The quest to remakeBritain’s politics

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Contents continues overleaf

Contents

1

#MeToo A movement sparkedby an alleged rapist could bethe most powerful force forequality since women’ssuffrage: leader, page 16. HowAmerica’s political parties arecoping with a swiftly changingculture, page 36. The #MeToomovement has raisedawareness. But it has yet tohave a lasting effect on theworkplace, page 59

On the coverBeneath the chaos of theBrexit talks, big ideas areforming that will shapeBritain’s next decade: leader,page 13. The world’s oldestpolitical party is under strain,page 21. Jeremy Corbyn isn’tthe outsider that both hisfriends and enemies believehim to be: Bagehot, page 30

9 The world this week

Leaders

13 BritainThe quest to remake politics

14 WasteCash for trash

14 Citizenship for saleWhat price a passport?

15 LIBORTick tock

16 Sex and power#MeToo, one year on

Letters

18 On Brazil, the SupremeCourt, gender identity,Ludwig von Mises,goodwill, Latin

Briefing

21 The Conservative PartyWhen all about are losingtheirs...

Britain

25 The Labour Party¿Hasta la victoria?

26 A second referendumVote early, vote often

27 Genomic medicineA new chapter

27 Tainted medical suppliesBloody scandal

28 Air powerLightning strikes

28 Northern IrelandBurn to earn, time to learn

29 Synthetic cannabinoidsSpice in the pot

30 BagehotCorbyn, establishment man

Europe

31 Average EuropeFrance’s tenth city

32 Dutch politicsWho doesn’t like a tax cut?

33 GermanyGreying Greens

33 Romanian royalsThirsty for blue blood

34 RussiaA sea of troubles

35 CharlemagneBritain, a lonely domino

United States

36 #MeToo and politicsTruth and consequences

37 The Supreme CourtBench-warming

38 Labour marketsDiversity implosion

39 Violent crimeStill piling up

40 Political harassmentUncivil hands

41 LexingtonHakeem Jeffries

The Americas

42 ChileThe middle-income trap

43 Presidential planesAerial austerity

44 BelloPeru’s president

Special report: Waste

A load of rubbishAfter page 44

Middle East and Africa

45 Iran and the worldIsolated and besieged

46 Egyptian politicsNo one is secure

46 Dysfunctional LebanonPower-boat struggle

47 Israel and RussiaMissiles with a message

47 South AfricaLong walk to growth

48 Somaliland’s heritageRestorers required

Iran Its problems are mountingat home and abroad, page 45

Rubbish How the world shouldcope with its growing piles ofrubbish: leader, page 14.Emerging economies arerapidly adding to the globalpile of garbage. But solvingthe problem should be easierthan dealing with otherenvironmental harms, saysJan Piotrowski. See our specialreport after page 44

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8 Contents The Economist September 29th 2018

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Passports for sale Floggingthe right to citizenship andresidence is fine, as long asne’er-do-wells are weededout: leader, page 14. It is a bigbusiness—and a controversialone, page 56

Burial in China As they oncedid to control births, officialsuse strong-arm tactics to curbburials, page 53

LIBOR The hunt for a newbenchmark interest rate posesrisks to financial stability:leader, page 15. Scandal andrickety economic foundationshave undermined LIBOR. A scramble to replace it isunder way, page 67

Spanish flu The next fewmonths mark the 100thanniversary of the peak of the20th century’s most deadlycatastrophe, page 75. Flu’ssuccess owes much to itsmutability, page 76

Asia

49 Public health in IndiaModicare

50 BanyanChina and the Vatican

51 Identification in IndiaCourt gestures

51 Eugenics in JapanAdverse selection

52 The MaldivesSun, sea, sand and surprise

52 South Korea and JapanControl is not enough

China

53 DeathA war against burials

54 Student activismBeware of Marxists

55 ChaguanOne-way globalisation

International

56 Investment migrationA home in the country

58 Residence and taxSweet deserts

Business

59 American business afterWeinsteinBehind closed doors

61 BartlebyExecutive privilege

62 Gulf carriersSuper-connecting

62 Comcast and SkySky high

63 Ride-hailing inSouth-East AsiaAfter Uber

64 French supermarketsShopping and nothingness

64 The gold-mining businessPanning out

65 SchumpeterLuxury cars

Finance and economics

67 Replacing LIBORThe price of everything

68 ButtonwoodPublic markets

69 World trade (1)A matter of dispute

69 World trade (2)Familiar KORUS

70 Sovereign bondsA timeless argument

70 Development lendingBuilding it up

71 ArgentinaA new deal

72 Free exchangeCrude awakening

Science and technology

75 Pandemic diseaseA deadly touch of flu

76 How influenza evolvesMind your H’s and N’s

Books and arts

78 The race for AI supremacyThe gladiator’s edge

79 Intellectual life in AmericaUnsafe spaces

80 Contemporary artThe Rales rules

81 Slavery and escapeFlight to freedom

81 British fictionKeys to the heart

84 Economic and financialindicatorsStatistics on 42 economies,plus a closer look at worldGDP

Obituary

86 Shan TianfangTradition’s voice

has imposed sanctions ondozens ofmembers ofVenezu-ela’s dictatorial regime.

Russia defends Iran in SyriaVladimir Putin said Russiawould supply Syria with anadvanced anti-aircraft missilesystem. Israel, which hascarried out dozens ofair strikeson Iranian targets in Syria,opposed the move. Relationsbetween Russia and Israelhave been strained since Syriamistakenly shot down aRussian plane in response toan Israeli air strike.

Several gunmen attacked amilitary parade in the Iraniancity ofAhvaz, killing at least 25people. Ethnic Arab separatistsand the jihadists of IslamicState issued competing claimsto have carried out the attack.The government claimed,without evidence, that thegunmen were backed by SaudiArabia, the United ArabEmirates and America.

In a speech to the UN, DonaldTrump accused Iran of“sowing chaos, death anddestruction” in the MiddleEast. Iran’s president, HassanRouhani, retorted that MrTrump suffered from a“weakness of intellect”.

José Filomeno dos Santos, theson ofAngola’s ex-dictatorand himself the former headofAngola’s sovereign-wealthfund, was arrested on suspi-cion ofmoney-laundering,embezzlement and fraud. Mrdos Santos is the most promi-nent figure from the formerregime to face prosecution inPresident João Lourenco’santi-corruption campaign.

warship to make a port call inHong Kong. Tension betweenthe two countries has risensince America decided toimpose sanctions on China forbuying jets and missiles fromRussia.

Ibrahim Mohamed Solih wona presidential election in theMaldives, defeating theincumbent, Abdulla Yameen.In February Mr Yameen haddeclared a state ofemergencyand arrested judges to stay inpower, so Maldivians weresurprised and delighted whenhe conceded.

Police in the Philippinesarrested Antonio Trillanes, asenator and critic ofPresidentRodrigo Duterte. Mr Trillaneswas pardoned for the crime inquestion—mutiny—by MrDuterte’s predecessor, but MrDuterte revoked the pardon.

India’s supreme court ruledthat a vast biometric identifica-tion scheme was constitution-al, and that participation couldbe required for those receivingpublic benefits or filing taxreturns. But it limited the scopefor private businesses to usethe system.

So that’s sorted then?Britain’s opposition LabourParty passed a motion at itsannual conference that left thedoor open to a second referen-dum on Brexit. Sir Keir Starmer,the party’s Brexit spokesman,won loud applause when hesaid such a referendum couldinclude the option to remain inthe EU. Some unions and MPssay this would be a betrayal.The party’s leader, JeremyCorbyn, just wants an election.

Labour’s Brexit manoeuvrescame after Theresa May’s“Chequers” deal for Britain to

More women made allega-tions ofsexual assault againstBrett Kavanaugh dating backto the 1980s, complicating theRepublicans’ plan for his swiftconfirmation to the SupremeCourt. The #MeToo move-ment, which began a year ago,has rallied to oppose Mr Kava-naugh. He denies all claims ofsexual misconduct.

Rod Rosenstein, America’sdeputy attorney-general,described a report that he hadthought about secretly tapingDonald Trump and had dis-cussed ways to remove himfrom office as “inaccurate”. MrRosenstein appointed thespecial counsel currentlyinvestigating Russian med-dling in American elections.Mr Trump has often expresseddispleasure with him.

Atheists appoint bishopsChina and the Vatican agreedto share responsibility forappointing Chinese bishops.The church had previouslyinsisted that only it coulddecide who was holy enoughfor the job. But China’s aggres-sively atheist regime cannotabide organisations that it doesnot control. The Vatican hopesthat persecution ofCatholicsin China will now ease.

The government in HongKong banned a small politicalgroup, the Hong Kong NationalParty, which supports theterritory’s formal indepen-dence from China. It is the firstpolitical party to be outlawedin Hong Kong since it washanded back to China in 1997.

China postponed militarytalks with America and denieda request for an American

leave the EU was rejected at asummit in Salzburg. DonaldTusk, the president of theEuropean Council, said the EU

could not accept the Britishprime minister’s plans. MrsMay said the solutions de-manded by the EU would“make a mockery” ofBritishvoters’ decision to leave. Someofher hardline backbencherssay much the same about herown plan.

Bellingcat, a journalism web-site, said that the real name ofone of the two Russian mil-itary intelligence agents ac-cused by Britain ofcarryingout a chemical attack in Britainis Colonel Anatoliy Chepiga,who was awarded Russia’shighest honour in 2014 byVladimir Putin personally.

Volker Kauder, a close ally ofGermany’s chancellor, AngelaMerkel, was ousted as head ofher CDU party’s parliamentarygroup. The move is a furthersign ofMrs Merkel’s weak-ening position.

In Sweden, the prime min-ister, Stefan Lofven, was for-mally ousted by a parliamenta-ry vote following aninconclusive election on Sep-tember 9th. However, he willstay on as caretaker until a newgovernment can be formed,which might take a while.

Caputo kaputThe president ofArgentina’scentral bank, Luis Caputo, quitafter just three months in thejob. His interventions to propup the peso had brought himinto conflict with the financeminister, Nicolás Dujovne,who objected to the sale of thecountry’s reserves to defendthe currency. The new head ofthe central bank is GuidoSandleris, who was MrDujovne’s deputy.

The United States Treasuryimposed sanctions on CiliaFlores, the wife ofVenezuela’spresident, Nicolás Maduro,and three other members ofhis inner circle. The sanctionsbar American citizens fromdoing business with them andsubject any assets they have inAmerica to seizure. America

Politics

The Economist September 29th 2018 9

1

The world this week

Correction: Last week we said thatGérard Collomb is to run for mayor ofToulouse. In fact, he is running formayor of Lyon. Sorry.

The Federal Reserve lifted itsbenchmark interest rate by aquarter ofa percentage point,to a range ofbetween 2% and2.25%, the third rise this year. Italso hinted that rates may beapproaching the level at whichthey no longer stimulategrowth, nearly a decade afterthey were cut to near-zero inresponse to the financial crisis.Another rise is on the cardsbefore the end of this year andthree more forecast for 2019.

A resolution of the trade warbetween America and Chinaremained a distant prospect, asnew tariffs came into force.One Chinese official said talkscould not take place as long asAmerica “holds a knife” toChina’s neck. Meanwhile,Japan changed tackand an-nounced that it would enterinto trade talks with America.The Trump administration hadbeen seeking a bilateral negoti-ation for months. The Japa-nese had held out for an Amer-ican return to the Trans-PacificPartnership.

End of an eraComcast won a blind auctionfor Sky, Britain’s premiersubscription-TV broadcaster,with a £30.6bn ($40.3bn) offer.That beat a competing bidfrom Rupert Murdoch’s 21stCentury Fox, ending his in-volvement with Sky, which helaunched in 1989 as an upstartrival to Britain’s established TV

channels. Disney, which isbuying Fox’s entertainmentassets, consented to Fox sellingits 39% stake in Sky to Comcast.

Santander, a Spanish retailbankwith an empire thatspans Europe and the Ameri-cas, named Andrea Orcel as itsnew CEO. Mr Orcel has been incharge of the investment-banking business at UBS for sixyears, undertaking a restruc-turing that slashed its balance-sheet. He is a confidant of theBotín family, which has heldthe reins at Santander fordecades, advising them onseveral big acquisitions, in-cluding the takeover ofBrit-ain’s Abbey bank in 2004.

Germany’s financial regulator,BaFin, appointed an auditor tomonitor Deutsche Bank’sprogress in preventing money-laundering. It is the first timeBaFin has taken such a step,apparently out of frustrationwith Deutsche’s complianceprocedures. The bankwasfined last year by Americanand British regulators follow-ing an investigation into Rus-sian asset-laundering.

Daimler announced thatDieter Zetsche (pictured) willstep aside as chiefexecutive inMay next year to be replacedby Ola Kaellenius, who isoverseeing the carmaker’spush into electric vehicles. ASwede, Mr Kaellenius willbecome the first non-Germanto lead the company. MrZetsche steered the Mercedesbrand as it overtookBMW inluxury-car sales; he will be-come chairman of the supervi-sory board in 2021.

BMW issued a profit warning.It blamed a number offactors,including higher costs associat-ed with stricter emissions testsin Europe and the trade warbetween America and China.Cars exported from BMW’sfactory in South Carolina toChina have been hit by stifftariffs.

Creeping upOil prices hit a four-year high,with Brent crude trading ataround $81.30 a barrel, inreaction to the decision byOPEC and Russia to maintaincurrent output and defy a callfrom President Donald Trumpto ramp up production. Pros-pects for Iranian crude are alsoa factor in the price spike, astraders weigh up the conse-quences ofsanctions thatAmerica will impose on Iran’soil exports in November.

In the gold-mining industry’sbiggest acquisition for years,BarrickGold said it wouldpay $6bn for Randgold, asmaller rival.

Kevin Systrom and MikeKrieger resigned fromInstagram, which they found-ed. Instagram was bought byFacebook in 2012; Mr Systromserved as chiefexecutive andMr Krieger as chief technicalofficer. The photo-sharing app

has grown snappily and nowboasts1bn monthly users. Thatis in contrast to Facebook,which has warned that itsgrowth will slow as it brings innew privacy measures. Ob-servers attributed the pair’sdeparture to efforts by Face-bookto exercise tighter controlover Instagram.

No static at allIn a deal that could help bothfirms better compete withSpotify and Apple Music,Sirius XM said it would ac-quire Pandora for $3.5bn.Sirius offers satellite radio tocar drivers and Pandora allowslisteners to customise stream-ing playlists. Both disruptedthe music industry in the early2000s, but since then digitalmusic services have grownenormously.

Michael Kors, an Americanfashion company that holdssway in the middle of theluxury-brand market, agreedto buy Versace, one of the fewremaining big independentfashion houses, for $2.1bn.Donatella Versace, who hasled the Milanese firm since themurder ofher brother, Gianni,in 1997, will remain as its prin-cipal creative force.

Business

10 The world this week The Economist September 29th 2018

For other economic data andnews see Indicators section

The Economist September 29th 2018 13

PITY the disaffected Britishvoter who looks to the au-

tumn conferences for inspira-tion. Both the main parties arehypnotised by Brexit. Labour,which gathered this week in Liv-erpool, tried to fudge its positiononly to fall into more bickering.

The Conservatives, who will meet in Birmingham next week,are so divided over Europe that they are openly conspiring tooust their own prime minister. The earthquake of the referen-dum two years ago has energised Britain’s parties like nothingelse—and crowded out debate on everything else.

However, at last there are signs that politicians are startingto think about the direction that Britain should take after itleaves the EU (see Briefing). Some of the fundamental ideasthat have underpinned Western governments of all stripes fordecades are being questioned from right and left. A partywhich could come up with persuasive answerswould stand todominate British politics for many years. And just as the Brexitrebellion has been followed by populist revolts in other coun-tries, so the ideas fermenting in Britain may well spread. Someof them are promising; others downright dangerous.

The people have spokenThe Leave campaign’s demand to “take back control” resonat-ed because it applied to more than just Britain’s relationshipwith Europe. It chimed with those sick of a hyper-centralisedstate, where feeble councils take marching orders from an out-of-touch London. It tapped into growing anger at the outsourc-ing of public services to remote and incompetent private com-panies. It pointed to the firms that bypass employment law bytreating staffas “gig” workers with few rights. And it reflected afeeling of impotence in the face of a system of global capital-ism which, ten years ago, sent Britain into recession after bank-ers thousands of miles away mis-sold securities that no one,including themselves, understood.

On becoming prime minister in 2016, Theresa May assuredvoters that she had heard their cry, and boldly vowed to re-shape “the forces of liberalism and globalisation which haveheld sway...across the Western world.” She has not kept thispromise. Her lack of imagination, squandered majority andthe all-consuming Brexit negotiations—the ones with herparty, rather than the EU—mean that, more than two years onfrom their great howl, the British people have seen nothing inreturn. When Brexit day comes next March, and Britain is leftwith either a bad deal or with no deal at all, the call for revolu-tionary change will not have been sated—it will be strongerthan ever.

Alarmingly, the camp readiest to answer that call is a La-bour Party marching ever further and more confidently to theleft. Many of the ideas in its manifesto last year recast old poli-cies, such as renationalising the railways, which would not an-swer the fundamental new questions being asked of the state.But since then Labour’s economic plan has evolved. The shad-ow chancellor, John McDonnell—a bigger thinker than his

boss, Jeremy Corbyn—proposes “the greatest extension of eco-nomic democratic rights that this country has ever seen”.

Mr McDonnell correctly identifies that power has drainedfrom labour towards capital in recent years. But his proposalsto redress this balance would see the state strong-arm its waydeeply into the economy (see Britain section). Companieswould have to nominate workers to make up a third of theirboards, while pay would be determined by collective bargain-ing. Ten per cent of companies’ equity would be expropriatedand put in funds managed by workers’ representatives, thatwould become the largest shareholders in many of the biggestfirms. Workers would receive some dividends, but the major-ity would go to the government. The Treasury would be “re-programmed” to channel money to favoured industries. Cou-pled with a plan to raise the minimum wage so that itembraces60% ofemployeesunder25, the package represents atransfer of power not just to workers but also to the state andthe unions. Labour-supporting economists propose still moreideas, including the introduction of capital controls. “Thegreater the mess we inherit, the more radical we have to be,”Mr McDonnell told the conference. Brexit is likely to providethe mess required to justify a socialist shock-doctrine.

The Tories have been slower to regroup, but they too areteeming with ideas. Some want to dust off the free-marketprinciples ofThatcherism and apply them to new areas, liftingplanning restrictions to encourage housebuilding, say. Otherswant the party to blunt capitalism’s sharperedges, for instanceby mimicking the trust-busting of Teddy Roosevelt, whose tar-get today would be the overmighty, rent-seeking tech monop-olies. Still others believe the remedy for Britain’s fractiousnessis to update Benjamin Disraeli’s “One Nation” Conservatism,arguing that its modern mission should be to unite a countrywhose deep divides—by age, class, region and more—were ex-posed by Brexit.

But what did they mean?These ideas could mark a dramatic break with the past. Butwhereas an insurgent Labour has united behind a growing listof detailed plans, the Tories’ thoughts are ill-defined, and theparty far from agreed on which to pursue. Their leader, on therack in Brussels and fighting for her job in Westminster, has notime for philosophising. She is unlikely to make way for a suc-cessor until Britain has left the EU. Yet there is no time to lose.Too many Tories doubt that plans as drastic as MrMcDonnell’scould ever be enacted in Britain. That is complacent. The gro-tesque folly of Brexit will be enough to persuade manywealthy Britons to ditch the Tories, even if it means electing afar-left chancellor. And Britain’s winner-takes-all system letsgovernments quickly and dramatically reshape the country.Mr McDonnell would not face the checks and balances thathave restrained President Donald Trump.

Britain is at last getting the battle of ideas that the referen-dum result demanded. That presents big opportunities, butalso grave risks. It is time for those who dislike the sound ofthefuture described by Labour this week to do some hard think-ing of their own. 7

The quest to remake politics

Beneath the chaos of the Brexit talks, big ideas are forming that will shape the next decade

Leaders

14 Leaders The Economist September 29th 2018

1

THE world is producing evermore rubbish. Households

and businesses took out 2bntonnes of trash in 2016, theequivalent of 740g each day forevery person on the planet. TheWorld Bank predicts the annualpile could grow by 70% by 2050,

as the developing world gets richer. Such waste is not simply unsightly, it also threatens public

health. Diarrhoea, respiratory infections and neurologicalconditions are more common in areas where waste is not regu-larly collected. And even where it is, it can cause environmen-tal problems (see our special report this week). Greenhousegases from the waste industry, principally in the form ofmeth-ane from older landfill sites, could account for as much as atenth of the global total by 2025. The case for taking action isclear. But what kind ofaction depends on where you are.

Poorer countries often lack good waste infrastructure. Rub-bish piles up on open dumps, if not in the street. In July, for ex-ample, India’s Supreme Court warned that Delhi is buried un-der “mountain-loads of garbage”. Such places must investenough to get the basics right. One study found that burning,dumping or discharging rubbish into waterways costs southAsian economies $375 per tonne in pollution and disease. Ba-sic disposal systems would cost only $50-100 per tonne. Mo-rocco’s government reckons the $300m it has recently investedin sanitary landfills has already averted $440m in damage.Such spending makes sense even when budgets are tight.

The rich world has a different problem. It is good at collec-tion. But at the start of 2018, China, until then the destinationfor many of the world’s recyclable material, stopped import-ing most waste plastic and paper, and severely curtailed im-ports of cardboard. Rich countries must recycle more, dispose

ofmore waste at home or no longer produce as much. For environmentalists the preference for recycling is obvi-

ous. Some even want economies to become “circular”—ie, toreuse or recycle everything. But anyone arguing that reducingphysical waste is a moral imperative needs to reckon with re-cycling’s hidden costs. Somebody must pick out, clean, tran-sport and process junk. When the time and effort obviouslypay off, the economy is already naturally circular. Three-quar-ters of all aluminium ever smelted remains in use, and there isa thrivingmarket forused aluminium cans. But forother mate-rials, recycling just isn’t worth it.

Round and roundThat is partly because chucking stuff out is artificially cheap.Were landfill and incineration priced to reflect their environ-mental and social costs, people would throw their rubbish inthe river or dump it by the road instead. Rules to discouragewaste should therefore focus on producers rather than house-holds. The principle of taxing pollution should be extended tocover makers of things that will need disposing of. A good ex-ample is the requirement, pioneered in Europe, for firms to fi-nance the collection and recycling ofelectronic waste.

Transparent subsidies for the recycling industry would alsohelp. It is better to pay the industry to absorb trash, and let themarket take care of the rest, than to craft crude rules with un-knowable costs, such as San Francisco’s ambition to send zerowaste to landfill. If recycling is sufficiently profitable, morewaste will become a valuable commodity. Some of it mighteven be dug backout of the ground.

Thankfully, rubbish is one environmental issue wherethere is little need to worry about political incentives. Voterseverywhere want rubbish to be taken away—and they do notwant to live near landfill sites and incinerators. The trick is toget the economics right, too. 7

Waste

Cash for trash

How the world should cope with its growing piles ofrubbish

WHEN Roman Abramovichhad problems renewing

his British visa, he turned toSwitzerland. It rejected his resi-dence application, however,after Swiss police said he poseda “reputation risk”. (He denieswrongdoing.) The colourful Rus-

sian billionaire and owner of Chelsea football club now hasan Israeli passport, allowinghim visa-free travel to Britain, andis converting a former hotel into his Tel Aviv pad.

Israel offersnationality to any Jewwho asks for it. Otheroli-garchs have to pay for the privilege, but they are spoilt for

choice. Citizenship- and residence-for-sale schemes, typicallycharging between $100,000 and $2m, are booming (see Inter-national section). More than a dozen countries sell passportsand around 100 sell residence. An industry of lawyers, bank-ers, accountants, consultants and estate agents has sproutedup to serve well-heeled “investment migrants”.

The idea of selling passports repels some people. Citizen-ship is a sacred bond, they argue, and should be granted onlyto foreigners who prove themselves worthy. Why should therich be allowed to jump the queue? Especially since some ofthe queue-jumpers are crooks or tax-dodgers, who want a newhome in which to hide or launder their loot.

There are legitimate reasons for wanting a second passport.

Citizenship for sale

What price a passport?

Selling citizenship and residence is fine, as long as ne’er-do-wells are weeded out

The Economist September 29th 2018 Leaders 15

2 Travelling businessfolk from poor or Muslim countries faceendlessvisa hasslesunless theyhave one. Others seek an extrapassport as insurance against instability or persecution. Morethan a third of rich Chinese would like a foreign bolthole(which may mean flouting China’s ban on dual citizenship).Countries meeting this demand gain a straightforward benefit:easy money to spend on public services. For hurricane-hit Ca-ribbean states, passport-flogging has been a lifeline.

Regardless of who gains, a principle is at stake. Countrieshave every right to reserve citizenship for people who try tobecome like the native-born population, for instance by learn-ing the language. But they also have the right to sell it, if votersagree. Citizenship is a basic matter ofnational competence.

Citizens ofsomewhere, and somewhere elseIts sale should not be unconstrained, however. Member statesof the European Union need to agree on common principlesgoverning whom to admit, since a passport from one gives ac-cess to live and workin all. Tiny states that sell lots ofpassportsface another risk. If they overdo it, native voters could eventu-ally be outnumbered by citizens of convenience. Some statesmay therefore wish to restrict voting rights to those who forge

a deeper connection with the place, for instance by residingthere for a minimum period each year.

All citizenship-sellers, large and small, should do more toweed out undesirables. Too often, their programmes open aback door to dirty money; think of the ill-gotten Russian gainsthat have been laundered through Cyprus, one of the EU’smost enthusiastic hawkers of passports. The industry talks agood game, emphasising recent improvements in client-vet-ting. But it has moved too slowly.

The time has come for stricter “know-your-customer” rulesand the blacklisting ofcountries that offer havens for migrantswith dirty money. Stiffer rules are also needed to thwart pass-port-buyers whose aim is to evade tax on money that was law-fully earned. In the United Arab Emirates, for instance, foreign-ers are buying residence and using it to secure tax residencetoo, which allows them to blockthe flow ofdata to tax authori-ties elsewhere. Banks should be required to establish whereclients’ personal and economic links are strongest, and tosnitch on those whose tax residence looks like a sham.

There are many sound reasons to grant residence or citizen-ship to foreigners who are prepared to pay for it. Abetting crim-inals is not one of them.7

IT HAS been called the world’smost important number. LI-

BOR, which stands for the Lon-don Interbank Offered Rate, is abenchmark interest rate, repre-senting the amount that bankspay to borrow unsecured fromeach other. Globally, it under-

pins $260trn of loans and derivatives, from variable-rate mort-gages to interest-rate swaps. But LIBOR’s days are numbered. Itis due to be phased out in three years. Broadly speaking, LI-

BOR’s planned demise is a good thing. But that does not meanit will go smoothly.

The case for moving away from LIBOR as a reference rate ispowerful. The rate isbased on a panel ofbankssubmitting esti-mates of their own borrowing costs. The rigging scandals thatmade LIBOR notorious in 2012 showed how this process couldbe manipulated. They have also made many banks nervous ofbeing involved. The interbank market has become less impor-tant since the financial crisis, because new rules encouragebanks to use other forms of borrowing. That means there arefewer transactions to base the rate on. Anyway, it is unclearwhy a measure depending in part on banks’ credit risk shouldbe part ofan interest-rate swap, say, between two companies.

Hence the decision by British financial regulators to ceaserequiring banks to submit rates after 2021. Hence, too, the raceby central banks, regulators and the industry to cook up re-placements (see Finance section). An alphabet soup of newreference rates, from SOFR and SARON to SONIA and TONAR,is already simmering away.

Welcome though it is, the end of LIBOR poses two risks.One is of market instability, as trillions of dollars-worth of fi-

nancial contracts that are based on LIBOR are forced, after itsdiscontinuation, to anchor themselves to a new benchmarkrate. That shift could have big effects, such as a sudden jump tohigher interest rates for borrowers. This is not just a theoreticalconcern. The Bank of England pointed out in June that in theprevious 12 months the stock of LIBOR-linked sterling deriva-tives stretching beyond 2021 had grown. The answer to this isfor contracts to have proper “fallback” clauses which specifywhat happens when LIBOR disappears. Regulators are apply-ingpressure to get these included, but efforts to amend existingcontracts before 2021could easily end up in the courts. 

The devil you knowThe other risk concerns the post-LIBOR world, where the newreference rates may cause banks’ assets and liabilities to be-come disconnected. Flawed though it is, the use of LIBOR of-fersbanksa hedge against sudden moves in theirown borrow-ing costs. The interest rates they charge and the interest ratesthey pay, whether for one day or one year, are linked by LIBOR.

The alternatives may not move in sync. They refer to thecost of borrowing overnight, not for a range of maturities. Therate being promoted by the Federal Reserve is for borrowingsecured against American government securities. In a crisis, itis easy to imagine that demand for such high-quality collateralwould go up even as willingness to lend to banks goes down.That would mean banks’ income from loans would fall just astheir own borrowing costs rose. 

Neitherofthese dangers can be wished away. Finding a ratethat is both immune to manipulation and an accurate reflec-tion ofbanks’ borrowingcosts ishard. And replacinga numberthat has become embedded in the financial system risks insta-bility. LIBOR deserves to be buried. It may still be mourned. 7

LIBOR

Tick tock

US dollar LIBOR market2018, $trn

0 50 100 150 200

Over-the-counter derivatives

Exchange-tradedderivatives

Other

The hunt fora new benchmarkinterest rate poses risks to financial stability

16 Leaders The Economist September 29th 2018

AYEAR ago Harvey Weinsteinwas exposed as a sexual

predator. Until then his treat-ment ofwomen was an open se-cret among some of the film in-dustry’s publicists, lawyers andjournalists. Mr Weinstein hadbeen protected by an unspoken

assumption that in some situationspowerful men can set theirown rules. Over the past year that assumption has unravelledwith welcome speed. In every walkof life powerful men havebeen forced out, and not just in America. Now Brett Kava-naugh maybe denied a seaton America’shighest court follow-ing a series of accusations that he committed sexual assaultsdecades ago as a student. What began on the castingcouch hasmade its way to the Supreme Court bench.

That is progress. And yet the fate of the #MeToo movementstill hangs in the balance in America, the country where it be-gan and where it has had the greatest effect. To see why, onlylook at the case of Mr Kavanaugh—who, as we went to press,was due to give testimony to the Senate Judiciary Committeealong with Christine Blasey Ford, his main accuser. The goodnews is that the appetite for change is profound; the bad newsis that men’s predation of women risks becoming yet onemore battlefield in America’s all-consuming culture wars.

Anmer’s kickThanks to #MeToo, women’s testimony is at last being takenmore seriously. For too long, when a woman spoke out againsta man, the suspicion was turned back on her. In 1991 whenAnita Hill accused Clarence Thomas, now a Supreme Courtjudge, of sexual harassment, his defenders smeared her as “alittle bit nutty and a little bit slutty”. The machine backing MrKavanaugh is equally determined. However, it has refrainedfrom questioning either Ms Blasey Ford’s sanity or her morals.In 2018 voters would find that unacceptable.

Abuse by men is being taken more seriously, too. Mr Wein-stein allegedly committed dozens ofsexual assaults, includingrape. The contrast between his brutality and his impunityshook the world out of its complacency. This week Bill Cosby,once America’s highest-paid actor, was jailed for being a sexu-ally violent predator. But women in colleges and workplacesall over America are harmed by abuse that falls short of rape.Thanks to #MeToo, this is more likely to be punished. Most de-fences of Mr Kavanaugh have focused on his presumed inno-cence; 30 years ago they would have insisted that the drunkenfumblings ofa 17-year-old are a fuss about nothing.

These shifts reflect a broad social change. Before the elec-tions of 2016, 920 women sought the advice of EMILY’s List,which promotes the candidacy of pro-choice Democraticwomen. Since Donald Trump was elected president, it hasbeen contacted by 42,000 (see United States section). Outsidepolitics, companies are keen for their staffand their customersto think that they buy in to #MeToo.

One worry is that there may be a gap between corporaterhetoric and reality (see Business section). Another is uncer-

tainty about what counts as proof. That is largely because evi-dence of an instance of abuse often consists of something thathappened behind a closed door, sometimes long ago.

Striking a balance between accuser and accused is hard. MsBlasey Ford has the right to be heard, yet so does Mr Kava-naugh. Mr Kavanaugh’s reputation is at stake, but so is the Su-preme Court’s. In weighing these competing claims, the bur-den ofproofmust be reasonable. Mr Kavanaugh is not facing atrial that could cost him his liberty, but interviewing for a job.The standard of proof should be correspondingly lower. Nei-ther the court nor natural justice is served by haste.

Also a problem is the greyzone inhabited bymen who havenot been convicted in court, but are judged guilty by parts ofsociety. Just now, every case is freighted with precedent-settingsignificance, perhaps because attitudes are in flux. This monthIan Buruma was forced out as editor of the New York Review ofBooks after publishing an essay by an alleged abuser whichfailed to acknowledge the harm he had done. Mr Buruma didnot deserve to go and, were values more settled, his criticsmight have been content with an angry letter to the editor.#MeToo needs a path towards atonement or absolution.

And #MeToo has become bound up with partisanship. Ac-cording to polling earlier this year by Pew, 39% of Republicanwomen thinkit is a problem that men get away with sexual ha-rassment and assault, compared with 66% of Democraticwomen; 21% of Republican men think it is a problem thatwomen are not believed, compared with 56% of Democraticmen. Mr Kavanaugh, however his nomination turns out, islikely to deepen thatdivide—ifonlybecause Republican zeal torush his confirmation is further evidence that the party putspower first. That was clear when it backed Mr Trump, despitehis boasts offorcing himselfon women and allegations ofsex-ual misconduct by at least19 accusers. Under Bill Clinton, whowas also accused ofsexual assault, the Democrats were not sovery different. They now offer less protection.

If #MeToo in America becomes a Democrats-only move-ment, it will be set back. Some men will excuse their behav-iour on the ground that it is hysteria whipped up by the left toget at Republicans. Those questions about proof, fairness andrehabilitation will become even harder to resolve.

ThinkaheadIt takes a decade or more for patterns of social behaviour tochange. #MeToo is just one yearold. It is not about sex so muchas about power—how power is distributed, and how peopleare held accountable when power is abused. Inevitably, there-fore, #MeToo will morph into discussions about the absenceof senior women from companies and gaps in average earn-ings between male and female workers. One protectionagainst abuse is for junior women to work in an environmentthat other women help create and sustain.

Conservatives often lament the role Hollywood plays inunderminingmorality. With #MeToo, Tinseltown has inadver-tently fostered a movement for equality. It could turn out to bethe most powerful force for a fairer settlement between menand women since women’s suffrage. 7

Sex and power

#MeToo, one year on

A movement sparked byan alleged rapist could be the most powerful force forequalitysince women’s suffrage

18 The Economist September 29th 2018

Letters are welcome and should beaddressed to the Editor atThe Economist, The Adelphi Building,1-11 John Adam Street,London WC2N 6HTE-mail: letters@economist.comMore letters are available at:Economist.com/letters

Give Bolsonaro a chance

You made a good case for allthat is wrong about JairBolsonaro, though you shouldalso have compared him withthe alternative that Braziliansface in the forthcoming elec-tions (“Latin America’s latestmenace”, September 22nd).This election is about choosingthe least-worst presidentialcandidate. If the polls are to bebelieved, the second-roundrun-offwill be between MrBolsonaro and FernandoHaddad, who represents theWorkers’ Party. Mr Haddad’scampaign is being master-minded by Luiz Inácio Lula daSilva, the party’s leader, fromhis prison cell.

For all his faults, and he hasmany, there is a chance that MrBolsonaro will provide Brazilwith the right leadership andmake badly needed reforms tothe pension and tax systems,privatise poorly run statecompanies and reduce theoverall size ofgovernment.Based on the record of theWorkers’ Party there is nochance that it will undertakethese vital measures and everychance that it will lead Brazildown the path ofVenezuela.That would be a far biggerthreat to democracy in Braziland Latin America.

Under this scenario MrBolsonaro becomes a riskworth taking for many Brazil-ians. They have become com-pletely disillusioned with thepolitical classes of this beauti-ful and bountiful but badlymismanaged country.ADRIAN FINCHRio de Janeiro

The court’s decisions

You suggested that America’sSupreme Court became poli-ticised through exposure to thequarrels in American society,as ifa communicable diseasehad been transmitted (“AndBrett makes five”, September15th). A better analogy is thephenomenon ofagency cap-ture. Powerful Republicaninterests have for years soughtjudicial nominees who willfollow an agenda they con-stantly present through “friendof the court” filings. When

decisions breakfive-to-four onpartisan lines (all Republicanappointees voting together as abloc) on matters important tothose interests, their win rate is100% across more than 70decisions under Chief JusticeJohn Roberts. This is no statis-tical fluke. That is capture.Hence the otherwise inexpli-cable behaviour ofRepub-licans in the Kavanaugh nomi-nation, desperate to keep thatfive-to-four advantage for theirbig donors.SENATOR SHELDON WHITEHOUSENewport, Rhode Island

Treating genderdysphoria

Regarding transgender behav-iour during adolescence(“Trans parenting”, September1st), sometimes teenagers withgeneral identity weaknessdevelop transient symptomsofgender dysphoria. Theseadolescents sometimes evenconsider themselves “trans-gendered” in an effort to im-prove peer relationships andbuttress their sense of identity.If the symptoms are significantthey can generally be resolvedthrough psychotherapy.

Patients like these representa subgroup ofadolescentswho are different from(although superficially similarto) those who are truly trans-gendered. The therapeuticstance we advocate is to re-spect the patient’s total “per-sonhood” and understandhow identity develops in thecontext of familial and peerrelationships and the sense ofthe self. In practice, doctorsshould not reinforce specificgender-role behaviours, nordetermine whether it is desir-able for the adolescent to “be”female or male, or neither.RICHARD FRIEDMANClinical professor of psychiatryDAVID LOPEZClinical instructor in child andadolescent psychiatryWeill Cornell Medical SchoolNew York

More than just a mentor

The Philosophy briefonSchumpeter, Popper andHayekreferred to Ludwig vonMises as Hayek’s mentor(August 25th). The contribu-

tions ofvon Mises to liberalphilosophy were far reachingand more influential than youthink. In1922 he published“Socialism: An Economic andSociological Analysis”, inwhich he demonstrated theimpossibility ofsocialism asan economic and social sys-tem and described how itleads to the destruction of thesocial fabric.

His book, “OmnipotentGovernment”, published in1944, the same year as Hayek’s“The Road to Serfdom”, is athorough analysis of the col-lapse of liberal ideas in Ger-many and the rise ofnation-alism, which led to Nazism.Von Mises’s works on econom-ics include the first coherentapplication of the theory ofmarginal utility (which wasdeveloped by Carl Menger) tomoney (“The Theory ofMon-ey and Credit”) and a study ofthe epistemology ofeconom-ics (“Epistemological ProblemsofEconomics”).FRANCISCO NADAL DE SIMONELuxembourg School of Finance

What constitutes goodwill?

I enjoyed Schumpeter’s col-umn on goodwill, an impor-tant topic that requires betteraccounting on firms’ balance-sheets (September1st). How-ever, goodwill does not repre-sent the difference betweenthe price the acquirer “paid tobuy another firm and thetarget’s original bookvalue”.Before the amount ofgoodwillarising from an acquisition isdetermined, the acquirer’saccountants allocate as muchof the purchase price to whatthey can justify as the fairvalue of the target’s tangibleand other intangible assetsacquired and liabilities as-sumed. Only the remaining,unallocated excess purchaseprice is recorded as goodwill.

It is worth noting that be-cause of the above require-ment and the fact that good-will is not something that canbe bought or sold separately, aminority view held by someaccountants is that goodwill isnot an asset. In the 1950s and1960s, when accounting was amore principles-based profes-sion, Arthur Andersen pro-

posed showing the non-allo-cated excess purchase price asa subtraction from the ac-quirer’s shareholders’ equity.This might trouble those whoare fixated on financial ratios,but it also would provide aclearer indication ofhowmuch the acquirer has paid forundocumented expectations.ROBERT STRAHOTAChevy Chase, Maryland

Latin lessons

I was tickled by Johnson’scolumn on the use ofLatinwords in English (September8th). My wife was recently inphysical therapy and haddifficulty grasping the differ-ence between adductor andabductor muscles. I explainedthat in Latin ad means“toward” and ab means “awayfrom”; thus, an adductormuscle is one that pulls a limbtoward the central line of thebody, an abductor muscle onethat pulls a limb away fromthat line. We explored otherexamples ofad and ab wordsbut ran into a bit of troublewith adverse and averse(where ab has been replacedby “a” for ease ofpronuncia-tion) because their functionalmeanings (“inimical to” and“feeling repugnance toward”)are much more alike than theiretymological meanings (“turn-ing toward/against” and “turn-ing away from”). To my mindsuch subtleties are one of theinfinite charms of language.ROBERT NICHOLSONDes Moines, Iowa7

Letters

19

The Economist September 29th 2018

Executive Focus

20

The Economist September 29th 2018

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Executive Focus

The Economist September 29th 2018 21

1

THE Conservative Party has met withtriumph and disaster a number of

times since the 1830s, and if it has nottreated them just the same, it has at leastsurvived them. There were long periods ofuninterrupted rule, such as 1951-64 and1979-97. There were times of marginalisa-tion, even irrelevancy, like that which fol-lowed Robert Peel’s decision to repeal theCorn Laws in 1846 and the one that wasushered in by the victory of Tony Blair’sNew Labour in 1997. Today, though, it is ex-periencing something stranger than either:both. The Tories are weakand strong at thesame time.

When the party gathers in Birminghamon September 30th for its annual confer-ence, the evidence of weakness will beplain to see. The party does not have a ma-jority in the House of Commons; TheresaMay, the prime minister, is clinging to pow-er through a grubby deal with the tenNorthern Irish MPs of the DemocraticUnionist Party (DUP). The government’sdomestic agenda is so threadbare thatthere will be no Queen’s Speech (whichtraditionally lays out the government’sagenda at the beginning of the new parlia-mentary session) this year.

The government is getting nothingdone because Brexit occupies all its timeand most of its considerable capacity for

internecine warfare. In the referendum of2016, called by David Cameron to fulfil apledge in the Tories’ election manifesto theyear before, a majority of Tory MPs votedto remain in the EU. The majority of theparty’s members and voters wanted toleave, as did enough of the voters for otherparties to secure that result. Mrs May, whosucceeded Mr Cameron when, seeingwhat he had wrought, he cut and ran, in-voked Article 50 of the EU treaty the fol-lowing spring; this means Britain is set toleave the EU on Friday March 29th 2019.

Twisted by knavesMost of the Tory MPs who voted Remainnow think that their job is to ensure thatBritain stays as close to the EU as it canwhile still honouring the result of the refer-endum—the sortofoption thathasbecomeknown as a “soft Brexit”. Some who cam-paigned for Leave, such as Michael Gove,currently the environment secretary, willaccept a moderately soft Brexit as long as itstill delivers a decisive break. The “Che-quers plan” Mrs May put together in Julyoutlines a softish Brexit in which Britainleaves the EU and its customs union, butseeks to stay in the EU’s single market forgoods and, with the help of a special cus-toms arrangement, to avert the need forany physical checks at the Irish border.

The other 27 EU countries rejected themain elements of the Chequers plan at asummit in Salzburg on September 20th.And the Conservatives’ hard-line Brexi-teers are having none of it, either. JacobRees-Mogg, the head of the European Re-search Group, which has the backing of upto 80 Tory MPs, talks in characteristic ar-chaisms of it reducing Britain to vassalage.David Davis and Boris Johnson, previous-ly the cabinet minister in charge of negoti-ating Brexit and the foreign secretary, re-spectively, quit their posts days after theplan was agreed on. In Mr Johnson’s caseopposition to Chequers stems from a de-sire to be prime minister. For many othersit comes from a desire to see no aspect ofBritish life under any sort of EU jurisdic-tion. A “hard Brexit” of this sort could looksomething like a free-trade deal, such asthe one that the EU has with Canada.

A number ofhard Brexiteers are willingto countenance the veryhardestoption: nodeal of any sort, a scenario in which, afterthe end of March, Britain and the EU treateach other like any other two members ofthe World Trade Organisation. There havebeen almost no serious preparations forthis, and large businesses, along with mosteconomists, warn that such a sudden rup-ture would spell doom. But no matter: itwould be Britain’s doom.

A policy the rest of the EU rejects andthat cannot get through Parliament marksthe final debasingofwhat was once the To-ries’ most valuable asset: a reputation forgood government. Labour can always relyon being the party of idealism: even if wemake a mess of things, we have pure inten-tions. The Tories’ great selling-point is be-ing the party of competence: even if we do

When all about are losing theirs...

