that unit labour costs, which adjust
wages for productivity, are growing at
about the same rate as before the reces-
sion.
This doesn’t mean the Fed has to raise
Buttonwood The growth paradox
Past economic growth does not predict future stockmarket returns
E MERGING stockmarkets go in and out
of fashion. They were battered during
the Asian and Russian crises of the late
1990s, but then recovered to offer double-
digit annual returns in the first decade of
the 21st century. Since 2010, however, they
have reverted to underperforming their
developed-country rivals.
The arguments in favour of investing
in emerging markets are the same as they
ever were. Such countries have faster
growth, on average, than the rich world
and a smaller weight in global equity in-
dices than they do in the world’s GDP.
But as Elroy Dimson, Paul Marsh and
Mike Staunton of the London Business
School have pointed out in the past, there
is no automatic link between economic
growth per person and stockmarket re-
turns. In their latest report for Credit
Suisse, a bank, the academics explore this
issue in more detail. They find one slightly
odd distinction: the correlation between
equity returns and economic growth per
person since 1900 has been negative, but
that between equity returns and aggre-
gate GDP growth is actually positive. A
growing population, in other words, is
better for equities than a richer one.
This relationship is, alas, not very use-
ful for investors. Let us assume that they
make forecasts of economic growth by ex-
trapolation from the data for the previous
five years, and put money in the equity
markets of the countries that have grown
the fastest. Since 1972, that approach
would have delivered a return of 14.5% a
year in dollar terms. But had they invest-
ed in the economies with the slowest
growth record, investors would have
earned 24.6% (see chart).
This may partly be down to a “value”
effect, similar to that observed with indi-
vidual stocks. Countries with good
growth records become favoured by in-
interest rates now, given how low inflation
is. But if inflation moves up, “this debate
becomes front and centre, right away,” says
Mr Alexander.
The Fed could, of course, let inflation
rise above its target in hopes of getting un-
employment down further. Ms Yellen
played a central role in the adoption of a
strategy that allows for that. But it may be
fighting a losing battle. Unpublished re-
search by Alan Krueger of Princeton Uni-
versity finds that in 2010 about 18% of the
long-term unemployed quit the workforce
each month. That has since risen to 24%.
Meanwhile, the rate at which they find
Crystal balls needed
Average annual total return, 1972-2013, %
Portfolio based on equities from economies with the:
lowest growth* 0
in the:
5 10 15 20 25 30
past five years
future five years
highest growth*
in the:
past five years
future five years
Source: Credit Suisse *GDP per person
vestors who bid up share prices according-
ly; future equity returns are thus lower. But
countries with poor growth records see
their stockmarkets shunned; their share
prices are thus cheap and offer higher sub-
sequent returns. Another problem is that
extrapolating from past economic growth
simply doesn’t work. The report finds no
correlation since 1900 between GDP
growth per person in an individual coun-
try in one year and growth two years later.
Furthermore, a stockmarket is not a per-
fect representation of the domestic econ-
omy; successful companies may be pri-
vately owned and not listed on the market
while many big companies (as in China)
may be owned by the state. As they grow,
companies issue more shares; as a result,
existing shareholders do not gain all the
benefits of higher profits.
Over the long term, these dilution ef-
fects mean that investors do not get all the
benefits of GDP growth, in the sense that
dividends grow more slowly than the
economy. Between 1900 and 2013, real divi-
dends declined slightly (0.1% a year) over
the 21 countries for which the academics
have data, while GDP growth was 2.8% a
year. Even in America, the most successful
economy over the period, real dividends
The Economist February 15th 2014
work has edged down to 10% per month.
The work they find is often transitory or
part-time. Thus, with each passing month,
more of the unemployed are drifting to the
fringes of the labour market than re-enter-
ing it. More monetary and fiscal stimulus
may have saved them a few years ago, but
are of much less help now.
Policymakers will need to put more ef-
fort into making the long-term unem-
ployed once again employable. Barack
Obama recently persuaded several hun-
dred companies to pledge not to discrimi-
nate against them. Unfortunately that will
probably not be nearly enough. 7
grew by 1.6% while GDP growth was 3.4%.
The report does find that prior knowl-
edge of GDP growth would be useful. If
investors had had perfect foresight of
which economies would grow fastest
over the following five years, and had in-
vested accordingly, they could have
earned 28.8% a year. Then again, if the
fates were to grant investors perfect fore-
sight, it would be simpler for them to be
aware of the best performing markets, not
the best economies.
In the absence of such powers, emerg-
ing markets still have their attractions.
The academics reconstruct an emerging-
market universe going back to 1900 using
a definition based on GDP per head; start-
ing with a group of seven (China, Finland,
Japan, Portugal, Russia, South Africa and
Spain). Over the extended period, emerg-
ing markets underperformed, returning
7.4% versus 8.3% for the developed world.
However, the biggest period of under-
performance was in the 1940s, when Japa-
nese equities lost 98% of their dollar value
and the Chinese market disappeared in
the revolution. Since 1950, emerging mar-
kets have returned 12.5% a year against the
developed markets’ 10.8%. This is the right
result, in theory: emerging markets are
riskier (in the sense of being more vola-
tile) and so investors should demand a
higher return.
The good news is that volatility has de-
clined over time, both in absolute terms
and relative to developed markets. The
bad news is that, in the five years to the
end of 2013, the correlation between
emerging markets and their developed
brethren was twice as strong as it was in
the early 1990s. Globalisation has inte-
grated developing stockmarkets as well as
their economies.
Economist.com/blogs/buttonwood
 The Economist February 15th 2014
The German courts and the ECB
It isn’t over
European monetary policy has not been given the reprieve markets believe
A S A working rule, the shorter a state-
ment the more it says. A commitment
made by the European Central Bank (ECB)
in September 2012 runs to fewer than 500
words, but it was enough to send the bond
vigilantes packing. The ECB promised to
make unlimited purchases of the sover-
eign debt of governments on the ropes.
These “Outright Monetary Transactions”
(OMT), whose dreary name disguises their
punch, proved so potent a deterrent that
they never had to be deployed.
But if quiescent markets were to turn
nasty again, requiring OMT to be fired,
would the central bank be acting within its
powers? For more than a year the German
constitutional court in Karlsruhe has been
contemplating this question. Even though
the place to decide whether a European
body is abiding by European law is in Lux-
embourg at the European Court of Justice
(ECJ), the court in Karlsruhe insists on its
right to examine whether the acts of a
European institution are infringing the
German constitution.
The judges finally issued a ruling on
February 7th. The judgment of the major-
ity (two of the eight judges dissented say-
ing that the case should not have been
heard) was far harsher than the “yes, but”
verdict that had originally been expected.
He’ll be back
Instead the court found that the central
bank had overstepped its mandate and
that OMT was a backdoor to “monetary fi-
nancing” of governments, outlawed under
European treaties. But the markets heaved
a collective sigh of relief as they noted that
in an unprecedented move the court had
referred crucial points in the case to the
ECJ. Since the European court is thought of
as a champion of European integration,
OMT should be safe in its hands.
But referring points in the case to the
ECJ does not mean deferring to it. The view
that the constitutional court has thrown in
the towel is incorrect, says Bruno de Witte,
a professor of European Union law at
Maastricht University; rather the German
judges have given their interpretation and
are asking the ECJ for its views. They will
take these into account when passing their
final judgment, based as before on wheth-
er OMT infringes Germany’s basic law.
If the European court simply upholds
the ECB’s defence of bond buying, which is
that it lies squarely within the central
bank’s monetary-policy mandate, then
that could set the stage for a clash of the
courts. Given how harsh its ruling has
been, the German court might insist that,
notwithstanding a favourable judgment
from the ECJ, OMT is incompatible with
the constitution. Though it could not pre-
vail upon the central bank to revise OMT,
the court could try to prevent the German
Bundesbank from participating in it.
Can such a battle between Karlsruhe
and Luxembourg be avoided? In effect the
German court sets out its terms for a com-
promise. In the event of a restructuring, it
does not want the ECB to be on an equal
footing with private creditors, accepting
losses like them on debt acquired through
OMT. The court also says that the policy
should, where possible, avoid interfering
with price formation (which may refer to
setting targets for bond yields). These de-
mands could probably be met without de-
fanging OMT. The third stipulation—that
purchases should not be unlimited—might
castrate it. Yet even on this point there may
be room for compromise by recognising
that OMT does have effective limits since it
would only target bonds between one and
three years from maturity.
At this level of judicial jousting, realpo-
litik rather than the strict letter of the law
prevails. Though it might be tempting for
the ECJ to slap down the constitutional
court, Germany underpins the euro and
Finance and economics 65
the single currency is central to the integra-
tionist project. A face-saving fudge seems
the most likely outcome; the ECJ after all
sits in the city that gave its name to a para-
gon of the genre, the Luxembourg compro-
mise on EU members’ voting rights.
The ECB’s formal commitment of Sep-
tember 2012 may have been short, but it
was a good deal longer than the impromp-
tu vow made by Mario Draghi six weeks
earlier “to do whatever it takes” to save the
euro, which turned out to be OMT. In fact
the ECB boss added a crucial and usually
omitted rider to his pithy pledge: “within
our mandate”. That qualification is now
being spelt out by the judges. When they
have resolved the matter to their satisfac-
tion it seems unlikely that OMT will be
quite so mighty a weapon as it appeared to
be when it was first unveiled. 7
Investment banks
An ocean apart
European firms fall behind
O N ONE side of the Atlantic a handful
of banks still find it possible to earn a
decent living by trading stocks, bonds and
other financial instruments. On the other,
tightening capital standards and unbal-
anced business models are making it al-
most impossible for investment banks to
make a buck doing much the same.
The latest chapter in the tale of woe of
European banks was written this week by
Barclays, a British bank. Its £5.2 billion ($8.6
billion) pre-tax profit for 2013 was marred
by an appalling fourth quarter in almost
every department: the three months yield-
ed a mere £191m profit. Antony Jenkins, its
reforming chief executive, was lambasted
for topping up the investment bankers’ bo-
nus pool even as earnings fell.
Weak profitability is not just a problem
for Barclays. Its arch-rival, Deutsche Bank,
posted a loss of €1.2 billion ($1.6 billion) for
the fourth quarter. The travails of both re-
flect a sudden downturn in the trading of
bonds, currencies and commodities (FICC
in the jargon), on which they are unhealth-
ily dependent. After a brilliant start to the
year in 2013, that market faltered: Deut-
sche’s FICC revenue dropped by 64% from
the first to the last quarter and Barclays’ by
47%. Leading American banks such as
JPMorgan Chase, Bank of America, Citi- 1
Correction: In a report about the Consumer Financial
Protection Bureau (“Caveat vendor”, Feb 1st), we said
that it had complained that discrimination against some
car-buyers had added $300 a year to their borrowing
costs. It should have been $300 over the life of the
loan. Sorry.
