OUR ANNUAL SUPPLEMENT: THE WORLD IF

Meet Britain’s new prime minister

Drugs, the dark web and the free market
Showdown in the South China Sea
The arrival of the geek economy
JULY 16TH– 22ND 2016

Donald
Trump and
a divided
America
 The Economist July 16th 2016 5
Contents
7 The world this week The Americas
32 Tierra del Fuego
Leaders Phones and tax breaks
9 Election 2016 33 Bello
The dividing of America Sue Peru’s conquistadors
10 Britain’s prime minister
Maytime Britain
11 The South China Sea 34 The political landscape
Come back from the brink, May’s irresistible rise
Beijing 35 The Labour Party
Theresa May A no-nonsense
11 Deutsche Bank Twist or split
conservative has taken
A floundering titan 35 The civil service Britain’s helm. She should
12 Marine management Building the Brexit team make the practical case for a
On the cover Donald Trump’s Net positive 36 Defence minimalist Brexit: leader,
nomination in Cleveland will The nuclear option page 10.Theresa May faces
put a thriving country at risk Letters 37 The post-Brexit economy huge challenges on Europe
of a great, self-inflicted Straws in the wind and the economy. She will be
14 On Zimbabwe, the Chilcot
wound: leader, page 9. helped by the turmoil in
report, companies, Brexit 37 The immigration paradox
Insurgent candidates tend opposition parties, page 34.
Explaining the Brexit vote
to transform their party, To understand Britain’s new
even if they never become Briefing 38 Bagehot prime minister, visit her
president, pages 17-20. Travels in May country constituency: Bagehot, page
17 The Republican Party
Despair over race and Past and future Trumps 38. Evidence is mounting that
policing is understandable. The world if the real economy is suffering
But there is also cause for from Brexit, page 37
Asia Our annual supplement
hope, page 27. Republicans
After page 38
used to produce big ideas. 21 Japanese politics
They have not yet regained Diet control
that habit, page 66 22 The Imperial House of Middle East and Africa
Japan 39 Land ownership in Africa
The long goodbye Title to come
The Economist online 22 Australia’s election 40 Mozambique
Daily analysis and opinion to Squeaking back in Fishy finances
supplement the print edition, plus 23 Violence in Kashmir 41 Zambia
audio and video, and a daily chart After the funeral Cry press freedom
Economist.com
24 Cambodia 41 Israel’s prime minister
E-mail: newsletters and Murder most murky The law looms larger
mobile edition A rare French globalist The
Economist.com/email 24 Taiwanese identity 42 Egyptian bureaucracy
Hello Kitty, goodbye panda A movable beast economy minister wants to
Print edition: available online by transform France. If he runs
7pm London time each Thursday for president, he may, page 43
Economist.com/print China Europe
Audio edition: available online 25 The South China Sea 43 Macron and France’s
to download each Friday A blow to China’s claims presidential election
Economist.com/audioedition L’internationaliste
United States 44 Ireland’s statistics
An incredible GDP bump
27 After Dallas
Progress and its 44 The EU-Canada trade deal
discontents Fear of the maple menace
29 Policing and race 45 Gibraltar and Brexit
Volume 420 Number 8998
Black and blue lives Rock out
Published since September 1843
30 Fishing 46 Charlemagne
to take part in "a severe contest between
intelligence, which presses forward, and All about the bass The EU’s divided market
an unworthy, timid ignorance obstructing South China Sea Why China
our progress." 31 Lexington should accept a damning
Editorial offices in London and also: Mitch McConnell ruling: leader, page 11. An
Atlanta, Beijing, Berlin, Brussels, Cairo, Chicago,
Lima, Mexico City, Moscow, Mumbai, Nairobi,
international tribunal delivers
New Delhi, New York, Paris, San Francisco, a blow to China’s claims,
São Paulo, Seoul, Shanghai, Singapore, Tokyo, page 25
Washington DC

1 Contents continues overleaf

6 Contents The Economist July 16th 2016

International Science and technology

47 Buying drugs online 62 Neuroscience
Shedding light on the Computer says: oops
dark web 63 Dating fossils
Shell shock
Business 64 Oncology
50 The future of television Fast thinking
Cutting the cord 64 Electric aircraft
51 Video games Extra thrust
I mug you, Pickachu! 65 Fishing
Drugs and the dark web The Unbalancing the scales The world if Our annual
52 Theranos
narcotics trade is moving from supplement of future-gazing
Red alert
the street to online scenarios includes: Donald
cryptomarkets. Forced to 52 Fads in corporate Books and arts Trump’s presidency, North
compete on price and quality, architecture 66 America’s conservatives Korea’s break-up, the
sellers are upping their game, Putting on the glitz Short on ideas see-through ocean, countries
page 47 53 Indian conglomerates 67 J.M.W. Turner trading territory, computers
Sell me if you can Industrious genius making laws, and more, after
53 Booming missiles page 38
67 South Sudan
Rocketing around the From hope to horror
world
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 The Economist July 16th 2016 7
The world this week
belonging to multinational The Liberal-National coalition In Zimbabwe, Evan Mawarire,
Politics companies that are based in led by Malcolm Turnbull, the a pastor who helped inspire a
Ireland for tax purposes are prime minister of Australia, one-day general strike, was
now counted. The whopping scored a narrow victory in an arrested and charged with
revision heightened Irish election. With the final votes attempting to overthrow the
citizens’ sense that, as more still being counted, the co- state. The charges were
offshore firms flock to the alition was expected to secure dropped and he was released
country, growth statistics have a majority in the lower cham- after a large crowd gathered for
become meaningless. ber. Mr Turnbull may need the his appearance in court.
support of small parties and
Emmanuel Macron, France’s independents, who are likely Amnesty International report-
economy minister, held the to hold the balance in the ed that hundreds of people
first rally of a political move- upper house. have disappeared or been
ment, En Marche!, he has set tortured at the hands of
up. A liberal voice in the go- Desperate measures Egypt’s security services over
verning Socialist Party, Mr the past year.
Theresa May became Britain’s Macron wants to deregulate
prime minister, after her last the economy. Advisers are Russian jets bombed a refugee
remaining opponent with- prodding him to run in elec- camp in Syria, killing12.
drew from the Conservative tions for president next year
leadership race. Mrs May’s against the unpopular in- America said it would send
elevation to Number10 cumbent, François Hollande. another 560 troops to Iraq to
brought a quick resolution to help the security forces and
the power vacuum left by Two commuter trains collided Kurdish fighters in their at-
David Cameron’s resignation in southern Italy, killing at tempt to retake Mosul from
after the vote on Brexit. One of least 23 people. Islamic State.
her first acts was to make Boris
Johnson, a prominent leader The great wail of China A week for weeping
of the campaign for Britain to An international court in The As the situation in Venezuela In a show of national unity
leave the EU, foreign secretary. Hague delivered its verdict on grew more chaotic, President amid a bad week for race
George Osborne, who until a a case filed by the Philippines Nicolás Maduro told the army relations in America, Barack
month ago was arguably challenging China’s territorial to take over five ports in order Obama and George W. Bush
Britain’s most powerful poli- claims in the South China Sea. to ensure adequate supplies of spoke at a memorial for five
tician, was unceremoniously The judges ruled that China’s food and medicine. He said policemen shot dead by a
dumped as chancellor of the claims to resources within a this was necessary because of black nationalist in Dallas.
exchequer. His replacement is “nine-dash line” encompass- the “economic war” being They were slain overseeing a
Philip Hammond. ing most of the sea had no legal mounted against him by rivals street protest against the kill-
basis. It also said China’s with the backing of the United ings of two black men by
Britain’s Labour Party, by island-building on reefs there States. Venezuela’s Catholic police, in Louisiana and Min-
contrast, was still hampered had violated the Philippines’ bishops warned that the grow- nesota. Mr Obama praised the
with its leader, Jeremy Corbyn. sovereign rights. China reacted ing role of the military was a police for doing a difficult job,
He refuses to resign despite furiously to the judgment. threat to civil peace. but urged them not to dismiss
losing the support of most of the black protesters as
the party in Parliament, citing The Liberal Democratic Party A well-known environmental “troublemakers or paranoid”.
his backing among party mem- of Shinzo Abe, the prime min- campaigner in Honduras,
bers. Two opponents running ister of Japan, scored a sweep- Lesbia Yaneth Urquia, was
against him in a party election ing victory in elections to the murdered. There was wide-
say they can provide the lead- upper house of the Diet. To- spread international outrage
ership that Mr Corbyn can’t. gether with Komeito, his ally in after her body was found
That does not appear to be the ruling coalition, and like- abandoned on a rubbish
difficult. minded parties and indepen- dump. She was the second
dents, Mr Abe now has the opponent of a giant dam pro-
The Polish parliament’s lower two-thirds majority to push for ject to be killed in four months.
house passed legislation that changes to the pacifist constitu-
would resolve a controversy tion in a referendum. Pulling back from the brink
over seating justices on the A ceasefire halted four days of
constitutional tribunal but still Street violence was reignited in fighting in South Sudan be-
limit its power to block laws. Indian-ruled Kashmir after tween soldiers loyal to the After weeks of wavering,
Poland’s ruling right-wing Law security forces killed a promi- president, Salva Kiir, and body- Bernie Sanders at last en-
and Justice party is at odds nent militant leader, Burhan guards of the vice-president, dorsed Hillary Clinton as the
with the EU and with a liberal Wani. In days of protest by Riek Machar, a former rebel. Democratic candidate for
protest movement that de- pro-separatist youth, more Efforts were made to reinstate president. Mr Sanders put up a
fends judicial independence. than 36 people have been a peace agreement between surprisingly strong challenge
killed, nearly all by police the factions. The fighting, to Mrs Clinton in the prima-
Ireland announced that GDP gunfire. The insurgency today which started after a shoot-out ries. She has made some con-
grew by 26% last year, because is being waged less by in- at a checkpoint, claimed the cessions, notably by agreeing
of changes in how it calculates filtrators from Pakistan and lives of 270 people and threat- to offer free tuition at public
the size of its economy. Assets more by local militants. ened a return to civil war. colleges for poorer students. 1
8 The world this week The Economist July 16th 2016

borne argued that this would chests of drawers in America that pop up on the screen.
Business destabilise a “systemically when the products were Tales abounded of players
important financial institu- linked to the deaths of six finding characters in odd
After two weeks of turmoil tion” and lead to “contagion”. toddlers who were crushed by locations. One man even
following Britain’s referendum the furniture toppling over. But captured a character while his
decision to leave the European A former high-frequency China’s official news agency wife was in labour (he stopped
Union, global markets rallied, trader who was found guilty declared that IKEA was “arro- playing during the birth). The
buoyed in part by a favourable last November of “spoofing”, gant” for not withdrawing the game is part-owned by Nin-
jobs report from America. or placing a large number of range from its Chinese stores. tendo; its share price surged.
Employers added 287,000 jobs small orders electronically to
to the payroll last month, the create the illusion of demand The steep drop in the value of In one of the biggest-ever deals
biggest gain this year. The S&P and drive prices higher before the pound against the dollar involving a sports brand
500 rose to beat the record it cancelling them, was sen- was a factor behind the acqui- WME-IMG, a talent agency,
set a year ago. The FTSE 250, a tenced to three years in prison. sition of the Odeon cinema agreed to buy Ultimate Fight-
share index comprising mostly Michael Coscia’s conviction is chain in Britain by AMC, an ing Championship, which
British companies, also ad- the first for spoofing under the American peer owned by promotes mixed martial-arts
vanced and was close to its Dodd-Frank financial reforms. Dalian Wanda of China. The tournaments and whose
pre-Brexit levels. Investors still deal is worth £921m ($1.2 bil- events are becoming as pop-
sought out havens, however. Having his say on pay lion). The seller is Guy Hands, ular as boxing. The acquisition
For the first time the German Jamie Dimon, the chief exec- whose private-equity firm is worth $4 billion; UFC was
government sold ten-year utive of JPMorgan Chase, bought Odeon in 2004. sold in 2001 for just $2m. WME-
bonds (Europe’s benchmark waded into the debate on low IMG’s other assets include the
issue) offering a negative yield. pay by promising to lift the Miss Universe organisation,
wages of18,000 of the bank’s which it bought last year from
Talks continued in Europe over lowest-paid staff. JPMorgan a certain Donald Trump.
a possible rescue of Italy’s Chase pays a minimum of
troubled banks, which have $10.15 an hour, but this will rise Cheers!
endured a further loss of to between $12 and $16.50, Anathema to some, America’s
investor confidence in the costing the bank an estimated biggest brewers agreed volun-
wake of Brexit. The head of the $100m. Announcing the step, tarily to place nutrition labels
euro-zone group of finance Mr Dimon decried that fact on bottles and cans of beer
ministers reiterated the official that “wages for many Ameri- that will disclose how many
view that any rescue must cans have gone nowhere” and calories and carbohydrates
observe EU rules that compel said the increase in pay would they contain. The move, to be
creditors to take losses before help retain talented people. The latest craze in video games completed by 2020, is intend-
any taxpayers’ money is used. literally hit the streets. “Poké- ed to help drinkers shed their
IKEA extended a safety recall mon Go” is an alternate-reali- beer bellies, often gained by
Not going to make it easy to China, following a backlash ty game for smartphones. chugging a six-pack.
The French finance minister from state newspapers and Guided by GPS, players tra-
gave an indication of the tricki- social media there. The com- verse their cities seeking to Other economic data and news
ness of the discussions ahead pany recently recalled 29m “capture” Pokémon characters can be found on pages 72-73
on Britain’s exit from the EU.
Michel Sapin lambasted a
recent pledge by George
Osborne, Britain’s erstwhile
chancellor of the exchequer, to
reduce corporation tax as
“not a good way to start negoti-
ations” over the UK retaining
its passport for financial ser-
vices in the single market.
France and Germany see
Britain’s desire to reduce busi-
ness taxes as an attempt to
create a low-tax jurisdiction
not subject to EU regulations.

Meanwhile, it emerged that in

2012 Mr Osborne had interced-
ed in the US Justice Depart-
ment’s investigation into HSBC
over money laundered
through its American branches
by Mexican drug lords. The
department was considering
bringing charges on top of the
fines it imposed on the bank,
Britain’s biggest, but Mr Os-
 The Economist July 16th 2016 9
Leaders
The dividing of America
Donald Trump’s nomination in Cleveland will put a thriving country at risk of a great, self-inflicted wound

F ROM “Morning in America”

to “Yes, we can”, presidential
elections have long seemed like
the population for about 200 years: from the presidency of
George Washington to that of Ronald Reagan.
Demographic insecurity is reinforced by divisive partisan
contests in optimism: the candi- forces. The two parties have concluded that there is little over-
date with the most upbeat mes- lap between the groups likely to vote for them, and that suc-
sage usually wins. In 2016 that cess therefore lies in making those on their own side as furious
seems to have been turned on as possible, so that they turn out in higher numbers than the
its head: America is shrouded in opposition. Add a candidate, Mr Trump, whose narcissistic
a most unAmerican pessimism. The gloom touches race rela- bullying has prodded every sore point and amplified every an-
tions, which—after the shooting of white police officers by a gry sentiment, and you have a country that, despite its
black sniper in Dallas, and Black Lives Matter protests against strengths, is at risk of a severe self-inflicted wound.
police violence, followed by arrests, in several cities—seem to
get ever worse. It also hangs over the economy. Politicians of Reshaping politics
the left and right argue that American capitalism fails ordinary The damage would be greatest were he to win the presidency.
people because it has been rigged by a cabal ofself-serving elit- His threats to tear up trade agreements and force American
ists. The mood is one of anger and frustration. firms to bring jobs back home might prove empty. He might
America has problems, but this picture is a caricature of a not be able to build his wall on the border with Mexico or de-
country that, on most measures, is more prosperous, more port the 11m foreigners currently in the United States who have
peaceful and less racist than ever before. The real threat is from no legal right to be there. But even if he failed to keep these
the man who has done most to stoke national rage, and who campaign promises, he has, by making them, already dam-
will, in Cleveland, accept the Republican Party’s nomination aged America’s reputation in the world. And breaking them
to run for president. Win or lose in November, Donald Trump would make his supporters angrier still.
has the power to reshape America so that it becomes more like The most worrying aspect ofa Trump presidency, though, is
the dysfunctional and declining place he claims it to be. that a person with his poor self-control and flawed tempera-
ment would have to make snap decisions on national securi-
This nation is going to hell ty—with the world’s most powerful army, navy and air force at
The dissonance between gloomy rhetoric and recent perfor- his command and nuclear-launch codes at his disposal.
mance is greatest on the economy. America’s recovery is now Betting markets put the chance of a Trump victory at
the fourth-longest on record, the stockmarket is at an all-time around three in ten—similar to the odds they gave for Britain
high, unemployment is below 5% and real median wages are voting to leave the European Union. Less obvious, but more
at last starting to rise. There are genuine problems, particularly likely, is the damage Mr Trump will do even if he loses. He has
high inequality and the plight of low-skilled workers left be- already broken the bounds of permissible political discourse
hind by globalisation. But these have festered for years. They with his remarks about Mexicans, Muslims, women, dictators
cannot explain the sudden fury in American politics. and his political rivals. It may be impossible to put them back
On race relations there has, in fact, been huge progress. As in place once he is gone. And history suggests that candidates
recently as 1995, only half of Americans told pollsters that they who seize control of a party on a prospectus at odds with that
approved of mixed-race marriages. Now the figure is nearly party’s traditional values tend eventually to reshape it (see
90%. More than one in ten of all marriages are between people page 17). Barry Goldwater achieved this feat for the Republi-
who belong to different ethnic groups. The movement of non- cans: though he lost 44 states in 1964, just a few elections later
whites to the suburbs has thrown white, black, Hispanic and the party was running on his platform. George McGovern,
Asian-Americans together, and they get along just fine. Yet de- who fared even worse than Goldwater, losing 49 states in 1972,
spite all this, many Americans are increasingly pessimistic remoulded the Democratic Party in a similar fashion.
about race. Since 2008, when Barack Obama was elected presi- One lesson of Mr Trump’s success to date is that the Repub-
dent, the share of Americans who say relations between licans’ old combination of shrink-the-state flintiness and so-
blacks and whites are good has fallen from 68% to 47%. The cial conservatism is less popular with primary voters than
election of a black president, which seemed the ultimate proof Trumpism, a blend of populism and nativism delivered with a
of racial progress, was followed by a rising belief that race rela- sure, 21st-century touch for reality television and social media.
tions are actually getting worse. His nomination could prove a dead end for the Republican
What explains the divergence between America’s healthy Party. Or it could point towards the party’s future.
vital signs and the perception, put with characteristic pithiness When contemplating a protest vote in favour of tearing up
by Mr Trump, that the country is “going down fast”? Future his- the system, which is what Mr Trump’s candidacy has come to
torians will note that from about 2011 white and non-white ba- represent, some voters may ask themselves what they have to
bies were born in roughly equal numbers, with the ageing lose. (That, after all, is the logic that drove many Britons to vote
white population on course to become a minority around for Brexit on June 23rd.) But America in 2016 is peaceful, prospe-
2045. This was always going to be a jarring change for a coun- rous and, despite recent news, more racially harmonious than
try in which whites of European descent made up 80-90% of at any point in its history. So the answer is: an awful lot. 7
10 Leaders The Economist July 16th 2016

Britain’s new prime minister

Maytime

A no-nonsense conservative has taken Britain’s helm. She should make the case for a minimalist Brexit

T HEY campaigned to Leave,

and they were as good as
their word. Three weeks on
sensible compromise.
The single biggest call of her premiership will be what vari-
ety of Brexit to aim for. At one end of the spectrum is a “soft
from their referendum triumph, Brexit”: full membership of the single market, or something
the politicians who led the close to it, in return for retaining the principle of free move-
charge for Britain to quit the ment of people. At the other is a “hard Brexit”: a clean break,
European Union have fallen by sacrificing membership of the single market for full control
the wayside in the race to re- over how many and which EU nationals can move to Britain.
place David Cameron as prime minister. This week the last of This newspaper favours minimal restrictions on migration in
the prominent Leavers, Andrea Leadsom, withdrew her candi- return for maximum participation in the single market; even
dacy after a few days’ media scrutiny revealed her to be fantas- those less enthusiastic than we are about immigration should
tically ill-prepared. The job of steering Britain towards the EU’s shudder at the economic damage from serious barriers to a
exit doors has thus fallen to the only candidate left in the race: market that buys nearly half of Britain’s exports.
Theresa May, who campaigned to Remain. Mrs May’s thinking on this trade-off is unknown, but there
Mrs May’s path to power was easier than that ofmost prime are ominous signs. As home secretary she cut immigration at
ministers, but her time in office will be the hardest stint in de- the expense of the economy—limiting visas for fee-paying uni-
cades (see page 34). Extricating Britain from the EU will be the versity students, for instance. She has been unnervingly reluc-
diciest diplomatic undertaking in half a century. The wrang- tant to guarantee the status ofthe 3m EU citizens already in Brit-
ling at home will be no easier: whatever divorce settlement ain. And during the refugee crisis last summer she claimed,
Britain ends up with is likely to be deeply unsatisfactory even outrageously, that under Labour the asylum system had been
to those who voted to Leave. Popular anger will not be soothed “just another way of getting here to work”.
by the recession into which the country is probably heading. It Her domestic economic plans, though only sketched, in-
will take a gifted politician to lead Britain through this turbu- clude some progressive ideas. She has vowed to tackle vested
lent period. interests and ramp up competition. Her promise of a splurge
on infrastructure is sensible. So is a vow to make shareholders’
Last woman standing votes on bosses’ pay binding. But there are hints of a prefer-
Is Mrs May up to it? The gormlessness of her rivals flatters her. ence for meddling over markets, for example in her suggestion
But she has real qualities: a Merkelian calm, well suited to that the government should be readier to stop foreign take-
counter the chaos of the moment, and a track record of compe- overs of British firms. As Britain gives up its prized link with Eu-
tence that increases the likelihood of an orderly withdrawal rope, it will need all the foreign capital it can get. The “proper
from the EU. Her first speech as prime minister—in which she industrial strategy” she has called for is too often a synonym
promised to fight the “burning injustice” faced by the poor— for empty or bad ideas.
suggests she has correctly read the mood of those who voted
against the establishment and for Brexit, and is preparing to Hard-working, little-known
seize the centre ground vacated by the Labour opposition. The Home Office never made a liberal of any minister. But it in-
Her effortless victory presents a tactical problem. Without a stils a reverence for order, which could make Mrs May think
proper leadership contest or general election, Mrs May lacks twice before slashing ties with the EU. Membership gives Brit-
the seal of approval of her party’s members or the public. She ain access to shared security resources, from Europe-wide ar-
has ruled out a snap election—rightly, since there is only so rest warrants to pooled information on airline passengers and
much political drama the country can take (in any case Labour, criminal records. During the campaign Mrs May pointed out
engulfed in civil war, is in no shape to fight one). Yet her lack of that British police will soon be able to check EU nationals’ DNA
a mandate will be used against her, especially by Brexiteers. records in 15 minutes, down from 143 days. Although Britain
When Mrs May eventually returns from Brussels with a deal pulled out of some EU justice initiatives two years ago, it hung
that falls short of the Brexit fantasy that voters were mis-sold, on to others such as these because, in Mrs May’s words, they
expect those in the Leave camp to cry treachery. To head off were “not about grandiose state-building and integration but...
such accusations she has already given plum cabinet jobs to practical co-operation and information-sharing”.
some unworthy Brexiteers, notably Boris Johnson as foreign That rationale applies to much of what matters in Britain’s
secretary. In negotiations she may be unwilling to give ground relationship with Europe. The single market is not a romantic
to the EU even when it is in Britain’s interest. ideal but a way of letting companies trade across borders. Free
The European divorce proceedings will dominate her gov- movement allows British firms and universities to recruit
ernment. The first decision is when to invoke Article 50 of the workers and students more flexibly, and lets Britons work and
Lisbon treaty, the legal mechanism by which Brexit begins. For- study abroad. These are the practical arguments for negotiat-
tunately, Mrs May seems to be in no hurry. Britain needs to set- ing a minimalist Brexit—and their urgency will grow as Brit-
tle its own position before firing the starting gun on negotia- ain’s economic predicament worsens. Mrs May seems to be no
tions, which will take months to do properly. Delay will also liberal, but we hope she will champion the conservative case
give EU politicians time for reflection, raising the chances of for staying close to Europe. 7
 The Economist July 16th 2016 Leaders 11

The South China Sea

Come back from the brink, Beijing

Why China should accept a damning international ruling

LAOS
CHINA
TAIWAN

Paracel Is. S o u t h
T HE aggression that China
has shown in the past few
years in its vast territorial grab in
der UNCLOS to any sovereign waters, China had encroached
illegally into the Philippines’ EEZ. The court also said China
had violated UNCLOS by blocking Philippine fishing boats and
VI

THAI- China
PHILIPPINES the South China Sea has terri- oil-exploration vessels and that Chinese ships had acted dan-
ETN

LAND Sea
AM

CAMBODIA Scarborough
Shoal
fied its neighbours and set it on a gerously and unlawfully in doing so. Moreover, China’s island-
Spratly Is. collision course with America, building had caused “severe harm” to the habitats of endan-
The “nine- long the guarantor of peace in gered species, and Chinese officials had turned a blind eye to
500 km dash line”
East Asia. This week an interna- Chinese poaching of them.
tional tribunal thoroughly demolished China’s vaguely de- For China, this is a humiliation. Its leaders have called the
fined claims to most of the South China Sea. How Beijing re- proceedings illegal. Its huge recent live-fire exercises in the
acts to this verdict is of the utmost geopolitical importance. If, South China Sea imply that it may be planning a tough re-
in its fury, China flouts the ruling and continues its creeping an- sponse. This could involve imposing an “Air Defence Identifi-
nexation, it will be elevating brute force over international law cation Zone” of the kind it has already declared over the East
as the arbiter of disputes among states. China’s bullying of its China Sea. Or China might start building on the Scarborough
neighbours greatly raises the risks of a local clash escalating Shoal, which it wrested from the Philippines in 2012 after a
into war between the century’s rising superpower and Ameri- stand-off between the two countries’ patrol boats.
ca, the current one. The stakes could hardly be higher. That would be hugely provocative. Although America is
deeply reluctant to risk a conflict, President Barack Obama is
Blown out of the water thought in March to have warned his Chinese counterpart, Xi
The ruling by the Permanent Court of Arbitration in The Jinping, that any move on Scarborough Shoal would be seen
Hague, in response to a case brought by the Philippines, is firm, as threatening American interests (the Philippines is a treaty
clear and everything China did not want it to be (see page 25). ally). For China to call its bluff in a sea that carries $5.3 trillion in
The judges said that the UN Convention on the Law of the Sea annual trade would be reckless and irresponsible.
(UNCLOS) should determine how the waters of the South Chi- There is a better way. China could climb down and, in effect,
na Sea are divided among countries, not China’s ill-explained quietly recognise the court’s ruling. That would mean ceasing
“nine-dash line” which implies the sea is Chinese. None of the its island-building, letting other countries fish where UNCLOS
Spratly Islands in the south of the sea, claimed (and occupied) allows and putting a stop to poaching by its own fishermen. It
by several countries including China, can be defined as islands would have good reason: its prestige and prosperity depend
that can sustain human life, they ruled. This means no country on a rules-based order. It would be in China’s interests to se-
can assert an Exclusive Economic Zone (EEZ) extending up to cure peace in its region by sitting down with the Philippines,
200 nautical miles around them. Vietnam and other South-East Asian neighbours and trying to
The court had no power to decide who owns which bits of resolve differences. Right now those countries, and America,
land in the South China Sea. But the judges said that by build- should avoid action that will needlessly enrage China, and in-
ing on rocks visible only at low tide, and thus not entitled un- stead give it a chance to walk back from the edge. 7

Deutsche Bank

A floundering titan

Germany’s banking champion has neither a proper business model nor a mission

Bank share prices

January 1st 2016=100
T
HERE are banks that are
smaller than Deutsche Bank,
and there are larger ones. There
worth barely an eighth of what they were in 2007. Employees
are demoralised: less than half are proud to work there.
Some of the blows Deutsche has sustained are not of its
S&P 500 banks 100
80
are riskier ones, and safer ones. own making. It has thousands of investment bankers in Lon-
But it is hard to think of any oth- don, for example, but the city’s future as Europe’s financial cap-
60
Deutsche Bank er big financial institution so be- ital has been thrown into doubt by Brexit. Negative interest
40
J F M A M J J reft of a purpose. rates hurt margins across the industry. A few problems, such as
2016
Since its acquisition of Bank- litigation costs for past misdeeds, will fade with time. Its new-
ers Trust in 1999, Deutsche has sold itself as a global investment ish chief executive, John Cryan, wins plaudits for a hard-nosed
bank. Yet American rivals leave it trailing, even in its own back- strategy to cut costs, sell assets and overhaul dusty IT systems
yard: the Goldman Sachs of Europe, it turns out, is Goldman (see page 58). But the task of turning Deutsche around is made
Sachs. Deutsche’s revenues have dived since the crisis; last nearly impossible by two problems—its inadequate level of
year it reported its first annual loss since 2008. Its shares are capital and the fundamental question of what the bank is for. 1
12 Leaders The Economist July 16th 2016

2 Capital, first. In the go-go years before the financial crisis, ica charge twice as much as those in Europe for their work on
banks could fund rapid expansion with vanishingly thin capi- initial public offerings. European investment banks have fall-
tal cushions. Today, nothing matters more for a bank than the back options. Barclays claims 16m retail customers in Britain;
amount of equity it has. Deutsche has consistently been be- UBS and Credit Suisse boast big wealth-management arms.
hind the curve, first waiting too long to raise capital, then doing Deutsche lacks a jewel in the crown. It does not have a
so in insufficient amounts. Its leverage ratio, a gauge of how strong retail presence in Germany: indeed, it plans to reduce its
much equity it has to soak up losses, was 3.5% at the end of presence on the Hauptstrasse further by selling Postbank, a
2015, lower than that of global peers. Concerns about capital large bank it took control of in 2010. It is too big to be simply the
mean no dividends for shareholders, and the threat of dilution house bank for Germany’s corporate elite. Its positioning as a
if the bank attempts another fund-raising exercise. global leader in selling and trading bonds made much more
sense in an era when banks could make big bets with their
Cryan de coeur own money, and when there were greater efficiencies from be-
Mr Cryan is loth to tap investors for more money. It is doubtful ing global. The returns now on offer are paltry.
that they would stump up one euro more in any case, given There is no obvious way out. Deutsche trades at about a
that Deutsche seems unable to generate decent profits. Before quarter of the notional value of its net assets. If it were a non-
the crisis its mantra, like that of other big banks, was expan- financial firm it would be broken up. But big banks cannot be
sion. Now lenders are focusing on core strengths, usually on dismantled without risking chaos. No regulator wants to see a
their home turf. American investment banks can rely on the charge oftheirs buy Deutsche. So on it must plod, more zombie
world’s largest capital markets to sustain them: banks in Amer- than champion, an emblem of an enfeebled industry. 7

Marine management

Net positive

How to stop overfishing on the high seas

F ISH are slippery characters,

with little regard for interna-
tional agreements or borders.
costs, subsidies bring the high seas within reach for a few lucky
trawlers, largely from the developed world. Just ten countries,
including America, France and Spain, received the bulk of the
The speediest, such as crescent- bounty from high-seas catches between 2000 and 2010, even
tailed bluefin tuna, can slice though Africa has more fishermen than Europe and the Ameri-
through the ocean at 70 kilo- cas combined. That is unfair and short-sighted.
metres per hour. Their routes The next step is to close off more areas to fishing. As of 2014
take them beyond areas that less than 1% of the high seas enjoyed a degree of legal protec-
come under the jurisdiction of individual coastal states, and tion. A review of144 studies published since 1994 suggests that
into the high seas. These wildernesses were once a haven for to preserve and restore ecosystems, 30% of the oceans should
migratory species. No longer. be designated as “marine protected areas” (MPAs). Individual
Under international law the high seas, which span 64% of countries can play their part, by creating reserves within terri-
the surface of the ocean, are defined as “the common heritage torial waters: last year Britain created the world’s largest MPA,
ofmankind”. This definition might have provided enough pro- an area bigger than California off the Pitcairn Islands in the
tection if the high seas were still beyond mankind’s reach. But South Pacific. But to get anywhere near that 30% share, mecha-
the arrival of better trawlers and whizzier mapping capabili- nisms must be found to close off bits of the high seas, too. The
ties over the past six decades has ushered in a fishing free-for- UN’s members have rightly agreed to work out how to do so.
all. Hauls from the high seas are worth $16 billion annually. De-
prived of a chance to replenish themselves, stocks everywhere Scaling up
pay the price: almost 90% are fished either to sustainable limits Progress towards even these limited goals, let alone more am-
or beyond. And high-seas fishing greatly disturbs the sea bed: bitious ones such as a total ban on high-seas fishing, will not be
the nets of bottom trawlers can shift boulders weighing as easy. The fishing industry is adept at protecting its interests.
much as 25 tonnes. Questions of governance and enforcement dog every effort to
Introducing private property rights is the classic answer to police the high seas. Demand for fish is rising: humans are each
this “tragedy ofthe commons”. That is the principle behind the consuming 20kg on average a year, more than ever before.
exclusive rights given to coastal states to maintain territorial So in parallel with efforts to protect wild stocks, another
waters. A clutch of regional organisations have been set up to push is needed: to encourage the development of aquaculture,
try to manage fish stocks in the high seas. But as a result of over- the controlled farming of fish. In 2014, for the first time, more
lapping remits, vested interests and patchy data, the plunder fish were farmed for human consumption than were caught in
continues apace (see page 65). Since 2010 the proportion of the wild; farmed-fish output now outstrips global beef pro-
tuna and tuna-like species being overexploited has grown duction. Unfortunately, feedstocks are often poor and storage
from 28% to 36%. facilities inadequate. By boosting basic research and infra-
A fresh approach is needed. Slashing fishing subsidies is the structure for aquaculture, governments could hasten a wel-
most urgent step. In total these come to $30 billion a year, 70% come trend. Eventually, efficient fish-farming will be the best
of which are doled out by richer countries. By reducing fuel guardian of stocks on the high seas. 7
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14 The Economist July 16th 2016
Letters
Zimbabwe and the IMF Iraq and the law That, I believe, is a rather pro- becoming more technocratic
vocative parallel to the affairs than working class.
The Economist provided only a Although the Chilcot report of recent years. Young foresaw a populist
partial picture of the IMF’s (“Iraq’s grim lessons”, July 9th) JOHN MCNEILL right-wing rebellion which
engagement with Zimbabwe declined to express an opinion San Francisco would baffle the new ruling
(“Bailing out bandits”, July on whether the invasion of class. Sound familiar? The
9th). In fact, financial support Iraq was legal, plenty of other A future outside the EU smart set has had its come-
from the IMF for Zimbabwe is people did, and in advance. uppance, yet, in a new snob-
far from a done deal. The The Foreign Office legal team, The Norwegian option for bery, scorns dissenters as daft,
authorities have announced for example, whose head later Britain once it leaves the Euro- racist, unpatriotic or all three.
that they intend to request IMF said that it was the first and pean Union would indeed do JON HUGGETT
financing after arrears to all only time in his 30 years of the least damage to the British London
international financial in- service that his advice had not economy (“Adrift”, July 2nd).
stitutions are cleared. Once the been taken. In his 2010 book Norwegian businesses, which In the wake of the vote to leave
arrears are cleared, the IMF’s “The Rule of Law”, Lord Bing- I represent, have lived well the EU, the move towards
executive board would need to ham said that Iraq was “a with the European Economic isolationist Euroscepticism in
approve the normalisation of serious violation of interna- Area for 20 years. It secures full the Tories and turmoil within
relations with Zimbabwe. Any tional law”. At the time of the access to the single market. But, Labour, Bagehot calls for a new
negotiation would start only at war, neither he, nor any other remember, we have to take on political party in Britain of the
that point. British judge specialising in board all relevant EU legisla- cosmopolitan centre (July
The approval of a potential international law, was asked to tion in order to keep a level 2nd). Happily such a party
programme would, in turn, be give a view. playing field. If we don’t, the already exists and it is simulta-
contingent on two factors. Instead, Tony Blair decided EU can respond by suspending neously new and old. The
First, designing sound eco- to “rely” on the advice of one the relevant chapter of the Whig Party was re-established
nomic policies to ensure that man, Lord Goldsmith, the agreement. Since market ac- in 2014 and fielded four candi-
structural imbalances are attorney-general. Although cess is so important, we have dates in the 2015 election on a
meaningfully addressed. Lord Goldsmith was a lawyer, never used this right. platform of optimistic, interna-
Second, obtaining financing he was also a government We even had to establish a tionalist liberalism.
assurances regarding Zimba- minister and as his evidence to separate surveillance au- ALASDAIR HENDERSON
bwe’s ability to service its debt Chilcot confirmed, he yo-yoed thority and court that can issue London
in a timely manner going around in order to find the binding decisions if our gov-
forward. A sound economic answer that Mr Blair wanted as ernment does not implement Bagehot dubbed pro-global-
programme would require the cover for a decision that had EU legislation correctly. Free isation, pro-EU parts of Britain
upfront adoption of important already been taken. It was a movement of people is a core “Londonia”. Surely
fiscal measures and the contin- sorry process. element of the agreement and “Remainia” is more apt?
ued implementation of struc- The world needs from time we have to contribute sub- STEPHEN GRAHAM
tural reforms to restore confi- to time clear reminders that stantial amounts to the EU’s Cambridge, Cambridgeshire
dence in the dollarised system, certain types of behaviour poorer countries. If you are
as well as an increase in the should not be allowed. I very ready to take up the obliga-
private sector’s contribution to much hope that somewhere, at tions and give up your voting
growth. And the financing some point in time, a compe- rights you are welcome to the
assurances would involve tent court of law will make the EEA. If not, it is not for you.
contributions from all multilat- judgment that Sir John Chilcot KRISTIN SKOGEN LUND
eral and bilateral creditors in declined to make. Director-general
support of Zimbabwe’s ROBERT SATCHWELL Confederation of Norwegian
economic programme after the Haarby, Denmark Enterprise
arrears clearance. Oslo
In short, irrespective of the Company sclerosis
calendar for the clearance of The Brexit vote was more a
arrears, the economy needs Schumpeter’s column on the democratic rebellion against
immediate reforms to address imperial chief financial officer meritocrats than a “backlash “Article 50 ways to leave your
the vulnerabilities that have (June 18th) reminded me of the against globalisation” (Free lover” was music to my ears
come to the fore since May. As observations made by Alfred exchange, July 2nd). In the (July 2nd). Possibly portending
your article pointed out, Sloan in “My Years with Gen- 1950s Michael Young coined that Brexit might be a lengthy
Zimbabwe has taken steps in eral Motors”. Sloan noted the the word “meritocracy” to divorce, that song was includ-
the past few months that move evolving power structure of describe a new ruling elite, ed on Paul Simon’s classic
the country further in putting firms as they went from start- nastier than an aristocracy or album “Still Crazy After All
in place some of the needed ups to institutions. The reign of plutocracy. He predicted that These Years”.
reforms. Expeditious imple- the bean counters was one of an elite picked by “merit” FABIAN DECHENT
mentation is critical to reverse the latter stages, chasing profits would feel entitled to exploit, Mainz, Germany 7
Zimbabwe’s economic decline, by grinding away at costs and drive up income differentials
exploit the economy’s poten- the vitality of the organisation and fix rules to give their kids a
tial and protect its most itself. In his cycle, that was head start. “The Rise of the Letters are welcome and should be
addressed to the Editor at
vulnerable people. soon to be succeeded by the Meritocracy”, published in The Economist, 25 St James’s Street,
GERRY RICE reign of the lawyers, who 1958, described a divided London sw1A 1hg
Director of communications hobbled what was left through 21st-century Britain, run by an E-mail: letters@economist.com
International Monetary Fund more and more complex rules elite hardened to outsiders, More letters are available at:
Economist.com/letters
Washington, DC and operational restrictions. with the party of the left
Executive Focus 15

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16
Executive Focus

The Economist July 16th 2016

 The Economist July 16th 2016 17
Briefing The Republican Party

rier fence that would keep out 95% of the il-

Past and future Trumps legal traffic. I think it can be done.” Four
years later Mr Buchanan, who studied at
Georgetown and Columbia, said that the
peasants were coming with pitchforks, and
that he was their champion. Ross Perot,
who ran for the presidency as an indepen-
Insurgent candidates who win the nomination tend to transform their party, even
dent in 1992, made a different part of the
if they never become president
Trump pitch—the successful businessman

I N EVERY continent he seems familiar.

Italians see another Silvio Berlusconi,
South Africans a Jacob Zuma and Thais a
the campaign and since, wrote in his
hometown newspaper: “On the issues that
make up our agenda, we have more com-
who would stop the “giant sucking sound”
of American jobs being hoovered up by
Mexico, the billionaire promising to make
Thaksin Shinawatra. Latin America practi- mon ground than disagreement.” competition go away.
cally invented the type: to Argentines he is For those watching the convention,
Juan Perón’s echo. Those who find Donald which begins on July 18th, what is happen- A lone voice
Trump scary sometimes compare him to ing may not appear unusual. The party has A second thread that has been gathered up
jackbooted fascists in 1930s Europe. The rallied, as it usually does, behind the nomi- by Mr Trump is isolationism. His talk of
search for the right precursor to Mr Trump nee. Before the first caucus met in Iowa, “America First” is borrowed, consciously
is born of an understandable urge to work Gallup reported that Mr Trump was al- or not, from Charles Lindbergh, whose
out what happens next. ready familiar to 91% of Americans. Famil- America First Committee argued in the
Here is a prediction: Mr Trump, who iarity has bred content among most right- 1940s against participation in the second
will stand onstage at the Republican Con- leaning voters (see chart1on next page). Yet world war. Mr Trump is not consistent on
vention in Cleveland and accept the what is happening in the Republican Party this point: at times he regrets American in-
party’s nomination as its presidential can- right now is far from normal. volvement in foreign wars, at others he
didate, will have a more lasting effect on The party is nominating someone who wants to seize foreign oilfields. The idea
the Republican Party than its elected mem- is not a Republican in any recognisable that America should station troops abroad,
bers currently realise, even if he goes on to form. Instead, Mr Trump combines tradi- but that the countries concerned would
lose the election in November. tions that Republicans and Democrats have to pay for it, is the synthesis of his op-
For the moment, most Republicans ei- have at times flirted with, only to reject posing instincts over dealing with the rest
ther resist this notion or are relaxed about them when in government. One of these is of the world.
it. “I don’t think the Trump nomination is populism, which in America usually The third thread is nativism. For Mr
going to redefine in any real way what means making promises to improve the Trump, not all citizens are equally Ameri-
America’s right-of-centre party stands for,” livelihoods of blue-collar workers by pro- can. Hence his claims that Gonzalo Curiel,
Mitch McConnell, the Senate majority tecting them from foreign competition, a federal judge born in Indiana, was biased
leader, told National Public Radio after the whether that comes in the form of immi- against him because of the judge’s Hispan-
primaries were over. “You know what, I gration or trade. ic background. Mr Trump’s plan to deport
think something different and something Pat Buchanan, who made bids for the the 11m undocumented migrants from
new is probably good for our party,” Reince Republican presidential nomination in America is a nativist fantasy. It recalls the
Priebus, head of the Republican National 1992 and 1996, declared during his first at- enthusiasm for deportation of Art Smith,
Committee, told CNN, hopefully. Paul tempt: “If I were president I would have another fringe politician from the 1930s.
Ryan, who has criticised Mr Trump during the Corps of Engineers build a double-bar- Smith, who really was a fascist, advocated 1
18 Briefing The Republican Party The Economist July 16th 2016

2 the removal of radicals from the country. Democratic nominee in 1972, beaten by
1
America’s appetite for fascism proper was Trump’s troops Richard Nixon in 49 states. One reason for
tested in 1933, after a protester was killed at How do you feel about Donald Trump as the 2016 this rout was that McGovern’s Democratic
a rally. Smith proposed a march on Wash- Republican nominee for president?* Party seemed to hold different values to
ington later that year which, he boasted, Enthusiastic Satisfied those of most voters. In his history of the
would number 1.5m people. Only 44 Dissatisfied Upset % of total era, Rick Perlstein recounts how television
voters, 2012
showed up. Not sure cameras at the 1972 convention lingered on
Populism, isolationism and nativism 0 20 40 60 80 100 two men in the hall who were wearing
are distinct from racism. But they can often White men
22.3 purple shirts with “gay power” written on
no college
be found on the same shelf. Towards the them, and kissing. The same convention
White women
end of the 19th century, as Chinese labour- no college 24.4 was the first to be addressed by an openly
ers were brought to California to work on White men
15.8
gay man, Jim Foster. McGovern proposed a
college educated
the railways, Denis Kearney, a labour- “Demogrant”, a basic income for all, guar-
Non-white men
movement leader, made a career out of college educated 3.1 anteed by government. Many Democrats
attacking the “Chinaman”, laying the White women looked at lonely Massachusetts in the blue
17.2
groundwork for the Chinese Exclusion Act college educated column the day after the election and con-
of1882, the first of several laws to interrupt Non-white men
no college 6.3 cluded that they could never win the presi-
migration from Asia. Kearney did not just Non-white women
dency with a candidate like McGovern.
object to Chinese workers undercutting college educated 4.0 Viewed today, the 1972 Democratic
American wages. He found their food, hab- Non-white women 6.9 campaign looks premature rather than
no college
its and living arrangements revolting. wrong. That is the view of John Judis and
“Whipped curs, abject in docility, mean, Sources: YouGov; *5,773 registered voters surveyed Ruy Teixeira, authors of “The Emerging
CCES; The Economist June 4th to July 9th 2016
contemptible and obedient in all things Democratic Majority”, published in 2002.
…they seem to have no sex. Boys work, One chapter of their book is called “George
girls work; it is all alike to them.” Party in 1936 and supported Huey Long, a McGovern’s revenge”. McGovern ap-
Mr Trump’s assertions that Mexico is populist of the left who wanted a corpora- pealed strongly to non-whites: according
not just destroying American workers’ tist state to save workers from the cruelty to Gallup he won 87% of them in 1972, a
livelihoods (because of NAFTA), but send- of capitalism. But it is impossible to disen- higher proportion than Barack Obama
ing drug-dealers and rapists across the bor- tangle Mr Trump from the world of reality managed in 2012.
der too, is Kearney for the 21st century. television, where he honed his narrow- The rapidly increasing racial diversity
When accused of racism, Mr Trump re- eyed stare and finger-jabbing persona. Or of the electorate between then and now
sponds that he loves Hispanics and insists from social media, which Mr Trump uses has turned this from a losing strategy into a
they love him back. His supporters hear sometimes to broadcast his views and winning one. McGovern did better with
what they want to hear. sometimes to insinuate them. working women than men and better with
He has an ability to say things that are professionals than with blue-collar work-
From light to night not true but which seem, to his supporters, ers. This, too, made him a loser in 1972 but
Like any successful populist, though, Mr to be right anyway. Shared with like-mind- provided the template for Democratic vic-
Trump is also of his time. In 1984 voters ed people on social networks, this has tories in 2008 and 2012. Polls suggest that
were persuaded that it was morning in been a boon for what Richard Hofstadter Hillary Clinton may be the first Democrat-
America; in 2016 many seem prepared to called “the paranoid style in American pol- ic presidential candidate for at least 60
believe that night is falling. Two-thirds say itics”, an apparently sincere belief in im- years to win a majority of white voters
that the country is on the wrong track. Ever plausible conspiracies. Mr Trump’s insinu- with college degrees (see chart 2).
since Ronald Reagan’s first victory, it has ation, after the shooting in Orlando, that Before McGovern, Barry Goldwater
been a cliché that the most optimistic can- the president might secretly sympathise also got thrashed and transformed his
didate usually wins. Mr Trump has turned with Islamic State was a model of the para- party in the process. Goldwater lost 44
this upside down, declaring during the pri- noid style. states on a platform of huge tax cuts, pour-
maries: “This country is a hellhole.” Bad The most novel thing about Mr Trump, ing weedkiller on the federal government,
news seems to confirm his thesis and gives though, when compared with the fringe opposition to civil rights and confronting
his candidacy energy. The shootings in figures who preceded him, is that he is the communism abroad. “Extremism in the 1
Dallas are the latest example, but the same nominee of one of America’s two main
could be said of the attacks in Orlando and parties. This puts him in a different catego-
2
San Bernardino. ry and will give him a greater opportunity Learning lessons
Mr Trump’s most popular proposal, to shape the country. This is obviously the % of white people voting for Republican Party
more loved even than the Great Wall of case if he wins in November. But it will presidential candidate, by educational attainment
Texas, is to ban Muslims from entering the probably happen even if he loses, cur- College High school
country. Exit polls from the Republican pri- rently the more likely result. Some college No high school
maries recorded that voters were more A handful of insurgent candidates have 80
worried about terrorism than immigra- seized the nomination, lost the election
tion. That, combined with anxieties about and transformed their parties anyway. 60
the changing racial make-up of America, From the late 19th century William Jen-
explains why around two-thirds of prim- nings Bryan failed three times as a Demo-
40
ary voters supported the Muslim ban. cratic candidate while campaigning for a
Though much of it may be old, there is federal income tax, popular election of
nothing old-fashioned about how Mr senators, votes for women and other 20
Trump delivers his message. His skill on causes that had become laws by the time
broadcast media recalls Charles Coughlin, of his death. Two more recent examples of
0
a Catholic priest whose radio show nominees who have done the same are 1956 64 72 80 88 96 2004 12
reached around 30m listeners at its peak in worth looking at more closely.
Sources: American National Election Studies; The Economist
the 1930s. Coughlin founded the Union The first is George McGovern, the
Benefit from a secured bond
20 Briefing The Republican Party The Economist July 16th 2016

out by a demographic wave of this size

3
Realigning Republicans would, eventually, lead to the Republican
United States, % of respondents* stating: Net Party being dragged to the ocean floor and
For the US, free-trade agreements When thinking about the long- Economic system in the held underwater until it blacked out.
have been a: term future of Social Security: United States: Yet the electorate is not the same as the
bad thing good thing reductions benefits should favours generally fair to population, because not all voters are
needed not be reduced powerful most Americans
equally likely to turn out. Even in 2012, an
80 40 – 0 + 40 80 80 40 – 0 + 40 80 80 40 – 0 + 40 80 election that saw minorities turn out in re-
22 -61 47
cord numbers, voters were as white as
Democrats Democrats Democrats
America was 20 years before. Three de-
Republicans -15
Republicans -10
Republicans 39 mographers—Mr Teixeira and Rob Griffin
of the Centre for American Progress, and
Trump Net: -40 Trump -23 Trump 48
supporters supporters supporters
Bill Frey of Brookings—have run a simula-
tion to see what would happen if the Re-
Source: Pew Research Centre *2,254 registered voters surveyed March 17th-27th 2016
publican Party managed to boost white
turnout by 5% across the board, while all
2 defence of liberty is no vice,” he told the cling plant in Pennsylvania in June, he said other voter groups remained constant.
1964 convention in Daly City, California. that American workers had been betrayed This would be hard to achieve, but not im-
Voters disagreed, and not even a power- by politicians and financiers, who “took possible: turnout among whites in 2012
ful televised speech made in support of away from the people their means of mak- was 64%, which leaves some headroom.
Goldwater by Ronald Reagan, then a TV ing a living and supporting their families”. The result of the voting model is a Republi-
presenter, could persuade them otherwise. This is a complete reversal of Republi- can advantage in the electoral college up
The future for Goldwater’s ideas did not can orthodoxy of the past 30 years, which until 2024, after which point the strategy
look bright. “The election has finished the has mixed openness to trade and an im- no longer works.
Goldwater school of political reaction,” pulse to cut entitlement spending with A Trumpist Republican Party might not
wrote Richard Rovere in the New Yorker, conservative stances on social issues. Any- win many presidential elections. But it
reflecting the consensus of what would one who thinks that the party will revert to could be competitive enough to resist de-
now be called the mainstream media but that orthodoxy if Mr Trump loses wasn’t mands for reform and would probably
then was simply known as the press. It paying enough attention during the prima- have enough bodies to block legislation in
could hardly have been more wrong. ries, which suggested that registered Re- Congress. With less outright hostility to
As with McGovern’s defeat, Republi- publicans are, on the whole, less interested Hispanics and a softer tone towards wom-
cans initially reacted by picking candidates in government-shrinking and values-vot- en, it might even attract some of those cur-
with more traditional views of govern- ing than their elected representatives are. rently on the left who are hostile to trade
ment. Goldwater’s success in the Deep Those who lean Republican, according and globalisation, or who worry about
South, thanks to his opposition to civil to polling by the Pew Research Centre, are threats from immigration and automation,
rights, the popularity of George Wallace, more likely to say that free-trade deals are to create an updated populism.
the segregationist governor of Alabama, bad for America than those who lean The coalitions that have underpinned
and rising public alarm about law and or- Democratic (see chart 3). The same polling both main parties now look fragile. On
der and cultural change, bore fruit in the shows that Republican voters are just as re- some cultural issues, notably guns, white
1968 election, when Richard Nixon luctant to cut Social Security benefits as Democrats without a college education are
grabbed millions of voters from the Demo- Democratic ones. This helps to explain more closely aligned with the Republicans
crats to build a “New Majority” of big-city why Republican primary voters liked the than with the party they currently vote for.
Irish, Italian and Polish Catholics, and sound of what Mr Trump is selling more Mr Trump’s coronation in Cleveland will
white Protestants from the South, Midwest than they liked the tax-cuts-and-Old-Testa- be the burial of an old dynasty. It may also
and rural America, beginning a nation- ment tunes of the party’s late-Goldwater be the foundation of a new one. 7
wide realignment of politics that is still period. And elected Republicans are acute-
playing out today. ly sensitive to the preferences oftheir prim-
ary voters, who have a veto on whether
Goldwater runs deep they will end up running for office.
The radical conservative side of Goldwa- As well as a reversal of party ortho-
ter’s platform had captured his party’s doxy, Mr Trump’s campaign has also
heart by 1980. Reagan won the nomination ditched the party’s electoral strategy. From
and then the general election on a platform Mitt Romney’s defeat in 2012 until Mr
of tax cuts, shrinking government and con- Trump won in South Carolina, it seemed
fronting communism abroad. Up until last obvious that to win the presidency the Re-
year, it was accurate to say that Goldwater publican Party needed a candidate with
still provided the intellectual framework some appeal to Hispanic voters: hence the
for the Republican Party: George W. Bush is excitement about Jeb Bush, whose wife is
disliked by so many Republicans because Mexican, and then Marco Rubio, whose
his big-government conservatism strayed parents were born in Cuba. Instead, the
too far from it. With Mr Trump as the nomi- party has picked a candidate of whom 87%
nee, the Goldwater takeover, which has of Hispanics disapprove.
lasted 35 years, is under threat. This would appear to be a recipe for Re-
What might a Trumpist Republican publicans to lose a lot of presidential elec-
Party look like? In “five, ten years from tions, and it might indeed prove to be so.
now,” he told Bloomberg, “you’re going to Even with low levels of immigration by
have a workers’ party. A party of people past standards, demographers expect
that haven’t had a real wage increase in 18 America to have a non-white majority by
years, that are angry.” Speaking at a recy- the middle of the century. Getting caught
 The Economist July 16th 2016 21
Asia
Also in this section
22 Emperor Akihito grows weary
22 Australia’s damaged prime minister
23 Kashmir erupts again
24 Murder most murky in Cambodia
24 The Hello Kitty craze in Taiwan
Banyan is on holiday