Brexit is straining the world’s oldest political party

Briefing The Conservative Party

22 Briefing The Conservative Party The Economist September 29th 2018

1

2 things you’d rather we didn’t, we won’tmake a complete hash of it.

It is not just that the party’s Brexit wingcontains a lot ofpeople who might politelybe described as eccentrics. It is that theirpresence deprives more sensible Tories oftheir judgment. Mr Cameron made a fatalerror in promising a simple in/out referen-dum. Mrs May compounded that errorfirstby triggering Article 50 before she neededto, and then by holding an election with amanifesto that went off like a booby-trapped briefcase, thereby losing a modestbut quite workable majority.

If that electoral fiasco demonstrated theparty’s weakness, not to mention lack ofnous, it also showed its surprisingstrength.The Conservatives won 2.3m more votesthan they had two years before under MrCameron; they secured their highest shareof the vote (42.3%) since Margaret Thatch-er’s “Falklands victory” in 1983. And theyhave a better claim to being a nationalparty than they did under Thatcher, whenthey risked disappearing in Scotland andthe north of England. The election of 2017saw them increasing their number of par-liamentary seats in Scotland from one to 13and making impressive gains in northernLabour strongholds such as Copeland.

This revival, masked by the first-past-the-post electoral system, has the samesource as the party’s division and hope-lessness: Brexit. More Britons voted forBrexit than have ever voted for anythingbefore. The Tory party not only gave themthe opportunity to do so; unlike any otherparty, it boasted many MPs who sharedtheir views. Voting for Brexit was a gate-way drug to voting Tory: the party’s shareofthe vote amongskilled manual workers,32% in 2015, was 45% in 2017.

The Torieshave also, to some extent, be-gun to look like the country they seek togovern. More than half the party’s MPs arenow educated in the state sector (see chart1); the current cabinet is its first ever to con-tain no Old Etonians. The elections of 2015and 2017 brought in 103 new Tory MPs,making up a third of the party in the Com-mons; they reflect Mr Cameron’s moder-nising attempt to welcome women, ethnicminorities and social liberals. There are 67female MPs—just over half the number onthe Labour benches, but a significant in-crease on the 49 who had seats when MrCameron came to power. When Mrs Maybecame leader in 2016 the other candidateto survive the second round of voting wasanother woman, Andrea Leadsom. Thehome secretary, Sajid Javid, is the first Brit-ish Asian to hold that job, or indeed any ofthe great offices ofstate. The party’s middleranks contain several talented members ofethnic minorities, such as Kemi Badenoch,Rishi Sunak, Kwasi Kwarteng, Sam Gyi-mah and JamesCleverly. While in coalitionwith the Liberal Democrats the Tories in-troduced gay marriage to Britain (though

MrsMay’s friends in the DUP are resolutelykeeping it out of Northern Ireland). RuthDavidson, the leader of the Scottish Toriesand a self-described “shovel-faced lesbi-an”, is married, pregnant and one of theparty’s genuine stars.

The Tories can lay claim to some eco-nomic successes, as well. The coalition pre-sided over a reasonable accounting withcapitalism’s demons after the financial cri-sis. Unemploymenthas fallen to 4%, a four-decade low. Inflation hoversaround 2%. In-come inequality appears to have declinedover the past decade. The public financesare heading towards balance.

And they have had good fortune intheir opposition. The party remains levelwith Labour in opinion polls despite theturmoil created byBrexitand the drag ofin-cumbency (see chart 2 on next page). Theone thing that Conservatives of all stripesagree on is that Jeremy Corbyn, a veteranMP on the Labour Party’s hard left who be-came its leader in 2015, is “the best recruit-ing sergeant we could have”. Tories andnon-partisan pollsters generally agree thatif Labour had a more centrist leader theConservatives would be a good 15 pointsbehind in the polls. The fact that Mr Cor-byn now looks immovable may be bad forthe country. But it is certainly good for theConservatives.

The parliamentary party also has a ro-bust diversity of views, thrown into un-helpful relief by arguments about Brexit,from which to draw when considering itsfuture. It is possible to divide them intothree camps: Thatcherites, New Dealersand the One Nation faction.

The Thatcherites, perhaps the largestgroup, come in two flavours, one sociallyconservative, one more liberal. Mr Rees-Mogg is the most outspoken member ofthe socially conservative faction, which

overlaps with the Brexiteer faction morethan any other does. Liz Truss, the chiefsecretary of the Treasury, is the championof the socially liberal faction. She is keenon pushing market solutions into new are-nas; but she also wants a party of modernsexual attitudes. Mr Javid straddles the di-vide between the two groups: he has a pic-ture of Thatcher in his office, but as thechild of immigrants was able to weatherthe recent storm over the “hostile environ-ment” for migration in the Home Office ina way a white Thatcherite would havefound much harder.

Worn-out toolsThe second group, the New Dealers, are re-thinking Thatcherism’s bedrock belief infree markets in the light of the global finan-cial crisis, stagnant living standards andthe rise of populism on both the left andthe right. As Mr Gove puts it, “It’s no longerpossible to replay the hit records of the1980s, only louder.” New Dealers are opento radical and somewhat interventionistideas for boosting productivity growth,“rebalancing” the economy by region, sec-tor and class, and preventing rent-seeking.They know that Labour’s economic cham-pioning of “the many, not the few” reso-nates, and that if Tories do not reform Brit-ish capitalism it will suffer a far worse fatein other hands.

Nick Boles, the MP for Thatcher’s hometown of Grantham, thinks that the Toriesshould model themselves on Teddy Roose-velt, challengingthe newhigh-tech “trusts”and championing the rights of consumers.Some have a more positive vision ofbuild-ing on Britain’s strengths. Mr Gyimah, theminister for higher education, argues thatBritain has big advantages when it comesto innovation: impressive fundamental re-search; a first-rate regulatory regime; abunch of good high-tech businesses, par-ticularly in fintech; and a flexible economythat puts few barriers in the way of ex-panding firms. “The north of England hasmore universities in the world’s top 100than the restofEurope combined,” he says.

One Nation Toriesharkbackto a philos-ophy invented by Benjamin Disraeli, one

1Less old school, fewer ties

Sources: House of Commons; Sutton Trust

Britain, Conservative members of Parliament, %

0

20

40

60

80

1979 83 87 92 97Election years

2001 05 10 15 17

Women

Privately educated

Mr Rees-Mogg sees the past in the future

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24 Briefing The Conservative Party The Economist September 29th 2018

2 of the great Victorian prime ministers,which dominated the party from the 1950sto the 1970s; basically traditionalist, moder-ately reforming, friendly to business but atthe same time plausibly cast as being onthe side of the common man. One Nation-ers retreated before Thatcher; against thelikes of Mr Rees-Mogg or John Redwood, aformer Welsh secretary, they fancy theirchances a bit more. When Justine Green-ing, a former education secretary, says thatthe best way to prevent the country fromdisintegrating into hostile tribes is to pro-vide people with equal opportunity andsocial inclusion, she is the voice of the OneNation faction. Chloe Smith, the ministerfor the constitution, argues that this philos-ophy applies not just to social and eco-nomic problems but also to breachingideological rifts, such as that over Brexit,and the decline of a common culturalframe ofreference into a digital cacophony.

Some of the divisions, exacerbated byBrexit, run deep; there is much that dividesa hard-Brexiteer like Mr Redwood from aOne Nationer like Anna Soubry, and it isof-ten bitter. But in general this is the sort ofpluralist party for which one might holdout hope; it feels more like a party of ideasthan it has for some time. Ms Truss saysthat Brexit has had a “year zero” effect onthe party, forcing it to go back to first princi-ples and think again about how to run thecountry after Britain leaves the EU.

But that is the party in Westminster. Theparty in the country is much more Brexit-y,significantly more right-wing, considera-bly less intellectually adventurous and in-creasingly elderly. It is also very small. Inthe 1950s the Conservative Party had 3mmembers. Itsyouth wingwas the biggest inEurope. Today it has about 124,000 mem-bers and “young Tory” is an oxymoron.The Mile End Institute ofQueen Mary Col-lege, London, calculates that 44% of itsmembers are over 65, compared with 30%of the other main parties.

Ashrinking, Blimpish partybrings withit various drawbacks. It provides littlemoney: the party got £1m in the form ofdues last year compared with Labour’s£16m. This makes the party all the more de-

pendent on the rich. The older member-ship cannot match the Labour Party’sground game; the Mile End Institute notesthat Tory Party members were responsiblefor just 262,150 “campaign activities” dur-ing the election of 2017 compared with1,385,520 for the Labour Party. Tory You-Tube channels make for sorry watching.

The unforgiving minuteThe problem extends beyond Conserva-tive members to Conservative voters. Old-er voters, who like Brexit more, vote Torymore, too. But they are in sympathy withwhat they see as the party’s values, notnecessarily its policies. Thatcher’s lessonwas that the best way to revive ailing Brit-ish businesses was to subject them to adose of global competition; Europe waswelcome as a vast marketplace, just not asa quasi-state. But the party’s supporters areless interested in such invigorating compe-tition. It is not for nothing that the heart ofthe Leave campaign was a pledge to spendmore on that quintessentially statist Britishinstitution, the National Health Service,emblazoned on the side ofthatquintessen-tially British vehicle, a big red bus.

As to younger voters: in 2017 the Torieswon only 27% of the vote among 18- to 34-year-olds and 33% among 35- to 44-year-olds. Again, this is Brexit at work. Youngervoters, who mostly backed Remain, seethe Toriesas the partyofLeave. But the pro-blem goesdeeper than that. The life experi-ences that make people into conservativesin the first place—starting careers, gettingmarried, having children, buying housesand savingfor retirement—are eitherdisap-pearing or being delayed until much laterin life. The gig economy is eating away atstable careers. Almost halfof the country’schildren are born outside marriage.Houses cost seven times annual income,

compared with three times a generationago. Pensions are becoming less generous.Younger professionals are attracted to Cor-bynism not just because they are idealists.They do not have a stake in the system theConservatives seek to conserve.

Ofthe Tory camps, it is the New Dealerswho have the best chance of dealing withthis deeper issue. But they have to getthrough Brexit first. Britain appears to beheading for a chaotic autumn of paralysisand panic. It is quite possible that the gov-ernment will fall and that Mr Corbyn willgo into the resultant election campaign asfavourite. Britain might have a second ref-erendum that would provide a chance ofreversingBrexit, butwould also quite prob-ably polarise the country yet further. In ei-ther case Mrs May might be deposed. Orshe might leave willingly after whateverhappens on March 29th. George Freeman,a former head of her policy board, saysthat at that point the party will badly needa leader who is “liberated from the poison-ous politics of the referendum and the‘shambles’ that followed.”

There are a number ofpotential leadersincluding cabinet members, such as Mr Ja-vid and Jeremy Hunt, and some who havenotyetattained such heights. MsDavidsonhas ruled out runningfor the leadership onthe grounds that it would take too heavy atoll on her emotional and personal life, butpolitics is full ofstrange reversals. But thereisalso Mr Johnson, who useshis column inthe Daily Telegraph as a platform for hislong-nourished leadership ambitions. Heis not popular in the parliamentary party,and younger members think his genera-tion’s day is done (he was at school withMr Cameron); but though MPs winnowthe candidates, Conservative leadershipelections are, in the end, decided by themembers, not the MPs, and among themMr Johnson seems popular.

A bad Brexit, buyer’s remorse amongLeave voters and Mr Johnson as leadercould both strip the party ofmuch of its re-sidual strength and exacerbate its weak-nesses enough to plunge it into true crisis.If it can keep its head, though, and bring offa Brexit that does not plunge the countryinto chaos orpaupery, then its longhabit ofexercising power, its ruthlessness with itsleaders and its ability to mix firmness withflexibility—qualities which have made theConservative Party the democratic world’smost successful political machine—mayyet see it through. And the intellectualskillsofa risinggeneration—not somethingit has always been able to count on—may, ifexercised to the full, allow not mere surviv-al, but success.

Britain’s biggest post-war political fias-co prior to Brexit was the Suez Crisis of1956, the unforced error of a Conservativegovernment. In 1959, with a newleader, theparty was returned to power with an in-creased majority.7

Mr Johnson was the future, in the past

2Evenly matched

Source: National polls

Britain, voting intention, poll of polls, %

2010 11 12 13 14 15 16 17 18

20

25

30

35

40

45

50Conservative

Labour

The Economist September 29th 2018 25

For daily analysis and debate on Britain, visit

Economist.com/britain

1

JOHN MCDONNELL has spent much ofhis time as shadow chancellor playingdown expectations of how radical a La-

bour government would be. This week hecame to Liverpool with a mission to raisethem. In one fringe event at Labour’s annu-al conference, he pledged an “irreversibleshift in the balance ofpower and wealth infavour of working people.” In the mainhall, he promised nothing less than a left-wing shock-doctrine. To cheering dele-gateshe declared: “The greater the messweinherit, the more radical we have to be.”

Labour’s ambition has gone up a gear.Mr McDonnell and Jeremy Corbyn, theparty’s leader, hail from the far left of Brit-ish politics. Yet since taking the reins of La-bour in 2015 their proposals have beenoddly unambitious. In the run-up to thegeneral election in 2017 the party promisedhigher taxes and spending, as well as therenationalisation of the railways and utili-ties. It was a more left-wing manifesto thanpreviousLabourefforts, buthardlyextrem-ist. Now, however, the party is developingpolicies that match up to the men.

Labour’s radicalism is not in its fiscal ormonetary policy, which remain fairly con-ventional, but in its proposed structural re-forms. The idea is to “democratise” theeconomy. The party’s leadership comparetheir plans to the governments of ClementAttlee in 1945-51 and, more surprisingly,Margaret Thatcher in 1979-90. Attlee em-powered the state and Thatcher the indi-vidual. MrMcDonnell wants to hand pow-er to the collective, with citizensgiven a say

avoid Britain, especially as Labour alsoplans to increase corporation tax.

Previously outlined plans to bring wa-ter under public ownership were alsofilled in. A Labour government would buyout the shareholders of England’s nine re-gional water companies—at a price to bedetermined by Parliament—and create “re-gional water authorities” in their place.Their boards would not be filled with face-lessmandarinsbutby“councillors, workerrepresentatives and representatives ofcommunity, consumer and environmentalinterests” (democratising the economywill clearly take a lot ofevenings).

To justify the buy-out, Labour points toa court case over the nationalisation ofNorthern Rock, a bank that collapsed dur-ing the financial crisis of2008, which in ef-fect ruled that the government was justi-fied in buying it at below-market pricesbecause itwas in the national interest. Thatis a thin legal thread from which to hang anationalisation strategy.

No pasaránWhy is Labour moving further left now?One reason is that the Corbynites havecompleted their takeoverofthe party. Theycontrol its ruling National Executive Com-mittee, which last week proposed rule-changes, later approved by the conference,requiring leadership candidates to obtaingrassroots or union support before theycan get on to the ballot. This shifts things infavour of left-wingers. The conference alsoapproved rules making it easier for mem-bers to deselect their MP. Most MPs nowback Mr Corbyn’s domestic agenda; recal-citrant ones may face the boot.

Ifanything, MrCorbyn now faces great-er pressure from the even-farther-left thanhe does from the centre of his party. Somehardline activists fear that, if elected, La-bour might backtrack. They call it “Syrizifi-cation”, after the Greek left-wingers whoprotested but then meekly accepted Brus-

over every part of the economy. In Liverpool the party launched a bat-

tery of economic policies. Workers wouldmake up a third of companies’ boards. TheTreasury’s rulebook on investment wouldbe rewritten to encourage investment inBritain’s ailing regions. Most significantly,workers at bigfirms would be given a stakein their business. Every company withover250 employeeswould have to transfer10% of its shares to an “inclusive owner-ship fund”, managed by workers’ repre-sentatives. Staff would be entitled to divi-dends from these shares. Over 10mworkers would benefit from the proposal,Labour says.

The policy is motivated by the fact thatin recent decades the income accruing toowners of capital has outpaced that accru-ing to labour. Some research also finds thatworker-owned firmsare managed more ef-ficiently. Yet the main beneficiary of La-bour’s plan would be the state. It proposesa limit of £500 ($660) a year on the divi-dend that each worker could receive. Any-thing above this would go straight to thegovernment. At many companies, divi-dends would far exceed £500 per employ-ee. Aback-of-the-envelope calculation sug-gests that, across the economy, firmswould wind up paying some £6bn to thestate, far more than would go to workers.

Companies would be likely to respond,quickly. Some would cut dividends. Firmslisted in Britain might relist abroad. Othersmight ask whether, if 10% can be confiscat-ed, could 50%? Foreign investors might

The Labour Party

¿Hasta la victoria?

LIVERPOOL

Aconfident Labour is swaggering left in its economicpolicy

BritainAlso in this section

26 A second Brexit referendum?

27 Genomic medicine

27 Tainted blood

28 Air power

28 Scandal in Northern Ireland

29 Spice addicts

30 Bagehot: Corbyn, establishment man

26 Britain The Economist September 29th 2018

2 sels’ demands during bail-out negotiationswith the EU. MrMcDonnell is likely to keepthrowing this wing of the party red meat.Further radical ideas are beingdiscussed inLabour circles, such as introducing capitalcontrols and a four-day working week.

As for the public, Labour believes thatBritain wants a leftward turn. In opinionpolls, support for raising taxes and spend-ing is at its highest since 2002. More thanhalf of Britons like the sound of the newworker-ownership plan, according to You-Gov. Nationalising the railways is popularwith the public (and perhaps now withjournalists, after many of them returningto London after the conference were de-layed for hours by a signal failure). Lastyear Mr Corbyn said Labour’s manifesto

was a mainstream option. Now, the partyis going further, says one senior aide: “Weare creating the mainstream.”

Such confidence may be misplaced. La-bour is at best level with the Tories in mostpolls. Asked who would make the betterprime minister, voters prefer Theresa Mayto Mr Corbyn, and “don’t know” to both.Asked why the Conservatives are still poll-ing decently, one cabinet minister replies:“Fear ofCorbyn.”

The next post-Brexit election will bewon by whichever party voters trust moreto improve capitalism. Buzzing betweenfringe meetings, Mr McDonnell repeatedhis intention to do just that, and “radical-ise” Labour’s manifesto. The party’s left-ward march is not over.7

THE most striking mood-swing at thisyear’sLabourconference was the grow-

ing hostility to Brexit. In place of previousambivalence, badges screaming “Bollox toBrexit” were everywhere. Fringe meetingswere thick with members denouncing aTory Brexit designed to benefit corporateinterests at the expense of workers. Andwhen Sir Keir Starmer, the shadow Brexitsecretary, declared that parliamentarydeadlock might justify a people’s vote,adding that nobody could say that Remainwould not be an option, he received one ofthe conference’s biggest standing ovations.

Sir Keir claims that the party is unitedon Brexit, but it is not. A long and much-contested motion, passed at the confer-ence, leaves all options open, including an-other vote. For all Labour’s pretence at be-ing constructive this week, Sir Keir’s sixtestsmean that the party isall but certain tooppose any deal Theresa May brings back

from Brussels. The party leadership ismore Eurosceptic than the membership. Itis also more dubious about the idea of asecond referendum. Some big trade un-ions, as well as quite a few Labour MPs, areunhappy being seen to challenge thedemocratic decision of June 2016. Al-though polls show rising support for afresh vote on a Brexit deal (see chart), partyleaders fret that callingfor it to include a Re-main option could drive Leave voters in La-bour seats into the Tories’ arms.

Labour’s creep towards a second refer-endum is driven by Mrs May’s own tortu-ous problems. Tories crowing this weekover Labour disunity on Brexit only haveto wait for their party conference nextweek to reveal more gaping splits. Themain parts of Mrs May’s “Chequers” plan,to stay in a single market for goods alone,with a complex customs arrangement toavert a hard Irish border, were rejected

more firmly than expected by her fellowEU leaders in Salzburg on September 20th.But they have also been rubbished bymany in her party. This week the hardlineEuropean Research Group, which claimsthe backing of around 60 Tory MPs, de-clared officially that it would vote againstany Chequers-like deal.

Unlike pro-European Tories, hardlineBrexiteers have shown themselves willingto rebel. Yet Mrs May’s response to this lat-est attack was, characteristically, to doubledown. She insists that neither the EU northe Tory rebels have proposed a plausiblealternative to Chequers. And when theBrexiteers this week produced a paperfrom the Institute of Economic Affairs, afree-market think-tank, that proposes aCanada-style free-trade agreement in-stead, her response was to suggest that,since it risked dividing Northern Irelandfrom the British mainland, a Canadiandeal would be worse than leaving with nodeal at all.

After Salzburg Mrs May made a tetchystatement to say that the Brexit negotia-tions were at an impasse and it was for theEU, not her, to make the next move. Techni-cally all that is required for a deal this au-tumn is agreement on a “backstop” plan toprevent a hard border in Ireland, no matterhow long it takes to strike a future tradedeal. Other details can be left until a 21-month transition period begins after Brexitnext March. Yet with Labour and Tory re-bels ready to vote against any deal that MrsMay brings back, the risk of its not gettingthrough Parliament is rising.

And this points to a worrying aspect ofBrexit. It was kicked off when Mrs May in-voked Article 50 of the EU treaty18 monthsago. In most negotiations, the two sidesslowlymove togetherand the gapsnarrow,making the end-point clearer. Yet with lessthan two months left until a deal is meantto be struck, the outcome ismore uncertainthan ever. The odds of a no-deal Brexit or afresh referendum that reverses it have bothrisen. It would be a brave pundit who pre-dicted the result. The one near-certainty isthat Brexit will cast a shadow over both bigpolitical parties for years to come.7

The politics of Brexit

Vote early, vote often

LIVERPOOL

Labour’s creep towards backing a second referendum creates still more uncertainty

Neverendum

Source: YouGov

Britain, “Should there be a second referendum after Brexit negotiations have been agreed?”

A M J J A S O N D

2017J F M A M J J A S

2018

25

30

35

40

45

50

Yes

No

The Economist September 29th 2018 Britain 27

Tainted medical supplies

Bloody scandal

IN THE1970s and1980s, thousands ofhaemophiliacs were infected with

hepatitis and HIV by bad blood products.Many were imported from America,where each batch was created by poolingand concentrating the blood ofup to40,000 paid donors, including prisoninmates and drug addicts. Thousandsmore people contracted hepatitis fromtransfusions of infected blood, adminis-tered after they had suffered accidents orgiven birth, for instance. In some casesthe virus went untreated for decades.More than 2,400 people are known tohave died as a result. The true figurecould be far higher.

This weekan inquiry opened into thescandal, branded the worst in the historyof the National Health Service. It is seek-ing to establish the scale of the disasterand how it happened. The inquiry willalso investigate allegations that the scan-dal was covered up by doctors, civilservants and politicians.

The scale of the alleged cover-upcould be vast. Many victims claim theirmedical records were altered or de-stroyed, to hide the fact they were giventainted blood. One haemophiliac saysthere is a blankspace in his file from1976-92, though he received treatmentthroughout. PatrickMaguire, a solicitorrepresenting several hundred people atthe inquiry, believes there may be “thou-sands upon thousands” ofsuch cases.Others allege that false information wasadded to death certificates to suggest thatpatients died from other causes, such asalcoholism. Papers from the DepartmentofHealth mysteriously went missing.

Two previous inquiries failed to get tothe bottom of the scandal or bring any-body to book. But unlike its predecessors,

this one can haul in witnesses and com-pel them to testify. Its chairman has urgedvictims to come forward, whereas aprevious inquiry was criticised for dis-missing their stories as incidental.

There have recently been broaderefforts to improve transparency in theNHS, following a string ofhospital scan-dals. Slowly, the health service is beingforced to change its tight-lipped ways.

This time, though, the Department ofHealth itself is also in the dock, accusedofbuying products it knew to be unsafebecause they were cheap. The Treasuryand the Cabinet Office are under themicroscope, too. Although hospitals areopening up, the workings ofWhitehallare as murky as ever. The inquiry may yetcompel the government to live by thestandards it demands ofothers.

An inquiry investigates claims ofan official cover-up

FORTY per cent of the babies born inBritain in the week starting on March

3rd 1946 became the first subjects in a pro-ject that eventually achieved global scien-tific renown (and inspired its share of lab-oratory envy). Along with children fromthree younger generations, 58,000 in total,those babies have been followed by re-searchers throughout their lives. Troves ofdata on everything from child develop-ment to ageing have helped to shapehealth care in Britain and beyond.

Now the National Health Service islaunching another big-data programmethat could be just as transformative. FromOctober, NHS England will begin to rou-tinely carry out a standard set of genomictests for some cancers and rare diseases,filling in the patchy use of such tests today.Crucially, for patients who consent, thedata from these tests will be held at a na-tional research centre along with theirhealth records. The NHS’s size, universalcoverage and cradle-to-grave health re-cords promise to make the databaseuniquely useful.

Genomics is a powerful technique.About 7% of people in Britain will at somepoint have a rare disease (one that affectsfewer than one in 2,000 people). Such dis-eases are usually caused by a single geneticmutation and first strike in childhood. Pa-tients go through what doctors call the “di-agnostic odyssey”, which typically takesthree to five years and involves batteries oftests. Genomics sets out to shorten thejourney, by comparing their genomes withthose of their parents. This can help doc-tors spot the disease’s cause and whether itis hereditary in a matter of weeks. In somerare diseases, such early diagnosis can belife-saving. Familial hypercholesterolae-mia, for example, causes dangerously highcholesterol which, if untreated, can causeheart attacks at an early age.

Most rare diseases, however, have notreatment—and this is where the NHS datawill be particularly fruitful. Because NHS

England covers 55m people, researchersshould be able to find several patients witha rare disease, compare its progress inthem, and identifyany lifestyle, diet oroth-er factor that affects the prognosis.

In cancer, anotherdisease caused by ge-netic changes, researchers may be able touse the new centre to identify a key muta-tion and then go on to match the cancer tomedicines that can treat it. Data gatheredby the testing services can help show

which treatment works best with whichparticular genetic profile.

The giant data centre where all NHS ge-nomic records will be stored is already upand running, with patient files from a pro-ject that has been a pilot study for the newservice. Its collection of 82,000 genomesfrom patients with cancers and rare dis-eases is already mined by nearly 3,000 re-searchers from more than 20 countries.

As new research becomes available, theNHS’s genomic-test menu will change,says Mark Caulfield from Genomics Eng-land, which runs the pilot study. Tests forgene variations that may cause adverse re-actions to some drugs are one research pri-ority. Some diagnoses that now require se-

quencing of the entire genome (whichtakes a powerful computer a day and costsabout $1,000) will be accomplished with asingle-gene test (which takes minutes us-ing a machine the size ofa shoebox).

Ever-cheapersequencingwill also help.Testing for combinations of gene variantsthatpredispose people to expensive chron-ic ailments, such as diabetes, say, can helptarget prevention. By some estimates,40-70% of drug prescriptions may be use-less. As with cancer, the NHS can savemoney by detecting which combinationsof genes and drugs are effective and whichnot. America and France are to copy bits ofthe new system. In the world of research,that is the sincerest form offlattery. 7

Genomic medicine

A new chapter

The National Health Service launches ascheme that could transform medicine

28 Britain The Economist September 29th 2018

1

THIS week, as The Economist went topress, an American F-35 Lightning jet

was due to sweep out of the sky over Ches-apeake Bay in Maryland and onto the deckof a waiting aircraft-carrier. This is nothingout of the ordinary for Pax River, the near-by air base that has housed the Americannavy’s test-pilot school for over 70 years.But the ship in question is the HMS QueenElizabeth, Britain’s largest-ever warship,and thiswill be the first landingon a Britishcarrier in eight years.

Neither ship nor plane is entirely new.The carrier began sea trials last summerand Britain took delivery of its first F-35 sixyears ago. But their integration marks animportant moment not only for the RoyalNavy, which resented gibes that ithad builtan aircraft-carrier with no aircraft, but alsofor British air power, which is celebratingthe centenary year of the Royal Air Force.

Though the F-35 has been plagued bycost overruns and technical snags, it is apath-breaking aircraft that comes into itsown when dodging enemy air defences.The significance of this feature was under-lined on September 24th, when Russiavowed to send powerful new radar andmissiles to its Syrian ally. Kaliningrad, theRussian enclave between Poland and Lith-uania, bristles with even more advancedanti-air systems. If the 800 British troopsdeployed to Estonia were to run into trou-ble, pilots sent to their aid would be grate-ful for the F-35’s stealthy profile. No less im-portant is that the plane can act as a flyingintelligence hub, pumping informationbackand forth between ships and aircraft.

The debut landing is also a reminder ofthe deep co-operation between British andAmerican armed forces, despite the chao-tic state of the wider transatlantic relation-ship. The American jet landing on theQueen Elizabeth was due to be piloted by aBriton, and plucked from a common poolof F-35s being put through their paces by ajoint test team. British pilots have flown off

American decks throughout the RoyalNavy’s eight-year carrier hiatus, keepingtheir skills sharp. Mark Sedwill, Britain’snational security adviser, acknowledgesthat the Queen Elizabeth would “inevita-bly” be deployed alongside allied ships inany serious conflict. This military intimacyexplains why British ministers have beenmore circumspect than their Europeancounterparts in proclaiming the death ofthe Atlantic alliance.

But the F-35’s arrival also raises newquestions about Britain’s defence budget.Britain originally envisaged a fleet of 150jets. That number has already fallen to 138.It could be squeezed further. In the sum-mer Gavin Williamson, the defence secre-tary, setoutplans fora newcombataircraft,the Tempest, to replace the 15-year-old Eu-rofighter Typhoon. These jets have differ-ent strengths. The F-35’s forte is sneakingpast air defences and attacking the ground;the Typhoon, and perhaps the Tempest,are optimised for combat in the air. But theTreasury is interested in trade-offs, not thefiner points ofaerial warfare.

By around 2035, Britain will be payingfor the last F-35 deliveries, the first of theTempests, and eking life out of an ageingTyphoon fleet. “Something will eventually

Air power

Lightning strikes

Britain welcomes a newwarplane, butfaces difficult strategicchoices

Feeling the need…the need for an aircraft-carrier

Scandal in Northern Ireland

Burn to earn, time to learn

IT BEGAN as an apparently sensibleinnovation to help Northern Ireland’s

farmers and the environment in general.Yet the Renewable Heat Incentive (RHI)scheme wound up as a morass, whichmay cost almost £500m ($660m) ofpub-lic money. It is also likely to make the taskof restoring the region’s power-sharinggovernment more difficult than ever.

RHI was based on a British scheme toencourage the use ofwood-burningheaters on farms. But in Northern Irelandcost controls were omitted and subsidieswere over-generous. This triggered abonanza for claimants, with canny farm-ers, some connected to the government,christening it “burn to earn” and “cash forash”. Warnings from whistleblowers andexperts were ignored.

An inquiry into the scandal began inNovember, and this weekheard evidencefrom Arlene Foster, leader of the Demo-cratic Unionist Party (DUP), wholaunched the RHI in 2012 as enterpriseminister. Mrs Foster has previously ad-mitted not reading the legislation sheintroduced. This weekshe told the inqui-ry she was “accountable but not responsi-ble” for what went on.

The episode has tarnished her party.

One DUP official’s brother and two cous-ins acquired 11boilers under RHI; theofficial admitted sending a confidentialdocument on the scheme to a cousin.Another official claimed that a DUP

minister on an official visit to New Yorkwas ejected from a bar after twice fallingasleep, and was taken back to his hotelsinging “Breakfast at Tiffany’s” at the topofhis voice. The civil service has notcome out of the affair well, either. DavidSterling, its boss in Northern Ireland,admitted that some meetings had notbeen minuted, “on the basis that it is safersometimes not to have a record” in caseoffreedom-of-information requests.

The inquiry has made nationalists nokeener to revive the power-sharing ar-rangement with the DUP, which brokedown in January 2017. It has also fuelledspeculation about Mrs Foster’s future. Butshe has no ambitious rivals within herparty. Nor is she likely to face much criti-cism from Theresa May, whose govern-ment is propped up by the DUP’s tenWestminster MPs. These factors may helpher survive for now. Next year, withBrexit out of the way, Mrs May perhapsgone, and the inquiry due to report, shemay come under pressure again.

BELFAST

Afar-reaching inquiry puts leading politicians in the spotlight

The Economist September 29th 2018 Britain 29

2

ONAbusystreetcorner inManchester’scentral shopping area, a young man

has just collapsed, unconscious. Judgingby his grubby clothes, he is one of themany people sleeping rough in the citycentre. There is no need to call an ambu-lance, says a shop assistant, after assessingthe situation. “It’s spice,” he explains witha shrug, as he walks back inside, addingthat it would be best to stay away, becausewhen the man comes round he may be-come violent.

Spice is the name collectively given to200-300 synthetic cannabinoids, drugsthat hit the same brain receptors as canna-bis but are more potent and addictive. Thedrugs, made mostly in China and illegal inBritain, take the form of chemicals sprayedonto dried plant leaves and smoked.

In 2017-18 only0.4% of16- to 59-year-oldsin Britain used the category of drugs thatincludes spice, according to the Home Of-fice. But spice has become an epidemicamong two groups not covered by thesestatistics: prisoners and rough sleepers.Over 90% ofhomeless people in Manches-

ter smoke it, according to one survey, as domany in other cities, including Birming-ham, Bristol, Leeds and Newcastle. It is“one of the most severe public-health is-sues we have faced in decades,” wrote 20police commissioners in an open letter tothe Home Office last month.

The trouble is that what has been triedand tested for other illegal drugs cannot bereadily copied for spice. For a start, its ef-fects on users are unpredictable. One rea-son is the rapid turnover of the chemicalsin the mix. Chinese authorities have beenbanning individual chemicals found inspice, but the laboratories that make themget round the bans by tweaking the com-position of their product.

Another worry with spice is that thespraying of the chemicals is uneven, lead-ing to highly variable potency within thesame batch. In April last year the concen-tration ofchemicals in spice in Manchesterjumped from 1-2% to nearly 20%—possiblybecause someone missed a decimal pointin a recipe found online, says RobertRalphs, a criminologist at Manchester Met-

ropolitan University. Ambulance crewswere overwhelmed, with nearly 60 call-outs for comatose people on the streets in asingle day. Smaller spikes in concentrationhave turned users into what the tabloidscall “spice zombies”, for their pale faces,pinkeyes and staggering gait.

Doctors and paramedics are having tolearn on the fly how to treat severe reac-tions to the many varieties of spice. Psy-chosis and paranoia are common, which iswhy users are often aggressive. One hospi-tal doctor, who seessomeone high on spiceon almost every shift, says that the effectsare wildly varied and that it is impossibleto predict how long they may take to wearoff. One man on spice walked around theward naked for three hours. “We didn’tknow what to do,” the doctor says. “Wejust locked the door, locking ourselves inwith him.”

A national network set up last year col-lects clinical reports about spice usersbrought to hospital emergency depart-ments. The process is similar to that used totrackadverse reactions to medicines. Treat-ment guidelines are updated online.

Prisons are also grappling with newproblems caused by spice. Failing a drugtest while inside or on parole brings extratime behind bars. But the prisons’ drug-testing kits do not detect synthetic canna-binoids, so manydrugusers switch to spicein order to hide their habit. “You go in as analcohol, heroin or crack user and come outas a spice user,” says Mr Ralphs.

Peter Morgan, who has worked withvulnerable youths in Manchester for 20years, says spice has been a “horrific thing”for the homeless. He lays out the problemsin “The Spice Boys”, a book about a groupof young homeless people hooked on thedrug. By making users limp, spice turnsthem into targets for theft, rape and assault.Outreach workers can usually catch fourorfive hoursofluciditya dayfrom a heroinaddict. With spice, the brain is foggy all thetime. “You need to smoke it constantly,”says one former user.

Weaning people off spice is alsotougher than getting them off other drugs.Some do not consider themselves addicts,a designation they reserve for heroin jun-kies. Even as they struggle with with-drawal symptoms and resort to selling sexor stealing to get their next fix, they seespice as not much more harmful than can-nabis. So far nothing makes an effectivesubstitute for it, asmethadone does for her-oin. Treatment therefore targets with-drawal symptoms, using drugs that dullpain, stomach problems and psychosis.

One thing that those who pick up spicetend to have in common is previous druguse. As spice users become more stigma-tised, those on other illegal drugs may beless inclined to switch to it. Even some her-oin users are now looking down on spicezombies, says Mr Ralphs. 7

Synthetic cannabinoids

Scary spice

MANCHESTER

Public services grapple with a street drug that is like no other

have to give,” says Justin Bronkofthe RoyalUnited Services Institute, a London think-tank. He warns that the Tempest is unlikelyto be viable unless defence spending is in-creased significantly, orF-35 orders pruned.

This would not only infuriate PresidentDonald Trump, who views arms pur-chases as something akin to protectionmoney. It would also stretch Britain’s air-power thin. Last year Boris Johnson, then

foreign secretary, promised to send “thetwo new colossal aircraft-carriers that wehave just built” straight to Asia. But therewill be demands on their time in the Medi-terranean, the Gulf and the Indian Ocean.The government must choose betweenstocking up on F-35s for the air force andnavy, lean and hungry after years of cuts,or investing in a new generation of airpower, shrouded in the fogoffuture war. 7

30 Britain The Economist September 29th 2018

THE one thing that people of all political persuasions agree onabout Jeremy Corbyn is that he is an anti-establishment radi-

cal. Tories mock him as a professional protester who wants totake Britain backto the era ofthree-dayweeksand wildcat strikes.Corbynites praise him for sticking to his pure Labour principles,whatever the personal cost. Since becoming leader of the opposi-tion, and a memberofthe PrivyCouncil, MrCorbyn hasgone outof his way to demonstrate that he hasn’t sold out. He refuses tobow to the queen (though he did present her with a pot of home-made jam) and sings the national anthem in a way that makes itclear that he knows it’s a farrago of imperialist nonsense.

The problem with this argument is that it ignores a more inter-esting reality: as well as being an inveterate protester, Mr Corbynis a pillarofan emergingestablishment. As well as being a throw-back, he is a harbinger of a new world of high-minded millenni-als and woke corporations.

When Henry Fairlie coined the term “the establishment” in1955, he was referring to a tightly knit group of politicians, civilservants and society ladies who held the fate of the nation intheir hands. Since then Britain has added two new establish-ments to the old one. The most conspicuous is the neo-liberal es-tablishment that celebrates itselfevery year in Davos. But even asthis oligarchy was being forged by Margaret Thatcher and given aface-lift by Tony Blair and David Cameron, a parallel left-wing es-tablishment was in the making. This establishment dominatesthe public sector, the trade unions, bits of the media and, aboveall, the universities. Fairlie defined an establishment asan “oligar-chy ofopinion”. The parallel establishment is defined by its com-mitment to three non-negotiable opinions.

The first is that “the people” and “the powerful” are locked in aperpetual conflict. The “people” in question used to be definedby class—Mr Corbyn delighted the Labour Party conference inLiverpool this weekby noting that next year is the 200th anniver-sary of the Peterloo Massacre, perpetrated by “troops sent in bythe Tories”—but is increasinglydefined bygender, race and sexualorientation as well. The second opinion is that Western imperial-ism is the primary cause of most of the emerging world’s pro-blems, from poverty to dictatorship. The new establishment re-gards an overmighty America as the chief source of the world’s

ills and treats its opponents, such as Hugo Chávez, as latter-daysaints. Mr Corbyn’s attitude to Israel is driven less by anti-Semi-tism than bythis“West isworst” narrative; he can’thelp regardingIsrael as an exemplar of Western imperialism and the Palestin-ians as virtuous freedom fighters.

The third opinion of the new establishment is that capitalismis a deeply flawed system, haunted by irrationalities and contra-dictions that only enlightened members of the new elite can fix.Clever academics and journalists have been thinking up ways ofrewiring capitalism for decades, for example by giving more vot-ing power to long-term shareholders or changing the composi-tion ofcompany boards.

The parallel establishment had to content itself with snipingfrom the sidelines during neo-liberalism’s glory days, consolidat-ing its control of the universities and the public sector as it waslocked out ofWestminster and Whitehall. But then several thingshappened that profoundly changed what Marxists call the “bal-ance of forces”. The Iraq war turned into a debacle. The financialcrisis of2008 shookcapitalism to its core, ushering in a prolongedperiod of stagnation. And the Labour Party changed its system ofelecting leaders to give more power to party members.

This week’s Labour conference was a reminder of the powerof the parallel establishment. The old private-sector trade unionbarons who dominated the party in the 1970s have disappeared.The most powerful groups in the party are now middle-class mil-lennials and public-sectorworkers. It was also a reminder ofhowobscure academic ideas can become public policy. John McDon-nell, Labour’s shadow chancellor, unveiled a plan to force “big”public companies to give 10% of their shares to a fund managedby employees.

Mr Corbyn was trained for his current role in the parallel es-tablishment’s equivalent of Eton and Oxford: his Islington Northconstituency and the Tribune Group of Labour MPs. In the late1970s and early1980s he immersed himself in the new politics ofrace, gender and anti-colonialism, relaxing, after a long day ofprotests and meetings, by singing Irish protest songs. He forgedclose ties with the likes of Mr McDonnell and Diane Abbott,which were to prove enormously useful in his chosen career. Heeven got the equivalent of special tuition, attending a studygroup, the Corresponding Society, that met every week in TonyBenn’s house and included such luminaries as Perry Andersonand Ralph Miliband. (Mr Corbyn invariably arrived late from ademonstration and ended up taking a chair that had belonged toKeir Hardie, Labour’s founding father, but was so uncomfortablethat nobody wanted to sit on it.)

The king is dead! Long live the king!The Labour conference made clear that the parallel establish-ment is learning some tricks from the old one. There is the divi-sion between the “dignified” and “efficient” branches of govern-ment, as originally defined by Walter Bagehot. Mr Corbynincreasingly plays the role of the monarch, smilingbenignly fromthe party platform, while Mr McDonnell does the real work ofcreating policies. Labour apparatchiks draw up “composite mo-tions” in late-nightconclaves, far from the pryingeyes ofordinarymortals. This is Fairlie’s government-over-the-club-table in mod-ern guise. Both Mr Corbyn and Mr McDonnell even claimed theblessing of the Archbishop of Canterbury, Justin Welby, for theirpolicies. The British establishment is forever changing—and yetsomehow forever remains the same. 7

A pillar of the establishment

JeremyCorbyn isn’t the outsider that both his friends and enemies believe him to be

Bagehot

The Economist September 29th 2018 31

1

APLATE-GLASS roof connects two for-mer textile factories under a soaring

atrium. There are potted palm trees in theentrance and industrial-chic open spaces,where youngsters in jeans huddle overlaptops amid low-hanging light bulbs andexposed brickwork. This is EuraTechnolo-gies, a vast startup incubator, which hashelped to turn a formerly abandoned sitein this northern French city into a hum-ming canal-side neighbourhood. IBM ismoving 700 people into a European client-innovation centre here, complete with anin-house yurt. Asleeknew gastro-brasseriehas opened on the plaza. A bilingualcrèche offers its infants English, as well asorganic meals.

A city battered by the loss of industryand the closing of the northern Frenchmines is reinventing itself as a techy busi-ness hub. “There’s a real entrepreneurialculture in Lille,” says Charles Christory, a32-year-old engineer who launched Adic-tiz, an online marketing-games startup, in2009. “Many people of my generationhave launched theirown businesseshere.”Today he employs 40 people. Among the4,000 startuppeurs working on the site atEuraTechnologies, says Mr Christory, “nota single one isn’t recruiting.”

business models in such open spaces be-long to the new face ofLille. On a Thursdayevening, when the city’s big student popu-lation traditionally hits the town, these arethe people who flock late into the night tothe bars and cafés of old Lille. In the Flem-ish city centre, a place of cobbled streetsand carved-stone façades, cafés serve qui-noa salads and yoga classes promise spiri-tual calm. Traffic on the web of ring-roadsaround the city is often jammed. Lille-bornlocals and new arrivals alike swear by thecity’s friendliness. “It’s a long way from theimage people have ofrain and sad people,”laughs Vincent Dupied, who studied lawin Lille and has returned to launch a food-delivery business there after a spell as acorporate lawyer in Paris.

Meanwhile, in anotherpart of townJust fourstops on the driverless metro fromthe centre of Lille, however, lies anotherworld. On the Boulevard de Metz, whichsome locals nickname the Boulevard deMerde (shit), an abandoned shopping trol-ley lies by the road and washing hangsfrom high-rise balconies. Overgrown grassseparates tower blocks in a space heroical-ly called “Paul Cézanne Square”. Thisneighbourhood, Concorde, is officiallyclassified as the sixth-poorest in France.Roughly 50% of its young people are out ofwork, 99% of people live in social housing,and nearly three-quarters of householdsare poor.