66 Finance and economics
Striving outward
Banks’ financial ratios, 2013, %
Basel 3 common Leverage
equity Tier 1 ratio
capital ratio
JPMorgan
Chase
15 Me B
rr i ofA
S ll L
UB 12
6 M
uisse
3 $150,000 to rent a smallish flat for three
Credit S
De Bank
uts
che
Barc
lays gan
Mor nley
Sta
Source: Company reports
2 group and Goldman Sachs experienced a
dip too. But their profits were buoyed by
better equity markets, in which they have a
bigger presence than Barclays and Deut-
sche. That difference shows up in their re-
turn on equity, a standard measure of prof-
itability (see chart).
Barclays and Deutsche have already jet-
tisoned some businesses that they deemed
unprofitable, such as trading American
mortgages and complex derivatives. Now
they see cutting costs as a route to restoring
their returns. Barclays aims to trim its ex-
penses to £16.8 billion by 2015 from £18.7 bil-
lion last year. It will be shedding 12,000
staff, including about 400 pricey invest-
ment bankers. Deutsche has fired nearly
3,000 employees since 2011, including
1,500 investment bankers.
But these cuts may not offset an inexo-
rable rise in the costs of complying with
new regulations and meeting higher capi-
tal requirements. Both banks insist they are
comfortably capitalised, but their cushions
look meagre if assessed by the most rigor-
ous measure, the leverage ratio, which is
gaining supporters on both sides of the At-
lantic. Both banks have shrunk their risk-
weighted assets: Barclays by £32 billion
and Deutsche by €32 billion. Yet as tougher
standards bite, each will need more capital
or fewer assets. Neither option is a recipe
for improving their return on equity. Bar-
clays hopes returns will beat the cost of
equity, estimated at around 11.5%, by 2016.
That looks unlikely without big changes.
One lever banks can still pull is on com-
pensation. Yet it has barely been touched.
That may partly be due to the persistence
of the go-go culture that predominated be-
fore the financial crisis. It is also because
many senior bankers expect markets to re-
bound, leaving behind those firms that cut
too deeply. Such optimism seems increas-
ingly misplaced. 7
South Korea’s housing market
Return on
Lumping it
equity
SEOUL
Landlords are having to ditch a
yn
ch century-old rental system
OST South Korean urbanites would
leap at the chance to part with
Citigrou
years in Seoul, the capital. These days,
p however, most Korean landlords would
spurn such a measly deposit.
Korea’s unusual rental system, known
Sacdman
as jeonse, does not involve monthly rental
hs
payments. Instead, tenants provide land-
l
Go
lords with a deposit, typically between a
quarter and half of the property’s value, to
invest for the duration of the lease. Proper-
ty owners keep the returns and then repay
the lump sum at the end of the tenancy.
Average deposits have now risen for 76
consecutive weeks in Korea, the longest
streak ever. Thousands of jeonse leases in
the capital are now as high as 90% of the
value of the house; they sometimes exceed
it in areas where property prices have fall-
en since leases were agreed.
The jeonse system was once prized by
both tenants and landlords. In the 1960s
rapid urbanisation drew farmers to Korea’s
thriving cities, boosting demand for
homes at a time when capital was being
mobilised for state-led industrial develop-
ment. The government thought property
unproductive, so restricted banks from
lending to developers, homeowners and
tenants, says Son Jae-young, a professor of
real estate at Konkuk University in Seoul.
In response jeonse emerged as a “self-help
funding mechanism”.
Tenants’ deposits financed landlords’
properties, interest-free, while pushing
renters to pool savings: over time, the de-
posit would become their own home-pur-
Jeonse’s future is hazy
The Economist February 15th 2014
chase fund. For decades, monthly rental
was synonymous with poverty.
Yet interest rates and property prices
have sunk since 2008. To earn a decent re-
turn on their investments, landlords have
been raising jeonse prices. Tenants have
tended to take out low-interest loans to
cover the hike. Since 2009 such borrowing
has almost doubled, from 33.5 trillion won
($31.5 billion) to 60 trillion won, according
to the Bank of Korea, the central bank.
That undermines one of the main ad-
vantages of this unusual system. Previous-
ly the large cash deposits that tenants had
to build up helped shelter the Korean prop-
erty market from bubbles, by restraining
price increases, and from busts, by provid-
ing buyers with ready pots of cash. It also
helped protect the banking system from
losses on risky mortgages. Long considered
a deal between individuals, the deposits
are still not included in Korea’s household
debt statistics, nor in calculations of aver-
age loan-to-value (LTV) ratios. Central bank
data on jeonse loans only go back to 2009.
But Sun Dae-in, the author of a recent book
on Korea’s housing market, says the depos-
its held by landlords must be seen as debts.
He estimates that about half of all jeonse
money (about 300 trillion won) is used to
finance a second or third property. If added
to housing loans, the average LTV ratio
would jump from just under 50% (the regu-
lated limit) to over 75%. Last November the
Bank of Korea estimated that a tenth of Ko-
rea’s 3.7m jeonse landlords may find it hard
to repay tenants’ deposits.
Already more landlords are choosing to
rent their properties for a monthly fee: 40%
did so last year, up from 34% in 2012. But
some homeowners would rather not ditch
jeonse entirely: more than a quarter are us-
ing its hefty sums to pay off a mortgage on
the rented property, according to the Bank
of Korea. They often offer tenants the op-
tion to substitute a monthly payment for
an increase in the deposit. A hybrid sys-
tem, still unique to Korea, is taking root. 7
 The Economist February 15th 2014
Credit cards
Skimming off the
top
ATLANTA
Why America has such a high rate of
payment-card fraud
A MERICA leads the world in many cate-
gories: shale-gas production, defence
spending, incarceration rates and, alas,
payment-card fraud. In December Target,
an American retailer, said that hackers had
breached its network and stolen payment-
card details of about 40m of its customers.
A few months before the Target breach,
roughly152m customers had their informa-
tion stolen in a hack of Adobe Systems.
Last month Neiman-Marcus, a department
store, reported a similar breach.
For crooks, there are rich pickings in
such data. Total global payment-card fraud
losses were $11.3 billion in 2012, up nearly
15% from the prior year. The United States—
the only country in which counterfeit-card
fraud is consistently growing—accounted
for 47% of that amount, according to the
Nilson Report: card issuers lost $3.4 billion
and merchants another $1.9 billion.
A survey released in 2012 by the Aite
Group and ACI Worldwide, a research and
a payment-software firm respectively,
found that 42% of Americans had experi-
enced some form of payment-card fraud in
the preceding five years. Nor is it just Amer-
icans who are affected: foreigners whose
card data is stolen often find the thieves
have little trouble waltzing into stores and
making purchases with ersatz cards. Euro-
peans rack up more losses in this way in
America than in any other country.
In part, fraudsters target the United
States because that’s where the cards are.
At the end of2013 there were 1.2 billion deb-
it, credit and pre-paid cards in circulation in
America—more than in any other region.
That is nearly five cards per adult.
But America also makes things easy for
fraudsters: alone among developed coun-
tries, it still relies exclusively on cards with
magnetic strips, which are far less secure
than the chip-and-PIN technology used
elsewhere. This combines a personal code
with a microchip from which it is harder to
extract data than a magnetic strip.
As of 2012, 45% of the world’s payment
cards and 76% of terminals were equipped
to use chip-and-PIN. By 2011 this technol-
ogy had brought some forms of card fraud
in Britain to their lowest level in two de-
cades. The spread of chipped cards in Can-
ada brought losses from skimming—steal-
ing data from credit cards—from C$142m
($129m) in 2009 to C$38.5m in 2012.
At a series of Senate hearings earlier
this month, Target’s CFO said it would
spend $100m to roll out chip-and-PIN
Swiped
Credit-card fraud, $bn
Total
12
10
of which: US
8
6 requirements transform the virtues of
4 and breadth of its network and its willing-
2 ness to process vast numbers of small tran-
0 In response to accusations that it had
2003 04 05 06 07 08 09 10 11 12
Source: The Nilson Report
store-issued credit cards and payment de-
vices that accept them. A consumer advo-
cate urged other card issuers to do the
same. Though the switch may cost issuers
and merchants as much as $8 billion, inter-
est at long last appears to be growing.
Many ofthose costs may be recoverable
over time through lower fraud losses.
Chip-and-PIN would also harmonise
American and global standards, making it
easier for Americans to use their cards
abroad and foreigners to use theirs in
America. It will make mobile payments
easier. And because recent banking regula-
tions have reduced the amount of money
banks make from interchange fees on debit
cards, issuers are looking to trim costs else-
where. Fraud losses no longer seem as
manageable as they once did. 7
Western Union
Finance in
purgatory
NEW YORK
The wonderful, awful business of
international transfers
O N FEBRUARY11th Western Union’s ex-
ecutives glossed over a decline in
earnings and revenues in an upbeat call.
But a day earlier five law firms had cast
light on some of its troubles when they pe-
titioned a court to represent its share-
holders in lawsuits related to dealings with
financial regulators.
The litigation is the latest twist in a legal
battle extending back more than a decade.
At its core, it reflects conflicting public poli-
cy objectives relating to one of the world’s
oldest businesses: the transfer of money
from one place to another.
Western Union’s services are essential
for people who do not have bank accounts
or are working far from home. Its network
is remarkable, encompassing more than
500,000 agencies in 200 countries. They
complete 29 transactions a second and
move $400 billion a year in remittances to
Finance and economics 67
developing countries. In the process, West-
ern Union helps to bolster trade and dis-
perse the world’s wealth. Yet these laud-
able activities conflict with another
pressing goal: impeding money launder-
ing. Rules to that end require financial insti-
tutions to know who their customers are
and how they obtained their money. These
Western Union’s model—the openness
sactions—into liabilities.
moved cash for people involved in the
cross-border smuggling of drugs, weapons
and people, Western Union struck a far-
reaching compliance agreement with Ari-
zona’s attorney-general in 2010. It agreed to
adopt 73 changes to its systems and proce-
dures, to install an external monitor to
keep tabs on its conduct and to fund the
creation of a new enforcement entity, the
Southwest Border Anti-Money Launder-
ing Alliance.
Many of the recommendations were
highly detailed. Western Union has, for ex-
ample, set up a system to monitor transac-
tions that takes into account factors such as
the seasonality of marijuana harvests and
illegal immigration. It is conducting back-
ground checks on agents and their fam-
ilies. Such efforts have turned out to be dif-
ficult and expensive. As this has become
clear, Western Union’s shares have been
jolted several times. Earlier this month
Western Union said it would be subject to
independent monitoring for an extra four
years. It faces big fines and criminal prose-
cutions if it fails to meet the stipulations in
the compliance agreement.
The allegations in the shareholder suits
echo these concerns. They contend that
the company has not been frank about its
difficulty in complying with the settlement
or the escalating costs involved in doing so.
Courts have sealed the documents related
to Western Union’s compliance efforts,
making it harder for outsiders to assess its
performance.
The monitor may complete a new re-
port on Western Union’s progress in the
next month, though distribution of that,
too, could be curtailed. To some extent, this
opacity helps Western Union, by sparing it
negative publicity. But it also comes at a
cost.