For daily analysis and debate on Asia, visit

Economist.com/asia

Japanese politics may amount to as much as ¥10 trillion

($99 billion), or 2% of GDP—to be added to
Diet control the current budget deficit and national
debt of about 6% and 250% of GDP respec-
tively. Mr Abe remains wedded to the old
LDP recipe of construction projects and
high-speed trains. Some of the money will
TOKYO
be raised through investment bonds
Shinzo Abe may have the two-thirds majority he needs to change the constitution.
which, like nearly all the finance ministry’s
But fixing the economy is more urgent
debt issuance these days, will be bought by

A S THE results of the election for the

Diet’s upper house rolled in on July
10th, Japan’s prime minister, Shinzo Abe,
In the circumstances, it is remarkable
that the opposition Democratic Party (DP)
landed so few punches. It lost 15 seats. Post-
the central bank, in a tight fiscal-monetary
tango. There is also talk of direct cash trans-
fers to boost consumption among target-
beamed. And why not? This was his third Brexit turmoil in Europe may have spurred ed groups, notably the young, the working
sweeping election victory since he and his voters to cling to the stability that the LDP poor, women and pensioners—a variant
Liberal Democratic Party (LDP) returned to represents. The DP’s tactical agreement to on “helicopter money” that seems des-
power in late 2012. It was won despite a co-ordinate fielding candidates with three tined to be called “drone money”.
sputtering economy and mounting doubts disparate opposition parties unsettled A cabinet reshuffle is likely in August,
about how Mr Abe might fix it. And it many voters. Gambling all on its opposi- and any Buggins’-turn appointments will
moves him a big step closer to achieving a tion to constitutional change, the DP had be presented as bringing in new reformist
lifelong political ambition: unshackling Ja- few economic proposals. blood. It is possible that the finance minis-
pan from the constitution imposed by Having postponed a planned rise in ter, Taro Aso, will want to go. But Mr Abe
America on a defeated country after the the consumption tax, Mr Abe has instruct- knows he has to do more than change faces
second world war. ed the finance ministry to draw up a “sup- and push yet more stimulus. One measure
With its junior partner, Komeito, the plementary” budget to be passed in a spe- hinted at for the autumn Diet session is to
LDP won 70 out of the 121 seats up for grabs cial session of the Diet, expected reform the labour market. The prime min-
(half the upper house), admittedly on a in mid-September. The fresh stimulus ister, his advisers say, has come to believe
low turnout. It nevertheless gives the rul- that the economy’s problems are structural
ing coalition firm control over the upper and to do with a shrinking population and
house. And, with support from like-mind- A glass two-thirds full rigid work practices. Japan has a two-tier
ed parties and independents, Mr Abe can Seats in both houses of the Japanese parliament labour market of cosseted permanent staff
now claim a two-thirds majority in both LDP Komeito Initiatives fom Osaka and less-protected employees on non-reg-
upper and lower houses. That, in theory, Communist Democratic Others ular contracts—many of them young.
Party Party
gives him the long-coveted supermajori- That said, the political will for labour re-
RULING COALITION & ALLIES
ties to present constitutional changes to form, or indeed much structural change of
House of Councillors
voters for approval by referendum. Upper house (242 seats) 7 any sort, has eluded Mr Abe to date. And
First, though, Mr Abe must turn to the Diet session has other urgent business,
boosting the economy. For all the trumpet- 121 25 12 49 14 14 including passing legislation to join the
ed “Abenomics” of the past three years, in- ½ ⅔
Trans-Pacific Partnership, a free-trade deal
cluding monetary and fiscal stimulus, out- MAJORITIES that has yet to be passed by America’s Con-
House of Representatives
put is forecast to grow at just 0.9% this year. Lower house (475 seats) 14 17 gress and is opposed by both presidential
Business confidence is flat, wages are stag- candidates (though Hillary Clinton’s pre-
nant and, though jobs are easy enough to 291 35 97 21 cise views are hard to pin down).
find, consumption is sluggish. Not for the The prime minister sees economic
Source: Yomiuri Shimbun
first time, Abenomics needs a reboot. strength and his nationalist agenda to re- 1
22 Asia The Economist July 16th 2016

2 store Japanese power and prestige as one ters, Mr Abe has form in pushing ahead their probing of the waters and air space
combined objective. But for all the opposi- with unpopular measures, such as a con- around Japan. At present, though, the hur-
tion’s efforts, Mr Abe ducked the debate on troversial law that now allows Japan to dles to constitutional change remain high.
constitutional change during the cam- take part in collective defence with allies. Natsuo Yamaguchi, Komeito’s leader, for
paign—for good reason. A pre-election sur- An LDP draft for a revised constitution one, has warned against tampering with
vey by NHK, the public broadcaster, found calls for, among other things, rewriting Ar- the constitution’s pacifist clause.
only11% of respondents thought the consti- ticle 9, which renounces war, to recast the Close advisers suggest that Mr Abe will
tution of greater concern to them than country’s “self-defence forces” as regular not push for early change. Brexit, they say,
bread-and-butter issues. armed forces. Getting that draft passed will has come as a stark reminder to him of
With victory in the bag, he has now require the “art of politics”, Mr Abe said how, without laying the groundwork, a ref-
called for a debate on changing the consti- this week. China may yet prove his best erendum can divide a country and pro-
tution, saying it is his “duty” as president of ally: it reacted furiously to an international duce an unexpected and “wrong” out-
his party. Setsu Kobayashi, a constitutional ruling on July 12th dismissing its territorial come. Besides, no consensus exists on
scholar at Keio University in Tokyo, says claims in the South China Sea (see page 25), what the changes should be. While some
that on security and constitutional mat- while its navy and air force have increased would-be amenders (including in the DP)
care about Article 9, others are more con-
cerned with enshrining human rights or
Japan’s Emperor Akihito
simply revamping the procedures for
The long goodbye amending the constitution. Still others talk
of a new amendment giving the prime
minister and self-defence forces emergen-
TOKYO
cy powers after a natural disaster.
A remarkable figurehead wants to step down
So no immediate drive for constitution-

E VEN for such an unusual institution as

Japan’s imperial system, Emperor
Akihito is an anomaly. Descended from
Kneeling to meet his subjects at eye level
seemed to acknowledge that path. Now
pneumonia, prostate cancer and heart
al reform, perhaps. All the more reason,
then, to judge Mr Abe by his promise to
transform the economy. 7
the sun goddess, Amaterasu, and son of surgery have weakened him. Having to
the man-god in whose name Japan scale back official duties has caused him
waged total war, Akihito was educated “stress and frustration”, says NHK, the Australia’s election
by humble Quakers. If there is something public broadcaster, in the timorous lan-
of which he can be said to be truly proud,
it is his scientific passion for fish—“Some
guage reserved for the imperial family.
A law must first be passed to allow
Squeaking back in
Morphological Characters Considered to Akihito to step down—nothing like this
be Important in Gobiid Phylogeny” being has happened in modern times. As for
a particular highlight. Yet for all his innate his son and successor, Prince Naruhito
SYDNEY
modesty, he lives on 115 manicured hect- (speciality: navigation on 18th-century
A tight victory hurts Malcolm
ares bang in the centre of crowded Tokyo. English waterways), he may struggle in
Turnbull’s political authority
Life in the capital, in a very real sense, the role. The royals are virtual prisoners
revolves around him.
As for his duties as emperor, Akihito is
an anomaly, too. At home, he has knelt to
of the Imperial Household Agency, the
gnomic bureaucracy that runs the
world’s oldest hereditary monarchy. It
I T WAS hardly the mandate Malcolm
Turnbull had hoped for when he called
an early general election, asking for a sta-
comfort victims of natural disasters. has treated Naruhito’s wife, Masako, a ble majority. On July 10th, eight days after
Across Asia, his frequent travels and former diplomat, as an imperial birthing the vote, Australia’s prime minister was at
sensitive speeches have helped make machine, and she has grappled with last able to claim victory for his conserva-
amends for Japan’s militarist past—even depression. Whether Naruhito would tive Liberal-National coalition.
as its politics has lurched rightwards. rather navigate the upper Thames than But he appeared to have secured only
The prime minister, Shinzo Abe, is the forces that swirl around the mon- the narrowest of majorities—76 seats in the
among the revisionists who imagine a archy remains unclear. 150-seat House of Representatives, down
beautiful past. He and other ministers from 90 seats previously; late counting
like to worship at the Yasukuni shrine may snare one more. But he may still have
that glorifies militarism; Akihito pointed- to rely on independents and small parties
ly refuses to visit. The Economist once (two minnows, Bob Katter and Cathy
asked a rightist whose publications McGowan, say they will back the prime
glorify the emperor system and white- minister), who are also likely to hold the
wash Japan’s wartime aggression, how balance in the Senate, the upper house.
he felt about having a liberal emperor The tight result could shrink Mr Turn-
who disagreed with nearly all his views. bull’s authority in the Liberal Party, the co-
No matter, he replied: Akihito was mere- alition’s senior partner. A centrist, he per-
ly the current, imperfect vessel; one day, suaded the Liberals’ rightists that he could
he would pass. rescue the party from its dire electoral pros-
And so, this week, came news that the pects under his divisive predecessor, Tony
82-year-old would like to retire. The reign Abbott, whom he unseated last Septem-
of his father, Hirohito, coincided with ber. That now looks unconvincing, and he
Japan’s transformation from militarist can expect tensions at the governing par-
empire to modern economic power- ties’ first post-election meeting on July 18th.
house. Akihito’s own reign since 1989 A big question hangs over Mr Turn-
oversaw a period of gentle economic bull’s ability to manage the economy. He
decline and diminished capacities. Goodbye Akihito, but not quite yet talks of the need to diversify growth “fu-
elled up” by a mining boom linked to Chi- 1
 The Economist July 16th 2016 Asia 23

2 na. With annual GDP growth at 3.1% and an

unemployment rate below 6%, Australia
has so far managed this transition well.
But his core campaign promise, to cut
Australia’s company tax rate from 30% to
25% over the next decade, now seems
doomed in the Senate. Moreover, the risk
of political gridlock has focused the atten-
tion of markets on the budget deficit of
A$37 billion ($26 billion), 2.2% of GDP, in
the current fiscal year. A balanced budget is
not projected before 2020-21.
After the election Standard & Poor’s, a
ratings agency, issued a negative outlook
on Australia’s AAA credit rating: it believes
the close result means “fiscal consolida-
tion may be further postponed”. Saul Es-
lake, an economist, reckons a ratings
downgrade would hit business and con-
sumer confidence.
So Mr Turnbull’s likely inability to push
through business tax cuts, which would re- Under the cosh in Kashmir
duce government revenue by around A$50
billion, could turn out to be his “saviour”, The conflict has for decades squeezed the infiltrators from Pakistan, but local boys, of-
sharply improving the long-term budget unhappy valley’s 7m inhabitants, nearly ten from the south of the valley far from
outlook. For now, says Paul Bloxham, an all Kashmiri-speaking Muslims, between the frontier. Worryingly, these militants
economist at HSBC, markets have been the rival ambitions of India and Pakistan. now tend to be of higher social class, and
largely untroubled by Australia’s result. Lately Pakistan has sharply curbed the ex- adept at using social media.
Mr Turnbull will be wary of too much port of guns and militants to a territory it Mr Wani exemplified this trend. Born in
belt-tightening: Bill Shorten, the Labor op- long claimed as its rightful property, while 1994 to a middle-class family, he went un-
position leader, won votes by promising to India’s estimated 600,000 troops have un- derground in 2010, during a previous
champion Australia’s public health-insur- derpinned a semblance of normality, al- round of violence, reportedly after his
ance system. How Mr Turnbull handles lowing a return of tourism and the holding brother had been beaten and humiliated
this fiscal dilemma could determine the of regular elections. by policemen. Although local activists as
fortunes ofAustralia’s sixth prime minister The problem, say Kashmiri activists, is well as at least one security official say
in a decade. 7 that relative calm has bred complacency in there is little evidence that Mr Wani was di-
New Delhi, the Indian capital, while frus- rectly involved in attacks on police, images
trations among Kashmiris, and especially of him in guerrilla clothes and armed with
Kashmir violence young people, have grown. Some troubles, a rifle, against a backdrop of forests and
such as a lack of good jobs, are shared with mountains, spread via mobile-phone mes-
After the funeral other Indians. But in Kashmir these are
compounded by a long, cyclical history of
sages and Facebook. In a video posted in
June he pledged that fighters would allow
political manipulation and repression, safe passage to Hindu pilgrims engaged in
where local politicians willing to “play In- an annual trek to a mountain temple, and
dia’s game” are discredited in Kashmiri would accept the return of Hindu refugees
DELHI
eyes. Most of India’s mainstream press from previous rounds of violence, but
The death of a militant sparks fury but
blithely disregards Kashmiri opinion, pre- would resist attempts to establish colonies
little change
ferring to view the region simply as a play- of Hindu returnees in Kashmir.

A S NEWS spread that security forces had

killed Burhan Wani and two other
guerrillas, admirers from across the Kash-
ground for Pakistani-sponsored terrorism.
The current state government of Jam-
mu & Kashmir, a polity that ties the Mus-
While Mr Wani’s example is not
thought to have inspired more than a few
dozen new recruits to armed insurgency, it
mir Valley headed to his village. Over lim-majority valley to adjacent regions of held strong symbolic appeal. His death, in 1
20,000 gathered for Mr Wani’s funeral on starkly different complexion, is an ungain-
July 9th. The crowd was too dense to hold ly coalition between a traditional Kashmiri
prayers; armed militants in its midst fired party and the Hindu-nationalist Bharatiya Stanched, or festering?
their guns in salute with no fear of arrest. Janata Party (BJP) ofthe prime minister, Na- Terrorist-related killings in Jammu & Kashmir
Over the next days angry protests spread rendra Modi. The BJP has little understand- ’000

throughout the valley. At least 36 people ing of and no patience for the Kashmiris’ 5
were killed and 2,000 wounded, nearly all disgruntlement. Its local partner, despite
by police gunfire. At least 117 civilians, in- efforts to spread patronage and to exploit 4
jured by blasts of buckshot, were likely to fears of Islamic radicalism, faces charges of
3
lose their eyesight, doctors said. acting as a stooge for New Delhi.
This was the worst outbreak of violence In recent years the number of armed 2
in Kashmir for six years, and yet it was dis- militants has plummeted, while their ro-
mally predictable. For months police, local mantic appeal has risen. Police reckon that 1
leaders and residents had warned of immi- fewer than 200 fighters now roam Kash-
nent trouble in India’s northernmost state. mir’s mountains and forests. The differ- 0
1988 95 2000 05 10 16*
True, the level of violence has dropped ence is that many, perhaps most, of the ren-
Source: South Asia Terrorism Portal *To July 10th
sharply from its peak in 2001 (see chart). egades are no longer jihad-minded
24 Asia The Economist July 16th 2016

2 a safe-house besieged by an overpowering

Taiwanese identity
Indian force, followed a familiar pattern.
Every few weeks guerrillas ambush Indian
patrols, and every few weeks a suspected Hello Kitty, goodbye panda
infiltrator or militant is killed in return.
TAIPEI
Since they are more often, now, local men,
Taiwan’s obsession with Japanese kawaii culture
their funerals have swollen in size, and
these in turn have fomented street clashes.
Many, even Mr Wani’s family, thought
his death was inevitable, and would prove
T HIS spring the world’s first Hello
Kitty-themed train began service in
Taiwan. It proved so popular that almost
meals in August 1999. Its supply of half a
million toys ran out in just four hours.
Later that year Chunghwa Telecom sold
a catalyst for further violence. The surprise all the head-rest covers on the seats were out of 50,000 telephone cards within five
is that the anger seems to have caught out snaffled by passengers on the first day. minutes of making them available.
the Indian authorities. “The Indian govern- Last week EVA Air, Taiwan’s second- Love of kawaii reaches politics, too. In
ment has got used to a firefighting ap- largest airline, announced that it would elections this year, the independence-
proach,” says Basharat Peer, a Kashmiri increase the number of Hello Kitty flights minded Democratic Progressive Party,
writer who has chronicled repeated bouts to Paris. Ten of its destinations have a which defeated the pro-unification Kuo-
of violence. “They don’t even see that by service that features pillows and slippers mintang (KMT), released a Japanese-style
making no attempt at a political process to branded with the white cat. Taipei air- animated campaign video of Tsai Ing-
address Kashmiris’ real demands, they port has a Hello Kitty check-in area, gift wen, its successful presidential candi-
simply perpetuate the cycle.” 7 shop and even a breast-feeding room. date, as a flying cat-woman “lighting up
Taipei has Hello Kitty shabu-shabu all Taiwan”. The video was not in Manda-
(hot pot) restaurants offering tofu in the rin, the island’s official language, but in
Cambodia form of the cat’s face and squid-balls Taiwanese, once scorned by the KMT.
shaped like her bow, all washed down Some Taiwanese idealise Japanese
Murder most with a Hello Kitty fizzy drink. Night- rule. Lee Teng-hui, a former president,
market stalls offer a variety of Hello Kitty even said that during the second world
murky apparel, including boxer shorts. war Japan—not China—was Taiwan’s
The craze is about more than infantile “motherland”. Now Hello Kitty allows
consumerism: Hello Kitty has become an the Taiwanese to be Taiwanese by out-
PHNOM PENH
unlikely token of Taiwanese identity. She doing the Japanese at being Japanese.
An assassination casts a lurid light on
is part of a wider embrace of Japan’s
politics and society ahead of an election
kawaii, or “cuteness”, culture. And this is

T HE murder on July 10th of Kem Ley, an

independent-minded commentator
who castigated the ruling party and the op-
a way for the Taiwanese to define them-
selves as different from China, which lays
claim to their island, by cleaving to Japan,
position alike, has jangled nerves ahead of their former coloniser.
local elections next year and a general elec- The message is clear from the livery of
tion the year after. Thousands of Cambodi- the Hello Kitty train: each of the eight
ans have poured in from all corners of the carriages is decorated with Hello Kitty in
country to Phnom Penh, the capital, to pay different parts of the world: Taiwan and
their respects to a man famed nationally then each of the seven continents. The
for his radio programmes and his mea- Taiwanese Hello Kitty drinks bubble tea
sured, impartial commentaries. beneath Taipei 101, the capital’s landmark
Mr Ley criticised politicians in general, skyscraper; she is separated from the
but he singled out Hun Sen’s ruling Cam- Chinese version (who visits pandas and
bodian People’s Party (CPP) for particular the Great Wall) by a kimono-wearing
contempt. The assassination, apparently Japanese feline. In Hello Kitty world
carried out by gunmen as the 45-year-old Taiwan has its own car; China is lumped
victim was sipping a morning coffee at a in with other Asians in a separate one.
petrol station, came only three days after The obsession is thought to have been
Global Witness, a campaigning group that started by McDonald’s, a fast-food chain,
specialises in exposing links between gov- which gave out Hello Kitty toys with its Catnip for Taiwanese babies
ernments and the exploitation of natural
resources such as Cambodia’s timber,
claimed that the prime minister’s family threats to peace in Cambodia began circu- Sokha, has been holed up for seven weeks
had acquired assets worth at least $200m, lating on social media, with local English- in the party’s headquarters fearing arrest
in one of the poorest countries in Asia. language newspapers and Global Witness after being summoned by the courts over a
Shortly before his death Mr Ley had spo- portrayed as villains. sex scandal that his supporters say has
ken at length about the Global Witness re- Mr Hun Sen and his party are facing been cooked up by the ruling party.
port. As the government cracks down on their toughest test. Attitudes have changed Mr Ley’s family and admirers are scepti-
dissent, corruption has become a big issue a lot since the civil war ended. A younger, cal about the police’s initial claims that a
in the run-up to the elections. more educated generation has grown up. man arrested soon after the murder had
Mr Hun Sen’s relatives have vilified the Two-thirds of Cambodia’s 16m people are borne a grudge against Mr Ley because of
report. Hun Mana, his eldest daughter and under 30. In the most recent general elec- his alleged failure to pay a debt of $3,000.
the clan’s biggest magnate, with interests tion, in 2013, many voted for the opposition Media friendly to the ruling CPP claim that
in television, radio and newspapers, said Cambodia National Rescue Party. Since the opposition was keenest to have Mr Ley
Global Witness was trying to tarnish her then many of its politicians have been out of the way, a suggestion his friends say
father’s reputation. A Nazi-style cartoon beaten up, jailed and sued. Its leader, Sam is preposterous. Mr Ley’s widow is think-
depicting America, Britain and Russia as Rainsy, has fled into exile. His deputy, Kem ing of moving to Australia. 7
 The Economist July 16th 2016 25
China

The South China Sea on the Law of the Sea (UNCLOS) were val-
id. Under UNCLOS, which came into force
Courting trouble in 1982 and which China ratified in 1996,
maritime rights derive from land, not his-
tory. Countries may claim an Exclusive
Economic Zone (EEZ) up to 200 nautical
miles (370km) off their coasts, or around is-
lands. Based on this, the tribunal ruled that
BEIJING, MANILA AND TAIPEI
the nine-dash line had no standing. The
An international tribunal delivers a blow to China’s claims in the South China Sea
judges wrote that there was “no legal ba-

B Y EJECTING its neighbours’ forces,

building up its navy and constructing
artificial islands, China has for years
tary presence (Chinese troops are pictured
above on one of the sea’s islands). America
had two aircraft carriers in the sea lately;
sis” for China to claim historic rights with-
in it. UNCLOS, they said, took precedence.
Until now, China has not specified the
sought to assert vast and ambiguous terri- on the eve of the court’s ruling, China’s exact meaning of the nine-dash line. It is
torial claims in the South China Sea. These navy was staging a live-fire exercise there. not clear, for example, whether the coun-
alarm its neighbours and have led to mili- Above all it is a region where two world- try claims everything within the line as its
tary confrontations. They also challenge views collide. These are an American idea sovereign possession or merely the islands
America’s influence in Asia. Now the Per- of rules-based international order and a and their surrounding waters. Even if the 1
manent Court of Arbitration, an interna- Chinese one based on what it regards as
tional tribunal in The Hague, has declared “historic rights” that trump any global law.
Limits of 200 nautical-mile Exclusive Economic
China’s “historic claims” in the South Chi- China claims it has such rights in the Zone under UN Convention on the Law of the Sea
na Sea invalid. It was an unexpectedly South China Sea, and that they long pre-
CHINA TAIWAN
wide-ranging and clear-cut ruling, and it date the current international system. Chi-
has enraged China. The judgment could nese seafarers, the government says, dis-
change the politics of the South China Sea covered and named islands in the region
and, in the long run, force China to choose centuries ago. It says the country also has HAINAN
Woody
what sort of country it wants to be—one ancestral fishing rights. In early July, by Island
that supports rules-based global regimes, happy coincidence, a state television com- Duncan
Island Scarborough
or one that challenges them in pursuit of pany began a mini-series about the experi- S o u t h Shoal PHILIPPINES
great-power status. ence of Chinese fishermen in the 1940s, re- Paracel
VIE

Manila
The case was brought by the Philip- inforcing China’s view. These rights are Islands C h i n a Manila
TNAM

Southwest Thitu
pines in 2013, after China grabbed control said to exist within a “nine-dash line” (still Cay S e a
Island
Itu Aba Eldad Reef*
of a reef, called Scarborough Shoal, about usually called that, though Chinese maps Island
220 miles (350km) north-west of Manila. began showing ten dashes in 2013 to bring Spratly Landfill work by:
The case had wider significance, though, Taiwan more clearly into the fold). It is a
Itu Aba Islands China Taiwan
Island
Gaven Reefs Mischief
because of the South China Sea itself. tongue-shaped claim that slurps more Fiery Cross Reef Vietnam Malaysia
Fiery Cross
Reef Mischief Philippines
Hughes
About a third of world trade passes than 1,500km down from the southern Reef Reef
Reef The “nine-dash
Cuarteron
through its sea lanes, including most of coast of China and laps up almost all the Reef
Johnson line” (ten since
South 2013)
China’s oil imports. It contains large re- South China Sea (see map). Swallow Reef Airstrips
serves of oil and gas. But it matters above The court comprehensively rejected Reef MALAYSIA
BR

Sources: amti.csis.org;
UN

all because it is a place of multiple overlap- China’s view of things, ruling that only lawfareblog.com;
EI

250 km janes.com
ping maritime claims and a growing mili- claims consistent with the UN Convention
SIA
26 China The Economist July 16th 2016

2 claim were confined to the islands, the rul- already serious risk that the two countries’
ing undermined that. The tribunal said Flashpoints fighter jets might end up in a confrontation.
that none of the Spratly Islands (where Selected incidents in the South China Sea A no-less-worrying possibility is that
China’s island-building has been concen- Jan China gains control of the Paracel Islands China might start building on Scarborough
trated) count as islands in international 1974 after a battle with South Vietnam Shoal, where the court case began. Radar,
law. Therefore, none qualifies for an EEZ. Mar Chinese and Vietnamese forces clash over aircraft and missiles based there would be
1988 the Spratly Islands
Adding insult to injury, the court ruled a close-up threat to the Philippines and
Feb The Philippines discovers China has built
that China had been building on rocks that 1995 huts on Mischief Reef in the Spratlys military bases that are used by American
were visible only at low tide, and hence Nov ASEAN members and China sign a forces. In March President Barack Obama
not eligible to claim territorial waters. It 2002 Declaration on the Conduct of Parties in the reportedly warned Mr Xi that reclamation
South China Sea
said this had violated the sovereign rights May China submits a map showing the
on the shoal would threaten America’s in-
of the Philippines, which has an EEZ cover- 2009 “nine-dash line” to the United Nations terests and could cause military escalation.
ing them. So, too, had China’s blocking of Jul Hillary Clinton, then US secretary of state, Still, in the short term, there are reasons
Philippine fishing and oil-exploration ac- 2010 declares that the US has a “national China might be cautious. It is hosting an
interest” in the South China Sea
tivities. The court ruled that Chinese ves- May Vietnamese officials accuse a Chinese ship
annual meeting of G20 leaders in Septem-
sels had unlawfully created a “serious risk 2011 of severing the exploration cables of a ber. It is spending lavishly on preparations.
of collision” with Philippine ships in the vessel working for a Vietnamese oil The last thing it wants is for countries to
company
area, and that China had violated its obli- Apr A Philippine aircraft identifies Chinese
boycott the event or spoil it with recrimina-
gations under UNCLOS to look after fragile 2012 fishing vessels at Scarborough Shoal. tions over its response to the verdict.
ecosystems. Chinese fishermen, the judges China sends ships to warn the Philippine No one in the region seems to want to
navy to leave. China gains control
said, had harvested endangered species, Jan The Philippines lodges case with the
make life harder for China at the moment.
such as sea turtles and coral, while the au- 2013 Permanent Court of Arbitration (PCA) The Philippines, for example, is going out
thorities turned a blind eye. challenging China’s claims in the South of its way not to crow. “If it’s favourable to
China Sea
China refused to take any part in the May Chinese rig, Haiyang Shiyou 981, drills off
us,” said the new president, Rodrigo Du-
court’s proceedings and said it would not 2014 the Paracel Islands in waters claimed by terte, just before the ruling, “let’s talk.”
“accept, recognise or execute” the verdict. Vietnam Vietnam and Malaysia, which might
As a member of UNCLOS it is supposed to Early Pictures emerge of building work on conceivably launch copycat cases in the
2015 multiple features in the Spratly Islands,
obey the court, but there is no enforcement including a 3km-long runway on the court, both put out measured statements
mechanism. The condemnation of China’s disputed Fiery Cross Reef supporting peaceful resolution of the dis-
actions is so thorough, however, that it Jun Haiyang Shiyou 981 returns to waters putes. The Association of South-East Asian
2015 contested with Vietnam
risks provoking China into a response that Oct A US destroyer passes through the Spratlys Nations (ASEAN), a ten-country grouping
threatens regional security as much as its 2015 in America’s first “freedom-of-navigation which includes four of the states in dispute
recent building of what one American ad- operation” in the area since 2012 with China, had little to say. Several of its
Jul The PCA in The Hague issues its verdict,
miral has called a “great wall of sand”. Oth- 2016 undermining China’s claims members wanted ASEAN to take a firm
er countries, and America, are nervously stance against China’s claims—and an
Sources: CNAS; amti.csis.org; press reports; The Economist
waiting to see whether China’s furious unusually strong statement released by
rhetoric will be matched by threatening ASEAN in June looked like the beginning of
behaviour by its armed forces. a particularly hawkish newspaper, called that. But it was retracted, mysteriously,
In 2014 the Indian government of Na- the ruling “even more shameless than the within hours, making the organisation
rendra Modi quietly accepted the court’s worst prediction”. The government look weak and ineffective, as usual.
ruling against it in a case brought by Ban- warned its neighbours that it would “take There may be a glimmer of hope from
gladesh over a dispute in the Bay of Bengal. all necessary measures” to protect its inter- China itself. By one reading, it may be in
But President Xi Jinping, who has super- ests. The social-networking accounts of the process of clarifying that the nine-dash
vised China’s recent efforts to reinforce its Communist Party newspapers brimmed line is less sweeping than it looks. A gov-
claims in the South China Sea, would find with bellicosity. “Let’s cut the crap,” said a ernment statement in response to the rul-
it very hard to do the same. He is preparing user called Yunfu, “and show them our ing mentions both historic rights and the
to carry out a sweeping reshuffle of the sovereignty rights through war.” Rumours nine-dash line repeatedly—but always sep-
Communist leadership next year; foes that China was preparing for a fight ran so arately, without linking them. Andrew
would be quick to accuse him of selling out rife that the normally taciturn ministry of Chubb of the University of Western Aus-
the country were he to appear weak. defence stepped in to deny them. tralia says this might mean that China is
Taiwan’s denunciation of the ruling as It is thought unlikely that China would preparing quietly to say that the line does
“completely unacceptable” will give suc- quit UNCLOS: that would reinforce the im- not indicate that China has historic rights
cour to Mr Xi. The positions both of China pression that China is a law unto itself and to everything inside it, but rather, that it de-
and Taiwan are based on claims made by do grave damage to its global image. notes an area within which China claims
Chiang Kai-shek when he ruled China, be- (America has not ratified UNCLOS, but ob- sovereignty over islands.
fore he fled to Taiwan in 1949. That Taiwan serves it in practice.) More likely is that it As the verdict showed, that would still
maintains the same stance under Tsai Ing- will set up an Air Defence Identification mean that many of China’s claims are in-
wen, who took over as the island’s presi- Zone (ADIZ) in the South China Sea, like consistent with UNCLOS. But it might re-
dent in May, is even more of a boost. Ms the one it declared over the East China Sea sult in China becoming less eager to patrol
Tsai’s party normally abhors anything sug- in 2013 after a spat with Japan over islands the nine-dash line right up to the edge. That
gesting that China and Taiwan have the there. The day after the ruling, Liu Zhen- may not seem much. However, in the after-
same territorial interests. Yet the day after min, a deputy foreign minister, talked math ofthe ruling, the biggest question fac-
the court ruling, Ms Tsai appeared on a Tai- about China’s right to do so. Aircraft flying ing the countries of the South China Sea is
wanese frigate before it set sail to defend through China’s existing ADIZ have to re- whether Asia’s oceans will be governed by
what she called “Taiwan’s national inter- port their location to the authorities or face the rules of UNCLOS or whether those
ests” in the South China Sea, where Tai- unspecified “emergency defensive mea- rules will be bent to accommodate China’s
wan controls the largest of the Spratlys. sures”. America’s military aircraft ignore rising power. Even a small sign that the
In China, raging rhetoric quickly this, and would do the same if a southern rules will not be bent as far as some hawks
reached stratospheric levels. Global Times, one were imposed. That could add to the in China would like could be important. 7
 The Economist July 16th 2016 27
United States
Also in this section
29 Quantifying Black Lives Matter
30 Climate-change and trout in Montana
31 Lexington: Mitch McConnell

For daily analysis and debate on America, visit

Economist.com/unitedstates
Economist.com/blogs/democracyinamerica

Race in America son deployed the bombmaking kit found

in his house. The mood is tense and jittery:
Progress and its discontents when an unknown man mounted a para-
pet opposite the HQ on July 10th, officers
drew their weapons and hurried bystand-
ers inside (the man was taking a selfie).
But both since the calamity and before
DALLAS
it, Dallas has offered reasons for optimism.
After a dreadful week, despair over race and policing is understandable. But
“Sometimes you have to have a light
America also has cause for hope
shined on you to see what reality is,” says

F OR a few generations, Americans sel-

dom saw death up close. It was ban-
ished to hospitals or mimicked, harmless-
ened”. Almost as he spoke, authorities in
Baton Rouge disclosed another alleged
plot to kill police. Meanwhile rallies
Mike Rawlings, the white mayor. “And
sometimes it’s positive.” At a City Hall vigil
on July 11th, thousands of candles were
ly, on cinema and TV screens. But on July against police violence, like the one at held aloft in the warm Texan night as bag-
5th death was beamed onto laptops and which Mr Johnson struck, continued. Hun- pipes played, a civic unity mirrored and
iPads from the forecourt of a convenience dreds of protesters have been arrested. led by the stoic conciliations of Mr Raw-
store in Baton Rouge, where Alton Sterling Yet the way Americans experience lings and the impressive police chief, Da-
was fatally shot by a police officer as anoth- these terrors is itself an example of their vid Brown. “I love Dallas,” Mr Brown, who
er pinned him down; and on July 6th it was complexity. The enmity and barbarity look is black, told journalists this week, exhort-
broadcast from the passenger seat of a car like a path to the abyss—but the smart- ing protesters to help fix the troubles that
in Falcon Heights, Minnesota, the police phone clips that help to relay them are a exercised them: “We’re hiring.”
weapon that killed another black man, form of progress as well as a medium of Dallas, it is true, remains starkly segre-
Philando Castile, still sticking through the horror. Something similar goes for the gated, black and white neighbourhoods
window as the footage began. fraught nexus of race and policing that lies split by the interstate that bisects the city
The next day, if they had the stomach behind the turmoil. On these overarching (though Mr Rawlings thinks the “real
for it, Americans could watch Micah John- issues too, the picture is more nuanced chasm” is economic, “between the haves
son, a black army veteran intent on slaugh- than it currently seems. From the streets of and the have-nots” rather than the races).
tering white policemen, stalk and slay an Dallas to national race relations, anger and An African-American surgeon who cared
officer in downtown Dallas, a stone’s disappointment are bound up with quiet- for wounded officers attested to residual
throw from the site of John F. Kennedy’s as- er improvements. tensions between black residents and the
sassination. Mr Johnson managed to mur- police: “I will care for you,” he said with
der five before a robot-delivered bomb The lens of grief painful honesty; “that doesn’t mean I do
ended his rampage and his life. These terri- Bedecked with flowers, Stars-and-Stripes not fear you.” Nevertheless, Mr Brown’s
ble images were more traumatic even than balloons and handwritten tributes such as emphasis on community policing and
most deaths. The killing of policemen, and “Back the Blue” and “All Lives Matter”, the transparency has been accompanied by a
killings inflicted by them, bloodshed two squad cars parked outside police drop in police shootings and in complaints
moreover tinged by racism, avowed or al- headquarters in Dallas have become col- about the use of force. Before they shielded
leged: these seemed, for many, to presage ourful, tearjerking shrines. The city’s re- the protesters from the gunman, Dallas of-
the unravelling of society. sponse has “been overwhelming,” says ficers posed for photos alongside them.
Or, as Barack Obama put it at a memori- one officer, taking a break from hugging Even before the massacre, the commu-
al service on July 12th, close to the bullet- well-wishing locals, a recently received nity was reciprocating. Richie Butler, pas-
scarred crime scene—five seats left empty teddy bear protruding from his shirt. But tor of St Paul United Methodist Church,
for the fallen officers—it felt as if “the deep- another confesses he is “miserable”, as one of the oldest black churches in Dallas,
est faultlines of our democracy have sud- might be expected after an atrocity that began arranging police-community get-to-
denly been exposed, perhaps even wid- could have been even worse had Mr John- gethers after the death of Michael Brown, a 1
28 United States The Economist July 16th 2016

2 young black man, in Ferguson, Missouri in think-tank, is that the public first “sees The “Ferguson effect” is controversial
2014. (That event also galvanised the Black something that looks awful”, then the ap- and disputed. But many officers and ob-
Lives Matter movement, which Mr John- parent impunity becomes, for the ag- servers agree that, in a more general sense,
son cited as an influence and which, de- grieved, “another example of injustice”. the reach of the police is more limited than
spite its leaders’ professed non-violence, Moreover, watching these remote but society would like. Dallas’s Chief Brown
now faces renewed and intense criticism.) shockingly intimate scenes—viewing that, this week objected that the common re-
To help build rapport, Mr Butler organised for many, seems at once voyeuristic and a sponse to the problems of drug addiction,
a basketball game involving officers and civic duty—conveys the impression that mental illness, failing schools and family
churchmen, a humanising idea that he they are ever more common. In fact, says breakdown is, “Let’s give it to the cops.” Mr
wants to extend to other cities. Peter Moskos of John Jay College of Crimi- Obama echoed that complaint: “We ask
Such under-the-radar efforts are not nal Justice, the police fired their weapons the police to do too much,” he said, “and
confined to Dallas. Consider an initiative much more frequently in the 1990s, and we ask too little of ourselves.”
sponsored by the Department of Justice even more in the 1970s. The rise is not in the Bias among police officers, the presi-
which, like the recommendations made number ofincidents but in the breadth and dent also argued, is not specific to them but
last year by a White House task-force on speed of their circulation. Even without evidence of wider prejudices. The police,
policing, aims to improve community rela- court convictions, that exposure can spur in other words, are not the origin of soci-
tions. In six pilot cities, the programme changes in police practices and open win- ety’s pathologies; they are a symptom of
promotes reconciliation between officers dows into black experiences for white au- America’s problems as much as they are a
and local people, many of them black. Its diences. Like the general state ofpolicing in solution. As Trotsky once said of the army,
moderators serve as impartial brokers be- America, the videos incite rage, but they they are “a copy of society, and suffer from
tween the two—remarkably, for a govern- also contain reasons for hope. all its diseases”.
ment-sponsored scheme—in sessions that On the face of it, this wider picture
resemble those in post-apartheid South Af- A symptom, not a solution looks grim, too. According to a recent sur-
rica. After all, says Amy Crawford, the ini- Some think this uproar is not just distress- vey by the Pew Research Centre, 84% of
tiative’s director, even if policies change on ing but destructive. Heather Mac Donald black Americans think they are treated less
neuralgic issues such as traffic stops, “You of the Manhattan Institute, a think-tank, fairly by police than whites are; only 50%
can’t force trust.” believes it has led to a retreat from discre- of whites agree. There are similar gaps in
Given that most police chiefs are only tionary policing tactics, street stops and the perceptions of the fairness of courts, banks
one PR disaster away from losing their like, that are liable to be denounced as rac- and workplaces. And in the durability,
jobs, many have been admirably willing to ist. This reticence, she argues, explains the even existence, of the basic wrong: among
embrace these reforms. Not surprisingly, recent bump in the murder rate in some cit- blacks, 43% believe the country will never
though, they make less of an impression ies. (It has risen in Dallas, though overall make the changes required for racial equal-
than viral footage of homicide, such as the crime there has fallen to historical lows, as ity; only 11% of whites concur. Among
images of Mr Castile slumped in his car it has in the country at large.) The victims whites, 38% think that goal has already
that were live-streamed by his girlfriend, of this so-called “Ferguson effect”, she been accomplished; only 8% of blacks are
Diamond Reynolds. “I’m right here,” Ms points out, are often the black residents of so sanguine. Blacks are twice as likely to
Reynolds’s four-year-old daughter, also a high-crime urban neighbourhoods. She think that racial issues are neglected. Ac-
witness, heartwrenchingly tells her dis- blames Black Lives Matter, among others, cording to Gallup, the share of Americans
traught mother. “Would this have hap- and denies that the criminal-justice system who worry “a great deal” about race rela-
pened if...the driver and the passengers is racially biased. One policeman in Dallas tions has doubled in two years.
were white?”, asked Mark Dayton, Minne- concurs. “Attacking us,” he says, “doesn’t Behind this gulf in perceptions there are
sota’s governor. “I don’t think it would stop black folks being killed.” He fingers stubborn and severe disparities in material
have.” (A lawyer for the officer who shot the media, too, for inflaming anti-cop senti- circumstances. Black youngsters are less
Mr Castile denied race was a factor, citing ment: “Our blood for their dollar”. likely to finish high school, make it to col- 1
instead the gun the victim was carrying.)
The impact ofthese clips is often exacer-
bated by what follows, which, judicially
speaking, is often little or nothing. On-duty
police officers kill roughly 1,000 times a
year in America—the imprecision is be-
cause official statistics are shoddy, making
it hard to know how far black men are dis-
proportionately affected, as they seem to
be in lesser interactions such as searches
(see next story). According to Philip Stinson
of Bowling Green State University, who
keeps a tally, since the beginning of 2005
only 73 officers have been charged with
murder or manslaughter. A third have
been convicted, while a further third of
cases are still pending.
That gruesome evidence from smart-
phones, or dash- or bodycams, often
proves less damning than it first appears;
prosecutors, judges or juries decide that,
while a decision to shoot might have been
tragically mistaken, it wasn’t criminal. The
result, says Jim Bueermann, a retired police
chief who leads the Police Foundation, a Baton Rouge remembrance
 The Economist July 16th 2016 United States 29

2 lege or graduate if they do. Black adults cent protesters did, it is confusing. gramme. He then analysed how non-le-
earn less than their white counterparts, Guns make police worknot just difficult thal uses of force—such as pushing, kicking
even when they have broadly comparable but terrifying, and therefore dangerous for and baton-wielding—varied by race. Based
qualifications and do similar jobs. Blacks everyone. The long-term trend in cop-kill- on the raw data, blacks and Hispanics were
are more than twice as likely to be poor or ing is downwards, as is that for murder as a more than 50% more likely to encounter
unemployed; at the last count, the net whole, but 39 were fatally shot on duty last police force than whites.
worth of white households was 13 times year, according to the Officer Down Memo- This in itself was not proof of racial dis-
higher. Black life expectancy is four years rial Page; several have been attacked since crimination, notes Mr Fryer. The gap might
lower than white Americans’. the tragedy in Dallas, in Georgia, Michigan be a result of what happened during the
And yet, once again, disappointment and elsewhere. Most officers never fire encounters; blacks might have been more
and progress are enmeshed; indeed, as their weapons in earnest in their entire ca- likely to resist. And yet, after any such dif-
with the new awareness of police abuses, reers, but those that do often shoot out of ferences were accounted for, the results
the disappointment may partly be the con- fear, justified in general in a gun-saturated still suggested bias. Blacks were 17.3% more
sequence of the progress. Among the signs society, if not always by the circumstances. likely to incur use of force after controlling
of the latter are the soaring public approval These killings of and by policemen are for the characteristics of the civilian (such
and incidence of interracial marriage. symbiotically linked, together contribut- as age) and the encounter (such as if they
Then there is Mr Obama’s presidency it- ing to a throb ofavoidable deaths in which, ran away, complained or hit an officer).
self. Historic leap that it was, it seems also unlike the other themes of this traumatic Analysis of a national survey of citizens’
to have contributed to the disenchant- week, it is hard to find anything hopeful. 7 contact with police found even greater dis-
ment, in two ways. The advent of a black parities in police use of non-lethal force.
presidency alarmed bigots, some of whom Mr Fryer adds that blacks who were report-
have denounced and attempted to delegi- ed by cops as being perfectly compliant
timise it: as Pastor Butler put it, “What was with police instructions during their inter-
in some folks, came out.” actions were still 21.1% more likely than
Meanwhile, many younger people, in whites to have some force used against
particular, evince frustration that racial them. This points to racial prejudice.
tensions have proved so intractable. To What shocked Mr Fryer was when he
have expected them to evaporate was na- looked in detail at reports of police shoot-
ive. But, in a way, the sense of betrayal is an ings. He got two separate research teams to
inverted form of optimism. read, code and analyse over 1,300 shoot-
ings between 2000 and 2015 in ten police
Towards the sound of fire departments, including Houston and Los
These neglected signs of racial progress lie Angeles. To his surprise, he found that
behind Mr Obama’s assertion at the me- blacks were no more likely to be shot be-
morial service that “we are not so divided fore attacking an officer than non-blacks.
as we seem”. America, he said a few days This was apparent both in the raw data,
earlier, was not as polarised as in the 1960s, and once the characteristics of the suspect
an era now often enlisted in comparisons, and the context of the encounter were ac-
in particular for the violence that engulfed counted for.
the Democratic convention in 1968. Do- Mr Fryer dug deeper into the data. He
nald Trump, on the other hand, observed combed through 6,000 incident reports
that the recent strife “might be just the be- Policing and race from Houston, including all the shootings,
ginning for this summer”; and, if there are incidents involving Tasers and a sample in
reasons for confidence about the political
sequel, there are also some to be fearful.
Quantifying Black which lethal force could have justifiably
been used but was not. What he found was
Race and party allegiance now overlap
tightly and toxically, with almost all blacks
Lives Matter even more startling: black suspects appear
less likely to be shot than non-black ones,
voting Democratic, and many Republicans fatally or otherwise.
sceptical of race-based grievances. In a These findings need caveats. Houston is
Are black Americans more likely to be
classic case of people hearing only what one city; there are no equally detailed data
shot or roughed up by police?
they want to, Mr Obama’s opponents ig- for the rest of the country (though findings
nore his praise for policemen and pick up
only his criticisms, even, sometimes, ac-
cusing him of complicity in Dallas.
A S A teenager, Roland Fryer had “un-
pleasant” run-ins with police. Officers
pointed guns at him six or seven times.
in the other districts seem to support the
conclusions). The city voluntarily submit-
ted its reports; it may have been confident
And there is one aspect of these events Even now, the youngest African-American of its lack of bias. Critics of Mr Fryer’s work
for which, at the federal level, the prospects to get tenure at Harvard wonders why po- have pointed out that his paper does not
look straightforwardly glum: guns, as pe- lice shout loudly at him as soon as he for- address any bias in an officer’s decision to
culiarly an American problem as is its slav- gets to indicate when driving. But when stop a black person in the first place—a
ery-shaped racial history. Considered in the economist began researching racial dif- common criticism ofstop and frisk. Mr Fry-
that context, the Dallas killer’s peers are ferences in the use of force by police offi- er acknowledges that blacks are more like-
not black militants but other savage wield- cers, he did not want his own experience to ly to be stopped, but adds that his findings
ers of assault rifles, such as the butchers of prejudice his findings. To understand how are consistent with other types of encoun-
Orlando and Sandy Hook. The role of guns cops work he joined them on the beat in ter between police and civilians.
in Dallas was not limited to the shooting it- New Jersey and Texas. In explaining why racial bias is present
self. Others at the demonstration were Then he collected a lot of data. In a pa- in all cases except shootings Mr Fryer sug-
openly carrying weapons, which served per published on July 11th, Mr Fryer gests that it may reflect how officers are
only to distract the police. As Chief Brown crunched police-generated data on almost rarely punished for relatively minor acts of
said, when a person with a rifle slung over 5m cases from 2003 to 2013 as part of New discrimination. When he shadowed cops
his shoulder starts running, as some inno- York city’s Stop, Question and Frisk pro- on patrol, Mr Fryer was told repeatedly 1
30 United States The Economist July 16th 2016

2 that “firing a weapon is a life-changing water temperatures hit 73°F (22.8°C) on to man-made climate change. All too often
event”—and not only for the victim. Al- three consecutive days. Afternoon clo- discussions follow partisan lines, says Mr
though activists argue that too many offi- sures are a compromise, aimed at giving Vermillion. He is a Democrat in a conserva-
cers get off lightly when they harm civil- trout a respite in the warmest hours of the tive state: his office wall has a photograph
ians, cops find it hard to escape any day. Trout are cold-water fish, which strug- of him fishing with President Barack
scrutiny after discharging their weapon. gle to digest food above such temperatures, Obama in Montana (“Dan! You got me
More transparency and accountability are and start to die once water nears 80°F hooked,” reads the presidential inscrip-
therefore needed, even when police en- (26.7°C). Warmer water carries less oxygen, tion). His wife’s family, who are conserva-
counter members of the public. too, so that trout caught and released may tive farmers, acknowledge that the weath-
For racial discrimination by police is so- never recover once back in the river. er is changing. “Where it gets tricky for
cially corrosive. Mr Fryer suggests that if Such worries used to be rare. In the six them is to admit that it is man-made.” Mon-
blacks take their experience with police as years from 1995 to 2000 water tempera- tana’s three-man congressional delegation
evidence of wider bias, it can lead to a be- tures on the Jefferson river, in south-west- splits on party lines: Representative Ryan
lief that the whole world is also against ern Montana, exceeded 23°C on only 23 Zinke and Senator Steve Daines, who are
them. They may invest less in education if days, and in some years never went that Republicans, call the science of climate
they think employers are biased too. It is high. In 2015 alone, the water crossed that change far from proven, and both have op-
more than 50 years since Martin Luther danger-mark on 21 days and exceeded 26°C posed carbon-emissions curbs that might
King spoke of blacks being “staggered by in early July, leading to significant fish hurt their state’s coal and oil industries.
the winds of police brutality”. Those deaths. After studying data going back de- Senator Jon Tester and the governor, Steve
winds are still blowing. 7 cades, the long-term trends are “exception- Bullock, both conservative Democrats, call
ally clear”, says Mr Vermillion. Other signs climate change a threat and back the devel-
of stress may be seen. The coldest, highest opment of renewable energy in Montana
Fishing rivers ofsouth-western Montana are home (a windy place), while urging caution over
to the Yellowstone cut-throat trout, named federal policies that would impose rapid
All about the bass after an orange under-jaw marking like a
slash. Smaller than non-native rainbow
change on the coal sector.
Spending by tourists is increasingly
and brown trout, which were introduced valuable, with the state Office of Tourism
to Montana in the 19th century, the cut- claiming that 53,000 jobs are supported by
throat is especially sensitive to warming visitors. Mining employs fewer than 7,000
LIVINGSTON, MONTANA
water. Rainbow and brown trout are push- people in a state of1m inhabitants. But coal
Montana’s rivers are warmer than they
ing up into cut-throat fisheries, even into and oil jobs pay better than tourism work,
should be, which is bad news for trout
the protected rivers ofYellowstone Nation- and energy companies pay a lot of taxes.