It is neighbourhoods like this thathelped to put a far-left candidate, Jean-LucMélenchon, at the top of first-round votingat last year’s presidential election in Lille.Its current mayor, Martine Aubry, is a So-

Lille’s industrial heritage was built oncotton-spinning and fabric-making, in a re-gion that once thrived on wool, steel andcoal. But France’s industrial heartland be-came its rustbelt. Between 1975 and 2010,the city alone lost 70,000 industrial jobs.The shock was salutary. Pierre Mauroy, aformer French prime minister and thecity’s Socialist mayor from 1973 to 2001,persuaded the government to direct thenew TGV line from Paris and Brussels tothe Channel Tunnel via his city—not theshortest route—hoping to give it an advan-tage. Greater Lille turned itself into a ser-vices hub, marketing its proximity to threeEuropean capitals within 80 minutes, andto 80m consumers within a 300km (185-mile) radius.

The idea, says Pierre de Saintignon, thedeputy mayor, was not only to lean on thecity’s deep business culture—global retailbrands, such as Auchan and Decathlon,were born in or around the city—but to fo-cus on industrial regeneration through in-novation. “Something is happening here,”says Raouti Chehih, a former town plan-ner and the director of EuraTechnologies.“We’ve made the transition between the19th and the 21st centuries.”

Those working on investor pitches and

Average Europe

The tenth city

LILLE

Europe’s capitals are booming, but most voters don’t live there. We begin anoccasional series on countries’ tenth-largest cities with Lille in northern France

Europe

Also in this section

32 The Dutch and taxes

33 Germany’s Greens

33 Romania’s royal wedding

34 Vladimir Putin’s sea of troubles

35 Charlemagne: the resilience of the EU

32 Europe The Economist September 29th 2018

2 cialist, and the city and its wider regionhave a longhistory ofvotingfor the left. Yetthat region, Hauts-de-France, is also a placewhere the far-right’s Marine Le Pen hasfound a powerful way of speaking to dis-illusioned working-class voters, and somade a lot of political ground. EmmanuelMacron, a former Socialist minister, mayhave been Lille’s final-round choice forpresident. But it was Ms Le Pen, not Mr Mé-lenchon, who topped first-round voting inthe region as a whole and in Lille’s départe-ment, Le Nord. Mr Macron came third inboth of them.

In a ground-floor office on the estate,Perspectives, a voluntary welfare centre,offers help with after-school homework,job-seeking and general administrativepaperwork. A row of laptops sits on a deskagainst the window. A recently releasedpsychiatric patient, in baggy jogging pants,has dropped by to use the lavatories. Theoriginal idea, says Fatiha Mifak, the cen-tre’s director, was to give young peoplesomewhere to go, and thus to keep themoff the streets. The only local café is a Mc-Donald’s, over by the motorway. But Per-spectives also has its work cut out trying tosteer local youngsters towards work ortraining.

Employers, saycounsellors, are wary ofapplicants with an address on the local es-tate. Apprenticeships are hard to find. Job-seekers need help too, they explain, withdress codes, haircuts, and what one advis-er calls delicately “personal hygiene”.Some of the older generation on the estate,particularly the women, have never beento central Lille. “We struggle against fail-ure,” is how Ms Mifakputs it.

Over at EuraTechnologies, bridging thegap between those who can embrace theworld that digital technology opens up,and those whose horizons are defined bythe tower blocks of their estate, is verymuch on MrChehih’s mind. His fatherwasa miner from Algeria who settled in Francein the 1950s. His parents arrived on Frenchsoil not knowing how to read or write. Us-ing tech as a tool for regeneration, he ar-gues, has to be about training and skills aswell as funding rounds, investor pitchesand exchanges with Silicon Valley.

Opposite Lille’s converted redbrick cot-ton mill, an education campus called “We-nov” is under construction. It will open in2020, offering classes in programming andsoftware development to all ages and lev-els, as well as high-tech research centres.Like all former industrial cities, Lille has askilled working-class tradition. But retrain-ing, and persuading people that they toocan be part of the tech world, is tough.“Digital has to be something that opens op-portunities for everyone,” argues Mr Che-hih. “We don’t want to contribute to thefracture between the two halves of France.But we can’t solve all the problems of allthe people here, either.” 7

THE highlight of the Dutch political cal-endar is prinsjesdag (“prince’s day”),

when the government presents its spend-ing plans to the king. Female politicianswear whimsical hats, brass bands play thenational anthem and the monarch arrivesin a gold coach to receive the budget docu-ments. The fiscal festival, which this yearfell on September18th, says something im-portant about the Netherlands: it is a coun-try where people get peculiarly excitedabout poring over balance-sheets. This isespecially true after prinsjesdag, when par-liament devotes two days to letting the op-position rip the budget to shreds.

The chief target of ire this year was a taxcut. The government plans to scrap a 15%withholding tax on dividends from sharesin Dutch companies, starting in 2020. MarkRutte, the prime minister, says this is need-ed to attract multinationals, and that twobig Anglo-Dutch companies, Shell andUnilever, deem it a key issue in decidingwhether to base their headquarters in theNetherlands or London after Brexit.

Eliminating the dividend tax is unpop-ular partly because Dutch do not pay it.They can deduct it from their income tax.Rather, it is paid by foreigners who ownstock in Dutch companies. The govern-ment says this discourages foreigners frombuying Dutch firms’ shares. But cutting for-

eigners’ taxes turns out not to have muchsupport among voters, who know theywill have to make up the shortfall: at least€1.9bn ($2.2bn) per year, about 0.25% ofGDP, the government says. A poll in Au-gust found just11% ofDutch backthe move.

Most countries have treaties with theNetherlands that let their citizens, too, de-duct withheld Dutch dividend tax. A studyby SOMO, a group that monitors multina-tionals, estimated this covers three-quar-tersofshareholders. Hence, theysay, scrap-ping the dividend tax will mostly just shifttax revenue from the Netherlands to othergovernments. The biggest exception is Brit-ain, which does not allow deduction ofDutch dividend taxes for most taxpayers.(This may be why Anglo-Dutch companiesfind it so irritating.) But few economiststhink scrapping the tax is an effective wayto keep jobs in the Netherlands. Bas Jacobsof Erasmus University calls the notion thatfirms like Shell or Unilever would quit thecountry “absurdly exaggerated”.

Another reason the proposal is unpop-ular is its secrecy. Mr Rutte’s Liberals didnot include it in their platform before theelection in March 2017. When it emergedfrom the coalition agreement last October,the public was blindsided. Other partiesemphasised it had all been the Liberals’idea; the centre-right Christian Unioncalled it a “melon [we had] to swallowwhole” during the negotiations. The Liber-als claimed there were no records showingbusiness associations had lobbied for thechange, but later admitted that there were.

The controversy undercuts the govern-ment’s efforts to show that it is making theNetherlands less hospitable to tax avoid-ance schemes by multinationals. It is intro-ducing legislation to stop companies fromfunnelling profits to subsidiaries in Carib-bean tax havens by taxing them in theNetherlands instead. But Francis Weyzig, atax expert at Oxfam, a charity, says thedraft law has worrying loopholes. Compa-nies need show only that the subsidiaryhas an office in the tax-haven country withemployees earning at least €100,000 peryear to avoid paying Dutch tax.

All this has opposition parties rushingto the barricades. “The Liberals want to gettough on everyone except bankers andmultinationals,” thundered LodewijkAsscher of the Labour Party, which itselfwas accused of pandering to business in-terests while in coalition with the Liberalsin 2012-17. The coalition seems solid, if onlybecause the parties fear they would sufferin new elections. But polls show that thecombined support for the country’s twofar-right parties, Geert Wilders’s FreedomPartyand the newForum forDemocracy, isnow up to about 30%. If Mr Rutte wants tohelp the populists, passing a secret, eco-nomically dubious tax cut to benefit for-eign shareholders in multinationals seemsan excellent way to go about it. 7

Dutch politics

Who doesn’t like atax cut?

AMSTERDAM

The Dutch, when it goes tomultinationals

The Economist September 29th 2018 Europe 33

Romanian royals

Thirsty for blue blood

NICHOLAS MEDFORTH-MILLS,grandson of the late King Michael of

Romania, is getting married on Septem-ber 30th. To the chagrin ofRomanianmonarchists, it will not be the royal wed-ding they have longed for. Their hopes ofreinstating a king or queen in Romaniahave stumbled over the problem ofagreeing on an heir.

In recent years there have been grow-ing calls in Romania for a restoration ofthe monarchy. Earlier this year, the eaglein the national coat ofarms againdonned its steel crown. Parliament con-sidered (but did not approve) a referen-dum on restoration last year; a recent pollshows that some 70% of the public wantthe issue put to a popular vote. Supportfor the monarchy, some reckon, is tied tofalling trust in elected politicians, manyof them mired in corruption scandals.Going with the mood, this summer BlueAir, Romania’s largest carrier, unveiled anew series ofaeroplanes featuring Roma-nia’s past kings on their tails. But even ifthe idea were ever to fly, it is unclear whothe new monarch would be.

Romania has had only four kings (andno queens), having been ruled until 1878by the Ottomans and before them byvarious princes. Its last king, Michael(pictured), abdicated in1947 and spentthe next four decades in Switzerland. Hiscitizenship was restored in1997, but henever reclaimed his throne.

Princess Margareta, Michael’s eldestdaughter, is the current “custodian of thecrown”. In a decree in 2015 her late fatherdeclared that since she had no children,she would be the last of the royal line. He

also explicitly deprived the once-promis-ing Nicholas Medforth-Mills, the son ofhis younger daughter and ofa professorofgeography at Durham University inBritain, ofhis princely title and dynasticrights, after he was accused offathering achild out ofwedlock (he denies it).

An unlikely yet vocal rival is the self-styled Prince Paul ofRomania, the grand-son ofKing Carol II by a morganaticmarriage (ie, to a woman of lower socialrank, preventing the passing on ofa title),who tried to sue King Michael to have hisclaim honoured. After a failed presi-dential run in 2000, the claimant hassupported the restoration ofa constitu-tional monarchy. But given what a tanglethe family tree is, Romanians may wellhesitate a bit longer.

Monarchism is on the rise in Romania, but who would reign?

Will anyone follow Michael?

AT AN outdoor organic market in Berlintrendystudents, affluentyoungprofes-

sionals and shabby grey-haired academictypes queue up for pricey local potatoes.There’s not an out-of-season vegetable,flown-in fruit or plastic bag in sight. This isthe only constituency in Germany with adirectly elected Green member of parlia-ment in the Bundestag. The district—whichincludes the hipster havens of Kreuzberg,Friedrichshain and East Prenzlauer Berg—has a radical past and a bourgeois-bohemi-an present, popular with alternative oldiesand hip youngsters.

The Green Party, which is surging in thepolls, is just as gentrified. The students ofthe 1970s and 1980s who founded the partyhave stayed loyal. Many are now affluent.As the Greens have gone grey, their anti-capitalist wing has all but vanished. Eco-nomically the party is now firmly centrist,making it palatable to property-owningprofessionals. But on social issues, the en-vironment and feminism, the Greens havestayed on the radical left. So they appeal toyounger voters, students and non-politicalurban types, who see voting Green as partofa virtuous lifestyle.

The Greens are polling at an average of15% nationwide, only just behind the right-wing populist Alternative for Germany(AfD), at 16%. In Bavaria, which holds stateelections on October 14th, they are in sec-ond place, with a record for them in thestate of18%.

“We are profiting from the weaknessesof the other parties,” says Anton Hofreiter,co-leaderofthe Greens in parliament. Ase-ries of undignified coalition squabbles inBerlin has undermined the credibility ofthe main governing parties—the centre-left

SPD, the Bavarian conservative CSU andAngela Merkel’s centre-right CDU—hittingthe support ofall three. After years of strifebetween its radical and pragmatic wings,the Green Party’s leadership is suddenlyremarkably unified and has managed torise above the bickering.

All of the mainstream parties are splitinternally on migration. Conservative par-ties are torn between pro-refugee church-goersand nationalistswho wantmore bor-der controls. Left-wing parties are dividedbetween open-border liberals and blue-collar workers fearful of migrants under-cutting theirwages. Only the unanimouslypro-refugee Greens and the anti-migrantAfD are clear on the issue, each standingfor opposite sides of the open-versus-closed debate. The Greens have beenhelped by summer droughts in Germany,

which have served to remind voters of thedangers ofclimate change.

But there is a danger of Green hype.“The Greens tend to do better in polls thanin the voting booth,” says Oskar Nieder-mayer, a political scientist. Theyare seen asa “nice” party, which people like to saythey will support. In reality, at October’sBavarian election, many may opt onceagain for the CSU, which is campaigning asthe safe choice. As the summer heat fades,so too will some of the attention on cli-mate change. Green leaders may present aunited front, but there are still deep ideo-logical divisions between purists, unwill-ing to sacrifice ideals, and pragmatists, itch-ing to share in government. In Bavaria theGreens might have a chance to enter intocoalition talks with the CSU. If so, expectmore Green conflict.7

Germany

Greying Greens

BERLIN

Whyis Germany’s Green Partysuddenlydoing so well?

Easy being green

Source: Infratest dimap

Germany, support for political parties, % polled

S O N D

2017J F M A M J J A S

2018

0

5

10

15

20

25

30

35

CDU/CSU

SPD

Greens

FDP

Die Linke

AfD

ELECTION RESULT

34 Europe The Economist September 29th 2018

VLADIMIR PUTIN is the world’s sav-iour. So saysa weeklyprime-time show

on state television, “Moscow. Kremlin. Pu-tin.” Its latest episode featured the Russianpresident heroically bringing peace to Syr-ia over a lunch of lamb and raspberrieswith Turkey’s Recep Tayyip Erdogan; MrPutin being mobbed by women at a forumin St Petersburg; Mr Putin hitting a distanttarget at a firing range with a new sniper ri-fle. The aim of the programme is to boostthe president’s image. But as the past fewweeks have shown, Mr Putin is starting tomiss his mark.

The foreign adventures that havebrought Russia’s new tsar a big boost overthe past few years ago are starting to gowrong. The exposure of two military secu-rity agents named by the British police asthe men who tried to murderSergei Skripaland his daughter with a nerve agent havebrought global embarrassment by reveal-ing the remarkable incompetence ofthe se-curity agencies. The affair is also soon ex-pected to produce a new round ofAmerican sanctions.

Meanwhile, the wars in Ukraine andSyria are becoming more costly. On Sep-tember 17th, as Israel bombed Syrian mili-tary installations, Syrian forces accidental-ly shot down a Russian spy plane with 15crew on board. In response, the Kremlinlashed out at Israel and agreed to supplyS-300 missile systems to Bashar al-Assad,despite protests from Israel, thereby riskingfurther escalation. The war in Ukraine,meanwhile, has produced a religious splitbetween Russian and Ukrainian churches,undermining Mr Putin’s claim to be theunifier of the Russian world.

But Mr Putin’s main problems lie athome. In the past few weeks the Kremlinhas suffered the biggest electoral fiascosince large-scale protests broke out overelection-rigging in 2011, losing four guber-natorial elections this month. The lossesare all the more striking since the electionsthemselves were neutered. Any seriouschallenger was barred from standing, sothe rivals to the Kremlin’s candidates weremeant to be no-hopers.

Yet in an atmosphere of economic stag-nation and building discontent, even thesetame elections turned into a form of prot-est for voters who have traditionally sup-ported Mr Putin—pensioners, low-paidworkers and the young from provincialtowns. Moscow, the scene of the largestprotests in 2011, has been placated with

money, renovation and social projects, butthe resentment in the regions has grown.

The alarm bell rangfirst in the far eastofthe country, where an incumbent gover-nor installed by Moscow was forced into arun-off. Mr Putin, who was in Vladivostokfor an annual pow-wow with China, hadpersonally endorsed him. “I know youhave a second round ahead of you. I thinkeverything will be all right,” Mr Putin toldAndrei Tarasenko, the governor, in a tele-vised meeting. It was not.

Emboldened, voters gleefully turnedup for the run-off on September 16th in fargreater numbers than they had done in thefirst round, to vote for the 37-year-old Com-munist challenger, Andrei Ishchenko. Alast-minute attempt to rig the result was soclumsy that the government did not riskupholding it, but instead of awarding theprize to the rightful victor has called for are-poll. On September 23rd three more go-vernors backed by the Kremlin lost the sec-ond round of their elections, in each caseon an increased turnout.

Don’t mess with the pensionersThe immediate cause for all this is a pro-posed hike in the age at which Russianscan retire and claim a state pension. Mr Pu-tin had previously vowed that this wouldnever happen. And of course, the securityservices are exempt. Under the proposal,Russian men can expect to retire at 65 anddie at 66; many will never receive a pen-sion at all. Small wonder they are miffed.

In the past six months, Mr Putin’s ap-proval rating has fallen by 15 percentagepoints. Only 48% ofRussians trust the pres-ident or say they would vote for him today,even though he was re-elected in Marchwith 76% of the vote. The rating of theKremlin’s United Russia party is below30%. Despite all the propaganda, people nolonger see Mr Putin as their saviour, andblame him for spending too much time onmakingRussia greatagain rather than help-ing them get by.

Even the wealthy elite are feeling tetchyand uncomfortable, thanks both to thegrowing confrontation with the West(which threatens their fortunes) and theunchecked power of the FSB, the secret po-lice (which threatens their liberty and eventheir lives). A few years ago, an endorse-ment from Mr Putin was seen as guaran-teeing political victory. Today, standingclose to Mr Putin carries a risk, both insideand outside the country.

None of this means that Mr Putin’s sys-tem is about to crumble. But he may try tomitigate its vulnerability with violence athome and abroad. Another sign of thatcame on September 24th, when Alexei Na-valny, an opposition leader who had spentthe previous 30 days in jail for organising aprotest rally nine months ago, was re-ar-rested two minutes after being released.With the appetite for protest rising, he andhis anti-corruption investigations are be-coming a threat.

If that were not enough, Mr Putin’s se-curity men have also been threateningextrajudicial acts. Viktor Zolotov, Mr Pu-tin’s former bodyguard who now com-mands a 300,000-strong internal army de-signed to put down any sign of revolt, onSeptember 11th bizarrely challenged MrNavalny to a duel and promised to “make ajuicy beefsteak” out ofhim. His threat testi-fied only to the Kremlin’s growing fear ofan open and honest contest. 7

Russia

A sea of troubles

Things are going wrong forRussia’s president

The Economist September 29th 2018 Europe 35

APRODUCT of myriad compromises, an amalgam of genera-tions’ worth ofvisions, a form ofgovernment without prece-

dent or parallel: the EU is a strange beast. Its uniqueness gives it acertain mystique. No one knows for sure how durable it is. Smallwonder, then, that Britain’s vote in 2016 to leave gave some inBrussels nightmares. No member state had quit before. The de-parture process had only been codified in 2009, in Article 50 ofthe Treaty of Lisbon. Could this falling domino crash into thenext: Denmark, perhaps, or even France? Could it create a prece-dent others might follow? Could it bring down the EU?

Television coverage of the Brexiteers’ victory on the morningof the result is said to have transfixed Angela Merkel. EU leaderswere particularly worried that Britain would use the differing in-terests and outlooks of the remaining 27 member states to playthem off against each other and thus secure generous terms pre-serving the benefits of membership without the costs. So theyhurried to establish a common front. Donald Tusk, the presidentof the European Council, had surreptitiously telephoned headsof government before the referendum. Mrs Merkel invited sever-al to Berlin in the days immediately afterwards. “We really fearedthe consensus would break,” says one Brussels official.

It did not. Leaders approved the guidelines for Michel Barnier,the European Commission’s chief negotiator on Brexit, with sur-prising ease and a round of applause. The line held even when,early this year, the focus of the talks shifted to the future relation-ship between the EU and Britain—where the scope for discordamong the 27 was greater than on the initial divorce agreement.Some small differences have bubbled up. France is firmer thanGermany on the need for a detailed declaration on the future re-lationship, for example. Poland recently suggested, albeit unsuc-cessfully, downgrading the EU’s insistence on an invisible borderbetween Northern Ireland and Ireland. But in the corridors of theEU institutions cautious language about upcoming Brexit sum-mits—a gathering of the European Council on October 18th andan extraordinary summit expected for mid-November—does notquite conceal the mood ofsatisfaction, or at least relief.

Some of it is justified. The EU moved fast to forge a consensus,and has maintained it. National representatives in Brussels re-port that Mr Barnier and Mr Tusk, sometimes with Mrs Merkel

standing behind them, have deftly bound in the governmentsthroughout the process. Mr Barnier is not always across the de-tails, but Sabine Weyand and Stefaan De Rynck, his deputies,command them. The impression of professionalism and consis-tency grows when compared with Britain’s leadership, whichhas been characterised by over-confidence (launching the Article50 process prematurely), vagueness (devising a Brexit proposalonly this summer, over a year into the two-year process) and dip-lomatic missteps (demonising the EU and boasting of plans to di-vide and conquer it, forgetting that continentals can read Britishnewspapers too). The unflattering contrast hardly encouragedBritain’s allies to spend political capital on breaking ranks.

Two factors in particular have curbed European fragmenta-tion when they were expected to hasten it: proximity and popu-lism. Those countries closest to Britain were initially assumed tobe voices for emollience among the 27, as they would lose mostfrom a harsh or chaotic Brexit. Yet often the Dutch and Danes areamong the toughest in the room, discloses one country’s repre-sentative to the EU, as they would suffer most from a cherry-pick-ing Brexit conferring unfair advantages on Britain. Meanwhile,the populist wave sweeping Europe has strengthened, not weak-ened, the resolve of mainstream leaders. The greater the threatfrom Eurosceptics, the more resolute theybecome thatBrexit can-not be seen as a success for Britain. As debates on associated top-ics like migration have become more heated, the space and ener-gy available for disputes over Brexit have shrunk.

Most important of all, the EU’s underlying cohesion hasturned out to be greater than anticipated. Against a backdrop ofsquabbles over migration quotas or financial risk-sharing in theeuro zone, politicianson both sidesofthe Channel underestimat-ed the strength of the consensus on the EU’s basic business mod-el. Membership comes with shared benefits that are founded oncommon rules and are not available to third countries. Supportfor the EU in the remaining member states has risen since theBrexit vote. Eurosceptic politicians such as Marine Le Pen inFrance and Matteo Salvini in Italy have toned down their hostil-ity to remaining in the club.

Muddling alongThis happy revelation must be tempered by thoughts of whatmight have been. Britain’s exit is not a success for the EU. Its sec-ond-largest economy, one of its two serious military powers andthe progenitor of the single market, is walking out because it felt itcould not tolerate one-size-fits-all membership. In August 2016Bruegel, a think-tank, published a paper proposing a new part-inand part-out “continental partnership” status that could keepBritain bound in but also pave the way to a more multi-tiered Eu-rope. A more dynamic and confident organisation might haveseized on the idea and used the opportunity to become more plu-ral and versatile. The EU’s rigidity on such matters may help up-hold its integrity in the short term, but in the long term it is also ahandicap.

The Brexit talks, then, have held up a mirror to the EU. The log-ic ofpooled sovereignty is too strongforBritain’s decision to havestarted a domino effect. But it is not so strong that the club can re-invent itself to accommodate a greater array of forms of integra-tion. It will not fall apart, but only ever creeps forward, entirelysatisfyingfewpeople yet remainingoddlyresilientdespite that. Ifan EU did not exist, someone would have to invent one—then, afew moments later, start grumbling about it. 7

A lonely domino

The Brexit talks have demonstrated the EU’s underlying resilience

Charlemagne

36 The Economist September 29th 2018

For daily analysis and debate on America, visit

Economist.com/unitedstatesEconomist.com/blogs/democracyinamerica

1

“THE political nightmare that hasfaced my colleague,” said Mark Hat-

field on September 7th 1995, “is coming toan end.” The colleague was Bob Pack-wood, his fellow senator from Oregon,who was resigning. The “nightmare” was aSenate Ethics Committee investigationthat found Mr Packwood had been sexual-ly harassing subordinates since the 1960s.Mr Packwood battled the committee forthree years, destroying evidence and ap-pearing “perplexed or confused…aboutwhat actually constituted sexual harass-ment”. When he resigned, he won praisefrom senator after senator—not one ofwhom managed a single word of concernfor his many victims.

In one sense, times have changed. Overthe past year—ever since the #MeToo hash-tag went viral in the wake of gruesome al-legations of sexual assault levelled againstHarvey Weinstein, a film producer—ninemembers of Congress have resigned or de-clined to run for re-election after facingcredible charges of sexual misconduct.Two White House officials left after beingaccused of spousal abuse (they deny thecharges) and three congressional candi-dates lost or quit their campaigns.

But that change is unevenly distributedacross the political spectrum. Republicansremain devoted to President Donald

from 27% in 2016 (and far higher than theRepublican share of less than 20%). From afield that includes Senators Elizabeth War-ren, Kamala Harris, Kirsten Gillibrand andAmy Klobuchar, the Democratic presiden-tial ticket in 2020 will probably include atleast one female candidate.

And as quickly as women are flockingto the Democrats, many appear to be flee-ing Republicans. The 2016 gender gap of 24points (women supported Hillary Clintonby13; men went for Mr Trump by11) was al-ready the largest on record. According to anaverage of three recent polls compiled byNational Public Radio, the same gap existsfor this year’s mid-terms, but with a stron-ger leftward lean. Women favour Demo-crats by 21; men favour Republicans by 3.

Since women vote at greater rates thanmen, that swing should worry Republi-cans. In 2016, despite his claims to the con-trary, Mr Trump won narrowly. For Repub-licans to prevail this year and in 2020, heneeded to expand his coalition. Instead heis driving away marginal supporters. Hisapproval rating seems to have a ceiling inthe low 40s, and has fallen even furtheramong women, particularly non-whiteand educated women.

That isnotentirelydue to sexual harass-ment, ofcourse. Butbecause pollingshowsthat voters in both parties care about the is-sue, the Republican response to #MeToorepresents a failure of opportunity. As themovement gathered strength late last year,Democrats pressed Senator Al Franken toresign his seat amid claims of groping andunwanted sexual advances. Republicansbacked Roy Moore in a Senate race in Ala-bama, despite multiple allegations that hehad molested teenage girls when he was agrown man.

Trump, who has been recorded boastingabout sexual assault and whom at least 19women have accused of sexual miscon-duct. His second Supreme Court nominee,Brett Kavanaugh, has been accused of sex-ual misconduct by at least four women.The furore surrounding his nominationhas become a partisan referendum on the#MeToo movement, which itself has be-come the defining cultural phenomenonof the Trump era.

That movement may have begun afterthe allegations against Mr Weinstein, butthose were petrol poured on a fire kindledby Mr Trump’s election. On January 21st2017, one day after his inauguration, mil-lions of people across America (and theworld) took to the streets for the Women’sMarch. Many of those who marched saidthat watching the first major-party femalepresidential candidate lose was painful;watching her lose to a man who has re-ferred to several women as “dogs” and“piece[s] ofass” was infuriating.

It has also been inspiring. During theprevious election cycle, 920 women con-tacted EMILY’s List, a political action com-mittee devoted to electing pro-choiceDemocratic women, about running for of-fice. Since Mr Trump’s election, more than42,000 have. Halfthe Democrats’ first-timeHouse candidates this year are women, up

#MeToo and politics

Truth and consequences

WASHINGTON, DC

How America’s political parties are coping with a swiftlychanging culture

United StatesAlso in this section

37 The Supreme Court

38 Labour markets

39 Murder in St Louis

40 Political harassment

41 Lexington: Hakeem Jeffries

The Economist September 29th 2018 United States 37

1

2 Mr Trump has loudly defended multi-ple men accused of sexual misconduct, in-cluding Mr Moore; Rob Porter, one of hisaides accused of spousal abuse; and BillO’Reilly, who left Fox News amid sexual-harassment claims. Bill Shine also left FoxNews after being accused in multiple law-suits of abetting sexual harassment; MrTrump hired him to be White House com-munications director.

Mr Trump has defended Mr Kavanaughand cast doubt on his accusers. Unsurpris-ingly, the rest ofhis party has followed suit.Mitch McConnell, the Senate majorityleader, vowed to “plough right through it”,promising to confirm Mr Kavanaugh “inthe very near future”. Several other Repub-lican senatorsalso appear to have made uptheir minds before hearing from thejudge’s accusers, the latest of whom hasmultiple security clearances and signed anaffidavit, under penalty ofperjury, that shewas gang raped at a party that Mr Kava-naugh attended.

Others seem to thinkthat sexual assaultis no big deal. Kevin Cramer, a Senate can-didate in North Dakota, called the incident

“an attempt or something that never wentanywhere”. Gina Sosa, who ran for Con-gress in Florida, wondered, “What boyhasn’t done this in high school?”

Some have wondered why Mr Trumpdoes not withdraw Mr Kavanaugh’s nomi-nation in favourofanequallyconservativejudge, such as Amy Coney Barrett. But toaskthat is to misunderstand contemporaryRepublican politics which, under MrTrump’s leadership, has become less aboutideals than about power and dominance.Withdrawing Mr Kavanaugh would meanadmitting that historical accusations ofsexual assault can be disqualifying, whichleads back to the president.

In his book about the Trump WhiteHouse, Bob Woodward quotes the presi-dent advising a friend accused of sexualmisconduct: “You’ve got to deny, deny,deny and push back on these women…Ifyou admit to anything and any culpability,then you’re dead.” If such attitudes leadthe Republicans to mid-term losses on thebackofenergised female turnout (and can-didacy), that may start to push the party to-wards a reckoning with Trumpism.7

ON OCTOBER1st, for the second time inthree terms, the Supreme Court will

begin its term a justice short. In 2016, withSenate Republicans stonewalling BarackObama’s choice to succeed Antonin Scalia,the justices plodded along as a court ofeight until Neil Gorsuch took his seat inApril 2017. This autumn the court will notremain shorthanded for nearly as long. Al-legations of sexual assault have spurred apolitical firestorm over Brett Kavanaugh,President Donald Trump’s second nomi-nee. But with Republicans commanding a51-to-49 majority in the Senate until at leastJanuary, the Supreme Court will probablyreturn to full strength—with a solidly con-servative five-justice majority—withindaysorweeks. The onlyquestion iswheth-er the person filling Justice Anthony Ken-nedy’s seat will be his former clerk (Mr Ka-vanaugh) or somebody else.

The 38 cases awaiting the justices (withmore on the way) may not grab headlinesquite like last term’s tiffs over gay-weddingcakes, gerrymandering and Mr Trump’sMuslim travel ban. But important ques-tions loom. In their first week back the jus-tices will hear arguments on the fate of anendangered amphibian, the separation ofpowers and whether a man with a mental

illness can be executed.Weyerhaeuser v United States Fish and

Wildlife Service, the opening argument ofthe term, pits logging companies againstthe three-inch-long creature, the dusky go-pher frog. With fewer than 200 believed to

be still hopping in America, the amphibianis listed as one of the 100 most endangeredspecies in the world. Habitats for the duskygopher frog are in short supply. They breedin fishless “ephemeral ponds” that dry upin the summer. Other than a single pond inMississippi, only one area in Louisianaseems suited to the frog. But the owners ofthose 1,544 acres include two timber com-panies. The justices will consider whetherthe Endangered Species Act authorises thefederal government to preserve thesetracts for the dusky gopher, costing thecompanies $34m over 20 years.

Another case probing the limits of exec-utive power, Gundy v United States, will beheard on October 2nd. Gundy asks wheth-er an ambiguity in the Sex Offender Regis-tration and Notification Act (SORNA) fallsfoul of the “non-delegation doctrine”, anold, seldom-enforced rule that one branchof government may not hand over its con-stitutionally prescribed duties to another.When Congress drafted SORNA in 2006,lawmakers remained mum on whetherthe requirements apply to people convict-ed of sex offences before the law waspassed; the attorney-general, SORNA pro-vided, can sort that out.

Based on previous rulings and a left-right coalition of amicus briefs, there maybe interest on both ends of the SupremeCourt’s ideological spectrum for policingabdication of the legislative role to the ex-ecutive branch. And the implications mayreach beyond sex offenders. Tom Gold-stein, a frequent Supreme Court litigator,points out that a judgment reviving thenon-delegation doctrine may cast doubton the feeble legislative hookpresidents of-ten cite when imposing tariffs, purportedlyto protect America from threats to its na-tional security. Mr Trump’s aggressivetrade policy, grounded in this pretence,may eventually face resistance.

The Supreme Court

Bench-warming

Frogs, executions, graveyards: what to lookfor in the 2018-2019 term

The scales of justice

38 United States The Economist September 29th 2018

1

2 The first oftwo death-penalty cases thisterm will also be heard on October 2nd.Madison v Alabama asks whether execut-ing a prisoner whose dementia has erasedall memory ofthe murderhe committed in1985 violates the Eighth Amendment’s banon cruel and unusual punishment. Anoth-er case coming up later in the term, Buck-lew v Precythe, considers the same consti-tutional standard in light of RussellBucklew’s claim that his rare medical con-dition, cavernous hemangioma, couldmake lethal injection monstrously painful.Mr Bucklew says he would prefer to die ina Missouri gas chamber, where his “unsta-ble, blood-filled tumours” would not be atriskof rupturing and choking him.

Capital punishment typically fracturesthe Supreme Court along ideological lines.Afew othercases in the pipeline may do sotoo, if the justices opt to take them up. Onepetition asks whether Title VII of the CivilRights Act, which bars gender discrimina-tion, should be read to prohibit discrimina-tion based on sexual orientation. Anotherinvolves a 40-foot-high cross in Marylandthathas stood asa first-world-warmemori-al on public land for 90 years; plaintiffs saythe cross violates America’s separation ofchurch and state. The most contentiousmatter the justices are likely to confrontthis term is whether Mr Trump acted legal-ly when, a year ago, he rescinded DACA,Mr Obama’s executive action of 2012shielding undocumented immigrants whoarrived in America as children.

Two other cases look juicy. One asks iffederal and state prosecution for the samecrime could be a violation of the double-jeopardy clause; this has implications forPaul Manafort, Mr Trump’s convicted for-mer campaign chairman. The other invol-ves a rule that owners of land containingold cemeteries must provide public access.

Relatively few cases slated for argu-ment this term seem likely to produce4-4—or, once the ninth justice arrives, 5-4—splits. This is by design. In the wake of Jus-tice Kennedy’s departure, a sordid confir-mation battle and a term that saw lossesforpublic-sectorunionsalongside wins fora gay-wedding-averse Christian baker, ger-rymanderers and pro-life pregnancy cen-tres, lowering the temperature is a wisecourse. The chief justice, John Roberts, en-couraged compromise during the court’sshorthanded stint and, according to JusticeElena Kagan, deserves credit for pushinghis colleagues to “keep on talking” until, inall but a handful ofcases, consensus came.

Chances of civility and modesty maybe high in the short run, but Stephen Vla-deck of the University of Texas, warns thatthe new conservative majority may soonenjoy ample opportunity to assert itself onthe Supreme Court. There will be plenty oftime, Mr Vladeck says, and plenty of cases,for the five-justice conservative bloc to flexits muscles. 7

COMPANIES discriminate. They dis-criminate against black people, poor

people, gay people and fat people—oh yesthey do. Using callback studies, in whichfictitious CVs for identically qualified can-didates are sent to employers, economistshave become quite good at measuring thepenalty paid for being a woman, a racialminority or lower-class. Identical résumésunder Asian-sounding names are 30% lesslikely to get call-backs from employers; forblack-sounding names the penalty is 50%.Unfortunately there appears to be little im-provement over time. Estimates of racialdiscrimination in hiring blacks in Americalookas bad now as they did in 1990.

Since Lyndon Johnson signed the CivilRights Act in 1964, employment discrimi-nation on the basis of race, sex and nation-al origin has been illegal. Johnson also be-gan government programmes ofaffirmative action—what he called “themore profound stage of the battle for civilrights”, which sought “not just equality asa right and a theory but equality as a factand equality as a result.” In a lesser-knownexecutive order, signed one year later,Johnson ordered government contractorsnot only to use affirmative action but alsoto append a non-discrimination statementto their advertisements.

Formore than 50 years, such “equal-op-portunity statements” have been dutifullybolted onto job adverts from Americanemployers, including private-sector firmsthat do so voluntarily. Arecent working pa-

perpublished by two economists, AndreasLeibbrandt of Monash University andJohn A. List of the University of Chicago,suggests they are actually failing to preventdiscrimination and foster diversity.

In their study, the two economists post-ed advertisements for an administrativeassistant job in ten large American cities.Of the 2,300 applicants who expressed in-terest, half were given a standard job de-scription and the other half were given adescription with an equal-opportunitystatement promising that “all qualified ap-plicants will receive consideration for em-ployment without regard to sex, colour,age or any other protected characteristics”.For racial minorities, those who receivedthe pro-diversity statement were 30% lesslikely to apply for the job—and the effectappeared to be worse in cities with whitemajorities (see chart). In a follow-up sur-vey, the prospective applicants said thestatement prompted worries that theywould be token diversity hires.

Equally damagingA single study rarely provides enough evi-dence to change public policy. Despitetheir ubiquity, equal-opportunity state-ments have received almost no scholarlyattention. “The little evidence we have gotis not encouraging,” says Iris Bohnet, aneconomist at Harvard who studies genderdisparities in the workplace. A study pub-lished in 2016 from Sonia Kang and col-leagues found that “whitened” CVs—

Labour markets

Diversity implosion

WASHINGTON, DC

Anti-discrimination statements byemployers mayresult in more discrimination

The Economist September 29th 2018 United States 39

2 where black and Asian candidatesstripped racial cues from their applica-tions—were twice as likely to get call-backs.Although firms with diversity statementsin their ads attracted fewer whitened résu-més from minority applicants, they wereactually no less discriminatory than otherfirms. An examination of mid-size andlarge American firms by Frank Dobbin, aHarvard sociologist, and Alexandra Kalev,a sociologist at Tel Aviv University, foundthat five years after setting up the mostcommon types of diversity programmes—mandatory training, job tests and griev-ance systems for biased managers—theshare ofracial minorities in managerial po-sitions had actually declined.

That does not mean that the entire en-terprise is doomed. Although the coercivemethodsstudied byMrDobbin and MsKa-lev backfired, their research also foundthat other initiatives, such as mentoringprogrammes and dedicated college recruit-ment teams, seemed to work. Anotherworking paper by Mr Leibbrandt and oth-ers finds that when firms show the impor-tance ofdiversity more convincingly, by in-cluding a human-sounding statementfrom the CEO rather than affixing a per-functory, legalistic equal-opportunitystatement, minority applications increase.

Despite all the racial progressAmericansociety has made since the civil-rights era,economic disparities remain stubborn.Some, like the white-black gap in hourlywages, are even getting worse. In 1979 theaverage black man earned 80% as much asthe typical white man. In 2016 that hadslipped to 70%. Unemployment gaps looksimilarly intractable. Undoing these dis-parities requires firms to surmount theirfrequently demonstrated tendencies todiscriminate, often unconsciously. Equal-opportunitystatementsare amongthe eas-iest, oldest and most frequently used tac-tics. Unfortunately, they may be doingmore harm than good.7

Spot the difference

Source: “Do Equal Employment Opportunity StatementsBackfire?” by Andreas Leibbrandt and John A. List, NBER

United States, effect of equal-opportunitystatements on minority job applications, 2018Selected cities

White population, % of total

Cha

nge

ina

pp

lica

tio

n li

keli

ho

od

, %

po

ints

40

30

20

10

0

+

–

10

20

30

40 50 60 7045 55 65

HispanicBlack

Chicago

DallasDC

NY

LA

San Francisco

PhiladelphiaHouston

Denver

Atlanta

CHARRED beams are all that remain ofthe top floor of one house. Nearby, a

group of young men lounge on the wood-en stoop of another once-handsome look-ing home, its windows boarded up. Manylots, behind chain-link fences, are aban-doned. The morning sun dazzles: in theshade of large trees two sex-workers waitfor custom. Otherwise the streets appearmostly deserted.

Drive around the downtrodden north-ern suburbs of St Louis, both in and be-yond its city limits, and signs of economicdecline and ongoing racial segregation areobvious. Prospects for its predominantlyAfrican-American residents look grim.Gangs are not especially a problem, butdrug trading and gun violence are. Overtwo days alone, last weekend, six peoplewere shot dead in St Louis. Police add thatnon-fatal shootings, “almost homicides”,get less attention but are also common,time-consuming and almost as distressing.

Statistics just released by the FBI showthe national rate of violent crime fell by0.9% last year, and the murder rate creptdown too, by 1.4%. That modest improve-ment confirms a return—after a two-yearupturn—to a two-decade trend of Americagettingslightly less violent. More striking isa recent analysis by the Brennan Centre forJustice, a think-tank, of 29 of the country’sbiggest cities. Based on reported crime sofar, it expects the murder rate in those areasto fall by 7.6% in 2018, led by big improve-ments in Baltimore, Chicago and San Fran-cisco. Violence is typically worst in warm-er months, so the forecast looks robust.

Such trends should be cheered, but of-fer little for St Louis, a city whose core con-tains 300,000 and which suffers from apersistently awful rate of violence. Lastyear it saw 205 homicides, giving St Louisthe highest murder rate of any big city inAmerica. (This year has seen some im-provement.) Almost all of the city’s homi-cides take place in just a few neighbour-hoods. The police plot a heat map ofcrimes in St Louis: clusters of glowing reddots show that murders typically occurclose to each other, in the same distressedstreets in the north.

That suggests an opportunity. Policeshould be able to attack a problem that isdensely concentrated. A failure to do so, atfirst glance, suggests wilful neglect. “We dohave a homicide rate we’d love to seesmaller”, says Major Mary Warnecke,Commander of Investigative Services,

which includes the homicide division forthe metropolitan area. Then she rattles offreasons—lack of staff, long-running socialand economic hardships, use of drugs andoverly lax gun laws, criminals who skipover the Mississippi to nearbyIllinois—thatmake improvements intensely difficult.

Her detectives clear only a dismal 52%of their murder cases, a slight gain on thepast few years, she says. They rely heavilyon co-operation of witnesses, who maynot be forthcoming. Couldn’t police culti-vate better tieswith residents? They try, butlack time, she says. By one estimate, a de-tective succeeds in clearingcaseswhen giv-en five orfewer to handle peryear. Ms War-necke says her overworked 33 homicidedetectives officially have 4.8 cases each,but lowclearancesmean cases, like bodies,pile up. The stats don’t capture the true pic-ture: “in reality they each handle more like11or12 cases.”

In theory technology can help. Threeyears ago the headquarters got a “real timecrime centre”, an Orwellian collection ofscreens to relay images from cameras allover the city, letting police monitor fortrouble. Pictures are matched with reportsfrom Shotspotter—lots of microphones inpublic places that record sounds of gun-shots. These are instantly analysed, lettingpolice know precisely where and whattype of weapons are in use. Police alsowant a drone for better aerial footage,though local regulations forbid it.

Gizmos, however, have limited impact.The cameras, many of which are privatelyowned, are mostly placed in commercialorprosperous areas, such as downtown, orin whiter parts of the city. The technologythus mostly preserves security in what arealready relatively safe places. In the declin-ing northern areas, much remains hol-lowed out, abandoned and forgotten.7

Violent crime

Still piling up

ST LOUIS

Howdo you police America’s mostmurderous city?

Major Warnecke, St Louis sleuth

40 United States The Economist September 29th 2018

TO FLOURISH in public life requires athick skin. Senator Ted Cruz needed

one this week, as chanting activists hound-ed the senator and his wife from dinner ina Washington restaurant. Such disruptionof politicians’ meals is getting almost ascommon as online abuse. Ruqaiyah Mor-ris, Vermont’s only black state legislator,has said that she is quitting after sufferingtoo many racist, “inflammatory and attimes, even dangerous” harangues. Harshwords are tolerable, reckons an ex-politi-cian in Chicago: credible death threats, orthrown rocks and bottles, are not.

Public figures know they must some-timesbrace for tough treatment. Brett Kava-naugh expected scrutiny in his bid to be aSupreme Court justice, although he has la-mented that he is suffering “character as-sassination” and death threats. That wasafter two women accused him of drunkensexual assaults against them (which he de-nies). His accusers also knew speaking outwould stir up a nasty backlash. One, Chris-tine Blasey Ford, says she faced an on-slaught of threats of murder and other “vi-cious harassment” within hours of hername becomingpublic. She and her familyhave fled the family home as a result.

Such intimidation of women who al-lege assault by the powerful is ugly, but it isnot new. In 1991Anita Hill’s reward for testi-fying that she was sexually harassed byClarence Thomas, who went on to be a jus-tice of the court, was disbelief and vileabuse. She recalled how she came home to“an answering machine full of messages”from strangers who threatened her withsodomy, rape and murder.