The law firms and their clients are not
the only ones questioning the depth of
Western Union’s compliance. Analysts re-
peatedly asked for more detail during the
earnings call, to little avail. This matters not
just to shareholders and law-enforcement
agencies. Without more detail, it is impos-
sible to tell whether Western Union has
been unduly lax, or whether the regula-
tors’ demands are inherently ruinous to
any massive, low-margin money-transfer
business. 7
68 Finance and economics
Free exchange The Loch Ness consensus
Countries make macroeconomic policy by themselves for themselves. Should they?
“I NTERNATIONAL policy co-ordination is like the Loch Ness
monster,” Olivier Blanchard and Jonathan Ostry of the IMF
wrote recently. It is “much discussed but rarely seen”. The oddity
was sighted in New York in 1985, when the big economies con-
spired to weaken the dollar. It resurfaced two years later in Paris,
when they decided to stop the greenback’s fall. Some also claim
to have witnessed it in Washington in 2008, when the G20 group
of big economies agreed to fight the financial crisis with simulta-
neous fiscal stimulus.
The G20’s finance ministers and central bankers will meet
again in Sydney later this month. As they gather, some prominent
economists think international co-ordination is due another ap-
pearance. They argue that the rich world’s central banks are
wrong to ignore the side effects of their policies on emerging
economies. By easing monetary policy so aggressively after the
crisis, these central banks obliged global capital to hunt for higher
yields in emerging economies. Now that America’s Federal Re-
serve is easing back on its easing, capital is flowing out again, leav-
ing emerging economies in some turmoil.
The hopes for co-operation are likely to be dashed. But they
are nonetheless interesting. They mark a break from the consen-
sus view that international co-operation is not terribly helpful—
and not in the least practical. According to this view, emerging
economies can take control of their own monetary fate by the
simple trick of letting their currencies float. They can untie them-
selves from the Fed by untying themselves from the dollar.
In the past decade many emerging economies heeded this ad-
vice, working hard to overcome their fear of floating. Their central
banks have shown more grit in the fight against inflation and
gained credibility for doing so. Thus when the currency falls, a
one-off jump in import prices tends not to result in ongoing price-
wage spirals. Emerging economies have also deepened their fi-
nancial markets and persuaded foreigners to lend to them in their
own currencies, narrowing the “currency mismatch” between
their assets and liabilities. Thus when their exchange rates slide,
the value of their foreign debt no longer rises to unbearable lev-
els, as it did during the Asian crisis.
But the turmoil of the past nine months has posed a stiff test of
this new-found currency courage. Emerging markets that no lon-
The Economist February 15th 2014
ger fear floating are still petrified of plunging. Central banks in the
worst-hit countries have felt compelled to raise interest rates, fear-
ful that exchange-rate tumbles will contribute to mounting price
pressures. And contrary to mainstream theory, a cheapening of
the currency is not always enough to entice back foreign buyers.
Exchange-rate falls have instead prompted renewed selling by in-
vestors hoping to escape any further depreciation.
Emerging economies are also vulnerable to new kinds of cur-
rency mismatch, according to Hyun Song Shin of Princeton Uni-
versity. In recent years their multinational companies have bor-
rowed dollars offshore via overseas subsidiaries. As
international borrowing costs have risen, they have fled the off-
shore market and turned their attention back home, withdraw-
ing local deposits, borrowing from local banks and cutting capital
outlays. Thus Fed policy can hurt an emerging economy even if
its residents (as opposed to its offshore subsidiaries) are free of
foreign-currency debt and no capital actually leaves the country.
At Nessie’s mercy
If emerging economies remain dependent on the Fed, should the
Fed bear its dependents in mind when it sets monetary policy?
Such solidarity is almost impossible to imagine. The Fed is ob-
liged by law to pursue solely domestic objectives. It will take note
of emerging-market troubles only if they threaten those national
goals. And thus far they don’t, said Janet Yellen, the Federal Re-
serve’s new chairman, in testimony to Congress this week.
Faced with the Fed’s unilateralism, emerging economies may
take unilateral steps of their own to protect themselves. When
capital next floods into emerging markets, they may impose limit-
ed controls on inflows, akin to the taxes Brazil imposed on foreign
bond and share purchases in 2009. Such controls will, however,
deflect capital to other economies. These bystanders may then
impose their own limits. The result could be a capital-controls
“arms race”, according to Anton Korinek of Johns Hopkins Uni-
versity, which would be damaging if those controls are clumsy.
Such capital controls—a response to Fed unilateralism—might
then create the need for multilateralism of another kind. Coun-
tries engaged in an arms race might seek the equivalent of “mutu-
al disarmament”. Everyone would ease their controls a notch or
two, preserving the same pattern of flows between them, but
without as much costly weaponry.
In principle, co-operation could go further, argue Mr Ostry
and Atish Ghosh of the IMF. Policymakers in rich countries could
tax risky capital flows at their point of departure, even as policy-
makers in emerging markets taxed them at their point of arrival.
As John Maynard Keynes once noted, controls are more effective
if “movements of capital can be controlled at both ends”.
The emerging-market turmoil of the past nine months may re-
new interest in such measures. But what works in theory rarely
works in practice. The rich world is unlikely to help the emerging
markets enforce their capital controls any more than it will set
monetary policy with their interests at heart. Certainly, if the ad-
vocates of international co-operation are hoping to see it in Syd-
ney and not just talk about it, the omens are not good. According
to Gary Campbell, president of the Loch Ness Monster fan club in
Inverness, the number of monster sightings has dwindled since
the turn of the century. Last year was the first since 1925 without
anyone spotting it at all. 7
Economist.com/blogs/freeexchange
Property 69

The Economist February 15th 2014

70 Property

The Economist February 15th 2014

Property 71

The Economist February 15th 2014


Science and technology
Condom technology
Sheathing Cupid’s arrow
BOSTON
The oldest artificial contraceptive may be ripe for a makeover
T HEY have been made of tortoiseshell
and horn. They have been made of the
finest silk and the coarsest leather. They
have been made of pigs’ bladders and
sheep’s intestines. They have been made
of rubber (natural and synthetic). They
have been made of plastic. But none of
these has quite fitted the bill. Condoms,
though 15 billion are manufactured each
year, and 750m couples use them, are not,
when push comes to shove, that popular.
In truth, they are awkward passion-killers
that have a disturbing tendency to pop off
at inconvenient moments.
Build a better condom, then, and may-
be the world will beat a path to your door.
That, anyway, is what a select band of re-
searchers in laboratories around the world
hope will happen. So does Bill Gates,
whose foundation is backing some of
these efforts with grants of $100,000
apiece as seed money, and the promise of
up to $1m more if the initial experimenta-
tion comes good.
Mr Gates’s foundation, the biggest non-
governmental source of cash for global
health, is interested in condoms for the
same reasons most users are. Not only do
they prevent unwanted pregnancies, they
also stop the transmission of venereal in-
fections—particularly HIV. The search for a
better condom, then, looks like a public
good as well as a private one. And there is
no shortage of ideas about how to do it.
When the Gates Foundation picked the
first 11 winners, in November 2013, it was
able to choose from among 812 proposals.
The winners of a second round, currently
being judged, and emphasising the hither-
to neglected field of “femidoms” (those
worn by women rather than men), will be
announced in May.
Cap this!
One of the most intriguing approaches to
building a better condom is to reinforce the
latex that modern prophylactics are made
from with graphene. This material, com-
posed of atom-thick sheets of carbon, is
one of the strongest known. Its thickness
(or, rather, lack of it) and its strength make it
an obvious starting point for something
that is supposed to be permeable to plea-
sure, but not to anything else.
One of the groups looking at graphene-
reinforced contraception is led by Aravind
Vijayaraghavan of the University of Man-
chester, in Britain. This is the institution
where, a decade ago, graphene was discov-
ered. Dr Vijayaraghavan’s team plans to
make a thin but tough, tear-resistant mem-
brane, suitable for condoms, by mixing it
with latex or polyurethane.
A second group that is interested in gra-
phene, run by Lakshminarayanan Ragu-
pathy of HLL Lifecare, India’s largest con-
dom-maker, hopes to go further. Dr
Ragupathy, too, intends mixing the carbon
sheets with latex to create a strong compos-
ite material. But he also proposes to adsorb
The Economist February 15th 2014 73
Also in this section
74 Robot builders
75 Understanding metastasis
For daily analysis and debate on science and
technology, visit
Economist.com/science
chemicals such as spermicides, antiviral
agents and even flavourings onto the gra-
phene. Some of these are already used in
condoms, but at the moment they have
only the smooth surface of the latex to stick
to. Add graphene, and that surface be-
comes much rougher (and its area much
larger) at a microscopic level, meaning
more chemicals can be retained on it.
Graphene is not, however, the only al-
ternative material being suggested for the
condom industry. Mark McGlothlin, boss
of Apex Medical Technologies, in San Die-
go, plans to borrow from the past rather
than looking to the future, by using colla-
gen, the stretchy protein that made guts so
suitable for use as condoms in olden days.
He intends to extract his collagen from
cows’ tendons and fish skins rather than in-
testines, and will break it down and reas-
semble it in a way that eliminates offensive
odours, imperfections and pores—for,
while the pores in natural collagen are too
small to let sperm through, they are big
enough to pass viruses.
Making condoms more effective is one
thing. But it will be of little use if they act as
a barrier to sensation as well as sperm. The
usual way to try to increase sensitivity is to
make their material thinner. But Patrick
Kiser of Northwestern University, in Illi-
nois, plans to tackle the problem in a differ-
ent way. Though he is cagey about the de-
tails, he says his group will make its
condoms out of polymers which mimic
the feel of the mucosal tissue encountered
during unprotected intercourse.
Karen Buch and Ducksoo Kim, of Bos-
ton Medical Centre, are also concerned
with how condoms feel in action. They are
trying to create a sheath which lubricates
itself when in contact with water. That
would eliminate the unpleasant oil-based
lubricants condoms currently use. To do
this, the two researchers have turned to the 1
74 Science and technology
2 fashionable field of nanotechnology. They
propose coating their condoms with tiny
particles of a polymer that binds tightly to
water—an arrangement which forms what
is known as a hydrogel. This, they hope,
will reduce friction and produce a smooth,
gliding sensation for users.
In Los Angeles, meanwhile, Ron Fre-
zieres of the California Family Health
Council, a charity, plans to fashion con-
doms from polyethylene, which is stronger
than latex (so condoms made from it can
be a fifth of the thickness of present-day
ones) and does not provoke allergic reac-
tions in the way that rubber sometimes
does. Polyethylene’s disadvantage is that it
does not have latex’s elasticity, which
holds things in place at the crucial mo-
ment. But Mr Frezieres, who has been test-
ing and developing condoms for 30 years,
claims this should not matter because a
condom made of the right sort of polyeth-
ylene will cling like shrink-wrap. More-
over, his device includes special tabs that
allow it to be pulled on like a sock. That
would be harder to do if it were elastic, and
thus just stretched when pulled.
How to get the thing on easily is also the
concern of Willem van Rensburg of Kim-
branox, in Stellenbosch, South Africa. He
and his team are working on the “Rap-
idom”, which can be deployed “with one
motion, thereby minimising interruption,”
as the Gates Foundation coyly puts it. The
Rapidom is a condom in a packet so organ-
ised that, instead of having to be ripped
open and the contents struggled with in
the heat of the moment, it can be grasped
on either side and pulled apart, unrolling
what is inside in a controlled way.