S TANDING on the banks of the Yellow-

stone river in southern Montana on the
last afternoon in June, Dan Vermillion
al Park, where anglers must watch for griz-
zly bears and snorting, shaggy-headed bi-
son, but increasingly catch hybrid trout,
Still, fish are changing the public discus-
sion about climate change and whether it
might be hurting Montana, says Mr Vermil-
gazes at the clear, sun-dappled waters, rather than pure-bred cut-throats. Worse, lion, who as a wildlife commissioner
checks the river temperature on his smart- smallmouth bass, a warm-water species, meets frequently with hunters, ranchers
phone, and pronounces the conditions are each year creeping farther and farther and other groups. Telling people where
“great fishing”. Alas, this does not cheer Mr up Montana’s rivers. Bass have even been smallmouth bass have been found is his
Vermillion, who grew up fishing these wa- caught near Mr Vermillion’s office in the most effective piece of evidence for con-
ters for trout and now works as a high-end handsome town of Livingston. vincing audiences that the weather is
outfitter, guiding the wealthy and power- Something, in short, is going on. Where changing, he notes, trumping dry statistics
ful to the world’s best fly-fishing spots, consensus breaks down is when locals, sci- about rising temperatures, shrinking snow
from Montana to Alaska and even Mongo- entists, politicians and even fishing clients packs and more frequent wildfires. “What
lia. For these fine fishing conditions—with debate whether what is going on has links bass say about our rivers is spooky.” 7
the water running clear after months of
turbid flows from spring snowmelt, and
the temperature at 65°F (18.3°C)—have ar-
rived too early, by some weeks. The water
should be ten degrees cooler, frowns Mr
Vermillion, and data retrieved by his
smartphone from a nearby measuring sta-
tion shows flows at less than half their his-
torical median level.
All rivers vary from year to year. What
worries federal wildlife officials, state biol-
ogists and a growing number of devoted
anglers across the mountain West, is that,
for the past 15 years, some of America’s fin-
est fishing rivers keep breaking records for
early snowmelts, too-warm water and low
flows. Mr Vermillion is also chairman of
the Montana Fish and Wildlife Commis-
sion, a government body. To his dismay he
has just approved some of the earliest fish-
ing closures ever recorded, closing legend-
ary trout waters on such rivers as the Galla-
tin, Beaverhead and Jefferson every
afternoon with effect from July 1st, after Hotter than July
 The Economist July 16th 2016 United States 31

Lexington Homeopathy politics

Bad ideas in small doses only give voters a taste for something stronger
his philosophy of conservatism. An owlish, taciturn, supremely
disciplined strategist—at one point his book describes a year and
a half spent outwitting a Senate rival, ending with an assassin’s
quiet boast: “Larry never saw it coming”—Mr McConnell is in
many ways the anti-Trump.
That does not make Mr McConnell a centrist. Unlike Mr
Trump, a would-be strongman who talks with relish of the presi-
dent’s executive powers, the Senate leader returns time and again
to what he considers his distinctively Republican distrust of gov-
ernment—reinforced by a brief stint at the Department of Justice,
recalled as “people shuffling paper, doing the bare minimum,
spending their days in an endless cycle of bureaucracy”. Mr
McConnell praises the wisdom of the Founding Fathers in creat-
ing a Senate whose rules—requiring a super-majority to pass
most laws—serve to temper the “worst impulses” of both politi-
cians and the voters who put them there.
Mr McConnell, a senator since 1985, differs from Mr Trump in
other ways. The Senate leader favours free-trade pacts and com-
mends George W. Bush for keeping America safe after the Sep-
tember 2001 terrorist attacks. He praises Mr Bush’s belief that im-
migration is to be celebrated, not seen as a “problem to be

F OR anyone with a bias towards scientific rigour, pharmacies

in continental Europe are liable to send blood pressure soar-
ing. Many are gleaming white, high-priced temples to hypochon-
solved”. He calls Mr Trump’s Muslim ban “a very bad idea”.
Chilly in public, the majority leader reveals a gentle side in his
book, notably in a tribute to his mother. She nursed him through
dria, peddling cures for maladies not found in other lands (the childhood polio, which enforced two years of painful bed rest.
French are obsessed with “heavy leg syndrome”, for instance). After his mother suffers a stroke in old age, the senator climbs
Worse, Euro-pharmacists often offer, unasked, remedies based onto her hospital bed and recalls how she lay beside him as a tod-
on homeopathy: the bogus theory that some compounds, even dler, making towns out of toys on his blankets, transforming his
toxins like arsenic, if so diluted that only a “memory” of their small bed into a “nearly limitless world”. When she dies the next
presence remains in a pill or potion, have magical curative pow- day, his sadness makes for hard reading. He describes his father’s
ers. A European doctor offered Lexington a convincingly cynical beliefin racial equality and “joy” at the passage ofthe Civil Rights
explanation: because many clients are not very ill and “homeo- Act—views which, he notes, were “extraordinary” for a man
pathic” sugar pills are cheap to make, quack cures offer low risks raised in the deep South. Mr McConnell scolds Barry Goldwater,
and high profits. the Republican presidential candidate in 1964, for opposing the
Alas, a similar quackery increasingly infects politics across the civil-rights bill, a decision that “hurt our party for decades”.
Western world, and the side-effects are grave. Political leaders
from America to Austria have a problem. To simplify, lots of peo- Unsafe at any strength
ple want something impossible: a return to some hazily-remem- Yet Mr McConnell has endorsed Mr Trump, a man willing to use
bered golden era before globalisation, offering jobs for life, up- racial, ethnic and religious resentment to win votes. Like other
ward mobility and shared traditional values. Republican grandees, he complains about conservative outside
Too often, the response of mainstream leaders amounts to po- groups and talk-radio hosts who in 2013 forced a “futile” govern-
litical homeopathy. They offer a small dose of a harmful idea, ment shutdown. But this is the same Mr McConnell who accuses
whether that is foreigner-bashing, protectionism or ugly partisan- President Barack Obama of a “far-left” agenda to “Europeanise”
ship, in the vain hope of soothing voters until their fevers pass. America, and boasts that when Mr Obama pushed ideas “bad for
That is a mistake. What voters hear is leaders agreeing that econo- the country”, such as his health-care reform law, Mr McConnell’s
mies should be shielded from global competition, that immi- goal was to deny him a single Republican vote, to make it “obvi-
grants disproportionately steal jobs and property, or that political ous” which party was to blame. Small wonder that activists think
opponents are bent on wrecking the country. But then, to the dis- they hear him declaring the Democrats a party unfit for biparti-
gust of supporters and grassroots activists, the realities of global san co-operation.
commerce mean that those same leaders are only able to deliver In an interview, Mr McConnell dismisses the suggestion that
half-remedies: eg, long-term targets for reducing immigration and legislation like the Civil Rights Act passed only because in the
vague pledges to put native workers first. Then such elites are sur- 1960s the two parties were still broad and overlapping coalitions,
prised to find themselves barged aside by populist insurgents like and home to many centrists. When he was a child in the South, he
Donald Trump peddling toxic ideas—build a border wall, start a says, “You couldn’t tell a Republican from a Democrat.” But now
trade war, ban Muslims—at full strength. the two parties are “properly labelled” and “people pretty much
Republicans hold their national convention in Cleveland know what they are voting for.” It is an elegant argument: mod-
from July 18th-21st, at which they are due to make Mr Trump their ern hyper-partisanship as a source of democratic accountability.
presidential nominee. In a neat bit of timing the Republican ma- It is also unconvincing. Mr McConnell can distance himself from
jority leader of the Senate, Mitch McConnell of Kentucky, recent- Mr Trump all he likes. But by peddling the poison of hyper-parti-
ly published a book of memoirs, “The Long Game”, explaining sanship, even in controlled doses, he enabled his rise. 7
32 The Economist July 16th 2016
The Americas
Also in this section
33 Bello: Let’s sue the conquistadors

Tierra del Fuego ics plants tripled and employment surged.

Newsan is the main private employer: in
The tax haven at the end of the world 2015 it was responsible for 5,000 jobs.
But this year demand for its wares has
cooled as Mauricio Macri, Argentina’s
president since December, brings a dose of
realism to a land where his predecessor
gave a sham sense of economic security.
USHUAIA
Consumption has fallen, as high interest
A giant economic experiment at Argentina’s southern tip is starting to flag
rates are used to curb inflation of around

E ARLY on a Tuesday morning, a team of

mainly female workers is assembling
mobile phones. Hair covered and hands
cessories must be made domestically.
However boldly planners set out to
defy geography, the effort usually peters
42% a year. The country’s dip into recession
is felt in Ushuaia. In late 2015 Newsan was
turning out 500,000 phones a month; in
gloved, they connect chipsets and insert out in the end. But with Tierra del Fuego, it the first six months of 2016 it was half that
batteries. This could almost be China, the is not for lack of trying. The place did draw rate, and 400 jobs were shed.
homeland of Huawei, the company which people; its population rose 11-fold between Ushuaia’s dowdy state does not help
designed these devices. But the plant is 1970 and 2015 to about 150,000. That marks the mood. Drab buildings are in ugly con-
16,000km (10,000 miles) away from Hua- a rise of about a fifth since 2009, when trast to the snow-capped peaks. In the pro-
wei’s base, and a long way from almost Cristina Fernández de Kirchner, Argenti- vincial governor’s office, corridors are
everywhere else: in the archipelago of na’s former president, blocked foreign elec- grubby and the ceiling needs repair.
Tierra del Fuego, a place where the buzz of tronic goods by raising sales and import Gloomy islanders see many threats. Man-
productive energy, impressive as it is, has taxes. Since then international brands agers fear Mr Macri will open the electron-
begun to die down. have had to use local makers like Grupo ics market to imports. A government vow
The assembly line’s location in a land Newsan, the owner of that phone-making to avoid “indiscriminate” liberalisation did
of glaciers and tundra reflects a giant exer- line, to reach Argentine users. Newsan’s six not reassure them. In 2023 the province’s
cise in mixing geostrategy with industrial plants in Tierra del Fuego also put together status as a special economic zone will ex-
policy. Argentina’s half of the main island TV sets, computers and air-conditioning pire, and it may not be renewed.
became a special economic zone in 1972 units. Phone kits come in up to 40 pieces. Without it, Tierra del Fuego’s electron-
when the then ruling junta decided to pop- Once assembled, they are officially Argen- ics firms would struggle much harder. In
ulate it, hoping to keep Chile’s military am- tine and escape import tax. Between 2009 order to find staff, they already pay around
bitions at bay. To lure people to this wild and 2015 output in the province’s electron- three times the Buenos Aires wage. Isola-
corner of the Earth, it exempted firms and tion costs a lot. Because Tierra del Fuego
residents from most taxes. lacks a good port, about 90% of foreign in-
As a bid to turn a remote place into a puts are shipped to Buenos Aires before be-
hive of manufacturing, the industrialisa- ARGENTINA ing loaded up for a four-day road trip
tion of Tierra del Fuego recalls the towns south. Once products are assembled, they
planted by Soviet planners in Siberia. But a trundle back. This makes them crazily ex-
closer parallel is with Manaus, the steamy, ATL ANTIC pensive. It can be cheaper to fly to New
inaccessible city on the Amazon where OCEAN York and buy a phone than to get the same
Brazil’s generals, in a similar use-it-or- CHILE device in Buenos Aires.
Río Grande
lose-it spirit, created a free economic area The island’s public sector, too, is hard to
TIERRA DEL FUEGO
in 1967. Both South American zones have PROVINCE sustain. Some 98% of the provincial budget
become bases for consumer electronics; Ushuaia goes on employment costs. Under a “law
PACIFIC
Manaus also makes almost all Brazil’s mo- OCEAN of 25 winters”, state workers can retire after
torcycles. In both cases, tax breaks go with B e a gl e 25 years on very generous terms; some
200 km Channel
protectionism; a minimum of parts and ac- stop work at 42 on a pension of up to 1
 The Economist July 16th 2016 The Americas 33

2 210,000 pesos ($14,000) a month. The head ers sent 35,000 pupils out of class for up to find new ways to make them competitive,
of the local teachers’ union, Horacio Cate- two months. On May 31st police burned for example by expanding the port.
na, calls these advantages fair return for the camp and dispersed the protesters. Some also want the province to imitate
“the cold, the wind, the storms, the isola- They remain defiant, but so is Ms Bertone. Manaus and move beyond consumer de-
tion”. But they seem unsustainable. When “This is not a fantasy island,” she says. vices, perhaps into automotive electronics.
Rosana Bertone, the province’s governor, With a fiscal deficit of 5.8% of GDP in But more hope may lie in bolder change.
took office in December, pensioners had 2015, the national government can ill afford Ms Bertone would like to tilt the economy
not been paid for three months. a status quo which means the treasury for- towards tourism, timber and hydrocar-
On January 8th she raised the retire- gos 23.5 billion pesos a year (0.5% of GDP) bons, which abound in the sea. Ushuaia
ment age to 60 and put a levy of up to 4.5% in tax receipts. And the place lost strategic could thrive as a base for Antarctic tours.
on public-sector wages and pensions to importance after Argentina made peace “Our geographical position is privileged,”
plug the gap. Irate citizens blocked the road with Chile in 1984. insists the governor, who calls herself a
to the mainland for ten days and erected a So far the government has revealed no “natural optimist”. It will take clear think-
camp outside government house, keeping plans for the archipelago. That frustrates ing as well as an upbeat spirit to sustain
Ms Bertone from her office. Striking teach- local firms; they want the authorities to that mood. 7

Bello Let’s sue the conquistadors

A hedge fund’s campaign risks bringing free-trade deals into disrepute

S CATTERED across rural Peru are the

ruins of thousands of casas hacienda
(estate houses), reduced to broken porti-
Gramercy claims the 2013 judgment was
rigged and says the formula offers only
0.5% of what it thinks it is owed.
cos and crumbled walls. These decayed The government counters that Gra-
structures recall one of the most radical mercy made a speculative purchase at
land reforms ever undertaken in a non- heavily discounted prices because of the
communist country. In the 1970s a leftist legal uncertainty surrounding repay-
military government expropriated 15,286 ment, something it says the fund’s own
rural properties and 9m hectares (22m due diligence recognised. Gramercy re-
acres) of land. It was a heavy-handed re- fuses to disclose how much it paid for the
sponse to gross inequality in landholding bonds; the government says its claim
and near-servile labour relations that would give it a return of up to 4,000%.
stemmed from the Spanish conquest. Gramercy’s purpose may be simply to
The bureaucrats turned the estates make a nuisance, in the hope that Peru’s
into top-down co-operatives, which soon new government, which takes over on
failed. Food imports soared for two de- July 28th and has a large quota of bankers
cades. But the reform had an unintended and businessmen, makes a better offer.
consequence. In the 1980s the co-ops di- Connecticut hedge fund, filed an arbitra- Certainly the official repayment formula,
vided up their land among around tion claim last month against Peru’s gov- which has yet to be applied, looks like a
300,000 beneficiaries. That laid the foun- ernment under the investment clause of ruse to avoid revaluing the bonds and
dations of a market-based agricultural the country’s free-trade agreement (FTA) should be reviewed.
revolution in Peru, featuring medium- with the United States of 2009. Gramercy Bigger issues are at stake in this dis-
and small-scale farmers who export fruit, claims to have bought some 10,000 of the pute. The Peruvian bondholders have in-
vegetables, spices and grains. bonds in 2006-08, and is demanding $1.6 deed had rough justice. But as Enrique
The reform was also unfair. The land- billion for them. It has waged an aggressive Mayer, a Peruvian anthropologist, wrote
owners received compensation totalling lobbying and publicity campaign claiming of the agrarian reform: “The irony is that
15 billion soles (then around $350m), of that Peru is in “selective default”, though fi- landlords, as they complained about the
which 73% was in bonds, redeemable nancial markets have shrugged at this. lack of due legal process in expropriation,
over 20 to 30 years and paying annual in- So far, so like the case in which “vulture were the ones whose parents and grand-
terest of 4-6%. According to one calcula- funds” extracted $5 billion from Argenti- parents had so patently disregarded laws
tion, that amounted to only a tenth of the na’s new government earlier this year. Ex- or arbitrarily manipulated them.” A rigor-
market price. When Peru’s economy col- cept that these are bearer (ie, unregistered) ous attempt to apply the rule of law to his-
lapsed in the 1980s, the government even- bonds issued under Peruvian law as com- tory would start with the conquistadors.
tually stopped servicing the bonds. Al- pensation, not as an investment instru- Hyperinflation confiscated the in-
though there were individual hard-luck ment. The dispute turns in part on how to comes, pensions and assets of many Peru-
stories, most of the landowners built new update their value, given that Peru went vians. Why should only holders of agrari-
and successful urban lives. As for Peru, through hyperinflation and two currency an bonds be fully compensated? This is a
after a quarter of a century of macroeco- reforms after they were issued. In 2001 the political question, for Peruvians to de-
nomic stability and rapid growth, it has Constitutional Tribunal ruled that the un- cide. But no reasonable person could con-
become a Latin American success story paid bondholders should receive “market strue Gramercy’s speculative punt on ar-
with an investment-grade credit rating value”. In 2013 it specified that this should chaic local IOUs as a foreign investment
since 2008. be calculated by reference to the dollar. A of the kind that the FTA is designed to pro-
Now, some 40 years later, these forgot- government decree then set out a proce- tect. By invoking the FTA Gramercy is do-
ten agrarian-reform bonds are the subject dure for registration and a complex mathe- ing its bit to discredit free trade and global-
of an international dispute. Gramercy, a matical formula for payment of the bonds. isation. Its case should be thrown out.
34 The Economist July 16th 2016
Britain
Also in this section
35 Labour’s civil war
35 Civil servants prepare for Brexit
36 Nuclear weapons
37 The post-Brexit economy
37 The immigration paradox
38 Bagehot: Travels in May country

For daily analysis and debate on Britain, visit

Economist.com/britain

Britain’s political landscape sumed the premiership without any La-

bour challenger, she accused him of run-
The irresistible rise of Theresa May ning scared by not holding an election to
test his credentials. Yet she now insists that
no election is needed before the current
parliamentary term ends in 2020. The
Fixed-term Parliaments Act of 2011 makes it
harder than it used to be for prime minis-
The new Conservative prime minister faces huge challenges on Brexit and the
ters opportunistically to call early elec-
economy. What will help her most is the turmoil in the opposition
tions. But Labour’s disarray may yet tempt

S O IT was a coronation after all. On July

13th Theresa May, the home secretary,
became Conservative Party leader and
battlefield, leaving Remainers to sort out
the mess. Mrs May was only ever luke-
warm about the EU, and has promised that
her to try, perhaps next year or in 2018.
Her biggest test of all will be Brexit. She
has experience of Brussels, notably in skil-
prime minister after her only remaining ri- “Brexit means Brexit”. Still, she can expect fully negotiating Britain’s opt-out from
val, Andrea Leadsom, the energy minister, cries of treachery if the process stalls. most EU justice and home-affairs policies
pulled out of the race. Mrs Leadsom’s os- As home secretary for six years, she in 2014, while ensuring that it opted back in
tensible reason was that she had the back- built a reputation as a moderniser, picking to 35 measures, including Europol (which
ing of only 84 Tory MPs, against Mrs May’s fights with the police. She was quicker assists members’ police forces), the Euro-
199. But what counted more was that, un- than most Tories to see which way the pean arrest warrant and the passenger-
der pressure, she had shown her unfitness wind was blowing on issues such as gay names directive. But she has not even met
for the job, embroidering her financial ca- marriage; in 2002 she warned that many most EU leaders. No doubt they will give
reer and hinting that, as a mother, she was voters saw the Conservatives as the “nasty her a cautiously warm welcome (she has
better qualified than the childless Mrs May. party”. She is a child of England’s home some affinities with Germany’s chancel-
A new Tory prime minister is but one counties, without the privileged back- lor, Angela Merkel, including an upbring-
feature of the redrawn political landscape ground of the outgoing prime minister, Da- ing as a pastor’s daughter). But they will
after Britain’s vote to leave the European vid Cameron, and many of his circle. also say it is for her to explain how she
Union. The opposition Labour Party has Her first task was to form a cabinet. Phil- wants to proceed—and how fast.
sunk into ever-deeper chaos under Jeremy ip Hammond, previously the foreign secre- Mrs May insists that there will be no at-
Corbyn, who now faces a leadership chal- tary, is to be the new chancellor. More sur- tempt to remain inside the EU and there
lenge (see next story). The populist UK In- prisingly she gave the Foreign Office to can be no second referendum. But she has
dependence Party has a vacuum at the top Boris Johnson, a Brexiteer not noted for his also said she will not trigger Article 50, the
following the resignation of its leader, Ni- diplomacy. (In May he won a magazine legal route to Brexit, until she has fixed her
gel Farage, on the completion of his ca- competition to write a poem about Tur- own negotiating position. And, although
reer’s ambition. And although the Scottish key’s repressive president—“a young fel- as home secretary she was fiercely anti-im-
Nationalists, the third-biggest party in low from Ankara / Who was a terrific wan- migration, she has been careful to insist
Westminster, are united under Nicola Stur- kerer”, as he put it.) Liam Fox, a fellow only that free movement of people in the
geon, they are uncertain how and when to Leaver who resigned from the cabinet in EU cannot continue as it currently oper-
pursue independence post-Brexit. disgrace less than five years ago, will be ates. She knows the value of full member-
Mrs May backed the Remain side in the trade secretary. David Davis, a veteran Eu- ship of Europe’s single market, and she un-
referendum, unlike most Tory voters. Yet rosceptic, will take charge of a new Brexit derstands the trade-off that may be
they welcomed her victory, if only because department. Amber Rudd, the energy sec- necessary between preserving this and
she has shown more political nous than retary, will become home secretary. setting limits on free movement.
her pro-Brexit opponents. Indeed, it is re- The next question will be whether Mrs It is within this framework that the hard
markable that the Brexiteers, having won a May wants or needs a stronger democratic bargaining with Britain’s partners will
famous victory, have now largely fled the mandate. In 2007, when Gordon Brown as- eventually take place. Many colleagues are 1
 The Economist July 16th 2016 Britain 35

2 floating ideas loosely called Norway-plus

(or Norway-minus), which involve trying
to keep as much as possible of Britain’s
membership of the single market while be-
ing permitted to impose some controls or
an emergency brake on free movement.
It will help that the recession that is
now on the cards will have the side-effect
of curbing immigration. But in other re-
spects the economy will be the second big
headache for Mrs May. She has sensibly
junked her predecessor’s target of balanc-
ing the budget by 2020. She plans more in-
vestment in infrastructure, though she is
against a third runway at Heathrow air-
port. She has evinced a surprising hostility
to foreign takeovers of British companies;
and she has moved to grab Labour’s terri- Eagle (left), Smith (left) and Corbyn (far left)
tory in proposing that workers and con-
sumers should sit on company boards, and bid, threatening a divide among anti-Cor- feat any challengers.
that executive pay be limited. Mrs May’s byn MPs. All this lends some justice to a re- What then? A large number of moder-
declared goals of building an economy mark by John McDonnell, the shadow ate MPs might set up a new opposition
that works for everyone, not just for the chancellor, that the anti-Corbyn plotters group and pick a new leader. But after such
privileged few, and of doing more to help were “fucking useless”. a split, they would risk losing Labour’s ap-
the poor and disadvantaged who have suf- Ever since Mr Corbyn became leader paratus, assets and name. The rebels are
fered most in the past decade, are admira- last September there has been tension be- not eager to join the Liberal Democrats;
ble. But she may yet need to curb her more tween Labour MPs, most of whom consid- they recall the rebels who left Michael
interventionist instincts. er him unelectably left-wing, and party Foot’s Labour Party in 1981 to form the So-
Her best asset, however, will be the cha- members, many of whom adore him. It cial Democrats, a party that later disap-
os of the opposition. The Tories precipitat- was bad enough when he won the leader- peared. So they may just hope that Mr Cor-
ed the Brexit vote for internal reasons and ship crushingly last September after scrap- byn is sufficiently wounded by winning
in doing so split their members and decap- ing around for last-minute nominations with a smaller margin than last time that
itated their leadership. It is extraordinary from MPs, some of whom backed him just they can prepare a successful challenge
that they now appear the more united of to make the contest more lively. It is now next year. Either way, the only winner for
the two main parties. 7 much worse: 172 of Labour’s 230 MPs have now is Mrs May. 7
declared no confidence in Mr Corbyn,
making his position in the parliamentary
The Labour Party party untenable. Next week’s Trident vote The civil service
is likely to expose just how far removed he
Twist or split is from his own MPs (see next page).
The Brexit referendum crystallised their
Building the Brexit
frustration. The party was formally com-
mitted to Remain, but many moderate MPs
team
felt that Mr Corbyn was half-hearted at
best, and that this caused many Labour
Jeremy Corbyn’s insistence on staying A bureaucratic marathon lies ahead.
voters, especially in northern and eastern
as leader risks destroying his party Does Britain have enough pen-pushers?
England, to back Leave. With Mr Corbyn’s

T HE timing could not have been worse.

After weeks of indecision Angela Eagle,
a veteran Labour MP, at last announced a
poll ratings dismal and a serious risk of the
party compounding its loss of Scotland in
2015 by losing northern England, most La-
F EW challenges the British civil service
has faced would boggle the bureau-
crat’s mind as much as Brexit. While un-
challenge to Jeremy Corbyn as party leader bour MPs desperately want a new leader. screwing the legal nuts and bolts that fas-
on July 11th. But just as she was making her Yet they may not get one. There is talk of ten the country to the European Union,
pitch to a room full of journalists, the re- a legal challenge to the NEC decision, but it officials will have to survey British indus-
porters began to leave. Elsewhere, the Con- is unlikely to succeed, as the rules are at tries to discover what protection motorcy-
servatives’ own leadership battle had best ambiguous about whether the incum- cle manufacturers and salmon fisheries
come to an abrupt end, and Theresa May bent needs signatures, like a challenger. might require from foreign competition
was about to be crowned the winner. Ms The nasty treatment of anti-Corbyn MPs, and what access they need to European
Eagle’s gauntlet was buried by headlines including a brick being thrown through the markets. Then they must negotiate more
about the new prime minister. window of Ms Eagle’s constituency office than 50 trade deals, to replace the ones Brit-
Things did not get better. A bid to keep and efforts to intimidate moderates by ain will forfeit by leaving the EU. Some
Mr Corbyn out of the leadership contest, members of the far-left Momentum group, wonder whether the “Rolls-Royce” of gov-
on the basis that he could not secure the could lead some party members to change ernment—which has shrunk by one-fifth
backing of 51 Labour MPs or MEPs, failed their minds about Mr Corbyn. The NEC’s since 2010—has the horsepower for the job.
when the party’s National Executive Com- decision to exclude from the leadership The scale of the task will depend on
mittee (NEC) ruled by 18 votes to 14 that Mr vote new members who have joined the what sort of Brexit the new prime minister,
Corbyn must be on the ballot as the incum- party only since January, and to require Theresa May, negotiates. Under the maxi-
bent. Then Owen Smith, another Labour newly registered supporters to pay £25 mal form of withdrawal, civil servants
MP who, unlike Ms Eagle, had opposed the ($33), not £3 as last year, may also reduce his would painstakingly have to copy, or scrap,
Iraq war, announced his own leadership support. Yet he remains the favourite to de- 12,295 EU regulations. They have already 1
36 Britain The Economist July 16th 2016

2 started to map out every British law that Defence MPs at Westminster are expected to vote
derives from the EU. against it (though polls suggest that public
Mrs May has promised a new ministry
for Brexit to co-ordinate all this, the first
The nuclear option opinion in Scotland is more mixed). If Scot-
land were to become independent—now
task-specific Whitehall department more likely because of Brexit—Britain
created outside of wartime. A new depart- could well have to relocate its subs, at fur-
ment of up to 1,000 staff may reassure the ther expense.
public that something is being done but, as Critics also say Trident relies too much
Parliament prepares to deliberate on
the Institute for Government, a think-tank, on a single naval platform (America has
whether to ban the bomb
points out, it will bog down mandarins at a air, land and sea options), and that im-
time when there is more important work
to be done than sorting out new e-mail ad-
dresses. Nick Wright of University College
N INE countries are believed to have nu-
clear weapons. On July 18th Britain
will decide whether it wants to remain in
proved ballistic-missile defences and the
future use of underwater drones and cyber
warfare could threaten the subs’ security.
London believes that funding boosts for that club, when its MPs debate whether to Yet land-based ballistic missiles are vulner-
existing departments, particularly the renew the country’s Trident nuclear deter- able to attack, and arming aircraft with nu-
stripped-down Foreign Office, would rent. Theresa May, the new prime minister, clear-tipped cruise missiles permanently
make more sense. has said it would be “sheer madness” to aloft carries a significant danger of nuclear
Whatever the new ministry looks like, give it up, and the vote is expected to pass accident and is much more expensive. The
the most pressing issue is expertise. Much easily. Perhaps150 of Labour’s 230 MPs will cut-price option of building three subma-
of the Brexit bureaucracy can be handled vote in favour of the plan, rebelling against rines rather than four would be a false
by Britain’s 393,000 existing civil servants. their leader, Jeremy Corbyn. economy, undermining the principle of
But some outside help will be required, The House of Commons approved in “continuous at-sea deterrence”.
particularly when it comes to trade. When principle the retention of a nuclear deter- The vote comes at a time when few in
Britain joined the European Economic rent in 2007. A review in 2013 reaffirmed Britain are minded to dial down the coun-
Community in 1973 it handed over control that “like-for-like” replacement of the four try’s defence capabilities. Mrs May has
of trade-deal negotiation, as all member submarines that carry the missiles repre- cited Russia’s renewed belligerence as one
states must. As such, only about 20 civil sented the best and most cost-effective justification for updating Trident. And
servants in London now have experience way to do it. Parliament will now decide Brexit has left the country, and its allies,
of these complex tugs-of-war, according to whether to approve the spending of £31 bil- shaken. Britain’s partners would be sensi-
an initial government review. The EU, lion ($41 billion) over 20 years to replace tive to signs of more isolationism, says
meanwhile, has a crack team of around the four Vanguard-class subs, which will Malcolm Chalmers of RUSI, a think-tank.
600. It will be “very difficult” for Britain to wear out within a decade. Britain has the largest defence budget in
catch up, says Pascal Lamy, a former head Trident’s detractors argue that a lot has Europe; maintaining nuclear capabilities
of the World Trade Organisation (WTO). changed since the programme was ap- shows that it is still committed to NATO.
The Department for Business, Innovation proved in 2007. For one thing money is “Our allies would not understand if we
and Skills recently advertised for 300 nego- tighter. Around one-quarter of defence chose this moment to give up our nuclear
tiators and trade specialists. spending on new equipment procurement weapons,” Mr Chalmers says.
The private sector stands ready to help. will be on submarine and deterrent sys- The vote is also linked to Britain’s image
But besides the expense, bringing in an tems by 2021-22. There has also been a of itself. Last year a strategic review boost-
army of management consultants would surge in support for independence in Scot- ed defence spending, as part of an effort to
raise questions ofconfidentiality, says Emi- land, where the submarines are based. It is restore Britain’s standing as a military pow-
ly Jones of Oxford University’s Blavatnik unlikely that the government would er after years of cuts. Trident is part of that.
School of Government. Any consultancy’s choose to site the capability north of the Though it is expensive and imperfect, most
other clients would love a keyhole into the border if the renewal process began again MPs, and their constituents, believe it still
Brexit negotiations; in the finance industry now, says William Walker of St Andrew’s helps to make Britain safe, and is a force for
alone, £12 billion ($16 billion) of business University. The Scottish government op- stability—something of which it has had
rests on the outcome, according to Pricewa- poses the plan; almost all of the 59 Scottish precious little in recent weeks. 7
terhouseCoopers. Doubts of allegiance
also surround foreign nationals. New Zea-
land, the first rich country to sign a trade
deal with China, has offered to loan its ex-
perts. But the top team should be British,
says Sir Simon Fraser, a former diplomat.
The wiliest strategy might be to poach
trade negotiators from the European Com-
mission itself. Some 32 Britons work with-
in its Directorate General for Trade. Recruit-
ing them may be easier for the fact that
Brexit is likely to stall Britons’ progress up
the Commission’s career ladder. Yet Euro-
crats enjoy reduced-tax salaries and have
put down roots in Brussels. Still, says Mir-
iam Gonazález Durántez, a lawyer and for-
mer EU trade negotiator, it is their doors
that Britain should be knocking on. Next it
could approach Britons working in the
WTO. If Britain is to leave the negotiating
chamber with its pockets unpicked, their
ilk is sorely needed. 7 No substitute
 The Economist July 16th 2016 Britain 37

The economic impact of Brexit erties listed from June 24th to July 11th,
roughly1,000 have had their price cut since
Straws in the wind the referendum. A survey by the Royal In-
stitution of Chartered Surveyors pub-
lished on July 14th, which accounts for the
post-referendum period, shows a sharp
fall in inquiries from homebuyers.
What of the export boom resulting
Forget the financial markets. Evidence is mounting that the real economy is
from the weak pound, as Brexiteers pred-
suffering from Brexit
ict? There is some evidence that flight

B EFORE the referendum, economists

were in near-unanimous agreement
that a vote to Leave would hit the economy.
fewer new jobs than in the first week of
June. Part-time roles appear to have been
particularly hit. Scotland, which was al-
bookings into Britain have risen. And the
headline on NetEase, a Chinese web por-
tal, is bullish: “Pound falls to 31-year low.
And as predicted, the past three weeks ready near recession because of low oil Time to bargain-hunt for British homes?”.
have been torrid. The pound has fallen by prices, is suffering most. But although it is difficult to assess the over-
one-tenth against the dollar; the FTSE 250, While some Britons struggle to find all impact on exports, there is little to sug-
an index of domestically focused firms, is new jobs, others may be losing theirs. A gest a bonanza is on the way. British export
down. Alongside the now-familiar turmoil Bank of England paper from 2011 analysed competitiveness has not improved as
in financial markets, there is growing evi- Google as a window into the labour mar- much as the fall in sterling implies, because
dence that the real economy is slowing. ket. Searches for “jobseekers” (as in job- one-quarter of the value of British exports
It is not easy to assess the economic im- seekers’ allowance, an unemployment contains imports—which are getting prici-
pact of Brexit, because official data are pub- benefit) have historically been correlated er. Analysis by The Economist of data pro-
lished with a long lag. The first official esti- with the unemployment rate. In the first vided by PriceStats, a consultancy that
mate of GDP growth in the third quarter fortnight in July, Britons searched for that scrapes prices from online retailers, sug-
will not come out until late October. word about 50% more frequently than in gests annualised inflation since the vote
But there is a smorgasbord of other indi- May. This suggests that unemployment is has been above the Bank of England’s 2%
cators of economic activity—in particular, now 5.3%, not the official rate of 5% (last re- target. In any case, research shows little evi-
data “scraped” from the internet—which corded for the three months to April). dence that currency depreciations lead to
occur at a higher frequency than official Businesses are cutting investment, too. increased market share in exports, particu-
data are published. None of the observa- On Funding Circle, a peer-to-peer loans larly for a country like Britain which com-
tions is robust on its own. But together, website for small firms, the volume of petes mainly on “non-price” factors such
they hint at how the British economy is do- lending is about 10% lower so far in July as quality and customer service.
ing after Brexit. than it was in the same month last year. Now the slowdown is taking shape, the
It is not all doom. Consumer spending The number of planning applications—for authorities must respond. Theresa May,
seems to be holding up. OpenTable, a res- permission to expand premises, say—is an- the new prime minister, has made encour-
taurant-booking website, showed a drop other decent proxy for investment spend- aging noises about a fiscal stimulus,
in reservations during the referendum, as ing. Though there is a lag in registrations, a though with the budget deficit already at
people made time to vote or watch the cov- tally of applications in London boroughs about 4% of GDP she does not have much
erage. After the next weekend, however, in the week after Brexit currently stands at room to manoeuvre. On July 14th the Bank
reservations were back to normal. one-third below their level a year before. of England surprised markets by holding
Shoppers have not been too affected, ei- The tail-off in planning may be linked interest rates at 0.5%; most analysts had ex-
ther. Sales at John Lewis, a department to a slowdown in the housing market. Data pected a cut. A future reduction cannot be
store, which has published weekly figures scraped from Zoopla, a property website, far away: as the economy slows, it will
to July 9th, are up on previous years. The suggest that of about 6,000 London prop- soon need all the help it can get. 7
number of people entering shops, a decent
proxy for retail spending, has not much
changed since the referendum, according
The immigration paradox MAJORITY REMAIN MAJORITY LEAVE
to data from Footfall, a consultancy. Super- 1
markets are not aggressively discounting, Although immigration featured heavily in 60
Foreign-born population,

finds mySupermarket, a price-comparison the Brexit campaign, areas with the most 50
site. Tesco, Britain’s biggest, had 23.7% of migrants—notably London—were among 40
2014, %

products on promotion on July 8th, down those most likely to vote Remain (see 30
Boston
from 24.8% just before the referendum. chart 1). Mint-tea-sipping metropolitans 20
All this chimes with what economists may find it absurd that people in areas 10
predicted—that consumer spending would with comparatively few foreigners should 0
hold up. Over half of voters plumped for be so keen to curb migration. But consid- 20 30 40 50 60 70 80
Vote for leave*, June 23rd 2016, %
Brexit, after all, so they should be happy er the change in numbers, rather than the
shoppers. An economic slowdown does total headcount, and the opposite pat- MAJORITY REMAIN MAJORITY LEAVE 2
not immediately pinch people’s pockets. tern emerges (chart 2). Where foreign- 500
Foreign-born population,

Instead, the assumption was that invest- Boston

born populations increased by more than 400
% change 2001-14

ment would be whacked. Companies 200% between 2001 and 2014, a Leave 300
would put off big decisions on capital vote followed in 94% of cases. The pro- 200
spending or recruitment, given the uncer- portion of migrants may be relatively low 100
tainty about the future of the economy. in Leave strongholds such as Boston, +
0
It looks a fair prediction. Firms already Lincolnshire, but it has soared in a short –
100
seem more reluctant to take on new staff. period of time. High numbers of migrants 20 30 40 50 60 70 80
Data from Adzuna, a job-search website don’t bother Britons; high rates of Vote for leave*, June 23rd 2016, %
with over 1m listings, suggest that in the change do. Sources: Electoral Commission; ONS *By local authority area
week to July 8th there were one-quarter
38 Britain The Economist July 16th 2016

Bagehot Travels in Theresa May country

To understand Britain’s new prime minister, visit her constituency

or house in Sonning, where Mrs May has her constituency home.
What about money? Maidenhead is Britain’s answer to Con-
necticut: “You were considered subversive if you only mowed
your lawn once a week,” recalls John O’Farrell, a Labour comedi-
an who ran against Mrs May in 2001. It contains the Fat Duck, the
three-Michelin-starred restaurant epitomising Britain’s gastro-
nomic boom. But this prosperous town also contains poor peo-
ple. Its service economy has plenty of lovely jobs (software de-
signers, bankers and insurance brokers) and plenty of lousy ones
(cleaners, dish-washers and carers), but not much in the middle.
House prices—one estate agent advertises a two-bedroom flat for
£575,000 ($760,000)—are forcing those in the latter category into
tiny dwellings and even onto the streets. Recently a group of
homeless people, “Born SL6” (the local postcode), camped on the
trim lawn of the town hall. A food bank feeds 200 families.
In this constituency of contrasts, one thing is uniform: every-
one likes Mrs May. “She’s approachable.” “Every Friday, you see
her in the town.” “She looks after us.” The new prime minister
has nurtured her seat with military discipline. Even at the peak of
the leadership contest she was there: opening an Alzheimer’s
charity shop, visiting a DIY store and attending a church service

F ROM 10 Downing Street, travel west. First you pass posh inner
districts like Notting Hill, where David Cameron and his fash-
ionable set plotted a liberal future for the Conservative Party ear-
commemorating victims of the Somme. The archives of the
Maidenhead Advertiser document her involvement in every local
campaign for the past 19 years. “Even her political opponents re-
ly in the past decade. Then you cross working-class suburbs ofthe spect her,” said Martin Trepte, the editor.
capital like Brentford and Hounslow, where trading estates inter- At times she seems like a liberal, at others an authoritarian.
twine with Victorian terraces. Afterwards comes Heathrow air- She admires Margaret Thatcher but postures as an economic in-
port, a series of reservoirs, the grandeur of Windsor Castle and terventionist. She was never part of the Notting Hill set, prefer-
Eton College, and then Slough, a town so architecturally dismal ring to spend her time working the “rubber chicken circuit”:
that in 1937 Sir John Betjeman penned a poem beckoning “friend- speaking to silver-haired Conservatives in village halls and mid-
ly bombs” to rain down on it. And then, where the concrete meets range restaurants in small-town Britain. Thus she has acquired a
the fields, you hit Maidenhead. reputation in Westminster for being dull and suburban. Mr Cam-
This is home turf for Bagehot, who grew up in similar border- eron claims his favourite bands include The Killers and Radio-
lands south of London and, when he was small and pesky, was head, for example; Mrs May goes for Abba and Frankie Valli. She
packed off to grandparents in Littlewick Green, a village immedi- holidays not on tycoons’ yachts but on hiking trips to the Alps,
ately west of Maidenhead. It is also Theresa May country. Since like Angela Merkel, another cautiously dutiful centre-right Euro-
1997 Britain’s new prime minister has been MP for the constituen- pean leader to whom the comparisons draw themselves.
cy encompassing the town and its surroundings. She spent her
childhood across the Chiltern Hills in Wheatley, where her father Go west, young Eurocrat
was a vicar. Her seat is suburban in the truest sense: Maidenhead Mrs May’s constituency epitomises her desire for order. Maiden-
has always been an in-between sort of place; it exists to connect head is not a backwater. It is buffeted by globalisation and change
other places. It started with a toll bridge on the River Thames. as much as anywhere. But it attracts people who want suburban
Then, in the 1830s, came the Great Western Railway, which turned calm and certainty over city buzz; who eschew the risky and un-
it into a London commuter dormitory. Now it thrives thanks to its known. Folk who, as Betjeman put it, “talk of sports and makes of
proximity to the M4 motorway and Heathrow. cars / In various bogus-Tudor bars / And daren’t look up and see
“In-between” describes Maidenhead in other ways, too. The the stars”. May’s unromantically pragmatic instincts reflect this.
Tudorbethan houses, the rowers on the Thames and the cricket She is not anti-globalisation (she was against Brexit). But she does
greens make it feel like deepest England. But Maidenhead is nei- want to take the edges off it, get it under control and make it neat
ther nostalgic nor monocultural. It is too diverse and too close to and manageable.
London for that. Polish pilots who flew from the White Waltham European negotiators should take note. Eventually they will
airfield settled here after the war. In the 1950s a Sicilian newspa- be locked in negotiations with the self-described “bloody diffi-
per advertised jobs here, attracting a large Italian contingent. To- cult woman” who now inhabits 10 Downing Street. She is inscru-
day the proliferation of global companies like Adobe, BlackBerry table, private and hard to read. But those with whom she spars
and Maersk draws residents from around the world. could do worse than head to May country for a sense of her in-
Aesthetically, the seat is similarly interstitial. It is where the stincts. To an in-between land of garden centres, railway season-
worst of London’s sprawl—post-war concrete and thundering tickets, motorway service stations, faux-mullion windows, chain
roads scarring parts of the town centre—mingles with the English restaurants and supermarket loyalty cards. Of leather-on-willow,
countryside at its parklike best. Murder mysteries are filmed in gin-and-jag and keep-calm-and-carry-on. To a land where Brit-
the surrounding villages. Amal Clooney, a hotshot human-rights ain’s bucolic past and cosmopolitan future pass each other in the
lawyer, and her actor husband George live in a 17th-century man- street—and avoid eye contact. 7
WHAT IF…
DONALD TRUMP WAS PRESIDENT
THE NORTH KOREAN REGIME COLLAPSED
THE OCEAN WAS TRANSPARENT
FINANCIAL SYSTEMS WERE HACKED
COMPUTERS WROTE LAWS
T H E E C O N O M I S T U N W I N D S

KNIT WIT
Suket Dhir, India’s
fashion superstar

ETON AND THE MAKING

OF A MODERN ELITE
THE ECONOMICS OF
THE BIRKIN BAG
BURNOUT
GENERATION
WHY BRAZIL’S
TOP ARTISTS
ARE WOMEN
TRUMP’S WAR
ON TAILORING
+ SLASH FICTION AND
FEMALE SEXUALITY
THE RETURN OF
THE WOLF

The Economist’s magazine of ideas,

lifestyle and culture with a global outlook

ON NEWSSTANDS NOW
www.economistsubscriptions.com/1843
 The World If is our annual
collection of scenarios.
Just suppose…

IF DONALD TRUMP WAS PRESIDENT POLITICS

The world v the Donald 5 North Korea collapsed

Night and day
7 States traded territory
A country market

BUSINESS AND ECONOMICS

Washington, DC, April 2017
How a made-for-TV foreign policy triggered real-world crises 8 Hackers halted finance
Joker in the pack

H
IS presidency is only 100 days old, yet already some are wondering if Donald Trump will ever
again match the approval ratings he enjoyed one week after inauguration day. His “Made in 10 China privatised boldly
America” summit, held in a blizzard-lashed White House on January 27th, delighted the public, The greatest sale on Earth
according to opinion polls, even as it reminded the president’s critics ofan event more suited to Vladi- 12 Economists reformed
mir Putin’s Russia. Mr Trump dressed down two dozen corporate chieftains on live television as “dis- A less dismal science
honest and greedy” and demanded that they promise, on the spot, to close or scrap named manufac-
turing plants in China within his first term and bring production back to America. The newspapers SCIENCE AND TECHNOLOGY
the next day carried images of Tim Cook, the head of Apple, and Dennis Muilenburg, the boss of Boe-
ing, shivering in the North Portico as they waited, coatless, to be picked up by their drivers after de- 15 Oceans were transparent
clining to make such a promise, prompting their summary expulsion from the building. The see-through sea
Supporters also cheered Mr Trump’s appointment in his first week of Joe Arpaio, the hardline
sheriff of Mariposa County, Arizona, to chair a presidential task force on building a fortified border 18 Computers wrote laws
with Mexico within three years, named “Make America Safe Again”. There was a more muted re- Decisions by data
sponse to a third announcement: that the new president’s first overseas visit would be to Moscow, for 19 All had personal drones
a meeting with Mr Putin to explore common ground in the fight against Islamist terrorism. Prone to disaster
True, Mr Trump promised he would strike “only the toughest deals, the smartest deals, or I walk
from the table”. But his quick offer to meet the Russian president reminded many Americans, uncom-
fortably, of the murky espionage scandal that played so large a role in the defeat of Hillary Clinton. In
HISTORY
October top-secret files had appeared on the internet, allegedly extracted by hackers from Mrs Clin-
ton’s private e-mail server when she was secretary of state, identifying individuals as American in- 20 Germany had not unified
telligence assets in Russia and Ukraine; one, an Israeli-Russian businessman, was soon afterwards 1 Better or worse?