Last year in Alabama several womenaccused Roy Moore of sexual assaults dur-ing a failed run for the Senate. His suppor-ters disparaged them, and then the homeof one, Tina Johnson, burned down a fewweeks later. Arson was suspected but notproved. Other women who merely cam-paign against images of sexual exploita-tion expect to face harassment. BriannaWu and Anita Sarkeesian were vilified andthreatened by some male video-game en-thusiasts, a crude episode in 2014 knownas Gamergate. A spokeswoman for the Na-tional Rifle Association, Dana Loesch, saidlastyear thatdeath threats from supportersofgun control forced her to move house.

Even if such harassment is not new,three developments do suggest incivilityhaschanged in the years since MsHill’s tes-timony. Private individuals, as well as fig-

ures who volunteer for prominence, aretargets for vile confrontations; anonymousattackers employ digital methods thatscale-up fast and are hard to block; and themost senior elected official sets an abys-mally low standard that others can follow.

The first of these changes is arguablythe most damaging: people are attackedeven when they are thrust unwillingly intothe spotlight. Veronique De La Rosa andLeonard Pozner, parents of a six-year-oldboy, Noah, who was murdered in a massshooting at a school in Sandy Hook, Con-necticut, in 2012, have been taunted onlineand threatened for years by fantasists whodeny the massacre and allege the parentsare “crisisactors” and partofa governmentconspiracy, perhaps to limit the public’s ac-cess to guns. Repeated publication of theiraddress has forced the family to movehouse seven times since the murder.

To new mutinySurvivors of another mass shooting of stu-dents in Parkland, Florida, in Februaryhave been attacked too. A conservativecommentator in St Louis was forced off atelevision show in April after he threat-ened a sexual attack with a “hot poker” onDavid Hogg, a Parkland student who daresto say why he favours gun control. MrHogg’s mother has reported death threats,as have others at the school.

Second, technology makes threateningpeople easier. Where once angry televi-sion viewers raged only at their screens, in-

ternet-users encourage each other, contacttargets and issue threats from darker cor-ners online, such as anonymous message-board sites 4chan and 8chan. A favouriteactivity isdoxing—publishing information,such as addresses and phone numbers, ofindividuals—which becomes an invitationfor subsequent threats. “Swatting”, whenemergency police teams are called to raidvictims’ homes, has been used against MrHogg and politicians.

Ms Blasey Ford’s lawyers say her emailhas been hacked and she has been imper-sonated online. The broad reach of a de-ranged, far-right fabulist, Alex Jones of In-fowars, long depended on his use ofYouTube and other platforms. His broad-casts of conspiracy theories encouragedothers to threaten the parents of NoahPozner, over Sandy Hook. (Several onlineplatforms banned him this summer.)

Third, President Donald Trump sets aremarkably unedifying example. As a can-didate he called for supporters at a rally inIowa to “knock the crap” out of protesters,one of many messages encouraging vio-lence. As president, his repeated allega-tions offake news help to whip up conspir-acy theorists. He also appears to encouragethose harassing the accusers of Mr Kava-naugh. In one tweet he dismissed Ms Bla-sey Ford for not reporting the alleged as-sault when she was a teenager. Hedisparaged a second accuser for havingdrunkalcohol and for memory lapses.

If all this gives the impression that poli-tics has fallen from a state of grace, that ismisleading. Despite the onslaught ofdeaththreats, Mr Trump’s tirades and online nas-tiness there is, so far, no obvious sign ofmore actual violence. Those who sawbeatings, shootings and murders of civil-rights activists in the South, in the 1950sand 1960s, recall a time when speakingagainst the powerful could cost you notonly peace ofmind but also your life. 7

Political harassment

Uncivil hands

CHICAGO

Despite an epidemicofviolent rhetoric, there is less actual political violence

The Economist September 29th 2018 United States 41

WITH less than 50 days to go until the mid-terms, Hakeem Jef-fries was not pushed for time. On a leisurely stroll through

his Brooklyn congressional district, the rising Democratic starpointed out the hospital where he was born and a former crackparkwhere the surrounding brownstones go for $2m, with a stopat his favourite diner along the way. While political America hy-perventilates over the handful of competitive House and Senateraces that will determine who controls Congress, Mr Jeffries isamong the vast majority of congressmen facing no serious con-test in November. In one of the safest Democratic districts in thecountry, he is running unopposed.

Such congressmen have nothing to fear but a primary chal-lenge, like the one that dislodged another Democratic leader andNew Yorker, Joe Crowley. Some veer to the political extreme tomitigate the risk of that. But Mr Jeffries is nearly as moderate as asafe-seat Democrat gets. That might seem surprising, given theplaudits he is winning in a party that is said to be shifting to theleft overall. The 48-year-old former corporate lawyer is one of ahandful ofmid-level Democratic leaders sittingbelowthe party’sgeriatric supremos. Some predict he will become the first blackSpeaker of the House of Representatives, perhaps sooner thanlater. The Democrats looklikely to take backthe House in Novem-ber, and at least a significant minority think that would be themoment for their 78-year-old leader, Nancy Pelosi, to step aside.

Mr Jeffries is not a member of the moderate New Democratsfaction, but he often sounds as ifhe should be. He is a fan ofchar-ter schools and fiscal rectitude. Though he supports the principleof universal health-care coverage, he speaks of “the importanceof market forces and getting things done in a responsible fash-ion”. QuotingRonald Reagan approvingly, he suggests this meanspromoting a flourishing private sector outside the “legitimatefunctions” of government. The eternal quest to strike the rightbalance between the two “is the American dream”, he muses.

His pragmatism is as striking as his moderation. He praises Ja-red Kushner as a “tremendous partner” in his support for a bipar-tisan criminal-justice bill that Mr Jeffries co-sponsored. It was de-rided from the left as too weak, including by two Democraticsenators with presidential ambitions, Cory Booker and KamalaHarris. They probably also minded the fact that President Donald

Trump praised the bill. Mr Jeffries gives them short shrift: Dem-ocrats should back useful legislation whoever is president, hesays, and a stronger bill was impossible under Mr Trump. He alsoquestions their political judgment. Allowing criminal justice tobecome a partisan issue has handed the Republicans an offen-sive weapon, he says. “If we can make this a non-partisan issue,that is to Democrats’ advantage.”

Yet despite his bold attachment to the real world, Mr Jeffries isnot merely unchallenged by his party’s Utopian wing. He is ad-mired. In an interview with a left-wing radio host, waves of adu-lation come pulsing through the speakerphone. She congratu-lates Mr Jeffries for his “unapologetic progressive streak”. As theDemocrats contemplate advancing from the wilderness, thisraises a salient question: how does he get away with it?

There are perhaps two big reasons, which could have a bear-ing on his party more broadly. First, like Barack Obama (whosebirthday he shares), Mr Jeffries’s ethnicity helps him head off theleft. That is mainly because black Democrats’ emphasis on socialjustice—which, despite its critics, Mr Jeffries’s First Step Act clearlyillustrates—earns them progressive stripes. It isalso because blackvoters, who dominate Mr Jeffries’s district and are an essentialportion of any Democratic coalition, are relatively moderate oneconomic issues. He attributes this to the traditions of the blackchurch, which emphasise ownership and self-reliance, as well asto a centuries-old hunger for opportunity. All things being equal,blackvoters therefore tend to support moderate candidates, suchas Hillary and Bill Clinton, in presidential primaries. If they end-ed up backing Mr Booker or Ms Harris, it would not be becausethe senators support Medicare for all.

The second reason Mr Jeffries gets away with it concerns MrTrump. So long as the congressman attacks the president onpoints of principle, the left seems to gives his moderate views apass, or fails to notice them. Mr Jeffries’s stand on school reform ismuch less well-known among Democratic activists than a feistyspeech he gave after Mr Trump accused the Democrats of treasonfor failing to applaud his state-of-the-union address. Mr Jeffries’sfellow second-tier leaders are also better known for their contri-butions to the anti-Trump warmachine than theirviews. They in-clude Adam Schiff, a star of the House intelligence committee,and Cheri Bustos and David Cicilline, who share responsibilitywith Mr Jeffries for messaging.

Cheri B. and HakeemA return to governing, Mr Jeffries acknowledges delicately, “maymake it more difficult to hold party unity”. But it might not be ashard as all that. Mr Trump will remain a powerful bogeyman.Moreover, Mr Jeffries thinks the Democrats’ fulcrum is closer tothe centre than many imagine, in part because they have mistak-en the Democrats’ zeal for resisting the excesses of the Trump ad-ministration with an enthusiasm for hard-left ideas. The prag-matic candidates who have emerged from most of the party’sHouse primaries suggest he may be right. Alexandria Ocasio-Cortez, Mr Crowley’s fiery vanquisher, turns out to be unusual.

How endangered Ms Pelosi is will probably depend on theviews of some 30-odd new House Democrats, which are yet un-known. Mr Jeffries says he will back her “to the end”, which isprobably judicious, given her reputation for vindictiveness. But itdoes not denote a lack of ambition. Mr Jeffries plainly believes itis time Congress had a black Speaker. That would be both princi-pled and tactically astute.7

High hopes for Hakeem Jeffries

The congressman from Brooklyn could be the first blackSpeakerof the House

Lexington

42 The Economist September 29th 2018

1

OCTOBER 5th 1988 was a good day forChile. In a plebiscite voters rejected a

proposal by Augusto Pinochet, who hadtaken power 15 years before, to extend hisdictatorial rule. That led to free elections ayear later and to more than two decades ofstrong economic growth, underpinned bypro-market policies, social reforms and,from the early 2000s, a commodity boom(see chart). The economy trebled in sizeand the poverty rate dropped from nearly40% to less than 10%. Economists dubbedChile “the tiger ofLatin America”.

Recent years have been less tigerish.The price of copper, the biggest export, be-gan falling sharply in 2014. Michelle Bache-let, the president from 2014 to 2018, rewrotethe tax code, strengthened labour unionsand proposed a new constitution. Her aimwas to reduce inequality, but she also un-nerved business. Investment contractedfor four consecutive years. Economicgrowth dropped from an average of 5% inthe post-Pinochet years to 1.7% in 2013-17.

Under Sebastián Piñera, who took overfrom Ms Bachelet in March, the economyhas begun to purr again. GDP in the secondquarter of this year was 5.3% higher than inthe same quarter last year, the fastest rateof growth since his first term as presidentin 2010-14. Investment grew at 7.1%. Thecentral bank has raised its forecast forgrowth this year to 4-4.5%.

But this is not yet a return to glory days.Growth has recovered partly because cop-

challenge “is to avoid falling into the mid-dle-income trap”, says Rodrigo Aravena,the chief economist of Banco de Chile, acommercial bank.

Voters elected Mr Piñera, a billionairebusinessman, to guide Chile away fromthat trap. His critics say he has been slow toseize the steering wheel. He unveiled hisfirst big reform proposal, a shake-up ofcor-porate tax, in August. It faces resistance incongress, where his centre-right coalitionlacks a majority. The economy’s growthspurt has so far not produced many morejobs. Consumer confidence fell into nega-tive territory in August; business confi-dence is also down. The pace of reformsand economic recovery have lagged be-hind expectations, says Jorge Desormeaux,a formervice-presidentofthe central bank.

“Our job is to defeat this pessimismwith action,” says José Ramón Valente, theeconomy minister. He is in charge of threenew units—for investment, productivityand “the economy of the future”—whichhave the task of encouraging entrepre-neurs and reducing the economy’sdependence on copper. The governmentwants to keep growth in investment at6-7% a year. The goal for productivity isgrowth of1% a year. If all goes well, the po-tential growth rate will rise from 3% to 4%.

Achieving that ambition will requireadvanceson several fronts. Some will meetresistance; others will take years to pro-duce results. The plans include a five-yearconcession programme, under which in-vestors will spend nearly $15bn, about 6%of this year’s GDP, to build roads, airportsand hospitals. The government itself willinvest $8bn in the Araucanía region,Chile’s poorest. It wants to provide freenursery school for every child, whichshould bring more women into the labourforce and raise productivity in the long run.Employerswill pay into a fund for that. The

per prices have. Potential growth—theeconomy’s capacity to grow without infla-tionary pressure—is only around 3%. In thepast 15 months the three big credit-ratingagencies have downgraded Chile’s sover-eign debt. Thishasgrown from 4.9% ofGDP

in 2008 to 23.5% in March this year. Al-though that is not high, the agencies feargrowth will not be fast enough to justifyChile’s strong credit ratings.

The workforce will shrink as the popu-lation ages unless more women, youngpeople and immigrants join it. Productivi-ty is “low and stagnant”, according to theOECD, a club of mostly rich countries. Thisholds back potential growth. Chile’sdream of becoming a fully developedeconomy thus looks elusive. Its biggest

Chile

Steering the economy away from themiddle-income trap

SANTIAGO

Sebastián Piñera has an opportunity to enact big reforms. It will not last long

The AmericasAlso in this section

43 Austerity in the air

44 Bello: Peru’s providential president

Copper bottomed

Sources: Thomson Reuters; IMF

Chile

GDP% change on a year earlier

Copper$’000 per tonne

1988 95 2000 05 10 15 183

0

3

6

9

12

0

3

6

9

12

+

–

The Economist September 29th 2018 The Americas 43

1

2 government also plans to reduce regula-tion of business, which is more complexthan in any other member of the OECD.More controversial is a scheme to makerules for employing students more flexiblethan for other workers.

The government has picked as its firstbig battle an assault on the confidence-kill-ing tax system introduced by Ms Bachelet.It will be one of the hardest to win. Ms Ba-chelet’s tax reform raised corporate taxesto provide more money for education. Itbrought in two corporate-tax regimes,which confused both business folkand taxinspectors. It also limits business-owners’scope for deducting from their personaltax bills the tax their company has paid onits profits. Among the angry entrepreneursare 80,000 owners of small businesses,who previously paid no tax at all.

Mr Piñera’s proposed reform would re-establish an “integrated model”, restoringshareholders’ ability to deduct taxes paidby the company. It would also exemptfrom tax the low-income company ownerswho were caught in Ms Bachelet’s tax net.To spur investment, the new schemewould let companies speed up deprecia-tion. With more money in their pockets,owners of businesses, both prosperousand poor, will spend more, the govern-ment predicts.

The reform proposal has had mixed re-views. Business-owners cheer the returnof the integrated model, but are disap-pointed that Mr Piñera has not kept a pro-mise to reduce corporate-tax rates (27% forbig firms). Large companies will get accel-erated depreciation for just two years,which will diminish the boost to invest-ment in the long run, says Claudio Agos-tini, a tax expert at Adolfo Ibáñez Univer-sity. The business-friendly intent of the taxreform has stirred suspicions in congress,where the opposition, split among centristand left-wing parties, has united to fight it.They claim it will increase inequality.

It may also increase debt. The govern-ment, which promises to cut the fiscal def-icit from 1.8% ofGDP this year to 1% by 2022,when MrPiñera’s term ends, claims the taxplan will raise a bit of revenue. It says thescheme will compensate for any shortfallby making electronic sales-tax invoicesmandatory. Many observers doubt that.Chile has no independent agency like Brit-ain’s Office of Budget Responsibility to es-timate revenues and spending, points outEduardo Engel, a director of Espacio Pú-blico, a think-tank. The governmentmissed an opportunity to set the tax ondiesel at the same rate as that on petrol andhas left open widely used loopholes.

If the tax reform does not pay for itself,the government will have less money tospend on more popularpolicies, like the in-vestment in Araucanía. Mr Engel worriesthat the battle over tax reform will use uppolitical capital needed to address the

grievances of Chile’s middle class, espe-cially crime, poor-quality health care andpension benefits they deem to be too low.Neither Mr Piñera nor his ministers havebeen astute political managers. The educa-tion minister suggested in July that schoolsshould host bingo games to pay for repairs,a gaffe that led to his sacking.

The window for enacting bold policieswill not stay open for long. Risingglobal in-terest rates and the trade war between theUnited States and China have not yet hurtthe economy, thanks to Chile’s relativelysolid finances and a floating exchange rate,which has allowed the peso to depreciate.But the economic environment is becom-ing unfriendlier just as Mr Piñera’s honey-moon is coming to an end. If he wants toswerve away from the middle-incometrap, he will have to act fast.7

FOR a traveller whose flight had been de-layed by five hours, Andrés Manuel Ló-

pez Obrador looked surprisingly cheerful.A video published on social media on Sep-tember 19th shows Mexico’s president-elect preparing to disembark a budgetflight from Huatulco to Mexico City. A re-porter asked whether the hold-up, causedby rain, had prompted him to reconsiderhis campaign promise to sell the presiden-tial plane, a Boeing Dreamliner, which cost$219m and was delivered in 2014. Not at all,replied Mr López Obrador, who will takeoffice on December 1st. “I’d be embar-rassed to board a luxurious plane in acountry with so much poverty.”

Mr López Obrador is the champion of

conspicuous non-consumption amongLatin American leaders. His chauffeurdrives a Volkswagen Jetta. He plans to cutthe president’s pay by 60% to 108,000 pe-sos, or$5,700, a month (and to chop the sal-aries of other senior officials). But when itcomes to using presidential aircraft as aplatform for ostentatious austerity, Mr Ló-pez Obrador has rivals.

In light of Argentina’s economic woes,its president, Mauricio Macri, decided inMay to postpone the purchase of a newplane (see Finance section). The existingone, known as Tango 01, is a 26-year-oldBoeing 757. Last year Lenín Moreno, Ecua-dor’s president, announced plans to sellone of two jets purchased by his free-spending left-wing predecessor, RafaelCorrea. Ecuador’s audit office is lookinginto the use of presidential planes duringMr Correa’s presidency as part of a regularinvestigation of government accounts. MrCorrea says that the audit will show howhard he worked. He brags that the presi-dential palace thriftily provided cateringservices to his flights. “We transported[food] in tubs to save money,” he tweeted.

The alternative to such aerial self-deni-al is to risk political turbulence. In 2016,during the worst recession in Brazil’s his-tory, Brazilians were outraged to discoverthat the government had put out to tendera contract worth 1.7m reais ($520,000) for acaterer to provision the presidential AirbusACJ319. The order included 500 tubs ofHäagen-Dazs ice cream and one-and-a-half tonnes of chocolate cake. MichelTemer, the president, cancelled the order.

Clever presidents weave their aero-plane politics into larger narratives. Mr Ló-pez Obrador’s vow to flog the Dreamlinerispartofa broadercampaign against politi-cal and business elites. During an electiondebate he joked that he “had already of-fered it to Donald Trump”.

The plane ordered by Tabaré Vázquez,Uruguay’s president, is modest by presi-dential standards. The eight-seater BAe 125,delivered in February, cost a mere $1m. But

Presidential planes

Those magnificentmen and women

BUENOS AIRES

Mexico’s president-elect is not the onlyleaderwho practises austerity in the air

Nicolás Maduro’s other ride is a donkey

44 The Americas The Economist September 29th 2018

2

PERUVIANS take a dim view of theirpresidents. The past four, after brief

honeymoons, were generally despised.So it is all the more notable that MartínVizcarra, the current holder of the job, isoften greeted with spontaneous ap-plause. This is testament to Mr Vizcarra’sskill in embracing the cause of fightingcorruption. Having raised expectations,he now has to meet them.

Mr Vizcarra took over in March whenPedro Pablo Kuczynski, whom he hadserved as vice-president, resigned toavoid impeachment over a conflict-of-in-terest scandal and an attempt by allies tobribe an opposition lawmaker. The augu-ries were bleak. Although Mr Vizcarrahad done well as governor of a small re-gion on the south coast, he was barelyknown nationally. Like Mr Kuczynski, hefaced an obstructive congress controlledby Popular Force (FP), the party of KeikoFujimori, who neveraccepted hernarrowdefeat in the presidential election in 2016.

But events offered Mr Vizcarra an op-portunity. Leaked tapes showed contactsbetween parts of the judiciary, organisedcrime and some members of FP. Thiscame as the judiciary was investigatingfour former presidents for possible cor-ruption, a spillover from the Lava Jatoscandals in Brazil. In July Mr Vizcarra pro-posed four constitutional reforms—one ofthe judiciary, the others to the politicalsystem. He wants these to be approved bycongress and then submitted to a referen-dum on December 9th. When congresstarried, this month he threatened to makeapproval of the reforms an issue of confi-dence in his cabinet. Congress last yearcensured Mr Kuczynski’s cabinet; if it cen-sured Mr Vizcarra’s, in theory at least, hecould call a fresh legislative election.

The threat seemed to work. Congressquickly approved the judicial reform. Cé-

sar Villanueva, Mr Vizcarra’s prime minis-ter, says he is “confident” the others willfollow. This leaves two questions: whetherthe reforms will really remedy Peru’s insti-tutional weakness, and whether Mr Viz-carra’s gambit marks the end of Ms Fuji-mori’s control of the political agenda.

The judicial reform sets up a new boardto select and supervise judges and prose-cutors. Its predecessor was politicised,poorly designed and penetrated by crimi-nal interests. The new board will be select-ed on merit in a public contest organisedby a committee of authorities, includingthe head of the supreme court and thechief prosecutor. A similar system hasworked fairly well in Peru to appoint theheads of regulatory agencies.

There may be problems. The chiefpros-ecutor featured on the leaked tapes. Hefaces an investigation in congress. “Noway” will he be a member of the commit-tee, says Mr Villanueva. The reform missesan opportunity to adopt a better practice,used increasingly by other countries, inwhich judicial supervisory bodies areelected by judges rather than judicial au-thorities, says Diego García Sayan, a for-

mer justice ministerwho now advises theUN on judicial independence.

Other government proposals wouldrecreate a senate, abolished by Ms Fuji-mori’s father, Alberto, who ruled Peru asan autocrat in the 1990s, and give constitu-tional status to a law banning corporatedonations to political parties. These aresensible in principle, though much willdepend on the detail. Asenate of30 mem-bers and a lower house of 100 look smallfor a country of 31m people, though offi-cials say those numbers are negotiable.

One measure is retrograde: banningthe re-election of legislators. The argu-ment against re-electing presidents—thatthe incumbent has an unfair advantage—applies less to congress, where experi-ence may serve the public interest. Inpractice, Peruvians re-elect only a quarteroftheir legislators anyway. But congress isin disrepute. Many of its members areseen as self-serving or bent. Officials ad-mit this measure is the price of rallyingpublic support for the package as a whole.

What Mr Vizcarra has already gainedis the thing that eluded his predecessor:the political initiative. He has done so bymobilising anti-fujimorismo, a diffuse butpowerful sentiment. It helps that Ms Fuji-mori hasforfeited much ofherpublic sup-port. Having feuded with her brother,thus splitting her party and depriving it ofits majority in congress, she is widelyseen as vengeful.

The referendum is just “the start of aprocess of change and reform” to achieve“legal security and political stability”,says Mr Villanueva. “It’s obvious thatnone of these things comes magically.”Next month’s municipal and regionalelections show as much. Nearly all of the100,000 candidates are nonentities. Re-storingPeruvians’ faith in democracy willtake time, but at least it may have started.

The providential presidentBello

Martín Vizcarra attempts to reform Peru

Mr Vázquez has the misfortune ofsucceed-ing a notable ascetic, José Mujica. Hehitched rides with fellow leftist leaderssuch as Argentina’s Cristina Fernández deKirchner and Dilma Rousseff of Brazil. SoMr Vázquez’s pre-owned business jetlooked self-indulgent by comparison. Hehas prudently ordered that it be modifiedso that it can double as an air ambulance.

Dictators face less pressure to be abste-mious in the air. Miguel Díaz-Canel,Cuba’s president, travels aboard a 12-year-old Russian-made Ilyushin Il-96, furnishedwith a drinks bar and leather seats. Itbrought him on his maiden trip to the Un-

ited States (to address the UN General As-sembly) this week. Venezuela’s NicolásMaduro, who presides over an economythat is suffering from hyperinflation andshortages of food, would have a hard timeflying commercial even if he wanted to.Currency controls have forced most for-eign airlines (or “saboteurs”, as he callsthem) to abandon the country. Domesticplanes are grounded because of a lack ofspare parts and fuel. But Mr Maduro hasgenerously put the presidential AirbusA319 at the service of Venezuelan athleteswhen they take part in competitionsabroad. “I can easily travel overland, by

motorbike or by donkey,” he explained.Pinching pesos on presidential planes

may be a false economy. Argentina’s secu-rity services advised Mr Macri to avoidcommercial flightsaltogether. Theymake ithard to provide security and medical careand to return home in emergencies. Dur-inga meetingwith investors in April MrLó-pez Obrador looked uncomfortable whenasked what he would do if a delayed flightcaused him to arrive late at a UN meeting.If he sells Mexico’s presidential Boeing, itwill probably fetch just half of what thegovernmentpaid for it. Once he takes officehe might be tempted to keep it. 7

September 29th 2018

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

W A S T E

A loadof rubbish

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The Economist September 29th 2018 3

CONTENT S

5 Two worldsDown in the dumps

7 ChinaExit the dragon

8 RecyclingModern-day alchemy

10 OceansClearing the waves

11 Looking aheadWhat goes around

1

THE OFFICES OF Miniwiz in central Taipei display all the trappings of avibrant startup. The large open space on the 14th floor of an office blockoverlooking Taiwan’s capital is full of hip youngsters huddled aroundcomputer screens. A common area downstairs includes a video-gameconsole, a table-tennis table and a basketball hoop. But a hint that this isnot just another e-commerce venture comes from neatly sorted sackspacked with old plastic bottles, CDs and cigarette butts.

Rather than peddle brand-new virtual products, Miniwiz derivesvalue from physically repurposing old rubbish. Chairs in the conferenceroom began life as plastic bottles, food packaging, aluminium cans andshoe soles. The translucent walls separating it from executives’ dens owetheir amber-like quality to recycled plastic mixed with discarded wheathusks. Coffee is served in glasses made of broken iPhone screens. ArthurHuang, the company’s 40-year-old founder and chief executive, whoholds a masters degree in architecture from Harvard, first tried setting upshop in New York in the mid-2000s. That effort failed when he discov-ered that few Americans shared his obsession with limiting the world’swaste. By contrast, many ofhis fellow Taiwanese did.

Theystill do. The island isa posterchild forrecycling, recovering52%ofrubbish collected from householdsand commerce, aswell as 77% ofin-dustrial waste, rivalling rates achieved by South Korea, Germany andother top recycling nations (America recycles 26% and 44% respectively).Its recycling industry brings in annual revenues of more than $2bn. LeeYing-yuan, the environment minister, boasts that 16 of the 32 teams com-peting at this year’s football World Cup in Russia sported shirts made inTaiwan from fibres derived from recycled plastic.

For more than two centuries since the start of the Industrial Revolu-tion, Western economies have been built upon the premise of “take,make, dispose”. But the waste this created in 20th-century Europe andAmerica was nothing compared with the rubbish now produced byemerging economies such as China. According to a new World Bank re-port, in 2016 the world generated 2bn tonnes of municipal solid waste(household and commercial rubbish)—up from 1.8bn tonnes just threeyears earlier. That equates to 740 grams (1lb 6oz) each day for every man,

A load of rubbish

Emerging economies are rapidly adding to the global pile ofgarbage. But solving the problem should be easier than dealingwith other environmental harms, says Jan Piotrowski

ACKNOWLEDGMENT S

Many people helped with this report.In addition to those named in thetext, the author would like to thankthe following: Isnawa Adji, MohamadBijaksana Junerosano, Joi Dan-ielson, Erik Dyrkoren, Tora Draegni,Sam Geall, Christine Halim, AtleHamar, Ede Ijjasz-Vas, Silpa Kaza,Russ Knocke, Berenice Lee, Ma Jun,Adam Minter, Kristyn Schrader-King,Nina van Toulon, Dominic Waughray,Doug Woodring

SPECIAL REPOR TWAS TE

4 The Economist September 29th 2018

SPECIAL REPOR TWAS TE

2

1

woman and child on Earth. That number does not include the much bigger amount

produced by industry. Industrial solid refuse contains more valu-able materials like scrap metal and has long been better man-aged by profit-seeking firms. And then there is the biggest wastemanagement problem of all: 30bn tonnes of invisible but dan-gerous carbon dioxide dumped into the atmosphere every year.

As people grow richer, they consume—and discard—more.Advanced economies make up 16% ofthe world’s population butproduce 34% of its rubbish. The developing world is catching upfast. On current trends, the World Bank projects, by mid-centuryEuropeans and North Americans will produce a quarter morewaste than they do today. In the same period, volumes will growby half in East Asia, they will double in South Asia and triple insub-Saharan Africa (see map). The annual global total will ap-proach 3.4bn tonnes.

This special report will argue that waste generation is in-creasing too fast and needs to be decoupled from economicgrowth and rising living standards. That will require people tothrow away less and reuse more—to make economies more “cir-cular”, as campaigners say. This can only happen if people“equate the circular economy with making money”, claims TomSzaky ofTerracycle, which develops technologies to use hard-to-recycle materials. “Take, make, dispose” must now shift to “re-duce, reuse, recycle”, he says.

Virtuous recycleGlobal waste may not present as apocalyptic a challenge as

climate change, but it may be easier to solve. This is because localaction to clean it up and recycle it can lead to immediate local ef-fects. That can in turn transform into a virtuous cycle of change.People are more likely to take action if theycan quickly see the re-sultsoftheirchange in behaviour. All the more so because reduc-ing waste offers two benefits not just one. It not only removes anaffliction (solid waste) but, unlike tackling smog, it also creates atangible benefitat the same time, in the shape ofthe recycled ma-terials that can be reused. On top of that, solid waste (the onlytype that this report will discuss) is a visible eyesore. It is hard foranyone to deny that it exists.

That does not mean it will be easy to move to a more circu-

lar economy. Currently 37% of solid waste goes to landfill world-wide, 33% to open dumps, 11% to incinerators (see chart on nextpage). Some goes to compost heaps. Two-thirds of aluminiumcans are currently recycled in America, but only 10% of plastic.All told, only 13% of municipal solid waste is recycled globally.Everyone agrees that this is far too little.

The urgency of the problem is not in dispute. In July India’sSupreme Court warned that Delhi, the country’s capital, is bu-ried under “mountain loads of garbage”. When dumps or land-fills catch fire, as more than 70 have in Poland over the swelteringsummer, noxious smog smothers their surroundings. Toxic run-off can permeate soils and poison waterways. Some rivers in In-donesia are so blanketed with litter that it completely concealsthe water beneath. According to the United Nations, diarrhoearates are twice as high in areas where waste is not collected regu-larly, and acute respiratory infections are six times as common.

Discharged into seas, rubbish can return to wreakhavoc onland. In August the Arabian Sea spewed 12,000 tonnes of debrisand litter onto the shores of Mumbai in two days. Or it can de-spoil the ocean. Fishermen in the Arabian Sea complain they netfour times as much plastic as fish. The “great Pacific garbagepatch”, an Alaska-sized ocean gyre in the north Pacific Ocean,where currents channel all manner of flotsam, may contain79,000 tonnes of plastic debris. Greenhouse gases from thewaste industry, mainlyemitted bya cacophonyofchemical reac-tions in landfills, could account for 8-10% of all climate-cookingemissions by 2025. Left unchecked, this groundswell of garbagerisks overwhelming the planet.

The good news is that around the world politicians and thepublic appear increasingly alert to the economic, ecological andhuman costs of waste, as well as to the missed opportunities itpresents. Many governments in the developing world are grasp-ing that spending less—or nothing—on waste managementmeans paying more for things like health care to treat its effects.In the developing world, only half of all municipal waste is col-lected. In low-income countries as much as 90% ends up in opendumps. Lowering these proportions requires more investmentin waste infrastructure such as managed landfills or low-pollut-ing incinerators. Taiwan’sexample shows that these can be cleanand need not discourage recycling.

Rich countries already have such fa-cilities, and more. They need to improvethe recovery of valuable materials fromtheir waste streams. For two decades theyhave relied on emerging economies, pri-marily China, to recycle their refuse. Overthe past 25 years, the world deposited106m tonnes of plastic in Chinese portsfor recycling. The system ran aground inJanuary when China banned imports ofvirtually all plastic and unsorted paper,out of concern for its environment. Thisleft Western waste-managers with tonnesof unwanted rubbish—and left policy-makers with piles of unanswered ques-tions about how to boost the capacity ofdomestic recyclers, and ultimately changecitizens’ carefree approach to waste.

Politicians in Europe and Americanstates and cities—if not Donald Trump,America’s distinctly ungreen president—are issuingambitiousrecyclingtargets andtrying to revamp the way they managetheir rubbish. Techies and entrepreneurslike Mr Huang or Mr Szaky are dreaming

South Asia

661

334466

Sub-SaharanAfrica

516

174269

East Asia &the Pacific

714

468602

Europe &Central Asia

490392 440

NorthAmerica

396289 342

Latin America &the Caribbean

369

231290

Middle East &north Africa

255129 177

2016 2030 forecast 2050 forecast

No data0 150 300 450 600 750Waste generation perperson, 2016, kg

Source: World Bank

Throwaway worldRegional waste generation, tonnes m

EVERY MORNING, JUST before 8am, a digger stretches outits steel limb from the bank of the Ciliwung river in central

Jakarta. It claws load upon load ofstinkingrubbishfrom a barrierstretched across the stream and deposits it into the back of anorange lorry. A city employee stands by, one of 5,000 peopleworking in pasukan oranye (orange teams), which dredge hun-dreds of tonnes of waste every day from the filthy waterways ofthe Indonesian capital. A rag-picker, treading precariously, sniffsfor plastic bottles and other recyclables. Once full, the lorry de-parts for Bekasi landfill. There, amid more stench, dozens ofwaste-pickers mill around beside the swinging arms of the ma-chines that unload the dripping rubbish. Their bounty is dividedmeticulously and sold on to scrap dealers or reprocessing facili-ties. The remaining trash is rearranged into landfill.

In many parts of the developing world formal collection is

expanding. There are now some 6,000 community waste banksin Indonesia, where residentsdeposit recyclables in exchange forcash. Once rubbish makes it to the waste-management site, thesystems can be relatively efficient. The problem is getting a na-tion’s refuse to suchsites in thefirstplace,whendoor-to-door col-lection is still rare, and households and businesses seldom sorttheir garbage.

More than 14,000km from Jakarta, in San Jose, California,trash is arriving at the Newby Island waste-management plant.As in most developed nations, getting it there is not the problem.Domestic and commercial waste is collected from homes and of-fices efficiently. The difficulties start when the rubbish arrives.With labour costs high, there are no rag-pickers to sift througheverything and work out what is worth recycling. The problemhere is in the sorting. Aluminium cans are easy to deal with be-cause they are all the same. But different types of plastics cannotbe recycled together and machines do not have the sophistica-tion to tell one type from another. So a lotgoes to landfill or incin-eration, mixed with the remaining worthless waste. And now,suddenly, China has stopped accepting imports of low-gradeplastic and paper, so Newby Island no longer has a place to sendthe mixed garbage that it lacks the hands to separate.

Both processes—in the developed and the developingworld—are partofa global system thathas improved substantial-ly in recent decades as patterns of consumption, and thereforewaste disposal, have changed. But both are under strain, as thevolume of rubbish has increased with economic growth and asthe global garbage industry has changed.

The improvements at Bekasi are part of a broader trend ofdeveloping-world governments finally grasping that proper rub-bish collection is more than just keeping your streets smellingnice. It is a vital part of public health. Stinting on rubbish meanspaying more for hospitals. Numerous studies have shown thatlife in areas with patchy collection increases the risk of diseasesas well as neurological conditions. In 2016 consultants at McKin-sey calculated that burning, dumping or discharging a tonne ofrubbish into waterways cost south Asian economies $375through pollution and disease, against $50-100 required for basicsystems to dispose of that same tonne properly.

In the poorest countries, especially in Africa, rubbish is stilljust dumped anywhere, and management is limited. But there isalso comparatively little of it. A typical citizen of Lesotho pro-duces110 grams a day, one-fortieth as much as a typical citizen ofIceland (the country with the highest rubbish-generation rateperperson). It is the economies that are booming that present thechallenge. Many are now pouring money into dealing withtrash. Narendra Modi’s government has earmarked $9.5bn for

Two worlds

Down in the dumps

The poor world and the rich world face very differentproblems with their waste

Sorted

Source: World Bank

Waste-disposal methods, 2016, %

0 20 40 60 80 100

Latin America &the Caribbean

North America

East Asia & the Pacific

Middle East & north Africa

Europe & Central Asia

Sub-Saharan Africa

South Asia

Landfill Open dumpRecycling IncinerationCompost

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up clever—and lucrative—ways to manage and reuse it. Multina-tionals are toying with resource-light business models based onservice contracts rather than product sales. And many consum-ers are adopting leaner lifestyles.

But municipal budgets are tight everywhere. Trade tiffs candampen legitimate exchange of scrap (as recycled waste is alsoknown). Regulations for handling waste are necessary but canbe obscure. Policymakers have yet to devise a way to boost large-scale investment in recycling, which is discouraged by periodicdeclines in the cost of primary commodities, with which recy-clers compete. And some worry that switching to a more circulareconomy will harm those built on the old model.

These problems are real. But, as this report will argue, theyare not insurmountable. In the 1990s, economic growth, risingliving standards and soaring consumption outpaced Taiwan’scapacity to clean up its waste, earning it the unflattering monikerof “garbage island”. As recently as 1993 nearly a third of Taipei’srubbish was not even formally collected and virtually none wasrecycled. By1996 two-thirds of landfills were nearing capacity.

In the face ofmountingprotests the governmentundertookto erect 24 incinerator plants to burn the waste instead, at a costof $2.9bn. It also incentivised the Taiwanese to produce less rub-bish in the first place. Under an “extended producer responsibil-ity” (EPR) scheme, manufacturers and brands began to contrib-ute to the cost of their products’ disposal, either through paying afee into a fund earmarked for waste management or sometimesby managing the waste themselves. The less recyclable the pro-duct, the more expensive for the company. The scheme contin-ues today. Households are charged for the amount of generalmixed waste they produce but not for paper, glass, aluminium orother recyclables. Those caught dumping their trash illegally facehefty fines and public shaming. A typical Taiwanese person nowthrows out 850 grams daily, down from 1.15kg 20 years ago.

Half a century after environmentalists first began implor-ing consumers to reduce, reuse and recycle, similar exhortationsare now echoingfrom San Francisco to Shanghai. And the world,drowning in garbage, has begun to listen. 7

rubbish deposited in sanitary landfillsrather than open dumps from 10% to 53%.This is expected to rise to 80% once fiveadditional facilities are completed.

Many authorities enlist the privatesector, while monitoringhow it performs.Istanbul accelerated a switch to privateproviders in 2003 after discovering theywere a third more efficient than the publicsector. In Nepal operators are paid basedon how many households get daily col-lection. Five Moroccan cities, home to aquarter of the kingdom’s people, use citi-zen report cards when deciding to renewcontracts with providers. Collection ratesin Lahore, Pakistan’s commercial capital,shot up from 51% to 88% once the cityhired a private company to manage itsrubbish. Lorries are monitored with GPS

trackers to measure performance and en-sure thatunscrupulous trash collectors donot dump the stuff illegally rather thandrive it to formal disposal sites.

Informal workers, or rag-pickers, re-main an important part of the system. UN

Habitat, the United Nations agency forhuman settlements, believes that suchpeople can collect 50-100% of rubbish atno cost to municipalities. The World Bankestimates that they pick 20% of China’smunicipal waste. “Waste-pickers knowphysics, chemistry, economics,” marvelsGonzalo Muñoz, founder and boss of

TriCiclos, a Chilean waste-management company. “They don’tknow they know—but they do.” That is just as well, for ordinarycitizens lack this knowledge. In China, for instance, a new re-quirement for big cities to install colour-coded bins in public ar-eas and buildings has shown mixed results, with few citizensknowing what to throw where.

This explains why the Chinese authorities tolerate infor-mal waste-pickers. Local governments in other countries active-ly embrace the sector, which is thought to include more than15mpeople worldwide. A Brazilian law from 2010 recognised co-op-erativesofsuch catadores asservice providers. Thisgranted themaccess to benefits such as pensions. Their national union wonthe rights to clean up football stadiums during the 2014 WorldCup in Brazil. Technology is making informal collection more ef-ficient. Mobile apps to match scavengers with rubbish producersare proliferating. Last yeara free mobile app called Cataki, whichlinks those throwing stuff away with those collecting it, waslaunched in São Paulo. Indian raddiwallahs in Bengaluru haveused a similar app called “I Got Garbage” since 2014.

Americans talk trashIn rich countries like America, the absence of professional

waste-pickers presents a problem. The general public is not verygood at sorting rubbish. Households and businesses serviced bymunicipal waste-management providers may actually have gotworse at sorting in the past 20 years, says Peter Keller ofRepublicServices, America’s second-biggest waste-management firm,which runs Newby Island in San Jose.

Citizens of rich countries, where almost 100% of municipalwaste gets collected, take such services for granted—unless thecollectors go on strike, as happened in the Belgian city of Ghentin early August, leaving streets in a stink for days. In some indus-

solid-waste management in its $30bn Swachh Bharat (Clean In-dia) Mission. Indonesia is ploughing $1bn into its plastic-clean-up campaign. Authorities in Morocco believe that $300mthey have invested in new sanitary landfills has already averted$440m in environmental damage. Many projects enjoy backingfrom the World Bank and other multilateral lenders. Others arepromoted by grassroots organisations and entrepreneurs.

Theyare bearingfruit. Collection rates in low-income coun-tries have nearly doubled to 39% between 2012 and 2016, even asthe volume of waste rose by a third. In middle-income countrieslike China, they rose on average to 51%. Rates for industrial wasteare also improving (in places that have industry), though they al-ready tend to be high because factories produce large, predict-able volumesofmorehomogeneousrefuse that isoftenvaluable(like metal scrap).

Ascollection has improved, so has the next stage. China hasemulated its rich Asian neighbours and embraced incineration.The Chinese authorities scrapped plans for some plants in theface of protests by local residents worried about air pollution.But they see incinerators as essential to tackling what the WorldBank predicts could be a 50% rise in China’s solid waste by 2050.They are trying to convince residents that incinerators are cleanand safe (as modern ones are, in places like Taiwan) by, for in-stance, promoting school trips to facilities. The number of incin-erators in China has shot up from 57 in 2010 to more than 400.They now consume one-fifth of the 220m tonnes of municipalrefuse that the Chinese disgorge each year.

Poorer countries (including Indonesia) continue to rely onlandfills, but these have also been getting more sanitary. Bekasi,which receives 7,000 tonnes of rubbish a day, now covers trashheaps with blackplastic that captures the methane gas and otherpollutants. In 2008-2014 Morocco increased the proportion of

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No way to make a living

trialised nations, increasingly, residents are charged based onvolume (known as “pay-as-you-throw”). To encourage sorting,such schemes often exempt recyclables. In Taipei, the binmenwill only accept unsorted general waste in official bags, whichcome in different sizes at different prices. They inspect recycla-bles to weed out cheats. The recyclables then proceed to materi-als-recovery facilities (MRFs) for further triage. General waste iswhisked to incinerators or (now rarely in Taiwan’s case) landfills.

In many parts of Europe and America rubbish collection isgenerallypaid forbymunicipal taxesand the garbage disappearsto huge facilities like Newby Island. The plant’s operator, Repub-lic Services, runs 91 MRFs nationwide, next door to landfills (ofwhich it runs 191) or incinerators (of which it owns 114) whichburn waste to produce electricity. It receives 156 trucks carrying1,600 tonnes each day from as far afield as Fresno, 200km to theeast. That is down from 2,200 tonnes a day a few years ago. Thevolume of recyclables has reached 1,400 tonnes a day, a lot byAmerican standards, says Mr Keller.

That should come as no surprise. After all, inhabitants ofthe San Francisco Bay area pride themselves on their recyclingprowess. San Francisco boasts a recycling rate of 80%, one of thehighest of any rich-world city. San Franciscans may therefore beshocked to learn that a lot of them, as Mr Keller puts it, “aren’tvery good at it”. “A pair of blue jeans can jam the whole line foran hour,” he groans. More than100 sorters try to plucksuch itemsfrom the stream before that happens. Even so, a big plant likeNewby experiences on average five such stoppages every day.Such disruptionscost the cityofPhoenix in Arizona $1m a year installed equipment and repairs.

Scott Smithline, who oversees recycling at California’s En-vironmental Protection Agency, cites two possible reasons. Thefirst is that many people do not know what is recyclable. Beerbottles and soft-drink cans are, he says. Egg cartons and glossymagazines are not, for there is no market for the materials ofwhich they are made. Some things are recyclable on their own,but not when combined, such as “paper” cups lined with plasticfilm. It is hard to blame consumers for feeling increasingly baf-fled, he admits.