Once a condom is on, though, there re-
mains the question of preventing it from
coming off inopportunely. Benjamin Strutt
and his team at Cambridge Design Partner-
ship, a British technology consultancy, are
tackling that with a material which, unlike
latex, stretches and contracts in one direc-
tion (around the penis) more easily than
the other (along it). It thus tightens gently
during intercourse, and holds itself firmly
in place.
Richard Chartoff of the University of
Oregon is also tackling the problem of
keeping condoms in place. He plans to
make them from a polymer with “shape
memory” that will, when it reaches body
temperature, conform to the contours of a
penis and thus provide a custom fit.
Johnny comes marching home
One way or another, then, it looks likely
that a better condom is just around the cor-
ner. Not everyone, however, thinks the
world’s lovers actually will beat a path to
its inventor’s door.
One sceptic, a man who has seen it all
before, is Jeff Spieler, the United States
Agency for International Development’s
main condom expert, who began research-
ing the devices in the 1980s. Though he test-
ed many novel designs then, from ones
that had ends like ice-cream whirls to those
that could be worn inside-out without loss
of effectiveness, he says it was hard to
come up with something that pleased
enough people more than the tried and
trusted traditional design did.
Quotidian improvements rather than
innovative leaps have actually been the or-
der of the day. Breakage rates, for example
(which most users probably regard as the
crucial test of a condom’s effectiveness),
have fallen without fanfare to 1-2%, down
from 11-13% in the 1980s. It may be, there-
fore, that the innovation condoms really
need is not in design, but in marketing.
That is suggested in particular by the
different patterns of condom use seen in
different parts of the world. According to
the Population Reference Bureau, an
American think-tank, 20% of married cou-
ples in rich countries use condoms, while
18% prefer the pill—and these two methods
are the most popular forms of contracep-
Automated construction
’Bot the builder
Robot navvies may be just around the corner
T ERMITES are synonymous for most
people with destruction. Given half a
chance, they will chew up a house as soon
as its owner’s back is turned. But entomol-
ogists have a different point of view. They
are more likely to wax lyrical about the in-
sects’ talents for construction.
Termite mounds may reach as much as
three metres towards the sky—quite an
achievement for animals that are but a few
A stairway to heaven?
The Economist February 15th 2014
tion in such places. In poor countries, intra-
uterine devices and sterilisation are the
most popular methods, and the respective
figures for condoms and the pill are 4% and
7%. Moreover, the rapidly falling birth rates
in most poor countries suggest that, for
family planning purposes, radical change
is not needed. So the paradox is that if a
better condom does emerge from all this ef-
fort, it may be enjoyed more by the rich
world’s inhabitants than those of the poor
world at whom, at least in Mr Gates’s eyes,
it is aimed.
This does not mean efforts to develop a
better condom are wasted. Though death
rates from AIDS are falling, thanks to the
wide availability of antiretroviral drugs,
HIV is still spreading. In the absence of ab-
stinence, or of complete fidelity, condoms
are the best way of fighting that spread. So,
though it is not, perhaps, the most roman-
tic of Valentine messages, when the rubber
hits the road, anything that makes con-
doms better and easier to use must surely
still be welcome. 7
millimetres long. And these mounds are
not mere piles of earth. They have clever
air-conditioning systems, which use con-
vection to keep things cool; some are even
aligned north-to-south, to avoid the worst
of the midday sun. Termites also build
sheltered tunnels from their mounds to the
outside world, to keep themselves safe
while they are foraging.
Individual termites are, of course, far
too dim to understand such things as con-
vection and solar flux. Instead, a few sim-
ple rules encoded in their nervous systems
by evolution and regulated by signalling
chemicals called pheromones steer them
to produce their mounds in all their archi-
tectural glory. This kind of behaviour, in
which simple actions combine to produce
sophisticated results, is called emergence.
Now human designers are getting inter-
ested in emergence, too. In a paper just
published in Science, a group at Harvard,
led by Justin Werfel, describes termite-in-
spired robots that can build things by com-
bining magnetic bricks of a standard size.
All their human controller has to do is pro-
gram them with a few appropriate rules
and leave them to get on with it.
Robot construction teams are not, in
themselves, new. Researchers at the Uni-
versity of Pennsylvania have already dem-
onstrated a system which uses remotely 1
 The Economist February 15th 2014 Science and technology 75

2 controlled flying robots to build things.

What makes Dr Werfel’s approach differ-
ent is that instead of having a controlling
force, in the form of a computer program,
sitting at the centre telling everything else
what to do (as was the case in Pennsylva-
nia), control is distributed throughout the
system’s components, which cannot com-
municate with each other. The robots,
which are little wheeled contraptions, do
not need to see the bigger picture.
In the case of termites, the bigger pic-
ture is provided by natural selection,
which has, over the millennia, refined the
rules that individual termites obey. In the
case of Dr Werfel’s robots, a human design-
er specifies the desired outcome and, with
the help of a program developed by the
team, generates the rules that will lead to
its construction, with which each robot is
then programmed. All that remains is to
place a foundation brick to show the ro-
bots where to start building. Cancer
The robots use this initial brick to keep
track of where they are. The rules they
have been fed consist of a list of actions
Secondary goals
they are allowed to perform at any given
point in a three-dimensional grid whose
axes originate, in their tiny minds, from
this brick. Such actions include things like
“move forward”, “move backward”,
A better way to understand metastasis
“place a brick”, “climb onto a brick” and
“climb down from a brick”. If a robot finds
it cannot perform a particular action (usu-
ally because a brick has been put in the
T HE most insidious thing about cancer is
its tendency to spread. A lone primary
tumour can be tackled by knife or radia-
Moretti, Dr Kamm and their students used
these chips to create matrices of blood ves-
sels, bone cells and stem cells which they
way by one of the others), it will move on tion beam, as well as drugs, with a reason- hoped resembled the living marrow of a
and find something else to do until, even- able hope of success. But once it has metas- bone. They then placed clusters of breast-
tually, the desired outcome is achieved. tasised, and spread secondary cancers cancer cells in the middle of each chip. As a
around a patient’s body, such treatments control, they did something similar using
March to the scaffold are much less likely to be effective for any matrices of collagen (a protein abundant in
There are limitations. For instance, the ro- length of time. Stopping metastasis would bone) instead of ersatz marrow. As they
bots can only add bricks to the building; thus be a great achievement. And a device guessed would happen, the cancer cells
they cannot remove them. So, although the created by Matteo Moretti of the Galeazzi quickly invaded the marrow, but not the
system is clever enough to let them build Orthopaedic Institute, in Milan, and Roger collagen. The question was, what was at-
staircases to reach high places, those stairs Kamm of the Massachusetts Institute of tracting them in?
will end up as part of the structure. The ro- Technology, may be a step towards that To find out, they repeated the experi-
bots cannot, in other words, cope with the goal. Their invention, which they describe ment with breast-cancer cells that had
concept of temporary scaffolding. Accord- in Biomaterials, is a lab-on-a-chip that been incubated with antibodies to CXCR2.
ing to Dr Werfel, though, that is only be- mimics the metastasis of breast cancer into These glom onto the receptors and reduce
cause of their physical limitations, for they bone marrow. their attraction to other substances. That
would find it hard to take away a brick that One of the mysteries of metastasis is slowed the cancer cells’ spread down a lot.
is already in place. A lack of scaffolding is why migrant cells from different sorts of Conversely, when they added CXCL5 to
not a conceptual limitation of the mathe- primaries prefer to set up home in particu- the collagen matrices, cancer cells moved
matics that underlie the system. lar types of secondary tissue. To test their in rapidly. The link between messenger
At the moment, Dr Werfel’s robots are device the two researchers studied the and receptor thus seems to be what makes
capable of building little more than ziggu- well-established proclivity of breast-can- bone so attractive to breast-cancer cells.
rats and pyramids—the sorts of things the cer cells (pictured above) to colonise bone. This is useful information. Taking
earliest human architects managed. But he They wanted to look at the hypothesis that chemical aim at the CXCR2 receptor, or de-
hopes that, like humans, his ’bots will in this case the attraction is between a sig- veloping drugs that reduce the secretion by
come to do better, incorporating voids and nalling molecule called CXCL5, which bone of CXCL5 might slow—or even halt—
overhangs in their constructions. bone cells use to talk to other cells, and a breast-cancer metastasis. But the new
As to the uses such buildings might be molecular receptor called CXCR2, which is chips have wider ramifications, too. In
put to, he suggests they could be thrown up often found on the outer membranes of making them Dr Moretti and Dr Kamm
quickly as temporary structures in disaster breast-cancer cells. have created a way of testing many types
areas, or in places hostile to people, such as The chip itself is a glass and plastic of cellular interaction, including those be-
outer space. And the process of building sandwich 2cm across that contains a series tween other cancers and the tissues they
them might also shed light on how their of interlinked channels in the junction be- like to colonise. That may, eventually, result
natural inspiration, the termite, really pulls tween the two materials. The channels are in less metastasis, fewer secondaries and
off its own impressive tricks. 7 filled with a gel in which cells can grow. Dr longer lives for patients. 7
76
Books and arts
Hillary Clinton
Ladies first
The time is ripe for a good book about Hillary Clinton’s view of the world
A S SECRETARY OF STATE until 2013,
Hillary Clinton was chief foreign
envoy for a president who came into office
burdened with impossible expectations.
Barack Obama’s to-do list included slow-
ing global warming, ending the Iraq war,
setting Afghanistan on its feet, defanging
al-Qaeda, mending ties with Muslims, de-
voting more military and economic atten-
tion to Asia, preventing Iran from building
the bomb and—in his own words—restor-
ing America’s image as “the last, best hope
on Earth”. He duly fell short. Sometimes,
the fault lay elsewhere: with foreign lead-
ers, domestic opponents and events
immune even to Mr Obama’s charms.
But foes and friends alike increasingly
began to doubt whether Mr Obama as-
pired to a global role at all, or whether he
saw foreign policy as a distraction from his
primary goal: to restore prosperity at
home. Though publicly loyal to the man
who defeated her for the Democratic presi-
dential nomination, when it came to some
tough debates—on troop levels in Afghani-
stan, intervention in Libya, or the arming
of rebels in Syria—Mrs Clinton could not
quite silence reports that she had more
faith in American power as a force for good
than her sceptical, imagine-the-worst boss.
With Democratic grandees now lining
up to support Mrs Clinton, should she
choose to run for her party’s presidential
nomination in 2016, the inside story on her
world view would be more than a publish-
HRC: State Secrets and the Rebirth of
Hillary Clinton. By Jonathan Allen and
Amie Parnes. Crown; 440 pages, $26.
Hutchinson; £20
ing scoop. Voters deserve to know whether
she, too, worries that America has over-
learned lessons from Iraq and a decade of
war, and may be retreating too far from the
world. They need to know how much
blame Mrs Clinton should share for a first
Obama term which ended without any
significant foreign-policy achievements,
and seemed at times adrift in the face of
such messy crises as Syria.