The Economist July 16th 2016 3

 POLITICS THE WORLD IF

2 found dead at a Geneva hotel. Mrs Clinton nounced that the most popular models ally, for helping the United States to stem
continues to deny any knowledge of the sold by General Motors and Ford in China flows of migrants from Central America.
leaked documents. Her husband, ex-Presi- will face new tests of their exhaust emis- By the end of March, 500 unaccompanied
dent Bill Clinton, sparked fresh headlines sions. Brushing aside assurances from child migrants had turned up at the Mexi-
with an intemperate interview in March in American car executives that their emis- co-Texas border, claiming asylum. The De-
which he charged that “Kremlin dirty sions comply with all Chinese laws, the partment of Homeland Security is said to
tricks” helped to swing the 2016 election. ministry added that Chinese consumers be bracing itselffor tens ofthousands more
One hundred days into the Trump might care to wait for tests to be completed by the summer.
era, that Moscow trip remains on hold. before choosing an American vehicle. The irony is that Mr Trump has
Like much else it has been delayed by dip- More poetically, a recent editorial in the stopped some way short of the pro-
lomatic, military and commercial moves gramme that he promised in his
by China, Mexico and Russia that a dissi-
dent Republican, Senator Lindsay Graham
“One hundred days in, that campaign. He has not slapped
punitive tariffs on Chinese-
of South Carolina, has called a “pre-emp-
tive strike by the rest of the world” against
Moscow trip remains on hold made goods. He has not banned
Muslims from entry, because he
Mr Trump’s “America First” agenda. cannot by law (though he has
No date has been set for Mr Trump’s stopped refugee arrivals from
emergency trip to Beijing, announced by state-run Global Times talked of China be- several Middle Eastern countries). His
him on Twitter several weeks ago but now ing willing to take “resolute actions” plans for a “beautiful” border wall have
deemed “just a suggestion” by the White against “an arrogant foreign leader who been parked with Mr Arpaio’s committee.
House spokesman, Sean Hannity. There prattles like a monk about honesty while Mr Trump has revoked Mr Obama’s execu-
has been no suggestion of a summit with hiding a stolen goose in his sleeve”. tive actions shielding millions of undocu-
the leader who has most gleefully cast In Mexico Mr Peña announced in mented migrants from deportation,
himself as the anti-Trump, President En- February that, to his “great anger”, he had though the legal status of those already
rique Peña Nieto of Mexico. received evidence that American drug-en- granted work permits is now before the
Relations with Russia trouble the forcement agents had been operating ille- courts. Work on a much larger task—plan-
Washington national-security establish- gally inside Mexican territory, abusing the ning the mass deportation of all foreigners
ment the most. The president faces grow- terms of the Mérida Initiative, a security without legal status—has barely started.
ing questions about the mysterious disap- co-operation agreement signed by Presi- Scrutinise the new government’s
pearance of a helicopter carrying Estonian dent George W. Bush. Mr Peña suspended “America First” approach to the world, and
troops over the Baltic Sea on March 1st, the initiative, ordering American liaison of- much of it amounts to made-for-TV dis-
amid claims that the aircraft may have ficers to leave Mexico immediately. plays of firmness. Alas, when America’s
been shot down by a Russian warship. Mr In mid-March he made a further an- president blusters and swaggers, it can pro-
Trump is being pressed over reports that he nouncement: Mexico would no longer duce real-world consequences. It has taken
told the Estonian president in a telephone deport unaccompanied children from just 100 days for multiple crises to teach Mr
call that his small Baltic republic, a mem- Central America back to their violence- Trump that lesson. Americans can only
ber of NATO, needs to “get smart and shut wracked home countries. Though Mr Peña contemplate the next three years and nine
up”, because America’s national interest called this a purely humanitarian gesture, months, and hope that their president has
lies in co-operating with Russia in Syria, Mexico had endured political pain, region- not learned it too late. 7
not with defending European allies. De-
clining to address those reports, Mr Trump
used a rambling White House press confer- THE UNITED STATES HAD A PARLIAMENT?
ence to complain about the media, about
YouGov polled Americans on whom they would prefer in a five-way election;
official leaks and about disloyalty at the
from this, we predicted the parliament that might emerge
Pentagon, where, he said, “there are a lot of
generals who need firing, believe me.” PREDICTED PARLIAMENT* PLATFORM
On the economic front moves by Chi-
“The Social Democratic Party” LEFT
nese authorities against American compa- protectionist, big government,
nies have panicked investors. The first firm 113 BERNIE SANDERS 26% of vote socially liberal
to be hit was Boeing, days after a speech by
Mr Trump calling it “just disgusting” that
“The Liberal Party” CENTRE-LEFT
the aerospace giant is planning to open a pro-trade, pro-immigration,
new facility in China. Chinese state media HILLARY CLINTON 28%
HILL socially liberal
TOTAL SEATS 435

gave prominent coverage to a speech by an 124

24
aviation regulator warning that planned “The Conservative Party” CENTRE-RIGHT
sales of hundreds of aircraft to Chinese air- pro-trade, socially
JOHN KASICH 9% conservative
lines might need to be reviewed if “certain 37
entities are not the reliable long-term sup- RIGHT
pliers that they claim to be.” 49 “The Christian Coalition”
pro-trade, socially
Soon afterwards the China head- TED CRUZ 11% conservative, religious
quarters of Apple, a computer firm, and
Pfizer, a drugs company, were raided by 112 “The People’s Party” POPULIST
antitrust investigators from the State Ad- nativist, protectionist,
DONALD TRUMP 26% socially liberal
ministration for Industry and Commerce;
both firms say they are in full compliance *based on April 22-26th 2016 polling of preferred candidate choice; seats
with competition laws. In early March the Sources: YouGov; CPS; The Economist allocated proportionally by census region (North, Midwest, South, West)
Ministry of Environmental Protection an-

4 The Economist July 16th 2016

 THE WORLD IF POLITICS

the fractured regime would lead to insta-

bility on its borders, risking a flood of refu-
gees. It helped that Mrs Clinton honoured
her pledges not to station American sol-
diers anywhere in the former North Korea.
Five years on, North Koreans were bet-
ter-fed and freer than they had ever
thought possible. The new government (in
effect the old one, of the South) had
stepped carefully, but gradually statues of
Kim Il Sung were disappearing. Portraits of
his son, Kim Jong Il, forever associated
with the famine of the 1990s, had been
quick to go. A massive building boom had
introduced South Korean efficiency to the
country’s 1930s infrastructure. Former sol-
diers used to building dirt tracks by hand
now used modern machinery to carve ex-
pressways linking the South to China.
The changes were even visible from
space. Satellite photos used to show North
Korea at night as an area of darkness next
IF THE NORTH KOREAN REGIME COLLAPSED to the bright glow ofthe South. Steadily, the
pinpricks of light were spreading. It was

Night and day like a dream.

Indeed it would be. Many analysts be-
lieve that the collapse of the Kim dynasty
in North Korea is, if not imminent, then
quite possible, and that the most likely up-
shot would be Korean reunification under
the South’s leadership. That should be
good news. North Korea is ruled by the
SEOUL
most repressive and closed regime on
America and China have done too little planning for a Korean crisis Earth. Hardly anyone, however, believes

A
S ERIC CLAPTON played the first of Macau. After all, North Koreans were in its end will be smooth or peaceful. Think
bars of “Cocaine”, the country’s blissful ignorance of his disgrace in 2001, not German unification, says Andrei Lan-
transformation seemed complete. when he was caught by Japanese immigra- kov, a Russian expert on the North who
The former “May 1st” stadium in Pyong- tion officials trying to sneak into the coun- teaches in Seoul, the capital of the South,
yang, renamed “December 1st” to com- try on a forged passport from the Domini- but “Syria with nukes”. And how would
memorate Korean reunification in 2018, can Republic, to visit Tokyo Disneyland. the outside world know if the regime was
was packed. Before the fifth-anniversary He was soon outmanoeuvred, how- imploding? “Fighting on the streets.”
concert, the organisers had shown that ever, by Kim Jong Chul, who hitched his
their old mastery of mass pageantry had wagon to the incoming South Korean The cold light of today
not been lost. After a stunning callisthenic forces and their American allies. As a re- Much work has been done in South Korea,
display, children from the Ban Ki-moon ward, he was given his cushy “advisory” si- America, China and Russia on scenarios
High School arranged themselves to form necure. It was on his advice, indeed, that for North Korea’s implosion. Most envis-
portraits. Mr Ban himself, first president of Mr Clapton was invited. An approach to age some or all facets of a complex disaster:
a unified Korea, was followed by President the musician to perform in Pyongyang in humanitarian emergency; civil war; inter-
Hillary Clinton, whose staunch support 2007 had been rebuffed, and this was the national conflict; nuclear proliferation;
had eased reunification. Then came Kim first time Jong Chul had seen his idol since economic hardship; social tensions be-
Jong Chul, “special adviser” to the interim two memorable gigs at the Royal Albert tween northerners and southerners. But
governments of the northern provinces, Hall in London in 2015. preparations for these contingencies are
grandson of North Korea’s founding In retrospect, it was perhaps not surpris- difficult. Not only are the circumstances of
leader, Kim Il Sung, and elder brother of its ing that China had backed off so quickly. collapse unforeseeable, but the co-ordina-
last leader, Kim Jong Un. For decades its North Korea policy had tion between America, China and South
After Kim Jong Un died in mysterious been based on the need for a “buffer” be- Korea is politically impossible, beyond
circumstances, apparently poisoned by a tween it and the South, ally to America talking-shops where scholars engage in
radioactive prawn consumed when visit- and home to some 25,000 American speculation. Even now, angry though it
ing a factory making frozen tempura for troops. But as the regime in the North seems to be with the recalcitrant Kim Jong
the Japanese market, his two brothers crumbled after Jong Un’s death, several Un, China is unwilling to discuss the possi-
came to prominence. Believing the dy- truths dawned on China’s leaders: that a ble end of its longtime ally.
nasty remained essential to any hope of reunified Korea would never, out of its China’s displeasure with Mr Kim is one
stability, the country’s neighbours had own self-interest, be hostile towards it; that reason some analysts think collapse may
turned to them. China backed the oldest, with North Korea’s nuclear sites scattered have become more likely. When he took
Jong Un’s half-brother, Kim Jong Nam, and the number of warheads unknown, it over on the death of his father in 2011, Mr
whom it knew well from his days of disso- had to co-operate with America to elimi- Kim, then in his late 20s, and without any
lution in the casinos and massage parlours nate them; and that to back one faction of administrative experience, seemed to 1

The Economist July 16th 2016 5

 POLITICS THE WORLD IF

2 some the face of a ruling clique. Yet he has tailed plan for a military occupation. South In the unfolding chaos, China, South
ruled ruthlessly, purging potential rivals, Korean forces would dominate, keeping Korea and America, their troops perhaps
including even his uncle, Jang Song Taek, hated American faces well in the back- eyeball-to-eyeball in remote nuclear sites,
who had been seen as the power behind ground—except for those highly trained would need to scramble through negotia-
his throne, and the country’s main inter- special forces who would be airlifted to tions on issues unsettled for more than six
locutor with China. He was executed in known nuclear sites to secure them. At decades. China would have to decide
2013. Mr Kim seems solidly in control. In some sites in the far north, they might find whether to install a puppet regime, to
May this year he convened the ruling the Chinese had got there first. There has, maintain its buffer. At least it has party-to-
party’s first congress since 1980, rewarding after all, been no co-ordination. But some party ties with the Workers’ Party, and
himself with a new job as its chairman, sites are unknown, as are the actual num- army-to-army links; and it has a number of
and showing the world evidence of his defectors it might have been
people’s adulation in a mass parade. But he
has many potential enemies: generals fear-
The kinship that linked the grooming for such an eventual-
ity. But imposing order might be
ing they may be next to be purged; mem-
bers of the elite fearing they will be impov-
peninsula has weakened beyond it without unacceptable
military risks. It seems to have a
erished by Chinese sanctions; a lone particular fear of mass migra-
hungry madman with a gun. tion. Some South Korean ex-
His is, in a phrase of Chun Yung-woo, a ber of nuclear devices and the amount of perts think this is misplaced: food is now
former South Korean delegate to talks with fissile material, let alone the identity of the more available on private markets, so mi-
North Korea, a “theocratic” regime. Unlike most important nuclear scientists. An in- grants may not be driven by hunger; and
other ruling communist parties, the Kore- tensive propaganda drive to convince most North Koreans live far from the bor-
an Workers’ Party probably does rely on a them they will be well treated in a unified der. But as early as 1994, on Kim Il Sung’s
dynasty for its legitimacy and durability. country may not work. Some may find ter- death, China was examining where it
With its linchpin gone, it might swiftly fall rorists willing to protect and reward them. might put refugee camps. After regime col-
apart. Uncertain who is in charge and re- Even if the headline number for the ac- lapse, disorder could engulf North Korea.
membering the shortages of the past, those tive front-line personnel in North Korea’s China might conclude that reunification is
with guns might start seizing food and loot- armed forces—some 700,000—includes not, after all, the worst outcome.
ing. Fighting would break out, and people many who are in fact deployed in con- So the issue would become: what assur-
start fleeing—probably not for the well- struction work, some soldiers would fear ances would China need? Would all Amer-
mined and fortified “demilitarised zone” punishment or at least a loss of privileges. ican troops have to leave the peninsula, or
on the 38th parallel that forms the border They would “almost certainly” oppose would a pledge to avoid the North suffice?
with the South, but to the more porous one outside intervention, concluded a study in Would South Korea’s security treaty with
with China in the North. Those guarding 2013 by Bruce Bennett of the RAND Corpo- America have to be abrogated? And, if that
the gulag housing tens of thousands of ration, a think-tank, “in some combination was the condition for reunification, might
“political” prisoners—ie, people suspected of regular combat, insurgency and crimi- South Korea accept it?
of even the mildest dissent—might turn nal behaviour”. However secure its nuc-
their guns on the inmates; they are said to lear weapons, North Korea has plenty of Two into one won’t go
have orders not to leave any evidence or conventional artillery and the ability, as it How the emotions of such a tumultuous
witnesses of the regime’s crimes. likes to remind the world at times, to turn time would play out is anyone’s guess.
The South, backed by America, would Seoul into a “sea of fire”. Its special forces Many in the South fear reunification. The
feel compelled to intervene. It has a de- might infiltrate the South. kinship that linked the peninsula (where
as late as 2000, 7.7m South Koreans were
estimated to have family in the North) has
North-South divides weakened as divided family-members
The two Koreas’ share of: have died. And the two countries have
drifted apart, linguistically and even physi-
population calorie average GNI* per total trade political nuclear light emissions cally: a study of North Korean refugees in
2016 f’cast availability height person goods, 2014 prisoners warheads at night
m per person 5-year-old 2014, $ ‘000 $bn 2015 2015, July 2012
the South suggested that boys were on av-
per day, boy, 2002, or latest estimate erage 10cm (4 inches) shorter than south-
2013 or cm
120,000 20 erners the same age, and girls 7cm. The ex-
latest,
perience of integrating defectors from the
North in the South has not been encourag-
North
Korea ing. Even comparatively well-off, highly
2,100
103.6 educated defectors struggle to find white-
25.3 North collar jobs. They have left not just one
Korea
country for another, but the past century.
1.3 South Koreans are put off by the cost of
EQUAL

7.6 Pyongyang
Total: 75.8

700† nil reunifying Germany (see the final story in

Seoul this supplement), and North Korea is far
poorer than the old East Germany. In the
South
Korea
initial chaos, the North’s currency would
112.9 be deemed worthless; people would use
3,100
50.5
Chinese yuan or scarce American dollars,
South
Korea or barter. America and South Korea would
28.2 1,098 find themselves having to guarantee the
*Gross national income
†Includes conscientious objectors and
value of the North’s won, before quickly
Sources: UN; FAO; Daniel Schwekendiek; Bank of Korea; Ministry of Justice; IISS those convicted of praising the North replacing it with the South’s—at a generous 1

6 The Economist July 16th 2016

 THE WORLD IF POLITICS

2 exchange rate. That in itself would be a to be given to current residents. politics that turned the 20th century into a
costly subsidy to the 25m people in the All this perhaps explains why the nightmare for much of the world.
North. But many would still be dependent South’s current president, Park Geun-hye, Nor has the dream of Korean unity fad-
on state handouts. Taxes in the South, and realising the reunification may be a fact not ed altogether. In that concert, the final en-
the national debt, would climb quickly. a choice, emphasises the “bonanza” of core would see Slowhand tackle “Arirang”,
Those in the South clinging to hopes that North Korean resources, cheap labour and a folk-song indispensable to karaoke-sing-
they might one day reclaim their ancestral unfulfilled potential. Even if they are scep- ers in both North and South. The crowd
homes in the North would also be disap- tical, many in the South would see reunifi- would sing along, waving cigarette lighters
pointed. To avoid legal wrangles or vigilan- cation as a moral necessity, ending the ugli- and hugging. There would be not a dry eye
te evictions, ownership rights would have est legacy of the cold war and of a form of in the house. 7

IF STATES TRADED TERRITORY

A country market
A way to solve some of the world’s trickiest problems
IT MIGHT not rank with the Battle of the
Somme, but 2016 also marks the 100th an- For sale?
To Iran From Russia From Ukraine
niversary of the Treaty of the Danish West Hypothetical
Indies, which transferred sovereignty land trades
over the Caribbean islands of St John, St Habibas
Islands
Thomas and St Croix from Denmark to Eastern
Karelia
America, for $25m (worth $550m today). Crimea
The deal removed trade barriers between From Algeria
To Nor th Korea To Finland E To Russia From Russia
the Virgin Islands and their region’s eco- UT N
SP O
nomic superpower, and prevented them ST DI UTI
T H R AT E L
from falling into German hands during RE SO
AT G I C RE
Kuril
La Tortuga Islands
the first world war. Now, it stands as the Island 
last time a country has directly sold con- H
A

trol over territory to another. GR IGH

SE
TH SS

OU ER
From Venezuela
E

ND To Japan
Such transactions were once common.
E
TO CC
A

(America’s Louisiana Purchase from

From Vietnam and
France in 1803 and Alaska Purchase from To Bolivia From Namibia To Nauru the Philippines
Russia in 1867 were big examples), and re-
main perfectly legal under international Nauru
law. But in the post-colonial age, borders South China
Sea islands
move when a state breaks up, or countries
settle a dispute or, occasionally, by use of
force, not because two governments sim- From Chile To Botswana From Solomon Islands To China
ply agree to trade a chunk of land.
What if that changed? With a little
imagination, it is possible to see a large in the South China Sea, might the Philip- Botswana’s trade would boom if it bought
and varied market for such trades. pines and Vietnam cash them in? Nigeria a corridor to the sea from Namibia.
Climate change could stimulate de- is still seething over a verdict in 2002 by There is a dark side, though. Today,
mand. Countries whose very existence is the International Court of Justice handing lenders are left with little recourse when
threatened by it, such as Nauru, have a the Bakassi peninsula to Cameroon; it sovereign debtors go bust. If governments
powerful incentive to acquire higher-ele- would have been far more efficient to buy were willing to buy land, however, issuers
vation islands from nearby states, like the out Cameroon’s claim. Russia could for- would have a highly marketable asset that
Solomon Islands. malise its annexation of Crimea by help- their creditors might demand they pawn
Small, rich, densely populated coun- ing to pay off some of Ukraine’s debts, off. Serial defaulters like Argentina might
tries would be natural buyers from land- possibly raising the money for this by borrow themselves out of existence.
rich, poorer states. No Arab government agreeing to hand eastern Karelia, which it Even more alarming would be militari-
could sell Israel land and hope to stay in conquered in the second world war, back ly motivated purchases. North Korea and
power. But this year Egypt did cede control to Finland (in the early 1990s Boris Yeltsin Iran could render the billions spent on
over a pair of disputed Red Sea islands to reportedly offered the territory for $15 bil- Western missile defences moot by acquir-
Saudi Arabia shortly after receiving finan- lion). Japan might take a similar interest in ing islands in the Mediterranean or Carib-
cial support from the kingdom, though a the Kuril Islands and oil-producing south- bean. Would America or its allies really
court has since quashed the decision. ern Sakhalin, which it lost to Stalin. pay whatever it took to keep these out of
Land sales could resolve territorial dis- Lastly, there’s access to the sea. Land- unwelcome hands, enabling the likes of
putes. Instead of struggling to stop mighty locked Bolivia could pay Chile in gas to ac- Venezuela or Algeria to arrange a bidding
China from taking over contested islands quire a Pacific port, an old yearning. war? It might be cheaper to invade.

The Economist July 16th 2016 7

 BUSINESS AND ECONOMICS THE WORLD IF

IF FINANCIAL SYSTEMS WERE HACKED from the Central Bank of Bangladesh’s ac-
count at the Federal Reserve in New York,

Joker in the pack in a shockingly ambitious heist. More wor-

rying than its scale was the fact that the
raiders hijacked bank personnel’s access to
SWIFT, a highly secure (or so it was
thought) messaging system that connects
11,000 financial institutions and sends
around 25m messages a day, helping to set-
tle billions of dollars-worth of transac-
Recent attacks give a glimpse of the sort of cyber-assault that could bring the world
tions. They then sent 35 false payment or-
economy to a halt. Better defences are needed
ders from Bangladesh Bank, via SWIFT, to

T
HIS May Anonymous, a network of ten using so-called denial-of-service at- the central bank’s account at the Fed.
activists, briefly hacked into Greece’s tacks), is worrying enough. But two recent Experts think it likely that several more
central bank and warned in a YouTube attacks signal a move from simple “Bonnie such efforts remain to be discovered. A
message that: “Olympus will fall…This and Clyde” crimes to a new “Ocean’s Elev- similar, smaller, one has come to light in
marks the start of a 30-day campaign en” sophistication. which hackers tried to take $1m from a
against central-bank sites across the In 2013 a raid by the Carbanak gang, bank in Vietnam, in December. Banks are
world.” The warning struck a raw nerve. named after the malware it used, was dis- now looking at limiting the number of
The financial system is little more than covered when its “mules” were seen pick- people who can access SWIFT, and SWIFT
a set of promises between people and in- ing up cash that was apparently being ran- itself has raised the possibility of suspend-
stitutions. If these are no longer believed domly dispensed by ATMs in Kiev (a ruse ing banks with weak security controls.
the whole house of cards will collapse and known as ATM jackpotting, whereby crim- These heists give a glimpse of what
people will take their money and run. That inals hack into a bank’s PCs and then send could lie ahead. Armageddon for banks
happened in 2008 because of bad credit direct commands to the ATMs). The extent could take the form of an attack prepared
decisions; but the same could unfold via a of the assault only gradually became clear: over several months and then carried out
sophisticated cyber-attack. Processes de- the final bill could be high. The largest over a day or two of mayhem. In this sce-
signed to make banking safer have created sums were stolen by hacking into bank sys- nario, the motive would be to cause maxi-
new vulnerabilities: large amounts of tems and manipulating account balances. mum instability, something that worries
money flow through certain key bits of in- For example, an account with $1,000 regulators more than simple theft.
frastructure. If such systemic institutions would be credited with an extra $9,000, Rather than hacking into an individual
were compromised, a panic similar to then $9,000 would swiftly be transferred bank, the assailants might aim straight at
those in 2008 could quickly spread. to an offshore account; the account holder the heart of global finance by choosing as
Cyber-attacks are rapidly growing, and would still have $1,000, so was unlikely to their target parts of its essential “financial-
financial services are a favoured target of notice or panic. This messing with the market infrastructure” (FMI), such as clear-
thieves and people intent on causing cha- numbers showed a new ability and ambi- ing houses or payments systems. FMIs are
os. The rise in attacks on individual banks, tion among cyber-criminals. like the plumbing in a city: they facilitate
mostly to steal money or information or to The second attack unfolded over a few the smooth flow of money. Because plenty
shut down the system for the hell of it (of- days in February, when hackers stole $81m can go wrong between the promise of a 1

8 The Economist July 16th 2016

 THE WORLD IF BUSINESS AND ECONOMICS

2 payment (eg, writing a cheque or making a stitution’s system functions. This hap- compromised and people started to won-
digital purchase) and its actual settlement pened in the Carbanak case: hackers in- der whether their bank might be next.
(the money arriving into the bank account stalled a “RAT” (remote-access tool) to The main concern at this stage would
of the seller), clearing houses sit in the mid- make videos of employees’ computers. be of banks going bust. Normally if a bank
dle of transactions to process them and in- Step two is to study the system and set has a run on its deposits, central banks will
sulate both sides against credit risk. up booby traps. Once in, the gang quietly provide emergency liquidity. But if this
If a major FMI is breached, it can turn observes the quirks and defences of the happens to many banks concurrently, and
from a source of market stability into a system in order to plan the perfect attack nobody understands why, would central
source of contagion. Target2, Europe’s in- from within; hackers have been known to banks be able to save the situation?
terbank settlement system, which handles When computer systems go
large transactions, had total flows of €470
trillion ($520 trillion), through 88m pay-
Banks could not settle their down, the typical response is to
switch to the backup systems.
ments, in 2015. In America the Automated
Clearing House saw more than 24 billion
books when markets close Unfortunately these would
have been corrupted as well, as
transactions with a total value of over $41.6 they are a copy of the manipu-
trillion flow through its system in 2015, for lated numbers. This would
everything from consumer payments to sit like this for years. Provided they are not leave banks and FMIs with no other option
payrolls. An attack on such systems could detected, they pick their places to plant but to shut everything down and eventual-
quickly have systemic consequences if it spyware or malware that can be activated ly call a bank holiday.
leads to wayward flows of money. Central at the click of a button. At the same time as figuring out what
banks would soon become involved: with- Step three is the launch. One day, prefer- had happened, a priority would be to get
out a speedy intervention, banks could be- ably when there is already distracting mar- the system up and running again. This re-
come insolvent. ket turmoil, they unleash a series of attacks quires public confidence that the attacks
on, say, multiple clearing houses. have been stopped, or at least confined.
Faking and entering The attackers might start with small Unlike a natural catastrophe or a physical
So how might such an attack unfold? Step changes, tweaking numbers in transac- war, it is often unclear when a cyber-attack
one, several months before mayhem is un- tions as they are processed (Bank A gets has started. The extent of damage can take
leashed, is to get into the system. Financial credited $1,000, for example, but on the a long time to become clear and finding the
institutions have endless virtual doors that other side of the transaction Bank B is deb- perpetrator can be tricky. Worse, as op-
could be used to trespass, but one of the ited $0, or $900 or $100,000). As lots of er- posed to the hit-and-run bank robbers of
easiest to force is still the front door. By get- roneous payments travel the globe, and as old, today’s sophisticated hackers can lin-
ting someone who works at an FMI or a it becomes clear that these are not just ger in a system for ages: even now it is un-
partner company to click on a corrupt link “glitches”, eventually the entire system clear whether the Carbanak attack has
through a “phishing” attack (an attempt to would be deemed unreliable. Unsure how ended (Kaspersky Lab, a cyber-security
get hold of sensitive information by mas- much money they have, banks could not firm, says with “complete confidence” that
querading as someone trustworthy), or settle their books when markets close. Set- the gang is still active).
stealing their credentials when they use tlement is a legally defined, binding mo- Broadly, there are three types of cyber-
public Wi-Fi, hackers can impersonate ment. Regulators and central banks would attacker: nation-states, criminals and hack-
them and install malware to watch over become agitated if they could not see how tivists. The limited number of actors
employees’ shoulders and see how the in- solvent the nation’s banks were at the end thought to have the capabilities to pull off
of the financial day. something like this are tied to nation-
At the latest, therefore, the affected states; and if the perpetrator did turn out to
banks should become aware of the attack be a rogue state, NATO might even get in-
at the end of the trading day when their volved. For now, thankfully, nation states
books don’t add up. And FMIs themselves have no interest in taking down the global
EVERYONE ONLINE should notice it too as part of their normal financial system. But that is no cause for
WAS HONEST? monitoring. The more sophisticated banks complacency.
would probably spot it sooner, because
By 2019, this could save
they are increasingly moving to real-time Bouncing back from disaster
$2.1 trillion monitoring. But even when institutions do
realise what is going on, it could take longer
Financial institutions are beefing up their
cyber-capabilities, for example by hiring
in cybercrime costs $400bn
before the scale and sophistication of the “white hats” (good hackers) to expose vul-
forecast
globally per year 2014 2019
offensive becomes clear to all involved, be- nerabilities, improve “threat intelligence”
cause banks remain reluctant to speak up and develop plans for prevention and re-
We wouldn’t have to remember when they are breached. sponse. FMIs take cyber-security very seri-
******************* 19 passwords The effects could spread quickly. If a ously. Their sector-wide target is to get the
bankcan no longer trust the numbers on its system back up within two hours of a shut-
each on average
balance-sheet, it will be reluctant to pay down, though many acknowledge this is
“Game of Thrones”, out other commitments such as payrolls more of an aspiration than a reality. The
the most pirated 64% and loans. Without a reliable payments CPMI, a branch of the Bank of Internation-
TV show of 2015, system, shops and businesses would not al Settlements, and IOSCO, the interna-
would lose of its viewers be able to operate normally, supply chains tional body of securities regulators, have
8.1m 14.4m would struggle and normal trading would taken the lead in co-ordinating efforts to in-
US TV viewers Illegal downloads stutter. Within days ifnot hours, even unaf- crease cyber-resilience in systemic FMIs, as
fected account-holders would probably well as in designing response-and-recov-
Sources: Juniper Research; Cyber Streetwise;
McAfee; Torrentfreak.com want to fetch their money from banks as ery plans in case an attack is successful.
news spread that “the system” had been They plan to issue new guidance soon. 1

The Economist July 16th 2016 9

 BUSINESS AND ECONOMICS THE WORLD IF

2 The industry is at last starting to accept developing faster than defences against 500 list of the world’s biggest companies
that not all attacks can be prevented. Re- them. “We’re not keeping up, we’re losing,” are from greater China, and most of these
sponse-and-recovery plans should now says one insurer, who thinks most people goliaths are in the state sector.
become a greater priority, says Coen Voor- remain blind to the real-world damage Few Communist Party officials are keen
meulen from the Dutch central bank, co- such assaults could do. So long as some- to sell off what they see as crown jewels.
chair of the CPMI-IOSCO group that has thing as simple as clicking on an advert Many would resist reforms that would
drafted the guidance, not least because “if could ultimately give an attacker the keys loosen their grip on the economy. How-
you reduce the impact, attacks will stop be- to the kingdom, the financial system re- ever, given the recent financial panics and
ing worth the trouble.” Today the two- mains vulnerable. Just as a country with a policy bungling that have set the world on
hour recovery target would be a challenge threat of flooding would build dykes, and edge about China’s economic health, it is
for certain extreme but plausible attacks. one with violent neighbours should guard becoming possible to imagine a scenario in
Much to the frustration of organisations its border, every country and institution at which the Chinese leadership feels com-
such as SWIFT, banks have been slow to risk would be wise to double down on pelled to embrace privatisation. Several
share information about hacks, which their cyber-defences as well as their plans forces could help to bring this about.
means that other banks are not warned as for when—not if—they are breached. And For one thing, it costs a fortune to keep
fast as they could be to expect one. since cyber-threats constantly change, so China’s lumbering SOEs supplied with
Unfortunately, cyber-attacks seem to be should the defence plans. 7 subsidies and cheap capital. By one reck-
oning, the government spent over $300 bil-
lion, in nominal terms, between 1985 and
2005 subsidising the biggest state firms.
These firms are also debt bombs waiting to
explode (see chart 1 on next page). The IMF
calculates that the average debt-to-equity
ratio at SOEs rose from 1.3 in 2005 to about
1.6 in 2014, whereas the level at private
firms in 2014 was below 0.8. Returns on as-
sets at SOEs lag far behind those at private
firms, and are dropping (see chart 2). A
stalling economy or another financial
shock could well force the country’s lead-
ers to reconsider their ambivalence about
privatisation.
If that happened, how should they go
about it? For a start, China should avoid
some mistakes. The temptation to move
swiftly, as a way of overcoming resistance
to reform, carries big risks. In Russia the fire
sale of state assets after the collapse of the
Soviet Union led to a massive transfer ofof-
IF CHINA EMBARKED ON MASS PRIVATISATION ficial wealth to well-connected oligarchs,
particularly in the raw-materials indus-

The greatest sale on Earth tries. Given China’s cosy nexus of party
and state, there is a great danger that a drive
to sell offstate assets quickly would merely
transfer them to China’s version of oli-
garchs, the “princelings”, as the influential
descendants of early Communist leaders
are known. Scott Kennedy of America’s
SHANGHAI
Centre for Strategic and International Stud-
How China sells its state-owned enterprises matters as much as whether it does ies, a think-tank, insists that “the outcome
would be one that Schumpeter would not
HINA must privatise,” insists Chen SAC), the body responsible for managing be proud of…with princelings and others

“C Zhiwu of Yale University, who

serves on the board of PetroChina,
the publicly traded arm of the China Na-
big state firms, even engages in an obscene
game of round robin whereby it occasion-
ally rotates the bosses ofSOEs within an in-
with guanxi [political connections] creat-
ing enclaves they would dominate.”
There are also lessons from Communist
tional Petroleum Corporation, one of the dustry—airlines, energy and banks are re- China’s own previous dalliances with the
country’s biggest state firms. He cautions cent examples—even though these firms private sector. China’s economic reforms
that, as long as state-owned enterprises are supposed to be commercial rivals. This began after 1978 in the countryside, where
(SOEs) are dominant in an industry, the makes a mockery of competition, as does most people lived in desperate poverty at
rule of law suffers as state assets are used to the fact that China’s state firms are rarely the time. Officials decided to allow rural
provide benefits to company bosses and targeted by antitrust authorities. entrepreneurs to start businesses; land was
political elites. Within the Communist Forty years after the death of Mao Ze- decollectivised and contracted out to farm-
Party hierarchy some state firms’ chairmen dong, who crushed the private sector, Chi- ers; and market prices began to erode the
have outranked the heads of the regula- na today still has some 150,000 SOEs. fixed-price system. Many ailing “township
tory agencies charged with supervising Many of its best-known companies, from and village enterprises” (including Wan-
them. The State-owned Assets Supervi- China Mobile to CITIC, are “red chip” xiang, now the world’s biggest indepen-
sion and Administration Commission (SA- firms. Nearly a fifth of the Fortune Global dent manufacturer of car parts) were al- 1

10 The Economist July 16th 2016

 THE WORLD IF BUSINESS AND ECONOMICS

trillion yuan in 2009. Count all 150,000-

1 2
Ever more mountainous odd SOEs today and that figure rises to over Spot the difference
China’s debt as % of GDP 100 trillion yuan in state assets. Return on assets of Chinese industrial
So, to be serious, the effort should be enterprises*, by ownership type, %
State-owned entreprises
bold, transparent and long-term. For exam- 10
Government 300
ple, a thoughtful plan to wind down hold- Non-state-owned
Private corporations
ings in several big industries currently 8
Households
dominated by the state—energy, telecoms
200 and transport, say—in stages over the next 6
decade could give enough time for markets
to absorb the inevitable wave of sell-offs, 4
100 acquisitions and bankruptcies. Successful State-owned
experience with privatisation in these in- 2
dustries around the world belies the Com-
0 munist Party’s claim that they are too stra- 0
2010 11 12 13 14 15 tegic to be left in private hands. 1999 2001 03 05 07 09 11 13 15

Sources: National statistics; Insiders will still try to game the system, Sources: CEIC; *7-month centred
Bank for International Settlements but this can be made more difficult (as it Gavekal Dragonomics moving average
was in the more sophisticated parts of
2 lowed to be run as private firms. This rural post-communist eastern Europe) by hold- the bold but, in the end, unsuccessful bid
“privatisation” drive did at least as much to ing competitive auctions that are open to by China’s Anbang Insurance Group for
reduce poverty and to spur economic all, including foreign investors. The gov- America’s Starwood Hotels & Resorts
growth and employment as did China’s ernment itself has proposed reforms to its Worldwide). Previously, he held big China-
subsequent opening to global trade and foreign-investment laws that would, at focused jobs at the IMF and Goldman
foreign investment. Alas, in the 1990s the long last, put foreign investors and domes- Sachs. From painful experience, he de-
party rolled back almost all of those rural tic rivals on an equal legal footing. Another clares that half-measures like “indepen-
reforms and related financial liberalisa- measure that would spread the wealth be- dent” boards do not work.
tion, and opted instead for stronger control yond the princelings would be the alloca- He wants President Xi Jinping to em-
over the economy. tion of shares from any privatisations to brace a privatisation plan that “sells off all
Before long, hard times again forced government pension schemes. This would SOEs to the world” over his remaining sev-
ensure a broad ownership of as- en years in office. Sequence the sales care-
sets and may help win over a fully, pull in strategic investors and put
The effort has to be bold, sceptical public worried about
dodgy dealings.
some shares into the state pension fund,
and this veteran China dealmaker thinks
transparent and long-term To ensure that competition
flourished, privatisation would
this can be done entirely on domestic capi-
tal markets. If it really happens, and is ac-
need to go hand in hand with an companied by reform of the rule of law, it
equally ambitious agenda of le- would prove transformative to China’s
Communist leaders to look to the private gal and institutional reform. In a paper for economy. As Mr Hu puts it, “it would be the
sector for salvation. In the late 1990s a the Paulson Institute, a think-tank, Curtis greatest sale on Earth.” 7
wave of privatisation and restructuring Milhaupt of Columbia University and
saw thousands of smallish state firms dis- Zheng Wentong of the University of Flori-
appear and tens ofmillions ofworkers lose da argue that China must “transform the
their jobs. This may seem like an embrace role of the state from an active market par-
ofmarket discipline, but Yasheng Huang of ticipant to the designer and arbiter of neu-
Massachusetts Institute of Technology ar- tral, transparent rules for market activity.” ASIAN ECONOMIES HAD
gues that it was flawed in two ways. They are rightly sceptical of the govern- MORE WOMEN IN WORK?
First, it was stealthy. Asset sales often ment’s timid plans for “mixed ownership
If South Korea, Hong Kong, Singapore
took place without proper legal and insti- reforms”, which involve selling off bits and
tutional frameworks. As a result, property pieces of a few SOEs to private investors and Japan boosted their share of
rights were insecure and assets subject to without yielding management control. women in work to Sweden’s level
subsequent state seizure as well as appro-

10%
priation by insiders. Second, leaders re- Beware of mega-zombies their annual GDP
mained wary of market forces, using pe- They are even more scathing in their cri- could increase
ripheral privatisations as part of a strategy tique of the government’s plans to consoli- by over
to retain political control. China’s leader- date the 100 or so biggest SOEs, many of
ship revealed that the objective of reform which are lumbering zombies, into just 40 or around
was to “grasp the large, release the small”:
the chief aim was not to increase the effi-
or so mega-zombies: “These massive con-
solidations will accentuate the role of the $670 billion
ciency of the state sector or to boost con- state in key sectors and will generate even
sumer welfare through competition. Rath- more rent-seeking activities… [and] addi-
er, it was to create bigger, more dominant tional deadweight loss that would be gen- Female labour-force participation rate*, 2015, %
national champions that would remain erated by the creation of monopolies.”
tightly controlled by the party. Few know China’s rocky history of 55 60 65 70 80
The proof is in the pudding. SASAC saw market reforms as well as Fred Hu does. He
its asset base (of the biggest state firms) in- runs Primavera, a prominent investment Sources: ILO; IMF; The Economist *15- to 64-year-olds
crease from 7.1 trillion yuan in 2003 to 21 fund in Hong Kong (which was involved in

The Economist July 16th 2016 11

 BUSINESS AND ECONOMICS THE WORLD IF

IF ECONOMISTS REFORMED THEMSELVES has come about when they are willing to
mix with others. Economists should get

A less dismal science out more and mingle with historians and
sociologists.
All this needs to start with the way
economists are trained—a final area for re-
form. Today, graduate economists undergo
“maths camp” before being bombarded
with lectures. Too little focus is on getting
real-world experience: visiting job centres,
Reforming economists’ tools, temperament and training could help to mitigate, if not to
meeting entrepreneurs, spending time at a
prevent, the next crisis
central bank or the national statistical

B
ASHING economists is scarcely out of could help test the relative power of com- agencies. Such work experience would in-
fashion. They are accused of being peting theories. With a better sense of crease the chances of theory being tied to
blinkered by mathematical models, what is influencing behaviour in the econ- practice. Exams would test critical reflec-
of overestimating their predictive powers omy, economists might become less blink- tion (for example, awareness of where the
and churning out narrow-minded gradu- ered by their own theory, and better able to results a student is “proving” might not
ates. Some folk see them, rather than bank- foresee the next crisis. Meanwhile, they hold true) as much as algebraic prowess.
ers, as the real villains behind the global fi- would be wise to repeat (daily) the words:
nancial crisis, asking, as Queen Elizabeth is “My model is a model, not the model.” Hedgehogs v foxes
said to have done at the London School of New technology points to another de- Economists face two competing criticisms.
Economics, why no one had seen the cred- sirable reform: the need for better numbers Either they are lambasted for their arro-
it crunch coming. to work with. The main gauge used to mea- gance or accused of being unwilling to
John Maynard Keynes once said that “if sure the size and progress of the economy, draw firm conclusions (in exasperation at
economists could manage to get them- GDP, was designed for a different era, and the hedging of his economic adviser, Presi-
selves thought of as humble, competent looks increasingly flawed for a modern dent Harry Truman requested a one-hand-
people on a level with dentists, that would world of services, apps and bots. Econo- ed economist). Dani Rodrik of Harvard
be splendid.” How could they achieve mists have work to do to improve these ba- University, drawing on an idea from Isaiah
that? Through a strong dose of what they sic tools of their trade. Berlin, splits economists into two camps:
(and this newspaper) often prescribe for Their tendency to look down on other hedgehogs and foxes. Hedgehogs take a
others: structural reforms. social sciences is ripe for change, too (one single idea and apply it to every problem
To start with, that means tackling what study showed that articles in the American they come across. Foxes have no grand vi-
Paul Romer, an economist at the Stern Economic Review cite the top 25 political- sion but lots of seemingly contradictory
School of Business in New York, calls the science journals one-fifth as often as arti- views, as they tailor their conclusions to
profession’s “mathiness”. The mountain cles in the American Political Science Re- the situation. More foxlike behaviour will
of algebra in economic research is suppos- view cite the top 25 economics journals). not by itself prevent the next crisis; politi-
edly meant for clarification and rigour, but Some of their most influential research—in cians anyway will still be making the deci-
is too often deployed for obfuscation. Used behavioural economics, for example, sions. But it could help policymakers be
responsibly, maths lends useful structure which fuses psychology and economics— better prepared. 7
to economists’ thinking, and weeds out
sloppiness. But there needs to be a purge of
maths-for-maths’-sake.
Related to mathiness is model-mania.
Economists are good at reducing a compli-
cated world to a few assumptions, then
adding bells and whistles to make their
models more realistic. But problems arise
when they mistake the map for the territo-
ry. In 2008, on the eve ofthe financial crisis,
Olivier Blanchard, then chief economist of
the IMF, published a paper celebrating the
convergence of thought within macroeco-
nomics. Unfortunately, some key assump-
tions behind that consensus turned out to
be wrong. It is now clear that different
models of asset bubbles and banking cri-
ses would have better prepared policy-
makers for the Armageddon that ensued.
So economists should treat consensus
with suspicion, and remain open to the
idea that there might be more than one ex-
planation of what they can see. Financial
stability could represent policy success, for
example, or it could mean that regulators
are becoming complacent and hidden
pressures are building. In future, big data
and new “machine-learning” techniques

12 The Economist July 16th 2016

 The world is crazy.
But at least it’s
getting regular
analysis.
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 THE WORLD IF SCIENCE AND TECHNOLOGY

ture of the see-through ocean: its empti-

ness. People tend to focus on the bits of the
ocean that are full oflife (such as reefs) or of
trade (such as shipping lanes). But these are
only a tiny fraction of everything there is.
And in much of that everything, there is
close to nothing. Spread those ships out
evenly and each one of them would have
3,000 square kilometres of ocean to her-
self—the size of the state of Rhode Island.
Ships are not the only man-made arte-
facts that float across the seas. There is an
alarming amount of rubbish—in some
places it outweighs the phytoplankton. As
ecologically delinquent as this is, in terms
of its bulk the problem would still be easy
to overlook in a transparent sea. The “great
Pacific garbage patch” consists of millions
of tonnes of rubbish floating in the slowly
circulating North Pacific Gyre. But the size
of the gyre is such that the rubbish adds up
IF THE OCEAN WAS TRANSPARENT to just five kilograms per square kilometre.
Indeed, rather than filling the ocean,

The see-through sea humankind has been working hard at

emptying it. Tuna stocks are thought to be
half of what they were before modern
commercial fisheries. Estimates of Atlantic
whale populations based on DNA suggest
they used to be between six and 20 times
greater than they are today.
The opacity of the ocean makes a
The ability to peer unhindered into the deep would reveal a host of wonders—and have
straightforward numerical census of what
huge practical consequences
remains impossible. But Simon Jennings

T
HE surface of Mars is better mapped tres down from the surface. It would be too of CEFAS, a research centre in Lowestoft, in
than that of the Earth. Every dry, dusty sparse to be seen over much of the planet; England, and Kate Collingridge have made
square metre of it has been peered at but in some patches, and close to some a brave stab at estimating how many fish
by cameras and illuminated by altimeters. shores, it would be a visible layer of light there are in the sea by applying ecological
The lion’s share of the Earth’s surface has and life. This is the world’s stock of phyto- modelling. Their result is strikingly small: 5
never been shown any such attention. This plankton, tiny photosynthetic algae and billion tonnes of fish weighing between a
is not because Mars is more interesting. It is bacteria. Its total mass is far less than that gram and a tonne. If piled together, those
because it suffers from an insufficiency of of the plants that provide photosynthesis fish would not even fill Loch Ness, which
ocean. In most respects, this is to its detri- on land, but every year it takes 50 billion though an impressive body of water is nu-
ment; seas are fascinating things that make tonnes of carbon out of the atmosphere, gatory compared with the whole ocean.
planets far more habitable. They also al- turning it into organic matter for the Even if Dr Jennings is off by a factor of ten,
low paddling, whalesong and other de- ocean’s inhabitants to eat. Scant though the volume of fish would still be less than
lights. But they do rather cover things up. the planktonic biomass is, it does roughly that of Lake Geneva. Broadly, the world
Water absorbs light. Despite this, seeing as much biogeochemical work as all the boasts less than a minnow for every Olym-
through a few metres of it is not too hard, continents’ forests, savannahs and farms. pic swimming pool of its seawater.
sediment permitting. And some wave- Yet life in the ocean can still mount sub-
lengths can penetrate a lot more. A ray that Water, water, everywhere lime spectacles. Nicholas Makris of MIT
is just the right shade of blue will still be From the smallest of the surface features to and his colleagues have observed fish in
half as bright after passing through 100 me- the largest, you would also see more than the Gulf of Maine using a sonar system
tres as it was when it started. If you were to 111,000 ships hanging as if suspended in that comes as close as almost any technol-
sink into the ocean looking up, that shade empty space, according to estimates of the ogy to making this article’s premise real,
of blue would be the last thing you would size of the world’s merchant fleet from IHS. and rendering the ocean transparent. Em-
see. But even it would eventually fade to They are the workplaces, and sometimes ploying longer wavelengths of sound than
black. Almost the whole ocean floor is dark homes, of at least 1.5m seafarers, and more most sonars, and taking advantage of light-
to those that inhabit it, and invisible to all. than 500 liners provide temporary accom- ning-fast processing power, it is possible to
What if it were not—if light could pass modation to hundreds of thousands of create time-lapse movies of sea life over
through the ocean as easily as it does passengers, too. This disassembled city of tens of thousands of square kilometres.
through the atmosphere? What if, when steel carries some 90% of all international Dr Makris’s team have been able to
you looked down from a trans-Atlantic trade by weight. Its wandering buildings quantify the processes by which herring
flight, the contents of the ocean, and its can carry, between them, over 1 billion can gather themselves into shoals many ki-
floor, were as clearly visible as if seen tonnes of cargo: a mass equivalent to one lometres long and comprised of hundreds
through air: what would you see? cubic kilometre of water, a little less than a of millions of fish, watching their depth
The most persistent feature would be a billionth of the total volume of the ocean. and behaviour change with the time of
thin green mist extending a few tens of me- That brings home the most striking fea- day. In the Gulf of Maine they were able to 1

The Economist July 16th 2016 15

 SCIENCE AND TECHNOLOGY THE WORLD IF

2 distinguish the calls and songs of various laying of ever more cable ever more pre- ly almost completely uncharted.
species of whale attracted by the herring cisely across the abyss; according to Tele- Since the 1990s radar-altimetry has al-
shoals, to track them as they communicat- Geography, there are now a million kilo- lowed oceanographers to fill in the 80% or
ed with each other and to distinguish their metres of submarine cable. Every second so of the ocean floor that sonar bathyme-
different herring-snaffling strategies. they can carry 31 terabits across the Pacific, try does not cover. The latest GEBCO map
55 across the Atlantic. still required some interpolation. But in
And a thousand thousand slimy things Because GPS satellites allow ships to both resolution and consistency such hy-
Other acoustic research has revealed a fun- know exactly where they are, and thus ex- brid maps are far better than what went
damental feature of ocean life invisible actly which bit of the sea floor they sit before. In some ways looking at these
from the surface—a layer of small fish and above, new sonar technology has also rev- maps comes as close as one can get to see-
other creatures that spend their days at olutionised mapping. The 2014 edition of ing right through the ocean.
depths of a few hundred metres before ris- the General Bathymetric Chart of the
ing to the surface at night. In the early days Oceans (GEBCO), an enterprise begun by The charmèd water burnt alway
of sonar this was regularly confused with Albert I of Monaco in 1903, includes sonar There is a subtle distortion, though. Maps
the sea floor, because of the way the fish’s depth data from thousands of voyages, of the ocean floor are typically rendered in
bladders resonated with the sonar’s sound covering more than 60m square kilo- a “shaded relief” style (and computers
waves. The daily rise and fall of this “deep metres of the ocean floor. But even that rep- now add a spectrum of “false colour”, with
scattering layer” would, in a transparent resents only 18% of the ocean floor. The rest red for high and blue for low). For this to
ocean, be revealed as one of the largest is mapped indirectly, by satellites. make sense to the untutored eye, the relief
Whereas light is absorbed in question has to be exaggerated, typically
Altimetry has discovered at least by water, some forms of elec-
tromagnetic radiation bounce
by a factor of ten or 20.
So people have become used to seeing
10,000 seamounts right off it. Satellites can thus
use radio waves to get a very ac-
the ocean-floor world as interestingly crag-
gy. It really isn’t. In maps the drops that sep-
curate picture of the height of arate continental shelves from the abyssal
the ocean’s surface. This varies plains far below them fall away like the
mass movements of the animal kingdom. from place to place, reflecting the uneven- edge of a flat Earth; in fact they have typical
Acoustic techniques produce pictures ness in the solid Earth’s gravitational field gradients of about 7%. Were it not for the
of the ocean’s floor, as well as its contents. that comes from the planet not being a per- water, few features in the ocean would pre-
For most of the 20th century, though, the fect sphere. The sea level is, for example, sent an off-road car with much difficulty.
relevant measurements were sparse. Thus slightly higher above a seamount—an Marie Tharp drew her maps in this way
the pioneering maps put together by Marie ocean-floor protuberance that does not in part to emphasise the new features she,
Tharp and Bruce Heezen of Columbia Uni- make it to the surface—because the water Heezen and their colleagues had discov-
versity in the 1950s and 1960s—which first feels the gravitational attraction of its ered. But it was also because the obvious
identified the structure of the mid-Atlantic mass. This difference is only a couple of alternative was no longer legal. Earlier
ridge, and of the faulted “fracture zones” centimetres; but satellites can measure it. 20th-century maps of the ocean floor had,
perpendicular to it—often relied on depth Altimetry has discovered at least like maps of the land, used contours. In the
data from just a few ships making single 10,000 such seamounts. Statistics suggest 1950s the precise depths necessary for
crossings of the ocean to get a sense of vast that hundreds of thousands of smaller making contour maps were classified by
swathes of the terrain below. The maps ones remain to be found. Added together the American government. The deep seas
were works of extrapolation, interpolation that’s an ecologically interesting habitat were becoming a cold-war battlefield.
and inspiration, not mere measurement. about the size of Europe that was previous- Being unseen had given submarines a1
Nevertheless, they had a huge impact.
They let geologists visualise the processes
at work in the nascent theory of plate tec-
tonics; those mid-ocean ridges and frac-
ture-zone faults turned out to be the
boundaries of the “plates” into which
plate tectonics cut the surface of the Earth.
They were mind-expandingly right in their
synoptic vision, if frequently inexact and
sometimes mistaken in their specifics.
The side-scanning and “multibeam” so-
nar introduced for civilian use in the 1980s
allowed a ship to map not just a thin strip
of sea floor directly beneath it but a rich
swathe to either side, and to provide detail
on its texture, not just its depth. At first this
acuity was used mostly for sites scientists
wanted to focus on, or artefacts of particu-
lar interest. UNESCO estimates that there
are 3m wrecks on the sea and ocean floors:
30 for every ship that now sails the surface.
Sophisticated sonar has found some of the
spectacular ones, such as Bismarck, and
others whose cargoes are of commercial
interest for salvage. It has also helped in the Tharp invents augmented reality