The otherproblem is that residentsonlyhave to separate re-cyclables from non-recyclables (though compost bins for organic

waste have appeared now,too). Cans, bottles and papersare all thrown into one bin.This mix can, to some degree,be sorted at plants like Newby,enabled by clever technologywhich uses optical sensors andmagnets to separate materialsautomatically. These were nomatch for humans when itcame to sorting, but were goodenough for China’s recyclingindustry, when it tookoffin the1990s, to supply the country’sgrowing ranks of manufactur-ers hungry for all manner ofmaterials. It snapped uptonnes of imperfectly sortedWestern waste, preferring it tothe even more impure refuseavailable at home.

As the volume of recycla-bles swelled in America andEurope, the quality of recycledoutput declined because

everythingwasmixed in together. Thisdid not trouble MRF oper-ators so long as they could offload their increasingly impurestock abroad. Then China announced it would not accept anyplastics or cardboard, and American waste-management com-panies have been scrambling to find what to do with their poor-quality waste.

Efforts are springingup to teach residents how better to sorttheir rubbish. Some American and European cities now pick updifferent materials on alternate days. Reverse-vending ma-chines, which accept empty drinks bottles and return money tousers, are appearing in supermarkets. More cities are adoptingpay-as-you-throw schemes. Consumer habits will take longer tochange. Developingcountriesneed to concentrate on getting bin-men to the kerb of every residence and help stop people throw-ing trash into rivers. The developed world needs to relearn howto recycle. The Chinese ban has lent all of this a new urgency.7

Circular heroes

Sources: OECD; WorldBank; Taiwan EPA *2011 estimate

Recycled waste2016 or latest available,% of total municipal waste

0 20 40 60

SouthKorea

Germany

Australia

Italy

Sweden

Britain

UnitedStates

France

Japan

China*

Greece

Taiwan

OECDaverage

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ON THE FIRST day of2018, a huge shockhit the global recy-cling industry. China, which is the world’s biggest scrap im-

porter, stopped accepting virtually any recycled plastic and un-sorted scrap paper from abroad, and severely curbed imports ofcardboard. The amount of recovered material that America, theworld’s biggest exporter of scrap, sent to China was 3m tonnesless than in the first halfof2018 than a year earlier, a drop of 38%.China plans to phase in bans on most other rubbish, of which itimports $24bn-worth a year. At recycling plants across the West-ern world, bales of mixed paper and polymers now languish inforecourts awaiting offers.

China used to import a significant portion of the world’sscrap. Suddenly, revenues from selling mixed waste to Chinawhich waste-management companies used to cross-subsidisecollection, dried up, hitting margins for American waste-man-agement companies.

The Chinese ban removed the third leg of the “collect, sort,export” system on which the West had long relied. Improve-ments to automation could in time sort some of the surplus rub-bish no longer sailing to China, but they have been incremental.High labour costs make hiring enough human sorters to dealwith Western waste volumes prohibitively expensive. Becausethey, too, cannot rely on cheap labour, Western reprocessingfirms need cleaner inputs than their Chinese counterparts, soshun a lot of what MRFs currently spit out. Even if they did not,their capacity is insufficient to deal with the glut. Incineratorsand landfill will take some of the surplus waste. But the capacityof both is limited. Building a new incinerator costs upwards of$200m. Landfills are being gradually regulated out of existence,with manyplaces, includingCalifornia and the European Union,mandating cuts to the volume ofwaste being landfilled.

The prohibition isnot the onlywayin which China is affect-ing the scrap trade. The trade spat provoked by American tariffson imported steel and aluminium (which exempt scrap) has al-ready prompted trading partners to impose retaliatory levies (in-cluding on recovered metals). If the current tiffs escalate into a

China

Exit the dragon

A Chinese ban on imports of rubbish is shaking up theglobal junk trade

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full-blown trade war, scrap—$109bn of which crosses borderseach year—would suffer along with many other products.

The ban is likely to prove more of a long-term headachethan the trade spat. It is part of a broader clampdown on pollut-ing industries championed by China’s all-powerful president, XiJinping. It aims to banish “solid waste with majorenvironmentalhazards” and thus prevent “intense public reaction”. That willdeprive many countries of the destination of choice for theirwaste. But, though it has disrupted the whole global scrap trade,many experts are already seeing a silver lining. Activists and ad-vocates of “circularity” say that it is forcing rich countries to re-thinkwhat theydo with theirwaste nowthata chunkof it can nolonger be swept away overseas. It is in that way forcing longer-term change.

Slow boat or junk?China came to dominate the global rubbish trade in much

the same way it has come to dominate all areas of trade. It has aninsatiable appetite for resources, including second-hand ones, tofeed its boomingeconomy. China’s $24bn-worth ofrecycled-ma-terials imports are a quarter of the total traded globally, and upfrom $12bn a decade earlier. On the eve of the ban, more thanhalf of the world’s used plastic, paper and cardboard—around32m tonnes each year in all—sailed to China, chiefly from the richworld. Plenty of metal scrap went there too, especially copper towire cities or manufacture electronics.

It was also helped by the nature of its trade flows. Bulkyscrap shipments to Chinese ports were only affordable thanks to“backhauling”. Container vessels had crossed the Pacific ladenwith Chinese products for North American markets. Rather thanlet them sail back empty, shipping companies ferried scrap forthe return leg at rock-bottom prices. Around half of all west-bound trans-Pacific container traffic was rubbish for recycling.

Because of the ban, shipping companies, whose low mar-gins were offset by massive volumes, now risk losing the back-haul trade. Drewry, a shipping consultancy, estimates that theban could jeopardise 4m-5m containers sailing west across thePacific annually. That is equivalent to 3% ofworldwide containertraffic. Port authorities from New York to California are rewritingtheir long-term strategies to take account of the disruption.

Even China is not immune from the impact. Its operation,dubbed “National Sword”, looks distinctly double-edged, strik-ing at a thriving domestic reprocessing industry—and manufac-turingmore broadly. Western scrap-industryveteransexpress as-tonishment at the Chinese authorities’ willingness to sacrificethe needs of its industrial base, parts of which rely heavily on re-processed materials. China recycled 85% of the 7m tonnes ofplastic it imported in 2016 (the rest went to landfills or was incin-erated). Many Chinese reprocessing firms are now fearful aboutthe future.

Some also see the benefits. Liu Jianguo, an expert on wastemanagement at Tsinghua University in Beijing, calls the ban“good news for domestic waste recycling”, for the same reasonthat it will help Western countries. It will force the Chinese in-dustry to change, adapt and be less reliant on imported foreigntrash (though there isa danger in the short run that some Chinesereprocessors, starved suddenly of imported inputs, could fold,resulting in the dumpingorburningofeven more rubbish than itdoes already).

The China ban has, however, given a boost to one group ofWestern entrepreneurs. In 2017 Rashad Abbasov co-foundedScrapo. It is an online marketplace that matches buyers and sell-ers of second-hand polymers in different countries. Since its in-auguration in November, suppliershave posted offers to sell 1.5mtonnes of recovered plastic on Scrapo. It now has more than

10,000 users, 70% outside America. Just 6% are from traditionalplastic-waste importers like China, Indonesia or Vietnam.

Other parts of the trade are also moving online. Scrap Mon-ster, a platform for tradingrecovered metal, has50,000 registeredusers. MerQbiz is a digital platform to streamline the $30bn an-nual reused-papermarket. Another forum, the Materials Market-place, allows American manufacturers to exchange factory by-products and leftovers more easily. State-level versions exist inOhio and Tennessee. Two years ago the project spawned an off-shoot in Turkey. Another is under development in Vietnam. Ad-vocates of “circularity” welcome such initiatives, which aim towring the most out of available resources. The Chinese ban hasdone them all a favourbyenablingrecovered materials to flowtothe highest bidder—and so the highest-value use. But it has alsoexposed the shortcomings of the recycling industry. 7

None of that came from Wisconsin

IN 2001, WHILE studying economics at the University ofCalifornia, Los Angeles, Dan Kurzrockgot into beermaking.

He soon discovered that for every five-gallon (19-litre) batch ofale, the brewing process yielded up to 22lbs (10kg) of mulch-likespent grains. “It felt like making food,” he recalls. And it didn’ttaste all bad, either—after all, it was wholesome fibres and pro-tein left over from a process which extracts sugars from cerealsfor fermentation. If he was producing kilograms of it, how muchgoodness was going to waste at breweries?

The answer was a lot. A rough calculation based on the vol-ume ofbeer brewed in America puts the total spent grain at1.4mtonnes a year. Large brewers often let local farmers pick up theby-products for livestock feed. But at craft breweries sprouting incities all over the world, these would often head straight for thelandfill. “It would be a commodity if there were a market,” MrKurzrockremembers thinking. So he set out to create one.

In 2012 he and Jordan Schwartz, a college chum, foundedReGrained to commercialise a recipe they developed to turn

Recycling

Modern-day alchemy

Business-minded fans of the circular economy aretrying to reduce, reuse and recycle

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spent grain, collected free from local craft brewers in San Francis-co, into energy bars. In September they inaugurated a new fac-tory near the city to cook up the main ingredient and sell to foodproducers. Griffith Foods, a big producer of doughs and condi-ments, has invested in the company. Barilla, an Italian firm, isworking with ReGrained on a line ofbeer-derived pasta.

Recycling—for that iswhatReGrained does—isnothing new.The word (at least its English version) datesback to the 1920s but the activity is as old asmankind. As the variety of materials churnedout by the modern economy has increased,however, so have attempts to repurpose evermore of them.

Fans of the “circular economy” relishepiphanies such as that which led Messrs Kurzrockand Schwartzto their idea. They lower the economy’s environmental footprinttwice over: reducing the amount both of natural resources (cere-als to make a snack) and of refuse. They take something peoplewould pay someone to take off their hands—waste—and convertit into something people are willing to purchase—a resource.

The trick is performing such alchemy profitably and atscale. It is already happening. In most rich countries a third ofglass and two-thirds of paper come from recovered materials.Around half of aluminium sold in North America each year isderived from scrap. Each day the United States alone churns out25 Eiffel towers’ worth of steel and other ferrous scrap. Recycledcopper satisfies two-fifths of global demand for the metal. Thereare reasons to believe that market forces will drive similar devel-opments for other materials. Electronic and electrical deviceslook particularly ripe for harvesting. But plastics are the biggestproblem, with only10% currently recycled.

Diamonds on the soles of their shoesNearly everythingcan be recycled, says Tom Szaky of Terra-

cycle. It is not just things like plastic bags or textiles, which a re-cent survey found one in two Britons incorrectly assumes to beunrecyclable. Mr Szaky’s firm has devised a way to turn cigarettefilters, made of a polymer called cellulose acetate, into sturdyplastic boarding. Plastic polymers can be chemically unwoundinto their original hydrocarbons. In April a Dutch company start-ed selling training shoes with soles made from chewing gumscraped offthe streets ofAmsterdam.

Some people will pay a premium for products that salvetheir conscience. The environmental appeal is an inherent partofthe brand. Formost customers“environmental considerationscontinue to be ‘nice to have’,” says Gavin McIntyre of EcovativeDesign, which uses fungi to turn agricultural waste into high-grade composite materials. Crucially, they are not yet ‘musthave’. The central concern is price.

Recycled materials compete with virgin ones, so recyclersare hostage to volatile raw-material prices. Recyclers’ costs de-pend on the cost of collection, distribution and processing ofscrap, which tend to be stable. Commodity prices—which deter-mine the price for recyclers’ output—can swing wildly. When

prices of primary resources drop suddenly, recovered materialsare no longer competitive. This can drive recyclers out of busi-ness. The uncertainty discourages long-term investments, keep-ing most recycling firms small and inefficient. That in turn con-strains the supply of recycled materials. Big manufacturers wanta steady supply of materials, which recyclers therefore find ithard to guarantee.

Things such as glass, paper and many metals have brokenout of this vicious circle, typically once economies spewed outenough of them to make it worthwhile to recycle. Reprocessingtechnology had often been around for a while—paper was beingrecycled in the 19th century—but greater availability of sourcematerials encouraged efficiencies. That in turn spurred demandfor these materials and itself encouraged further improvementsin recovery. In other words, a vicious cycle turned virtuous.

In some areas, a similar virtuous turn looks not just possi-ble but imminent. Last year scholars at United Nations Universi-ty in Tokyo calculated that the 45m tonnes of defunct fridges, ra-dios, smartphones and the like discarded annually worldwidecontain $55bn-worth of gold, silver and other valuables. Accord-ing to research from Tsinghua University in China and Macquar-ie University in Australia, it costs Chinese recyclers of defunctelectronic devices (known as “e-waste”) $2,000 to extract a kilo-gram ofgold from old television sets; mined from the ground, themetal fetches $40,000 a kilo. The recyclers outperform minerseven after strippingout the $13 that the Chinese government sub-sidises them per television. Facts like these help explain how theAmerican e-recycling business went from less than $1bn in 2002to more than $20bn in 2016, and why today’s 20% recycling ratefor e-waste looks poised to rise.

Not all materials are as precious as gold and silver. But pro-gress is visible even in areas such as food waste, the world’s mostcommon form (see chart, below) and construction debris. “An-aerobic digestion”, in which organic matter is broken by mi-crobes in the absence of oxygen, produces biogas which can beburned for energy or heat. In 2009-16 the number of biogasplants in Europe grew from 6,000 to 17,700—heating houses withold banana skins and uneaten porridge. It still produces only 2%of EU electricity but the share looks set to grow as more govern-ments tackle food waste and encourage renewable energy.Meanwhile, Ecovative is an example of a company that turnsfood waste into durable goods, such as high-grade faux leather.ZEN Robotics of Finland sells smart disassembly lines for con-struction rubble where computer-vision algorithms identifypieces ofmetal, cardboard or other valuables for a robotic arm topluck from the conveyor belt. Companies like Jiangsu LVHE inChangzhou, outside Shanghai, use the system to recover materi-als for reuse or resale, and bake the remaining debris into bricks,tiles and other building wares.

The problem for plastics is that hundreds of everyday po-lymers are incredibly cheap to make from petroleum, and com-parativelycostly to extract from the waste stream compared withless heterogeneous materials like paper, glass or even metals.This has kept plastics stuck in the negative feedback loop of lowdemand, low investment and low supply. The market will onlydevelop if there isan increase in demand, thinks Jean-Marc Bour-sier, vice-president of Suez, a giant French waste-managementand recycling company.

Where you, bin?

Source: World Bank

Waste composition, worldwide, 2016, %

0 20 40 60 80 100

Food Paper andcardboard Plastic

GlassMetal Rubber and leather

Wood

Other

In 2009-15 the number of biogas plants in the EUgrew from 6,000 to 17,700—heating houses with oldbanana skins and uneaten porridge

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PLASTIC DEBRIS IN the ocean has surfacedrecently as a prominent environmentalconcern. Other pollution takes a greater tollon the seas—fertiliser run-off can causedamage worth $200bn-800bn a year, com-pared with $13bn for marine plastic litter,according to one estimate. Yet palpable,garish plastics nevertheless attract the mostattention. Rich-world television audiencesgasp at harrowing images of sea creaturesensnared in disposable bags. Citizens of poorbut pretty places worry that rubbish washedup on once-pristine beaches puts off wealthysun-seekers.

The best solution is better rubbishcollection in Asia. Just ten countries, eight ofthem Asian, spew two-thirds of all marineplastic litter originating on land (ships shedsome, too, particularly old nets). Fully 90%of the stuff discharged by waterways comesfrom ten rivers, two in Africa and the rest inAsia. Around 1.5m tonnes of plastic flowsdown the Yangzi river in China each year,compared with 18 tonnes from the Thames.Scooping all this up will be hard.

In Hvaler, a small shrimp port 110kmsouth of the Norwegian capital, Oslo, HansOlaf, a craggy-faced skipper, rememberswhen he had to pay the local waste-manage-ment company to take away rubbish hecaught in his nets. Most people just dumpedit overboard instead, he says. Last yearHvaler was chosen as one of a dozen Norwe-gian harbours piloting a programme to makeit simpler to discard trash in port than at sea.The garbage, mainly old fishing gear, iscollected free by a Latvian firm which con-verts it into new nets.

“Fishing for litter” schemes exist in anumber of North Sea fishing nations, in-cluding Scotland, England and the Neth-erlands. A government-sponsored one in theIndian state of Kerala has hauled in morethan 65 tonnes of plastic waste since its

launch last year. The material is shreddedinto plastic chips, which local constructionfirms buy to strengthen asphalt.

In March the port authority in Osloapproved a plan to clean up the litter fromthe Oslo fjord. To pinpoint underwater is-lands of rubbish, it turned to Blueye, a ma-rine-technology firm based in Trondheim.Blueye has devised an underwater drone,tethered to a battery unit, which can be usedfor all manner of subsea inspection down to adepth of 150 metres. Its drones are consid-erably cheaper—and safer—than sendinghuman divers or larger submersibles, sodozens can be deployed. A trial this springshowed promise. Next year an electric-powered ship with a crane will join the dronefleet to salvage the sunken trash.

Another scheme is The Ocean Cleanup,a Dutch charity backed by crowdfunders,deep-pocketed endowments and tech ty-

Clearing the waves

Serious efforts are being made to clean up the oceans

coons like Peter Thiel. It has designed asystem to trawl for plastic in the vast mid-ocean gyres where currents funnel all mannerof flotsam. It is huge: a drifting bow-shapedboom 600 metres long with a three-metreskirt dangling underneath. Because it ispropelled by wind and waves, as well as thecurrent, it outpaces the plastic detritus thatis driven solely by the ocean. It thereforescoops up the litter as it moves.

After successful trials in the North Sea,the first full-size stage sailed from San Fran-cisco on September 8th towards the Alaska-sized patch of garbage in the middle of thenorth Pacific. Boyan Slat, The Ocean Clean-up’s boss, believes that, once fully deployedin 2020, 60 such contraptions, costing $6mapiece, can mop up about 40,000 tonnes ofplastic, around half of the total, within fiveyears. He thinks that corporate sponsors willhelp foot the bill. Anchors aweigh.

Got some flotsam

The Chinese ban may in time provide just such a jolt, byforcing countries used to dispatching their recovered plasticsabroad—as Ireland has done with 95% of its total—to reprocessmore at home. But even before the prohibition entered into forceat the start of the year, rising public angst over plastic pollutionhad begun to concentrate policymakers’ minds on how to makereused plastic more attractive relative to the virgin kind.

Fiscal incentives are one way. For instance, exempting sec-ond-hand polymers from value-added tax is defended on thegrounds that the primary material has already been taxed. Aswell as being desirable to combat climate change, carbon taxesfavour less energy-intensive recycled plastic production. More

hands-on proposals are also being aired. The EU’s new recyclingtargets are one example, especially now that poorly recycledplastic can no longer be palmed off on China. Campaigners arealso pressing the EU to mandate a minimum recycled content inplastic containers, as California has had since 1991.

“Extended producer responsibility” (EPR) has become aparticular favourite among campaigners and policymakersalike. EPR rules make manufacturers and brands contribute tothe net cost of their products’ disposal once consumers are donewith them. This cost is lower if the products can be sold to recy-clers. The number of such policies rose from a few dozen in theearly 1990s to nearly 400 worldwide by 2013, according to the

The Economist September 29th 2018 11

2

1

SPECIAL REPOR T

A SINGLE, BARE lightbulb helps illuminate part of the Liv-ermore-Pleasanton fire department on the eastern edge of

the San Francisco Bay area. It does not look out of place, if a littledim. But it is no humdrum piece of electrical equipment. For theCentennial Light, as it is known, has been burningalmost contin-uously since 1901. To proponents of a less resource-intensive,more circular economy, the bulb (pictured) shows that everydayproducts can be affordable and built to last.

Not everyone has an interest in such longevity, however. In1924 a cartel of big lightbulb manufacturers, including GeneralElectric, Osram and Philips, agreed to keep lifetimes of their pro-ducts to 1,000 hours or so, down from an average of2,500 hours,in order to sell more of them. Many companies still make it diffi-cult, or even illegal, to mend their products. This has provokedpush-backfrom customers demanding a “right to repair”. French

prosecutors are investigating whether Apple, which has admit-ted slowing older iPhones with software upgrades, deliberatelyintended to shorten the product’s lifetime to make customers re-place it—a criminal offence in France. Legal or not, such activitieslookeconomically inefficient and environmentally foolish, eventhough they may make perfect sense for individual companies.The question is how to persuade those firms to go against theirapparent self-interest in order to create a more circular economy.

Forecasts can help focus minds. Last year the InternationalResource Panel, an independent scientific body under the aus-pices of the UN Environment Programme, suggested that wiseruse of resources could add $2trn, or roughly the GDP of Italy, tothe global economy by 2050. Limiting food waste alone couldcontribute $252bn a year by 2030. Analysis by Circle Economy, aconsultancy, found that, of the 84bn tonnes of materials con-sumed each year by the global economy—including biomass,sand, metals and fossil fuels—barely 9% are reused.

Workers need not lose out, either—in their jobs or as shop-pers able to snap up more durable smartphones. A series of re-ports for the Club of Rome, a think-tank, found that, if productlifetimes were doubled and half the virgin materials consumedtoday replaced with recovered ones, the resultingeconomic shiftwould create 200,000 net new jobs in Spain and 300,000 inFrance. (Improvingenergyefficiencyand replacinghalf ofall fos-sil fuels used with renewables would add another 565,000 jobsacross all the countries studied.) Most new work would come ingreen industries such as recycling. After reviewing 65 studies onthe effects of a more circular economy, academics at the Univer-sity of Augsburg found that related job creation outweighs jobdestruction. A report by McKinsey said the global net employ-ment gains would be anywhere between 9m and 25m jobs.

The environment would benefit, with fewer mines, moretrees and less need for landfills and incinerators. Recycling alu-minium saves 95% of energy compared with smelting new met-al. The savings are 88% for plastic, 60% for steel and paper, and38% for glass. According to Sitra, Finland’s state-run innovationfund, raising recycling rates for aluminium, steel and plastic by50-80% would cut European industrial emissions, which ac-count for one-tenth of the continent’s total, by a third.

However, what makes sense environmentally may notlook good for the bottom line of an individual company or re-gion. The most obvious casualties would be purveyors of fossilfuels, minerals, agricultural produce and other primary materi-als, the demand for which would suffer. If everything else re-

Looking ahead

What goes around

Introducing a more circular economy is necessary, butit will meet with resistance

OECD. Nearly all of the club’s 34 mostly rich members now havethem for different types ofproduct, as does Taiwan. Latin Ameri-can countries like Brazil, Colombia and Chile have them, too.South-EastAsian countriesare workingon them. Lastyear Chinaunveiled a plan to draft comprehensive EPR legislation by 2025.Such policies may in time bring the plastics recycling rate from10-20% todaycloser to the 60-80% rate currentlyenjoyed byothermaterials such as aluminium, steel and paper.

All of this should help boost recycling. But some firms haveambitions to embrace the other two components of the circular-economy triad, by reusing products rather than materials, andeven reducing production altogether. Companies like the Re-newal Workshop are putting a new spin on second-hand cloth-ing. They take old garments and refashion them into new items,with the approval of the original brands (for the Renewal Work-shop these include North Face). Darrel Stickler, Cisco’s head ofsustainability, discerns a promising second-hand market for thecompany’s networking gear, $3bn-worth of which is bought andsold each year. Cisco’s share of this is tiny but could be much big-ger, Mr Stickler thinks.

Meanwhile, some big manufacturers are reorienting frommaking products to selling services. Martin Stuchtey of System-IQ, a consultancy, says that nine out of ten boardrooms he visitsare debating “how to sell freshness, not fridges; kilometres, nottyres”. Rolls-Royce has sold “power by the hour” rather than air-craft engines for years. Rather than flog LED lamps Philips leasesthem to some customers—including Britain’s National Union ofStudents—with a promise to keep buildings illuminated. By 2020it wants to double to 15% the share of its profits from such con-tracts, which can lock in customers for 20 years. Safechem, achemical company, rents out tanks of fresh solvent rather thanselling it to manufacturers for cleaning metal parts. It then col-lects the tanks, purifies the contents and rents them out again.

Business models like these are grist to the mill of circular-economy advocates. They are presented as proof that lower re-source intensity need not mean smaller profits. But their wide-spread adoption would not be painless for everyone. 7

WAS TE

tho, whose citizens waste little,consumption can increase by alot before it comes close to West-ern levels—especially if it is ac-companied by improvements inrubbish collection. African gar-ment-workers deserve assis-tance, but shoppers there bene-fit from cheap, decent-qualityforeign wear. And “circular” in-dustries create employment intheir own right.

Even if Club of Rome orMcKinsey forecasts prove wideof the mark, history teaches thatreshaping the economy createsmore work than it destroys.Waste disposal generates just 0.1job per 1,000 tonnes, comparedwith two jobs recycling thesame amount, according to onestudy. A single Kenyan e-recy-cling programme is estimated tohave generated over 2,000 jobswithin four years of its launch.Recycling and repair industriescould go global, too. Platformslike Scrapo or MerQbiz lubricatethe exchange of recyclablesacross borders, showing that cir-cular economies are not inher-ently protectionist.

The right response is therefore to experiment, not eschewresource efficiency. As this report has illustrated, there are signsthat this is happening. Cities in the developing world are tryingto get better at collecting rubbish and making sure that as little aspossible goes to waste. The Chinese import ban is stirring manypeople in the West to relearn how to recycle. Campaigners andentrepreneurs are chivvying them along. Governments, espe-cially in the West, are crafting “circular” strategies. By 2035 all EU

states will be required by law to recover 65% of their rubbish,from an average of 40% today. America under Donald Trump isan exception, but American cities and states are compensatingby helping people sort their rubbish and send less to the landfill.

Yet, while rich countries are cleaning up at home, they areonly beginning to deal with the fact that (as with carbon emis-sions) they have exported their throwaway Industrial Revolu-tion model around the world, outsourcing their waste to devel-oping countries. Westerners continue to enjoy products that aremade elsewhere, and whose disposal does not affect them per-sonally. Rather than being smug about how well they are doingat home, they need now to encourage the developingworld in itsquest for a less wasteful growth model.

Some middle-income countries appear willing to listen(see chart). China’s latest five-yearplan reaffirms its commitmentto a “circular economy” and last year’s party congress called forthe creation ofa “waste-free society”. Indonesia, Nigeria and oth-er emerging economies are emulating developed ones by mak-ing producers help pay for managing the waste created by theirown products.

Most have a long way to go before they emulate Taiwan.Poor countries must prepare to cope with an increase in waste asthey develop a middle class consuming at Western levels. Onlywhen they see that proper handling of solid waste can aid pros-perity will the global tide of rubbish be stemmed. 7

12 The Economist September 29th 2018

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The world economy October 13thAustralia October 27thMonopolies & competition November 17thTQ: Towards zero carbon December 1st

2 mained constant, eliminating 1.3bn tonnes of food waste couldmean $750bn less in sales for farmers—the value which the UN’sFood and Agriculture Organisation ascribes to all the foodspoiled or lost annually between farm and fridge. More durableconsumer products could mean that fewer have to be made, po-tentially hurting manufacturers’ volumes. More Uber rides mayultimately lead to fewer people buying cars of their own. Lessneed to ferry merchandise could hit shipping companies, too.The Club ofRome study found that, in Poland, where many peo-ple continue to be employed in agriculture, more productive useof resources could potentially destroy jobs overall.

Politicians in most rich countries may calculate that repatri-ating offshored factory jobs to plants back home where recov-ered materialsare reprocessed isa vote-winner. But it maybe lessappealing to their counterparts in poorer places where workersfound employment in manufacturing. Research by Garth Frazerof the University ofToronto found that clothes donated to Africaharmed African garment-makers. Between 1981 and 2000 sec-ond-hand importsexplain two-fifthsofthe decline in African ap-parel production and half of the fall in garment-industry em-ployment. South Africa has restricted imports of used Westerngarb. Six countries of the East African Community are consider-ing a ban. China already has one.

You can’t refuseThis leads to a final concern about “closing the loop” of cir-

cularity: that it can ring-fence parts of economy from globalisa-tion. As Mr Abbasov of Scrapo laments, the circular economyrarely crosses borders. Sometimes, as in the case of the Chineseban on foreign recovered plasticand paper, ring-fencing seems tobe the explicit objective. But it can also be an unintended conse-quence. New repair shops would by their nature be more local.Recyclers often gripe about national and international ruleswhich, bynotdrawinga cleardistinction as to what is hazardous,raise transport costs and hamper trade. For second-hand elec-tronics, which are treated as waste even if they are in perfectlygood working order, regulations make it several times costlier tofreight within most countries and almost impossible to sendabroad. “Our industry has been in almost constant strife withregulators,” grumbles Ranjit Singh Baxi, president of the Bureaufor International Recycling.

Such concerns are real. But they are not insuperable. For astart, other things are never constant. Populations grow; by 2050Earth will have 2bn more consumersand mouths to feed. Aspeo-ple become richer, they consume more. In poor places like Leso-

Trash and cash

Source: World Bank *Purchasing-power parity

Waste generation and GDP

GDP per person, 2016, constant 2011 $’000 at PPP*

Was

te g

ener

atio

n pe

r pe

rson

,20

16 o

r la

test

ava

ilabl

e, k

g

0

200

400

600

800

1,000

0 20 40 60 80 100 120

France

Poland

Australia

Brazil

Canada

China

Denmark

India

Iran

Italy

Japan

Luxembourg

NorwayQatar

South Korea

Russia

Switzerland

Timor-Leste

Britain

United States

The Economist September 29th 2018 45

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

Economist.com/world/middle-east-africa

1

IT IS clear whom President Donald Trumpblames for the Middle East’s problems.

Iran’s “corrupt dictatorship”, he told theUN General Assembly on September 25th,“sows chaos, death and disruption” in theregion. It used the economic benefits of itsdeal with America and other world pow-ers, which curbed Iran’s nuclear pro-gramme in return for sanctions relief, toraise military spending and support terro-rism, he claimed. So his administrationpulled America out of the deal in May andlaunched “a campaign of economic pres-sure to deny the regime the funds it needsto advance its bloody agenda”.

Iran has responded, as usual, with de-fiance. Hassan Rouhani, its president (pic-tured), insisted he would not meet MrTrump, denounced his “xenophobic ten-dencies resembling a Nazi disposition”and predicted victory over America. “Theend of this war will be sweeter than theend of the eight-year war,” said Mr Rou-hani, referring to Iran’s warwith Iraq in the1980s, which left 600,000 Iranians dead.Though considered a pragmatist, hesounds much like Iran’s hardliners, whoopposed his nuclear deal and see no roomfor compromise with America.

Mr Trump, though, is not the only onechallenging the regime. Several gunmenkilled at least 25 people, including12 mem-bers of the Islamic Revolutionary GuardCorps (IRGC), the regime’s praetorianguard, at a military parade in Ahvaz, a city

ences with Israel in order to take on Iran, ashared enemy. The White House is nowfull of officials who have spent much oftheir careers calling for regime change inIran. Some senior members of Mr Trump’steam have supported the Mujahideen-e-Khalq, a cult-like dissident group that wasuntil recently considered a terrorist organi-sation in Europe and America, and pro-vokes revulsion even among reform-minded Iranians. John Bolton, Mr Trump’snational security adviser, has hailed it asIran’s “viable opposition”. On September23rd an illustrious group of former Ameri-can officials warned that Iran was beingunwisely forced to choose between “capit-ulation or war”.

Iran’s sense ofsiege is likely to grow. OnNovember 4th America will impose newsanctions aimed at Iran’s oil industry. As aresult, Japan, South Korea, Sri Lanka andEuropean countries plan to slash oil im-ports from Iran. America might offer cheapoil from its own reserves to induce India tofollow. Though European states continueto uphold the nuclear deal, some have leftIran to twist in the wind. A French state-owned bank has dropped plans to financeexports to Iran, while the French govern-ment has restricted diplomatic travel toIran and suspended the appointment of anew ambassador. Iran is seeking help fromRussia and China. But Russia has gleefullyfilled the gap left by Iran in the oil market,while China is focused on its trade warwith America.

The government’s obsession with for-eign plotsdeflectsattention from problemsat home. Khuzestan holds the vast major-ity of the country’s oil reserves but is poorand neglected. Arabs say they are kept outof local government and that the IRGC

steals the region’s water as well as its oil. Aplethora of dams has diverted rivers thatflowed to the Gulf from central Iran, turn-

in the south-western province of Khuzes-tan, on September 22nd. Two differentgroups claimed responsibility. The firstwas a splinter of a local Arab separatistgroup, the Arab Struggle Movement for theLiberation of Ahvaz. But the Islamic Stategroup, which a yearago stormed Iran’spar-liament in Tehran, then promptly claimedthe attack too, perhaps lying to boost itsstature. The regime quickly, and with nohard evidence, blamed America and its re-gional “puppets”—Saudi Arabia, the Un-ited Arab Emirates (UAE) and Israel.

The usual suspectsIranian officials are fond of lurid conspira-cy theories, but it is not hard to see whythey suspect outsiders. Khuzestan is hometo some 2m Arabs (most Iranians are Per-sian). In recent years Arab broadcastershave stoked up coverage of Iranian minor-ities, keenly supporting Arabs “under oc-cupation by Persian forces”. Bahrain hasgone as faras to name one of its streets Ara-bian Ahvaz Avenue. One ofthe groups thatclaimed responsibility for the attack did sothrough Iran International, a television sta-tion based in Britain and funded by Saudiinvestors. Last year Muhammad bin Sal-man, Saudi Arabia’s crown prince and defacto ruler, promised to take his country’sfight “inside Iran”.

In Iran’s eyes this Arab offensive is partof a broader, ominous front. Saudi Arabiaand the UAE have set aside their differ-

Iran and the world

Isolated and besieged

Iran’s problems are mounting. Donald Trump is just one

Middle East and AfricaAlso in this section

46 The crackdown in Egypt continues

46 A fight over power in Lebanon

47 Upgrading Syria’s air defences

47 South Africa’s struggling economy

48 Preserving Somaliland’s heritage

46 Middle East and Africa The Economist September 29th 2018

1

2 ing Khuzestan into a dust bowl. Protestshave been brutally suppressed. Groupsvowing to “liberate” Ahvaz claim to sabo-tage pipelines and shoot at officials.

The malaise is countrywide. Iran’s cur-rency, the rial, hasslumped in the past year.The poor, long the regime’s base of sup-port, have to hoard tinned food. Officialsare stealing and extorting more to make upfor their shrinking salaries. Foreign busi-nessmen, who flocked to Iran after the nuc-lear deal, have left. This year’s intake at theFrench school in Tehran was down from350 to 200. Many Iranians want out, too.Such is the demand for work visas at theGerman consulate that applicants have towait two years for an interview.

Years of sanctions have made Iran de-velop a “resistance economy”, which is di-verse and in many areas self-sufficient.Prices of basics have risen, but by far lessthan they might have if Iran depended onimports. Cynics note that although the fall-ing rial makes people poorer, it makes thegovernment stronger, since Iran earns itsoil revenue in foreign currency. Its reservescan survive two more years of Mr Trump,says Mr Rouhani. But suffering Iraniansmay prove a bigger threat to the regime.7

PITY the future historian who tries to de-cipher the workings of Egyptian courts.

On September15th police unexpectedly ar-rested Gamal and Alaa Mubarak, the sonsof Hosni Mubarak, Egypt’s deposed dicta-tor. No one knows why they have beenjailed again. Their stock-manipulationcase has dragged on since 2012, and theyhave been free on bail for three years.Some call it a shakedown: the Mubaraksare among the few old-regime figures whohave yet to trade wealth for freedom. Oth-ers fear a broader campaign against therich. The news sent Egypt’s main stock in-dex tumbling 3.6%, its biggest single-dayloss since January last year.

It is hard to discern truth in Egypt thesedays. President Abdel-Fattah al-Sisi’s gov-ernment is opaque, and there are few inde-pendent journalists to question it. Under anew law, even popular social-media ac-counts can be regulated as if they werenewspapers, which are themselves horri-bly over-regulated. A pro-government tele-vision host has been off the air for weekswith no explanation. A rumour on Whats-App claims that 22 military officers werequietly arrested this month. The facts of

these stories are almost irrelevant. Whatmatters is that the rumours circulate.

Mr Sisi ought to be comfortable. Hewon a second term in March with 92% ofthe vote. After years of stagnation, theeconomy is growing at 5.3% a year. A newcapital city is rising in the eastern desert.Energy firms have discovered vast reser-voirs of natural gas. Tourists are comingback. Security has improved, even in therestive Sinai peninsula. Though the consti-tution says Mr Sisi cannot serve anotherterm, his allies in parliament want to re-move the limit. They will probably suc-ceed. “There will be a lot ofnoise, and thennothing,” says Anwar Sadat, a former MP.

Yet, for the average Egyptian, all thiscould be happening on another planet.Millions of them cheered when Mr Sisiseized power in a coup in 2013. All theyhave known since then ishigherprices andunceasing repression. The latest jolt was anew electricity tariffin July, the third big in-crease in four years. In the hot summermonths, prices jumped by up to 43%. SomeCairenes were hit with bills close to 1,000pounds ($56), a quarter of the average sala-ry. Weary bill collectors recount beingchased out oftenement buildings by angryresidents. Shops and restaurants come andgo every few months, their owners unableto make a living. “There’s a feeling of de-spair I’ve never seen before,” says a sea-soned foreigner visiting for the summer.

Most Egyptians keep their complaintsprivate. In August a retired diplomat, Ma-soum Marzouk, called for a referendum onMr Sisi’s rule. He was promptly arrested, aswere several other dissidents. Policegrabbed a geology professor, a critic of thegovernment, at a relative’s funeral andhauled him off to jail. The remnants of theopposition held a rare press conference todemand their release. It did not help. MrMarzouk and the rest are still in jail, theirassets reportedly frozen. On September8th an Egyptian court upheld 75 death sen-tences in a farcical mass trial of more than700 mostly Islamist defendants.

No one envies Mr Sisi’s position. He in-herited a mess and has made unpopulardecisions to reverse decades of bad eco-nomic policy. You do not have to be popu-lar to run an authoritarian state, but ithelpsto have the support of the elite. Businessleaders are nervous. Some of Mr Sisi’s me-dia allies are murmuring. Sami Anan, a for-mer army chief arrested for mounting abrief presidential campaign, now lan-guishes in hospital, hishealth failing. “Forageneral to be treated this way, it’s unthink-able,” says a Western diplomat. “[Sisi] hasmade a lot ofenemies.” 7

Egyptian politics

No one is secure

CAIRO

The longerAbdel-Fattah al-Sisi rules,the less he tolerates criticism

When Pharoah’s around, then you get down on the ground

FOR decades Lebanon has failed to pro-duce enough electricity. Some homes

endure blackouts for12 hoursa day. The un-stable supply makes it hard to do busi-ness—and frequently fries appliances.Many people use expensive generators tokeep the lights on. So when Karadeniz, aTurkish company, sent Lebanon a floatingpower plant and offered free electricityfrom it for the summer, it seemed like agood deal. The firm is hoping that the gov-ernment will extend a contract for two ofitsotherpowerbarges, which were alreadyin place. The new barge was meant as asweetener. But far from solving Lebanon’selectricity problems, it has highlighted thegovernment’s chaos.

As the vessel chugged across the Medi-terranean in July, a feud erupted amongthe country’s sectarian leaders. A Shiaparty, Amal, accused its rival, the ChristianFree Patriotic Movement, of using the shipto delayconstruction ofa newpowerplant

Dysfunctional Lebanon

Power boat

BEIRUT

Afeud overa floating electricityplantshows howpoorlyLebanon is run

The Economist September 29th 2018 Middle East and Africa 47

1

2 in the south, where it was first meant todock. Critics countered that Amal’s leadersfeared the barge would eat into the profitsthey make from their ties to the operatorsof diesel generators. Changing the vessel’sname from Aisha (a wife of the ProphetMuhammad who is reviled by many Shi-as) to the more Ottoman-sounding EsraSultan had little effect. So the ship dockedin Druze territory—until locals complainedabout pollution. It eventually sailed north,docking in a Christian-dominated area.

That the barge is necessary at all is a re-sult of the government’s incompetence. In2010 the Christian-led energy ministrydrew up plans to repair the country’s age-ingpowerplantsand build newones. Pow-er ships would make up for the temporarydrop in supply. Karadeniz’s barges arrivedin 2013. But the upgrades never wentahead, so the ships stayed. They have al-ready cost the heavily indebted country$1.9bn. The government seems unfazed. Itwants to double the fleet. Many believe thefree barge, which isdue to leave in October,will stay indefinitely.

The ruling elite sees more to lose thangain from reforming the energy sector.Over the past 25 years a whopping 9% ofpublic spending has gone to prop up Elec-tricité du Liban, the state power company.Most of the money has bought fuel fromfirmstied to currentand formerpoliticians.“This is really about their interests andthose of their cronies, and how they bene-fit from all this at the expense of the peo-ple,” says Sami Atallah of the LebaneseCentre for Policy Studies, a think-tank.

The government could save money byraising energy tariffs and reducing theft ofits electricity. Solar power is also an optionfor sunny Lebanon. Hiring two more pow-er barges until 2022, as the governmentwants, would cost $2.25bn and supplyabout 825 megawatts. The same amountcould pay for a 3-gigawatt solar plant,which would last 25 years, says Ali Ahmadof the American University of Beirut. “Ifwe could show our politicians how to begreen and corrupt at the same time, thenmaybe things would improve.” 7

Why the lights go out

Source: Energy Policy andSecurity Program, AmericanUniversity of Beirut

*Excludes technical and non-technical losses. Estimated

at 31% in 2017 †Forecast

Lebanon, peak electricity, gigawatts

0

1

2

3

4

2011 12 13 14 15 16 17 18†

Demand Generation*

Generated byTurkish barges

IF EMIGRATION is a barometer of confi-dence in a country’s future, then South

Africa, where a growing number ofpeopleare upping sticks, is in trouble. Privateschools complain about losing students asfamilies move abroad. More people areselling their homes in preparation for leav-ing (see chart). “Emigration sales” are a fix-ture of neighbourhood Facebook groups,with leavers peddling their patio furnitureand braais. But unlike previous waves, thisis not just white flight. There has been a bigincrease in black, coloured (mixed-race)and Indian people who are looking to go.Many cite declining opportunities.

There was a burst of optimism among

South Africa

Long walk togrowth

JOHANNESBURG

There are no quickfixes fora sorelyabused economy

Packing for Perth

Source: First National Bank

South Africa, emigration as reason for selling% of total home sales

2013 14 15 16 17 180

2

4

6

8

10

IT WAS “a chain of tragic circumstances”that led to the downing of a Russian spy

plane by Syria on September 17th, saidVladimir Putin, Russia’s president. Withthose words, Mr Putin seemed to acceptthe episode as an accident and absolve Is-rael of any blame. Israeli jets had earliercarried out air strikes on Syria’s territoryand appeared to be the intended target ofits air defences. But, as the days passed,Russia grew more belligerent. Its generalsclaimed that Israeli jets used the Russianplane as a shield (Israel has denied this).Then, on September 24th, Russia an-nounced plans to supply the Syrians withadvanced S-300 air-defence batteries, sig-nalling a shift in its regional strategy.

Since Russia intervened in Syria’s civilwar on the side of Bashar al-Assad, thecountry’s dictator, in 2015, it has sought toavoid clashes with Israel. In the past 18months Israel has carried out more than200 air strikes on Iranian-affiliated targetsin Syria. A “deconfliction” hot-line con-nectingIsrael’sair force headquarters in TelAviv with Russia’s operations centre atKhmeimim, in western Syria, has prevent-ed mishaps in the air. The military proce-dures were backed by a tacit agreement be-tween Mr Putin and Binyamin Netanyahu,Israel’s prime minister. Israel would nothamper Russia’s campaign to save Mr As-sad, and Russia would not prevent Israelfrom attacking Iranian targets in Syria.

Russia’s planned upgrade of Syria’s airdefences complicates that understanding.The S-300 is a formidable system with a ra-dar capable of tracking more than 100 tar-gets simultaneously, at ranges of up to300km. It would make Israel’s missionsriskier, which is why Mr Netanyahu haslongopposed transferofthe weapon to theSyrian government. (Russia already oper-ates the S-300 in Syria, but it has not used itagainst Israel.) Still, Israel says it will con-tinue strikingtargets in Syria. Its F-35 stealthbombers are capable of evading the S-300system, and destroying it. But ifRussian op-erators are working alongside ill-trainedSyrian ones, there is a riskofescalation.

Russia’s defence minister, SergeiShoigu, said the S-300 would be trans-ferred to the Syrian army within twoweeks. Some analysts doubt that will hap-pen. Under pressure from America and Is-rael, Russia tooknine years to send a prom-ised S-300 to Iran. It may see the threat ofthe transfer as a way to pressure Israel tolimit its intervention in Syria.