Dismayingly, maddeningly, “HRC”, a
new account of Mrs Clinton’s State Depart-
ment years and her subsequent re-emer-
gence as a partisan political leader, is not
that book. Written by two members of the
White House press corps, Jonathan Allen
and Amie Parnes, the book is crammed
with revelations about Mrs Clinton’s ser-
vice with Team Obama. The authors report
that they have interviewed more than 200
people. Alas, for all their hard work, they
seem much more excited by the process of
politics than the ideas that lie beneath.
There are stories about favourites who
fell from favour and Democratic politi-
cians being punished for crossing the Clin-
tons. There are breathless anecdotes about
Obama staff who loathed Clinton people
until they were won round by canny Mrs
The Economist February 15th 2014
Also in this section
77 The lift, a life
77 America’s first subways
78 Changing pharmaceuticals
78 Caryl Churchill in New York
79 “Yves Saint Laurent”, the biopic
For daily analysis and debate on books, arts and
culture, visit
Economist.com/culture
Clinton. One tale describes how Tommy
Vietor, an Obama press aide, hurt his
shoulder in 2009, around the same time
that Mrs Clinton broke her arm. He ad-
mired her sling with the State Department
seal, only to receive a similar sling two
days later. The gesture “won Vietor over”,
ending any lingering animus from the
2008 primary, the book records.
No detail is too footling to report. “The
couches in the room were soft, but Abdul-
lah’s tone was not,” the book explains,
while describing a meeting with an Arab
foreign minister. An account of crisis meet-
ings in 2012 with the Israeli prime minister,
Binyamin Netanyahu, amid Palestinian
rocket attacks from the Gaza Strip and talk
of a full-scale Israeli counter-attack, notes
that Mrs Clinton and aides “noshed on
fruit and cookies” and that Mrs Clinton
was worried about getting home to spend
Thanksgiving with her family. There is
higher-calibre gossip. Before Mrs Clinton
flew to Israel, the same account explains,
Mr Obama used a chat aboard Air Force
One to ask his secretary of state to stay on
an extra year, but was turned down.
What is missing is information that will
still matter in even a few years’ time. True,
loose-lipped staffers tell the authors how,
as the Gaza crisis unfolded, Mrs Clinton
told colleagues: “We’ve gotta support
Israel one hundred and ten per cent here.”
The authors briskly assert that Mrs Clinton
had a good relationship with the Israelis;
“certainly better than Obama had”. But
this gap between president and secretary
of state is not explored any further.
The book is equally at a loss when it
comes to Mrs Clinton’s thinking on
Afghanistan, and whether she really
believed that a comprehensive settlement
there, involving the Taliban, Pakistan, the
Afghan government and America, was
possible, as her own pugnacious envoy 1
 The Economist February 15th 2014
2 Richard Holbrooke insisted. “There is
disagreement to this day” about her views,
the authors sigh.
One tantalising line of inquiry is their
assertion that Mrs Clinton, more than any
other official, was responsible for Ameri-
ca’s intervention in Libya on the side of
anti-Qaddafi rebels. Yet having declared
Libya “Hillary’s war”, they venture no
view as to whether she was right, given the
chaos that grips that country now. Instead,
in line with the rest of the Washington
politico-media bubble, they focus virtually
all their attention on the murder in 2012 of
four Americans in Benghazi, among them
America’s ambassador. Two chapters ex-
amine Mrs Clinton’s role in the affair with-
out breaking any new ground (security
The lift, a life
Lift-off
Lifted: A Cultural History of the Elevator.
By Andreas Bernard. New York University
Press; 309 pages; $35 and £27.99
M ANKIND has been hauling loads up
and down since the pulley was
invented. But it was not until 1854, when
Elisha Graves Otis demonstrated that lifts
could be made safe that people began to
trust their lives to cages on ropes. Mr Otis
stood on a platform supported by guide
rails—a kind of primitive lift. When the
cable was tight, it bent a spring on the
platform roof, allowing the contraption
to move up and down. When the cable
was cut, the spring flattened and jammed
into notches on the guide rails, prevent-
ing the lift from crashing to the ground.
Mr Otis’s business was born.
Andreas Bernard, a German newspa-
per editor, has written a history of the
now-ubiquitous lift. Elevators made tall
buildings, and thus modern urban life,
possible. Upper floors became prestige-
laden places with desirable views, rather
than wearisomely inaccessible attics.
Garrets for the destitute gave way to
penthouses for plutocrats.
Lifts are a “magic machine” in Holly-
wood thrillers, especially when they get
stuck. They are a place of encounter, of
assignation, of sexual tension—and its
release. Personal space shrinks. Halitosis,
body odour and dandruff become pain-
fully obvious. They challenge protocol.
The courtiers of Tsar Nicholas II panicked
when he was due to visit the Adlon Hotel
in Berlin. Etiquette laid down in the era of
Catherine the Great offered no guidance:
who would enter the lift first? And who
would press the buttons? Amid worries
about lifts’ revolutionary effects, doctors
was lacking but this was not directly Mrs
Clinton’s fault, the book suggests, though it
makes the point that she had wanted to
send American diplomats to Libya quickly
to show that the country was returning to
normal). As for the rest of the saga, “The
story of Libya continues to unfold,” the
authors limply conclude.
Their focus on the American deaths in
Benghazi is no coincidence. The incident is,
essentially, a point of domestic political
contention. It is an obsession of conserva-
tive radio stations, and Republicans hope
to use it against Candidate Clinton, should
she declare herself. “HRC” is a relentlessly
domestic book. Blame the parochial side
of Washington, a world capital that is also
a small town. Even so, what a waste. 7
warned of an impending wave of “eleva-
tor sickness”. Oddly, Mr Bernard leaves
out the genre of “elevator pitches”—mini-
spiels to a boss that can be made if the
two of you find yourselves alone in a lift.
The book was originally written in
German, and the translator, David Dol-
lenmayer, has valiantly tried to render Mr
Bernard’s solemn prose into readable
English. It mostly works, and the anec-
dotes and insights are captivating. But the
philosophical allusions to Charles Bau-
delaire and Walter Benjamin can be
overwhelming in places, as is the jargon.
Readers may need to brace themselves as
they encounter the “historiographic
hegemony” of the Otis Elevator Com-
pany in a book that seeks to examine the
“conceivability and expressability” of
what people do in buildings: which is go
up and down, mostly.
Books and arts 77
America’s first subways
Boston loves
New York
The Race Underground: Boston, New York,
and the Incredible Rivalry that Built
America’s First Subway. By Doug Most. St
Martin’s Press; 404 pages; $27.99
I F THEY were not such rivals, New York
and Boston could be twinned. Their
strengths make a good fit: New York sees it-
self as the cultural and financial capital of
America; Boston has claims to be its aca-
demic and intellectual centre. So the two
cities make an impressive team when they
channel their aggression, as they did in
their earnest yet friendly race to build
America’s first subway around the turn of
the 20th century.
“The incredible rivalry” of the book’s
subtitle is salesmen’s hype. Doug Most’s
meticulously researched history reveals
that getting the subways built was more a
collaborative than a competitive effort. It
helped that two brothers from an old, rich
and influential family were early propo-
nents of subways. Henry Whitney in Bos-
ton and William Whitney in New York
suppressed their sibling rivalry to work
together to discover and recruit the
country’s best engineers for their various
transport ventures.
Both brothers and both cities came to
appreciate the truth of a business-school
mantra: “It’s the second mouse that gets
the cheese.” The Whitneys and, when they
dropped out, their successors, learnt a lot
from the London Underground. This, the
world’s first subway, was trapped for years
in steam-age technology. Passengers com-
plained that their trips were dark, dank
and dangerous, that the foul air left them
coughing “like a boy with his first cigar”.
Thanks to the genius of Thomas Edison,
the subways in New York and Boston were
well lit. They were also clean. Although Mr
Most gives due credit to Edison he also
celebrates Frank Sprague, an inventor of
efficient electric motors. According to Mr
Most, Sprague deserves to rank alongside
Edison and the Brunels, England’s father-
and-son transport engineers.
When London opened its underground
system in 1863, the inhabitants of the two
American cities were still reliant on horse-
drawn public transport to get about. The
horses were loved but so slow and smelly
that people swarmed into city slums to
avoid long journeys to and from work.
Congestion worsened as immigrants
poured into New York and Boston.
By the mid-1890s, Mr Most notes, New
York’s Lower East Side was one of the most
crowded places on the planet. Its tene-
ments were “wet, cold and rancid, and 1
78 Books and arts
2 vermin-infested”. Diseases like diphtheria
and tuberculosis were common, as a
consequence ofpoor sanitation, the lack of
lavatories, and bad ventilation. “Staying
clean in a neighbourhood filled with horse
stables, brothels, slaughterhouses and
saloons was impossible.”
Speedy action was demanded, not just
to build the first subway in America but
also to make it easier for people to spread
out from the inner city into the outer city
and the suburbs. To save time and money
the proponents of both the New York and
Boston subways opted where possible for
the cut-and-cover method rather than a
circular tube. Instead of boring a tunnel far
below ground they dug a trench. Once a
section of the trench was long and deep
enough, as Mr Most explains, steel beams
were laid in a grid across the top to begin
the process of building the roof of the
tunnel and of rebuilding the surface of the
street above.
Who then won the race? That would be
giving away the climax of an exciting book.
Nonetheless, without spoiling the story, it
can be disclosed that rivalry between the
two cities remained friendly. The winner
did not crow. There were, Mr Most reports,
no boastful proclamations, no proces-
sions, no celebratory spikes. But much that
is worth reading about. 7
The pharmaceutical industry
When the times
were a-changing
The Antidote: Inside the World of New
Pharma. By Barry Werth. Simon & Schuster;
435 pages; $30
“M EDICINE is for people, not for
profits.” So read the caption be-
neath a photograph of George Merck, boss
of a huge American drug company, on the
cover of Time magazine in 1952. Of course
the choice was a false one, as Merck
himself admitted in Time’s article. His
company, by devoting itself to making
medicines that helped patients, made
money too. After the second world war
Merck & Co and other big pharmaceutical
companies began a golden age in drug
development, producing better antibiot-
ics, vaccines and other treatments that
transformed patients’ lives.
Medical innovation looks rather differ-
ent now. In the 1990s many big companies
made billions from small improvements in
care. Then a number of important patents
expired and manufacturers began losing
intellectual-property protection for their
medicines. Pharmaceutical companies
such as Merck trimmed their research de-
partments. Since then a new crop of drug
Shooting for the moon
companies has sprung up. Genomics, the
study of man’s genetic code, has brought
dramatic advances in the understanding of
disease. And recently biotechnology
stocks have soared. In “The Antidote”,
Barry Werth uses one company to describe
a new era for the drugs business.
Developing a medicine requires stami-
na and mountains of capital. Scientists can
struggle for their whole careers, only to
have a medicine foiled by side effects or
anxious regulators. Given this, it takes a
certain type of person to want to start a
drug company. In the 1980s Josh Boger was
one such man: brilliant, with a confidence
that at times approached zealotry.