16 The Economist July 16th 2016

 THE WORLD IF SCIENCE AND TECHNOLOGY

2 tactical advantage since they entered wide- them, but that is not mandatory. The wings tems like that which he and his colleagues
spread use in the first world war. In 1960 of “seagliders”, which also rise and fall by have pioneered available for fisheries
the obscurity of the depths took on a strate- changing their buoyancy, allow them to management. As Dr Jennings points out,
gic importance, too. The nuclear-powered traverse large distances as they sink. They the seas are already transparent for a lot of
George Washington, launched that year, can operate autonomously for months at a fishing fleets, thanks to short-range fish-
carried 16 Polaris missiles with nuclear time and traverse whole ocean basins. finding sonar and spotter planes. Letting
warheads. That her location when sub- There do not yet appear to be any sea- managers see what is going on might be a
merged could not be known meant there gliders designed for detecting or tracking boon for conservation in some fisheries.
was no way for all of America’s nuclear submarines—but in April DARPA, the Pen- Charting of the deep seas will continue,
weapons to be destroyed in a pre-emptive tagon’s developer of futuristic technology, too. The task is daunting: Larry Mayer of
attack. The appeal of this “assured second commissioned Sea Hunter, a small non- the University of New Hampshire says
strike” capability saw missile submarines multibeam-sonar mapping of
adopted by Russia, Britain, France, China,
Israel and India. These days about a dozen
The ocean will surely become all the remaining deep ocean
would take 200 years of a re-
nuclear-missile-carrying submarines
(known as SSBNs) patrol the ocean at any
more see-through search ship’s time. But bit by bit
it will be done. In June a GEBCO
given time. If water were perfectly trans- forum in Monaco discussed the
parent you would see them, plump tubes way forward.
of menace hanging in the void. And if you submersible trimaran that needs no crew, Being able to see is only the start; then
could see them, you could target them. but carries sensors. It is intended to prove you have to learn to look, to distinguish, to
There is a certain irony, then, that the that once an enemy submarine is located it understand. What ecological patterns
technologies which have done most to can be trailed indefinitely. could be discerned from those as yet un-
make the ocean transparent have come Sea Hunter is designed to track conven- mapped seamounts? What secrets lie in
from the armed forces. The American navy tional diesel-electric submarines, not the ecosystems of the deep sea? What ar-
developed multibeam sonar to under- SSBNs. The American navy got a shock in chaeological surprises may lurk in those
stand the submarine battlefield. The gravi- 2006 when a previously unnoticed Chi- millions of wrecks—or in the abandoned
tational-field mapping that lies behind sat- nese diesel-electric boat surfaced less than homes of those who, in the last ice age,
ellite altimetry was needed so that 10km from one of its aircraft-carriers, Kitty lived in plains that today are sea floors?
submarines and their missiles would bet- Hawk, in the Philippine Sea. If it wants to Where is the heat the Argo floats are tracing
ter know where they were and what they keep its carriers safe it needs to be able to ending up—and how likely is it to come
would hit. The cold war produced the ex- keep better tabs on such craft. But what can back out? What sorts of clever manage-
perts as well as the technology: Dr Makris be used for one sort of submarine today ment could restore some of the riches that
listened for submarines at the Office for might be adapted to track another tomor- have been fished away?
Naval Research before he listened for her- row. It is likely that drones above, on or be- There is a fear that making things visi-
ring off Maine. If you were interested in low the surface will come to play a much ble will strip them of their mystery. Maybe
ocean remote sensing, he says, you more bigger role in anti-submarine warfare; the so. But it need not strip away curiosity or
or less had to: “They had all the great toys.” underwater ones, though, will still have to wonder. As mappers of both Mars and the
The end of the cold war saw a big drop deal with the sea’s opacity. A swarm of air- ocean bear witness, there is no void, abys-
in undersea sensing as a military priority, borne drones can co-ordinate itself by ra- sal or interplanetary, that those feelings
but its strategic importance is hardly di- dio, but things are harder underwater. cannot fill, if given a chance. 7
minished. Britain, for example, is deciding New data-processing approaches could
whether to renew its SSBN fleet. It matters also make submarines easier to see. Amer-
whether the submarines will, in the 2050s, ica’s Ohio-class submarines displace
be as impossible to trace as they are today. 18,750 tonnes when submerged. Moving
such a big object, even slowly, will leave a
Under the keel nine fathom deep wake of sorts on the surface. Computers ALL THE ICE CAPS MELTED?
What new technological approaches are getting better and better at picking
might be able to make the ocean transpar- small signals out of noisy data. And being 13 million km2
ent to submarine-hunters? Two are widely metal, submarines have an effect on the FLOODED
discussed: drones and big data. Uncrewed Earth’s magnetic field, another potential
surface vessels and submersibles might be giveaway. Flying drones equipped with
More than the
able to field far more instruments more new sorts of magnetometer could make The world’s combined areas
cheaply than navies have in the past. And submarine-hunting easier. total land area of Canada and
new data-processing capabilities might be Turning these possibilities into opera- km2 Mexico
able to make sense of signals that would tional systems could make vital parts of 148 million
previously have been swamped by noise. the ocean—for example, some of the seas
Thousands of remote-sensing plat- off Asia—transparent. Scaling them up to
forms are already scattered around the cover whole ocean basins, though, would
ocean. The Argo array currently consists of be a huge endeavour. Remember the first Global sea levels
3,918 floats which submerge themselves to insight of the transparent ocean: very big, could rise by

66
about 2,000 metres and then return to the very empty. That array of 3,918 Argo floats
surface, measuring temperature and salini- works out as one per 340,000 cubic kilo-
ty as they rise and fall and sending their metres of water. And SSBNs are sneaky.
data back by satellite. By gauging the If the SSBNs can still find somewhere to
METRES
amount of heat stored in the ocean they lurk, for now, the ocean will surely become
are crucial to studies of climate change. more see-through, especially at the edges. Source: “What If All the Ice Melts?” by Wm. Robert Johnston
These floats go where the currents take Dr Makris would like to make sonar sys-

The Economist July 16th 2016 17

 SCIENCE AND TECHNOLOGY THE WORLD IF

IF COMPUTERS WROTE LAWS demic paper, written in 2015, by two pro-

fessors, one at the University of Chicago,

Decisions handed down the other at the University of Toronto*.

They envisaged machines able to assem-
ble data and produce predictive outcomes,

by data and then distribute these everywhere, in-

stantly, turning rules and standards upside
down and replacing them with micro-di-
New Haven, Connecticut, circa 2030 rectives that were more responsive to cir-
Might future law-school graduates look to machines rather than the judges, rules and cumstances, and rational.
standards that have underpinned the legal system? One of the paper’s co-authors had gone
so far as to join a startup combining law

S
ONIA picked up her hoverboard, put and machine learning to provide answers
it under her arm and trudged up three about complex areas of tax, such as how to
flights of stairs illuminated by stained determine if a person is an employee or in-
glass to a vast room with old portraits of dependent contractor, or whether an ex-
judges and shelves of dusty books. New penditure should be treated as current or
students wondered why all this paper ex- depreciated—murky stuff that even tax au-
isted. All treaties, regulations and court de- thorities preferred coming from machines.
cisions had long since been digitised. The That was novel in 2016. Each year since
answer for the continued accumulation of then it had expanded.
paper, students learned, was that the Students aspiring to work in invest-
American Bar Association required it. It ment management now routinely used
was by itself a lesson in law, Sonia conclud- machines to assess whether a shareholder
ed. Regulation never kept up with reality. in a firm that was sold through a leveraged
The move to electronic forms of infor- buy-out would be retrospectively liable for
mation was briefly believed to be a mo- a “fraudulent transfer” if the company sub-
mentous change in the law. In retrospect it sequently collapsed, a risk that defied be-
was little more significant than going from ing addressed because it was so hard to
a pencil to a pen: different means, same measure. The entire world of negligence
end. The struggle for every student now had been transformed. Live in a remote lo-
was to understand how technology was cation and it was fine to install a swim-
turning the foundations of law upside ming pool. A child moves nearby and a
down. Specific rules and broad standards, computer sends out a notification that the
the two approaches through which law pool has become an “attractive nuisance”
was applied for thousands of years, were and a fence should be built immediately.
becoming obsolete, along with the judges The physical topography may not have
who weighed in with the last word. changed, but the legal one had.
Change was everywhere. On Sonia’s Criminal law once revolved around ex-
scoot to school, streets had been empty so delayed concerned her mangled hand. The ternally observed facts. Then DNA evi-
traffic lights were off. Who needed them? computers noted that courts had levied dence entered the picture. Now, cases often
Preset rules shifting red to green had been heavy penalties on hospitals when the hinged on data about pulse rates, intoxica-
replaced by “micro-directives”, really a treatment of a hand resulted in the loss of tion and location, drawn from the wrist-
standard, tied to safety and efficiency. As dexterity, since that had an impact on life- bands that replaced watches. It was much
traffic picked up, lights came on, pro- time earnings. Treatment, the screens said, fairer—but creepy, because the facts came
grammed to optimise the flow. Needs should await the arrival of a specialist. from perpetual monitoring.
could change in an instant, such as when a It all seemed “reasonable”—that essen-
car hit a fellow hoverboarder. The micro- tial legal word—and even smart. But not A formula for justice
directive controlling the lights ensured her fun. Over-strict rules could be challenged, The most important introductory course
ambulance received all green lights to the standards could be vague but allowed for faced by Sonia and her classmates had
hospital. That, of course, caused problems responsibility and initiative. Not so micro- long ceased to be about contracts or proce-
for others. A woman in labour was held up directives. Among the portraits on the li- dure; it was algorithms and the law. One
by the sudden red lights and gave birth in brary wall where Sonia studied was one of student melded data on work attendance,
the back of a cab. Sonia understood why Potter Stewart, a Supreme Court justice high-school grades, standardised tests and
all the most ambitious third-year students famous for his definition of pornography: documented preferences in music into a
were hoping to get jobs at government he knew it when he saw it. Now, focus program for use by states to determine an
agencies vetting the micro-directives that groups evaluated a handful of films and individual age of consent for sex and alco-
computers put into practice. They deter- television shows in terms of their impres- hol. She was voted by Sonia’s class the
mined who got the green lights. sion of what might be offensive. The re- most likely to have a portrait added to the
Even hospital treatment was changing. sults and the material were then evaluated library wall—the first of many replacing
Micro-directives had replaced the broad by computers which rated every produc- old judges, who had somehow gained
standard controlling medical care: that a tion released, or not released, to the public. fame for making decisions that now
doctor aspire to act in a patient’s best inter- When, Sonia wondered, did the system seemed hopelessly devoid of data. 7
est. Her injured friend was scanned and begin to take this effective, but nonetheless ...........................................................................
prodded; then, as she was wheeled into oppressive, shape? She had inadvertently * “The death of rules and standards”, by Anthony J.
the operating room, screens listed proce- spoken out loud, prompting the screen she Casey of the University of Chicago Law School and
dures to be done, and one that should be carried to display the first draft of an aca- Anthony Niblett of the University of Toronto

18 The Economist July 16th 2016

 THE WORLD IF SCIENCE AND TECHNOLOGY

The Economist July 16th 2016 19

 HISTORY THE WORLD IF

WHAT IF GERMANY HAD NOT REUNIFIED?

A German question
BERLIN
Joining East and West together within NATO and the European
Union was the worst option, except for all the others

W
HEN the Berlin Wall fell in November 1989 it quickly be-
came clear that the cold war was over. The reunification of
Germany, however, was not a foregone conclusion. The
West German government’s priority was freedom for the East
Germans, with no timetable for reunification, says Horst Teltschik,
who was then advising the chancellor, Helmut Kohl. “Internally,
we thought at the end of ’89 that it would take five to ten years.”
Even the East Germans at first could not conceive of reunification;
they proposed vague “confederative structures”.
Moreover, the leaders of three of the four Allied Powers of the
second world war, which still had a say in German affairs, initially trauma on Western expansion beginning with Germany reunited
opposed reunification: Britain’s Margaret Thatcher, France’s Fran- as part of NATO.
çois Mitterrand and the Soviet Union’s Mikhail Gorbachev. They That narrative, however, leaves out what would have taken
feared resurgent German power (as Thatcher is said to have put it, place in East Germany had it remained a separate country. Its
“We’ve beaten the Germans twice. Now they’re back!”). Only economy was on the verge of collapse in 1990, recalls Lothar de
America’s George Bush senior was in favour of German unity Maizière, who was East Germany’s last leader in 1990 (and its only
from the start. democratically elected one ever). In the winter of 1989-90, several
So history could easily have gone another way, and kept two thousand East Germans were migrating west every day. Their
Germanys. Europe would have evolved very differently. Looking chant was: “If the D-mark comes, we stay/or else to her we move
back from 2016, two of today’s crises might have been avoided. away”. Without reunification, says Mr de Maizière, East Germany
would have been emptied of all but the old and frail.
Crises? What crises? East Germany was thus different from, say, Poland or (from
First, there might have been no euro crisis. Reunification put a 1993) the Czech Republic. Poles and Czechs spoke their own lan-
strain on the economies of the other11 members of what was then guage and did not have West German citizenship. They had no
the European Community. Even before political unity in October choice but to stay, reform and rebuild. Under the West German
1990, East Germany’s money was exchanged into West Germany’s constitution, however, East Germans had an automatic right to
D-mark at an economically fantastical rate of 1:1 for prices, wages, West German citizenship. “It was a race between capital going east
rents and small savings. Germany then ran budget and trade def- and people going west, and the people were faster,” says Karl-
icits to finance reconstruction in the east. And western Germany’s Heinz Paqué, an economics professor in Magdeburg.
trade unions, afraid that the east’s low wages would hollow out A depopulated East Germany could have become a failed state,
their collective-bargaining powers, colonised the east, winning destabilising all of central Europe. Such a “wild east” could either
huge pay rises for easterners. have run into conflict with Russia in a pre-run of today’s Ukraine
All this prompted Germany’s Bundesbank to raise interest crisis, or chosen “resubmission” to Russia, thinks Ulrich Speck of
rates to “keep the D-mark credible”, recalls Otmar Issing, who was the Transatlantic Academy, a think-tank in Washington, DC. Nei-
on its board at the time. Because the Bundesbank, through its ther sounds appealing. To stabilise central Europe, West Ger-
weight, influenced interest rates in all of western Europe, Italy, many’s allies, even Britain and France, would before long have
France and other economies were burdened with higher rates begged it to rescue the failed eastern state. This would eventually
than they should have had. Indirectly, the trend even forced Brit- have led back to reunification. But “that path would have been
ain to drop out of the European exchange-rate mechanism in 1992. more chaotic and more dangerous,” says Mr Teltschik.
Without reunification, moreover, Europe would have moved As it happened, the great powers came to that conclusion by
much more slowly, if at all, towards the euro. The idea of a com- themselves in 1990. The breakthrough occurred on June 3rd, dur-
mon currency predated the fall of the Berlin Wall. But an acceler- ing a meeting between Mr Bush and Mr Gorbachev. Until then Mr
ated march towards it was the precondition that Mitterrand, who Gorbachev had demanded that a reunited Germany be neu-
viewed the D-mark as the symbol of German power, demanded tral—in effect, a “Finlandisation”. Mr Bush casually opined that the
from Mr Kohl in return for blessing reunification. Without that matter was really for Germans to decide. Mr Gorbachev did not
time pressure weaker EU economies could have continued deval- contradict him. And so history turned.
uing against the D-mark when needed. They would have had time Not without costs. Mr de Maizière recently asked a Czech
to adjust before eventually adopting the euro. friend how the experiences of Czechs and eastern Germans differ
Second, relations with Russia might be less fraught. A smaller today. Czechs, his friend replied, compare their lives now with
European Union with a smaller Germany could have continued their lives in the past, and are happy; eastern Germans compare
its own “deepening” instead of prematurely “widening” towards their lives with those of western Germans, and are unhappy.
the east, says Mr Teltschik. Russian troops would not have had to Czechs are proud that they changed themselves; eastern Germans
leave East Germany in a hurry. NATO could still have expanded know they were changed by westerners. Many are alienated and
eastward later, and Russians would still have been traumatised by follow populist parties. This is the price for a stabler Europe than
their bloc’s disintegration. But they could not today blame their any alternative scenario could have offered. 7

20 The Economist July 16th 2016

 The Economist July 16th 2016 39
Middle East and Africa
Also in this section
40 Twin crises in Mozambique
41 Zambia’s pressured press
41 Legal woes for Binyamin Netanyahu
42 Egypt’s uncivil service

For daily analysis and debate on the Middle East

and Africa, visit
Economist.com/world/middle-east-africa

Land ownership al Food Policy Research Institute (IFPRI).

“The more you increase the cost, the more
Title to come likely it is that urban elites and men with
more education will be able to register the
land in their names, rather than poor peo-
ple, the less educated and women.”
Being able to prove you own your land
may be a necessary condition for using it as
NAIROBI
collateral, but a title deed does not guaran-
Property rights are still wretchedly insecure in Africa
tee that anyone will lend you money. As

C OSMAS MURUNGA was always

proud to show off his mud-walled
home, set in a clearing on the wooded
ary tenure, with rights to land rooted in
communities and typically neither written
down nor legally recognised. In 31 of Afri-
Abhijit Banerjee and Esther Duflo, two
economists, observe in their book “Poor
Economics” (2011), banks need a lot more
slopes of Mount Elgon; to explain how his ca’s 54 countries, less than 5% of rural land information to judge borrowers’ credit-
people coexisted with, and cared for, the is privately owned. So giving peasants title worthiness and be sure of repayment. And
forest and its wildlife on the border with to their land seems like an obvious first the administrative costs of offering very
Uganda. But that home is no more, burnt to step towards easing African rural poverty. small loans to very small farmers, even
the ground by around 50 Kenya Forest Ser- However, it has proven extremely hard. those with collateral, are often prohibitive.
vice (KFS) rangers and police, along with Rwanda, for example, rolled out a pro- Africa’s rickety infrastructure does not
200 other dwellings, on June 20th and 21st. gramme over three years, whereby local help. Where there are no roads or ware-
“We lost everything,” he says. surveyors worked with land owners and houses to help get crops to market, many of
Evictions are almost routine for the their neighbours to demarcate and register the benefits of formal tenure will go unre-
Ogiek, a group of around 80,000 indige- 10.3m parcels of land. By the time the alised. And legal property rights offer less
nous hunter-gatherers who have suffered scheme was completed in 2013, 81% of plots protection in countries where big men can
repeated expulsions since being moved by had been issued with titles, at relatively flout the law with impunity—a particular
the British colonial government in the low cost; investment and women’s access problem in Africa.
1930s. Yet this one still came as a surprise: to land have both improved. But even a rel- Customary rights have the advantage
the community is in the middle of negoti- atively well-organised place like Rwanda that they already exist, people understand
ating a settlement with the local govern- has had problems keeping records up to them and they offer at least some security.
ment that should see formal recognition of date when land is sold or inherited. “Law and policy should recognise what is
its right to live, graze livestock and forage working on the ground. So if it is custom-
on land it has inhabited for centuries. This land is your land? Prove it ary rights, so be it,” says Esther Mwangi of
In all rich countries, property rights are In Kenya a large-scale titling programme the Centre for International Forestry Re-
secure. Formal, legal title makes it easier to was carried out in colonial times and car- search. A USAID survey conducted in Ethi-
buy, sell and develop land. Buyers can be ried over to independence. The first presi- opia, Guinea, Liberia and Zambia found
confident that the seller really has the right dent, Jomo Kenyatta, and his cronies that less than a third of people had experi-
to sell what he is selling. Owners can use bought the huge estates of white settlers enced land disputes. About the same num-
their property as collateral, perhaps bor- who left. But the system is costly and ill- ber thought confiscation of, or encroach-
rowing money to buy fertiliser and better run. Most Kenyans cannot afford to update ment on, their land was likely. That
seeds. Legally recognising land ownership titles, and the government has not main- suggests that their property is far less se-
has boosted farmers’ income and produc- tained the registry. Recognising land rights, cure than it would be in any rich country,
tivity in Latin America and Asia. whether customary or titled, needs to be but not as insecure as one might expect,
But not yet in Africa. More than two- done as cheaply and simply as possible, given that less than 10% of households
thirds of Africa’s land is still under custom- says Ruth Meinzen-Dick of the Internation- have any documents proving their land 1
40 Middle East and Africa The Economist July 16th 2016

2 ownership in the latter three countries. Mozambique 300 km

Renamo attacks T ANZANIA
In recent years land grabs have some-
Fishy finances
(Jan-Jul, 2016)

M A LA W I
times made a mockery of customary own- Main roads Lake Malawi
Source: Armed Conflict Pemba
ership. In Ethiopia, all land is still officially

Z A M BIA
Location and Event
Lichinga
state-owned. The government has success- Data Project
Nacala
fully registered customary rights in some Tete
regions: about 30% of Ethiopian house-
MAPUTO

l
holds now have such documents. But it has

ne
A donor darling stumbles towards Quelimane

an
ZIMB AB WE
also leased to foreign investors large tracts

Ch
bankruptcy Chimoio

e
qu
of land in Oromia that have traditionally Beira

bi
“W

am
been used by smallholder farmers for HO cares about the tuna fish?” MADAGASCAR

oz
growing crops, grazing livestock and col- asked a fund manager a year or so

M
MOZAMBIQUE
lecting firewood—and brutally suppressed ago, explaining his decision to buy bonds SO UT H
the protests that erupted as a result. issued by a Mozambican government- AFRIC A INDIAN
In Ghana chiefs have used their right to backed company that planned to use the Maputo OCEAN
SWAZILAND
administer communal land to sell large money to buy a brand new fleet of fishing
tracts without their community’s permis- boats. Instead this investor, and many oth-
sion. Property rights are even less respect- ers, looked simply at the government guar- to defaulting.
ed in Zimbabwe. Over the past decade and antee that underpinned the deal: even if At the heart of Mozambique’s debt cri-
a half, Robert Mugabe’s government has not a single tuna were caught, the loans sis is a series of three foreign-currency
seized most of the country’s commercial would still be repaid, since the govern- loans that, between them, add up to about
farms with little or no compensation. Tra- ment would step in. 15% of GDP. The first was for $850m that
ditional chiefs have also sold communal That assurance was as full ofholes as an was meant to have been spent on a fishing
land to private firms, leaving many peas- industrial-sized tuna net. Although the fleet. Yet it seems to have bought ludicrous-
ants destitute. In South Africa the ruling Af- government has indeed stepped in to hon- ly expensive boats, and a chunk went on
rican National Congress (ANC) has gener- our the debt, its own finances are horribly high-speed patrol craft. The fishing boats
ally been trying to weaken individual land stretched, not least because it has bor- that did arrive generally spend their days
rights by declaring more land “commu- rowed far more than it had previously ad- tied up on the docks, though occasionally
nal”. This puts it under the control of chiefs mitted. Faced with a shoal of troubles, it one is seen puttering about inside the har-
and shores up the ANC’s rural support, now appears to be on the brink of default. bour. Earlier this year Empresa Moçambi-
since people afraid of being evicted tend to For a start, its decades-long civil war, cana de Atum (EMATUM), the state-owned
vote for whomever they are told to. which raged from 1977 to 1992, has re- tuna-fishing company, said it could not re-
In several places custom dictates that turned. Vehicles are being burned and peo- pay its debt. A rescue plan was cobbled to-
only men can inherit land. In Uganda sto- ple killed daily in parts of central Mozam- gether under which investors swapped
ries abound of widows being turfed off bique where Renamo, a former rebel their EMATUM bonds for ones issued by
their marital land by in-laws. One woman movement that became an opposition the government.
was thrown out of her home a week after party, has gone back to guerrilla warfare. That ought to have settled the matter.
her husband died in an accident; she had Highways, including those linking neigh- But just as the swap was going through it
refused to marry any of his five brothers, bouring countries such as Malawi to the was revealed that Mozambique had secret-
and her children were taken away to a sis- sea, are no longer safe to travel without a ly borrowed another $1.4 billion, or about
ter-in-law. Individual land ownership is of- military escort. Government forces are re- 10% of its GDP, making it the most indebted
ten ineffectual for forests and rangelands, turning Renamo’s violence with interest. country in sub-Saharan Africa (see chart).
which lose their value when parcelled up. Drought compounds the misery: in the The revelation shocked the IMF and west-
There is evidence that recognising the com- southern half of the country some 1.5m ern donors into freezing disbursements to
munal rights of indigenous forest commu- people are hungry after rains failed for the the government, whose budget relies on
nities can mean their lands are conserved second year in a row. And weak oil and gas international aid. It also led to red faces at
better. prices have slowed the development of re- Credit Suisse and VTB, the two banks that
Around Mount Elgon successive gov- serves in the north that many had hoped helped arrange the various bond sales.
ernments have argued that, when evicting would provide huge dollops of cash to pay Some of the investors who bought the
the Ogiek, they were protecting the forest off the country’s debts. Instead, investors bonds complain that the banks should
and the rugged moorland above it to make are running scared. Government bonds have given them more information.
way for a national park and forest reserve. are trading at about 70% of face value. This Yet it seems to have induced almost no
Yet where the woodland is under the con- week Moody’s, a ratings agency, down- shame in the government. The IMF and
trol of the KFS, whole areas have been graded the country, saying it was very near western donors are pressing for an inde-
razed to rent out to maize farmers. The pendent audit of the secret loans. Yet Filipe
Ogiek, by contrast, graze their cows in Nyusi, Mozambique’s president, is drag-
glades and above the tree line, relying on Worse than they thought ging his feet, prompting speculation that a
the forest to provide honey and medicine. General government gross debt, % of GDP, 2015 cover-up is under way.
Land rights are still a combustible issue Previously undisclosed loans Mozambique is not alone in its fiscal
in Kenya. The constitution of 2010, which 0 20 40 60 80 100 fishiness. Economic crisis is stalking Ango-
recognises customary tenure, was passed Mozambique la, which is also suffering from the slump-
after the post-election violence of 2007-08, ing price of oil, its main export. Its bonds
Ghana
sparked in part by politicians inciting Ka- tumbled earlier this month after Jose
lenjins in the Rift Valley to attack Kikuyu Angola Eduardo dos Santos, its president since
“squatters” who had migrated there for Zambia 1979, said the country was collecting barely
work. The constitution may help the Ogiek Kenya enough revenue to service its debt. It, too,
fight their corner. But until the men in pow- had been in bail-out talks with the IMF, but
Nigeria
er respect the law, the law can do little to called them off after seeing the fund’s con-
Source: IMF
protect property rights. 7 ditions on fighting corruption. 7
 The Economist July 16th 2016 Middle East and Africa 41

Zambia The government says that the closing of

the Post is about taxes, not politics. The au-
Cry press freedom thorities demanded $6m in unpaid taxes
and when it was not paid, seized the pa-
per’s assets, including its offices and print-
ing presses. A week later, on June 28th, Mr
M’Membe claimed to have a court order
declaring the seizures illegal and reopened
LUSAKA
the offices—only to be arrested for trespass
A lively government critic feels the heat
and using false documents.

I T IS mid-afternoon in Lusaka, the capital

of Zambia, and a newsroom has formed
on a pavement. Journalists tap away at lap-
Nobody disputes that some taxes have
gone unpaid. The dispute is over the scale.
The government says the Post has been un-
tops in the shade of a tree; phone conversa- derpaying taxes for a decade and that the
tions are held on mobiles against the taxman is acting independently. Mr
sound of traffic. Cables lead out of cars. An M’Membe says his business is far more up-
ice-cream salesman does brisk business to-date than most organisations in Zambia.
out of a cool box mounted on a bicycle. He points out that government-owned
The newspaper is the Post, a punchy competitor newspapers have had their tax
tabloid that is Zambia’s biggest indepen- debts written off, and accuses Mr Lungu of
dent media organisation. Opposite the ordering the crackdown personally.
makeshift office on the street are the real Proving who is right is impossible. But
ones—but the journalists cannot enter. The Zambia’s only source of independent Israel’s prime minister
paper, a staunch critic of President Edgar news is now struggling. And that has an
Lungu’s government, was shut down on
June 22nd by the Zambian tax authorities;
outsize effect. Though few people actually
buy newspapers, the Post’s stories—full of
The law looms
its reporters were pushed out with tear gas.
A weeklater, its editor, Fred M’Membe, was
lurid details about vote-rigging and cor-
ruption—are repeated on radio stations
larger
arrested and beaten. Coming barely a across the country. Now they will have to
JERUSALEM
month before elections, it is a sign of how rely more on the official media, which are
Binyamin Netanyahu’s legal
dissenting voices are being quietened. nakedly pro-government and all but ig-
tribulations are worsening
Press freedom is under assault in much nore the opposition. In a recent bulletin on
of Africa. Jihadists threaten and some-
times murder journalists in northern Nige-
ria and Mali. Eritrea’s despotic regime bans
public radio, eight out of the ten headlines
began with the words “President Lungu”.
For now, the Post carries on, printed on
A LACONIC announcement by Israel’s
attorney-general, Avichai Mendelblit,
confirmed weeks of rumours: his office
independent journalism entirely. Else- cheap paper at a secret site. It has plenty to and the police, he said, have indeed been
where, hacks are most likely to be harassed write about. On July 11th the government looking into allegations against Binyamin
around voting time, when politicians par- banned campaigning after a man was Netanyahu, the prime minister. Mr Men-
ticularly resent criticism. According to Re- killed at an opposition rally. “We are still delblit provided no further detail and
porters Without Borders, an NGO, press doing what we know best,” says Mr stressed that no criminal proceedings had
freedom declined in Uganda, the Republic M’Membe, flat cap on his head, apparently begun. The prime minister’s spokesman
of Congo and Djibouti over the past year— thriving despite having only just been re- later reminded reporters that Mr Netanya-
all of which had elections. In Burundi, it leased from jail. “For us, the most impor- hu had previously been the subject of alle-
has all but disappeared. Zambia seems to tant thing is to keep coming out every day.” gations “that turned out to be baseless”
be the latest country to fall victim. That, sadly, is a lot to ask. 7 and that “there will be nothing here ei-
ther—because there is nothing.”
It is true that Mr Netanyahu has never
been indicted, but in two separate cases, in
1997 and 2000, police investigators opined
that there was enough evidence to charge
him with fraud and breach of confidence.
Each time, however, they were overruled
by the then attorney-general, who criti-
cised Mr Netanyahu’s conduct but said it
fell short of criminal. The latest inquiry
may, however, be more menacing because
law-enforcement chiefs are considering a
whole raft of allegations regarding the
prime minister and his close circle. Among
other things, the attorney-general is look-
ing into the sources of funding for some of
Mr Netanyahu’s trips abroad more than a
decade ago when he was finance minister,
and into payments Mr Netanyahu received
from Arnaud Mimran, a Frenchman subse-
quently convicted of tax fraud.
In both cases the prime minister says
that all payments to him were above
Without fear or favour board. Another decision awaiting Mr Men- 1
42 Middle East and Africa The Economist July 16th 2016

2 delblit is whether to act on the police’s rec- have so far proved incapable of rallying are few incentives to perform well. It is im-
ommendations to indict his wife, Sara Net- around a viable challenger. Meanwhile, possible to get anything done without a
anyahu, over misuse of public funds for the main opposition group, Zionist Union, certain amount of baksheesh (bribery) and
the upkeep of their private weekend is being torn apart by infighting. wasta (connections). An MP called Amr al-
home. In recent days two members of Mr But a criminal indictment could force Ashkar tendered his resignation on ac-
Netanyahu’s inner circle—a former politi- Mr Netanyahu out of office. In recent times count of his own frustrations. “I have not
cal adviser and a former chief of staff— Israel’s legal system has shown itself fear- been able to solve a single problem,” said
have also been revealed to be under inves- less in the face of power. Ehud Olmert, Mr Mr Ashkar, who accused the bureaucracy
tigation for alleged dodgy dealings. Netanyahu’s predecessor as prime minis- of turning the lives of the poor “into a hell”.
This accumulation of corruption allega- ter, was forced to resign in 2009 over brib- Gamal Abdel Nasser, Egypt’s president
tions will not make Mr Netanyahu step ery allegations and is now serving a 19- from 1956 to 1970, expanded the public sec-
down. Although he has been in power for month sentence in prison, while possibly tor to create a middle class “that relied on
more than ten years in all, he has made it facing further convictions. the state for its livelihood and on which the
clear he has no plans to resign in the fore- The independence of the current law- state, in turn, depended for political sup-
seeable future and has already been con- enforcement chiefs has yet to be thorough- port”, writes Amr Adly of the Carnegie
firmed as the ruling Likud party’s candi- ly tested. Mr Mendelblit is Mr Netanyahu’s Middle East Centre, a think-tank. This sym-
date for the premiership in the next general former cabinet secretary and the police biotic relationship has hindered reform.
election. Not that he wants it to take place commissioner, Ronny Alsheikh, has rea- Egypt’s leaders have long purchased stabil-
soon: the current parliament could serve son to hope that one day he will become ity by increasing government wages and
for another three years and Mr Netanyahu head ofIsraeli’s security service, Shin Bet, a adding to the public payroll, so that it now
has only recently broadened his coalition. post in the prime minister’s gift. Indeed, contains some 7m employees. (By compar-
That said, there is no lack of disgruntled ex- both men owe their promotions to Mr Net- ison Britain, with 80% of Egypt’s popula-
ministers from Likud and other parties anyahu. They may soon have to decide his tion, has under 500,000.)
who would be glad to see him go; but they political fate. 7 Faced with a strained budget, Abdel-
Fattah al-Sisi, the president, has tried to
rein in the bureaucracy at least a tiny bit. A
Egyptian bureaucracy law he decreed last year, in the absence of
parliament and as he was to host a confer-
A movable beast ence of international donors, aimed to lim-
it some forms of compensation and tie bo-
nuses and promotions to performance.
Workers might even be sacked if they per-
formed poorly. Mr Sisi said that the state
only needed 1m workers—but still prom-
THE MOGAMMA, CAIRO
ised that all 7m would keep their current
Egypt’s bureaucrats can act fast when they want to
jobs and wages.

I T IS hardly surprising that Adel is having

trouble obtaining an official certificate of
movement, which documents a person’s
even more confusion than normal. A secu-
rity guard says he is moving next month.
An official down the hall says it will take
Even these mild reforms enraged public
workers, who claimed Mr Sisi was ram-
ming through drastic cuts. Several protests
travels and is often required for visas. Wait- six or seven months. But he doubts it will were held. In January a new parliament
ing outside the Mogamma, an enormous happen at all. The government has prom- approved most of the president’s decrees,
administrative building in downtown Cai- ised to close the Mogamma before. but rejected his civil-service reforms. (It
ro, he explains that he submitted his paper- Few expect the change of address, if it may soon vote on a modified version of
work a week ago, came back as instructed does occur, to improve Egypt’s bureauc- the law.) Concerns linger and Egypt’s bu-
and—after pushing through a mob of other racy. Government jobs are often handed reaucrats have proven that, when properly
applicants—was told to reapply. Amid all out based on connections, not skill. There motivated, they can take action. 7
the jostling he may not have noticed that
the government’s travel records were scat-
tered beneath his feet.
For over 60 years Egyptians have gone
to the Mogamma (roughly, “the complex”)
seeking official documents, such as pass-
ports and driver’s licences. They wait in
disorderly queues, often for hours, only to
be frustrated by indifferent civil servants.
Egyptians’ relationship with the building
is captured in one of the country’s most
popular films, called “Terrorism and Ke-
bab”, in which a man becomes fed up with
the bureaucracy, and inadvertently takes
the Mogamma hostage.
So it does not come as a surprise that
few Egyptians have mourned the govern-
ment’s decision to shut down the complex
and move its 30,000 employees to more re-
mote offices, supposedly to improve the
flow of downtown traffic. News reports
had this happening last month, but the
building is still occupied. Inside there is
 The Economist July 16th 2016 43
Europe
Also in this section
44 Ireland’s crazy economic statistics
44 Unwilling to trade even with Canada
45 Spain, Gibraltar and Brexit
46 Charlemagne: Single-market blues

For daily analysis and debate on Europe, visit

Economist.com/europe

Macron and France’s presidential election for closed, Eurosceptic, inward-looking sol-
utions. “The biggest challenges facing this
L’internationaliste country and Europe—geopolitical threats
and terrorism, the digital economy, the en-
vironment—are not those that have struc-
tured the left and the right.”
To this end, Mr Macron has enrolled
16,000 volunteers to knock on doors and
PARIS
gather ideas over the summer, and signed
The young economy minister wants to change French politics. If he runs, he may
up 50,000 members. His hope is to carry

W HEN he passed the lingerie shop, the

minister hesitated. It was not on the
schedule. But the store manager insisted,
left and right is being eroded by the rise of
the National Front (FN), once an extremist
fringe party, which seems better able to of-
out a different sort of politics, based on di-
rect contact with voters through social me-
dia and emerging local networks, in order
and Emmanuel Macron, France’s young fer hope to those disillusioned by the polit- to respond to political disillusionment. At
economy minister, found himself greeting ical elite and buffeted by globalisation. Un- his first political rally this week in Paris, be-
astonished shoppers as they leafed der Marine Le Pen, the anti-immigration, fore a packed audience of about 3,000 sup-
through piles of lace-trimmed bras. By the Eurosceptic FN has become the most popu- porters, Mr Macron hinted that he might
time he made it out, a crowd had gathered, lar party among working-class voters, sup- lead the movement into elections next
some eager for selfies, others for a chance ported by 43% of them, next to just 20% for year—but stopped short of declaring his
to unload their discontent. He lingered and the Socialists. She now tops most polls for candidacy.
listened. “It’s rare to see a minister stop to the first (though not the second) round of
talk to people like us,” said one woman. A next year’s presidential election. Think positive
young man agreed: “He’s a fighter. He The geography of voting reflects this In the long run, Mr Macron may be right
knows what he wants and he wants to new divide. Thriving, cosmopolitan cities about the coming shift. Yet his effort raises
make a difference.” such as Lyon, Grenoble and Bordeaux, tough questions. One is whether combin-
Mr Macron is the face of France’s youn- with their smart pedestrian centres, tech ing left and right to confront nationalism
gest political movement, En Marche! (“On hubs and gourmet food, vote for either the runs the risk of lending such forces legiti-
the Move!”), which he launched earlier left (Lyon) or the centre-right (Bordeaux)— macy. He brushes aside such concerns,
this year as a platform for a possible bid for but not for the FN. By contrast, in battered pointing out that the FN is already France’s
the presidency in 2017. Although a member second-tier towns full of betting shops and top party in recent voting. His argument is
of President François Hollande’s Socialist half-empty cafés, the FN is on the rise. Less that politicians cannot just fight fear (of im-
government since 2014, Mr Macron insists than 9% of voters in Grenoble, a centre of migration or globalisation) with fear (of an
that his new movement is “neither on the high-end scientific research, voted for the FN victory): they need to make a positive
right nor the left”. Rather, it is a response to FN at municipal elections in 2014. In the case for progress, and equal opportunity, in
a new fault line that is emerging in Western same elections Hénin-Beaumont, a town an open society.
liberal democracies confronted with the in the former mining basin of northern Another question recalls the difficulties
rise of populist nationalism. “The new po- France, elected its first FN mayor. experienced by tech start-ups, which Mr
litical split is between those who are afraid Mr Macron calculates that this creates a Macron champions in the face of protected
of globalisation,” he told The Economist, new political space for progressives who industries. As so often happens in French
“and those who see globalisation as an op- believe in an open and mobile society, in- business, the incumbent parties may crush
portunity, or at least a framework for poli- cluding, he says, “those who haven’t bene- Mr Macron before he can disrupt politics.
cy that tries to offer progress for all.” fited from globalisation but are ready for Manuel Valls, the reformist prime minister,
His diagnosis is based on France, but ap- change”. He judges that peeling such vot- who has his own presidential ambitions, is
plies to other European countries, from ers away from both left and right is a way to infuriated by Mr Macron’s circumvention
Britain to Poland. The old divide between confront the conservative forces that push of the party system. “This has got to stop,” 1
44 Europe The Economist July 16th 2016

2 he huffed earlier this week. It is difficult to the Socialist Party. He is loathed by union- The EU-Canada trade deal
see the insubordinate Mr Macron remain- ists for, among other things, his critique of
ing much longer in government.
Outside, however, he will be on his
the 35-hour working week. Polls say Social-
ist voters would prefer Mr Valls or Mr Hol-
Fear of the maple
own, and he has never run for elected of-
fice. Both right and left plan their own pres-
lande as their nominee.
Yet if one polls all French voters, Mr
menace
idential primaries in coming months. It Macron is the favourite. And his cross-
takes a leap of faith to see the space for a se- party support reaches into unlikely cor-
One of Brussels’ biggest trade deals
rious candidate outside either structure— ners. At a recent event for start-ups in the
looks uncertain after Brexit
and, to the frustration of some of his impa- banlieues, Paris’s high-rise suburbs, partici-
tient backers, it is unclear whether Mr Mac-
ron would run were Mr Hollande, his
former boss, to seek re-election.
pants were unbothered by his establish-
ment ties. “We like his message that it’s OK
to want to succeed,” said Daniel Hierso, a
O F ALL the countries with which the
European Union might conclude a
trade agreement, Canada ought to be the
A final question is whether Mr Macron young black businessman. “In France we least controversial. The land of maple syr-
has what it takes. His inexperience can be- never try new things, it’s always the same up and baffling politeness has had a patch-
tray him: in April it led to an embarrassing- faces,” said Yacine Kara, an entrepreneur work of sectoral trade and investment
ly gushing photo splash with his wife, his of Algerian origins. “His political inexperi- deals with Europe since the late 1970s. It
former high-school French teacher and 20 ence is positive. He’s taking a risk, like us.” currently boasts a liberal government led
years his senior, in a celebrity magazine. A Nobody denies that it is a long shot, and by an affable young prime minister who is
graduate of the high-flying Ecole Nationale could flop badly. But as a response to Eu- keen on protecting the environment and
d’Administration, Mr Macron is also a for- rope’s populist convulsions, it is one of the taking in Syrian refugees. As Chrystia Free-
mer banker, and thus is distrusted within most intriguing attempts around. 7 land, the Canadian trade minister, put it in
Brussels earlier this month: “If the EU can-
not do a deal with Canada, I think it is le-
Ireland’s economic statistics
gitimate to say: Who the heck can it do a
Not the full shilling deal with?”
The question is apt. On July 5th the
European Commission announced that
the Comprehensive Economic and Trade
Why GDP growth of 26% a year is mad
Agreement (CETA), a long-awaited deal be-

T HE year 2015 was a busy one in Ire-

land, what with protests against
water charges, a referendum legalising
Gross domestic blarney
Ireland’s GDP, % change on a year earlier
tween the EU and Canada, would not be
signed by the European Council and Euro-
pean Parliament alone, but would need to
same-sex marriage and speculation over 30
be ratified by at least 36 parliaments, both
a coming general election. No wonder national and provincial. This appeared to
the Irish failed to notice their country’s 20 contradict previous statements by Jean-
record-breaking economic growth. On Claude Juncker, the commission’s presi-
July 12th, in front of gobsmacked journal- 10 dent. It could add four or five years before
ists, Ireland’s Central Statistics Office + the agreement takes effect. And it implies
(CSO) revised up GDP growth for 2015 0 that an intercontinental deal which has
from 7.8% to 26.3%. In modern economic – been a decade in the making could in prin-
history, only poor countries experiencing 10 ciple be scrapped by the local parliament
natural-resource booms or the end of of the Belgian province of Flanders.
wars have grown faster. 20 Britain’s vote to leave the EU appears to
2006 07 08 09 10 11 12 13 14 15 16
Few economists take the revised have sapped the European Commission’s
Source: Central Statistics Office of Ireland
figure seriously. “It’s complete bullshit,” energy for a fight with its fractious member
says Colm McCarthy, an economist at states. Several countries oppose aspects of
University College Dublin. “It’s Alice in Spectacular growth sounds good. It the deal. Bulgaria and Romania are irked
Wonderland economics.” But while the will make it easy for Ireland to satisfy the that their citizens would still need to apply
26.3% figure may distort economic reality, euro zone’s demand that countries keep for a visa to visit Canada, while other Euro-
it has real political consequences. their budget deficits below 3% of GDP. peans can go moose-hunting in Ontario
The CSO calculations are not flawed, But this may allow politicians to return to without one. Activists in Germany and the
Mr McCarthy says. The change stems bad habits. The finance minister prom- Netherlands complain about a clause
from a Europe-wide shift in the way ises not to indulge in tax cuts or spending which lets investors sue national govern-
investment is treated in GDP statistics. increases, but his minority government ments. In April the Dutch parliament
When a company executes a “tax in- may ditch that pledge to win friends in passed a motion against letting the deal ap-
version”, registering in Ireland to benefit parliament. Ireland will be the country ply provisionally, and activists have threat-
from its low 12.5% corporate tax rate, it hit hardest by Brexit. It should be building ened a referendum to overturn it if it is rat-
and its intellectual property are now up fiscal firepower, not spending it. ified. In the same month the Walloon
added to the country’s capital stock, and A second risk is that the Irish will lose parliament in Belgium voted against the
the returns are included in GDP. Ireland’s all trust in economic figures. Voters are agreement.
capital stock grew by one-third in 2015, as already alienated because most growth is Ms Freeland and Cecilia Malmstrom,
American firms rushed to pull off tax concentrated in Dublin and does not the EU’s trade commissioner, stress the
inversions in anticipation of a likely reach the countryside. Fairy-tale GDP benefits of the deal, which would remove
crackdown. Ireland’s booming air-leasing statistics will worsen their scepticism. tariffs and other barriers to trade and is
sector also inflates the figures: planes One can hardly expect voters to embrace more ambitious in terms ofservices and in-
owned by local firms are included even sound economics when the statisticians vestment than any previous deal. It would
though most never visit the country. seem to be living in virtual reality. make both sides somewhat richer, but few
national politicians in Europe have spent 1
 The Economist July 16th 2016 Europe 45

instance, there are different provincial tion is as a gateway into Europe.”

Syrup on the pancake standards for maple syrup, organic foods Some industries will prove immune.
European Union total merchandise trade, $trn and the size of milk containers; firms must Roughly 90% of Gibraltar’s insurance and
often register in every province where they online-betting business consists of transac-
1.8
Canada do business.) tions with Britain, Mr Picardo reckons. Low
1.5 But it also hints that the EU is growing tax rates will help keep firms in place. “We
more protectionist. Anti-trade activists fear don’t see Gibraltar plc collapsing,” says
1.2
that this deal sets a precedent for a more John Westwood, managing director of
0.9 controversial one currently being struck Blacktower, a financial-services company
Japan China with America, known as TTIP, and com- based in the territory. And Mr Picardo gives
0.6 plain that the deal has been shrouded in short shrift to Mr Garcia-Margallo’s threats
0.3 secrecy. “Brussels has received a message: over sovereignty: “Another day, another
United States
people do not feel like they have enough stupid remark.” The British Foreign Office
0 control over their own fates,” says Pieter insists it will not even discuss the issue.
1993 2000 05 10 15
Cleppe of Open Europe, a think-tank. Moreover, self-interest is likely to mute
Source: IMF
Several of the EU’s trade deals have Spanish sabre-rattling. Gibraltar provides
been ratified by national parliaments. But 25% of the economy of the neighbouring
2 much time trying to enthuse voters. Partly the Commission’s move to defer to them Spanish area of Campo de Gibraltar; the re-
this reflects the fact that Canada has more first, rather than argue for EU institutions to gion of Andalusia as a whole suffers 32%
at stake: last year the EU was Canada’s sec- fast-track the deal, is unprecedented, and unemployment. “Our economy is com-
ond-largest trading partner, accounting for risks making the EU look weak. “This was a pletely dependent on Gibraltar,” says Juan
9.5% of its trade, while Canada represented golden opportunity for the Commission to Franco, mayor of the border town of La Lí-
just 1.8% of the EU’s. The EU trades much show that despite Brexit they would con- nea de la Concepción. Thirty-year-old Ta-
more with other countries (see chart). Ca- tinue to deal with the business of govern- mara Gómez commutes daily from La Lí-
nadian free-marketeers also hoped that ing,” says John Manley of the Business nea to her waitressing job, and has never
the deal would force their government to Council of Canada, which represents the been able to find a job in Spain: “The only
dismantle convoluted internal trade barri- country’s largest companies. “They let the money I’ve ever earned is in Gibraltar.”
ers between provinces and territories. (For opportunity slip by,” he laments. 7 Some even think the future will be
brighter. A Shell-operated liquid natural
gas terminal will come online by mid-2017.
Spain, Gibraltar and Brexit A new secure data facility is housed deep
within the Rock. The government hopes to
Rock out forge tighter links with Morocco and Africa
beyond. Tarik El-Yabani, one of the few lo-
cal Leave activists, thinks that Gibraltar
could position itself as “the Hong Kong of
Europe”.
Nevertheless, many are hoping that Gi-
GIBRALTAR
braltar will somehow avoid Brexit. Mr Pi-
A territory is dragged from Europe against its will. Spain looms
cardo is conferring with his counterparts in

R ED post boxes and phone booths line

the streets. Musket-bearing re-enactors
march past helmeted policemen. The pubs
eign minister, José García-Margallo,
crowed: “The Spanish flag is now much
closer to the Rock.”
Scotland about how to remain within the
EU, and has called for a second referendum
to be held once the details of Britain’s pros-
serve pie and chips even in 25-degree heat. Gibraltar’s booming economy (growth pective relationship with Brussels are
It seems like a Brexiteer’s paradise. Yet came in at 10.6% last year) relies on the hashed out. Whatever the result, Gibral-
while 17m Britons were voting to leave the thousands of Spanish workers who cross tar’s politicians and people have displayed
European Union on June 23rd, Gibraltar—a the border every day. Christian Hernan- remarkable unity, both in their stance dur-
tiny British Overseas Territory dangling dez, president of the chamber of com- ing the referendum and in their efforts to
from the southern coast of Spain—voted by merce, says the peninsula’s thriving finan- cope with the consequences. In this, red
19,322 to 823 to stay. Their votes “did not cial-services sector is at risk, too: “The phone booths or no, Gibraltar looks very
even move the needle”, Gibraltar’s chief whole way we’ve marketed the jurisdic- little like Britain. 7
minister, Fabian Picardo, told a crestfallen
public the following day. The peninsula
now faces an uncertain future outside the
EU, which has helped underwrite decades
of prosperity and kept the all-important
border open. Spain has periodically
pressed its claim to Gibraltar (and laid siege
to it twice) since ceding it to Britain in 1713.
For now, the EU flag still flutters along-
side the Union Jack above the government
building. Inside, Mr Picardo is confident
that his government can deliver the 8.25%
annual growth promised in its pre-election
manifesto in November, which had sup-
posedly priced in the risk of Brexit. But
many worry that Spain could close the bor-
der again, as it did between 1969 and 1985.
Within hours of the result, the Spanish for- The European vision
46 Europe The Economist July 16th 2016

Charlemagne Single-market blues

The European project that Britain helped build is grinding to a halt

The European Commission, which polices the single market,
has tried to prise open some of the more protected areas of Eu-
rope’s economy. A services directive in 2006 cut red tape and
made it easier for firms to establish operations abroad, but its
scope was limited and implementation patchy. A “single-market
strategy”, launched almost unnoticed last October, sought to do
better at applying existing rules. But this is hardly visionary stuff.
Among the first to argue that this was hypocritical was John
Major, a former British prime minister. In a speech in 2014 warn-
ing of the risk of Brexit, he suggested that the incomplete EU mar-
ket in services was reason not to be dogmatic on labour mobility.
If Germany could, in effect, limit foreign businesses from operat-
ing inside its borders, why should Britain not cap EU migrants?
That argument seemed reasonable in Britain, where high EU im-
migration rates had become divisive, but found scant support on
the continent. Some governments even grumbled at the termin-
ology: EU workers are not “migrants”, they fumed, but citizens
with legitimate free-movement rights. They had a point: plenty
of services can only be delivered in person (think waiters or tat-
too artists). Herein lies the “indivisibility” of the four freedoms.
But the energy devoted to defending the single market is ap-

“N O EUROPE à la carte.” “The four freedoms are indivisible.”