Russia has sought a balance between Is-rael and its foes in the Middle East. Mr Pu-tin was the first Russian leader to make anofficial visit to Israel (twice) and Mr Netan-yahu stood shoulder to shoulder with MrPutin ata Russian militaryparade thisyear.But the friendship did not stop Russia invit-ingHamas to Moscow, helpingIran with itsnuclear programme or arming Syria.

As Russia has become increasingly iso-lated from the West, the importance of Is-rael as a source of technology and politicalsupport has grown. The Kremlin has beencareful to limit anti-Israeli rhetoric in its de-nunciations of the West. After the down-ing of its plane in Syria, Russia struck thetone ofbetrayed trustand regret; Russia dideverything to help and accommodate Isra-el, but was repaid with treachery, its com-mentators implied. Mr Netanyahu hasmade two calls to Mr Putin and sent his airforce chief to Moscow, but the Kremlinmight be looking for more favours from Is-rael to defuse the situation. 7

Israel and Russia

Missiles with amessage

JERUSALEM

What Russia’s upgrade ofSyria’s airdefences means for Israel

48 Middle East and Africa The Economist September 29th 2018

2

Somaliland’s heritage

Restorers required

IMPERIALISTS have long covetedSomaliland’s coast. Nowadays visitors

to Berbera, its main port, can stroll froman old American air base, pass a clutch ofbuildings where the British ran the terri-tory from the late 19th century untilindependence in 1960, then trundle on toMoscow Village, where Russian tech-nicians were billeted in the era whenSomaliland was absorbed into Somalia,and the Soviet Union was its key ally.

But imperialists come and go. It wasthe Ottoman Turks, lording it centuriesbefore the British, who have left the finestarchitectural mark. Their limestonevillas, with arched colonnades and lat-ticed windows, still line Berbera’s un-kempt streets. Whitewashed mosquesand even a synagogue can be glimpseddown its alleys. The port ofZeila, north-west ofBerbera, hosts a crumbling sev-enth-century mosque.

Africa’s eastern coastline, from Sudanto Mozambique, is dotted with architec-tural gems. Tourists love Zanzibar andLamu, islands offTanzania and Kenya.Several coastal towns ofSomalia are justas charming, including the old quarter ofMogadishu, the capital. But after decadesofdevastating civil war, few foreignersriskvisiting them. Somaliland, which

broke away from Somalia soon after acoup in 1991, should be a better prospect.It is relatively stable. Tour agencies al-ready offer trips. Restoring the Ottomanquarters could pep up its attraction.

Some visit Berbera to follow in thefootsteps ofElmi Boodhari, a poet wholived in the old quarter. In the 1930s herhapsodised in verse over an encounterwith a girl called Hodan and was said tohave pined to death from unrequitedlove. Hodan has been immortalised inSomaliland’s legend. The statelet’s tou-rism director happens to be Hodan’s son.

IfSomaliland were recognised as astate, it could askUNESCO, the UN’scultural agency, to declare Berbera andZeila World Heritage sites and win for-eign funds. Somaliland officials hope thatUNESCO may make an exception and letSomaliland join, as the Palestinian Au-thority was allowed to do in 2011.

Turkey could be asked to help. Today’ssuccessor state of the Ottomans haspromised to restore old buildings on theSudanese island ofSuakin, farther northup the Red Sea. The snag in Berbera is thatthe United Arab Emirates, a rival of Tur-key, has got there first and is building amilitary base. Perhaps the Emiratis couldspruce up the city while they are at it.

BERBERA

Who can repairSomaliland’s crumbling architecture?

Hoping to turn blue into greenbacks

South Africans when Cyril Ramaphosa(pictured) took over as president sevenmonths ago, after nine ruinous years un-der Jacob Zuma, who is due to stand trialfor corruption. But South Africa’s long-term fortunes are looking ever gloomier.The country entered a recession earlier thismonth—the first since 2009. Weak growthis expected next year. Joblessness is over37%, if one includes people who have giv-en up looking for work. The murder rate isalso rising. The country’s sovereign debthas been downgraded to junk by all of thebig credit-rating agencies except Moody’s,which has it a notch above sub-investmentgrade and will review it in October. Therand has fallen nearly 20% this year.

When announcing his recovery planon September 21st, Mr Ramaphosa admit-ted that “our economic challenges arehuge, and our difficulties are severe.” Buthis solutions are meagre. There will be nofiscal injection—because there is no moneyfor it. Instead, about 3% of the budget,which totals 1.67trn rand ($120bn), will bereallocated to create jobs and fuel growth.This will include support for black com-mercial farmers and small entrepreneurs.A 400bn rand infrastructure fund, drawnmainly from the existing budget andspread over three years, hopes to attractprivate investment. Details will be filled inwhen Mr Ramaphosa’s finance minister,Nhlanhla Nene, delivers the government’smid-term budget statement on October24th. Fitch, a ratings agency, doubts theplan will do much for growth.

An ill-educated workforce, inflexible la-bour laws and corruption will continue tohold South Africa back. But Mr Rama-phosa is at least moving ahead with re-forms. He has announced a review of elec-tricity, port and rail tariffs to reduce the costof doing business; and he promised tochange confusing visa regulations, whichhinder tourism. He will also make it easierfor skilled foreigners to work in South Afri-ca. New rules on mining aim to providemore certainty to industry.

Efforts by Mr Ramaphosa’s party, the

African National Congress, to change theconstitution to allow the expropriation ofland without compensation have added tothe economic uncertainty. A panel to ad-vise the government on land reform in-cludes some sober academics and agricul-ture experts, but it will take more than thatto reassure investors.

The president is stepping up his effortsover the next month, mindful of elections

due between May and August next year. Ajobs summit in early October will bring to-gether government, labour and businessrepresentatives; an investment summitwill follow later in the month. Meanwhile,many well-to-do South Africans seek sec-ond passports, the first step towards emi-gration. Whether they stay or go may de-pend on Mr Ramaphosa’s ability tojump-start the economy. 7

My hands are empty

The Economist September 29th 2018 49

For daily analysis and debate on Asia, visit

Economist.com/asia

1

THE one thing everyone knows aboutinsurance is, read the fine print. Indians

should take heed as Narendra Modi, theprime minister, rolls out what he is trum-peting as the world’s biggest health-insur-ance plan. Ayushman Bharat, meaningLong-Life India, aims to install a safety-netfor the poorest half-billion of India’s 1.3bncitizens, which is to say, for a big portion ofthe poorest people in the world. From nowon, the government promises, any familythat fits broad criteria of need will be eligi-ble to receive nearly $7,000 a year in hospi-tal expenses without paying a pennythemselves. Instead, the state will pay pre-miums to private insurers; eligible patientscan seek treatment at any institution, pub-lic or private, that has joined the scheme.

There is no doubt that Ayushman Bha-rat will bring immense relief to many. Onlya third of Indians now have any medicalinsurance, and government spending onhealth, equivalent to a measly 1.1% of GDP,accounts for a low 25% of health spending.The government spends far less on healthcare than its counterparts elsewhere in thedeveloping world (see chart). An analysisby Mint, a financial newspaper, suggeststhat every year some 36m families, or 14%of households, face an unexpected medi-cal bill equal to the entire annual living ex-penses of one member of the family. Alltoo often such surprise costs are enough totip families into penury.

Past government schemes have tried to

fits that go beyond reducing misery for thedowntrodden. The scheme, they say, aptlyreflects the reality that private care nowdominates Indian medicine, yet it alsoseeks to pool risk so as to reduce insurancepremiums and use the huge number of pa-tients to drive down the cost ofprocedures.The creation of a new class of consumersshould encourage the building ofhospitalswhere they were previously uneconomic,especially in remote rural areas.

Forcriticswho question the focus on in-patient treatment, rather than primary orpreventive care, government boosterspoint to Ayushman Bharat’s commitmentto create some 150,000 public “health andwellness centres” across the country.These are supposed to provide initial diag-noses and outpatient services, feeding pa-tients who need hospital care into the in-surance scheme.

But detractors have other reasons to de-tract. For one thing, the initiative looks aswoefully underfunded as previous efforts.The insurance scheme’s first-year budgetamounts to a miserly $300m (0.01% ofGDP), hardly the “world’s biggest” and in-deed not substantially more than was pre-viously budgeted for health insurance.Indu Bhushan, the CEO ofAyushman Bha-rat, insists that this will rise rapidly to per-haps $1.5bn a year.

Public-health experts concur that ameasured expansion, with plenty of roomfor trial and error, makes more sense than ahuge initial splurge. But even then, fundingwould amount to less than what Mr Modirecently doled out to India’s ailing, but po-litically potent sugar industry. If just one inten of the 36m families facing shock medi-cal bills every year made full use of thescheme, hospitals would be demandingcloser to $25bn in fees.

That may seem an over-estimate, butthe experience of previous insurance

tackle this problem, but with far lower lim-its on payouts. They have nonethelessbeen plagued by administrative troubles,understaffing and wide-scale fraud perpe-trated by hospitals, insurance companiesand patients themselves. Studies showthat families who availed themselves ofpublic insurance ended up spending moreof their own funds on health than thosewith no coverage, partly because of fol-low-up costs such as medicines, but alsobecause people felt less need to econo-mise, and started treating conditions theywould previously have just endured.

Ayushman Bharat is intended to re-place and vastly expand previous pro-grammes. Proponents note potential bene-

Hospital treatment in India

Modicare

DELHI

The government launches a lavish health-insurance scheme with a miserlybudget

AsiaAlso in this section

50 Banyan: China and the Vatican

51 Identifying Indians

51 Eugenics in Japan

52 An electoral upset in the Maldives

52 The Koreas’ island romance

Stunted

Source: WHO *Purchasing-power parity

Domestic health spending per person, 20152011 $’000 at PPP*

0 0.3 0.6 0.9 1.2 1.5

Brazil

South Africa

China

Thailand

Vietnam

India

Pakistan

BangladeshPublic

Private

50 Asia The Economist September 29th 2018

2

ONCE, the Catholic church in Chinawas not underground. In the 17th

century Jesuits were favoured advisers tothe emperors of the Qing dynasty. In the19th and early 20th centuries, abetted by agrowing Western presence, the churchthrived. But after two years of trying to es-tablish formal ties with the new Commu-nist regime, the Vatican gave up in 1951and resumed diplomatic relations withthe Nationalist government, now in exilein Taiwan. Foreign priests and bishopswere expelled from the mainland. ManyChinese priests fled to Taiwan.

In 1957 the Communist Party estab-lished the Chinese Patriotic Catholic As-sociation as an official overseer. The out-raged Pope Pius XII decreed that allbishops consecrating new bishops underits aegis would be excommunicated.Since then, a schism constantly threat-ened between China’s official Catholicchurch and the underground one loyal tothe Vatican. About half of China’s esti-mated 10m Catholics sit in each camp. Inthe coastal Mindong region of Fujianprovince, for centuries a Catholic strong-hold, an estimated 70,000 worshippersall belong to the underground church.

In the hope of healing the rift, on Sep-tember 22nd the Vatican announcedwhat it said was a breakthrough: China’sfirst recognition of papal authority. Nei-ther side is giving away the details of the“provisional” deal, but its outline can bedivined. China will give the Vatican a sayin the appointment of bishops in thestate-controlled church. In return, PopeFrancis has in effect acknowledged its le-gitimacy, even though his predecessorsspent much of the Middle Ages resistingthis sort of state interference. He is bring-ing seven bishops, excommunicated be-cause they were state-appointed, backinto communion with the church.

For the pope, the deal promises to opena sixth of the world’s population to thechurch’s message. He has long expressedthe desire to visit China, where the churchhas lost ground to Protestantism, the faithof the bulk of China’s estimated 60mChristians. It does not help that Catholi-cism is strongest in rural areas. The numberof adherents is slowly declining as young-sters head for the city to find jobs, says An-thony Lam of the Holy Spirit Study Centrein Hong Kong. There, mass may not be intheirnative language, and so is as unintelli-gible as Latin: there is no Cantonese ser-vice in Shanghai, for instance. Supportersof the pope think that, with more priestsand official blessing, this could change.

Yet Pope Francis’s move has plenty ofcritics. Many of the faithful are appalledthat he would recognise priests overwhose appointment the stridently atheistCommunist Party has a veto. And the dealcomes at a time when the party is crackingdown on religion on several fronts.

Many unofficial (mainly Protestant)churches have been razed and congrega-tions broken up. President Xi Jinping haslaunched a campaign to “sinicise” religion,

ie, toeliminate foreign influenceand instilloyalty to the party. Tibetan Buddhistsstruggle to practise their faith freely. InXinjiang the state has detained hundredsof thousands of blameless Muslim Ui-ghurs in Mao-style re-education camps.Cardinal Zen, the former bishop of HongKong, accuses the Vatican of sending itsflock “into the mouths of the wolves”.Mindong’s underground bishop, Guo Xi-jin, is being forced to step aside in favourofa state-approved cleric.

Taiwan fears a fate similar to the bish-op’s. China has long made two demandsof the Vatican. The first, now met, was notto deny the authorities any say in the run-ning of the church. The second is with-drawal of diplomatic relations with Tai-wan. That has not happened, but “someday, one day” it surely will, Mr Lam says.

There are fewer than 300,000 Catho-lics in Taiwan, with some congregationsmade up nearly entirely of Filipino mi-grant workers. China, meanwhile, haspoached five diplomatic allies since TsaiIng-wen became president in 2016, leav-ing just 17. The sundering of formal tieswith small Pacific and Latin Americancountries may not do much damage toTaiwan’s cause, but losing its most presti-gious ally, which claims to speak for 1bnCatholics, would be a much bigger blow.

What should Taiwan do? MichaelReilly, a former British diplomat, arguesthat instead of its emphasis on protocol—next month Ms Tsai’s deputy, ChenChien-jen, will attend the canonisation ofPope Paul VI in Rome—the governmentneeds to strengthen informal ties with theVatican. That should include support forCatholic schools and charities in Taiwanwhich, after all, serve non-Catholics too.Taiwan can also build on its role as a cen-tre for training priests to serve in China.That is worth more than a nunciature.

Render unto XiBanyan

Adeal between China and the Vatican stirs anxiety in Taiwan

schemes suggests that once patients do notneed to worry any more about the cost,those who might have put up with pains,or turned to informal doctors, eagerly em-brace more elaborate treatment. In anycase, given the paucity ofdata that insurersneed to set rates, and given the bargain-basement prices that the government is of-fering to hospitals that sign onto thescheme ($550 for inserting a cardiac stent,for example), it may take years of bargain-ing and tinkering to devise a workable fi-nancial model. And paying for health carevia insurance might prove more expensiveto the state than providing it directly.

As for the health centres, these in fact al-ready exist, having been built by previousgovernments as village clinics. Most arenow defunct or woefully under-used.They are simply being renamed, says JeanDreze, an economist, who notes that thebudget earmarked for them would barelycover the cost of fresh paint. Jishnu Das ofthe Centre forPolicy Research, a think-tankin Delhi, is puzzled by the decision to tartup derelict clinics. “Policymakers say thatinstead of improving the places wherepeople actually go to seek primary care—community health centres, public districthospitals and informal private provid-

ers—we should try to improve the placeswhere they don’t go. That is extremely con-voluted logic.”

What is not convoluted is the politics ofannouncing a giant, transformationalhealth programme, which may prove alife-giving gift for millions ofpoor families,six months before a general election. Youdo not need to read the fine print to figurethat out.7

Correction: In our story last week about the most recentsummit between North and South Korea (“Parading forpeace”), we said that the press conference given by theleaders of the two countries was broadcast live on NorthKorean television. It was not. Sorry.

The Economist September 29th 2018 Asia 51

RARELY does a verdict allow all sides toclaim victory. Yet the Supreme Court of

India managed to pull offjust such a feat ina 1,448-page judgment upholding the con-stitutionality of Aadhaar, a vast biometricidentification scheme containing the per-sonal details, fingerprints and iris patternsof 1.2bn people—nine out of ten Indians.The ruling Bharatiya Janata Party (BJP)called it a “big victory”. The oppositionCongress party described it as a “slap onthe face of the BJP”. The Unique Identifica-tion Authority of India, which runs thescheme, said that the decision “set the paceof India’s digital destiny”. Apar Gupta, oneof the lawyers involved in the case,tweeted that “the legitimacy of its statedpurposes is destroyed”.

Aadhaar started life under the previ-ous, Congress government, as way to pro-vide every Indian with a form ofidentifica-tion and thus to plug gushing leaks ingovernment welfare schemes. The BJP,which took power in 2014, massively ex-panded its scope to encompass nearly allcontact with the state. It also allowed priv-ate companies to use Aadhaar, which theydid with great enthusiasm.

Although participation is supposedlyvoluntary, the government’s insistencethat Indians use Aadhaar not only to ac-cess any government service, but also toopen bank accounts or subscribe to a mo-bile-phone line, in effect made it compul-sory. The opposition was fierce and varied.Privacy campaigners worried that it en-abled unwarranted government snooping.Cyber-security types said the system was

insecure and prone to error. Anti-povertyactivists argued that it erected obstacles be-tween the poorest and their rightful bene-fits. And lawyers were appalled when theBJP used procedural sleight-of-hand torush through parliament a bill giving Aad-haar legal status. Reports of abusesstreamed in: babiesbeingrefused birth cer-tificates, children denied admission toschool, pregnant women turned awayfrom public hospitals, all for lack of a veri-fied Aadhaar registration.

The court ruled with a majority of 4-1that Aadhaar was constitutional and couldremain obligatory for those wishing to re-ceive public benefits or file taxes. Giventhat a majority of Indians do one or theother, that in effect makes participationmandatory. To throw out Aadhaar al-together, the court said, “will amount tothrowing the baby out of hot water alongwith the water”.

Yet the court also struck down sectionsin the law allowing the use of Aadhaar byprivate companies, giving critics cause forcheer. For months mobile operators andbanks had been threatening to disconnectcustomers’ phones or close their accounts

unless they provided their Aadhaar num-bers. Airtel, a big mobile network, usedcustomers’ Aadhaar data to open some2.3m bank accounts without proper con-sent (it paid a small fine). Fast-growingfirms such as Paytm, a mobile-wallet outfit,and Jio, a mobile network, owe their suc-cess in part to their ability to sign up cus-tomers quickly using Aadhaar data. Propo-nents of Aadhaar envisioned an entireindustry providing services linked to it.

The ruling will hit such companies. Butthe damage is likely to be temporary. C.V.Madhukar, who runs the identity pro-gramme for Omidyar Network, an invest-ment fund, says the decision “will now re-quire parliament to pass laws that allowfor specific uses”. Arun Jaitley, the financeminister, has already hinted that this is thegovernment’s likely response.

A scorching dissent from one judgefound the whole enterprise unconstitu-tional. Critics have vowed to carry on thefight, but, as one opponent of Aadhaarputs it, “I don’t know what happens next.”And whether intentionally or not, the rul-ing will inevitably diminish public interestin the issue. 7

Identification in India

Court gestures

Ahuge ID scheme is upheld, but curbed

Eugenics in Japan

Adverse selection

WHEN Junko Iizuka was16, she wastaken on a jaunt to the countryside.

Now in her seventies and in failinghealth, she dimly recalls enjoying a pic-nic of rice balls before being taken by herfoster parents to a hospital and told to lieon a bed. When she woke, she had beensterilised, though she did not know it.

A panel of“experts”, she learned later,had decided she should not be allowedto bear children, after a welfare officialhad accused her of theft and aggressivebehaviour. The procedure was carriedout under something called the EugenicProtection Law, passed in 1948 to preventthe birth of“defective descendants”.Local governments set up review boardsof judges, police and doctors to decidewho should be sterilised. Most of thetargets were disabled people or thosewith hereditary conditions such as epi-lepsy. But some, including Ms Iizuka,were operated on just for being “diffi-cult”. In all, around 25,000 people weresterilised under the law, which was re-pealed in 1996. The youngest were justnine years old.

Eugenics flourished around the worldin the 20th century. Sweden had a policyof“ethnic hygiene” until 1976 (20 yearsago it agreed to compensate some of the63,000 people sterilised as a result).

Norway and Denmarkran similar pro-grammes, as did some American states.Forced sterilisation was part ofChina’sone-child policy, introduced in 1980.

In Japan, boards in each prefecturecompeted to fill quotas. Victims whoobjected were coerced or tricked. Manywere so young they may not even havebeen aware that they had had surgery,says Osamu Nagase, a disability special-ist at Ritsumeikan University in Kyoto.

The victims are starting to seekcom-pensation. One woman filed suit at alocal court in March, demanding ¥11m($100,000) in damages. Her fallopiantubes were tied in 1972 after she wasdiagnosed with “hereditary feeble-mind-edness”. More lawsuits are on the way. Ahotline set up by legal experts has attract-ed dozens ofcalls.

The government is resisting theclaims. The Ministry ofHealth, Labourand Welfare argues the policy was legalat the time. It says only that it will lookinto the matter. Shame may preventmany victims from pursuing redress.

Ms Iizuka never married, fearing thather infertility would put offany suitors.She did not get her hands on her case fileuntil she was 55. Anger—and pain fromthe operation—kept her going, she says. “Ihad to know what they did to me.”

TOKYO

Victims offorced sterilisation fight forcompensation

52 Asia The Economist September 29th 2018

THE last time Abdulla Yameen lookedon the verge of losing power, in Febru-

ary, he declared a state of emergency, dis-missed the police chief, rejected an order torelease political prisoners and locked uptwo of the Supreme Court justices whohad issued it. Hispreparations for the presi-dential election on September 23rd werejustas thorough. The mostprominent lead-ers of the opposition remained in jail or inexile. The government had showered vot-erswith goodies, such aswaivingrent finesand trimming prison sentences. The policeeven raided the opposition alliance’shead-quarters the day before the vote.

And yet, when the results came in, togeneral astonishment, Mr Yameen was de-clared to have lost, with only 42% of thevote. The winner was the unassuming butunjailed Ibrahim Mohamed Solih, theleaderofthe diminished opposition in par-liament. Mr Yameen, who had appeareddetermined to cling to power just sevenmonths before, conceded without protest.

Mr Solih, who is known by his nick-name, Ibu, has pledged to overturn the du-bious convictions of his fellow oppositionleaders, most notably the country’s firstdemocratically elected president, Mo-hamed Nasheed, who is the leader of theMaldivian Democratic Party, to which MrSolih belongs. “For many of us this hasbeen a difficult journey, a journey that hasled to prison cells or exile,” Mr Solih said ashe claimed victory. “It’s been a journeythat has ended at the ballot box.”

Maldivians can only hope that the jour-ney is indeed at an end. Their country, astring of atolls in the Indian Ocean with apopulation of just 430,000, was a dictator-ship for 30 years under Maumoon AbdulGayoom, Mr Yameen’s half-brother. He al-lowed a competitive election to be held in2008, which he lost to Mr Nasheed. But MrNasheed was forced from office in murkycircumstances in 2012 and MrYameen beathim in a disputed election the followingyear by just 6,000 votes. His governmentsoon began to show an authoritarianstreak, prosecuting Mr Nasheed, amongothers, for plotting to overthrow it.

Some worry that Mr Yameen, whoseterm ends on November17th, might still beplanning to hold on to power somehow.Rumours have swirled that his party is pre-paring to challenge the results. But powerseems to be ebbing away quickly. Since theelection, the courts have ordered the re-lease of four opposition MPs and a de-posed police chief. Police have become lessfussy about who can enter the heart ofMalé, the capital.

Mr Yameen offered Maldivians a diet ofnationalism and religiosity, spiced withChinese- and Saudi-funded developmentprojects. Mr Solih and the opposition arecloser to India. Big Chinese investmentsmay now receive the scrutiny parliamentwas unable to give them before. Strong-man policies, such as the reintroduction ofthe death penalty and the recriminalisa-tion of defamation, could be rolled back.And the corruption scandals and unex-plained murders of critics that marred MrYameen’s rule are likely to be investigated.

Speaking from nearby Sri Lanka, an ex-ultant Mr Nasheed declared that Maldivi-ans had “taken back their country from thebrink”. On Twitter, he declared, “Democra-cy is a historical inevitability.” In the Mal-dives at least, until this week, it hadseemed anything but. 7

The Maldives

Sun, sea, sand andsurprise

Malé

The strongman president concedes anelection he was expected to rig

They never thought they’d see the day

THE two countries of the Korean penin-sula may have many disagreements to

resolve, but in one respect, they are in per-fect accord. Dokdo, a pairofrocks in the seathat separates the peninsula from Japan,both insist, have been an integral part ofKorea for centuries. Consequently Japan’sclaim to the islands, which it calls Takesh-ima, is imperialism, plain and simple. Atthe first of three recent summits betweenKim Jong Un, the North’s dictator, andMoon Jae-in, the president of the South,the mango mousse was decorated with achocolate map of the peninsula completewith a tasty Dokdo-shaped dot.

Dokdo-ganda is everywhere—even onthe train from the airport into Seoul, SouthKorea’s capital. “History knows the truth,”flash the screens above the seats, “Japanknows the truth.” To rousing martial mu-sic, they go on to display a series of yellow-ing documents and maps with excerptshighlighted in red. These bits of paper, thebleary-eyed visitor is informed, are proofthat Dokdo is inalienable Korean territory.

South Korea has the upper hand in thedispute, since it controls the islands. But theauthorities are leaving nothing to chance.Primary-school children are taught thesong“Dokdo isour land”, which celebratesthe fauna of the islands and surroundingwaters (“squid, beka squid, cod, pollock,tortoise, salmon egg, waterfowl egg”) andreminds them that Dokdo was mentioned“in the third line on page 50 in the geogra-phy records of King Sejong”, a 15th-centuryruler. High-school students are appointed“Dokdo keepers” and dispatched on tripsto the islets to protect their country’s terri-tory. In a recent survey, 98% of South Kore-ans agreed that the specks were Korean.

The government seems keen to instilthat thought in foreigners, too. Posters in-forming passers-by in English that “Dokdobelongs to Korea” are dotted around Seoul.Pay a visit to the city’s Dokdo museum,opened “in response to the Korean peo-ple’s desire for the protection of Dokdo’ssovereignty”, and you will be handed abooklet of “ten facts about Dokdo whichJapan does not know”, available in multi-ple languages. (Not to be outdone, the Japa-nese government opened a Takeshimamuseum in Tokyo earlier this year.) A copyof the video played on the airport train hashad millions of views online. But 80%were of the Korean-language version, sug-gesting that locals’ interest in the issue con-tinues to outstrip foreigners’. 7

Dokdo/Takeshima

Control is notenough

SEOUL

South Korea craves foreign approval ofits claim to two specks in the sea

The Economist September 29th 2018 53

1

WANG TINGYU points sadly towardsthe space above her bed where her

coffin used to lie. It was one of a pair sheand her husband bought 20 years ago,when the couple entered their 60s. Afterhe died, hers remained stored in the eavesof their sooty cottage—ready for the dayher own body would be buried on a near-by hillside. But a few months ago officialsentered the home of the 81-year-old andtook the casket away. She says the 1,000yuan ($145) they gave her in compensationwas one-half to one-third of its value.

The distress of Ms Wang (not her realname) is shared by neighbours in her vil-lage bordered by bright-green rice fields inShangrao, a prefecture in the south-easternprovince of Jiangxi. They say that this sum-mer officials went door-to-door collectingthe coffins that elderly residents had pur-chased and put aside, as is often the cus-tom in rural areas—expensive ones aresometimes displayed as status symbols(coffins confiscated in Shangrao are pic-tured). The officials piled up the casketsand had them crushed with a mechanicaldigger. They claimed that the pieces wouldbe burned to generate power. State mediasaid that villagers had willingly handedover their coffins. Locals dispute this. “Peo-ple are outraged,” says one.

Efforts by the Chinese government todissuade people from burying the deadhave a long history. After the fall of the last

land becoming even more scarce and thusimpair China’s ability to feed its rapidlygrowing population. The one-child-per-couple policy, introduced in 1979, aimed toreduce the burden of sustaining so manypeople by curbing the numberentering theworld. Anti-burial measures, though lessnationally co-ordinated, were intended toprevent those departing this world fromhogging badly needed land.

Between 1986 and 2005 China’s nation-al cremation rate rose steadily, from 26% ofcorpses to 53% (see chart). In big cities,which grew quickly over that period, cre-mation is now nearly universal—incramped urban areas economics, as muchas diktat, has helped to determine how todeal with the dead. Since then, however,there has been little further change. Manyvillagers still bury bodies, not just on hard-to-farm hillsides but on fertile fields.

Since Xi Jinping took over as China’sleader in 2012, officials have stepped uptheir anti-burial efforts. In 2014 the govern-ment said it wanted the cremation rate togrowbyup to 1% annually for the restof thedecade, with “close to 100%” cremation inselected areas. It has been trying harder topromote “ecoburials”. These can involveashes being packed into tall columbaria,buried in flower beds or sprinkled into thesea. The confrontations in Jiangxi occurredafterseveral ofits counties said they wouldallow no more burials after the end of Au-

imperial dynasty in 1911reformersadvocat-ed cremation, believing that it symbolisedmodernity. That view was shared by Mao,who argued that coffin-making was awaste of wood and money and that elabo-rate burials fostered superstition (ironical-ly, his embalmed body now lies in a glasssarcophagus in central Beijing). During theGreat Leap Forward of 1958-61 graveyardsin Shanghai were turned over to pigs, notesNatacha Aveline-Dubach ofthe French Na-tional Centre for Scientific Research. In the1960s and 1970s gravestones were fash-ioned into kitchen counters and floor tiles.

Mao’s successors inherited his misgiv-ings about burial. They had another fear,too: that the practice could result in arable

Death

A burning question

SHANGRAO

As theyonce did to control births, officials use strong-arm tactics to curb burials

China

Also in this section

54 The party worries about Marxists

Dashes to ashes

Sources: Ministry of Civil Affairs;Cremation Society of Great Britain

Cremations, % of all body disposals

0

20

40

60

80

100

1995 2000 05 10 15 17

United States

Britain

Japan

Italy

China

55 Chaguan: One-way globalisation

54 China The Economist September 29th 2018

2 gust. Videos on social media showed oldpeople lying in their coffins to stop officialsfrom seizing the caskets.

The intensified campaign involvesmore than the usual worries about thescarcity of farmland. The government be-lieves that lavish spending on coffins andmourning rituals, in order to show off thepopularityorstatusofthe deceased, is frus-trating its effort to eradicate rural povertyby2020 (in January the MinistryofCultureannounced that it would clamp downmore firmly on funeral organisers whohire strippers to boost turnout). Officialsalso want to “beautify” the countryside toattract tourists. They think, with some jus-tification, that rich city-slickers find gravesspooky and unsightly. Villagers allege thatlocal authorities sometimes grab burialland in order to replace fields which offi-cials have sold to developers.

In the past three years there has been aslight uptick in the cremation rate. But anti-burial campaigns have had grim side-ef-fects. In 2014 several pensioners in Anhuiprovince were reported by state media tohave killed themselves shortly before a no-burial policy was due to take effect. Theywanted to ensure that their remains wouldnot be cremated—keeping the body intactis considered by some Chinese to be a signof respect for one’s ancestors. The sameyear two officials in the southern provinceof Guangdong were alleged by police tohave hired a grave-robber to exhume morethan 20 corpses from a neighbouring prov-ince. The officials then had the bodiesburned in order to help them meet crema-tion-rate targets, the attainment of whichhad been frustrated by surreptitious bu-rials. This was not an isolated incident. Of-ficials’ benefits and promotions weresometimes linked to meeting such targets,encouraging a furtive trade in bodies. Theproblem was said to be so prevalent thatvillagers in some areas took to camping byrelatives’ tombs to protect them.

Urban officials have remained as reluc-tant as ever to allocate land for funeral use,even for the burial ofashes. So space is at apremium. Bloomberg, a news agency, cal-culates that last year the price per squaremetre of an urban burial plot sold by FuShou Yuan, a high-end undertaker, wasmore than 112,000 yuan ($16,000). It reck-ons thiswasdouble the costpersquare me-tre ofan apartment in Shenzhen, an expen-sive city in Guangdong.

In contrast with the one-child policy,about which the government brooked nocriticism when it was in force, state mediahave attacked the excesses of the anti-bu-rial campaign. Newspapers have variouslydescribed the coffin seizures in Jiangxi as“barbaric”, “inhuman” and “unlawful”.The government prefers to highlight moresensitive methods that are being tried insome regions. Wenling, a city in the coastalprovince of Zhejiang, said this year that it

would award monthly stipends of be-tween 100 and 400 yuan ($15-60) to pen-sioners who commit to having their ashesscattered at sea. Some other places in Zhe-jiang and elsewhere promise to cover thecremation and funeral costs ofvillagers.

Optimists hope that a clause soon to beinserted into China’s funeral regulations,emphasising the need to respect the “digni-ty” of citizens, will discourage abuses. In

2012 the lawwastweaked to make it clearerthat no force should be used to promotecremation. Officials clearly found that easyto ignore. Having already suffered the lossof their treasured coffins, the villagers inJiangxi worry that they may now face an-other big bill if they want to have theirashes buried in their nearest public ceme-tery. Unlike the traditional hillside plot, it isa long drive away. 7

Marxism

A spectre is haunting China

IN EARLY May China’s leaders pulledout all the stops to mark the 200th

anniversary ofKarl Marx’s birth. Thatwas no surprise. The Communist Partyclaims to be a champion of the Germanthinker’s revolutionary ideas. Xi Jinping,the party’s chief, led fellow leaders in aMarxist study session. Some 300 Marxistscholars attended a grand conferenceheld at Peking University, one ofChina’smost prestigious institutions.

It may seem odd, then, that on Sep-tember 21st a Marxist society run bystudents there announced that it wasfacing closure. A message posted by theclub on social media said the group washaving trouble finding a faculty memberto supervise it (an annual rigmarole facedby student societies in China). It said theclub had eventually found a backer whowas not a teacher ofMarxism, but theauthorities had rejected this solution. Thefollowing day young Marxists at a uni-versity in Nanjing, an eastern city, saidthey had also been facing hassles. AMarxist society at another university in

Beijing said it was struggling, too.In recent years the party has tightened

controls over journalists, lawyers andothers it regards as potential trouble-makers. It is now turning its attention toyoung campaigners who wave the sameMarxist flag as the party, but who use it indefence ofsociety’s underdogs ratherthan as a bludgeon against the party’scritics. Last November Zhang Yunfun, a20-something former member ofPekingUniversity’s club, was arrested during aMarxist study session he had organisedat a university in the southern city ofGuangzhou. He was given a six-monthjail sentence for disturbing public order.

The country’s rulers tremble at thethought ofa Marxist revival. #MeTooactivists have been invoking the philo-sophy in their efforts to expose professorswho demand sex from students. Earlierthis year hundreds ofstudents fromseveral universities expressed supportfor workers who had been fired for tryingto set up a union in their factory in thesouthern city ofShenzhen. Several stu-dents, including self-styled Marxists whotravelled to the city to help them, werearrested in August (some are picturedbefore the police raid). In its posting onsocial media, Peking University’s clubsaid officials had hinted that events inShenzhen were one reason why thesociety was in difficulty.

In the end supportive responses onsocial media to the club’s posts appearedto persuade the university to soften itsstance. On September 26th the societysaid it had finally completed its registra-tion, and that the head of the university’sMarxism department would be its spon-sor. But the group, and others like it, willsurely be kept on a short leash. The partyis not only afraid ofgenuine Marxists, butalso ofPeking University’s long history atthe forefront ofanti-establishment move-ments. When Marxists first started astudy group at the university a centuryago, those attending included a librariancalled Mao Zedong.

BEIJING

Astudent-run Marxist societywins a last-minute reprieve  

Black marks for Marxists

The Economist September 29th 2018 China 55

RICHARD GATHIGI, a Kenyan entrepreneur, has lived in thesouthern Chinese city of Guangzhou since 2005, oiling the

wheels and gears of the low end of globalisation with doses ofhuman trust and acuity. When an African friend had a small buturgent order—450 safety vests bearing the logo of the UN missionto Somalia—MrGathigi knew a factory that could help, though hewishes he had asked a higher price. “The UN has a lot of money,”he explains cheerfully, stabbing at a late-night plate of fish andrice in the Xiaobei district of Guangzhou, a hub for African trad-ers. In a world withoutcontracts, confidence ishis currency. Near-strangers in Africa trust him to inspect goods ordered online fromChina. He is an old-timer in Guangzhou’s cramped, fluorescent-lit trading malls. Chinese bosses are cautious about tricking him.

Still, MrGathigi isno pioneerofmulticulturalism, China-style.He is one of thousands of Africans who work in the city, thoughtheir numbers have shrunk since 2014 when officials said 16,000Africans were living in Guangzhou. He respects his host country.Now 44, he wants his teenage children to study at Chinese uni-versities, after being brought up in Kenya. But in 13 years he hasnot learned Chinese, visited the Great Wall or eaten at a local’shome. He first saw China in his 30s, he notes. “Most ofmy valueswere formed. Apart from business, I don’t have much interest.”

Listeningto MrGathigi, he could be an 18th-century“supercar-go” or trade agent, sweltering on the riverfront to which Western-ers were confined, back when the city was known as Canton.Non-Chinese then were forbidden even to learn the language. MrGathigi thinks that China still prefers foreigners to visit, tradewith locals, then leave. America and Europe make it difficult forAfricans to obtain visas, he observes, but once in the rich worldmigrants can easily overstay and live in the shadows, doing workthat Westerners shun. “With the Chinese it’s the opposite,” headds. “They make it easy to enter but very difficult to stay.” Afterall these years, he liveson a businessvisitor’svisa thatmustbe re-set with a run to Hong Kong or Macau every 30 days.

Many countries are questioning the benefits of globalisation.The nastiest rows occur when immigration enters the equation.Citizens chafe against the free movement of goods and capital,but most of all people. China’s leaders speak as globalisation’schampions. President Xi Jinping declared to African leaders in

Beijing this month that “with open arms, we welcome Africancountries aboard the express train ofChina’s development.”

Yet if Chinese leaders like the idea of goods and capital rush-ingatexpress-train speed (ideallywith Chinese drivers at the con-trols), they have never embraced the idea that people shouldmove freely, let alone dream of acquiring hybrid, part-Chineseidentities. Even marriage to a Chinese national brings no specialresidency rights. A decade ago Guangzhou’s diversity promptedarticles and books by Westerners pondering whether this wasmulticulturalism. After watching African men marrying Chinesewomen, Gordon Mathews of the Chinese University of HongKong wondered whether the world might see a “Chinese BarackObama” (not soon, he concluded). More recently journalists andscholars have debated whether China is displaying racism withcampaigns to build a “clean, safe and orderly” Guangzhou, dur-ing which street traders have been swept away, restaurants cater-ing to foreigners ordered to close by 10pm and districts like Xiao-bei flooded with police checking passports.

Obtuse or callous views of ethnicity are dismayingly com-mon in China. Racial assumptions run like an electric currentthrough some official vows to clean up Guangzhou. But many Af-ricans take a fatalistic view. Emmanuel Ojukwu, a prominent Ni-gerian trader, has no issue with the twitchy police. “Some peoplewere taking the opportunity to conduct bad business, tradingdrugs and other criminality,” he says. Kiema Moussa, from Bur-kina Faso, describes strict visa rules as a business cost. Muslimsattract no special scrutiny, he says, chewingon a street-stall kebabafter Friday prayers at Guangzhou’s ancient Huaisheng mosque.Chinese officials know “straight away” if a country suffers terrorattacks or an outbreakofdisease and may refuse visas as a result.“It’s still worth coming,” he shrugs.

Building world cities, not melting-potsAli Mohamed, a Somali freight forwarder, is a rare African with aChinese passport, having spent long enough in Hong Kong toearn citizenship. Jaws drop when he joins the domestic immigra-tion line at Chinese airports. He has seen many Africans leave.Officials want a “modern” Guangzhou focused on global financeand commerce, he says. But he insists they are “not targeting Afri-cans”. Mr Mohamed, who is 50, has moved around Asia all hislife. Although proud of his new passport, he is keeping an eye onChinese factories opening in Africa and on businesses moving toVietnam. “We are Somali nomads. Where it rains, we go.”

Western politicians and CEOs often brag about their coun-tries’ or companies’ long relationships with China, fondly imag-ining that Communist leaders have a sentimental side. Chineseofficials promote schemes offering permanent residence to a few,exceptionally qualified foreigners. But at the ground level of glo-balisation, the Africans know that outsiders stay on sufferance.

Your columnist watched a packed evangelical Christian pray-er service at a dowdy central business hotel, tolerated becauseonly holders of foreign passports may attend. One worshipper,Velile Sibiya, a medical student from South Africa, thinks Chi-nese leaders have done “magically well” by persuading so manycitizens to work hard, think alike and inhabit a “little cocoon ofpeace”. She is unsurprised that people are not encouraged to be-come Chinese by naturalisation. “Citizenship gives you rights, itgives you a voice. I think they are protecting this world that theyhave created.” Though grateful forher training in China, she isnotplanning to stay. Good guests know when to leave. 7

China’s one-way globalisation

An African enclave in Guangzhou reveals limits to Chinese openness

Chaguan

56 The Economist September 29th 2018

1

“I BOUGHT an island” is the simple an-swer given by Thaksin Shinawatra,

former prime minister of Thailand, as tohow he became a citizen of Montenegro.Deposed in a coup in 2006, Mr Thaksinwas stripped of his Thai passport. Hencehis need for another one. At one point heseemed to be collecting them. A colleagueonce claimed he had six. His Nicaraguanone, he says, has lapsed.

If “home”, as Robert Frost, an Americanpoet, put it, is where, when you have to gothere, they have to take you in, Mr Thaksinis one of many to find that the home he in-herited at birth is not enough. The numberof “investment migrants” is growing.Thousands of passports are bought andsold every year, almost always by thewealthy. The number of commercially ac-quired residence permits runs into thehundreds of thousands. A burgeoning“CRBI” industry (citizenship and residenceby investment)—of consultants, lawyers,bankers, accountants and estate agents—isbusy advising well-heeled investors, chaf-ing at the constraints of their paltry singlecitizenship, on howand where theycan ac-quire another, or at least a long-term resi-dent’s visa.

The industry, however, is undera cloud.It is suspected of commercialising and tri-flingwith rightsand privileges that patriots

a law passed in 1984 in tiny St Kitts and Ne-vis, offering citizenship to foreigners whomade a “substantial” investment. Today itspopulation is about 50,000. Half as manyoutside the country hold passports.

Even more important to the industry’sscale, in 1986 Canada introduced a resi-dence-by-investment programme. It prov-ed a magnet for Hong Kongers nervous atthe impending handover to China in 1997.Canada withdrew its federal scheme in2014, but, at the provincial level, Quebeccontinues to offer one. These days, main-land China remains the main market formost schemes.

Other countries followed Canada, in-cluding, in 1990, America, which intro-duced EB-5 visas, requiring investment ofat least $1m, or at least $500,000 if into a“targeted” area of high unemployment.The total size of the CRBI business is un-known. The Investment Migration Coun-cil (IMC), a lobby group, estimates that5,000 people a year acquire a citizenshipthis way, investing some $3bn. Far highernumbers are tied up in the “residence”business. America alone, for example, is-sues about 10,000 EB-5 visas each year.Henley and Partners, a CRBI consultancythat advises both governments (includingMalta and Moldova) and migrants, says ithas facilitated more than $7bn in foreign

regard as sacred; and of making life easierfor crooks and terrorists. For the EuropeanUnion in particular, the issue is delicate. Ittouches on one of the most “national” ofcompetences—who lives in a country andbears its passport—yet has Union-wideconsequences. An EU-member-country’spassport is also an EU passport; a “Schen-gen” visa grants access to 22 EU membersand four other countries.

Citizenship as commodityTo meet the demand for long-term visasand passports, more and more countriesare flaunting their attractions. About 100offer a “residence by investment” pro-gramme. Over a dozen offer citizenship—including five Caribbean island-states,Vanuatu, Jordan and, within the EU, Aus-tria, Cyprus and Malta. The latest entrantsto this market are Moldova, which in Julysigned a contract with a consortium thatwill design its citizenship-by-investmentscheme, and Montenegro itself, which inthe same month announced it would inOctober launch its own formal pro-gramme. The modern business tends notto mention one of its pioneers, the King-dom ofTonga in the South Pacific, which in1983 began selling passports fora few thou-sand dollars with few questions asked. To-day the CRBI business traces its ancestry to

Investment migration

A home in the country

GENEVA

Selling citizenship and residence rights is big business—and controversial

International

Also in this section

58 Buying residence to evade tax

The Economist September 29th 2018 International 57

1

2 direct investment. Businesses which tookpart in the IMC’s

annual get-together in Geneva in June re-ported buoyant demand. But, of the twomost popular destinations, Canada’s fed-eral programme is closed, and America’sEB-5 scheme has a waiting list for Chineseapplicants estimated at 18 years. Demandis rising in countries such as Brazil, India,Russia and Vietnam. Chad Richard Ells-worth of Fragomen, a New York law firmspecialising in immigration, believes thatthe investment route is becoming morepopular, because ofthe “restrictionist envi-ronment” affecting other ways of securingresidence abroad, such as asylum andworkvisas.