Mr Boger left Merck in 1989, a heyday for
that firm, to start Vertex. His goal was not
just to create new drugs, but to create a new
type of drug company—a “social experi-
ment”, as Mr Werth describes it. In an earli-
er book, “The Billion-Dollar Molecule”
(1994), Mr Werth recounted Vertex’s early
days. Twenty years later “The Antidote”
describes its journey from scrappy start-up
to public company with more than $1
billion in annual revenues.
It was a long, hard trudge—and still is.
Mr Werth describes one scientist “isolating
protein from calf thymus, on his swollen
feet past dawn night after night…his hands
raw and eyes burning from solvents until
he blanked out”. Competition among com-
panies is fierce as they race to publish data
that prove how effective their drugs are.
Executives are ushered in, only to be
kicked out again. Mr Boger was replaced in
2009. This relentless work is broken by
occasional moments of euphoria, as when
Vertex transformed the treatment for cystic
fibrosis. Until then many patients died
before they were 40.
Mr Werth keeps a brisk pace, describing
Vertex as the antidote to older pharma and
Merck in particular. He infuses the book
The Economist February 15th 2014
with drama, even managing to make a reg-
ulatory meeting seem exciting. In general
he explains scientific concepts clearly,
though readers must endure some techno-
babble. (“Of course,” Mr Boger muses at
one point, “they were nucleotide guys.”)
But Mr Werth’s account comes at a cost.
Vertex gave the author access to its execu-
tives and scientists. Having devoted two
books to the firm, Mr Werth at times seems
too allied with it. “The Antidote” describes
Mr Boger as an evangelist; in Mr Werth, he
seems to have found a convert. 7
New theatre: “Love and Information” 
Top girl
NEW YORK
At 75, Caryl Churchill is creating some
of her finest work yet
“L OVE AND INFORMATION”, the
latest play from Caryl Churchill, a
British playwright, opens in what seems
like the middle of a conversation between
two lovers. “Please, please tell me,” pleads
a young man. He is begging a young wom-
an to share her secret. She refuses, but then
she gives in. As she mischievously whis-
pers her news into the man’s ear, he looks
victorious, but then haunted. “Now
what?” he asks, his voice edged with
anxiety. “Now what? Now what?”
This exchange may be a minute long. Its
characters are unnamed and the secret
remains unknown. But for all its brevity,
the scene packs a wallop. Who are these
people? What has happened? Such ques-
tions linger as the stage goes dark and
strange sounds blare from speakers. But
when the lights switch back on there are 1
 The Economist February 15th 2014
2 suddenly different actors in a baffling new
drama. In one sketch a woman bursts out
with the news that she is a young boy’s
mother, not his sister, as he previously
thought. Another scene follows the
reunion of a middle-aged man and wom-
an as they reminisce about their youthful
love affair, though none of their memories
seem to overlap.
This dizzying play has more than 100
characters in nearly 60 scenes. Some are as
short as a line of dialogue (“The difficulty
of getting the Israelis and Palestinians
to…”, spoken between two boozy Elvis
impersonators), while others last for min-
utes. But each one seizes the imagination.
And all of them raise subtle questions
about how information is revealed or
withheld, pursued or misplaced—and
consider what this does to relationships.
At 75, Ms Churchill may be at the top of
her game. “Love and Information”, which
will have its American premiere at the
New York Theatre Workshop (NYTW) on
February 19th, is startlingly fresh. In the
hands of James MacDonald, who directed
the original sell-out production at Lon-
don’s Royal Court in 2012, the ensemble
cast of 15 actors creates a world of deeply
felt moments. Every scene promises a reve-
lation, a moment of intimacy. Every con-
versation feels like a frail bridge across a
great distance.
Playwrights who are lucky enough to
find a voice often end up writing essential-
ly the same play over and over again. Few
have proven as inventive as Ms Churchill.
In over 40 years of scribbling for the stage,
she has consistently dreamed up new
ways oftoying with weighty themes: “Seri-
ous Money” (1987) uses salty dialogue
delivered in verse to dramatise capitalist
corruption. “Drunk Enough to Say I Love
You” (2006) imagines the asymmetric rela-
tionship between America and Britain as a
gay romance. And “Top Girls” (1982), Ms
Churchill’s best-known play, uses a bois-
terous dinner party of historical female
martyrs to consider some of the empty
promises of feminism and the rise of self-
ish ambition under Margaret Thatcher.
(Max Stafford-Clark, who directed its de-
but at the Royal Court, recalls overhearing
a man in the audience describe it as “Just a
bunch of drunken women chattering”.)
Ms Churchill’s nearly three dozen plays
are rarely tethered to a time or place,
though they often resonate with contem-
porary anxieties. If there is a unifying
theme, it might be that they all question
conventional notions of progress. They
also examine what it means to live a good
life, observes David Lan, a friend and col-
laborator of Ms Churchill’s and artistic di-
rector of the Young Vic, a London theatre.
“Each play says something that hasn’t
been said, in a form that hasn’t been used,”
says Mr MacDonald, who has worked
with Ms Churchill on several occasions.
New film: “Yves Saint Laurent”
Fold after fold
PARIS
The fragile charms of a master, his maestro and his muse
“Y OU HAVE the talent; I’ll take care
of the rest.” With those words,
spoken gently to a self-doubting Yves
Saint Laurent, Pierre Bergé frames the
relationship at the heart of a stylish new
French biopic about the great couturier,
which was shown at the Berlin film
festival on February 7th. The first of two
films coming out this year about the
designer, “Yves Saint Laurent”, which is
backed by the real-life Mr Bergé, tells their
joint story: that of a brittle creative genius
and the socialite entrepreneur who
became his business partner, lover and
emotional keel. Yet what carries the film
is a single remarkable performance: that
of Pierre Niney (pictured), a 24-year-old
actor with the Comédie-Française, as the
excruciatingly gauche and emotionally
tormented Saint Laurent.
Narrated as a flashback by the on-
screen Mr Bergé (Guillaume Gallienne)
after Saint Laurent dies in 2008, the film
He didn’t get them at Specsavers
“And each new play creates a fresh set of
challenges.” For “Love and Information”,
perhaps the biggest challenge involved
bringing Ms Churchill’s bare, minimalist
script to life. Unlike her earlier plays, which
are noisily crammed with monologues
and overlapping dialogue—a convention
she helped originate—her later works are
as spare as haiku, and often come with no
stage directions. Settings, costumes, even
the sex of the actors—all are decided later.
Books and arts 79
travels with the young Yves from French
Algeria, land of his birth, to high-society
Paris in the 1950s. Appointed assistant to
Christian Dior, Saint Laurent was pro-
pelled after Dior’s death in 1957 to the job
of head designer—at the age of just 21. Mr
Niney is uncanny as Saint Laurent. The
quiet precise diction, the dark personal
fragility beneath the creative flair, the
natural reserve engulfed by self-
destructive drug-taking, partying and
mental collapse: Mr Niney’s range, and
resemblance to the designer, captivate.
Although the film, directed by Jalil
Lespert, has been criticised in some
quarters as a giant brand-marketing
exercise, fashion is the setting rather than
the subject of “Yves Saint Laurent”. Mr
Bergé, who refused to co-operate with the
rival biopic “Saint Laurent”, directed by
Bertrand Bonello and due out in May, lent
Mr Lespert the designer’s original sketch-
es, haute-couture dresses, even his glass-
es. The workshop scenes, as Yves drapes,
tucks and fusses over Victoire, his muse
(Charlotte Le Bon), and the catwalk
shows in Paris villas that unveil now-
famous collections, are a visual tribute to
the modern history of French high fash-
ion. Indeed, with impossibly romantic
moonlit scenes of Paris bridges and
rooftops, the film at times feels more like
a commercial for the French capital than
the fashion house.
Yet “Yves Saint Laurent”, Mr Lespert’s
third feature film, is oddly unsatisfying.
The narrative structure does not quite
carry the film to the end, when the pair’s
love affair stalls. The decision to tell the
story through Mr Bergé’s eyes, in some-
times-jumpy sequences, diverts the
viewer from a more meaningful un-
derstanding of the man behind the Saint
Laurent brand. But “Yves Saint Laurent”
supplies enough of the elements that
Hollywood wants from French cinema—
seductive Paris scenery, jaunty vintage
fashion and above all a superb leading
actor—to suggest that it will travel well.
Ms Churchill “empowers her collabora-
tors in a way that many writers don’t,” says
James Nicola, the NYTW’s artistic director.
She loves being in the theatre during re-
hearsals, but she is not prescriptive. Rather,
she trusts actors “to take fragments of dia-
logue and run with them”. Essentially, Ms
Churchill understands that her plays only
truly exist on stage. They are not meant to
be read, but watched. And watched they
will be—for quite some time. 7
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“Adem Jashari” Prekaz – Skenderaj.
MC “Adem Jashari” Prekaz – Skenderaj is one of the priorities of the Republic of Kosovo, which has
been declared as an area of special interest, and as such this Complex within itself, has the symbol of
sacrifice, heroism, war for freedom and independence of Kosovo. The Memorial Complex is declared
as ASI in an area of 450 ha. The facilities which need to be conserved are: Three houses of the legendary
commander “Adem Jashari” and his shelter – bunker, the house of Sahit and Musa Jasharit, as well
as the house of the martyr Smajl Jashari. We possess the necessary material for this part – Projecting
assignment and conceptual plan of this area. The project is foreseen to be completed during this year,
and initially must be intervened in those facilities which are damaged and in danger of destruction.
One of the priority tasks for the year 2014 is also drafting of the Project for Conservation of Resistance’s
facilities of the legendary commander Adem Jashari, which have been damaged during the war, and
are in danger of destruction. In case this happens, it means that we have lost major war values, and in
order to preserve these values, it is necessary to draft the main conservation project during this year
and within a short period of time to enable the direct interventions on conservation works.
Potential bidders must submit their pre-qualification documents until 21st of March 2014, in
accordance with the requirements that are set out in the memorandum for expression of interest, on
the 4th of February 2014, which is available to the Agency for Management of Kosovo Memorials
(AMKM). Explanatory visit will be organized in the place where the project will be done, in the
memorial complex “Adem Jashari” Prekaz – Skenderaj, on 10th of March 2014 at 11: 00 o’clock in
Prekaz-Skenderaj. The withdrawal of documents as well as additional information can be found on the
Web page of PPPK-krpp.rks-gov.net –contract notices, we kindly ask you to send your official request
in a written form or via email to the below mentioned address.
For information, please contact:
Procurement officer; Naim Gjoshi
Agency for Management of Kosovo Memorial Complexes
Kosovo Assembly Building, Office no N - 310
Telephone: +381-38 211352 Email: naim.gjoshi@rks-gov.net
Business & Personal
Readers are recommended
to make appropriate enquiries and take appropriate advice before sending money, incurring
any expense or entering into a binding 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.
The Economist February 15th 2014
83
Invitation to Submit
an Expression of Interest for the MSSO Tender
The International Conference on Harmonisation of Technical
Requirements for Registration of Pharmaceuticals for Human Use
(ICH) is considering a Call for Tender in 2014 for the contract for the
MedDRA Maintenance and Support Services Organization (MSSO).