“There can be no cherry-picking.” It takes a lot to get the
European Union’s leaders to agree, but Britain’s vote to leave has
parently not available for deepening it. Jean-Claude Juncker, the
commission’s current boss, tookoffice almost two years ago vow-
ing to accelerate integration in energy, digital services and Eu-
managed it. The merest hint from Brexiteers that they might seek rope’s fragmented capital markets. But progress has been slow
the full benefits of the EU’s single market while curbing immigra- (and Jonathan Hill, the British commissioner in charge of the cap-
tion was enough to galvanise the rest of the club to action. Angela ital-markets union project, resigned after the Brexit vote). Con-
Merkel, Germany’s chancellor, emphasised the point again this sumer-friendly measures, such as preventing “geoblocking” (al-
week: Britain could expect no “free access” to the single market if tering website access for users in different countries), will grab
it shut its borders to EU workers. headlines but are unlikely to do much for growth.
Ah, the single market. The €14-trillion ($15.6 trillion) jewel in
the EU’s crown, the pinnacle of European integration. Unlike the The market that Jacques built
single currency it covers all EU members and is largely considered That is a shame. Or, as one senior EU official puts it, “it is border-
a success, generating a 2.1% increase in GDP in its first 15 years. it line criminal”. The commission reckons that merely implement-
has quickly acquired a totemic role in debates on both sides ofthe ing current law on services trade could boost EU output by1.8%. A
English channel. Almost half of Britain’s exports by value go to proper digital market could add 3%. Other estimates are higher.
the rest of the EU; any curbs on that trade could seriously injure Across the EU growth is slow, investment low and, in most coun-
an economy already tumbling towards recession. On the EU side, tries, fiscal space limited. Deepening the single market looks like a
governments trying to hold their fracturing club together are good way to boost long-term output. And yet progress has
hardly minded to offer privileged market access to a country that ground almost to a halt. Why?
has chosen to leave. First, the low-hanging fruit has been plucked. It is much easier
More than a traditional free-trade area, the single market eases to liberalise trade in goods than in jealously protected services
intra-EU commerce by reducing non-tariff barriers, facilitating markets, as the EU has learned during its painful attempts to ne-
capital flows and trade in services, and granting full mobility to gotiate “next-generation” trade deals with Canada and America.
European workers, a right 7m have chosen to exploit. (Hence the Second, the euro crisis forced governments to focus on macroeco-
“four freedoms”: movement of goods, services, people and capi- nomic stability rather than the fiddly business of market regula-
tal.) The idea is to allow Europe’s businesses to operate as freely tion. Third, the commission is not the mighty beast that, under
across borders as within them. the guidance of a French Socialist, Jacques Delors, assembled the
If only. Although goods are easily traded and EU citizens have rudiments of the single market in the 1980s. Today power in the
the right to live and work where they please, elsewhere the single EU rests firmly with governments, and few seem minded to take
market remains a work in progress. Energy, finance and transport on vested interests at home when the benefits of freer trade will
markets are far from integrated. The service sector, 70% of the EU be so diffuse. One Brussels-based lobbyist notes ruefully that in
economy, is particularly hampered: in 2012 it accounted for only 2008 industrial firms tried to stop the commission from regulat-
one-fifth of intra-EU trade. Professions are often hard for outsid- ing so much. Now they are desperate for it to be more aggressive.
ers to penetrate, thanks to licensing rules, training requirements Calls to deepen the single market will not go away, but they
and other barriers to entry. Ask architects or notaries trying to set are starting to acquire a sepia tinge. Momentum has stalled and
up shop outside their home country, or anyone trying to break looks unlikely to pick up, not least because the departure of Brit-
into Germany’s heavily regulated (and low-growth) services sec- ain will deprive the single market of its biggest champion. For
tor. Some countries have over 400 regulated professions. A spe- some, who never trusted the EU’s great project of liberalisation,
cial diploma is needed to become a corset-maker in Austria. that is no great loss. Others may come to regret it. 7
 The Economist July 16th 2016 47
International
The dark web
Skunk Value of a sample of sales on
Peruvian Hash
Silk Road 2, Evolution and Agora
Colombian Edibles
December 2013-July 2015, $m
Fake money
of which
Social Weed
eBooks
Credit-card data Cocaine Marijuana
Bolivian 5.2 5.7
Fake IDs
Crystal
Ecuadorean
$0.8m Fake brands

Electronics
Non-drugs Hacking Speed
MDMA &
ecstasy
Pills
services 2.3 7.7 Alprazolam
Cigarettes Illegal drugs Xanax

Gift cards Pornography $27.0m 1.1

Afghan 1.0
Oxycodone
Heroin TCI
1.8
Brown 0.8
0.2 Mushrooms
White LSD 0.4 Prescription
Valium 0.3
1.5 drugs
Crystal 0.8 DMT
meth $4.6m
Blotter 1.4 Ritalin 0.1
Sources: Gwern Branwen’s Tabs Ketamine
dark-web archive; The Economist

Buying drugs online of handwritten addresses on international

packages). Smart sellers use several post of-
Shedding light on the dark web fices, all far from their homes—and, prefer-
ably, not overlooked by CCTV cameras.
Some offer to send empty packages to new
customers, so they can checkfor signs ofin-
spection. Smart buyers use the address of
an inattentive or absent neighbour with an
The drug trade is moving from the street to online cryptomarkets. Forced to
accessible postbox, and never sign for re-
compete on price and quality, sellers are upping their game
ceipt. Judging by the reviews, around 90%

L EAVING vacuum-sealed bags, digital

scales and stashes of marijuana lying
around was a mistake. So was getting T-
browsers such as Tor, which route commu-
nications via several computers and layers
ofencryption, making them almost impos-
of shipments get through.
Despite the elaborate precautions, until
now cryptomarkets have tended not to last
shirts and hoodies emblazoned with “Cali sible for law enforcement to track. Buyers long. The first, Silk Road, survived almost
Connect”, under which name drugs were and sellers make contact using e-mail pro- three years until the FBI tracked down its
dealt online. Selling pot to an undercover viders such as Sigaint, a secure dark-web administrator, Ross Ulbricht, aka “Dread
officer was a further slip-up. All this is part service, and encryption software such as Pirate Roberts”. He is serving a life sen-
of the prosecution evidence in an ongoing Pretty Good Privacy (PGP). They settle up tence for money-laundering, computer-
case against David Burchard in California. in bitcoin, a digital currency that can be ex- hacking and conspiracy to sell narcotics. Its
But the crucial piece of evidence, according changed for the old-fashioned sort and successor, Silk Road 2, lasted just a year be-
to the police who arrested him in March, that offers near-anonymity during a deal. fore law-enforcement caught up with it.
was that he had trademarked Cali Connect Almost all sales are via “cryptomar- Buyers and sellers migrated to the next-big-
to protect his brand. kets”: dark websites that act as shop-fronts. gest sites, Evolution and Agora. The former
Mr Burchard is awaiting trial; the char- These provide an escrow service, holding vanished in March 2015 with $12m-worth
ges against him may be demolished in payments until customers agree to the bit- of customers’ bitcoin in an “exit scam”.
court. But even if the police officers’ story coin being released. Feedback systems like Then Agora disappeared, claiming that it
does not hold up, in its outline it is typical those on legitimate sites such as Amazon had to fix security flaws. The biggest still
of recent developments in the drug trade. and eBay allow buyers to rate their pur- standing is Alphabay, though the recently
Though online markets still account for a chases and to leave comments, helping opened fourth version of Silk Road could
small share of illicit drug sales, they are other customers to choose a trustworthy knock it off the top spot.
growing fast—and changing drug-dealing supplier. The administrators take a 5-10%
as they grow. Sellers are competing on cut of each sale and set broad policy (for ex- Quality assurance
price and quality, and seeking to build rep- ample, whether to allow the sale of guns). The secretive nature of dark-web markets
utable brands. Turnover has risen from an They pay moderators in bitcoin to run cus- makes them difficult to study. But last year
estimated $15m-17m in 2012 to $150m-180m tomer forums and handle complaints. a researcher using the pseudonym Gwern
in 2015. And the share of American drug- Once a deal is struck and payment is Branwen cast some light on them. Roughly
takers who have got high with the help of a waiting in escrow, drugs are packed in a once a week between December 2013 and
website jumped from 8% in 2014 to 15% this vacuum-sealed bag using latex gloves to July 2015, programmes he had written
year, according to the Global Drug Survey, avoid leaving fingerprints or traces of DNA, crawled 90-odd cryptomarkets, archiving
an online study. and dipped in bleach as a further precau- a snapshot of each page.
Online drug markets are part of the tion against leaving forensic traces. A label The Economist has extracted data from
“dark web”: sites only accessible through is printed (customs officials are suspicious the resulting 1.5 terabytes of information 1
48 International The Economist July 16th 2016

2 for around 360,000 sales between Decem- web drugs in most of the world, says Mr light. But heroin and cocaine still have to be
ber 2013 and July 2015 on Agora, Evolution Christin, is that vendors must build in sourced from Afghanistan or Latin Ameri-
and Silk Road 2. In total the deals were some of the cost of parcels being intercept- ca. So their sellers, even online, are likely to
worth around $50m. For each transaction ed (some promise to split the loss with the be middlemen, with the associated risks,
we know what was sold, the price in bit- seller; others say they will abide by a mod- rather than producers.
coin, the date of completion, shipping de- erator’s decision). And using the postal sys- For most drugs, though, cryptomarkets
tails, the customer’s rating and the ven- tem makes it hard to introduce economies allow dealers to avoid the dangers they
dor’s pseudonym. of scale. To avoid suspicion, vendors do face on the street. They no longer run such
There are, inevitably, flaws in the data. not buy vacuum-seal bags in bulk. A pack- risks as being shot by a rival or stabbed by a
Mr Branwen’s scrapes probably missed age can take an hour to prepare. The com- junkie. Customers are less likely to be ar-
some deals. We excluded any sale that was mon precaution of using a distant post of- rested, or sold dodgy products. But there
more than a week old when the scrape fice is costly: on an online forum, one are also new dangers.
took place. If a price was absurdly high we dealer complains that dispatching a single Ms Aldridge points to “doxxing”—the
ignored the page; such “holding prices” are package a day would mean losing money release of personal details online—as one.
used by dealers to indicate a lack of supply. on petrol alone. Postage and packing raises An aggrieved (or opportunistic) vendor
Vendors may fake sales (though probably prices as much as 28% (see chart 2). who thinks a customer’s review was unfair
not often, since cryptomarkets take a cut) The main reason for the online price may publish the delivery address or threat-
or reviews (though dissatisfied real cus- premium, though, appears to be that dark- en blackmail. On a forum, one user com-
tomers would soon catch outright fraud- web drugs are of higher quality. If you or- plains that he received a letter postmarked
sters). The volatile exchange rate between der from someone with thousands of re- Hawaii saying that someone “has my info
bitcoin and dollars means our conversions views you are unlikely to get a poison in and he’s going to give it to the cops” unless
of prices are not completely accurate. place of a psychedelic, explains a regular five bitcoin ($1,217 at the time) are sent to an
MDMA (ecstasy) sold the most by value buyer of LSD. An online dealer who flogs untraceable account. And cryptomarkets
(see graphic on previous page). Marijuana dross gets bad reviews and loses clients. themselves have suffered distributed deni-
was the most popular product, with A study by Energy Control, a Spanish al-of-service attacks, in which a website is
around 38,000 sales. Legal drugs such as think-tank that asked volunteers to send brought down by a flood of bogus page re-
oxycodone and diazepam (Valium) were samples of dark-web drugs for testing, con- quests. These may be orchestrated by ri-
also popular. A third of sales did not be- firms the existence of this quality pre- vals who want to grab market share, says
long in any of our categories: these includ- mium. It found an average purity level for James Martin, a cryptomarket expert at
ed drug kit such as bongs, and drugs de- cocaine, the drug for which it gathered the Macquarie University in Australia, just as
scribed in ways that buyers presumably most data, of 71.6%, compared with 48% for offline gangs engage in turf wars.
understood, but we did not (Barney’s cocaine bought on Spanish streets. Over
Farm; Pink Panther; Gorilla Glue). half of the dark-web samples contained Medicine man
Some of the products cater to niche in- nothing but cocaine, compared with just As the drug trade moves to cryptomarkets,
terests. You can consume “with a good con- 14% of those bought offline. Taking purity ancillary services are springing up. Outfits
scious [sic]”, promises one vendor for his into account, it is probably cheaper to score such as Mr420 claim to offer vendors pub-
“ethically sourced” THC chocolate, which online than via your local dealer, says Ju- lic-relations services—and fake reviews.
costs 13% more than the ordinary, immoral dith Aldridge of Manchester University. Online forums allow dark-web users to
stuff. “Conflict-free” cocaine is also avail- The price gap differs from drug to drug. warn each other about rip-off vendors,
able for the humanitarian (or delusional) Some of the variation can be explained by and addicts to seek advice on how to man-
drug-taker. And “social” coke—a less pure where the cryptomarket sits in the supply age their habits. Dealers, too, share infor-
version sold at a discount of 5-25%—is chain. With the right know-how and ac- mation: leaked customs and post-office
aimed at buyers who want to look lavish cess to chemicals it is possible to produce manuals are mined for tips on how to low-
on a budget. synthetic drugs such as LSD and ecstasy er the odds that a shipment is stopped.
The first striking finding is that drugs anywhere. Cannabis can be grown in- DNMAvengers, a website that launched
bought on the dark web are comparatively doors, if bathed in high-powered electric last November, funded by donations, uses 1
pricey (see chart1). Even though buyers can
browse for a bargain, in most countries a
High times 1
gram of heroin costs roughly twice as
much online as on the street. The markup Price of drugs, 2014-15, $ per gram Street price Median dark-web price
for cocaine is around 40%.
Australia bucks this trend. Narcotics Cocaine Heroin Marijuana
prices there are usually three or four times 0 100 200 300 400 500 0 100 200 300 400 0 5 10 15 20 25
higher than the rich-world average. Austra- Australia
lia is so remote that sending drugs there is Italy
much more expensive, plus their customs
officials are better at securing their border, Britain
notes David Décary-Hétu, a cyber-security Belgium
expert at Montreal University. But the com- Canada
petition from an international market
Spain
drives online prices below those on the
street. Using the postal system makes arbi- Germany
trage possible, says Nicolas Christin of Car- France
negie Mellon University. An enterprising
dealer could, for instance, pick up a gram of Netherlands
heroin from the Netherlands for $75. If it United States
makes it through customs into Australia, Croatia
the price jumps to $288.
Sources: Gwern Branwen’s dark-web archive; UN; European Monitoring Centre for Drugs and Drug Addiction; The Economist
One reason for the higher price of dark-
 The Economist July 16th 2016 International 49

Another study, by Mr Décary-Hétu and buyer, who finds that dealers online are
Postman Pot 2
Ms Aldridge, suggests that roughly a quar- “very polite and friendly”. Good feedback
Postage and packaging fees on Silk Road 2 ter of deals on dark-web markets appear to may be rewarded: some sellers respond to
December 2013-July 2015, % of product price be for wholesale purposes. Purchases of positive reviews by putting a little extra in
0 10 20 30 cannabis costing over $1,000 (roughly the next parcel. Diversifying is another
United States three ounces) make up 24% of marijuana way to increase revenue. Vendors split into
Britain sales by value. Ecstasy orders worth the two distinct groups: those who peddle
Sweden same amount make up 47%. Other sellers drugs and those who do not (see chart 3).
Australia are probably users who have bought a bit Within those categories, bigger vendors
Spain more than they need and have no one to typically stock at least two products; small-
Canada sell to. They find buyers online, drop their er vendors often sell just one. And when
Germany surplus in the post and leave it at that. drug dealers decide to branch out, what
Belgium We crunched numbers for around they add depends somewhat on what they
Worldwide
Netherlands
2,000 vendors, splitting them into quin- already peddle. Those who sell speed, for
Domestic
tiles and analysing their characteristics. instance, are more likely also to stock
Sources: Gwern Branwen’s dark-web archive; The Economist
Those who did well look a lot like the best MDMA, another synthetic drug. Those
sellers on legitimate marketplaces such as who sell cocaine are likely to diversify into
2 trained chemists to analyse samples of Amazon and eBay. The sellers with the heroin; and those who sell marijuana not
dark-web drugs sent in by users. It publish- highest revenues tend to offer a wider to diversify at all.
es the results on its website. Fernando Cau- range of products and to ship globally. Just as on the “surface” web, going glo-
devilla, a physician based in Madrid who They seekto distinguish their brands by de- bal can be profitable. About half the deal-
is better known as DoctorX, dishes out free veloping a reputation for quality, reliability ers in the upper bracket of sales ship world-
drug-related advice on dark-web forums. and speed. They get the best reviews. wide, compared with a third at the bottom
Drug-users do not come into hospitals, he Since little other information about the end. But this is riskier: customs officers are
says, so health workers need to go and find seller is available, a good track record mat- more likely to inspect suspicious packages
them. He has responded to about a thou- ters even more in illicit markets than in or- than postal workers are. Australian offi-
sand queries in the past few years, from dinary ones. Most of the ratings in our cials seem to be the nosiest: of the 126 deal-
“Can I take MDMA if I have diabetes?” (Yes, dataset are close to five, but there is still a ers in our dataset who name regions where
if you follow the guidelines and closely gap between the best and the rest. The big they will not ship, 112 exclude Australia.
monitor blood tests) to “Can I use marijua- fish were awarded scores of 4.9 on average, Compared with legal online markets,
na while I am breastfeeding?” (No; it gets compared with 4.7 for the minnows. trust in cryptomarkets lies more with sell-
into breast milk). Breaking into such a market can be ers than with the platform on which they
Other developments are making the tough. So newcomers use promotions operate. Exit scams and police takedowns
job of law-enforcement harder. Tails, an such as free samples to win their first re- mean no site becomes dominant, and cus-
operating system popular among dark- views. Low prices help, says one vendor: tomers are resigned to none lasting long.
web fans, blocks almost all non-anony- once you have a following you can raise Buyers tend to have accounts on multiple
mous communication to or from a com- them. Some use stunts: one outfit some- markets and to jump ship as soon as things
puter. Mr Christin and Kyle Soska, another how convinced a customer to get its logo go wrong. Grams, a dark-web search en-
cyber-security expert, found that the share tattooed on his back. The photo, circulated gine modelled on Google, allows punters
of vendors using PGP encryption jumped on forums, helped attract new buyers. to hunt for bargains across different mar-
from about 25% in July 2013 to over 90% in Once established, vendors work hard kets, further eroding sites’ ability to gain
January 2015. “Bitcoin-tumblers” make the to keep clients happy. “Customer service is market share. Its logo even mimics the in-
digital currency harder to trace. A custom- usually excellent,” notes a regular weed- ternet giant’s colour palette, and Grams
er’s bitcoin are poured into a virtual black Trends lets users see what other people
box and mixed with other bitcoin. After- have been searching for (mostly marijua-
3
wards the same amount is returned, but Perfect pairings na). Dedicated forums and dark-web news
made up of bits of other people’s stashes, Likelihood that vendors selling one product sites keep track of which websites are ac-
making transactions even harder to track. on dark-web markets will sell another tive, and recommend specific dealers.
December 2013-July 2015
OpenBazaar, a trading site launched in
April, works on a peer-to-peer basis, rather More likely Legitimate businessmen
DRUGS NON-DRUGS
than through a central website. Users Less likely Thus far the powerful “cartels” that have
Pornography
Credit cards

Fake money

download a program that links their com- Neutral long dominated the drugs trade seem to
Mushrooms

Electronics
Marijuana

Gift cards
Ketamine

Fake IDs
Hacking
Cocaine

Pharma

puters to all others on which it is installed, have taken little interest in the dark web.
Heroin

MDMA

Speed
LSD

thus creating a network through which One reason is that they have established
deals can take place. This model could Cocaine supply chains that they are not keen to dis-
Heroin
make dark-web markets less susceptible to Ketamine
rupt. Their special skills—smuggling, in-
exit scams, since the escrow system re- LSD timidation and violence—are useless on-
quires either the buyer’s or seller’s approv- MDMA line. And their comparative advantage is in
al to release the bitcoin, and nearly impos- Mushrooms shifting drugs in tonnes, not kilograms.
Marijuana
sible to take down. According to Mr Martin, the drug trade
Speed
Around three-fifths of dark-web ven- Pharma may be experiencing the equivalent of the
dors are groups of people rather than indi- Credit cards online retail boom of the 1990s, when de-
viduals, judging by the share of profiles Electronics partment stores downplayed the threat
that refer to themselves as “we”. And a Fake money posed by insurgent e-tailers. Those depart-
Gift cards
small number are responsible for most of ment stores have since built websites of
Hacking
the sales. The study by Mr Christin and Mr Fake IDs
their own—or gone out of business. Old-
Soska found that just 2% of sellers made Pornography style drug lords might want to think about
more than $100,000 between July 2013 and Sources: Gwern Branwen’s dark-web archive; The Economist
investing in cryptomarkets, or risk being
January 2015. disrupted out of existence. 7
50 The Economist July 16th 2016
Business
Also in this section
51 Pokémon goes ballistic
52 The Theranos saga
52 Fads in corporate architecture
53 Indian conglomerates
53 Booming missiles
54 Corporate philanthropy in China
55 Schumpeter: The nerd economy

For daily coverage of business, visit

Economist.com/business-finance

The future of television advertisers, for studios that produced

shows, and for sports leagues that sold
Cutting the cord broadcast rights. Cable operators and net-
works enjoyed gross margins of 30-60%
and merrily pushed new gear, such as digi-
tal video recorders, and still more channels
towards their loyal customers.
They are becoming less loyal. The pace
of cord-cutting has not been as fast as
Television is at last having its digital-revolution moment
many expected, but it has begun to quick-

T HE future of television was meant to

have arrived by around now, in a
bloodbath worthy ofthe most gore-flecked
Google), as well as Hulu, a video-stream-
ing service that is jointly owned by Disney,
Fox and NBC Universal, are negotiating to
en. The number of people leaving cable
each year outnumbers those joining, and
has done so since 2013. For a while the
scenes from “Game of Thrones”. The high offer live television over the internet by the losses were modest, at just over half a mil-
cost of cable TV in America, combined end of the year or early next year. They lion households in total in 2013 and 2014,
with dire customer service and the rise of would offer America’s major broadcast out of 101m subscribers. Last year, how-
appealing on-demand streaming services networks and many popular sports and ever, traditional pay TV suddenly lost 1.1m
as inexpensive substitutes, would drive entertainment channels, at a price that subscribers. Lots switched to an early inter-
millions to “cut the cord” with their cable would cut the typical monthly bill almost net “skinny bundle” from Sling TV, a new
providers. Customers would receive their in half, to $40 or $50. product from Dish Network, a satellite-TV
TV over the internet, and pay far less for it. That threatens to upend what was, and provider. Investors panicked. When Bob
Many obscure channels with small audi- still is, the best business model in media Iger, chief executive of Disney, acknowl-
ences, meanwhile, would perish suddenly. history. The media conglomerates deliv- edged last August that people were sever-
So, at least, many in the industry ered a package of something for every- ing the cord even with ESPN, a sports net-
thought. Instead, the death of old televi- one—at first, at a reasonable price. The au- work and the firm’s most profitable media
sion has been a slow bleed. American dience kept on growing along with the property, a media rout ensued. Since then,
households have started to hack away at number of channels, which was good for shares in Disney and Fox have fallen by al-
the cable cord, but the attrition rate is only most 20%.
about 1% a year. Television viewership is in Those that do chop the cord almost nev-
decline, especially among younger view- Switching over er come back, joining the ranks ofmillenni-
ers coveted by advertisers. Yet media firms Pay TV subscribers in the United States als who avoid signing up for cable in the
are still raking it in, because ad rates have % change on a year earlier first place, dubbed “cord-nevers” by media
3
gone up, and the price of cable TV contin- executives. They are lost to the world of
ues to rise every year. The use of Netflix 2
subscription video-on-demand: Netflix,
and other streaming services has explod- Amazon Prime video, Hulu, HBO Now and
ed—half of American households now 1 the like, services that cost around $10 to $15
subscribe to at least one—but usually as + a month each.
add-ons, not substitutes. Overall, Ameri- 0 To stanch this flow, cable operators can
cans are paying more than ever for TV. – offer “triple-play” packages that combine
This cannot last for much longer. The 1 broadband, television and telephone ser-
fat, pricey cable bundle of 200 channels is vice, which gives them a pricing advan-
fast becoming antiquated as slimmer 2 tage. They can also rely on older Ameri-
2006 08 09 10 11 12 13 14 15 16
streaming options emerge. Now two tech cans. Older viewers watch more television
Source: MoffettNathanson
giants, Amazon and YouTube (owned by than any other group, they watch more of1
 The Economist July 16th 2016 Business 51

2 it than they used to, and more are tuning in; ment conglomerate, to raise cash); small in- en week. Five years later, they had 189
and they are not going anywhere. Internet dependent channels that have benefited channels, and were still watching only 17.5,
services may also blunder as they go into from being part of the “long tail”; and satel- or just under a tenth of the available offer-
TV-streaming. An internet service from lite operators, who have little to sell but TV. ing. Their bills, unlike disposable incomes,
HBO, owned by Time Warner, a media con- The winners and survivors will be media have doubled in this century.
glomerate, recently suffered a blackout just companies who provide the most “must- The fact that more TV viewers have not
as a much-anticipated episode of its see” TV and the fewest unwanted chan- switched channel to a better model is
“Game of Thrones” was about to begin, en- nels. Coveted content will still be king, as mainly the result of two factors. The first is
raging customers. Early adopters will sign seen in the recent sale of a niche martial- that customers are still addicted to live TV,
up; others will wait and see. arts league for $4 billion. Cable firms can especially sport, and fat, pricey bundles re-
But over time the changes threaten to still earn their keep selling broadband in- liably give that to them. Media firms have
cripple several actors that now live off the ternet and, perhaps, streaming services. bid up sports rights to fantastic sums. Dis-
big bundle: large media companies with The clearest winners will be consum- ney’s ESPN, and TNT, owned by Time War-
weak programming, like Viacom (the firm ers. In 2008, cable subscribers had 129 ner, are paying a combined $24 billion for
may sell a large stake in its film studio to channels to choose from, and they the rights to broadcast NBA basketball
Dalian Wanda Group, a Chinese entertain- watched an average of17 channels in a giv- games for the next nine years, almost triple
the amount they were paying under their
former deal. The second factor is that cus-
Video games
tomers have lacked reliable, cheaper op-
I mug you, Pickachu! tions until now. That is changing with the
arrival of services like Sling TV, which now
has 700,000 subscribers, reckons Michael
Nathanson of MoffettNathanson, a re-
A hit video game shows how the real and virtual worlds are merging
search firm. Another new “skinny” bun-

O N JULY10th police in O’Fallon, a

Missouri town of about 80,000
people, made a statement about the
dle, from Sony PlayStation Vue, recently
passed 100,000 subscribers.
Many more may end up going to Hulu.
modus operandi of an armed gang that Its old-media parents appear to have ac-
had been using “Pokémon Go”, a video cepted the risks of disrupting the existing
game, to prey on the locals. “You can add model in order to keep a stake in the future
a beacon to a Pokéstop to lure more through younger viewers; channel negoti-
players,” the lawmen explained. “Appar- ations are expected to go smoothly. And
ently they [the muggers] were using the Hulu’s product at least continues the high-
app to locate people standing around in ly profitable concept of the bundle. One
the middle of a parking lot or whatever owner, NBC Universal, is owned by Com-
other location they were in.” cast, a cable firm that could lose much from
If that sounds like gibberish, it might cord-cutting, but it has no say in the opera-
be best to consult your nearest millenni- tions ofHulu, and would probably have lit-
al. “Pokémon Go”, an app for smart- tle choice but to participate under competi-
phones published by Nintendo, a Japa- tion terms set by the media regulator. Time
nese video-gaming firm, has proved a Profits over here Warner is also considering joining in.
smash hit since its release on July 6th in Hulu is now testing channel combina-
America, Australia and New Zealand. It is player) discovered that the old church in tions at various prices, including around
the latest instalment of the Pokémon which he lives had been tagged by Nian- $40 to $50 a month, close to similar pack-
franchise, which began as a video game tic, the firm that developed the game, as a ages from Sling TV and Sony PlayStation
in 1996, before branching out into collect- “gym”—a meeting-point for players want- Vue. That would mean a slim margin, but
ible cards, toys, books, TV shows and ing to do battle, dozens of whom had its chief executive, Mike Hopkins, says get-
comics, and grossing ¥4.8 trillion ($46 duly begun arriving outside his house. ting people to cut the cord is all about price.
billion) in the process. Players take part in Most gyms seem to be in public places, It can profit from extra services, such as op-
a sort of lighthearted digital dogfighting, suggesting the man’s home was tagged tions to stream on multiple devices, to re-
in which the protagonists are not canines by mistake, though there is, at present, no cord and store shows in the cloud, and to
but cute magical animals discovered and way to have the tagging undone. subscribe to premium channels.
trained by players. Much like Pokémon, pundits are now Amazon and YouTube are sure to gener-
“Pokémon Go” applies that formula to engaged in a virtual battle over what the ate yet more buzz, although their plans are
the real world. Smartphones direct play- game’s success means. Is it just a fad? still under wraps. Traditional players
ers to various locations, either to find Possibly. Will it help augmented reality know full well that the dominant pay-TV
Pokémon or useful virtual items (at the go mainstream? Probably. How much operators of the future could well be the in-
aforementioned Pokéstops), or to deploy money will Nintendo make with “Poké- ternet giants. New competitors will not
their charges in battle. An optional “aug- mon Go”? Although the app itself is free, have things all their own way. Apple failed
mented-reality” feature uses the phone’s players buy virtual items to strengthen to launch its own live TV service last year,
camera to show a picture of the real their Pokémon. That “freemium” model perhaps because it could not agree with lo-
world with a Pokémon digitally superim- has earned riches for other firms. And cal broadcast affiliate stations on how
posed (pictured). Niantic wants retailers and other firms to much they should be paid for retransmit-
There have been unforeseen side- sponsor locations in its virtual world. In ting their feeds. But the cable networks are
effects, some macabre. As well as the any case, Nintendo’s owners should be keenly aware of what happened to the mu-
muggings in Missouri, a player in Wyo- happy: the firm’s shares are up by over sic business after Apple’s iTunes and other
ming found a dead body in a river while 50% since the game’s release, adding $11 streaming services disaggregated the al-
looking for Pokémon. A civilian (ie, not a billion to its valuation. bum. They will do what they can to pre-
vent TV from being Spotified. 7
52 Business The Economist July 16th 2016

Diagnostics when the Wall Street Journal questioned

whether the firm’s core technology—the
Red alert ability to perform multiple tests on a tiny
droplet of blood—actually worked. More
problems piled up after news of flaws in its
lab testing. The Securities and Exchange
Commission said it would investigate
whether Theranos’s investors, who fund-
ed the company to the tune of $690m,
Theranos’s fortunes worsen again
were misled. In May it emerged that in

“F IRST they think you’re crazy, then

they fight you, and then all of the
sudden you change the world,” said Eliza-
2014-15, results from its proprietary blood-
testing device had been thrown out entire-
ly (see table).
beth Holmes as troubles mounted for her These made up only a tiny proportion
blood-testing startup, Theranos, last year. of the millions of tests that Theranos ran,
Things look ever less likely to go beyond but there are concerns that patients may
the fighting stage. nonetheless have been harmed by receiv-
On July 7th a government regulator, the ing the wrong test results. Theranos’s own
Centres for Medicare and Medicaid Ser- industry is turning upon its erstwhile star.
vices, said Ms Holmes would be barred The chief executive of HealthTell, another
from owning or running a laboratory for blood-diagnostics startup, says it is now Fads in corporate architecture
two years. It will also revoke her com- clear that Theranos did not spend enough
pany’s licence to operate one of two lab-
oratories where it conducts tests. As The
time developing the necessary clinical evi-
dence before launching its new blood-test-
Putting on the glitz
Economist went to press the firm was due ing product.
to reply to a letter from Congress, which Theranos’s chief business partner, Wal-
asked how, exactly, Theranos is going to greens, an American drug retail chain, end-
PARIS
handle the tens of thousands of patients ed its three-year partnership with Thera-
Everyone wants buildings as trendy as
who were given incorrect test results. Even nos in June. It will now close Theranos’s
those of tech firms
so, Ms Holmes looks set to remain in posi- lab-testing services inside 40 of its shops.
tion even as the situation deteriorates
around a firm that once commanded a
multi-billion-dollar valuation.
Theranos has also been hit with lawsuits
from patients claiming fraud and false ad-
vertising, with Walgreens as a co-defen-
P ICTURE a set of Lego that covers 50,000
square metres (540,000 square feet),
costs over one billion Danish kroner
These may be some of the last twists in dant. Walgreens confirmed to The Econo- ($150m), and has a mini-golf course on its
a story which will be turned into a Holly- mist earlier this year that it had not roof. In reality the new global headquar-
wood film by the director of “The Big validated or verified Theranos’s tests (con- ters of the Lego Group will be of real bricks
Short”. Theranos’s troubles began last year tradicting earlier assurances by the firm). and concrete, but its boss, Jorgen Vig Knud-
If Theranos is to limp along with Ms storp, describes it with childlike glee. It will
Holmes at the helm, one option the firm rise up in Billund, in rural Denmark, he
A bloody mess will be considering is to close down its lab- says, as “a great facility, not opulent, very
Theranos oratories (to comply with her ban) and fo- playful, for children too.” “People house”
2003 Company founded cus the business on developing new blood will be a totem of the firm’s success.
2004 Elizabeth Holmes drops out of tests. This was what she had been trying to Mr Knudstorp is allowed to brag. The
Stanford do before the ill-fated move into the refer- toymaker’s annual return on invested cap-
2013 Theranos announces a partnership ence laboratory market, one that offers ital has topped 100% for each of the past
with Walgreens to allow blood many commonly used tests to customers eight years. Pre-tax profits leapt by 28% last
testing at its pharmacies
at one location. year and sales are buoyant. His “stick-to-
2014 Company valued at more than $9
billion The move into the reference market the-brick” strategy has done handsomely,
July 2015 FDA approves Theranos’s test to made it seem as ifthe firm was not commit- after an earlier crisis. Warner Brothers
detect infection by herpes simplex ted to developing finger-stick tests. When makes and owns brand-boosting Lego
virus 1
customers arrived for testing they were of- movies and others run Lego-themed parks,
October 2015 Wall Street Journal questions
whether technology works ten required to give blood from a vein, al- leaving him to sell toys. After years of re-
January 2016 Government regulator (CMS) finds beit blood taken in unusually small sam- cruitment, he says the 4,000 staff in Den-
serious problems, one of which ples with tiny needles. That heightened mark have outgrown their offices.
poses a threat to patient health concerns about the company. But behind Getting a glitzy new building with an
March 2016 CMS says it is not satisfied with the the scenes it was moving towards its aim of indoor prairie, open space and bright yel-
reply it received and threatens
sanctions using ever smaller volumes of blood in low staircases is a fine way to celebrate.
April 2016 SEC says it will investigate whether more consumer tests. The design is packed full of fads common
private investors were misled by Whether the company has any technol- to others’ new headquarters: staff who get
Theranos
ogy worth saving from its mess is now the “hot desks” to share, not their own work-
May 2016 Theranos voids two years of tests
from its proprietary testing most intriguing question. The firm still spaces ; a big atrium and lots of glass to sug-
machine claims to have a family of new clinical di- gest a transparent firm culture and not
June 2016 Congressional committee demands agnostic methods that can reduce the much hierarchy; space for exercise plus lots
to know what steps Theranos is
taking to comply with federal law amount of blood needed for testing and of green features, notably low energy use.
and address inaccurate test results that can perform a wide range of tests in That will sound familiar to others. Last
July 2016 CMS bars founder from operating a centralised and decentralised settings. A month Siemens’s boss, Joe Kaeser, un-
lab for two years and revokes the Hollywood ending would involve some veiled a pricey new corporate HQ in Mu-
certificate to run a laboratory
sort of redemption for Ms Holmes. The real nich, and has described it as a place where
Source: The Economist
world is not always as kind. 7 encounters occur. Airbus, too, just cut the 1
 The Economist July 16th 2016 Business 53

2 ribbon on its “Wings Campus”, a new Given how indebted India’s largest modity prices might resurrect an ailing
group head office in Toulouse. A big can- firms are—ten prominent ones taken to- firm’s fortunes. Meanwhile, tycoons are
teen, fitness centre and “collaborative of- gether have interest payments bigger than good at making money from the business-
fice space” are supposed to get staff talking. their annual profits, according to Credit es they own even when no profits are
Tom Enders, its boss, claimed it all shows Suisse, a bank—there should soon be a forthcoming. One ruse is getting firms to
his firm is “open-minded, innovative and long list of items on the block. A few big overpay for rent on a head-office building
future-oriented”. Meanwhile Adidas, groups have already raised fresh funds by ultimately owned by family members.
which makes running shoes, is splashing selling off parts of their businesses. An- Nor will asset sales be a panacea. If a
over €500m ($550m) on a head office in alysts at State Bank of India reckon that profitable part of a conglomerate’s busi-
tiny Herzogenaurach in Germany. It insists deals worth 2 trillion rupees ($29.8 billion) ness is sold to raise cash, its profits won’t be
the design will ensure workers’ “spontane- have been signed or are on the way, available to service what remains of the
ous interaction”. enough to make a dent in the total debt of debt, so leaving both bankers and busi-
Big, old firms try to package themselves the companies involved, which amounts nessmen only a bit better off. But it is sur-
as nimble and open because they have to to around 10 trillion rupees. prising even to see the deals happening—
compete ever harder for talent, including So far, more deals have been rumoured and that a regulatory change is already
against tech firms. Mr Knudstorp frets that than actually completed (the Qatar Invest- having such a visible effect. 7
in ageing Europe, labour markets will grow ment Authority is poised to snap up the
ever tighter for skilled designers, software London hotel). Many of the investment
engineers and others. Offering them a ca- bankers who had hoped for fat mandates Defence firms
reer in a windowless cubicle won’t do. worry that the founder-shareholders who
Luka Mucic, chief financial officer of SAP,
Europe’s largest software firm, notes a
dominate India’s business scene (and its
debt) are keener to talk about break-ups
Rocketing around
change ofattitude among recent graduates,
saying recruits care less than previous gen-
than actually preside over them. Others
prefer to flog overseas trophies, for exam-
the world
erations did about status and title. They ple a stake in Sabiha Gökçen airport in Tur-
FARNBOROUGH
want to know about a firm’s “vision”, and key, sold by GMR, an infrastructure group,
Weapons-makers reckon missiles will
whether it has “an environment where to a Malaysian rival.
be their next big hit
they have a sense of choice”, he says. But a sea-change is on its way. Formerly,
Whether non-tech firms can really win
in a battle of the buildings is another thing.
Apple is spending an estimated $5 billion
company founders had the clout to keep
their empires intact. They could put in a
call to their pals in government to keep
T HE F-35 stealth fighter is designed to be
unnoticeable—at least by enemy radar.
Nonetheless, it was the showstopper at
on its new flying saucer-shaped campus in down any pesky banker demanding re- this week’s Farnborough air show in Brit-
Cupertino, California; nearby Google will payment. India had no proper bankruptcy ain, impressing crowds in the show-
erect such futuristic headquarters that one regime, so promoters, as company foun- ground’s terraces with its smooth manoeu-
website calls it a “spiderweb canopy uto- ders are known, could effectively black- vres and party tricks such as flying
pia”. Amazon, not to be outdone, is putting mail banks with an implicit threat: keep backwards. Such was the buzz around the
up tree-filled “spheres” in downtown Seat- funding me or face years of litigation as the new jet that CEOs attending the show to
tle so staff can hold meetings in forests. For business implodes. hammer out big deals broke off meetings
European firms in out-of-the-way com- Banking reforms championed by Ragh- to watch. But at Farnborough’s trade show,
pany towns such as Billund or Herzoge- uram Rajan, the departing central-bank go- which opened on July 11th, all the talk was
naurach, it might be hard to compete, how- vernor, have made such tactics harder. The of the missiles the F-35 can fire, as well as
ever appealing the minigolf course. 7 government passed a new bankruptcy law the new missile-defence systems that
in May. It will mean that banks should could eventually shoot it down.
from next year onwards be able to fore- Missiles excite, for unlike other weap-
Indian conglomerates close on insolvent firms. A new mood in ons, demand for them is growing strongly.
the offices of regulators and government Global defence spending grew by just 1%
Sell me if you can officials is also emboldening bankers to re-
coup dud loans rather than, as in the past,
last year—after five years of severe budget
cuts in many countries—but the global
extend new ones. Better still, under Naren- market for missiles and missile-defence
dra Modi, India’s prime minister, tycoons systems is racing ahead at around 5% a
appear to have lost their direct access to year. The capabilities of such weapons are
MUMBAI
ministers’ offices. increasing, and with that their price and 1
India’s indebted tycoons are under
Even with the coming changes, India is
pressure to flog their prized assets
far from using an efficient, American-style

A STAKE in a Formula One team, four

planes and a slew of posh hotels in-
cluding the Grosvenor House Hotel in Lon-
procedure in which over-indebted firms
are swallowed by their lenders and then
disposed of, either whole or in parts, to
Self-propelled
Defence firms’ operating profit margin, 2015, %
Unit including missile-defence systems
don: the troubles of Sahara, an Indian con- new owners. One reason is that buyers are 0 5 10 15 20
glomerate whose founder has been in and scarce. A web of regulation makes it hard
Raytheon
out of prison, has resulted in a neat pile of in India to run the private-equity firms that Integrated
trophy assets for the discerning buyer. The could smooth the process. And promoters Defense Systems
often unmanageable debt levels at India’s are hesitant to swoop for each other’s as-
largest firms now mean plenty of less sets, bound as they are by long histories of Lockheed Martin
glamorous assets are up for grabs, too, from their families doing business together Missiles and
Fire Control
cement and steel plants to airports and toll (and, often, by marriage, too).
roads. Once adept at giving their bankers Much of corporate India’s unsustain- BAE Systems
the runaround, tycoons are now less able able debt is also in cyclical industries such MBDA*
to fend off pressure to pay down debt with as steel or mining. Shareholders often hang
Source: Company reports *37.5% of European joint venture
sales of prize assets. on for far too long hoping that rising com-
54 Business The Economist July 16th 2016

2 profitability. Missiles are no longer just fly- become normal. But it meant poor schools
ing bombs; they now often contain more and indigent interior provinces lost out.
computer than explosive to help find their As the economy modernises, a crop of
target autonomously. youngish technology billionaires, keen to
Sales are rising along with the military “democratise” philanthropy, has emerged.
threats they help address, says Wes On the eve of Alibaba’s initial public flota-
Kremer, who runs Raytheon’s integrated tion in New York two years ago, Mr Ma and
missile-defence business. NATO has been Joseph Tsai, the firm’s co-founder, donated
upgrading its European ground-missile de- options worth about 2% of their firm’s equ-
fences to prepare for Russian aerial attacks ity to a new charitable trust (Alibaba’s mar-
since Vladimir Putin annexed the Crimea ket capitalisation today is around $200 bil-
in 2014; last week an initial version was de- lion). Pony Ma (pictured), founder of
clared operational. In Asia several coun- Tencent, a Chinese gaming and social-me-
tries are spending on systems to defend dia giant, said in April that he will donate
against China and North Korea. And in the shares worth over $2 billion to his firm’s
Middle East, the use of targeted air-to- charitable foundation.
ground missiles has dramatically risen to Many entrepreneurs are following their
try and reduce casualties in conflicts lead. The younger generation is much
against IS and in Yemen. Corporate philanthropy in China more likely than older ones to give money
For defence firms, missile systems are to more politically sensitive areas such as
among the most profitable products they
can offer (see chart on previous page). One
The emperor’s gift the environment and public health, as the
two Mas are doing with their respective
reason is that the current generation of foundations. They are also applying
weaponry has not faced the same scale of whizzy digital tools, from the mobile inter-
development problems as new plane pro- net to cloud computing, in order to help
HANGZHOU
jects such as the F-35, or Airbus’s A400M charities to modernise their operations.
Chinese bosses are giving more to
military transporter, both of which are bil- Such beneficence is helping to address
charity
lions of dollars over budget. some of the flaws in the non-profit sector.
Executives are putting missiles at the
forefront of their efforts to expand abroad
and to reduce their reliance on home gov-
W HEN Warren Buffett and Bill Gates
held a banquet for Chinese billion-
aires in 2010, they hoped to win them over
There is a lack of proper management and
not enough transparency. Governance is
weak. Various prominent charities have
ernments. This week the West’s big three to philanthropy. They got the cold shoul- been ensnared in corruption scandals in
missile-makers (Raytheon, Lockheed Mar- der. Many wealthy industrialists stayed recent years. Numerous research institutes
tin and MBDA) showed off their kit to visit- away, and none of those who attended and academic training programmes have
ing military delegations, festooned with signed their “Giving Pledge”. This mean- sprung up of late to address the problem.
colourful aiguillettes and decorations, ness was not due to penury: China boasts The last, and most surprising, push to-
from across the world. Small countries can more dollar billionaires today than does wards philanthropy comes from the gov-
afford the million-dollar-plus price tags for America. Asked why he and his compatri- ernment. Chinese rulers have long viewed
missile systems compared with $80m for a ots rebuffed the evangelisers, Jack Ma, boss private philanthropy with suspicion, wor-
new F-35. The most go-ahead so far has of Alibaba, an e-commerce giant, insists it rying that the public might recognise in it
been MBDA, a European joint venture, is not because they were stingy. At a confer- the manifold failings of the state. Many
which last year won more missile orders ence on private-sector philanthropy host- would-be donors also resisted giving mon-
outside Europe than within its home conti- ed by his firm this month in Hangzhou, he ey, or did so furtively, for fear of attracting
nent. Others are now catching up on for- explained that China’s charitable sector unwanted official attention. But the gov-
eign sales. Raytheon hopes soon to sign a was then still in its infancy. ernment has pushed through a sensible
$5.6 billion deal with Poland to upgrade its The outlook has since improved. Chari- philanthropy law, due to come into force
Patriot missile-defence shield, while Lock- table giving in China still lags that in Amer- later this year, that makes it easier to do-
heed and MBDA plan to ink a deal with ica, but it is rising (see chart). Oscar Tang, a nate. It also clarifies regulations governing
Germany for their air-defence systems. Chinese-American billionaire and philan- local charities and pushes for transpa-
Investors reckon this will surely all thropist, tells of another banquet for fat rency. If the implementation is as good as
translate into fatter profits for the defence cats in Beijing, this one hosted earlier this the framework, China’s corporate giving
industry. The share prices of Lockheed and month by Ban Ki-moon, secretary-general will surely surge. 7
Raytheon have both risen by a third over of the United Nations, and the C100, a
the past year. But there also are reasons to group of prominent Chinese-Americans.
be cautious. “We’re unlikely to see returns Unlike at the frosty meeting in 2010 with Can’t give it away
as good in the sector over the next few the “two white men” telling them to give Philanthropy, $bn
years as we have since 9/11 from which away money, he recounts, the mainland China
Other donations
point American military spending bosses were enthusiastic about his exhor- Corporate donations United States, total
surged,” says Michael Goldberg, a defence tations to share the wealth. 40 400
consultant at Bain & Company. One reason for this shift in attitude is a
Another reason to be cautious is that generational change. Scholars at Harvard 30 300
defence ministries have become better at University have looked at patterns of giv-
20 200
procurement and at fostering competition. ing among China’s top donors. In the past,
That means missile divisions at Western the most generous were property tycoons 10
* 100
firms are facing more competition from who gave to educational outfits, especially
0 0
Chinese, Israeli and Russian firms in some elite universities in their home provinces 2011 12 13 14 15
export markets, where the latter are upping along the wealthy coast. It was a careful ap- Sources: Giving USA Foundation; China Charity
their game. However good the missile, not proach, suited to a political system where Information Centre; Annual Report on China’s
Philanthropy Development, 2016 *Estimate
every target will be hit. 7 making pots of money had only recently
 The Economist July 16th 2016 Business 55

Schumpeter Be nice to nerds

Forget the cool kids. Geeks are now shaping new products and services
swelled. IDC, a research firm, estimates there are now around
20m professional and hobbyist software developers worldwide;
that is probably low. Geeky, addictive video games are drawing
more into the fold. Each month at least 70m people play “League
of Legends”, a complex multiplayer online game; that is more
than play baseball, softball or tennis worldwide.
As a result, companies had better pay attention to the rise of a
“nerd economy” that stretches well beyond their direct technol-
ogy needs. Venture capitalists were first to pick up on this. Chris
Dixon of Andreessen Horowitz, a Silicon Valley venture-capital
firm, says he is constantly watching “what the smartest people
are doing on the weekends”, because it hints at what the main-
stream will be up to in ten years’ time. With this rationale, An-
dreessen Horowitz has invested in various gadgets and products
that early adopters have embraced, including a nutrient-rich
drinkable meal for engineers too busy to take a break from cod-
ing, called Soylent. Another investment is in a company called
Nootrobox, which makes chewable coffee for people too lazy or
antisocial to order a liquid shot from a barista. The “mouth of the
cultural river” has shifted from New York and Los Angeles to San
Francisco, says Mr Dixon.