That environment, however, also col-ours views of investment migration. At atime when immigration is controversial,the idea that residence rights and even citi-zenship can be acquired for cash strikesmany as unsavoury. The numbers in-volved are trivial compared with total mi-gration flows. In 2016, forexample, 863,000non-EU citizens were granted EU citizen-ship; every year America naturalises700,000-750,000. But investment mi-grants embody the freedoms available tothe winners from globalisation. So theyare an obvious target of the backlashagainst it: the kind of people that TheresaMay, Britain’s prime minister, once dis-missed as “citizens ofnowhere”.

Shopping for this year’s passportThe fact that some of the passport-queue-jumpers are crooks makes the businesseven more unpopular. “Allowing cheatsand criminals to buy residency is a scan-dal,” harrumphed a column in the Timesof London in June. Nowhere now is as laxas Tonga once was, but the suspicion lin-gers that this is a business where moneyhelps dodgy people cut corners. Low TaekJho (“Jho Low”), a Malaysian-born finan-cier wanted in connection with the lootingof 1MDB, a Malaysian state investmentfund, is now a citizen of St Kitts. MehulChoksi, an Indian billionaire wanted inconnection with a $2bn fraud at PunjabNational Bank, moved in January to Anti-gua and Barbuda, where he has been aproud citizen since last year.

EU-member schemes have also beencontroversial. In 2014 the European Parlia-ment passed a (non-binding) resolutionthat EU citizenship should not have a“price tag”. Malta’s scheme has attractedthe most scrutiny. The assassination in acar-bombing last year of Daphne CaruanaGalizia, a campaigning journalist, drew at-tention to her multifarious allegations ofgovernment corruption. Of the many legalactions (including 47 libel suits) she facedat the time of her death, one was a letterfrom lawyers for Henley and Partners, ar-chitects of the citizenship programme.

Both the EU and the OECD, a club of

rich countries, are looking leerily at CRBI

schemes. Later this year, the EuropeanCommission, the EU’s executive, is to pub-lish a report on those offered by EU mem-bers. The industry fears the worst. In Au-gust Vera Jourova, the justice commis-sioner, told Die Welt, a German daily, thatthe Commission was “extremely con-cerned”. “We don’t want any Trojan horsesin the EU,” she said.

The EU also takes a dim view of othercountries that use visa-free access to the EU

as an inducement to investment migrants.It has yet to punish any country with themost obvious sanction—withdrawingvisa-free access, as Canada has done withSt Kitts, Antigua and Barbuda and others.But the EU is introducing online travel-au-thorisation requirements even for foreign-ers who do not need visas.

Meanwhile, the OECD is concernedthat these schemes can be used to circum-vent its efforts to crack down on tax eva-sion and money-laundering. It argues, forexample, that a tax evader can dodge re-porting rules by taking citizenship or resi-dency in a second country and opening abank account in a third, claiming tax resi-dence in the second, without mentioningany connection with the home country.Early thisyear it conducted a public consul-tation on what to do about CRBI schemes.The next article describes one such ar-rangement, in the United Arab Emirates.

Speaking on the margins of the IMC’sannual forum, Christian Kälin, Henley’schairman, plausibly argued that the indus-try saw regulation as both inevitable andwelcome. Indeed, the forum itself seemeddesigned to burnish its credentials as re-spectable—even virtuous.

This claim rests on a three-pronged ar-gument. The first points to the economic

benefits to the countries running CRBI pro-grammes. As Henley’s Paddy Blewer putsit, they are boons to “small countries withlimited industrial capacity looking to kick-start their economies”. Not only do they at-tract investment directly, they bring in richpeople who may well invest more and,more generally, put the country on the glo-bal map of the wealthy.

An often-cited example is Dominica,devastated in late 2017 by Hurricane Maria,following the havoc wrought by TropicalStorm Erika two years earlier. The IMF cal-culates CRBI income in the country at 10%of GDP and 16% of government revenue.Without it, recovery would have beeneven harder. Another avowed successstory is Malta, where the investment-mi-gration industry claims some of the creditfor strong recent economic performance.Its Henley-designed scheme is closest to asimple passport-for-sale model, requiringa one-off non-refundable “contribution”of€650,000 ($765,000).

Requiring investment is a more uncer-tain way of raising money—it can be takenout, after all. And even Mr Thaksin, for ex-ample, says he has “not had the time” todevelop his Montenegrin island. But puresales schemes are politically unpalatable,even in Malta, where other requirementswere added—to buyorrentproperty, for ex-ample, and invest €150,000 in approvedshares or bonds. Mr Kälin says part of Hen-ley’s expertise lies in calibrating the sumsinvolved: “Set it too high, and you only getshady oligarchs.” (Like Cyprus, Malta ap-peals to Russians.)

The second argument is the benefit tothe migrants themselves, portrayed asthose Bruno L’écuyer, chief executive ofthe IMC, calls “unlucky in the passport lot-tery of life”. Many CRBI customers simplywant the ease of movement some pass-ports offer. Ofthose actually moving coun-try, many have legitimate reasons to wantresidency elsewhere—fear of political per-secution, for example, or simply wantingto send their children to better schoolsabroad. Both of these are common mo-tives in the biggest market, China. The in-dustry presents itself as defending liber-alism and globalisation at a time whenthey are under threat.

The third strand of the argument coversthose who want passports or residencyrights for less pure motives: to dodge taxesor the police, to launder ill-gotten moneyor, atworst, to engage in terrorism. To coun-ter the perception that these are the clientscountries are seeking, the main topic at theGeneva forum was how to weed such ap-plicants out. Delegates spoke of due dili-gence, “know your customer” and otherchecks. Jonathan Cardona, the director ofMalta’s programme, says it has approvedmore than 900 passports in four years, butrejected 22% ofapplicants, mainly becauseof a “lack of clarity” about the source of

58 International The Economist September 29th 2018

2 their wealth. That is a high percentage, sug-gesting that the bar set for applicants ishigh, or that they include a large number ofthe shady; or both.

Clearly, it is not in the interests of the in-dustry to be seen as an accessory after thefact to illegal activity. So there is little rea-son to doubt that the respectable end ofit isserious about its due-diligence proce-dures—up to a point. Only about half thecountries in the world allow their citizensto hold dual nationality. China is not one;and it has strict exchange-control rules. Itseemsunlikely thatall Chinese investment

migrants have alerted the authorities totheir plans, or gained permission to takethe money out.

So due diligence seems to cover onlysome countries’ rules. If and when moreregulation comes, this distinction will behard to codify. But as ever more countriesjump on to the CRBI bandwagon, competi-tion will intensify. Moldova, for example,saysone ofitsadvisers is likely to try to wincustomers by setting the investment-pricelower, and offering speedier processing.The question of how to keep out the unde-sirable will become more urgent.7

THE waron cross-border taxevasion, de-clared by America over a decade ago

and since joined by other governments,has made life a lot more uncomfortable foranyone looking to squirrel away unde-clared income. More than 100 countrieshave signed up to the Common ReportingStandard (CRS), which requires them toswap information on account-holders thatmay be relevant for tax purposes. But theenterprising and tax-shy can still exploitloopholes in the system. A popular one isto procure residence in the United ArabEmirates (UAE), set up a company thereand use the tax residence that comes withit to blockthe flowofinformation to taxau-thorities elsewhere.

According to experts with knowledgeof the scheme, it works as follows. A for-eigner sets up a company in one of theUAE’s free-trade zones and rents officespace. In return he gets a residence visawith a minimum-stay requirement of justone day every six months. Both the indi-vidual and the company, through whichhe may hold bank accounts, may thenclaim tax residence in the UAE, a countrythat levies no income tax.

Under the CRS, banks must share infor-mation with the country where an ac-count-holder is tax-resident. If the accountholder is an entity, then the bankmust lookthrough it to the “controlling person” andreport on that individual. In the UAE, sinceboth the individual and the company havelocal tax residence, neither need fear hav-ing any information passed on to othercountries, regardless of whether theirmoney is held in a bank account, a trust oran investment fund. And, of course, thereis no local tax to pay.

No other haven works quite like this.Others, even Caribbean islands which

have held out against the CRS, say foreign-owned enterprises and the people whocontrol them cannot be tax-resident there.Under CRS rules, the firms are deemed tobe resident where they are managed from.In the UAE, however, foreign-owned enti-ties are permitted to be tax-resident, eventhough the owner would normally be tax-resident elsewhere.

The UAE’s documentation system alsomakes it easier for people to avoid tax in-spectors. When dealingwith banks, clientsneed to produce a Tax Identification Num-ber (TIN). This number is particularly im-

portant for any company that holds an ac-count because it serves as an identifier fortax-information exchange between gov-ernments. Since the UAE levies no incometax, it does not issue TINs. Instead, the ex-perts say, it hands out registration numbersfor value-added tax, which it does levy. Cli-ents then try to pass these off as genuineTINs to bolster the claim that they are tax-resident in the UAE. The ruse appears to beworking. Whether because they cannottell the difference orare turninga blind eye,many banks in other countries, when pre-sented with the VAT-linked substituteTINs, accept that the client’s taxaffairs are amatter for the UAE and therefore do notpass information on to other countries.

Compared with most offshore tax-min-imising schemes, this one is cheap. In theUAE, companies can be formed, officespace rented and residence acquired for“the price of a decent suit and pair ofshoes”, saysan adviser. Unlike in most oth-er countries that sell residence rights, a do-nation or property investment in the hun-dreds of thousands or millions ofdollars isnot a prerequisite for a visa.

The country’s first free-trade zone wasestablished in the mid-1980s. It now hasmore than 40, with tens, perhaps hun-dreds, of thousands of companies be-tween them. Ras al-Khaimah, one of thecountry’s seven emirates, has over 14,000.The number ofUAE firms being used as ve-hicles to dodge tax is impossible to deter-mine. “Judging by the talk among tax andwealth advisers, it’s many thousands,”says a tax expert.

The Organisation for Economic Co-op-eration and Development (OECD), whichoversees the CRS, is worried about the tax-dodging possibilities of residence-for-saleschemes. Pascal Saint-Amans, head of theOECD’s tax group, says the UAE is a con-cern and argues that the country has notbeen “proactive” in curbing abuse. TheUAE finance ministry replies that it is “com-mitted to implementing international eco-nomic standards to the highest levels of[tax] transparency” and is “actively work-ing with the international community” ondata exchange. Asked to comment, the Rasal-Khaimah free-trade zone did not reply.

The OECD will unveil some new poli-cies this year, says Mr Saint-Amans. Thesecould include making banks ask tougherquestions ofanyone claiming to be tax-res-ident in a haven. Banks could be required,for example, to run through a list of ques-tions to establish where a client’s personaland economic links are strongest: wherehe spends most of his time, where his chil-dren go to school, where his doctor is andso forth. In cases where banks see evi-dence of discrepancy, they could be re-quired to send account information to allcountries with a possible claim on the cli-ent’s tax domicile. Until then, the Gulfstate will remain a tax-dodgers’ oasis. 7

Buying residence to evade tax

Sweet deserts

An oasis for the tax-averse beckons in the Middle East

The Economist September 29th 2018 59

For daily coverage of business, visit

Economist.com/business-finance

1

“IDIDN’T wait for a pay cheque. I didn’ttell anyone. I was scared, ashamed

and just ran,” is how Daniela Contreras re-calls sexual harassment—as she nowknows to call it—by her employer whenworking as a nanny in her teens. Twentyyears later she feels able to say “This hap-pened to me”, and works with the Nation-al Domestic Workers Alliance in New Yorkto ensure others can do so sooner. Over thepast year she has seen a big increase inwomen phoning, almost daily, for legal ad-vice. #MeToo catalysed this rise, she says.“The hashtag helped start the conversationby writing it, saying it and sharing it: ‘Thishappened to me.’”

It is almost a year since revelationsemerged about the behaviour of HarveyWeinstein, a film-studio boss charged withmultiple counts of rape and sexual assault.In response Alyssa Milano, an actor, invit-ed anyone who had been harassed or as-saulted to tweet #MeToo. The hashtag hassince been shared over 15m times. Victimsof harassment in workplaces of all sorts,from S&P 500 companies to small-and me-dium-sized firms to startups, have comeforward in unprecedented numbers toshare their harrowing experiences.

Many powerful men have been forcedout. Earlier this month one of the most-praised bosses in media, Les Moonves, thechief executive of CBS, was forced to leave

rule against people gazing into each other’seyes for more than five seconds on filmsets. Yet the occasional overreaction maybe part of the messy process of changingnorms across society, business and poli-tics. Although the majorityofthose over 65say it has become harder for men to inter-act professionally with women in thewake of MeToo, a minority of those under30 say the same. Indeed, the real questionis not whether the pendulum has swungtoo far but whether it has swung farenough. The answer to that is clearly “no”.

It is true that some notorious sexualpredators are now facing justice; Mr Wein-stein’s next court appearance is in Novem-ber. But most of those accused of harass-ment or assault have faced the court ofpublic opinion, not the law itself. In Ameri-ca the Equal Employment OpportunityCommission, a federal agency, has notedin preliminary findings just a modest, 3%uptick in sexual-harassment complaintsfiled by employees this year.

Their day in courtThis is in part because few victims reportabuse, let alone press charges. Those whodo rarely manage to get their complaintsheard in court. In America the Time’s Upmovement set up a $21m legal-defencefund to try to change this. Since January ithas had 3,500 applications, two-thirds ofthem from low-income workers.

Many American states are reviewingtheir laws. Washington now bars employ-ers from mandatory non-disclosure agree-ments for employees, which stop workersfrom speaking out publicly about their ex-periences. Several are exploring extendingor ending statutes of limitations, spurredon by revelations of child abuse in theCatholic church in America. California is

following accusations of sexual harass-ment (which he denies). A handful, includ-ingMrWeinstein, await trial. Thisweek BillCosby, an actor once known as America’sDad, became the first post-MeToo A-listerto be sentenced to prison.

Firms are under growing pressure tochange how women are treated at work.Not a week goes by without a fresh exam-ple of an organisation finding itself in thespotlight. Earlier thismonth workers atMc-Donald’s, one of several firms being suedby workers, protested against a culture ofharassment, replacing the “M” on theirMe-Too banners with the golden arches. In thesame week the board of the New York Re-view of Books, under pressure from adver-tisers, pushed out its editor, Ian Buruma,after he published a controversial essay byJian Ghomeshi, a Canadian broadcasterand alleged abuser.

Some people worry that the movementhas gone too far, warning of a “witchhunt”, “trial by Twitter,” and the end of in-nocent office romance. Others fret about abacklash forwomen atwork, where seniormale executives may no longer want tomentor them or travel or dine with themalone (a code of conduct sometimes re-ferred to as “the Pence rule”).

Some responses have felt knee-jerk:Netflix, a media company, was mockedwhen in training it reportedly suggested a

American business after Weinstein

Behind closed doors

The #MeToo movement has raised awareness ofsexual harassment. But it has yet tobring lasting change to the workplace

BusinessAlso in this section

61 Bartleby: Executive privilege

62 The world’s largest airline?

62 Comcast reaches for Sky

63 Ride-hailing wars in South-East Asia

64 French supermarkets

65 Schumpeter: The luxury-car business

64 A gold-mining merger

60 Business The Economist September 29th 2018

1

2 in the process of passing several “#MeToobills”, including banning forced-arbitra-tion clauses in contracts, which requireworkers to waive the right to take an em-ployer to court in the event ofa dispute.

Meanwhile, the numberofshareholderclass-action lawsuits based on genderclaims has risen, says Kathleen McKenna,an employment lawyer at Proskauer inNew York. Last November, 21st CenturyFoxreached a $90m settlement with share-holders over losses related to two harass-ment scandals. Employees are taking firmsto court too—including Google, where aplaintiff cites a “bro culture” that allegedlyallowed harassment to go unpunished,and Ford, which faces a class action byworkers claiming they were sexually ha-rassed and their complaints obstructed.Yet the uptick in workers’ class actions hasbeen modest, partly because in May theSupreme Court upheld employers’ rightsto blockemployees from bringing them.

What the law can do is in any case onlypart of the picture. Many, ifnot most, of theaccounts ofharassment that have emergedin the pastyearpoint less to a failure oflaw-makers than to one on the part of employ-ers. Big companies in America are keen tobe seen to “do something”: the number ofpublic declarations about zero tolerance ofharassment has gone up. Yet whether ornot theiractions are meaningful, orwheth-er they are still dodging deeper problemsaround power imbalances in the work-place, is very much in question.

Customers, investors, boards, employ-ees, stock analysts and even insurers in-creasingly ask for information on what acompany does for women, including theprotection it affords against harassment.Equileap, which ranks firms on gender-equality criteria, now includes sexual-ha-rassment policies. It is seeing strong de-mand for such data. That is partly becausethe headline costs of a scandal are clear:shares of several big firms have fallensharply after executive departures (seechart). But less obvious costs, such as toproductivity, turnover and reputation, arealso becoming harder to ignore.

In a recent survey by Deloitte, a consul-tancy, business leaders cited the #MeToomovementas the newsstory thathad mostaffected what they call “inclusive growthinitiatives”. “As with the first cyber-risk in-cidents, #MeToo is helpingmake boards re-alise ‘this could happen to us’,” says JaneStevenson from Korn Ferry, a consultancy.

Even so, few firms want to talk publiclyabout what they are doing inside the orga-nisation. Those that do often have reputa-tions sorely in need of burnishing. Uber, aride-hailing firm, replaced much of its topmanagement and claims to have priori-tised culture and safety; it isadding a safetyfunction to its app, has ended forced arbi-tration forharassment and assault and willstart publishing data on assault reports.

The Old Vic, a London theatre tainted by ascandal involving Kevin Spacey, its formerdirector, will next week announce a“Guardians network” to better protectworkers in the performing arts.

Less visibly, several employers havemade efforts to improve internal proce-dures for reporting harassment. Victims of-ten fear retaliation, both from their harass-er and their employer (particularly whenthey are the same person). Independent,anonymous helplines overcome conflictsof interest and several report growing de-mand. A non-profit called Callisto, basedin San Francisco, has developed softwarethatallowsemployees to entera complaintwhich will be filed only if a second com-plainant accuses the same person.

But many other firms appear to beshirking the task. Less than a third of Amer-icans surveyed in May said that their em-ployer had done anything new to dealwith sexual harassment following #Me-Too, according to the American Psycholog-ical Association (APA). Of those that had,the commonest approach was to remindemployees of existing harassment trainingor resources. Other favourites include re-viewing company policy, revising codes ofconduct and refreshing training material.

Listening to EverywomanSome of the most promising solutions tothe problem of harassment come not fromS&P 500 companies nor from Hollywood,but from workers in low-wage sectors,who were grappling with this issue wellbefore it became a hot topic. Domestic ser-vants and farm workers face some of thehighest levels of harassment and some ofthe flimsiest protections.

Decades of work by a Florida farm-worker-advocacy organisation, the Co-alition of Immokalee Workers, has seen itspractices copied in other states. As well astraining workers, the organisation per-suades tomato growers to sign up to a FairFood programme, binding them to strictconduct rules, including on pay and ha-rassment. In exchange growers can sell to

retailers such as Whole Foods or Taco Bell,which will buy only from Fair Food farms.During the 2016-17 growing season, 70% offarmsreported no sexual harassmentat all.

Away from the fields, nearly six in tenhotel housekeepers have been sexuallyharassed or assaulted and 65% of casinococktail-servers have been groped,grabbed or touched in an unwelcome way,according to UNITE–HERE Local 1, a Chica-go union. Its campaign, “Hands Off PantsOn”, successfully lobbied for a city-wideordinance that obliges all hotels to issuehousekeepers with panic buttons. Al-though the campaign was under way be-fore #MeToo, the movement undoubtedlyplayed a role in the recent decision by sev-eral chains, includingthe Hilton and Marri-ott groups, to start issuing such buttons na-tionwide.

But panic buttons and reporting sys-tems still put the onus on victims ratherthan abusers. The bigger step is to preventharassment in the first place. In most com-panies this requires deeper culturalchange. “Organisations struggle most withbehaviour that’s unwelcome, unaccept-able but not unlawful,” says Pam Jefford ofMercer, another consultancy.

The worry is that most employers havespent the year since the Weinstein scandalbroke carrying out symbolic actions andconducting a sort of phantom reckoning.Lots of companies have done the mini-mum necessary to reassure compliancedepartments. Announcing a “zero-toler-ance” policy sounds tough but is oftenempty rhetoric; it can even be counterpro-ductive, by putting victims off reporting iftheyknowthata sacking isbound to result.

Having rid itself of Mr Moonves, andpreviously ofCharlie Rose, a star presenteraccused of decades of harassment (whichhe denies), CBS shows little sign yet ofwanting to change its culture. It may stillpay a big severance package to MrMoonves. One of its executives reassuredthe Washington Post that “I’m confident theculture of the entertainment division isvery safe, very collaborative and very wel-

Despicable me 2

Source: Bloomberg *Allegations confirmed over a month later

Share-price change over two weeks, indexed to day before allegations=100

Fox Wynn Resorts Guess

Nike CBS Barnes and Noble

70

80

90

100

0 7

Days

1470

80

90

100

0 7 1470

80

90

100

0 7 14

70

80

90

100

0 7 1470

80

90

100

0 7 1470

80

90

100

0 7 14

Bill O’Reilly takesleave of absence

Trevor Edwards leaves company Demos Parneros is fired

for unspecified reasons*

Les Moonves resignsover a month later

Paul Marciano resignssix months laterSteve Wynn

resigns

The Economist September 29th 2018 Business 61

2 coming.” But Patty Wise, an employmentlawyer, questions whether CBS’s culturecan recover from the serious damagecaused by Mr Moonves’s abuse ofpower.

A similar question about culturechange looms over Nike, which fired 11 se-nior managers over harassment and dis-crimination earlier this year. It has at leastissued a public apology, and taken somesteps—introducing an anonymous hotlineand hiring a chief diversity officer. Yetwhether this will be enough remains to beseen. Four former executives are suing thesportswear company for alleged genderdiscrimination in pay and promotion.

Few firms have got to grips with the factthat harassment is often a symptom of big-ger, subtler problems: unequal access topower and unaccountable cultures. “Allthe training, policies and punishmentswon’t have an impact on harassment ifyou don’t address power differentials, payequity and gender equality in organisa-tions,” says David Ballard from the APA. Inits survey, employees for organisationsthat have women in senior leadership saidthey were more likely to report sexual ha-rassment at work (56% vs 39%) or to con-front a co-worker engaging in it (53% vs34%) than those without. Several studies

found that harassment is more prevalentwhere men outnumber women andwhere supervisors are mostly male.

A survey carried out by Pew, a researchoutfit, this week found that the majority ofAmericans consider men and womenequally capable ofbeing leaders in politicsand business. Yet in the time that #MeToohas been trending the number of femaleFortune 500 CEOs has fallen. Progress inclosing the pay gap has stalled in severalrich countries. Until the barriers that stopwomen from having an equal stab atreaching the top are cleared away, #MeToowill struggle to succeed.7

ONE of the time-honoured tropes ofwriting on business is the detailed

description of the life of a corporate titan.Readers are expected to marvel at thestamina of Tim Cook, for example. Ap-ple’s chief executive rises at 3.45am todeal with emails. Spare a thought for hisunderlings, whose iPhones buzz at 4amevery morning. Some subordinates mayhave the fortitude to sleep through it all;many will be guilt-tripped into answer-ing the boss. Highly effective people ofteninflict all their idiosyncrasies upon theirhapless juniors.

Perhaps the aim of admiring biogra-phies and articles is to prompt their read-ers to emulate the workethic ofsuch lead-ers. But they will not reach the top of anS&P 500 firm if they do. All this columnistwould achieve if he rose at 3.45am everymorning is a divorce from Mrs Bartleby.

A particular danger for executives isthat their supposedly inspiring examplesmake them look out of touch. Jeff Bezos,founder of Amazon, recently told a con-ference that he likes to “putter” in themorning, read a newspaper, drinka coffeeand have breakfast with his kids. Heschedules his first meeting for 10am. It allsounds very relaxed. But that option isn’tavailable to workers at many of his ware-houses. At Amazon’s British ones the twopossible shifts are 7.00am-5.30pm or5.45pm-4.15am, according to the GMB un-ion, both of which make it hard to break-fast with the children.

Richard Branson, founder of VirginGroup, also put his foot in it recently bydeclaring that “there’s very little that an-noys me in life, but people turning up latereally does irritate me.” Frazzled passen-gers on Virgin’s train service swiftly tookto social media to note that they too likedto be on time, but that one in five trainshad been late over the past12 months. It is

also easier to avoid being late if you don’thave to worry about dropping the kids atschool or the vicissitudes of public trans-port. Top executives, both male and fe-male, are surrounded by people whose jobit is to help them, from executive assistantsand personal drivers at work through tocleaners and cooks at home.

Bosses also vie with each other on ear-ly-morning gym routines. Again, a hard-working parent with children to look aftermay not have the time, or the money, to dothe same. A well-paid middle managermight be able to join a gym, only to findthat every time they get on the StairMasterthey get a call or an email from someoneup the hierarchy.

It is easy to confuse correlation withcausation. Tim Cook would probably bejust as effective ifhe rose at 6.45am. He willhave some qualities other than hard workand an unusual circadian rhythm to ex-plain his rise. If long hours were the key tosuccess, after all, people who hold downtwo jobs, or nurses on the night shift inemergency rooms, would be rolling inwealth. Ronald Reagan became presidentdespite quipping that “I’ve heard that hard

work never killed anyone, but I say whytake the chance?”

Homilies about successful executivesinvolve lots of virtue-signalling. No bossis going to admit that on Friday nightsthey consume pizza and watch boxsets of“Game of Thrones”. Instead they claim tomeditate or read improving books. Manybusiness profiles resemble medieval“lives of the saints”, with the subjects ofthe hagiographies receivingshare optionsinstead ofcanonisation.

Some executive habits may be harm-less, such as the preference of Steve Jobsand Mark Zuckerberg to wear the sameoutfit every day. But the danger is that aleader’s eccentricities and views becomeso embedded in the culture that theydamage the business in the longrun. Hen-ry Ford achieved great success with theModel T , but he failed to change it when itbecame old-fashioned; his dislike of cred-it also held back Ford when other produc-ers allowed consumers to buy in instal-ments. Gerald Ratner’s fondness foroutspokenness (after childhood sales les-sons at London’s Petticoat Lane Market)turned sour when he described his jewel-lery chain’s products as “crap”.

Hobbiescan be destructive, too. WhenBear Stearns, an investment bank, was indanger of going bust in 2008, JimmyCayne, its chief executive, was indulginghis passion for bridge in Nashville, andwas out of reach by email or phone.

The dangerofcopyingchiefexecutivesis that what makes their habits fashion-able is usually strong profit growth andshare price performance, and those canbe ephemeral. Quirks that look daringand groundbreaking in good times seemmore ofa liability in testing times. Just askshareholders in Tesla.

Executive privilegeBartleby

The annoying habits ofhighlyeffective people

Economist.com/blogs/bartleby

62 Business The Economist September 29th 2018

1

AVIATION geeks have few more enjoy-able hobbies than speculating which

airlines will merge next. But last weekbrought news of one potential deal worthtaking seriously. On September 20thBloomberg, a news service, reported thatEmirates of Dubai is looking into takingover Etihad Airways, the flag carrier ofneighbouring Abu Dhabi, a merger whichwould create the world’s largest airlinegroup (see chart). Both carriers denied thattalks were under way, but some sort oftie-up may nonetheless be on the cards.

The two have plenty in common. Bothhave “super-connector” business models,whereby they connect passengers onflights to and from other cities via theirhubs in Abu Dhabi and Dubai, which areonly130km apart. Theyfightovermuch thesame market. Etihad competes directly onthe same routes as Emirates on 96% of itscapacity, reckons OAG, a data firm.

In other respects the differences arestark. Etihad’s financial woes explain themotive behind a deal. In 2003 Abu Dhabistarted trying to copy Emirates, which hadgrown from a minnow in the 1980s into theworld’s biggest airline (by internationalpassenger-miles) by luring flyers awayfrom other full-service airlines in Europeand Asia. AbuDhabi setup itsown flag car-rier, and to gain scale, spent billions buyingstakes in other airlines to funnel trafficthrough its hub.

The strategy imploded last year withthe bankruptcies of two of its investments,

Air Berlin and Alitalia, resulting in lossesfor Etihad of $1.95bn in 2016 and $1.52bn in2017. Fitch, a credit-ratings agency, predictsthat the airline will remain in the red untilat least 2022. That has made the UAE’s gov-ernment, which is dominated by AbuDhabi and Dubai, keen on a tie-up. Avia-tion accounts for15% ofGDP, and is seen asa good source of jobs for local Emiratis.

For Emirates, a deal could eliminate acompetitor and increase its economies ofscale. But the airline is cautious, says SajAhmad of StrategicAero Research, a con-sultancy. It is nervous that taking on Eti-had’s liabilities, which include over 160plane orders worth tens of billions of dol-lars, will wreck its profits.

Politics might get in the way of any sav-ings to be gleaned from a deal. AbuDhabi’sruling Al Nahyan family, which used its oilwealth to bail out Dubai in 2009, wouldnot want to lose face, which would proba-bly mean keeping two hubs and brands inboth Abu Dhabi and Dubai, forgoing thepotential efficiency savings from movingto a single hub airport.

What is likeliest is a merger of opera-tions only, just as Emirates is already doingwith flydubai, a low-cost carrier alsoowned by the Dubai government. Thiswould enable Emirates to reap the benefitsof a deal without Etihad’s liabilities. Thetwo have already started to co-operatealong these lines, notes Mark Martin, aconsultant based in Dubai. In January thetwo began to work together on aviation se-curity and in June they struck a deal onsharing pilots.

For international passengers flying viathe Middle East to and from other places,such a tie-up would be no loss. The Europe-to-Asia market would remain highly com-petitive. But for local Emiratis flying in andout of the UAE, having all the country’s air-lines on one team would restrict competi-tion. Since the UAE’s antitrust watchdogsare under the thumb of the governmentsthat own the airlines, they will get no sayin the matter.7

Gulf carriers

Super-connecting

Amergerbetween Emirates and Etihadcould create the world’s largest airline

New heights

Sources: Bloomberg; company reports *If merged

Airlines, available passenger seat kilometres, bnLatest available

0 100 200 300 400 500

Emirates-Etihad*

American Airlines

United Airlines

Delta Air Lines

Lufthansa

Air France-KLM

IAG

China Southern

Air China

China Eastern

Emirates Etihad

EXECUTIVES at Comcast in Philadelphiahave grown accustomed to describing

their company in a way that exudes angst:it is “cash-rich but future-poor”. The cable-and-entertainment giant generates $85bnin annual revenues but, unlike its principalrivals, Disney and AT&T, is regarded aspoorly equipped to challenge a powerfulcompetitor, Netflix, in global internet vid-eo. On September22nd the companyspentextravagantly to change that, outbidding21st Century Fox (which was backed byDisney) forcontrol ofSky, a European satel-lite broadcaster. It won the day, in a rareauction of a public company, with an offerof£30.6bn ($40.3bn).

It may prove a costly victory. Comcastshares have fallen by nearly 7% since theauction, on fears that it overpaid for a com-pany whose core technology, satellite tele-vision, is becomingobsolete. Disney, as the“loser” along with Fox in the bidding,makes out like a bandit. The Mouse was toget a 39% stake in Sky as part of its acquisi-tion of Fox. Now Disney will, by way ofFox, flip that stake to Comcast for lots ofcash and pay down debt, freeing up moremoney to invest in its own ambitious Net-flix-like service. (Disney probably alsowants Comcast to divest its 30% stake inHulu, which would give the new Disney-Fox combination 90% of the American in-ternet-video company.) Disney’s shareshave risen by 4%.

The Panel on Takeovers and Mergers inBritain had set up the unusual auction toresolve a months-long bidding war be-tween Comcast and Fox, which in turnwas part of a larger tug-of-war betweenComcast and Disney. In December 2016Fox had agreed to a deal to buy the remain-ing 61% of Sky it did not own for £10.75 ashare, or £11.7bn in total. But in December2017 Foxagreed to sell much of its business,including its stake in Sky, to Disney (whilespurning an offer from Comcast). BrianRoberts, boss of Comcast, then started bid-ding wars for both Sky and Fox.

Mr Roberts ultimately dropped his pur-suit of Fox after Disney increased its origi-nal offer by $19bn (to $71bn, plus the as-sumption ofFox’s debt) but remained benton getting Sky. What he has got for hismoney is a company with £13.6bn in rev-enues; 23m subscribers in Britain, Ireland,Italy, Germany and Austria; near-termrights to Hollywood studio films (includ-ing Disney and Fox films); top-flight sportsrights including Premier League football in

Comcast and Sky

Sky high

NEW YORK

Comcast has pulled offa transformativedeal fora loftyprice

The Economist September 29th 2018 Business 63

2 Britain; and some original programming.Crucially, Comcast also gets a direct-to-

consumer Netflix-like service called NowTV. As with AT&T and DirecTV in America,satellite-pay television is an outdated,high-margin business that is swiftly losingcustomers to cheaper video options likeNetflix and Amazon Prime. Comcast maytry to build Now TV into a powerhouse,takingmoneyfrom the satellite business asit slowly declines.

For Rupert Murdoch, who launchedSky Television (a precursor to Sky) in 1989,it is a bittersweet ending to another chap-ter. He has sold much of his entertainmentempire, leaving Lachlan, one ofhis sons, torun what remains of Fox after the Disneydeal closes in the coming months. He alsofailed to take full control of Sky for a sec-ond time this decade (in 2011 he aban-doned another bid because of a phone-hacking scandal at his newspapers).

But Mr Murdoch forced Mr Roberts topaya heftypremium. Comcast’s sealed bidcame in at £17.28 a share, compared withFox’s bid of £15.67, a difference of nearly£4bn. Comcast ispayinga premium of125%over what Sky was trading at before Foxinitially put Sky in play in December 2016.Craig Moffett of MoffettNathanson, a re-search firm, concludes that Comcast“grossly overpaid” for Sky. He notes the“winner’s curse” in auctions, that the suc-cessful bidder is the one willing to paymore than anyone else thinks it is worth.But Comcast is still cash-rich and may beconsiderably less future-poor.7

THErivalrymayhavestarted in theclass-room. Anthony Tan and Hooi Ling Tan,

unrelated founders of Grab, a Singapore-based ride-hailing platform, and NadiemMakarim, founder of Go-Jek, an Indone-sian scooter-ride startup, all graduatedfrom Harvard Business School in the sameyear. They returned to South-East Asiawith big plans to change local transportsystems. Launched a little more than sixyears ago, Grab’s jolly green-and-whitelogo appears on billboards and driver jack-ets across eight countries in the region. Go-Jek, founded eight years ago, onlylaunched its first foreign operation, in Viet-nam, this month; it will soon enter Thai-land, the Philippines and Singapore.

The region’s 634m people, often bereftofeasycommutingchoices, are a rich prize.The main option for those hailing a ride is

Grab. Uber once battled it for customersbut the American platform withdrew fromSouth-East Asia in March (following heavylosses), selling its business to Grab for a27.5% stake in the firm. That turned Grabfrom underdog to overlord. Drivers in In-donesia have rallied to accuse it of exploi-tation. Many riders grumble about highprices, poor service and technologicalweaknesses. On September 24th regula-tors in Singapore fined Grab S$6.4m($4.7m) and Uber S$6.6m for their merger,saying itharmed competition and led to in-creases in effective fares.

Hence Go-Jek’s forays abroad. It is bet-ting that people are ready to back a new re-gional upstart. “There is a craving for a sec-ond option,” declares Andre Soelistyo, thefirm’s president. Go-Jek says it grabbed atenth of the market in Ho Chi Minh Cityafter only three days ofoperation.

When Uber fought Grab, the battlepitched a foreign titan againsta local cham-pion. This time both competitors possessextensive on-the-ground understanding ofSouth-East Asian markets. They also havedeep-pocketed backers from the technol-ogy industry. Grab, which is valued ataround $10bn, is one of Masayoshi Son’scollection of ride-hailing firms: the boss ofSoftBank, a Japanese telecoms giant, hasinvested not just in Grab and Uber, but alsoin China’s Didi and India’s Ola. Go-Jek hasa broader array of supporters, includingheavyweights such as Google, Tencent, aChinese gaming giant, and JD.com, Chi-na’s second-largest e-commerce platform.It is worth about $5bn.

The epicentre of the struggle remainsIndonesia. As the single largest market inthe region, it is also the most important. “Ifyou lose Indonesia, it’s hard to win the

rest,” says one consultant who knows bothfirms. Grab claims to control 65% of thecountry’s ride-hailing market. But the com-petition is so fierce that neither companyturns a profit in the country from rides. Go-Jek’s expansion plans may be an attemptto force Grab to throw money away in oth-er South-East Asian markets too, reducingits ability to pour money into Indonesia.

As well as spending on promotions fordriversand customers, both firmsare woo-ingcustomerswith otherservices. Go-Jek’smain strength is variety. Shortly afterlaunching its ride-hailing services, it addedfood delivery. Now its platform offers 17services—from purchasing cinema ticketsto massages. “These models can turn veryprofitable very fast because the number oforders is in the millions per day,” says oneof its backers.

Grab is also keen to become a single“super app” with commercial, financialand logistical offerings. Its advantages areits size and reach. In the Philippines it con-trols 90% of the ride-hailing market; in Sin-gapore its share is 80%. Customers aroundthe region recognise the brand, as do regu-lators. “No other company has the foot-print of licences that we have,” says MingMaa, the company’s president. Grab is alsobattle-tested after its long clash with Uber.

A few speculate that the two firms’bosses might take the companies publicsoonerrather than later in a bid to line theirwar chests further as their rivalry deepens.One venture capitalist thinks another set-tlement in South-East Asia, like that be-tween Uberand Grab, is the likelier scenar-io. “If it gets bloody, the loser will want tonegotiate a peaceful outcome,” he says.Until then, customers can enjoy beingcaught in the crossfire. 7

Ride-hailing in South-East Asia

After Uber

JAKARTA

Go-Jek’s first foreign forays aim tochallenge Grab’s dominance

Go-Jek plots a landgrab

64 Business The Economist September 29th 2018

IS IT possible to reject a takeover bid thathas not been made? Such ontological

questions rarely bother mergers-and-ac-quisitions bankers. France is different. Ataround midnight on September 23rd Casi-no, a supermarket chain, said its board ofdirectors had unanimously rejected a hos-tile takeover attempt by Carrefour, a biggerrival. By sunrise, the supposed bidder in-sisted it had made no such offer. Investorshave been left scratching their heads in themanner of undergraduates grappling withthe tenets ofexistentialism.

Whether a merger is in the works re-mains unclear. Carrefour might havesniffed an opportunity in the travails ofCa-sino, part of the empire of Jean-CharlesNaouri, a well-connected former civil ser-vantand mathematician. His shops, whichinclude the upscale Monoprix chain, arewell run. But the firm is heavily indebted,and sits at the bottom ofa cascade of listedfirms also saddled with loans. Concernsover the health of its balance-sheet haveprompted Casino’s shares to drop by near-ly 30% since the start of the year.

On September 3rd S&P Global, a ratingsagency, cut Casino’s credit rating furtherinto junk territory when a key subsidiarywas late filing its accounts. Analysts havebeen struggling for months to make senseof its books. Casino denies improprietyand has blamed the share-price drop onhedge funds betting on the downfall ofone of the pillars of the Naouri empire.

Markets have also focused on Rallye,another listed firm run by Mr Naouri,which owns just over half of Casino. Alarge part of its borrowings, which reached€2.9bn ($3.4bn) in June, use its sharehold-ing in Casino as collateral. Given the share-price plunge, the collateral availableshrank, increasing pressure on Casino toremitmoneyto Rallye lest itdefault. That inturn would have harmed Casino’s pros-pects, so causing its share price to fall fur-ther, and so prompting Rallye to ask formore cash from Casino, and so on.

The doom loop was disrupted whenRallye said on September 16th that itsbanks had offered it €500m of credit notsecured on Casino shares. That has boughtthe firm some breathing room, thoughbonds ofCasino and Rallye are still tradingat levels that suggest some riskofdefault.

Talk of a merger with Carrefour, theworld’s biggest bricks-and-mortar retailerafter Walmart, may therefore be a wel-come distraction. Carrefour has problems

too, however. Although its balance-sheet isstrong in comparison with Casino’s, itslumped to a net loss last year as a result ofa restructuring prompted by a prolongedspell in the doldrums. The group has reliedfor too long on the fading hypermarketmodel it pioneered in the 1960s. Only un-der its newish chief executive, AlexandreBompard, has it made the right kind ofnoises about trimming its large shops andinvesting in online ordering, as Casino hasalready done.

Both sides do agree that their bossesmet and even discussed what a tie-up be-tween Casino and Carrefour might looklike. But whether a bid exists now, or willexist in future, isasmuchaquestionforreg-ulators as forphilosophers and investmentbankers. Observers note that competitionauthorities would surely balk at giving asingle group around a third of the grocerymarket and around three-quarters of allconvenience stores. In July, France’s Auto-rité de la Concurrence started investigatinga series of purchasing alliances betweengrocers, such as that between Carrefourand Système U. For Carrefour and Casino,too, the real world may intrude.7

French supermarkets

Shopping andnothingness

PARIS

Apotential bid from Carrefourdistractsfrom Casino’s debt woes

“THE gold sector is like a charade,”MarkBristowproclaimed in 2016, de-

riding miners for having too much debtand too little discipline. Mr Bristow isnonetheless poised to become the indus-try’s most powerful man. On September24th Barrick Gold, a giant miner, said itwould pay $6bn for Randgold Resources,the firm Mr Bristow founded. If share-holders approve the deal, it would be theworld’s biggest gold-mining company. MrBristow’s task, as chief executive of the

combined entity, is to restore its gleam. The industry as a whole is looking a bit

grubby. As gold prices rose in the 2000s,many firms went on a spree, snapping upmediocre mines. When prices fell, theywere left with debt and inferior projects.This year share prices for big miners havebeen stuck in the dirt even as the broaderstockmarket has soared (see chart).

Barrick has struggled, too. Founded inCanada in 1983, it took on more debt as itmined for gold on five continents. JohnThornton, its chairman, has in recent yearsworked to sell mines and strengthen thecompany’s balance-sheet. But Barrick stillhad $5.8bn in debt in July and a BBB creditrating from S&P, a ratings agency. It facesdeclining production, because reserves arebeing depleted and some far-flung invest-ments are proving problematic. Work hashalted on a large mine in the Andes, for ex-ample, in the face of opposition from envi-ronmentalists. Production has plunged inTanzania, as the government demands agreater share of riches from mines inwhich Barrickhas a majority stake.

Enter Mr Bristow, a geologist who likesto traverse Africa by motorbike. Investorswidely admire Randgold. It is choosyabout its mines, investing only in placeswith particularly rich deposits, and disci-plined about costs, regardless of whethergold prices are high or low. Management islocalised in the countries where Randgoldoperates—Mali, Ivory Coast and the Demo-cratic Republic of Congo (DRC). This hashelped it succeed in an industry dogged byvolatile prices and volatile governments,or “complex jurisdictions”, as the com-pany calls them.

Barrick’s Mr Thornton, who will re-main chairman, hopes Mr Bristow can ap-ply his operational expertise to a globalminer. For instance, Randgold excels at un-derground mining, which will be more im-portant for Barrickbut has not been its spe-ciality to date—Barrick has mostlyunearthed gold in vast open pits. Randgoldalso brings hard assets. The combinedgroup would be a mega-miner, with five ofthe world’s ten biggest mines. Randgold’scash flow would help service Barrick’sdebt and support investments in Americaand the Dominican Republic.

Notwithstanding such benefits, share-holders may still oppose the deal. Barrick’sinvestors may balk at risks in Africa—theDRC, for instance, is changing its laws in or-der to take higher royalties from miningcompanies. Randgold’s investors may re-sent that Barrick is paying no premium forRandgold’s shares.