In 1999, ICH released MedDRA, the Medical Dictionary for
Regulatory Activities Terminology, as its standardised medical
terminology. Since then, the maintenance and support of MedDRA
has been contracted to a MSSO. ICH’s decision to now consider a
Call for Tender represents interest to conform with good business
practices and does not reflect on the performance of the current
contractor.
In order to acquire feedback on interest and approach, and to use
the feedback to inform next steps, ICH is first conducting a Call for
Expression of Interest.
Full details, including instructions on the format and content of
expressions of interest, can be found on the ICH website
www.ich.org/eoi. Interested parties are invited to submit their
expressions of interest by March 12, 2014.
Responses written in English should be sent by both email and
courier to the following coordinates and marked for the attention of
the ICH Call for Tender Working Group:
ICH Secretariat
Chemin Louis-Dunant 15
P.O Box 195
1211 Geneva 20
Switzerland
eoi@ich.org
84 The Economist February 15th 2014
Economic and financial indicators
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* 2013† latest latest 2013† rate, % months, $bn 2013† 2013† bonds, latest Feb 12th year ago
United States +2.7 Q4 +3.2 +1.9 +3.7 Dec +1.5 Dec +1.4 6.6 Jan -398.7 Q3 -2.4 -4.1 2.76 - -
China +7.7 Q4 +7.4 +7.7 +9.7 Dec +2.5 Dec +2.6 4.1 Q4§ +188.6 Q4 +1.9 -1.8 4.38§§ 6.06 6.23
Japan +2.4 Q3 +1.1 +1.7 +7.3 Dec +1.6 Dec +0.3 3.7 Dec +34.4 Dec +0.9 -8.2 0.61 103 93.1
Britain Economic
+2.8 Q4 +2.8data
+1.8 +1.8 Dec +2.0 Dec +2.6 7.1 Oct†† -94.9 Q3 -3.6 -6.7 2.93 0.60 0.64
Canada +1.9 Q3 Statistics
+2.7 +1.7 on 42+2.6
economies,
Nov +1.2 Decplus a closer7.0
+1.0 look
Jan at housing
-59.9 Q3 -3.1 -3.0 2.48 1.10 1.00
Euro area -0.3 Q3 starts-0.4
+0.5 +0.5 Dec +0.7 Jan +1.4 12.0 Dec +279.2 Nov +2.0 -2.9 1.72 0.74 0.74
Austria +0.7 Q3 +2.5 +0.4 -0.9 Nov +1.9 Dec +2.1 4.9 Dec +9.6 Q3 +2.5 -2.9 2.03 0.74 0.74
Belgium +0.9 Q4 +1.7 +0.2 +5.9 Nov +1.1 Jan +1.2 8.4 Dec -12.6 Sep -1.3 -3.0 2.37 0.74 0.74
France +0.2 Q3 -0.5 +0.2 +0.5 Dec +0.7 Dec +1.0 10.8 Dec -42.0 Dec -1.9 -4.1 2.31 0.74 0.74
Germany +0.6 Q3 +1.3 +0.5 +2.9 Dec +1.3 Jan +1.6 6.8 Jan +267.6 Dec +6.8 +0.1 1.72 0.74 0.74
Greece -3.0 Q3 na -3.6 +0.4 Dec -1.7 Dec -0.9 27.8 Oct +1.3 Nov +0.6 -2.2 7.53 0.74 0.74
Italy -1.8 Q3 -0.1 -1.8 -0.7 Dec +0.7 Jan +1.3 12.7 Dec +17.1 Nov +0.5 -3.3 3.75 0.74 0.74
Netherlands -0.4 Q3 +0.8 -1.0 +1.8 Dec +1.7 Dec +2.6 8.5 Dec +83.6 Q3 +9.8 -3.5 1.92 0.74 0.74
Spain -0.1 Q4 +1.2 -1.2 +3.5 Dec +0.3 Dec +1.5 25.8 Dec +10.3 Nov +0.8 -7.2 3.56 0.74 0.74
Czech Republic -0.3 Q3 +0.9 -1.4 +9.3 Dec +0.2 Jan +1.4 8.6 Jan§ -3.4 Q3 -0.6 -2.8 2.30 20.3 18.8
Denmark +0.5 Q3 +1.5 +0.4 -0.7 Dec +1.0 Jan +0.8 5.6 Dec +23.9 Dec +5.8 -0.3 1.75 5.49 5.54
Hungary +1.8 Q3 +3.6 +0.8 +4.6 Dec +0.4 Dec +1.7 9.1 Dec§†† +3.1 Q3 +2.0 -3.0 5.98 227 216
Norway +1.1 Q4 -0.7 +1.3 +1.3 Dec +2.3 Jan +2.3 3.5 Nov‡‡ +61.0 Q3 +12.8 +13.0 2.83 6.12 5.49
Poland +1.9 Q3 na +1.5 +6.6 Dec +0.7 Dec +1.1 14.0 Jan§ -7.9 Dec -2.1 -4.0 4.53 3.06 3.11
Russia +1.2 Q3 na +1.5 +0.8 Dec +6.0 Jan +6.8 5.6 Dec§ +33.0 Q4 +2.3 -0.5 8.22 34.8 30.1
Sweden +0.3 Q3 +0.3 +0.8 +0.1 Dec +0.1 Dec +0.1 7.5 Dec§ +34.3 Q3 +6.1 -1.4 2.26 6.45 6.36
Switzerland +1.9 Q3 +2.1 +1.9 +0.7 Q3 +0.1 Jan -0.2 3.2 Jan +79.9 Q3 +11.8 +0.2 1.04 0.90 0.92
Turkey +4.4 Q3 na +3.9 +6.9 Dec +7.8 Jan +7.5 9.7 Oct§ -60.8 Nov -7.5 -1.2 10.10 2.18 1.77
Australia +2.3 Q3 +2.3 +2.4 +2.7 Q3 +2.7 Q4 +2.4 6.0 Jan -51.3 Q3 -3.0 -3.1 4.22 1.11 0.97
Hong Kong +2.9 Q3 +2.1 +3.1 -0.9 Q3 +4.3 Dec +4.3 3.2 Dec‡‡ +5.4 Q3 +1.9 +1.8 2.27 7.76 7.75
India +4.8 Q3 +16.5 +4.9 -0.6 Dec +8.8 Jan +10.1 9.9 2012 -76.9 Q3 -3.1 -5.0 8.81 62.1 53.9
Indonesia +5.7 Q4 na +5.6 +0.6 Dec +8.2 Jan +7.0 6.3 Q3§ -32.1 Q3 -3.9 -3.3 na 12,085 9,646
Malaysia +5.1 Q4 na +4.8 +4.8 Dec +3.2 Dec +2.1 3.4 Nov§ +11.7 Q4 +4.9 -4.2 4.15 3.32 3.10
Pakistan +6.1 2013** na +6.1 +3.4 Nov +7.9 Jan +7.7 6.2 2013 -4.0 Q4 -1.4 -8.0 12.60††† 105 98.1
Singapore +4.4 Q4 -2.7 +3.7 +6.2 Dec +1.5 Dec +2.4 1.8 Q4 +49.8 Q3 +20.4 +2.1 2.45 1.27 1.24
South Korea +4.0 Q4 +3.7 +2.7 +2.6 Dec +1.1 Jan +1.3 3.5 Jan§ +70.7 Dec +4.6 +0.9 3.54 1,063 1,091
Taiwan +2.9 Q4 +10.1 +2.2 +5.1 Dec +0.8 Jan +0.8 4.1 Dec +56.3 Q3 +10.8 -2.3 1.62 30.3 29.7
Thailand +2.6 Q3 +5.2 +3.0 -6.1 Dec +1.9 Jan +2.2 0.7 Nov§ -2.8 Q4 -1.6 -3.1 3.71 32.6 29.9
Argentina +5.5 Q3 -0.7 +4.9 -5.4 Dec — *** — 6.8 Q3§ -3.5 Q3 -1.2 -3.3 na 7.81 5.00
Brazil +2.2 Q3 -1.9 +2.2 -2.3 Dec +5.6 Jan +6.2 4.3 Dec§ -81.4 Dec -3.7 -2.7 13.35 2.41 1.97
Chile +4.7 Q3 +5.4 +4.2 +2.3 Dec +2.8 Jan +1.8 5.7 Dec§‡‡ -9.5 Q3 -3.7 -0.6 5.00 551 472
Colombia +5.1 Q3 +4.5 +4.3 +0.2 Nov +2.1 Jan +2.0 8.4 Dec§ -12.6 Q3 -3.4 -0.8 7.10 2,030 1,783
Mexico +1.3 Q3 +3.4 +1.2 -0.3 Dec +4.5 Jan +3.8 4.8 Dec -24.9 Q3 -1.6 -2.5 7.75 13.3 12.7
Venezuela +1.1 Q3 -0.8 +1.6 +0.8 Sep +56.2 Jan +40.6 5.6 Dec§ +6.9 Q3 +3.2 -10.4 12.77 6.29 4.29
Egypt +1.0 Q3 na +2.3 -18.1 Dec +11.3 Jan +9.5 13.4 Q3§ -4.5 Q3 -2.6 -13.8 na 6.96 6.72
Israel +2.4 Q3 +2.3 +3.3 -4.1 Nov +1.8 Dec +1.5 5.8 Dec +3.3 Q3 +1.5 -3.2 3.73 3.52 3.69
Saudi Arabia +3.8 2013 na +2.9 na +3.0 Dec +3.5 5.6 2013 +139.3 Q3 +18.0 +6.7 na 3.75 3.75
South Africa +1.8 Q3 +0.7 +1.9 +2.6 Dec +5.4 Dec +5.8 24.1 Q4§ -22.1 Q3 -6.6 -4.8 8.58 11.0 8.93
Source: Haver Analytics. *% change on previous quarter, annual rate. †The Economist poll or Economist Intelligence Unit estimate/forecast. §Not seasonally adjusted. ‡New series. **Year ending June. ††Latest 3
months. ‡‡3-month moving average. §§5-year yield ***Official number not reliable; The State Street PriceStats Inflation Index, December 23.38%; year ago 25.98% †††Dollar-denominated bonds.
 The Economist February 15th 2014 Economic and financial indicators 85

Markets
% change on Housing starts
Q1 2000=100, four-quarter moving average
Dec 31st 2012 Housing starts are a leading indicator of
Index one in local in $ economic activity. For several of the 140
Markets Feb 12th week currency terms world’s biggest developed economies, France
United States (DJIA) 15,963.9 +3.4 +21.8 +21.8
China (SSEA) 2,208.4 +3.8 -7.1 -4.5
recent figures show signs of recovery.