F IVE years ago Zach Sims, a sprightly, striving 21-year-old,

launched Codeacademy, a startup, to offer online courses
about how to write software. He remembers pitching his idea to
Not only nerd food has won venture capitalists’ attention, but
also their fashion choices. Warby Parker, a glasses firm, and
Stance, a startup that makes bright, geeky socks, have attracted
prospective investors only to hear a “chorus of no”. At the time, $200m in venture capital. Both cater to techies as well as the fash-
the naysayers thought coding was a weird, fringe activity for com- ion-aware (the line between hipster and nerd can be fuzzy). The
puter-science geeks. They were wrong. Since 2011, more than 25m “sharing economy”, exemplified by Lyft and Airbnb, also was
people have signed up for Codeacademy. Meanwhile, in-person originally a nerd thing: they prefer renting to buying stuff.
crash courses that teach computer programming, called coding Incumbent businesses, too, have started to take their cue from
boot-camps, have spread worldwide, as more people aspire to all this nerdiness. Brands like Mountain Dew and Doritos have
tech jobs or running their own startup. This year tuition fees at sponsored video-game competitions and “rodeos” where com-
these boot-camps will reach around $200m in America alone. petitors race drones around stadiums. By intrepidly going where
“Be nice to nerds. Chances are you may end up working for the nerds go, brands hope to get some credibility. “Hackathons”,
them,” wrote Charles Sykes, author of the book “50 Rules Kids where companies invite prospective and current employees to
Won’t Learn in School”, first published in 2007. Today there are stay up all night, eat pizza and code, are de rigueur as a means to
more reasons than ever to treat nerds with respect: never mind recruit engineers. Even very traditional companies like Master-
the fact that every company is clamouring to hire them, geeks are Card and Disney have started to hold them.
starting to shape markets for new products and services. Sometimes, however, it can all be a bit embarrassing. GE, an
Stephen O’Grady ofRedMonk, a consultancy, calls developers industrial giant, has run a television ad campaign about how it
the “new kingmakers”: they are driving decisions about the tech- hires software developers that feels as awkward to watch as an
nology that their companies use to an extent that has never be- engineer trying to do stand-up comedy for the first time. Haagen-
fore been possible. From personal computers to social-media Dazs, an ice cream-maker, has put up billboards in San Francisco
companies like Twitter and Facebook, many gadgets and plat- that proudly declare “We’re a 56-year-old startup” and present the
forms started out with curious tech enthusiasts experimenting in written recipe for vanilla ice cream as if it were code.
their garage or dorm room, only to turn into mainstream hits.
Slack, a two-year-old messaging firm that aims to displace e-mail, It’s all geek to me
started as a tool for software developers to communicate with As the success of Pokémon Go, an augmented-reality game,
one another before it spread to other functions and companies. shows (see page 51), there can be big profits in the avant-garde ar-
But nerds’ influence now goes well beyond technology. They eas where nerds like to experiment. Unfortunately, trying to ob-
hold greater cultural sway. “Silicon Valley”, a show on HBO serve and appeal to nerds is not a sure-fire strategy. Not every pro-
which will soon start filming its fourth season, presents the “bro- duct or pastime embraced by software engineers will become a
grammer” startup culture in all its grit and glory, and suggests that hit. “Brogrammers” may embrace Soylent and Nootrobox. But
mass audiences are transfixed by what really happens behind your correspondent, who has tried both to her stomach’s displea-
closed (garage) doors. Techies in San Francisco don not only hoo- sure, is sceptical on whether they will ever be a match for solid
dies but also T-shirts with “G∑∑K” emblazoned on the front. Those food and hot coffee.
too risk-averse to become university dropouts like Microsoft’s Bill And if they try too hard to speak geek, large companies will
Gates and MarkZuckerberg ofFacebookrush in rising numbers to come off as inauthentic and alienating, exactly what they were
Silicon Valley as soon as they graduate, forsaking careers on Wall trying not to be. Nerds may be a powerful commercial force, but
Street to code their way into the 1%. many of them harbour disdain for big brands and overt market-
Nerds carry more clout in part because their ranks have ing. Firms will have to try hard to send a cool, coded message. 7
56 The Economist July 16th 2016
Finance and economics
Also in this section
57 Buttonwood: The curse of low rates
58 The agony of Deutsche Bank
58 Prosecuting financial firms
59 The unhappy growth of temping
60 Payouts for whistleblowers
61 Free exchange: Comparing economies

For daily analysis and debate on economics, visit

Economist.com/economics

Turkey’s economy ferred again in the wake of Brexit and a

broader slowdown in the world economy.
Sugar highs There is much that could be done to
boost growth, however, including scrap-
ping rules on firing that discourage hiring,
improving the quality of education and
bringing the huge informal economy onto
the books. Investment shrank in the first
Istanbul
quarter. Reviving it requires greater politi-
Turkey’s economy needs boring reforms. Instead, it is getting quick fixes
cal and economic stability, says Zumrut

L AST year Soner Tufan, straining to keep

up with demand for guided tours
around Istanbul, decided to move to spa-
ary 1st, which lifted consumer spending.
The IMF expects growth to decline further,
to 3.5% in 2018.
Imamoglu of TUSIAD, Turkey’s main busi-
ness lobby. Raising the pitifully low sav-
ings rate would reduce Turkey’s reliance on
cious new offices. “Those were the days,” Turkey’s current-account deficit, how- flighty foreigners. Without such reforms,
sighs Ali Emrah, his business partner. De- ever, is already large and persistent. Cheap growth will inevitably falter at some point,
spite running one of the top-rated tour- oil and reduced demand for imports of she argues.
guide companies in Istanbul, they have other goods because of the weakness of Yet Mr Erdogan’s speeches suggest a
seen daily inquiries about tours fall from the Turkish lira helped keep it to 4.5% of preoccupation with quick fixes instead of
20 or 30 to three or four following a series GDP in 2015. But Nafez Zouk of Oxford Eco- worthy but arduous reforms. He has pub-
of terrorist attacks in Turkey, the most re- nomics, a consultancy, expects that the licly criticised the (theoretically indepen-
cent on Istanbul’s main airport. Their ex- tourism slump will lead to a current-ac- dent) central bank for keeping interest rates
pansion now feels like an error. Many tour count deficit of 5% this year and 5.4% in too high, accusing a mysterious “interest-
guides, they say, are looking for new jobs. 2017. rate lobby” of choking off investment. To
Turkey’s tourism slump is already visi- This is worrying, as it leaves Turkey de- the befuddlement of economists, he has 1
ble in deserted sights and empty hotels, pendent on flighty foreign lenders and in-
but not yet in its economic statistics. Banks vestors to cover its import bill. Turkey’s for-
have restructured loans to the industry; eign debts have risen rapidly, from 38% of All carbs, no protein
non-performing loan ratios will begin to GDP in 2008 to 55% of GDP at the end of Turkey, contribution to changes in GDP
rise only next year, says Ozlem Derici of 2015. And more than 90% of them are de- Percentage points
DenizBank. The impact on Turkey’s current nominated in foreign currency, not in lira. Personal consumption Investment
account—last year revenues from tourism Further depreciation of the lira risks a mis- Government spending Net exports
paid for half of Turkey’s trade deficit in match between what companies owe and 15
GDP, % change on a year earlier
goods—will become clearer as the summer what they can afford. And if the foreigners
wears on. Nihan Ziya-Erdem of Garanti take fright, funding could dry up. 10
Bank says the slowdown could shave as Yet the economy does not seem to be on
much as one percentage point off this the brink of crisis. Most firms borrowing in 5
+
year’s growth rate. foreign currency are taking out long-term
That is bad news for Recep Tayyip Erdo- loans, Mr Zouk notes, and many, such as 0
–
gan, Turkey’s president. As it is, growth has energy and property firms, price their pro-
slowed from rates of 7-8% a year when he ducts in dollars, providing something of a 5
was prime minister (see chart). The rela- hedge against further depreciation. Be-
tively healthy clip of 4.5% in the first quar- sides, expected interest-rate rises in the rich 10
2007 08 09 10 11 12 13 14 15 16*
ter, year on year, was largely the result of a world, which might have drawn capital
Source: Government statistics *Q1
30% boost to the minimum wage on Janu- out of emerging markets, have been de-
 The Economist July 16th 2016 Finance and economics 57

2 even suggested that lower interest rates without raising rates sharply and thus in- meanwhile, is idling in parliament.
would dampen inflation, the exact oppo- juring the economy. Mehmet Simsek, the deputy prime
site of the conventional view. Instead of improving the investment minister, admits that the electoral cycle has
Unfortunately, Mr Erdogan’s fulmina- climate more broadly, Mr Erdogan is scat- got in the way of reform over the past few
tions seem to be influencing the central tering subsidies and tax breaks. On June years. But he argues that beneath the rheto-
bank. Annual inflation ticked up to 7.6% in 28th the government announced an in- ric, the government will keep pushing
June, well above the official target of 5%. vestment-promotion package, including more substantive measures. He says that
Nevertheless, the bank has been easing an exemption from property tax for invest- the becalmed tax reform should eventual-
monetary policy over the past few months, ments, cuts to stamp duty on contracts and ly become law, as will a new policy auto-
under the guise of simplifying an (admit- subsidies for research and development. matically enrolling people in pensions,
tedly complex) interest-rate regime. Cevdet For now, the budget remains in primary which should boost private savings. “If we
Akcay of Yapi Kredi, another Turkish bank, surplus (ie, before interest payments), but are successful in implementing reforms,
found that inflation has become less re- that is largely thanks to one-off revenues, then Turkey should return to high growth,”
sponsive to monetary policy. That will including an auction of broadcasting spec- he says. Left unsaid is the corollary: with-
make it much harder to bring it back down trum. A bill to improve tax collection, out reform, Turkey will merely scrape by. 7

Buttonwood Slow suffocation

The financial system isn’t designed to cope with low or negative rates

E VERY time commentators say that

bond yields cannot go any lower, the
markets take delight in proving them
Plumbing new depths
Ten-year government-bond yields, %
abilities. But insurance companies in Ger-
many and Switzerland are stuck with sav-
ings products they sold in happier times,
wrong. After Britain’s shock decision to which guaranteed returns well above cur-
3
leave the European Union, yields rent yields. A similar problem hit Japa-
dropped again: the income on ten-year United States nese insurers in the 1990s and 2000s.
Treasury bonds reached a record low, and 2 Insurance companies that have asset-
German and Japanese yields headed fur- management arms have some protection
ther into negative territory (see chart). The 1 from this pressure. The savings products
prospect that monetary policy would re- Germany + they sell are not guaranteed, instead offer-
main accommodating also helped shares 0 ing returns linked to the financial mar-
Japan
on Wall Street reach new highs. – kets. But the impact of low returns is slow-
Interest rates are the oil in the financial 1 ly squeezing asset managers too: clients
Jan Feb Mar Apr May Jun Jul
system’s engine, helping capital to flow 2016
tend to notice the impact of fees much
from one area to another. There is a rea- more than they did when returns were in
Source: Thomson Reuters
son that rates have been positive for the double digits. New business is gravitating
past three centuries, despite world wars towards low-cost exchange-traded funds
and the Depression. The system isn’t de- Many commercial banks own portfolios of and index-trackers. A similar problem af-
signed for a world of ultra-low, let alone government bonds, in part because regula- flicts private banks, whose wealthy cli-
negative, rates. tors require them to keep a stock of liquid ents are starting to wake up to the impact
The traditional business of banking is assets on hand. The interest payments on of fees.
to take money from depositors (a bank’s those bonds used to be a handy source of In a way, each sector’s problem is a
liabilities) and lend it, at higher rates and income. But as older, higher-yielding manifestation of the same phenomenon.
over longer periods, to borrowers (its as- bonds mature, they are being replaced Short-term interest rates and govern-
sets). So an important driver of profits is with much lower-yielding assets. ment-bond yields are the risk-free rates
the shape of the “yield curve”—the chart Mr Napier estimates that this factor that form the basis of all financial returns.
of interest rates for different durations. alone will cut European bank profits by The expected return on equities com-
The smaller the gap between short- and 20% over several years. Offsetting this ef- prises the risk-free rate plus a premium to
long-term rates (the flatter the yield curve, fect will be hard. Either costs will have to allow for the volatility of the stockmarket
in the jargon), the harder it is for banks to be cut by 10% or banks will have to charge and the risk of capital loss. A good chunk
make money. The problems become even their borrowers an extra 0.3% a year. But of the income of financial-services com-
greater as bond yields near zero. Banks pulling off the latter trick would not be eco- panies is the “cut” they take out of these
face resistance from depositors if they try nomically helpful; central bankers are try- returns. Now there is simply less return to
to charge them for the privilege of having ing to reduce, not increase, the cost of cor- share around.
money in an account. Even as the return porate borrowing. The irony is that low rates were initial-
on banks’ assets declines, it is hard for Banks are not the only institutions to be ly devised as a policy to save the financial
them to reduce the cost of their liabilities. affected. Insurance companies used to fol- sector, and through the mechanism of
When a central bank imposes negative low the Warren Buffett model for making higher lending, the rest of the economy.
interest rates on the reserves commercial money: collect the premiums upfront, in- Many voters protested about the bailing
banks keep with it, as those in Europe and vest them wisely, and use the returns to out of the very institutions that caused
Japan have done, it is thus very hard for create a cushion against bad news on the the crisis. Those protesters can take only
the banks to pass this cost to depositors. underwriting front. These days, thanks to cold comfort that the same policies are
Negative rates act as a tax on bank profits. regulations, insurers have very little expo- now slowly suffocating the industry.
According to Jason Napier, an analyst sure to risky assets like equities. They buy
at UBS, there is another factor at work. bonds to match their assets with their li- Economist.com/blogs/buttonwood
58 Finance and economics The Economist July 16th 2016

Deutsche Bank Prosecuting financial firms

Bottom of the class Fixed income*,
In a rut Price-to-book ratio
July 2016
as % of total
revenues, 2015 Hongkong and
JPMorgan Chase
0 0.2 0.4 0.6 0.8 1.0
16
Shanghaied
Goldman Sachs 28
New York
UBS 9
Brexit is merely one more worry for An investigation into an investigation of
Germany’s leading lender Morgan Stanley 18
HSBC
HSBC 10

T HE biggest bank in Europe’s most ro-

bust economy may seem an unlikely
victim of Brexit. Yet in the fortnight after
Citigroup
Bank of America
19

13
T HERE are two conflicting views of
American regulators’ response to the fi-
nancial crisis, and to misdeeds at big banks
Britons voted to quit the European Union BNP Paribas 8 more broadly. The first holds that Uncle
Deutsche Bank’s share price tumbled by Credit Suisse 22 Sam has gone easy on Wall Street, sparing
27%—putting Germany’s biggest lender in individuals from prosecution, for the most
Barclays 21
the unexalted company of British and Ital- part, and punishing institutions with noth-
RBS 11
ian banks. On July 7th it slid to €11.36 ing more serious than fines. The other con-
($12.58), a record low. Société Générale 9 tends that banks have been the victims of a
The price has since clambered back to- Deutsche Bank 29 capricious and unjustified shakedown,
wards €13. But Deutsche still trades at only Source: Thomson Reuters; *Debt underwriting plus fixed
driven entirely by politics, with little op-
a quarter of the supposed net value of its Morgan Stanley; income, currencies and portunity for redress. A new congressional
The Economist commodities sales and trading
assets—far behind its peers (see chart). Its report examining one bank’s travails pro-
shares fetch half of what they did a year vides grist for both arguments. The process
ago and an eighth of what they did in 2007. Deutsche to fatten capital by making and that led to a swingeing fine for HSBC in 2012
It lost a staggering €6.8 billion in 2015. The retaining profits. Its net interest income (the does indeed look arbitrary, but the govern-
newish chief executive, John Cryan, is car- difference between what it pays depositors ment was also less severe than it might
rying out an overdue spring-clean: he has and charges borrowers) dropped by 7%, have been.
told investors to expect no profit or divi- year on year, in the first quarter. In 2012 HSBC agreed to pay American
dend this year (and scrapped last year’s Slower growth in Europe is also little authorities $1.9 billion, admitting that it
too). Brexit makes the job a little harder. use to Deutsche’s investment bank, which had violated sanctions against Cuba, Iran,
Mr Cryan is overhauling Deutsche’s suffered with the rest of the industry in the Libya, Myanmar and Sudan, and had failed
rickety computer systems, closing offices market turmoil at the start of the year. The to impose tight enough safeguards to avoid
and shedding 9,000 jobs. But his most second quarter may have been better—and handling drug money in Mexico. Some ob-
pressing task is to thicken Deutsche’s capi- Brexcitement boosted trading volumes. servers complained that the government
tal cushion. The bank is not in mortal dan- But the second half may be weaker again. should have brought criminal charges
ger, but in these post-buccaneering days And in recent years Deutsche has been against the bank instead, even if that led to
regulators insist that lenders have ample hampered by its focus on fixed income— the loss of its American licence and, as a re-
means to withstand big losses. European selling, trading and underwriting sult, its potential collapse. Soon after, Eric
“stress tests” this month may not flatter bonds—in which it is among the world’s Holder, the attorney-general at the time,
Deutsche, partly because they take no ac- leaders. According to Huw van Steenis of who had participated in the negotiations
count of its capital-boosting plans. Morgan Stanley, industry revenues from with HSBC, told the Senate that the dire
Deutsche’s ratio of equity to risk- bonds, currencies and commodities fell by economic consequences had an “inhibit-
weighted assets, an important gauge of re- 9% a year in 2012-15, while equities busi- ing influence” on plans to prosecute big fi- 1
silience, is 10.7%. Had the latest regulations nesses grew by 6% annually. Among big
been in place in 2009, estimates Autono- banks, none relies on fixed income more
mous, a research firm, Deutsche’s ratio than Deutsche does.
would have been a threadbare 2.4%, and The bank has legal worries too. The big-
just 5.5% even in mid-2012. Despite this im- gest of these is an allegation by America’s
provement, Deutsche still lags its peers. Mr Department of Justice that Deutsche mis-
Cryan wants to lift its score to 12.5% by 2018. represented the value of residential mort-
The sale of a stake in Hua Xia, a Chinese gage-backed securities before the crisis of
bank, due to be completed soon, should 2008. Other leading banks have already
close around 0.5 points of that 1.8-point settled similar claims. American and Brit-
gap. The disposal of Postbank, a German ish authorities are also examining whether
mass-market retail bank of which Deut- slack controls at Deutsche let money-laun-
sche took control in 2010, is slated to bring derers spirit cash out of Russia. Deutsche
in most of the rest. (Deutsche also has an- has set aside €5.4 billion to cover legal bills.
other, posher retail operation under its Another looming headache is a proposal
own name.) But Mr Cryan has soft-ped- by international regulators that would
alled on the sale. Postbank relies chiefly on sharply increase capital requirements for
deposit-taking and mortgage lending, and mortgages and other loans.
the euro zone’s ultra-low interest rates Mr Cryan said this month that he didn’t
have made it less attractive to would-be see his bank as a takeover target. He’s right
buyers. Hurrying to sell makes little sense. about that: regulators think banks are big
The Brexit vote portends weaker enough. He also said that Deutsche would
growth in Europe and thus even lower reach its capital target without needing to
rates, making Postbank even less alluring. tap up investors. He may be right about
Still-lower rates also make it harder for that, too—but it’s much less certain. 7 It could have been much worse
 The Economist July 16th 2016 Finance and economics 59

2 nancial firms. Later, he said had been “mis- troller of the Currency, a financial regula- teachers on holiday and middle-class
construed”, and that decision to prosecute tor, could not provide any assurance that a housewives—to earn a little extra cash.
rested simply on whether wrongdoing successful prosecution of HSBC would not One early study found that about half of
could be proved. lead both to the closure of its American female temps during the 1960s had some
The Republicans of the Financial Ser- unit and to the revocation of its right to pro- college education, nearly twice the nation-
vices Committee of the House of Repre- cess transactions in dollars—a fatal out- al rate. The typists, stenographers and oth-
sentatives, convinced that Mr Holder had come the bank could not risk. There was er clerical workers supplied by temping
admitted that big banks were above the definitely political intervention: Britain’s agencies earned wages only slightly below
law, decided to investigate. Their 245-page chancellor interceded on HSBC’s behalf those ofpermanent workers. Perhaps most
report, published this week, concludes both with his American counterpart and important, temp agencies were not seen as
that big banks were indeed seen as “too big with the head of the Federal Reserve, al- second-rate employers. “There is nothing
to jail”. It points to the fact that some offi- though whether this had any effect is un- demeaning about working for such an or-
cials in the Justice Department had recom- clear. Just how regulators arrived at $1.9 bil- ganisation,” Barron’s wrote in 1962; “Many
mended a criminal prosecution for HSBC, lion, or at any of the $219 billion of fines workers prefer to do so.”
but were overruled. they have heaped on financial firms since According to the Census Bureau, temps
Yet the report also makes clear that the crisis, remains opaque. The report, in today are disproportionately young, single
HSBC could never have fought the govern- short, leaves everyone cross with the gov- and black or Hispanic. More than half are
ment’s charges. The Office of the Comp- ernment—just as they were before. 7 men. If the temps of the 1960s were rela-
tively educated, today’s are more likely
than permanent workers to be high-school
dropouts. Just 8% of them have an ad-
vanced degree compared with 12% of per-
manent workers. Perhaps unsurprisingly,
given all that, temps earn 20-25% less than
their permanent counterparts. Even after
controlling for demographic characteris-
tics such as age and education, Lawrence
Katz, an economist at Harvard University,
reckons temps face a 15% earnings penalty.
In 1970 8% of temporary workers lived be-
low the poverty line; in 2014 it was 15%.
Such conditions have stigmatised tem-
porary employment—so much so that
workers seek out temping jobs only as a
last resort. In 2005, the last year temporary
workers were thoroughly surveyed by the
Census Bureau, eight in ten said they
would prefer a permanent job. More than
half said they were working as a temp not
for the added “flexibility”, a claim fre-
quently made by industry boosters, but be-
cause it was the only work they could find.
Temporary work A survey by the Federal Reserve in 2013
found that a big share of temps consider
How the 2% lives themselves overqualified for their jobs.
Less than a third see their job as a “stepping
stone to a career”.
Although temps account for just 2% of
America’s workforce, there is wide varia-
tion at the local level. In Queens County,
New York (home to the borough of the
Temping is on the increase, affecting temps and staff workers alike
same name), fewer than one in 200 work-

A T THE BMW factory in Spartanburg,

South Carolina, brand new sport-utili-
ty vehicles roll off the assembly line with
whose numbers are growing even as their
lot in life diminishes.
Demand for temps has never been
ers is employed by temp agencies. In
Greenville County, South Carolina, just a
few miles from BMW’s factory, it is nearly
the regularity of a German express train. higher (see top chart on next page). The in- one in ten. Big, concentrated and enduring
Work rotas at the vast facility, alas, are not dustry now provides work for some 2.9m pockets of temporary workers suggest that
always so reliable. Between 2007 and people, over 2% of the total workforce. The temping agencies are being used not just to
2009, amid the turmoil of the financial cri- American Staffing Association, an indus- smooth out fluctuations in demand, but
sis and ensuing recession, BMW hired, try group, reckons that it generated over also to lower labour costs.
then laid off and then re-hired some 700 $120 billion in revenue in 2015. Since the The proliferation of ill-paid temp work
temporary workers through a firm called economic recovery began in 2009, tempo- affects temporary and permanent workers
Management, Analysis and Utilisation rary employment has been responsible for alike. Many of the costs that employers of
(MAU). Josef Kerscher, the luxury carmak- nearly one in ten net new jobs. temps avoid, including prevailing wages
er’s American boss, likened the conditions But as temping has grown, the quality and health-care costs, are now borne in
that prompted the wild fluctuations in of the jobs it provides has deteriorated. In part by taxpayers in the form of increased
Spartanburg’s temporary workforce to a the 1950s and 1960s temping was seen as a spending on Medicaid, food stamps and
“rollercoaster”. Such volatility is not un- way for educated people with time on other welfare schemes. More than 26% of
common for America’s temps, however, their hands—college students, school temps participate in at least one of these 1
60 Finance and economics The Economist July 16th 2016

Payouts for whistleblowers sion, confusingly, has decided not to make

A lasting problem payments in cases in which it plans to pur-
United States temporary employment Whistle while you sue a criminal conviction. There is an ad-
ministrative logic to that: the commission
As % of total employment
2.5
work does not handle criminal cases itself, but
hands them to Ontario’s prosecutors.
2.0 Nonetheless, says Mr Gross, the distinction
Ot tawa
1.5 “could have a chilling effect on whistle-
Ontario offers finance workers millions
1.0 blowers, who will be reluctant to come for-
to blow the whistle on fraud
ward in the most serious cases.”
0.5

1990 95 2000 05 10 16
0 C ANADA has long had a reputation as a
security fraudster’s playground,
where misdeeds go undetected and un-
Others think the promise of payouts
will create an “avaricious mentality
among employees and agents”. Similar
Relationship with wage growth by state punished and investors must take extra programmes run by Britain’s Financial
care. David Dodge, then governor of the Conduct Authority and Australia’s Securi-
North Dakota
5 central bank, provoked outrage in 2004 ties and Investments Commission do not
when he said foreigners perceive Canada offer money. Nor does the new whistle-
Annual average wage growth*, 2000-15, %

as a “Wild West” in terms of the degree to blower office in neighbouring Quebec,

which financial rules and regulations are which opened its doors in June.
4 enforced. At the time Mr Dodge was advo- Quebec looked at the American, British
Wyoming cating a single national securities regulator, and Australian systems and concluded
Oklahoma which despite the efforts of successive fed- there was not enough evidence to show
eral governments has yet to be created. But that money generated more or better tips.
stung by the criticism, Canada’s 13 separate Ms Gorman defended Ontario’s choice,
3
securities commissions—one for each saying that while the prime motivation of
Arizona province and territory—have at least been most whistleblowers is to stop wrongdo-
South Carolina trying much harder to get to grips with se- ing, the offer of a reward might tip the bal-
New York curities fraud. ance for those who fear blowing the whis-
2
Michigan The regulators, often working in con- tle will be a career-ending move.
cert with the police, the government or the It will take time to see whether Ontario
0 1 2 3 4 courts, have experimented with all kinds has struck the right balance with its finan-
Temporary employment as % of total, 2000
of fraud-fighting schemes. They have set cial inducements. Yet just by opening its
Source: BLS *Permanent workers
up multi-agency enforcement teams, doors the new office helps send a message
brought in no-contest settlements akin to to investors that regulators are on the case.
2 social safety-net programmes, compared those used by America’s regulators and al- Mr Dodge, the former central-bank gover-
with 14% of permanent workers. lowed institutional investors to finance nor, says the situation has changed since
The growth of the temping industry af- lawsuits on behalf of aggrieved investors he made his comments in 2004, with
fects labour markets in other ways. On the in exchange for a cut of the proceeds. The many new rules and regulations now in
positive side, by offering positions to work- results to date have been underwhelming. place. “The West is not so wild as it was,”
ers who might otherwise be unemployed, Between 2012 and 2015, 1,205 individuals he says. 7
temping reduces the unemployment rate. and companies were prosecuted for secu-
Temps also insulate permanent employ- rities offences in Canada, but fewer than
ees from downturns in the business cycle, 40 went to jail, according to FAIR, a lobby
thereby improving job stability. group for investor rights. “From a swin-
Yet according to a paper published in dler’s point of view, these are great odds,”
2013 by David Pedulla ofStanford Universi- says Neil Gross, FAIR’s boss.
ty, permanent employees who work This week the Ontario Securities Com-
alongside temps worry more about job se- mission, Canada’s biggest, decided to up
curity. They also take less pride in their firm the ante, by setting up an office to encour-
and have worse relationships with manag- age whistleblowing, with the power to of-
ers and co-workers. A study published in fer financial rewards of as much as C$5m
1999 by Mr Katz and Alan Krueger of ($3.8m). “It will be a game-changer,” says
Princeton University found that states Kelly Gorman, who heads the new office.
with a higher share of temporary employ- She expects insiders will help uncover dif-
ment in the late 1980s experienced lower ficult-to-detect frauds and offer the kind of
wage growth in the 1990s. These results meaty evidence that investigators would
have held up: in states where less than 2% normally spend years accumulating. It
of the workforce was employed by tem- should also prompt financial firms to im-
ping firms in 2000, wages of permanent prove compliance systems to catch mis-
workers grew an average of 3% a year be- conduct before it becomes fodder for a tip.
tween 2000 and 2015; in states with a high- The payouts for whistleblowers, modelled
er proportion of temp workers, wages on those offered by America’s Securities
grew at an annual rate of 2.6% (see bottom and Exchange Commission, will be an es-
chart). Such findings lend support to the pecially powerful tool, she says.
view of David Autor of MIT that the use of The creation of a new office to encour-
temping agencies, while beneficial to indi- age whistleblowing has broad support, but
vidual workers and firms, “may exert a the decision to offer financial rewards has
negative externality on the aggregate la- been much more controversial. Some see
bour market—that is, it is a ‘public bad’.” 7 the hand-outs as too timid: the commis-
 The Economist July 16th 2016 Finance and economics 61

Free exchange Econometrics

It is not easy to compare the size of economies—even across the Channel

F RANCE is renowned, fairly or not, for its long holidays and

short working weeks, subsidised farmers and unionised
workers, high culture and higher taxes. Less than two-thirds (64%)
Grossly distorted picture
China’s GDP GDP
of its working-age population was employed last year, according 2015 yuan trn $trn
FO REC A S T
to the OECD, compared with almost three-quarters (73%) in Brit- 70 3.0
ain. But is France’s well-lunched workforce of26.4m now produc- 60 Britain PPP*
ing more than Britain’s harried 31.1m employees? 2.8
2008-15 50
Many people seem to think so. France’s GDP in 2015 was about 427 trillion yuan France PPP*
€2.18 trillion. Britain’s was a little over £1.86 trillion. On July 6th 40 2.6
the pound fell below €1.17 on the currency markets, rattled by 30 France†
Britain’s vote to leave the European Union (EU). Since 1.86 multi- 2.4
plied by the exchange rate of July 6th is less than 2.18, many com- 1952-2007 20
382 trillion yuan Britain†
mentators jumped to the conclusion that Britain’s economy had 10 2.2
slipped overnight from fifth-biggest in the world to sixth. It was 0
one more humiliation among many. 1952 70 80 90 2000 15 2015 16 17
Comparing the size of national economies can be a frustrating Sources: National Bureau of Statistics of China; *At purchasing-power parity
†At current prices
Economist Intelligence Unit
exercise. The measuring tape is not always consistent from place
to place or period to period. This week Ireland’s statisticians add-
ed over19% to last year’s GDP after folding multinationals’ aircraft longer and shorter. From 1952 to 2015 China’s GDP amounted to
and intellectual property into its economy. Both China and India, over 809 trillion yuan (at 2015 prices), according to our calcula-
two of the biggest economies in the world, have recently revised tions, based on the government’s revised figures. Incredibly, of all
their methods for calculating GDP, bringing them closer to inter- the goods and services ever produced by the People’s Republic of
national standards agreed on in 2008. India’s controversial over- China, over half were produced from 2008 onwards.
haul recalculated everything from manufacturing output (draw- Shorter timespans are also possible: Canada publishes a
ing on a new database of corporate e-filings) to the value of dung. monthly GDP estimate. In theory, one could even calculate the
(This latter revision added over $180m to India’s GDP, assuming output of Britain and France in the few weeks since the EU refer-
an “evacuation rate” of 0.3kg a day for goats and rather more for endum. But weekly GDP figures do not exist and would be hid-
sheep.) eously volatile if they did.
China, for its part, last week added R&D spending to its mea- Because GDP represents a flow of goodies over time, it makes
sure of economic size (just as advanced countries already do). It sense to value it at the exchange rates that prevailed during that
also took the opportunity to revise its figures all the way back to time. It seems odd, in contrast, to reprice what happened last year
1952 (see chart). The new numbers suggest that China’s GDP was at an exchange rate that arose only last week. Many of the items
over 68 trillion yuan last year, compared with only 478 billion that constitute GDP are perishable, disappearing shortly after
yuan in 1952 (at 2015 prices). The difference between those two their creation. Hot meals and long journeys, a stirring night at the
numbers, however sketchy they may be, represents the greatest theatre, a warm radiator on a winter’s morning—Britain pro-
economic story of the modern age. But the statisticians keep fid- duced many such necessities and conveniences over the course
dling with the earlier chapters. of 2015. But these items left nothing behind that could be marked
When laypeople reflect on the size of their national economy, to market in July 2016.
they may think of a vast inventory of productive assets: hum- This is not to deny that the pound was overvalued. Its strength
ming factories, gleaming skyscrapers, fertile lands, cosy homes was rooted not in the international appeal of British goods but in
and teeming workers, full of brains and brawn. Similarly, when the widespread appeal of British assets—including gilded homes
they look at a chart of GDP, like China’s above, it may remind and gilt-edged securities. Foreign purchases of these assets added
them of a pile of money accumulating steadily over time, like an little directly to British output (because GDP includes only newly
unusually successful stock portfolio. built homes and factories, not financial securities or pre-existing
Viewed this way, it may seem natural to recalculate the value properties or companies sold to new owners). But these buyers
of an economy in the light of sudden currency fluctuations, like did bid up the currency in which GDP was priced.
the yuan’s decline since August or the pound’s since June 23rd.
Why not mark these economies to market? It seems unobjection- Liberty, fraternity, purchasing-power parity
able to reprice Britain’s GDP at the lower July 6th exchange rate, The size of Britain’s GDP, when converted into euros, thus reflect-
just as a Frenchman in London might recalculate the diminished ed an uneasy amalgam of demand for its goods and services and
euro value of his sterling bank account or his Battersea flat. a somewhat separate demand for the pounds required to buy
But such an exercise betrays a misunderstanding of GDP. This British assets. The combination made Britain an expensive place
deceptively familiar gauge of economic size does not represent a to visit: all told, its prices were about 16% higher than France’s last
stock of assets but a flow of goods and services. It is more akin to year, according to the World Bank and the IMF. As it happens, if
the wages and interest someone earns during a year than to the similar items were priced similarly in both countries (bringing
money in an account at the end of the year. It cannot therefore be their purchasing power into parity with each other), France’s GDP
valued at a point in time, like a bank balance, dwelling or stock would have been almost the same size as its neighbour’s in 2015,
portfolio. It must instead be evaluated over a span of time. even before Britain’s recent setbacks and indignities. 7
Most often, this span is a year (which obviates the need for sea-
sonal adjustment) or a quarter. Other periods are possible, both Economist.com/blogs/freeexchange
62 The Economist July 16th 2016
Science and technology
Also in this section
63 Unreliable palaeoclimatology
64 Starving cancer to death
64 A new electric plane
65 The problems of high-seas fishing

For daily analysis and debate on science and

technology, visit
Economist.com/science

When science goes wrong (I) formation from 499 resting volunteers
who were being scanned while not think-
Computer says: oops ing about anything in particular (these
scans were intended for use as controls in
the original papers). The researchers divid-
ed their trove arbitrarily into “controls”
and “test subjects”, and ran the data
through three different software packages
Two studies, one on neuroscience and one on palaeoclimatology, cast doubt on
commonly used to analyse fMRI images.
established results. First, neuroscience and the reliability of brain scanning
Then they redivided them, in a different ar-

N OBODY knows how the brain works.

But researchers are trying to find out.
One of the most eye-catching weapons in
has found that the computer programs
used by fMRI researchers to interpret what
is going on in their volunteers’ brains ap-
bitrary way, and analysed those results in
turn. They repeated this process until they
had performed nearly 3m analyses in total.
their arsenal is functional magnetic-reso- pear to be seriously flawed. Since all the “participants” in these
nance imaging (fMRI). In this, MRI scan- fMRI works by monitoring blood flow newly conducted trials were, in fact, con-
ners normally employed for diagnosis are in the brain. The idea behind this is that trols in the original trials, there ought to
used to study volunteers for the purposes thinking, like any other bodily function, is have been no discernible signal. All would
of research. By watching people’s brains as hard work. The neurons doing the thinking presumably have been thinking about
they carry out certain tasks, neuroscien- require oxygen and glucose, which are something, but since they were idling rath-
tists hope to get some idea of which bits of supplied by the blood. The powerful mag- er than performing a specific task there
the brain specialise in doing what. netic fields generated by an MRI machine should have been no discernible distinc-
The results look impressive. Thousands are capable of distinguishing between the tion between those categorised as controls
ofpapers have been published, from work- oxygenated and deoxygenated states of and those used as subjects. In many cases,
manlike investigations of the role of cer- haemoglobin, the molecule which gives though, that is not what the analysis sug-
tain brain regions in, say, recalling direc- red blood cells their colour and which is re- gested. The software spat out false posi-
tions or reading the emotions of others, to sponsible for shepherding oxygen around tives—claiming a signal where there was
spectacular treatises extolling the use of the body. Monitoring haemoglobin there- none—up to 70% of the time.
fMRI to detect lies, to work out what peo- fore monitors how much oxygen brain False positives can never be eliminated
ple are dreaming about or even to deduce cells are using, which in turn is a proxy for entirely. But the scientific standard used in
whether someone truly believes in God. how hard they are working. this sort of work is to have only one chance
But the technology has its critics. Many in 20 that a result could have arisen by
worry that dramatic conclusions are being I want to look inside your head chance. The problem, says Dr Eklund, lies
drawn from small samples (the faff in- In an fMRI study, an image of a brain is di- with erroneous statistical assumptions
volved in fMRI makes large studies hard). vided into a large number of tiny “vox- built into the algorithms. And in the midst
Others fret about over-interpreting the tiny els”—3D, volumetric versions of the famil- of their inspection, his team turned up an-
changes the technique picks up. A deliber- iar pixels that make up a digital image. other flaw: a bug in one of the three soft-
ately provocative paper published in 2009, Computer algorithms then hunt for ware packages that was also generating
for example, found apparent activity in the changes in both individual voxels and false positives all on its own.
brain of a dead salmon. Now, researchers clumps of them. It was in that aggregation The three packages investigated by the
in Sweden have added to the doubts. As process that Dr Eklund and his colleagues team are used by almost all fMRI research-
they reported in the Proceedings of the Na- found the problems. ers. Dr Eklund and his colleagues write that
tional Academies of Science, a team led by To perform their test, they downloaded their results cast doubt on something like
Anders Eklund at Linkoping University data from old fMRI studies—specifically, in- 40,000 published studies. After crunching 1
 The Economist July 16th 2016 Science and technology 63

2 the numbers, “we think that around 3,000 cated piece of software. rams are translucent, those fossilised in
studies could simply be wrong,” says Dr There is another problem, says Dr Ek- rocks are often chalkily opaque. This
Eklund. But without revisiting each and ev- lund: “it is very hard to get funding to check means their chemical composition has
ery study, it is impossible to know which this kind of thing.” Those who control the changed in the process of fossilisation.
those 3,000 are. purse strings are more interested in head- The two researchers therefore looked at
Dr Eklund’s results blow a hole in a lot line-grabbing discoveries, as are the big- samples of sea-floor sediment taken from a
of psychological and neuroscientific work. name journals in which researchers must site on Blake Ridge in the north-western At-
They also raise the question of whether publish if they wish to advance their ca- lantic Ocean. They knew from the work of
similar skeletons lurk in other closets. reers. That can leave the pedestrian—but others that some foram shells in this sedi-
Fields from genomics to astronomy rely on vital—job of checking others’ work un- ment have remained translucent while
computers to sift huge amounts of data be- done. This may be changing. Many areas others have become opaque, permitting
fore presenting summaries to their human of science, including psychology, are in the the two sorts from the same sedimentary
masters. Few researchers are competent to midst of a “replication crisis”, in which sol- layer to be compared and contrasted.
check the assumptions on which such soft- id-seeming results turn out to be shaky The contrasts, they found, are huge.
ware is built, or to scour code for bugs— when the experiments are repeated. Dr Ek- Radiocarbon dating suggests the opaque
which, as programmers know, are virtual- lund’s findings suggest more of this check- shells are a lot older than the translucent
ly guaranteed to be present in any compli- ing is needed, and urgently. 7 ones. In one sample, collected from a
depth of 71-73cm below the sea floor, the
translucent shells clocked in as being be-
When science goes wrong (II) tween 14,030 and 17,140 years old, while
the opaque shells seemed to be aged be-
Shell shock tween 26,120 and 32,580 years. Another
sample, taken from almost twice that
depth beneath the sea floor, had translu-
cent shells that were apparently between
21,730 and 21,800 years old. Opaque shells
at that depth were dated to between 27,860
and 33,980 years ago.
Tiny fossils used to date rocks may not be the accurate clocks once believed
Clearly, there is something wrong here.

U NDERSTANDING past climates is cru-

cial to understanding future ones, and
few things have been more important to
Ms Wycech and Dr Kelly suspect that the
compaction which transforms ooze into
sedimentary rock forces carbon-contain-
that historical insight than fossil foraminif- ing compounds like bicarbonates into the
era. Forams, as they are known, are single- shells, both making them more opaque
celled marine creatures which grow shells and diluting their 14C—and thus causing
made of calcium carbonate. When their them to appear older than they really are.
owners die, these shells often sink to the The randomness of such a process would
seabed, where they accumulate in sedi- also explain why the range of possible ages
mentary ooze that often gets transformed is wider for the opaque shells than for the
into rock. translucent ones.
For climate researchers, forams are Whatever the cause, though, this find-
doubly valuable. First, regardless of their ing will worry climate scientists. If studies
age, the ratio within them of two stable iso- in other locations support Ms Wycech’s
topes of oxygen (16O and 18O) indicates and Dr Kelly’s conclusions, then foram-
what the average temperature was when based estimates of when the climate has
they were alive. That is because different changed over recent millennia will have to
temperatures cause water molecules con- Opaque results or translucent answers? be reconsidered. Forams are not the only
taining different oxygen isotopes to evapo- clocks used to date such transitions—tree
rate from the sea at different rates; what make calcium carbonate for their armour rings, ice cores and so on also play a part—
gets left behind is what shells are formed plating. When an organism dies, radioac- but they are important. Moreover, as the re-
from. Second, for those forams less than tive decay gradually diminishes the con- sults cited above suggest, it is not simply a
about 40,000 years old, the ratio of an un- centration of 14C in its remains. The isotope matter of applying a proportional correc-
stable, and therefore radioactive, isotope has a half-life of 5,730 years, and that tion to the existing estimates. In those
of carbon (14C) to that of stable 12C indicates steady decay rate means it can be used as a cases, the translucent shells had similar ap-
when they were alive. That means the rock clock. This clock, however, can reach back parent ages while the opaque ones did not.
they are in can be dated. only so far. After around 40 millennia (ie, On the other hand, this work does suggest
How accurately such rocks have been seven half-lives) only1/128th of the original a way to get around the problem in future,
dated, though, has just been called into amount is left. That puts a practical limit on namely by concentrating analysis on trans-
question by Jody Wycech and Clay Kelly, such radiocarbon dating. lucent shells alone.
of the University of Wisconsin-Madison. A Moreover, for the technique to be accu- Ms Wycech’s and Dr Kelly’s work also
paper they have published in Geology sug- rate the remains in question need to have raises the question of how reliable the oxy-
gests many foram-derived dates may be been chemically undisturbed. In particu- gen-isotope-ratio data are. With luck, in
too old. lar, post-mortem contamination by other their case, there will be no problem, for the
14C is formed in the atmosphere by the sources of carbon can sprinkle grit into the ratio in foram shells reflects that of the oxy-
action of cosmic rays on nitrogen atoms, radioactive clockwork. Ms Wycech and Dr gen atoms in the water of the ocean at the
and often subsequently reacts with oxy- Kelly wondered whether foram shells pro- time those shells were formed. Any leak-
gen to form carbon dioxide. This CO2 may vide quite such a precise timepiece as pa- age from the surrounding ooze would thus
be taken in by plants as part of photosyn- laeoclimatology researchers assume. In be likely to have had the same ratio. It
thesis, or by shell-forming creatures to particular, though the shells of living fo- would, though, be worth checking. 7
64 Science and technology The Economist July 16th 2016

Oncology days and then put through the cycle again. of breast-cancer tissue from the mice in the
Another nine mice, chosen from the origi- re-run experiment and scanned these for
Fast thinking nal 30 as controls, were starved for 60
hours (the maximum feasible without en-
TILs. They found that, while such cells
were indeed present in the tumours of
dangering lives) every ten days but other- mice fed ordinary chow, there were 70%
wise kept on normal chow. And the re- more of them in the tumours of mice given
maining ten (one of the originals had died) doxorubicin alone, 80% more in those of
were fed the chow continuously. mice that were on the special diet alone
How to starve a cancer without starving
When the team terminated the experi- and 240% more in mice that had been giv-
the patient
ment, they found that both the rodents en both therapies.

A GENERAL besieging a city will often

cut off its food supply and wait, rather
than risking a direct assault. Many doctors
which had been starved and those which
had been fed the special diet developed tu-
mours which were only two-fifths of the
A follow-up experiment revealed at
least part of what was going on. An en-
zyme called haeme oxygenase-1, which
dream of taking a similar approach to can- size of those found in the mice on the or- helps regulate immune responses, turned
cer. Tumours, being rapidly growing tis- dinary diet. Encouraged by these results, out to be protecting tumours from the at-
sues, need more food than healthy cells do. Dr Longo ran the experiment again, but tention of TILs in mice on the normal diet.
Cutting this off thus sounds like a good with the addition of doxorubicin. The re- Dr Longo’s diet seems to suppress this en-
way to kill the out-of-control cells. But, sults were impressive. In combination zyme’s production in a tumour—and that
while logical in theory, this approach has with the special diet, doxorubicin drove tu- encourages TILs to accumulate. Add in the
proved challenging in practice—not least mours down to a quarter of the size of drug, and the tumour faces a two-pronged
because starvation harms patients, too. those found in control mice—close to the assault. Further work by the team suggests
In particular, it damages cells called tu- reduction he had reported in 2012. this approach also works on melanoma, a
mour-infiltrating lymphocytes (TILs) that, To work out what was happening at the particularly aggressive form of skin cancer.
as their name suggests, are one of the im- cellular level, the team collected samples A siege mentality can pay off. 7
mune system’s main anti-cancer weapons.
Valter Longo of the University of Southern
Electric aircraft
California, in Los Angeles, however, thinks
he may have a way around this problem.
As he and his colleagues write in a paper in Extra thrust
this week’s Cancer Cell, they are trying to
craft a diet that weakens tumours while si-
Another stage on the journey to battery-powered planes
multaneously sneaking vital nutrients to
healthy tissues, TILs included.
Dr Longo first used starvation as a
weapon against cancer in 2012. In experi-
T HIS aeroplane may not look special,
but it is. Its airframe is that of a 330L,
an aerobatic craft built by Extra Flugzeug-
to be strapped to the co-pilot’s seat. For
this and other reasons, the plane’s pilot
(and Extra Flugzeugbau’s founder), Walt-
ments on mice, he employed it in parallel bau of Dinslaken, Germany. It is pro- er Extra, did not attempt any of the fancy
with doxorubicin, a common anticancer pelled, though, by an electric motor built aerobatics for which the 330L is re-
drug. The combination resulted in the ani- by another German company, Siemens. nowned on his ten-minute proving flight.
mals’ tumours shrinking by an average of Electric aircraft are, as it were, in the The limited duration of Mr Extra’s
four-fifths, as opposed to a halfifthey were air—with projects like the Solar Impulse, flight was determined by a need not to
dosed with the drug alone. No one, a sun-powered plane about to complete a drain the batteries—which, combined,
though, was willing to follow this experi- round-the-world flight, and Antares, a have only about 20 minutes’ worth of
ment up by starving people in the same motorised glider. But the 330LE, as it is juice in them. But that does not bother
way. The consensus was that this would be dubbed, is the first to have an airframe Siemens. Battery technology is improv-
too risky. That led Dr Longo to think about already certified for sale and also the first ing rapidly and Frank Anton, head of the
how he might mimic the benefits of starva- (other than motorised gliders) to use an firm’s eAircraft programme, believes it
tion while minimising its problems. The re- electric engine its makers plan to have will quickly become powerful enough to
sult is a diet rich in vitamin D, zinc and fatty certified as well. The 330LE’s initial public sustain Siemens’s ambition to build, by
acids essential to TILs’ performance, while outing, on July 4th, was thus a step for- 2030 and in collaboration with Airbus, a
being low in the proteins and simple sug- ward for the field. pan-European company, a hybrid-electric
ars that tumours make ready use of. The motor itself weighs a mere 50kg. regional aircraft with 60-100 seats.
To test this diet’s efficacy, Dr Longo and That compares with 201kg for the 9,550cc, Depending on how the power used to
his colleagues injected 30 mice with breast- six-cylinder device a 330L normally charge the batteries is generated, such a
cancer cells. For the first two days after the sports. Batteries are not included, how- craft could help reduce carbon-dioxide
injections they fed these mice standard ro- ever, and that makes a bit of a difference— emissions. A more certain environmental
dent chow, composed of 25% protein, 17% for the batteries required weigh 150kg benefit, though, would accrue to those
fat and 58% simple sugars and complex each, and two are needed. One sits con- living near airports—for one particularly
vegetable carbohydrates. This contained veniently in the liberated space in the desirable feature of electric motors is that
3.75 kilocalories of energy per gram. They engine compartment, but the second has they are almost silent.
then put ten of the animals onto a transi-
tion diet of 1.88 kilocalories per gram for a
day before switching them to the near-star-
vation diet. Besides its special ingredients
this consisted of 0.5% protein, 0.5% fat and
99% complex carbohydrates that would be
of little value to cancer cells.
The mice remained on their meagre
commons for three days before being re-
turned to standard rodent chow for ten
 The Economist July 16th 2016 Science and technology 65

Fishing this sort of thing. Since 2010, the fraction of

tuna stocks regarded as over-exploited has
Unbalancing the scales risen from 28% to 36%. Sometimes, indeed,
matters descend into farce. In 2015 the In-
ternational Commission for the Conserva-
tion of Atlantic Tunas, another RFMO,
agreed to a 23% reduction in the quota for
the Atlantic bigeye tuna after warnings
from its scientists. But this will help little,
Poor management of fisheries is not a local problem. It extends to the entire ocean
for the species is now so rare that catches

T HE high seas are a lawless place. That is

no metaphor. Beyond the jurisdiction
of governments, beyond even the United
Making sail
had fallen below the newly approved level
when the change was promulgated.
There are some signs of progress. In
Top high-seas fishing countries
Nations Convention on the Law of the Sea By landed value of catch, 2000-10 annual average, $bn May another RFMO, the Indian Ocean
(UNCLOS), which was agreed in 1982 and 0 1 2 3 Tuna Commission, adopted tighter rules to
came into force in 1994, they have been Japan 27
help ailing skipjack-tuna stocks. This, ac-
subjected to few laws over the centuries cording to Mireille Thom, a marine-policy
South Korea 41
besides the prohibition of piracy and specialist at the World Wide Fund for Na-
slave-trading, and the regulation ofsubma- Taiwan 60 ture, a global conservation charity, was the
rine cables and pipelines. Spain 30 first time a body responsible for tuna has
In 2001, though, they became a little United States 8 acted to prevent a stock from collapsing,
less lawless. That was the year the United Chile 19
rather than reacting to its collapse.
Nations’ Fish Stocks Agreement (UNFSA) Skipjacks and their kin are migratory
China 6
came into effect. The UNFSA tried to im- species. The state of straddling stocks can
pose some order on high-seas fishing, an Indonesia 9 be even harder to determine. No one has
activity not previously considered to mat- Philippines High-seas catch 16 reliable information on how they fare in
as % of total
ter enough for people to care about it. France marine catch 20 the western central Pacific, the eastern and
Fishing beyond those parts of the ocean western central Atlantic and the Indian
within 200 nautical miles of land, codified Global landed value of high-seas catch oceans. Some RFMOs attempt to act re-
2000-10 annual average, $bn
by UNCLOS as exclusive economic zones Top ten countries: 8.45 Others: 3.62 sponsibly amid the murk anyway. The
(EEZs), began about six decades ago. It Southeast Atlantic Fisheries Organisation
Source: Global Ocean Commission
ramped up in the late 1970s when Austra- has imposed catch limits on certain spe-
lian and New Zealand vessels started cast- cies, such as orange roughy, armourhead
ing their nets specially for deepwater spe- an area’s stocks, for example, is often as- and cardinal fish, although how much
cies. Other countries have now joined and sessed by working out how many of a spe- these are exploited is unknown. And
overtaken them (see chart). cies there would be in that area if there many RFMOs say they want to care for ma-
Though the fuel needed to get to the were no fishing at all (a quantity known as rine ecosystems, even if their translation of
high seas is pricey, taxpayers often pick up its unfished biomass), and then estimating that intention into action is patchy.
part of the tab in the form of government how far short of this level stocks currently Possibly, they could learn lessons from
subsidies. Such subsidies, combined with fall. In an active fishery, they obviously one other organisation that has high-seas
overexploitation of fisheries closer to land, will fall short of it, but the optimal shortfall jurisdiction, the Commission for the Con-
have made the high seas attractive to fish- is shown by a second number, the maxi- servation of Antarctic Marine Living Re-
ermen. The consequence, according to the mum sustainable yield. This is the peak sources. This was established by interna-
UN’s Food and Agriculture Organisation, is crop that can be taken from a fishery, year tional convention in 1982 and has 25
that they, too, are being pillaged. Already, after year after year. members. It was set up to prevent a repeat,
two-thirds of their stocks are being fished in the late 20th century, of the unfettered
beyond sustainable limits and, as they The old plans and the sea ravaging of Antarctic wildlife (especially
once provided a haven for fish every- Translating these numbers into fishing whales and seals) that characterised the
where, yields in EEZs are suffering, too. practice can be hard. For example, two spe- 19th and early-20th centuries.
The UNFSA attempts to regulate high- cies with the same unfished biomass may, Under the commission’s aegis, report-
seas fishing through clubs called Regional because of their ways of life, be under dif- ed catches of krill, Antarctic toothfish and
Fisheries Management Organisations ferent levels of strain from net-casters. Fish- other species of the Southern Ocean have
(RFMOs). The 17 RFMOs set rules supposed ing optimally for one might threaten the fallen to a third of their levels in the 1980s
to be binding on member countries (unlike other. But data on by-catch—species netted and 1990s. That has been achieved by the
about 50 other fisheries bodies which that are not a boat’s main quarry—which long-term closure of certain areas to fishing
mainly provide advice). Some are confined would illuminate such differences, are dif- efforts directed at particular prey, such as
to EEZs. But those that do extend their remit ficult to come by, for countries are often toothfish. This ensures that wildlife have
to the high seas attempt to protect two loth to share them. enough food. The Ross Sea alone is home
groups of fish. The first are straddling Moreover, even if data are true, actions to almost 30,000 pairs of emperor pen-
stocks, species such as cod, halibut and based on them may be questionable. In guins and 21,000 minke whales.
pollock whose habitats, and therefore pop- 2014, for example, an RFMO called the In- Even the Antarctic commission, how-
ulations, stretch beyond EEZs into the high ter-American Tropical Tuna Commission ever, struggles at times. For example, China
seas. The second are migratory animals reduced the bluefin-tuna catch in its juris- and Russia oppose efforts to create the
such as tuna and swordfish, which travel diction from 5,500 tonnes a year to 3,300 world’s largest marine reserve in the Ross
long distances between feeding and breed- tonnes. That sounds like common sense, Sea. Like an RFMO, the commission is only
ing grounds. but the cut recommended by the commis- as strong as its most reticent members. Bet-
RFMOs’ decisions about how much sion’s scientific advisers was to 2,750 ter data-gathering and greater sharing of
fishing to allow are supposed to be guided tonnes, so the species is still at risk. the information discovered should at least
by ecological reality. The overall health of Tuna seem particularly vulnerable to make such reticence harder to justify. 7
66 The Economist July 16th 2016
Books and arts
Also in this section
67 J.M.W. Turner, a life
67 The early years of South Sudan
68 Death penalty in Pakistan
68 A peeping Tom in America
69 Johnson: Women in politics

For daily analysis and debate on books, arts and

culture, visit
Economist.com/culture

America’s conservatives It looked rather different to women

with little chance of a career beyond the
Seeking a way forward typists’ pool, or to African-Americans
forced to the back of the bus. Even those
who benefited from this arrangement be-
tween the races and the sexes frequently
found the conformity of mid-century
America stifling.
Feminism, the civil-rights movement
Republicans used to produce big ideas. They have not yet regained that habit
and economic progress in other countries

P ARTY conventions are built around set-

piece speeches given from the main
stage at a time when middle America, that
The Fractured Republic: Renewing
America’s Social Contract in the Age of
swung a wrecking-ball at the edifice. To re-
gret its collapse, as both parties sometimes
do, is also to wish those improvements
mythical place, is settling down after din- Individualism. By Yuval Levin. Basic; 272 had never happened, which is absurd. Mr
ner to watch the news. Delegates usually pages; $27.50 and £18.99 Levin argues that the nostalgia he sees
hear from the party’s previous nominee, everywhere in politics reflects a longing
from a rising star, from the candidate’s contract was popularised by Rousseau, for childhood on the part of the baby-
spouse and then, on Thursday night, from whose prose inspired generations of left- boomer generation, a cohort whose size
the candidate. In theory, what that candi- wing European revolutionaries just as con- handed it a cultural clout not enjoyed by
date says will bear some relation to the servatives were about to be guillotined. any other. “Our political, cultural and eco-
ideas discussed, papers published and “Life in America”, Mr Levin begins, “is nomic conversations today overflow with
data marshalled by the wonks who popu- always getting better and worse at the the language of decay and corrosion, as if
late the fringe meetings that take place at same time.” Both political parties are in the our body politic is itself an ageing boomer
the convention, unseen by TV cameras, grip of overpowering nostalgia for the looking back upon his glory days.”
where health-care costs and optimal tax mid-20th-century moment. For Republi- If ditching nostalgia is the first step in
rates may be debated. This year’s Republi- cans, this was a time of stable marriages, building a new kind of conservatism, what
can convention will be different. The party respect for authority and economic dyna- comes next? Mr Levin, borrowing from
is running an experiment to see what hap- mism. For Democrats, it was a time when a Edmund Burke, puts his faith in what he
pens when the nominee’s ideas on almost man could leave high school at16 and walk calls the “mediating institutions” that sit
everything contradict those of the party’s into a well-paid job, with pension and between families and the state: churches,
professional intellectuals, those people health-care benefits, which would allow unions, charities. Only these, he thinks,
who write newspaper columns or work in him to support a family and retire comfort- can reconcile a fragmented culture with
think-tanks clustered between Dupont ably. With it came a high degree of consen- self-government. The tendency to central-
Circle and K Street in Washington, DC. sus on what was right for the country, ise decision making in a country as divided
Yuval Levin, a White House staffer un- partly because everyone was watching the as America makes little sense to Mr Levin,
der George W. Bush, editor of National Af- same nightly news broadcasts. and he sees it as one of the causes of the
fairs and fellow of the Ethics and Public Yet, as Mr Levin writes, though there long decline in public trust in institutions,
Policy Centre, is a prominent member of a was much to like about this land of ice- Congress chief among them.
tribe within this tribe—the self-styled “re- cream sundaes, sports coats and cars with Mr Levin has done conservatism a
formicons” who delight in borrowing tail fins, the nostalgic picture of post-war service by reining in nostalgia. His writing
ideas from different political traditions and America is conveniently partial. It forgets is precise, well-observed and witty in a
giving them a conservative spin. Mr Lev- that much of the rest of the world was in sober sort of way. But he offers little on
in’s first steal is in the subtitle of his new ruins after the end of the second world what the consequences of more decentral-
book, “The Fractured Republic: Renewing war, clearing the field of competition in the isation would be, or where its limits are.
America’s Social Contract in the Age of economic sphere, or that the spectre of nu- The form of government that Mr Levin
Individualism”. The notion of the social clear annihilation was ever-present. advocates sounds very different if you are 1
 The Economist July 16th 2016 Books and arts 67

2 a black American in, say, Ferguson, Mis- ever figured on the walls of any academy”. moved into an insalubrious street in Chel-
souri, who is accustomed to seeing the Ms Moyle has not written academic art sea, where neighbours thought he was a
federal government as a protector against history; she is entertaining on Turner’s life sea captain.
rapacious local officials. What kind of and good on his times. Of humble begin- Turner died there. His friends tried to
conservatism could bring those voters on nings, he was a prodigy who first showed keep his second home with Sophia secret
board? That is a question that will proba- his work, aged 15, at the annual exhibition in the belief that the publicity would
bly not be raised at the convention in of the Royal Academy (RA). He was canny, destroy his reputation. It survived long
Cleveland on July 18th. too, making sure of his place as an acade- enough, however, for the grand funeral
Another quibble is that the author sees mician at the RA, both to enhance his that the barber’s son from Maiden Lane in
gay marriage as something foisted on reli- social position (he needed aristocratic Covent Garden had always hoped for to
gious America by secular America, down- endorsement to succeed), and to provide take place in St Paul’s Cathedral. He had
playing the changes in attitudes that he ob- an acceptable floor price for his work. richly deserved it. 7
serves so keenly elsewhere in the book. That price rose steadily. He was able to
There is no mention of climate-change, open an account at the Bank of England at
guns, or race and policing. These may be the age of19, and his fortune only grew. His South Sudan
preoccupations of the left, but a broad kind clients were aristocrats and wealthy indus-
of conservatism ought to have something trialists. In his middle years, he was in such From hope to
to say about them. Nor is there mention of demand that he could open a gallery in
Donald Trump. In Mr Levin’s telling, all the Queen Anne Street to sell his work. Before horror
threats to conservative values come from his death in 1851, an American collector of-
the left. Yet if the Republican nominee gets fered the unheard of sum of £5,000 for the
his way, Mr Levin and his fellow reformi- “Temeraire”, but the old man did not need
South Sudan: The Untold Story from
cons may eventually be forced to conclude the money, and kept the painting for him-
Independence to Civil War. By Hilde
that their ideas stand a better chance in the self. In search of new subjects, he became a
Johnson. I.B. Tauris; 304 pages; $35 and £20
hands of centre-left politicians. 7 tough and dedicated traveller, going by

J.M.W. Turner
foot and donkey down German rivers, and
across the French Alps, and to Venice,
which he painted in gold, white and blue
H ILDE JOHNSON is a Norwegian for-
mer minister for international devel-
opment who became head of the UN mis-
to reflect “a melancholic delicacy”. sion in South Sudan when it gained
Industrious genius When not playing politics at the RA, independence in 2011. Two years after leav-
Turner was deeply private, especially ing the capital, Juba, she has written an ac-
about his romantic life. Victorian critics count of the challenges she faced and tries
thought him “squalid, seedy and eccen- to explain how the world’s newest country
tric”, in Ms Moyle’s words. He relished the spiralled from hope to civil war. “South Su-
company of women, and his notebooks dan” is packed with riveting detail, but
The Extraordinary Life and Momentous
contained erotic sketches as well as land- mostly shows how badly international ac-
Times of J.M.W. Turner. By Franny Moyle.
scapes. Initially, he lived with Sarah tors, including Ms Johnson herself, have
Viking; 508 pages; £25. To be published in
Danby, the widow of a composer. They misjudged their roles in South Sudan.
America by Penguin in October
had one child. A second child may well The first time this reviewer met the au-

N EITHER old admirers nor recent con-

verts can seem to get enough of J.M.W.
Turner. Franny Moyle’s biography, the
have been born to Hannah, a relation of
Sarah’s who was his housekeeper. He later
found himself with Sophia Booth, his
thor, she was living in a hotel in the centre
of Juba. The special representative of the
UN secretary-general had resisted living
latest of many in recent decades, is a fat, landlady in Margate, which he had regular- within the confines of a UN base. Ms John-
satisfying popular history of the man who ly visited during his adolescence. When son said that she wanted to live among the
was arguably Britain’s greatest painter. The his health began to fail, he and Sophia South Sudanese. Her ambition was admi-
book-jacket goes further, declaring Turner rable, but misjudged; most South Suda-
to be the world’s most famous landscape nese live in mud-walled huts, as opposed
painter. Turner himself would have to a several-storey hotel with room service
disagreed. His hero was Claude Lorrain, a and a working lift.
17th-century French landscape painter. Ms A large part of Ms Johnson’s mission
Moyle says he wept on seeing a painting by was to work with the country’s many dif-
Claude on a subject that he had also tack- ferent actors. As she documents in detail,
led: “I shall never be able to paint anything she routinely met senior government and
like that picture,” he said. military figures, advising, entreating, cajol-
Turner eventually outshone his hero by ing. Ms Johnson saw her role as head of the
taking advantage of his momentous times. UN mission as personal. “They never lie to
He quickly absorbed the importance of the me. They know that I know them too
Industrial Revolution, and was inspired by well,” she said of the generals leading the
it. In his last 20 years, says Ms Moyle, he al- Sudan People’s Liberation Army (SPLA),
lowed himself to be himself, experiment- the rebel movement that became the fledg-
ing with colour and drawing inspiration ling nation’s regular army. But lie they did.
from landscape. Magnificent works such Over and over again. In retelling the his-
“Rain, Steam and Speed” and “The Fight- tory, the author seems as blind to this as
ing Temeraire” being towed to the break- she is dogged in her biases, making fre-
er’s yard by a steam tug (both hanging in quent mentions of “freedom fighters”,
the National Gallery) were the work of an “comrades” and “cadres”.
adventurous and energetic painter. Wil- Her book also reaffirms a narrative that
liam Makepeace Thackeray thought the has long been favoured by the country’s
“Temeraire” was “as grand a painting as Mysterious visionary gatekeepers—a tight network of Western 1
68 Books and arts The Economist July 16th 2016

2 academics and their humanitarian and de- butes that oddity to “a quiet, subtle act of
fence advisers, as well as their affiliated fig- objection” on the part of Pakistan’s higher
ures within South Sudan. It is a narrative courts, which do what they can to lessen
that resists naming names in connection the law’s damage. Instead, convicted blas-
with atrocities and corruption, and down- phemers are murdered routinely outside
plays or even suppresses the role of ethnic- the court system, as are those who might
ity in the mayhem of the past three years. protect them. Yet many continue to brave
It also fails to grasp the way that South the murderers’ threats.
Sudanese leaders perceive the UN and its Other bravery shows itself through ten-
biggest supporters—America, Norway and derness, as when an innocent prisoner de-
Britain. Earlier this month, as violence es- votes himself to comforting panicked men
calated, a state-affiliated group, the Red on their way to the gallows. Ms Buchanan
Army Foundation, posted on Facebook a dedicates her book to him. She manages to
call for the public to “resist” plans by the keep aloft several such stories at once, with
UN to “invade South Sudan” and “over- a fine eye for machinery behind the
throw the government”, suggesting that scenes: like the black typewriters that jud-
the Western presence is seen as far less ide- der under candlelight during a summer-
alistic than its leaders might believe. time blackout.
Ms Johnson closes her book with a plea In an elegant final chapter, Ms Buchan-
for still more international engagement to an makes the point that Pakistan is hardly
“save South Sudan” so that “the next gener- alone in subjecting Pakistanis to inhumane
ation of South Sudanese leaders” can treatment. Ms Belal’s ragtag team turns to
“finally build the country their people Shackled to the system arguing for the repatriation of Pakistani
dreamt of. Only then can South Sudan rise civilians dragged by American special
as a nation.” Her plea is admirable, but learn Urdu, move to Lahore and bury her- forces across the border into Afghanistan
again misplaced. The real question is how self beneath a mountain of files in a stifling and stored like meat in a locker at an Amer-
the “nation”, as perceived by the SPLA and room. She says modestly little about her ican prison near Bagram. Its inmates have
its Dinka leadership, deals with other eth- reasons, save for a self-effacing remark been denoted by serial numbers, and
nicities. Heavy fighting broke out in Juba about her love for Pakistani sweets. years of their lives have been stolen, on a
on July 7th. Tens of thousands have been The first pattern to emerge is the way mere guess that they may be terrorists.
displaced. Two Chinese peacekeepers are Pakistan’s penal system is wielded against Eventually the courts in Pakistan agree
among the more than 300 said to have British-raised expatriates who return to to recognise the prisoners near Bagram as
been killed in five days of fighting. Civil- their homeland. Jealous neighbours easily people, and Ms Buchanan gives them their
ians who sought protection inside UN suborn the police into arresting them. Ms due. “It was Pakistan’s legal system that
bases have also died. The corpses are Buchanan tookup the victims’ cases to pro- championed fundamental rights where
decomposing, and there is no way to trans- vide them with legal aid. Her guide is an- two great Western democracies [Britain
port them to a morgue. So they will be other crusading misfit, Sarah Belal, whom and America] had denied them.” In a
buried there, inside the perimeter fencing she introduces with great charm (“one of triumph against appearances, some Paki-
where the UN had sought to protect them. Pakistan’s least successful lawyers… stanis refuse to submit to pressure to
And so the bloodshed continues. 7 unemployed, depressed” and yet glamor- dispense with the niceties of justice. 7
ous). Along the way, she cobbles together a
handbook to a mad system.
The death penalty in Pakistan Together, the two lawyers plough into a Peeping Toms
field of perversity. The police routinely be-
Flowers from the gin their investigations by torturing sus- Too much
pects into unreliable confessions. This is so
muck well known that Pakistan’s courts have information
ruled statements made in police custody to
be inadmissible as evidence, unless cor-
roborated. So the torture goes on, in co-or-
Trials: On Death Row in Pakistan. By Isabel The Voyeur’s Motel. By Gay Talese. Grove
dination with police who plant evidence
Buchanan. Jonathan Cape; 264 pages; £16.99 Press; 233 pages; $25 and £14.99
to validate the forced confessions. In one

P AKISTAN’S death row is one of the

grimmest places on earth. The sordid
conditions of its condemned—stowed
case the same man is sentenced to death
twice: once by hanging, once by firing
squad. But the most perverse judgments
I S VOYEURISM madness, or just exagger-
ated curiosity? Gay Talese, a veteran
American journalist renowned for investi-
away for decades, eight men to a 120- arise from an unholy hybrid of antiquated gations into the private lives ofhis subjects,
square-foot cell, sustained on filthy gruel British rules and Islamic law: the law is more qualified than most to answer. His
and constantly recontaminating one an- against blasphemy. An Islamist reinterpre- latest book is a study of voyeurism
other with disease—are the least of its hor- tation of sharia demands the ultimate pun- stripped to its bare fundamentals.
rors. When this book begins in 2013, an esti- ishment, while colonial-era criminal pro- Based on a long-standing correspon-
mated 8,000 people were awaiting cedures short-circuit traditional Islamic dence with Gerald Foos, the self-declared
execution. A former minister estimates opportunities for apologies and mercy. “World’s Greatest Voyeur”, Mr Talese tells
that two-thirds were innocent. “Trials” is More than 1,200 people have been sen- the story of his subject’s life as owner of
about a foreign lawyer’s plunge into this tenced to death for blasphemy, but none Manor House Motel in Colorado for nearly
swirling injustice. The surprise is the flow- has been executed. Ms Buchanan attri- 30 years. Mr Foos fitted his property with
ering of virtue that she finds at its centre. an “observation platform” in the attic,
Isabel Buchanan was somehow drawn complete with fake ventilator grates,
Correction: We wrote (“A Worcestershire lad”, July 9th)
to this mess. Just months after finishing her that A.E. Housman had gone to “the local grammar enabling him to spy on his guests (often
law degree in Scotland, she decided to school”, but it had long been private. Sorry. accompanied by his wife) undetected for 1
 The Economist July 16th 2016 Books and arts 69

2 around three decades. His interest was distinct agendas. Mr Talese is interested in owned the motel for the whole period he
both sexual and “scientific”: Mr Foos voyeurism and its moral implications. Mr claimed to have had access to it. Mr Talese
would take meticulous notes as he ob- Foos, who first confided in Mr Talese in seemed to disavow the book, then to dis-
served the sex lives of couples in the rooms 1980 and over three decades later gave the avow his disavowal (probably under pres-
beneath him, from the suburban mother writer permission to go public with his sure from his publishers). If the primary
stealing lusty trysts with a doctor in his story, believes himself to be a “pioneering value of “The Voyeur’s Motel” lies in its
lunch hour, to the married couple and the sex researcher”. He explicitly places his veracity, or, as Mr Foos might like, as a sexu-
young stud employed in their vacuum- journal and statistical records in the tradi- al history of post-war America, this flip-
cleaner company, to the Miss America can- tion of William Masters and Virginia John- flopping might render it worthless. In fact,
didate from Oakland who spent two son, themselves pioneering sexologists. Mr it adds a layer of intrigue. The problem for
weeks in the motel and never had sex with Foos considers himself to have performed the reader, though, is that this is an exercise
her husband. Mr Foos would often then three decades of public service, and now in exhibitionism as much as a study of voy-
masturbate, or have sex with his wife. seeks recognition. eurism. Even if Mr Foos’s tale is broadly re-
“The Voyeur’s Motel” is a strange com- Shortly before publication, the Wash- liable, it is unsettling that he has been given
posite. It has, in effect, two authors with ington Post found that Mr Foos had not a platform. 7

Johnson War of words

Women are judged by the way they speak

F EMALE politicians are easily labelled:

from the battle-axe to the national
mum. Everything they do contributes to
Leadsom, who hoped to defeat Mrs May
and become prime minister, was undone
partly by a newspaper interview in
the media’s desire to pop them into ready- which she spoke at length about the im-
made boxes, whether it’s their hairstyle, portance of having children to her candi-
clothes or shoes. But the way they speak, dacy. This was taken as a swipe at the
the main task of politicians everywhere, childless Mrs May, and the hapless Mrs
is the most important source oftheir influ- Leadsom was soon out of the race.
ence and the biggest potential pitfall. Women must also beware of pushing
How women leaders talk to voters and back too hard on the sexist culture they
each other is soon to get more scrutiny face, or risk being labelled as humourless
than ever, with Britain’s new prime min- feminists. Type the name of Julia Gillard,
ister, Theresa May, joining Angela Merkel Australia’s prime minister from 2010 to
as two of the most powerful leaders in Eu- 2013, into Google and the search engine
rope, and perhaps soon to be ranked with will quickly suggest “Julia Gillard misogy-
President Hillary Clinton at international ny speech”, a fiery denunciation of old-
summits. The pitfalls for women’s politi- boy sexism she gave in 2012. The speech
cal language come at every level, from thrilled admirers, irritated opponents and
tone of voice to word-choice to the topics made her name around the world. But the
of conversation to conversational styles. true feminist triumph will be when wom-
Authority, for example, is linked to en leaders are remembered more for
male voices. A study in 2012 showed that being leaders than for being women.
a bland political slogan, digitally altered Merkel, whose country has come to dis- Finally, there is the issue of how wom-
to make it deeper, was more appealing to trust charismatic leadership and highly en interact with others. The more “male”
voters, no matter whether the voices—or personalised debate, rarely varies the pitch a woman behaves in a leadership setting,
the voters—were male or female. This of her deep voice, and is known, for her the more authority she gains—but stacks
hardly needed experimental proof, how- calm, as Mutti, or mum—in this case at least, of research have shown that this comes
ever. Margaret Thatcher took elocution a mostly admiring label. with a loss of likeability among both
lessons in the 1970s as she prepared to be- Mrs Clinton, an experienced and articu- women and men. It is hard to be both
come the Conservative Party’s leader and late politician, has a calm and capable de- tough and likeable, but it can be done:
ultimately prime minister. A surprisingly livery in small settings. But she is less com- Deborah Cameron and Sylvia Shaw, two
girlish voice from the 1960s became a fortable on the stump, especially in the British academics, analysed the 2015
commanding and much-admired tone current hot-and-bothered American politi- general-election debates, and found that
during her premiership. cal climate, where a politician is expected Nicola Sturgeon, the Scottish Nationalists’
It is not only tone, but variation in to signal that they are mad as hell and not leader, interrupted most among the seven
tone, that matters. Pitch with a wide band going to take it any more. When Mrs Clin- participants. Interrupting is a quintessen-
of variation signals emotion. Men who ton attempts this, with her voice high and tially male tactic—the kind of thing wom-
vary their tone are rarely punished for do- loud at its peaks, she is called “shrill” and en are punished for—but her performance
ing so. Mark Liberman, a linguist at the “hectoring”, while her laugh is a “cackle”— won rave reviews. Ms Cameron notes
University of Pennsylvania, compared words rarely aimed at men. that Ms Sturgeon moves comfortably
seven Republican presidential candi- Another tightrope women must walk is between cut-and-thrust debate, states-
dates’ speeches and found one contender, topic. Interviewers rarely ask men about manlike speech and warmth. Most politi-
Rand Paul, to have the most varied pitch. being a man in politics, or their role as hus- cians are lucky to be good at just one of
Yet he is not called “emotional”. But for bands and fathers. Women leaders face these, but women must be especially ag-
women, variation in tone matters. Mrs this regularly, and it can be a trap. Andrea ile to avoid falling into a stereotyped box.
70 Courses

The Economist July 16th 2016

Tenders Appointments 71

Soliciting Consultancy Firms

IRAN, the 2nd largest economy in the MENA Region, and 18th worldwide, has a high
saturation capacity for disparate and diversified economic activities in multifarious
fields and sectors. The largest proven gas, and 4th largest proven oil reserves, are
but part of the story: Approximating 1% of the global landmass, holding 7% of
the world’s mineral riches. Nearly 50 million of her 80-million populace is under-30,
98% literate, with a 58% university enrollment rate, in line with more industrialized
nations. Along with this high economic potential, Iran straddles a contrasting
topography of tree-laden mountains, divergent deserts, open seas, and agriculturally
rich terrain, on a keystone landmass connecting Asia to Europe and Africa.
IRAN-EU3+3 historic 2015 agreement has reopened the door for Iran to reclaim her
indispensable role in the economic prosperity of the region, demonstrated by the
hundreds of commercial and political delegations from Europe, and elsewhere, with
potential partners discerning enough to grasp this new horizon.
IRAN Chamber of Commerce, Industries, Mines and Agriculture (ICCIMA), which
represents Iranian private business interests, intends to facilitate the entry of
financial institutions and enterprises, as well as leading influential investors, into
Iran. Accordingly, a project with the following deliverables is to be organized:
• Comprehensive Report on core strengths of Iran’s economy, and key sectors
which have the capacity to be attractive to foreign investors. Also, potential
actions essential for her private sector enterprises, to complement their
identified strengths and ameliorate their classified shortcomings, in order to
grant them a competitive advantage on global markets.
• Presentation of the key findings of the above mentioned report shall be
presented in four international conferences, to be tentatively convened,
respectively, in selected financial hubs in Europe, the Far East, and North
America, and additionally in Iran. Invitees shall be a number of preferred
financial institutions, prominent consultancy firms, Fortune Global 500 &
Forbes Global 2000 enterprises, as well as Iranian expatriates.
• Detailed Report on key concerns and issues of foreign financial institutions
and enterprises present in Iran, and barriers hindering entry of prospective
interested parties. A proposal contemplating appropriate policies and
strategies for making investment in Iran attractive and effective, as well
as the regulatory requirements and practical business & legal frameworks
necessary for cooperation between investors and domestic partners.
Therefore, reputable consultancy firms interested in the above mentioned proposal
are cordially invited to submit an LOI, accompanied by an introductory package, as
instructed below. The package must provide a portfolio of similar conducted projects,
list of current clients (including NGOs), Résumés of prospective staff, along with
the contemplated proposal and framework for effectuating the above mentioned
deliverables.
All applications should be submitted electronically to consult.notice@iccima.ir,
no later than 12 P.M. (GMT) on July 31st, 2016. Upon receipt of each proposal, a
confirmation email will be remitted to the submitting party. After initial evaluations,
and no later than August 14th, eligible firms will be invited to take part in a
presentation and clarification session to be convened in September, on a date to be
concurred upon by the parties, in Tehran.

Business & Personal

Readers are recommended
New Citizenship by to make appropriate enquiries and take
appropriate advice before sending money,
Investment in incurring any expense or entering into a
binding commitment in relation to an
3 months advertisement.
The Economist Newspaper Limited shall not be
Ask for a free quote! liable to any person for loss or damage incurred
or suffered as a result of his/her accepting or
www.gmccitizenships.com offering to accept an invitation contained in
any advertisement published in The Economist.

To advertise within the classified section, contact:

UK/Europe United States
Martin Cheng - Tel: (44-20) 7576 8408 Richard Dexter - Tel: (212) 554-0662
martincheng@economist.com richarddexter@economist.com

Asia Middle East & Africa

ShanShan Teo - Tel: (+65) 6428 2673 Philip Wrigley - Tel: (44-20) 7576 8091
shanshanteo@economist.com philipwrigley@economist.com

The Economist July 16th 2016

72 The Economist July 16th 2016
Economic and financial indicators
Economic data
% change on year ago Budget Interest
Industrial Current-account balance balance rates, %
Economic data product
Gross domestic production Consumer prices Unemployment latest 12 % of GDP % of GDP 10-year gov't Currency units, per $
latest qtr* 2016† latest latest 2016† rate, % months, $bn 2016† 2016† bonds, latest Jul 13th year ago
United States +2.1 Q1 +1.1 +1.8 -1.4 May +1.0 May +1.4 4.9 Jun -473.1 Q1 -2.6 -2.5 1.50 - -
China +6.7 Q1 +4.5 +6.6 +6.0 May +1.9 Jun +2.0 4.1 Q2§ +284.7 Q1 +2.8 -3.1 2.69§§ 6.69 6.21
Japan +0.1 Q1 +1.9 +0.5 -0.4 May -0.4 May -0.1 3.2 May +158.7 May +3.4 -6.1 -0.27 104 123
Britain +2.0 Q1 +1.8 +1.5 +1.4 May +0.3 May +0.7 5.0 Mar†† -161.9 Q1 -5.0 -3.6 0.93 0.76 0.64
Canada +1.1 Q1 +2.4Statistics
+1.4 on Apr42 +1.5 May
+0.9 +1.6 6.8 Jun -47.6 Q1 -3.1 -1.7 1.00 1.30 1.28
Euro area +1.7 Q1 +2.2economies,
+1.5 plus
+0.5 May a +0.1 Jun +0.3 10.1 May +381.6 Apr +3.0 -1.9 -0.14 0.90 0.91
Austria +1.6 Q1 -0.7closer
+1.3 look +2.4
at AprEA-+0.6 May +1.1 6.1 May +10.5 Q1 +2.3 -1.9 0.17 0.90 0.91
Belgium +1.5 Q1 +0.9 +1.3
France +1.3 Q1
GLE, The +2.3
+2.6 +1.4
Apr
Econo- +2.2 Jun
+0.5 May +0.2 Jun
+1.6
+0.3
8.4 May
9.9 May
+6.5 Mar
-20.9 May‡
+1.2
-0.5
-2.4
-3.5
0.19
0.19
0.90
0.90
0.91
0.91
Germany +1.6 Q1 +2.7mist’s
+1.5 new -0.4
predic-
May +0.3 Jun +0.4 6.1 Jun +305.9 May +8.1 +0.5 -0.14 0.90 0.91
Greece -1.3 Q1 -1.9tion
+1.2model +2.9
for May
golf -0.7 Jun +0.4 23.3 Apr +1.3 Apr +2.1 -3.9 7.86 0.90 0.91
Italy +1.0 Q1 +1.0tournaments
+0.9 -0.6 May -0.4 Jun +0.1 11.5 May +45.9 Apr +2.1 -2.5 1.21 0.90 0.91
Netherlands +1.5 Q1 +1.8 +1.5 +1.1 May nil Jun +0.4 7.6 May +62.0 Q1 +9.9 -1.6 0.08 0.90 0.91
Spain +3.4 Q1 +3.1 +2.8 +4.0 May -0.8 Jun -0.4 19.8 May +20.4 Apr +1.3 -3.5 1.17 0.90 0.91
Czech Republic +2.7 Q1 +1.6 +2.6 +8.6 May +0.1 Jun +1.2 5.2 Jun§ +2.7 Q1 nil -1.5 0.39 24.3 24.6
Denmark -0.1 Q1 +2.7 +1.1 +6.2 May +0.3 Jun +0.8 4.3 May +17.5 May +6.5 -2.8 0.10 6.70 6.78
Norway +0.7 Q1 +4.0 +1.4 -0.1 May +3.7 Jun +2.6 4.6 Apr‡‡ +29.3 Q1 +10.8 +6.8 0.89 8.42 8.08
Poland +2.5 Q1 -0.4 +3.5 +3.5 May -0.8 Jun +1.2 8.8 Jun§ -2.2 Apr -1.8 -2.1 2.87 3.97 3.76
Russia -1.2 Q1 na -0.8 +0.7 May +7.5 Jun +7.2 5.6 May§ +38.4 Q2 +3.4 -2.5 8.39 63.9 56.8
Sweden +4.2 Q1 +2.0 +3.5 +1.7 May +1.0 Jun +1.0 7.6 May§ +28.2 Q1 +5.6 -0.5 0.19 8.49 8.48
Switzerland +0.7 Q1 +0.4 +1.0 +1.0 Q1 -0.4 Jun -0.5 3.3 Jun +71.9 Q1 +9.0 +0.3 -0.60 0.98 0.95
Turkey +4.8 Q1 na +3.4 +0.6 Apr +7.6 Jun +7.5 10.1 Mar§ -28.6 Apr -4.7 -1.8 9.17 2.90 2.65
Australia +3.1 Q1 +4.3 +2.7 +4.8 Q1 +1.3 Q1 +1.4 5.8 Jun -62.3 Q1 -4.3 -2.0 1.95 1.31 1.35
Hong Kong +0.8 Q1 -1.8 +2.0 -0.3 Q1 +2.6 May +2.6 3.4 May‡‡ +11.9 Q1 +2.7 -0.4 0.99 7.76 7.75
India +7.9 Q1 +9.6 +7.5 +1.2 May +5.8 Jun +5.3 4.9 2013 -22.1 Q1 -1.2 -3.7 7.28 67.0 63.5
Indonesia +4.9 Q1 na +5.0 +7.5 May +3.5 Jun +4.0 5.5 Q1§ -18.2 Q1 -2.4 -1.9 7.16 13,105 13,300
Malaysia +4.2 Q1 na +5.5 +2.7 May +2.0 May +2.8 3.5 Apr§ +7.0 Q1 +2.7 -3.7 3.59 3.97 3.80
Pakistan +5.7 2016** na +4.8 -3.1 Apr +3.2 Jun +5.1 5.9 2015 -2.5 Q1 -0.9 -4.6 8.03††† 105 102
Philippines +6.9 Q1 +4.5 +6.2 -1.2 May +1.9 Jun +2.6 6.1 Q2§ +6.7 Mar +3.5 -1.9 4.42 47.2 45.2
Singapore +2.2 Q2 +0.8 +2.3 +0.9 May -1.6 May +0.8 1.9 Q1 +54.8 Q1 +20.5 +0.9 1.75 1.35 1.36
South Korea +2.8 Q1 +2.1 +2.5 +4.3 May +0.8 Jun +1.2 3.6 Jun§ +105.2 May +7.3 +0.2 1.39 1,147 1,130
Taiwan -0.7 Q1 +3.1 +1.8 +1.9 May +0.9 Jun +1.0 4.0 May +74.8 Q1 +12.6 -0.9 0.68 32.2 31.0
Thailand +3.2 Q1 +3.8 +3.4 +2.6 May +0.4 Jun +2.4 1.2 May§ +40.1 Q1 +3.3 -2.2 1.92 35.2 34.0
Argentina +0.5 Q1 -2.7 -0.9 -2.5 Oct — *** — 5.9 Q3§ -15.0 Q1 -2.3 -2.8 na 14.6 9.13
Brazil -5.4 Q1 -1.1 -3.5 -7.7 May +8.8 Jun +8.5 11.2 May§ -29.5 May -1.0 -5.7 12.00 3.29 3.17
Chile +2.0 Q1 +5.3 +3.0 -2.0 May +4.2 Jun +3.6 6.8 May§‡‡ -4.7 Q1 -1.5 -1.8 4.37 659 648
Colombia +2.5 Q1 +0.6 +3.3 +8.4 Apr +8.6 Jun +4.7 8.8 May§ -16.9 Q1 -5.3 -1.9 7.59 2,945 2,696
Mexico +2.6 Q1 +3.3 +2.3 +0.4 May +2.5 Jun +2.9 4.0 May -30.5 Q1 -2.9 -3.0 5.88 18.4 15.7
Venezuela -8.8 Q4~ -8.4 -7.7 na na +220 7.3 Apr§ -17.8 Q3~ -1.7 -15.5 11.73 9.99 6.31
Egypt +6.7 Q1 na +3.7 -17.8 May +14.0 Jun +9.8 12.7 Q1§ -18.3 Q1 -2.9 -9.8 na 8.88 7.83
Israel +1.9 Q1 +1.3 +3.4 +1.2 Apr -0.8 May +1.0 4.8 May +14.7 Q1 +4.2 -2.5 1.62 3.86 3.77
Saudi Arabia +3.5 2015 na +2.5 na +4.1 May +3.8 5.6 2015 -59.5 Q1 -2.4 -9.6 na 3.75 3.75
South Africa -0.2 Q1 -1.2 +0.4 +3.8 May +6.1 May +6.4 26.7 Q1§ -13.4 Q1 -4.2 -3.3 8.71 14.5 12.5
Source: Haver Analytics. *% change on previous quarter, annual rate. †The Economist poll or Economist Intelligence Unit estimate/forecast. §Not seasonally adjusted. ‡New series. ~2014 **Year ending June. ††Latest
3 months. ‡‡3-month moving average. §§5-year yield. ***Official number not yet proved to be reliable; The State Street PriceStats Inflation Index, May 37.09%; year ago 26.74% †††Dollar-denominated bonds.
 The Economist July 16th 2016 Economic and financial indicators 73

Markets
% change on Food prices
April 5th 2016=100, $ terms
Dec 31st 2015 The Economist’s food-price index has
Index one in local in $ jumped by 8% over the past three 160
Markets Jul 13th week currency terms months, propelled in large part by the
United States (DJIA) 18,372.1 +2.5 +5.4 +5.4 Soyabean meal
China (SSEA) 3,204.0 +1.4 -13.5 -16.1
rising price of soyabeans (soya-related
Japan (Nikkei 225) 16,231.4 +5.5 -14.7 -1.6 products make up 27% of the index).
140
Britain (FTSE 100) 6,670.4 +3.2 +6.9 -4.2 Heavy flooding in Argentina, the world’s Sugar
Canada (S&P TSX) 14,493.8 +1.8 +11.4 +19.2 largest soyabean-meal exporter, has
Euro area (FTSE Euro 100) 992.9 +5.6 -9.3 -7.3 reduced supplies. Growing demand in Soyabeans
Euro area (EURO STOXX 50) 2,926.1 +6.0 -10.4 -8.5 China, where the meal is used as animal 120
Austria (ATX) 2,136.2 +5.6 -10.9 -8.9 feed, has also driven up prices. Promising
Belgium (Bel 20) 3,390.3 +4.8 -8.4 -6.3 growing conditions in America have
France (CAC 40) 4,335.3 +6.1 -6.5 -4.4 helped temper the rally recently. The
Germany (DAX)* 9,930.7 +5.9 -7.6 -5.5 100
price of sugar has also been on an upward
Greece (Athex Comp) 559.7 +5.7 -11.3 -9.4 Wheat
Italy (FTSE/MIB) 16,527.9 +7.2 -22.8 -21.1
trajectory, rising by 33% since April. Wet The Economist
Netherlands (AEX) 444.5 +5.3 +0.6 +2.8 weather in Brazil has reduced the amount food-price index
Spain (Madrid SE) 851.2 +7.0 -11.8 -9.9 of recoverable sugar per tonne of cane. 80
April May June July
Czech Republic (PX) 826.2 nil -13.6 -11.7 Reports of record yields of wheat in
2016
Denmark (OMXCB) 870.3 +4.4 -4.0 -1.6 America have pushed its price down.
Source: The Economist
Hungary (BUX) 27,192.3 +2.6 +13.7 +17.0
Norway (OSEAX) 685.0 +4.3 +5.6 +11.0
Poland (WIG) 45,017.8 +3.4 -3.1 -3.6 Other markets The Economist commodity-price index
Russia (RTS, $ terms) 952.4 +3.8 +10.1 +25.8 % change on 2005=100
Other markets % change on
Sweden (OMXS30) 1,356.4 +5.6 -6.3 -6.9 Dec 31st 2015 The Economist commodity-price indexone
one
Switzerland (SMI) 8,142.3 +3.1 -7.7 -6.1 Index Jul 5th Jul 12th* month year
one in local in $
Turkey (BIST) 81,321.7 +3.7 +13.4 +14.0 Jul 13th week currency terms Dollar Index
Australia (All Ord.) 5,470.3 +3.5 +2.4 +7.0 United States (S&P 500) 2,152.4 +2.5 +5.3 +5.3 All Items 139.2 139.6 -1.5 -3.5
Hong Kong (Hang Seng) 21,322.4 +4.0 -2.7 -2.8 United States (NAScomp) 5,005.7 +3.0 nil nil
India (BSE) 27,815.2 +2.4 +6.5 +5.1 Food 163.0 162.8 -5.7 -4.3
China (SSEB, $ terms) 353.6 +0.1 -14.5 -17.1
Indonesia (JSX) 5,133.9 +3.3 +11.8 +17.6 Japan (Topix) 1,300.3 +5.4 -16.0 -3.0 Industrials
Malaysia (KLSE) 1,660.4 +0.6 -1.9 +6.1 Europe (FTSEurofirst 300) 1,326.3 +4.9 -7.7 -5.7 All 114.5 115.5 +5.4 -2.3
Pakistan (KSE) 39,049.5 +2.9 +19.0 +18.9 World, dev'd (MSCI) 1,694.4 +3.3 +1.9 +1.9 Nfa† 121.2 122.9 +4.1 +2.3
Singapore (STI) 2,910.7 +1.6 +1.0 +6.3 Emerging markets (MSCI) 856.4 +4.5 +7.8 +7.8 Metals 111.7 112.3 +6.0 -4.4
South Korea (KOSPI) 2,005.6 +2.7 +2.3 +4.6 World, all (MSCI) 409.3 +3.4 +2.5 +2.5 Sterling Index
Taiwan (TWI) 8,857.8 +3.3 +6.2 +8.5 World bonds (Citigroup) 962.9 -0.7 +10.7 +10.7
Thailand (SET) 1,477.6 +1.7 +14.7 +17.4 All items 194.0 192.6 +4.6 +14.0
EMBI+ (JPMorgan) 804.5 +0.8 +14.2 +14.2
Argentina (MERV) 15,145.2 +3.1 +29.7 +15.4 Hedge funds (HFRX) 1,176.3§ +0.7 +0.2 +0.2 Euro Index
Brazil (BVSP) 54,598.3 +5.2 +25.9 +51.4 Volatility, US (VIX) 13.0 +15.0 +18.2 (levels) All items 155.8 148.8 -5.4 -9.0
Chile (IGPA) 20,004.4 +1.4 +10.2 +18.4 CDSs, Eur (iTRAXX)† 72.2 -13.1 -6.4 -4.3 Gold
Colombia (IGBC) 9,834.5 +1.1 +15.1 +24.0 CDSs, N Am (CDX)† 71.2 -7.4 -19.4 -19.4 $ per oz 1,345.3 1,342.4 +4.4 +16.2
Mexico (IPC) 46,272.0 +2.1 +7.7 +1.1 Carbon trading (EU ETS) € 4.8 +4.1 -42.3 -41.1 West Texas Intermediate
Venezuela (IBC) 12,090.1 +2.6 -17.1 na Sources: Markit; Thomson Reuters. *Total return index.
Egypt (Case 30) 7,559.9 +5.2 +7.9 -4.9 †Credit-default-swap spreads, basis points. §July 12th. $ per barrel 46.6 46.8 -3.6 -11.4
Sources: Bloomberg; CME Group; Cotlook; Darmenn & Curl; FT; ICCO;
Israel (TA-100) 1,262.7 +3.9 -4.0 -3.2
Indicators for more countries and additional ICO; ISO; Live Rice Index; LME; NZ Wool Services; Thompson Lloyd &
Saudi Arabia (Tadawul) 6,691.2 +2.9 -3.2 -3.1 Ewart; Thomson Reuters; Urner Barry; WSJ. *Provisional
South Africa (JSE AS) 52,814.9 +3.9 +4.2 +11.7 series, go to: Economist.com/indicators †Non-food agriculturals.
74 The Economist July 16th 2016
Obituary Michael Cimino
commercial days, taking an infinity to pro-
vide a minute of stunning visuals for Ko-
dak or Pepsi-Cola. When Clint Eastwood
gave him his first big break to direct “Thun-
derbolt and Lightfoot”, a buddy movie, in
1973, his finnickyness was forever bump-
ing against Clint’s impatience. He even
spoke slowly, as if with effort, from behind
near-perpetual sunglasses and a glossy-
smooth tan, and walked slowly, in stacked
Western boots that gave his small body an
air of Napoleonic command. On set once,
needing some wind, he raised his hand;
and the wind, from nowhere, blew.

The burning fiery furnace

“The Deer Hunter” also went over-sched-
ule and over-budget. The search for au-
thenticity led Mr Cimino to use eight loca-
tions for Clairton, the fictional town at the
film’s heart; to put his actors on the furnace
floor of a real steelworks, and make a wed-
ding last for a real hour; to strip leaves from
trees, paint them orange and reattach
them, in order to make summer autumn; to
shoot the Vietnam scenes in Thailand, de-
liberately on the River Kwai; to make his ac-
tors really slap each other, jump out of heli-
The price of perfection copters and fall into waters full of live rats,
for as many as 50 takes. He drew the best
out of his devoted cast, and it cost $15m.
This came to seem a pittance. “Heaven’s
Gate”, “the real West, not the fake West”, re-
quired an even higher pitch of perfection,
Michael Cimino, a film-maker who tasted both triumph and disaster, died
including the restoration of a buggy at
on July 2nd, aged 77
workshops in three states; the building of

W HAT people did not understand

about him, Michael Cimino said—
briefly emerging in 2005 from his seclusion
who at the age of five could draw perfect
portraits. A student of art, who had studied
painting and architecture at Yale. His chief
an irrigation system under a wide area of
prairie to make it lushly green for the cli-
mactic battle scene; the training of the cast
in Los Angeles—was that he was not a film- influences, he proudly said, were Degas, in rifle-shooting, horse-riding, roller-skat-
maker. He had read one book on film-edit- Kandinsky and Frank Lloyd Wright. His ing and Slavic accents, and the demolition
ing, but never got to the end of it. His train- predilections showed in the way he placed of a street in order to rebuild it a mere six
ing consisted of going to the movies every extras in his shots, as though painting them feet wider. UA tried to rein him in. He re-
week with his grandmother, and getting in; the way he favoured interiors with fused to speak to them or let their people
the feel of a Movieola camera when he shafts of light playing through smoke, as on set and, once the film was in the can,
went to New York to make commercials. Caravaggio might have done; his love of edited it behind barred windows and
The fact that he ended up directing seven big choreographed dance scenes, in which locked doors.
films was a mystery and a wonder to him. swirling human beings built a structure of After the debacle, with critics cold and
And to others. With only his second beauty; his habit of driving thousands of studios no longer wanting him, his quest
film, “The Deer Hunter”, a story of three miles to find just the right range of moun- for perfection turned inward. His mouth
steelworkers before, during and after their tains, or line of trees, to frame his shots; his was too small, his cheeks too plump; LA
service in Vietnam, he became a star; in readiness to wait, for hours if necessary, for cosmetic surgeons turned him into an un-
1979, it won five Oscars. America’s most the right cloud to appear. recognisable waif. His career seemed over,
humiliating war had not been touched be- In pursuit of perfection he did every- but he was writing novels, which the
fore; the film proved emotionally devastat- thing himself, including the screenplays French liked, and noting that his new cut of
ing. But his third, “Heaven’s Gate” (1980), a and, he claimed, the photography. He “Heaven’s Gate”, released on DVD in 2013,
vast narrative of struggle between cattle wanted to inspire such total belief that the was murmured by some to be a master-
barons and immigrants in late-19th-cen- screen would be demolished and the audi- piece. He said he was never happier. After
tury Wyoming, was the biggest flop in Hol- ence transported. He insisted on location all, he had never aimed to be a film-maker.
lywood history. Its 1.3m feet of film were shooting because he believed, as firmly as A mountain of unproduced scripts re-
edited to five and a half ravishing, snail- native Americans did, in a spirit of place mained in his house. They included adap-
paced hours. It cost $44m, 300% over bud- that could change the texture of a film (a tations of “Crime and Punishment” and
get, and almost sank United Artists. He theme he developed in “Sunchaser” (1996), Malraux’s “La Condition Humaine”. His fa-
withdrew the film after a week, with no re- his last work). And he would go on, obses- vourite, worked on for decades, was Ayn
grets, though it had cost his reputation; he sively on, until he was satisfied. Rand’s “The Fountainhead”: the story of
had wanted to make the best Western ever UA should have known this when in an architect ready to destroy all he had
and, in his view, he had. 1978 they allowed him to make “Heaven’s built rather than betray his perfect vision.
He spoke as an artist. A precocious one, Gate”. He was already a slow worker in his Truly he had been there, and done that. 7
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