120
Japan (Nikkei 225) 14,800.1 +4.4 +42.4 +20.1 Orders for new homes in Germany are
Britain (FTSE 100) 6,675.0 +3.4 +13.2 +15.5 above their ten-year average, as rising
Canada (S&P TSX) 13,900.5 +2.5 +11.8 +1.3 employment, low borrowing costs and 100
Euro area (FTSE Euro 100) 1,018.5 +4.5 +18.9 +22.6 immigration fuel demand. In March and Japan
Euro area (EURO STOXX 50) 3,094.9 +4.5 +17.4 +21.0 November last year housing starts in England 80
Austria (ATX) 2,655.1 +4.4 +10.6 +14.0 America rose back over 1m (at an annual
Belgium (Bel 20) 2,959.5 +3.9 +19.5 +23.2 rate), from a low of 478,000 in early
France (CAC 40) 4,305.5 +4.6 +18.2 +21.9 2009. Government schemes have boosted 60
Germany (DAX)* 9,540.0 +4.6 +25.3 +29.2
new home construction in England. In Germany*
Greece (Athex Comp) 1,278.2 +3.1 +40.8 +45.1
Italy (FTSE/MIB) 20,145.0 +5.6 +23.8 +27.6
contrast, French housing starts, which 40
Netherlands (AEX) 397.4 +3.9 +16.0 +19.5 held up better than most during the United States
Spain (Madrid SE) 1,029.0 +3.1 +24.8 +28.6 recession, are falling. With unemploy-
ment at a record high, construction is 20
Czech Republic (PX) 1,018.1 +3.3 -2.0 -7.9
2000 02 04 06 08 10 12 13
Denmark (OMXCB) 619.7 +4.0 +36.9 +41.1 unlikely to pick up this year.
Source: Thomson Reuters *New orders received
Hungary (BUX) 18,062.2 -1.5 -0.6 -3.2
Norway (OSEAX) 606.5 +3.1 +23.6 +12.5
Poland (WIG) 53,231.4 +4.2 +12.2 +13.4 Other markets The Economist commodity-price index
Russia (RTS, $ terms) 1,353.2 +2.7 +1.0 -11.4 % change on 2005=100
Other markets % change on
Sweden (OMXS30) 1,330.0 +2.9 +20.4 +21.4 Dec 31st 2012 The Economist commodity-price indexone
one
Switzerland (SMI) 8,402.4 +3.6 +23.2 +25.1 Index Feb 4th Feb 11th* month year
one in local in $
Turkey (BIST) 64,513.7 +3.3 -17.5 -32.5 Feb 12th week currency terms Dollar Index
Australia (All Ord.) 5,319.8 +4.5 +14.0 -1.0 United States (S&P 500) 1,819.3 +3.9 +27.6 +27.6 All Items 163.5 165.0 +0.4 -11.5
Hong Kong (Hang Seng) 22,285.8 +4.8 -1.6 -1.7 United States (NAScomp) 4,201.3 +4.7 +39.1 +39.1
India (BSE) 20,448.5 +0.9 +5.3 -7.1 Food 184.4 185.6 +2.4 -9.6
China (SSEB, $ terms) 248.2 +0.8 -1.4 +1.4
Indonesia (JSX) 4,496.3 +2.6 +4.2 -16.9 Japan (Topix) 1,219.6 +4.9 +41.8 +19.6 Industrials
Malaysia (KLSE) 1,825.6 +2.2 +8.1 -0.5 Europe (FTSEurofirst 300) 1,326.8 +4.3 +17.0 +20.6 All 141.7 143.6 -2.2 -13.9
Pakistan (KSE) 26,677.3 -0.3 +57.8 +45.7 World, dev'd (MSCI) 1,637.7 +4.2 +22.4 +22.4 Nfa† 150.6 154.0 -0.9 -10.5
Singapore (STI) 3,035.5 +2.5 -4.2 -7.5 Emerging markets (MSCI) 953.3 +4.0 -9.7 -9.7 Metals 138.0 139.1 -2.8 -15.4
South Korea (KOSPI) 1,935.8 +2.4 -3.1 -2.3 World, all (MSCI) 401.3 +4.1 +18.1 +18.1 Sterling Index
Taiwan (TWI) 8,510.9 +3.0 +10.5 +5.9 World bonds (Citigroup) 919.2 -0.4 -2.7 -2.7
Thailand (SET) 1,314.1 +2.6 -5.6 -11.4 All items 182.5 182.1 +0.2 -15.9
EMBI+ (JPMorgan) 650.2 +0.5 -8.5 -8.5
Argentina (MERV) 5,884.2 -0.7 +106 +29.8 Hedge funds (HFRX) 1,226.9§ +1.0 +6.8 +6.8 Euro Index
Brazil (BVSP) 48,216.9 +3.4 -20.9 -32.7 Volatility, US (VIX) 14.3 +20.0 +18.0 (levels) All items 150.5 150.0 +0.5 -12.8
Chile (IGPA) 17,850.2 +4.8 -15.3 -26.4 CDSs, Eur (iTRAXX)† 74.5 -9.3 -30.0 -27.9 Gold
Colombia (IGBC) 12,419.8 +3.3 -15.6 -26.5 CDSs, N Am (CDX)† 65.3 -10.4 -23.7 -23.7 $ per oz 1,251.2 1,289.8 +3.1 -21.8
Mexico (IPC) 40,690.1 +2.0 -6.9 -9.1 Carbon trading (EU ETS) € 6.4 +4.4 -4.3 -1.4 West Texas Intermediate
Venezuela (IBC) 2,758.8 -2.1 +485 na Sources: Markit; Thomson Reuters. *Total return index.†Credit-de-
Egypt (Case 30) 7,571.4 +3.1 +38.6 +26.7 $ per barrel 97.4 99.9 +8.0 +2.5
fault-swap spreads, basis points. §Feb 11th
Sources: Bloomberg; CME Group; Cotlook; Darmenn & Curl; FT; ICCO;
Israel (TA-100) 1,210.2 +0.9 +15.4 +22.2
Indicators for more countries and additional ICO; ISO; Live Rice Index; LME; NZ Wool Services; Thompson Lloyd &
Saudi Arabia (Tadawul) 8,912.6 +1.4 +31.0 +31.0 Ewart; Thomson Reuters; Urner Barry; WSJ. *Provisional
South Africa (JSE AS) 46,425.1 +4.4 +18.3 -8.7 series, go to: Economist.com/indicators †Non-food agriculturals.
86
Obituary
Shirley Temple
Shirley Temple Black, actress and diplomat, died on February10th, aged 85
T HERE had to be a dark side to Shirley
Temple’s life. Biographers and inter-
viewers scrabbled around to find it. The
adorable dancing, singing, curly-haired
moppet, the world’s top-earning star from
1935 to 1938, surely shed tears once the cam-
eras were off. Her little feet surely ached.
Perhaps, like the heroine of “Curly Top”,
she was marched upstairs to bed after-
wards by some thin-lipped harridan, and
the lights turned resolutely off.
Not a bit of it. She loved it all, both then
and years later, when the cuteness had
gone but the dimples remained. Hadn’t her
mother pushed her into it? No, just encour-
aged her, and wrapped her round with af-
fection, including fixing her 56 ringlets ev-
ery night and gently making her repeat her
next day’s lines until sleep crept up on her.
Hadn’t she been punished cruelly while
making her “Baby Burlesks”, when she
was three? Well, she had been sent several
times to the punishment box, which was
dark and had only a block of ice to sit on.
But that taught her discipline so that, by the
age of four, she would “always hit the
mark”—and, by the age of six, be able to
match the great Bill “Bojangles” Robinson
tap-for-tap down the grand staircase in
“The Little Colonel”.
To some it seemed a stolen childhood,
with seven feature films to her name in
1934, her breakthrough year, alone. Not to
her, when Twentieth-Century Fox (born
out of struggling Fox Studios that year on
her glittering name alone) built her a little
bungalow on the lot, with a rabbit pen and
a swing in a tree. She had a bodyguard and
a secretary, who by 1934 had to answer
4,000 fan-letters a week. But whenever she
wanted to be a tomboy, she was. In the
presidential garden at Hyde Park she hit El-
eanor Roosevelt on the rump with her cat-
apult, for which her father spanked her.
The studios were full of friends: Orson
Welles, with whom she played croquet,
Gary Cooper, who did colouring with her,
and the kind camera crews. She loved the
strong hands that passed her round like a
mascot, and the soft laps on which she was
plumped down (J. Edgar Hoover’s being
the softest). The miniature costumes, espe-
cially her sailor outfit in “Captain Janu-
ary”, in which she could side-step and
jump even better, thrilled her to bits; as did
her miniature Oscar in 1935, the only one
ever awarded to somebody so young.
Grouchy Graham Greene mocked her as “a
complete totsy”, but no one watching her
five different expressions while eating a
forkful of spinach in “Poor Little Rich Girl”
doubted that she could act. She did pathos
and determination (jutting out that little
chin!), just as well as smiles.
The Economist February 15th 2014
Her face was on the Wheaties box. It
was also on the special Wheaties blue
bowl and pitcher, greeting people at break-
fast like a ray of morning sunshine. Adver-
tisers adored her, from General Electric to
Lux soap to Packard cars. After “Stand up
and Cheer!” dolls appeared in her polka-
dot dress, and after “Bright Eyes” the music
for “On the Good Ship Lollipop” was on
every piano, as well as everyone’s brains:
“Where bon-bons play/ On the sunny
beach of Peppermint Bay.” Too much of all
that meant (pretty pout) a tummy ache!
A toss of those curls
Her parents did not tell her there was a De-
pression on. They mentioned only good
things to her. Franklin Roosevelt declared
more than once that “America’s Little Dar-
ling” made the country feel better, and that
pleased her, because she loved to make
people happy. She had no idea why they
should be otherwise. Her films were all
about the sweet waif bringing grown-ups
back together, emptying misers’ pockets
and melting frozen hearts. Like the dog-star
Rin Tin Tin, to whom she gaily compared
herself, she was the bounding, unwitting
antidote to the bleakness of the times.
She was as vague about money as any
child would, and should, be. Her earnings
by 1935 were more than $1,000 (now
$17,000) a week, and by the end of her ca-
reer had sailed past $3m (now $29m). But
when she found out later that her father
had taken bad financial advice, and that
only $44,000 was left in the trusts, she did
not blame him. She remembered the mot-
to about spilt milk, and got on with her life.
Things appeared to dive sharply after
1939, when her teenage face—the darker,
straighter hair, the troubled look—failed to
be a box-office draw. She missed the lead in
“The Wizard of Oz”, too. She shrugged it
off; it meant she could go to a proper school
for the first time, at Westlake, which was
just as exciting as making movies. By 1950
she had stopped making films altogether;
well, it was time. She couldn’t do inno-
cence any more, and that was what the
world still wanted. Her first husband was a
drunk and a disaster, but the marriage
brought her “something beautiful”, her
daughter Linda Susan. The second mar-
riage, anyway, lasted 55 years. She lost a
race for Congress in 1967: but when that
door closed another opened, as an ambas-
sador to Ghana and Czechoslovakia.
Breast cancer was a low point, but she
learned to cope with it, and helped others
to cope. “I don’t like to do negatives,” she
said. “There are always pluses to things.”
In the films, her sparkling eyes and
chubby open arms included everyone; one
toss of her shiny curls was an invitation to
fun. Her trademark was, it turned out, that
rare thing in the world, and rarer still in
Hollywood: a genuine smile of delight. 7
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