If the companies do combine, Mr Bris-tow must manage a much larger, morecomplex business than he has to date. Hewill have to show that the expertise he dis-played in Africa is useful in developingBarrick’smines in, say, Nevada. Time to testhis Midas touch.7

The mining business

Panning out

NEW YORK

Acombination ofBarrickGold andRandgold would create a mega-miner

Gold diggers

Source: Thomson Reuters

January 1st 2010=100

2010 11 12 13 14 15 16 17 180

50

100

150

200

250

300S&P 500

Barrick Gold

RandgoldGold price

The Economist September 29th 2018 Business 65

SUGGEST to Torsten Müller-Ötvös, the boss ofRolls-Royce, thathe runs a carmaker and with a shake of the head, he explains

that he is in the luxury-goods business. You are not buying a carbut “commissioning a work of art…building a dream”. Whetherswathed in leather from pampered cows or stuffed with racing-car technology, ultra-expensive cars are made by firms that havelittle in common with the rest of the industry. Ferrari, a maker ofsleekItalian sports cars (whose chairman, John Elkann, sitson theboard ofThe Economist’s parent company), saw its valuation soarafter it was spun offfrom Fiat Chrysler in 2016. The investors whoown Aston Martin, bought from Ford in 2007 for £500m ($1bn),hope to reap similar rewards. An initial public offering in the nextfew weeks is expected to value the firm at around £4bn-5bn.

The numbers alone show how scant a resemblance suchfirms bear to mass-market auto manufacturers. Six firms domi-nate the ultra-luxury sector, where prices start at around$200,000: Ferrari, Aston Martin, Rolls-Royce (owned by BMW),Bentley and Lamborghini (both divisions of the Volkswagengroup), and McLaren. Along with a few tiny specialists, such as It-aly’s Pagani and Sweden’s Koenigsegg, which make track-in-spired hypercars (whose prices start at $1.4m), these firms sold29,600 cars in 2017, compared with sales of 86m by regular car-makers, according to JATO Dynamics, a research firm. As with su-peryachts, fine watches and the like, sales of high-end cars haveboomed along with the numbers of the global rich. Annualgrowth looks set to stay at around the 10% mark for the next fewyears, compared with 2-3% for the car industry as a whole.

Luxurycarsare sold forentertainment, not transport, saysoneexecutive. Instead of striving to sell as many cars as possible, pro-duction is often limited in order to maintain exclusivity. In 2013Ferrari even elected to cut volumes slightly, from around 7,400 to7,000 a year. According to Enzo Ferrari, the firm’s founder, the ide-al is to make one fewer car than the market wants. This meanslong waiting-lists and vehicles that sell at the advertised price in-stead ofwith the discounts common in the mass market.

The relationship with buyers is also unlike the “sell and for-get” model of other carmakers. Many customers are collectors,each with a garage-full offast cars. Theyare often invited to watchtheircarsbeingmade. McLaren’s factory includesa purpose-built

viewing gallery. No ordinary carmakers offer the same range ofcustom-made accessories, nordo they invite buyers to the factoryto select them in person. At Rolls-Royce’s in-house “atelier” cus-tomers can fondle a range of rare woods and other fine materialsbefore making a choice. Bentley offers a Breitling Mulliner Tour-billon clock that costs almost as much as the car it adorns. It is allrather like being measured for a Savile Row suit, says Andy Palm-er, the boss ofAston Martin.

For the chosen few, ownership buys entry to an even more ex-clusive club. Spend on several regular models and you might beinvited to put your name down for a limited-edition hypercar,such as the upcoming McLaren Speedtail—only 106 of thesebeasts will be made and each will probably be capable of hitting250mph. Such fire-breathing road-rockets are constructed at acost of$2m or more. They are massively profitable and usually insuch demand that they can be resold immediately for a big re-turn. To ensure that these cars remain the property of the tech bil-lionaires, Hollywood A-listers and sheikhs who are luckyenough to be chosen to buy one, their manufacturers operateblacklists barring anyone who has previously flipped a vehicle.Other perks include invitations to “trackdays” where outrageousperformance can be properly tested, and the carmakers can findout what their customers want next.

But howevermuch these firms disown the label ofcarmakers,only Ferrari’s margins, at over 30%, are known to put them in thesame bracket as luxury-goods firms (for comparison, Germany’spremium carmakers notch up margins of around 10% in a goodyear). That is partly because Ferrari has been unusually success-ful at mastering the trick of the “diffusion line”. Just as Chanelmakes a few thousand $2,000 handbags but coins it selling lip-stick to the masses, Ferrari also sells cheaper branded goods suchas watches and clothes, even down to a $50 baseball cap.

The difficulty of attaining couturier-like margins also stemsfrom the fact that these businesses retain some trappings of theeveryday carmaker. A clothing firm needs to worry about chang-ing hemlines; it does not have to bother with emissions regula-tions. Capital spending ismuch higherforan ultraluxury carmak-er than for a handbag designer. And though most have copedwith the growing taste for SUVs, for Ferrari, whose brand is basedon hard-core sports models, its plans to make a beefier car, likeBentley’s Bentayga or the Lamborghini Urus, may prove difficult.

Selling cars built for driving pleasure should confer some im-munity from industry-wide upheavals like the advent of car-sharing or autonomous vehicles, at least for the time being. A big-ger problem, especially for sports-car firms, is the trend to electri-fication. Hybrid engines can make fast cars faster, but they wouldalso silence those throaty exhaust notes that shout “Lookat me”.

Couture or clunkerAston Martin’s IPO will provide further clues to which categoryultra-expensive carmakers reallybelong. It isplanning a newSUV

and electric saloon, as well as branchingout into other areas suchas boats and property. A successful debut might tempt others todo the same. McLaren once considered a flotation and may do soagain. VW has bundled Bentley and Lamborghini into a “super-premium” group with Bugatti and Porsche that could potentiallystand alone in future. If a series of such brands tap the markets,that would provide a clearer answer to the question of whetherluxury cars have more in common with LVMH and Hermès thanwith Ford and Toyota. 7

Joining the high revvers

Makers ofveryexpensive vehicles strive to be seen as luxury-goods firms, not carmakers

Schumpeter

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1

SITTINGin hisoffice in the Wrigley Build-ing overlooking the Chicago river in

2012, Richard Sandor, who has spent his ca-reer inventing financial products, wasreading about the scandals surroundingthe London Interbank Offered Rate (LI-

BOR), an array of interest rates set daily bya club of banks in Britain and used to pricetrillions of dollars’ worth of loans, deriva-tives and more. “This is stupid,” Mr Sandorrecalls saying to a colleague. “Let’s make abet; LIBOR will lose its pre-eminence.”

Two years later the Federal Reservereached the same conclusion. It formed agroup, the Alternative Rate ReferenceCommittee, which has created a newbenchmarkdollar interest rate, the SecuredOvernight Financing Rate (SOFR). SinceApril, SOFR has been used for a handful ofbond offerings by large institutions includ-ing the World Bank, MetLife and FannieMae. Central banks in Britain, the eurozone, Japan and Switzerland are also con-structing new benchmarkrates.

LIBOR is heading for extinction. Its fatewas sealed in July 2017 when Andrew Bai-ley, head ofBritain’sFinancial ConductAu-thority, a regulator, said itwould be phasedout in 2021. It had been undermined bytwin scandals. In the first, a product of thecrisis, the rate-setting banks tweaked theirquotes, possibly with supervisors’ implicitsupport, to limit the chances of marketpanic. In the second traders manipulatedthe rates subtly, to gild their profits.

$260trn-worth of financial products, frominterest-rate swaps to retail mortgages, arepriced, estimatesOliverWyman, a consult-ing firm. Dollar LIBOR accounts for by farthe biggest chunk, not far short of $200trn;sterling and yen weigh in at $30trn apieceand Swiss francs at $5trn. The chief bench-marks for euros, EURIBOR and EONIA, facean even tighter timetable for reform and re-placement than LIBOR. (EONIA does notcomply with a recent European Union di-rective and must go by the end of2019.)

Creating and then switching to trulymarket-based alternatives is an almightytask. The Fed’sapproach was to tap into the“repo” (repurchase) market. Banks seekingshort-term cash sell securities with littlecredit risk, such as Treasuries, to otherbankswith a promise to buy them back thenext day at a slightly higher price. The dif-ference is in reality the interest rate on anovernight loan. To ensure repayment, theyprovide collateral. There are $700bn-worth of these transactions daily, whichare reported to the Fed through the Deposi-tory Trust & Clearing Corporation and theBank of New York Mellon. After ingestingand processing vast quantities of data toproduce a weighted average, the Fed pub-lishes the result, SOFR, at 8am.

Take-up has been slow. So far only sev-en or eight bonds have been sold usingSOFR as a reference price. Doubtless this ispartly because of investors’ unfamiliaritywith a new product, compounded by theFed’s inability to explain itself to thosewho do not understand its jargon. But itmay also reflect difficulties with usingovernight, near-risk-free rates.

For a start, an overnight rate is exactlythat: a term structure has to be constructedfor longer maturities, for instance from ex-pected or actual overnight rates. SOFR alsoreflects the rate on extraordinarily high-quality, essentially risk-free credits, which

The ruckuscostBob Diamond, the chiefexecutive of Barclays, his job and TomHayes, a trader at UBS and Citigroup whowas jailed for11years, his liberty. Oversightof LIBOR was transferred from the BritishBankers Association, a trade body, to Brit-ish regulators and then to IntercontinentalExchange, an American stock- and deriva-tives-exchange group. In June Société Gé-nérale agreed to pay American authorities$750m to settle a charge of manipulation,adding to a list of seven other big banks.(The French bankalso agreed to pay a largesum to settle charges related to a briberyscheme in Libya.)

From fiction to frictionLIBOR also rests on shaky economics. Itsroots go back to an informal coalition ofLondon banks in the 1960s. This was for-malised into a panel of 20, which submit-ted daily estimates of their borrowingcosts for up to five currencies and sevenmaturities of up to a year. Yet some quotesare little better than guesses. In July RandalQuarles, the vice-chairman of the Fed incharge ofbanksupervision, noted that justsix or seven transactions a day were usedto set one- and three-month dollar LIBOR

and an average of one for the 12-monthrate, for which on “many days there are notransactions at all”. A few banks havedropped out of the panel; some are stayinguntil 2021only at the FCA’s request.

On this flimsy foundation a staggering

Replacing LIBOR

The price of everything

NEW YORK

Scandal and ricketyeconomic foundations have undermined the benchmarkinterest rate. Ascramble to replace it is underway

Finance and economicsAlso in this section

68 Buttonwood: Public markets

69 Settling trade disputes

69 Revising KORUS

70 Historical sovereign bonds

70 The BRICS’ new bank

71 Argentina’s new IMF deal

72 Free exchange: Dearer oil

68 Finance and economics The Economist September 29th 2018

2

WHATEVER your view of the recentantics of Elon Musk, one thing

seems clear. He rather regrets that Tesla,the electric-car maker ofwhich he is boss,ever became a public company. To recap:in August Mr Musk announced that hehad secured the funding to take Tesla priv-ate. The gyrating stock price is a distrac-tion to staff, he explained. The obligationto report earnings each quarter fostersshort-term fixes that may hurt the firm’slong-term health. And being listed makesTesla prey to short-sellers.

Tesla’s share price rallied. The shortslost money. It then emerged that the mon-ey to buy out shareholders was not quiteassecure asMrMuskmayhave suggested.Before long, the board confirmed that thefirm would not be taken private. Its sharessank back. The company is now under in-vestigation for possible securities fraud.

Whatever these larger consequences,Mr Musk achieved a minor feat. He hasdrawn fresh attention to some familiargrumbles about public markets. Thenumber of listed firms in America is inlong-term decline (see chart). Mr Musk’sbeefs seem specific, but they are part of ageneral explanation for this trend. The redtape, the endless disclosures, the cease-less spotlight—all have made the cost ofbeing a public company too high. Yet thatisnot the real cause. The main reason whystartups do not become public firms isthat many of them no longer need to.

In part, this reflects changes to the sup-ply side of capital markets. In the 1990sspecialist venture-capital firms were al-most the only option for startups seekingmoney to finance their expansion. Nowa-days there are large pools of private mon-ey that can be tapped. “There is a level ofpre-IPO capital that did not exist before,”says Philip Drury, head of capital marketsin Europe at Citigroup. Private-equity

firms are sitting on piles ofcash. Sovereign-wealth funds are willing to tie up capital innew, unlisted ventures. So are hedge funds,family offices and even pension funds.

This shift can be traced back to a pieceof deregulation. The National SecuritiesMarkets Improvement Act of 1996 made iteasier to set up large pools ofprivate inves-tors. A study by Michael Ewens and JoanFarre-Mensa, two academics, finds that thesupply of“late-stage” capital (ie, to startupsfour or more years past their first fundinground) accelerated soon after. In the 1990smost young firms seeking $150m or morehad to raise it by an initial public offering.Now such sums are raised privately.

Capital-light capitalismThe demand side of capital markets hasalso changed. In the heyday of public mar-kets, the typical listed firm would be capi-tal-intensive—a railway, say, or a largemanufacturer or a chain store. Such enter-prises needed pots of capital to pay forland, buildings, plant and equipment.Even the very rich could not fund enter-prises on this scale. The ventures were ei-

ther too large or too risky.These days the value ofnew firms is in

ideas more than fixed assets. New ven-tures, notably technology firms, need farless capital to start and to grow than theyonce did. The buildingblocks forwebsitesor smartphone apps are available free asopen-source code. Computingpoweranddigital storage can be leased. And a miniservice industry has emerged to helpstartups refine and market their businessideas. It is also far cheaper to expand abusiness based on an idea than one that isbased on physical capacity. Software canbe copied at almost zero cost. That is nottrue of factories or warehouses.

Startups need less capital and havemore options for raising it as they mature.Increasingly they choose private money.That is not only because it is more readilyavailable. It is also because private capitalis more suited to ideas-rich firms, sayCraig Doidge, Kathleen Kahle, AndrewKarolyi and René Stulz in another recentpaper. Listed firms are obliged to makepublic how they are using their capital.That is fine for a firm with lots of fixed as-sets. Spending on, say, a new plant maylift the firm’s value. But when an ideas-ledfirm reveals plans for its spending, it givesaway details of its business plan to rivals.Itwould be betteroffseekingfunds from aselect group ofprivate investors.

There is still a place for IPOs. Lots ofas-set-heavy firms still need pots of capital.More of those firms are found outsideAmerica, where the number of listedfirms is still rising. But for most technol-ogy firms, an IPO is a way for founders tocash in their chips or to create shares touse as a currency for acquiring otherfirms. Bargaining-power is shifting. Sup-pliers of capital once had the whip hand.Now it is users of capital. Mr Musk, a fi-nance whizz, looks on with envy.

A private function

Depleted stocks

Sources: Craig Doidge et al., NBER;Jay Ritter, University of Florida

United States

0

200

400

600

800

0

2

4

6

8

1975 80 85 90 95 2000 05 10 16

Initial public offeringsNumber of listed

firms, ’000

Buttonwood

American startups are less inclined to list on the stockexchange because theyno longerneed to

would default only if America’s govern-ment failed. Using it as a benchmark maytherefore risk creating a mismatch for theaverage bank. In a crunch, SOFR may fall asinvestors run forsafe assets, pushing downbanks’ revenues from SOFR-linked loans.Yet banks’ own borrowing costs on whole-sale markets will increase.

In addition, legal problems loom, andtime is short. Contracts continue to be writ-ten on LIBOR, of which plenty extend be-yond 2021. The Bank of England noted inJune that the numberofsuch LIBOR-linkedsterling derivatives had risen since the pre-vious year. Many contracts, the bank went

on, lack “fallback” clauses setting outwhich rate appliesonce LIBOR goes. Britishregulators wrote to banks on September19th instructing them to provide byDecem-bera summary oftheirplans formitigatingLIBOR-related risks.

Meanwhile Mr Sandor has developedhis own benchmark, which is steadily at-tracting customers. By 2015 he had con-vinced a handful of small banks to join hisnew American Financial Exchange, whichnow has 99 members and where $1bn-worth of loans are traded daily. From thosetransactions, a benchmark overnight inter-est rate for unsecured loans, Ameribor, has

been derived.This month Ameribor was used for the

first time in pricing a loan, by ServisFirstBank of Birmingham, Alabama, to a cardealer in Tennessee. The bank’s chief exec-utive, Tom Broughton, says that it consid-ered SOFR, butbecause itdoesnotuse Trea-sury repos and its liabilities are notsecured, it needs a rate that can accommo-date credit risk. Mr Sandor hopes that intwo to three years Ameriborwill become abenchmark for many of America’s 5,000regional and community banks and theircustomers. Whether or not that happens,the era ofLIBOR is ending.7

The Economist September 29th 2018 Finance and economics 69

1

ONE ofPresident Donald Trump’s moreimprobable achievements has been

to make international trade negotiationsinto front-page news. Less visibly, his offi-cials have turned the legal systems for set-tling trade disputes into hotly contestedtopics. Not only is dispute settlement oneof the last obstacles between America andCanada reaching a new North AmericanFree Trade Agreement (NAFTA), it is alsocentral to Mr Trump’s assault on the WorldTrade Organisation (WTO), the guardian ofthe global rules-based system of trade.

A trade deal is a bit like the rulebook ofa game in which the players are ofvery dif-ferent sizes and speak a host of differentlanguages, and so may have different ideasof what constitutes fair play. A dispute-settlement system is the referee, decidingwhether the rules have been broken. Itsvery existence may discourage cheating.

The system Canadian and Americannegotiators are arguing over dates from1986, when the two countries first startednegotiating a trade deal. The Americanswanted a simple, tariff-slashing agree-ment, but the Canadians wanted to go fur-ther, harmonising defensive tariffs, knownas anti-dumping and countervailing du-ties, which are levied on imports suppos-edly unfairly priced at below the cost ofproduction. The Canadians hoped therebyto protect their exporters from Americanfire. American negotiators at first declaredthat Congress would never agree to this;the Canadians threatened to walkout.

In what—at least among trade dip-lomats—became a legend of dealmaking,at 9pm on the day of the deadline theAmericans compromised. They offeredwhat became known as “chapter19”. Rath-er than curbing America’s use of defensiveduties directly, it set up a system of judicialreview. If either country imposed an anti-dumping duty on the other’s exports, theinjured exporter could appeal to a panel offive judges, who would assess whether theduties were consistent with the applyingcountry’s domestic law. Chapter 19 was in-corporated into NAFTA when the broaderagreement was created in 1993.

Today American and Canadian negoti-ators are locked in battle once more, thistime over chapter 19 itself. Robert Light-hizer, the United States Trade Representa-tive (USTR), wants to scrap it. Unless Cana-da accepts his demands by September30th, he has said that he will sign a dealwith Mexico alone, which is the other

member of NAFTA and has already agreedto scrap the offending chapter.

Mr Lighthizer’s opposition to chapter 19appears to be based on principle morethan on economic interest. American ex-porters have used chapter 19 successfully,for example to dispute Mexican tariffs onbeef, chicken and corn syrup. Gary Hor-lick, a lawyer who has argued in front ofchapter19 panels, says that for farmers andranchers, going through Mexican courts is“not a realistic option”. He adds that al-though they could fight the Mexican gov-ernment at the WTO, if they win underchapter19 any illegal charges are refunded.At the WTO, they are not. But Mr Lighthizerseems to regard chapter 19 as an affront toAmerica’s right of self-defence. The USTR

has described himself as a “sovereigntist”,and resents the idea that foreigners wouldbe able to challenge American law any-where other than in an American court.

The Canadians may well decide thatchapter19 isnotworth sacrificingthe entiredeal for. Itspanelspresided overonly 23 de-cisions between 2007 and 2017 (althoughits mere presence may have deterred othermisbehaviour). And Canada has more tolose this time if the talks fall apart, especial-ly if Mr Trump carries out his threat to levytariffs on Canadian cars in retribution.

If Canada caves in, the Trump adminis-tration will have won a battle in a biggerwar. September 30th is also the last day ofShree Baboo Chekitan Servansing’s term

on the WTO’s appellate body. Ordinarily,Mr Servansing, a Mauritian judge, wouldhave been reappointed. But the adminis-tration has been blockinghis renewal, hav-ing also stopped the appointment of threeother judges. The number of appellate-body judges will drop from four to three,the minimum required to hear a case. Ifany of the three has a conflict of interest,the case in question cannot be heard. 

American officials complain that theWTO’s appellate body has chipped awayat their country’s sovereignty and hasstrayed beyond its remit. In effect, they ac-cuse it of hobbling America’s ability to de-fend itself against, for example, surges inimports or subsidies doled out to Chinesestate-owned enterprises.

On September 24th Canada circulateda proposal to assuage America’s concernsto otherWTO members. The European Un-ion has also made suggestions. But it is un-clear that either of the disputes over dis-putes can be settled in this way. As themostpowerful playeron the field, Americamay simply prefer to be the referee as well.The rules will be what it says they are.7

World trade (1)

A matter of dispute

WASHINGTON, DC

The Trump administration is trying to change the waytrade arguments are settled

This version comes with a whistle

“IT’S a horrible deal. It was a HillaryClinton disaster, a deal that should’ve

never been made,” said America’s presi-dent in April 2017. Donald Trump wasthreatening to scrap his country’s free-trade agreement with South Korea, knownas KORUS, claiming that it had left America“destroyed”. On September 24th, after heand Moon Jae-in, his South Korean coun-terpart, had signed a revised deal on thesidelines of the UN General Assembly inNew York, Mr Trump sounded much moreemollient. “This is a great day for the Un-ited Statesand a greatdayforSouth Korea,”he said, having hailed a “basic redoing” ofthe old, “unfair” version.

In fact, KORUS has undergone some-thing well short of a full overhaul. Most ofthe original 24 chapters were untouched.KORUS is just the first of many pacts MrTrump has said he wants to negotiate; onSeptember 26th, for example, Mr Trumpannounced his intention to start formaltalks with Japan. The Japanese may hopethe results are similarly shallow.

Even the most notable changes to KO-

RUS are likely to have little immediate im-pact on America’s $23.1bn goods-trade def-icit with South Korea (see chart, next page),which has been botheringMrTrump. Most

World trade (2)

Familiar KORUS

SEOUL

Little has changed in the deal betweenAmerica and South Korea

70 Finance and economics The Economist September 29th 2018

1

2 of these changes concern cars, which ac-count formost of the gap. American manu-facturerswill each be able to export 50,000cars a year that comply only with Ameri-can, rather than South Korean, safety stan-dards. That is twice the old limit. But Amer-ican carmakers have filled barely half theirquotas for years. America’s 25% tariff onimported light trucks, which was due to goby 2021, will now remain until 2041. ButSouth Korean firms currently sell scarcelyany trucks to America, and nothing in thedeal will diminish Americans’ appetite forHyundai and Kia cars.

The revamped agreement is a modestimprovement for American exporters,says Wendy Cutler, who led America’s ne-gotiators in the first revision of KORUS in2010. For instance, it reduces red tape inclearing South Korean customs. “But thechanges build on provisions already con-tained in the original agreement,” she says.A cap on steel imports from South Korea,of 70% of the average in 2015-17, which isnot part of the new deal but to whichSouth Korea has agreed in return for ex-emption from tariffs, may also have a mod-est impact, reckons Brad Setser of theCouncil on Foreign Relations, a think-tank.

Contrary to the Trump administration’searlier claims, the deal does not come witha side-agreement on currencies, an area inwhich Mr Setser believes America couldhave extracted more. “The fact that theoriginal agreement didn’t tackle the SouthKorean government’s currency interven-tions was the biggest legitimate complaintabout it,” he says. “If this was about gettinga better deal for America, that would havebeen an obvious thing to address.”

After the signing, Mr Moon expressedrelief that the “uncertainty” surroundingKORUS had been resolved. That isnot quitetrue. The revised agreement contains noexplicit guarantee that America will notuse national security as an excuse for in-creasing tariffson South Korean cars. SouthKorean parliamentarians, who have to rati-fy the modified deal, have said they mayblock it without such an assurance. It maybe a while before the new, old KORUS

comes into force.7

Seoul traders

Source: US Census Bureau

US trade in goods with South Korea, $bn

80

60

40

20

0

20

40

60

+

–

2000 05 10 15 17

Imports Exports

Trade balance

LIKE many Americans, Jonna Bianco be-lieves President Donald Trump to be “a

tireless defender of the American peopleagainst Chinese economic aggression”. MsBianco, a Tennessee cattle-rancher, is presi-dent of the American Bondholders Foun-dation (ABF), which represents more than20,000 owners of bonds issued by Chi-nese governments before the Communistrevolution in 1949—and which claims thatAmerican citizens are owed more than$750bn. Having met Mr Trump at his golfresort in New Jersey last month, Ms Biancohopes he will press their case.

The ABF’s claim is built on the widelyaccepted doctrine that governments inher-it their predecessors’ debts. Pre-Commu-nist Chinese governments flooded inter-national markets with debt, such as a £25m(then $122m) issue of “gold loan” bonds in1913. “As a legal matter, those debts still ex-ist,” notes Mitu Gulati of Duke University.“But so too does the statute of limitations.”

Sovereign debtors are usually keen torepay or restructure debt rather than repu-diate it, in order to retain access to capitalmarkets. Last year Russia repaid the last ofits outstanding $70bn Soviet-era debt. In2010 even North Korea attempted to settlepart of a debt to the Czech Republic—with$500,000-worth ofginseng root.

But some governments do repudiatedebt in a symbolic rupture with their pre-decessors: the young Soviet Unionshocked the world when it disavowedTsarist debt in 1918. (The debt was mostlywritten off in 1996.) They might also dis-own the “odious debt” of despotic re-gimes, although this concept is hazy. Itsproponents argue that, just as individualsare not liable for fraudulent borrowing intheir name, entire populations should nothave to repay debts run up by deposed ty-rants. When he was America’s president,George W. Bush supported writingoffIraqidebt incurred by Saddam Hussein (Ameri-ca cancelled all of the $4.1bn it was owed).Such write-offs, says Lee Buchheit of Cle-ary Gottlieb, a law firm, usually rely oncreditors’ goodwill.

Diplomacy is the usual route to settlingthe debts of past regimes. China and Brit-ain struck a deal in 1987 for a payment toBritish holders of imperial bonds. An ab-sence of diplomatic relations helps to ex-plain why the ABF has not pursued Taiwanwith the same vigour as it has China. (In1990 Taiwan’s finance ministry said that re-payment “shall be held in abeyance pend-

ing the recovery ofmainland China”.) Asettlement with China through Trum-

pian diplomacy looks unlikely. The ABF isnonetheless demanding a hefty payout—although it realises it may have to acceptsome discount from its outlandish esti-mate of its due, which is based on assump-tions about decades ofunpaid interest andforgone capital gains. Meanwhile, a Chi-nese gold bond of1913 with a face value of£100 sells for around $250 on eBay. The cer-tificates seemingly appeal more to inves-tors in antiques than to investors in debt.7

Historical sovereign bonds

A timelessargument

American creditors are demanding thatChina honourpre-Communist debts

Still outstanding

AS STORM clouds gather over emergingmarkets, the BRICS countries that were

supposed to be the building blocks of anew globalised economy are instead in va-rious degrees of trouble. Brazil and Russiaare recovering only slowly from down-turns. A sharp fall in the rupee reflects jit-ters about India. China is mired in a tradewar with America. South Africa hasslipped into a recession. Those who dis-missed the BRICS as little more than a mar-keting acronym might feel justified in theircynicism. But at this moment ofweakness,their most tangible creation—a bank thataims to reshape the world ofdevelopmentfinance—is making surprising headway.

The New Development Bank (NDB),which is based in Shanghai, was foundedjust over three years ago. It has received far

Development lending

Building it up

SHANGHAI

The beleaguered BRICS can be proud oftheirbank

The Economist September 29th 2018 Finance and economics 71

2 less attention than another multilaterallender launched a short time later, theAsian Infrastructure Investment Bank(AIIB) in Beijing. Take The Economist’s owncoverage: a dozen articles have mentionedthe NDB, whereas the AIIB has cropped upin roughly 60.

This is understandable. The AIIB, with87 members, is seen as a vehicle for Chinato project its power. China has an effectiveveto over it, its chiefisa veteran Chinese of-ficial and America has refused to join. TheNDB has only five members. All haveequal stakes; none has a veto. They havealso been the bank’s only borrowers so far.For those minded to view the BRICS as ajoke, it is easy to dismiss.

But a closer look at the two banksshows that this would be unwise. They areroughlyas busyas each other. The NDB hasapproved $5.7bn in loans, a touch morethan AIIB’s $5.3bn. The AIIB has more full-time employees—180 to NDB’s 120—butboth are adding to their ranks by the week.They both now have international creditratings, making it easier for them to issuebonds. The three bigratingagenciesaward-ed the AIIB triple-A scores last year. In Au-gust the NDB received AA+ ratings, just anotch lower, from S&P and Fitch.

More striking, though, are their differ-ences. Under intense scrutiny, the China-led AIIB has been at pains to get off to asmooth start. It is teaming up with incum-bents more than challenging them: two-thirds ofits loans have been co-financed byother big development organisations suchas the World Bank. The AIIB has refrainedfrom making any loans to Russia or Iran,which are under American sanctions. Andit has denominated its loans in dollars, thenormal practice for development lenders.

The NDB has taken on slightly morerisk. Almost all its loans have been its ownprojects; just 2% are co-financed with othermultilateral lenders. K.V. Kamath, theNDB’s president, says its goal has been tobuild its own expertise quickly. Afifth of itsloans have gone to Russia. One of its big-gest was a $460m deal to make the Russianjudicial system more efficient—somethingalmost designed to raise hackles in Ameri-ca. The bank has also vowed to lend in lo-cal currencies, in order to shelter borrow-ers from a stronger dollar. To manage itsown balance-sheet, the NDB will do thisonly if it can raise local-currency financing,which it has done for just a few loans inChina so far. But Mr Kamath says it hopesto issue rand bonds in South Africa laterthis year.

The NDB is even managing to win someadmirers. “Why do we need anotherWorld Bank? The AIIB looks a lot likewhat’s out there. The NDB is looking moreinnovative,” says Gregory Chin, a special-ist in economic diplomacy at York Univer-sity in Canada. The BRICS’ walls are shakythese days. Their bank looks more solid. 7

Argentina

Second time lucky?

THE three-year, $50bn credit lineagreed on with the IMF on June 7th

was intended to halt Argentina’s curren-cy crisis. The peso had lost a quarter of itsvalue against the dollar since the start ofthe year as investors fled to safe havens. Itkept sliding. On August 29th MauricioMacri, Argentina’s president, asked theIMF to bulkup the package. On Septem-ber 26th, after three weeks ofnegotia-tions, the fund’s managing director,Christine Lagarde, agreed to increaseArgentina’s credit line from $50bn to$57.1bn and accelerate its disbursal.

Argentina is on the brinkof its secondrecession since Mr Macri tookoffice in2015. The peso has now fallen by morethan half in 2018, pushing inflation to 34%in August. The central bankhas raisedinterest rates to 60%. Investors worry thata further slide in the peso would leaveArgentina unable to service its large pileof foreign-currency debt. Mr Macri’sapproval ratings have slumped.

In recent weeks the government hasstriven to reassure investors. On Septem-ber 3rd Nicolás Dujovne, the financeminister, promised to eliminate the prim-ary fiscal deficit (ie, before interest pay-ments) in 2019, a year sooner than agreedon with the IMF, by levying a tax onexports and cutting subsidies for publictransport and electricity. The next day MrDujovne arrived in Washington to beginnegotiations with the fund.

Under the new deal the fund hasagreed to provide Argentina with $36.2bnby the end of2019, $18.7bn more than

under the June agreement. The extra cashand speedier hand-out should helpArgentina to meet its external financingneeds next year, which Mr Dujovne putsat $28bn.

In return Argentina has agreed to anew exchange-rate regime. The centralbankhas burned through $16bn in re-serves since the start of the year in a futileattempt to defend the peso. Now it willintervene only if the peso falls outside aband of34-44 to the dollar. (On Septem-ber 26th a dollar bought 38.83 pesos.)Intervention is limited to $150m per dayand the band will be allowed to depre-ciate by 3% a month.

In anticipation of the change, thecentral bank’s president, Luis Caputo,resigned on September 25th. Mr Macri’saides had touted the former Wall Streettrader as a Lionel Messi of the markets.But his frequent attempts to prop up thepeso caused conflict with Mr Dujovneand were thought to irritate the fund. Theappointment ofGuido Sandleris, MrDujovne’s deputy, as his successorshould repair relations between thefinance ministry and central bank.

Mr Macri had hoped for a vigorouseconomic recovery in 2019 to propel himto a second term in presidential electionsnext October. That recovery now looksimpossible. Mr Macri has no choice butto “stay the course and deliver on thefiscal commitments,” says Alberto Ra-mos ofGoldman Sachs. It is good advice,but hardly the campaign slogan Mr Macriwould have wished for.

BUENOS AIRES

The IMF agrees to beefup Argentina’s bail-out

All smiles: Dujovne and Lagarde

72 Finance and economics The Economist September 29th 2018

OIL prices have a knack of jumping at the most inconvenienttimes. As in 2007, for instance, when the price of a barrel

soared into triple digits, destabilising a world economy alreadyheading for a financial crisis. Or, for that matter, now. At morethan $80 per barrel, Brent crude is nearly twice as costly as in thesummer of 2017 and three times as pricey as in early 2016 (seechart, left panel). Dear oil does not yet mean a crisis. But it is put-ting emerging markets, already labouring, under further stress.

That oil should once again be causing trouble is a bit of a sur-prise. Halfa decade ago prices in excessof$100 perbarrel seemedto be a permanent feature of the economic landscape. But in 2014prices crashed, as America’s shale boom turned the market on itshead. The world quickly embraced the idea of a “new normal”for oil: in which large-scale, flexible shale production in Americapromised to keep prices stable and moderate. Americansscarcelyhad an opportunity to swap their Priuses for gas-guzzling SUVsbefore the market turned again.

Not all oil shocks are the same. When robust global growthboosts the demand for oil and pushes up prices, the effect on theworld economy is largely benign. In such cases, the rising cost ofoil to countries that must import it is offset, to some degree, by in-creased demand for their exports. In contrast, a jump in prices re-sulting from an interruption to supply is more unsettling. Risingprices in the mid-2000s were clearly a result of soaring demand.Mosteconomiesweathered risingcosts tolerablywell until pricesclimbed vertiginously in 2007. But the cause of today’s run-up ismurkier. Demand growth is a factor. Oil consumption in ad-vanced economies recovered as post-crisis doldrums recededand as lower prices reduced the incentive to conserve. But globalgrowth ispoised to slowin 2019, accordingto newforecastsby theOECD. Growth in China, which added most to oil demand in the2000s, is ebbing and becoming less energy-intensive.

Meanwhile, supply constraints loom larger (see chart, rightpanel). Economic and political crises have sapped Venezuela’sproductive capacity. Prices are rising in anticipation of tighterAmerican sanctions on Iran, scheduled to take effect in Novem-ber. At a recent meeting members of OPEC, joined by other lead-ing oil exporters such as Russia, chose not to respond to higherprices by increasing supply. And importantly, inventories havebeen falling. Markets will have very little cushion against furtherprice increases should any new supply disruption occur.

In the past, soaring oil prices could threaten the global econ-

omy by squeezing household budgets and depressing spendingin petrol-thirsty countries like America. In a paper examining thespike of 2007-08, James Hamilton, an economist, concluded thatdearoil was responsible fordrivingAmerica into recession in late2007. ButAmerica’splace in oil marketshaschanged asa resultofthe shale revolution. The price collapse of 2014 might have beenexpected to deliver a substantial stimulus to the American econ-omy, wrote Christiane Baumeisterand Lutz Kilian in a paper pub-lished in 2016. Yet the blow that lower prices dealt to America’spetroleum industry offset the benefits of cheap oil to consumers,resulting in a wash for the economy as a whole. Similarly, risingprices now irkconsumers but provide relief to the oil industry.

Other economies are less hedged, however. The big emergingmarkets most at risk account for a far larger share of global GDP

than in the past. For the oil-importing economies of the emergingworld, both the nature and the timing of the present run-up inprices are worrying.

When oil prices rise, oil-importing economies’ terms of tradedeteriorate: the price of their imports rises relative to that of theirexports. Because their exports pay for fewer imports, the import-ers’ current-accountdeficitswiden. Duringa more propitious mo-ment, this would not be cause for great concern. The importers’exchange rates would depreciate, facilitating an adjustment: theywould buy a bit less from the rest of the world than before, andsell the rest of the world a bit more. Whatever current-accountdeficits remained would be easy enough to finance, given bullishinvestors’ eagerness to lend to the fast-growing emerging world.

That’s oil, folksThis is not that sort ofmoment. Growth in world trade is slowing.Manufacturing export orders flipped from growth to contractionover the summer. As trade growth slows, the adjustment that oilimporters must make to higher oil prices becomes more severe.India’s current-account deficit continues to swell, for instance,even as the rupee plumbs record lows against the dollar. Fallingcurrencies exacerbate the burden ofdollar-denominated debt. Inrecent years, companies in emerging economies embarked on adollar borrowing spree, lured by low interest rates. For compa-nies that earn in their domestic currencies but owe in dollars, thedepreciations which ease the adjustment to dearer oil pricesmean a financial squeeze. Indebted corporate borrowers maycurtail investment and hiring, or even default. One economicdrag reinforces another.

Unluckily, oil prices are rising just as global financial condi-tions are also becoming less forgiving. Rich-world central banks,on high alert for signs of accelerating inflation, are moving to-wards a tighter monetary stance. When America’s Federal Re-serve raised its benchmark interest rate by another 25 basispoints, to 2-2.25%, on September 26th, it reiterated that furtherrises were on the way. Rising rates in America act as a magnet forglobal capital, buoying the dollar and sponging up money whichpreviously sought out high returns in emerging markets.

In the early 2010s the Fed stayed doveish despite high oilprices, recognising that high unemployment would keep infla-tion in check. With joblessness now below 4%, the hawks arepoised. Higher energy prices may well mean faster interest-rateincreasesand more pressure still on the currentaccounts ofbelea-guered emerging economies. Dearer oil is more an ill-manneredguest than a harbinger of doom. But its arrival is nonetheless im-pressively ill-timed.7

Crude awakening

Tighter times

Sources: Thomson Reuters; US Energy Information Administration

World liquid fuels, production andconsumption balancem barrels/day

Brent crude oil price, $ per barrel

2013 14 15 16 17 18 19

F’CAST

1.5

1.0

0.5

0

0.5

1.0

1.5

+

–

SURPLUS

DEFICIT

2013 14 15 16 17 180

20

40

60

80

100

120

Deareroil is catching emerging economies at a vulnerable moment

Free exchange

73

The Economist September 29th 2018

Property

74

The Economist September 29th 2018

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Chateau in Normandy, FranceFor Sale - EUR 1.9m

Property

The Economist September 29th 2018 75

1

ON JUNE 29th 1918 Martín Salazar,Spain’s inspector-general of health,

stood up in front of the Royal Academy ofMedicine in Madrid. He declared, notwithout embarrassment, that the diseasewhich was ravaging his country was to befound nowhere else in Europe.

In fact, that was not true. The illness inquestion, influenza, had been sowing mis-ery in France and Britain for weeks, and inAmerica for longer, but Salazar did notknow this because the governments ofthose countries, a group then at war withGermany and its allies, had made strenu-ous efforts to suppress such potentiallymorale-damaging news. Spain, by con-trast, was neutral, and the press had freelyreported on the epidemic since the firstcases had appeared in the capital in May.Before the summer was out, the diseaseSpaniards knew as the “Naples Soldier”—after a tune from a popular operetta—hadbeen dubbed the “Spanish illness” abroad,and that, somewhat unfairly, was thename which stuck.

Spanish flu was probably the worst ca-tastrophe of the 20th century. The currentestimate is that it killed at least 50m peopleand perhaps as many as 100m. At mini-mum, therefore, it ended the lives of threetimesasmanyasdied in the firstworld war(in the region of 17m). It was probably also

caught it from have therefore scoured re-cords for an earlier, more localised out-break of respiratory disease that quicklypetered out.

At the moment, there are three theoriesas to where the 1918 flu first manifested it-self. John Oxford, a British virologist, haslong argued that it was in a British armycamp at Étaples on the northern Frenchcoast, not far from the Western Front. Here,an outbreak of “purulent bronchitis”, char-acterised by a dusky blue hue to the face,was reported as early as 1916. Such bluefaces were also characteristic of fatal casesofSpanish flu.

In 2004 John Barry, an American jour-nalist, put forward a rival theory. Heclaimed that a small but severe outbreak offlu-like disease in Haskell County, Kansas,in January1918, could have seeded the laterone at Camp Funston. The camp’s catch-ment area for recruits included Haskell.

In 2013 a third hypothesis joined thesetwo—or rather was revived, since it wasfleetingly popular in the years immediate-ly following the pandemic. According toMark Humphries, a historian at WilfredLaurier University in Waterloo, Ontario,the 1918 flu began in Shanxi province, Chi-na, where an epidemic of severe respira-tory disease in December 1917 had doctorssquabbling over its identity. Some thought

more lethal than the second world war(60m), and may well have outstripped theeffects ofboth wars put together. The deathtoll was so high partly because Spanish fluwas truly pandemic (some 500m people,more than a quarterofthose then alive, arebelieved to have been infected), and partlybecause of its high mortality rate (5-10%,compared with 0.1% for subsequent influ-enza epidemics).

Understanding what happened istherefore important. Two questions in par-ticularneed answering. One is: what madethisoutbreakofinfluenza so much more le-thal than both previous and subsequentones? The other is: given that knowledge,what defences need to be put in place tonip any similar outbreak in the bud?

Origin of a speciesThe first cases of the 1918 flu to be recordedofficially as such were at Camp Funston, amilitary base in Kansas, on March 4th 1918.That morning, Albert Gitchell, a messcook, reported sick. By lunchtime the campinfirmary was dealingwith dozens ofsimi-lar incidents. The highly contagious natureof the Camp Funston outbreak suggests,however, that Gitchell was not the real “pa-tient zero”. An emergingflustrain tends notto infect people very well at first. Research-ers hunting for the individual Gitchell

Pandemic disease

A deadly touch of flu

The next few months markthe 100th anniversary ofthe peakofthe 20th century’smost deadlycatastrophe: neithera warnora genocidal ideology, but a plague

Science and technology

Also in this section

76 How influenza evolves

76 Science and technology The Economist September 29th 2018

1

2How influenza evolves

Mind your H’s and N’s

BOTH “mini-epidemics” ofseasonalflu, which happen most years, and

much larger pandemics, ofwhich1918’swas the worst example, are the result ofan arms race between the influenza virusand the immune systems of the animalsit infects. Here’s how it works.

Type A flu viruses—those which causepandemics, and also most seasonal flu,have two important surface proteins,haemagglutinin (H) and neuraminidase(N). Haemagglutinin helps the virusinvade a target cell. Neuraminidase helpsnew virus particles breakout of that cell.These two proteins are also antigens,meaning that they are parts ofa virus thatmay be recognised and reacted to by theimmune system.

But the process by which a flu virushijacks a host cell’s molecular machineryin order to reproduce itself cuts out of theloop what are known as proofreadingenzymes. The virus’s genetic material is

thus copied with low fidelity, meaningproteins derived from it vary consid-erably in detail. That variability generatesantigens which immune systems do notalways recognise and react to immediate-ly. Each year’s seasonal virus is thereforeslightly different, and thus requires anupdated vaccine—which is not true formost antiviral vaccinations.

Pandemic viruses represent biggershifts in this process. These create anti-gens sufficiently novel that have beengiven numbers by virologists (eg, N1, H3).Many hosts’ defences are unprepared forsuch big shifts, which happen, on aver-age, three or four times a century. The1918pandemic was caused by a strain with aversion ofhaemagglutinin called H1anda version ofneuraminidase called N1.The two subsequent flu pandemics of the20th century, in1957 and1968, werecaused by viruses carrying H2 and H3

antigens respectively, in combinationwith N2.

Much of this mutating goes on outsidehuman beings. Influenza is primarily aninfection ofbirds, especially waterfowl.In these animals the virus infects thedigestive system rather than the respira-tory tract, usually without producingsigns ofmalaise. Occasionally a bird-flustrain arises with molecular tools thatenable it to infect people—the H5N1andH7N9 strains are currently worryingdisease-surveillance experts.

The virus sometimes jumps directlyfrom a bird (often a chicken) to a person,but more usually passes via a pig. Thecells lining bird guts and human lungs arebuilt differently, meaning that the virusneeds different sets of tools to invadethem. Pig-lung cells, sharing properties ofboth, act as intermediaries in which thevirus can adapt from one to the other.Even after it has infected a human being,though, a virus cannot go on to cause apandemic unless it also acquires theability to pass easily between people.Fortunately, this is something H5N1andH7N9 have yet to do.

Flu’s success owes much to its mutability

Model flu virus showing surface antigens

it was pneumonic plague, a respiratoryvariant of bubonic plague to which Chinawas distressingly prone. Others suspecteda form of influenza.

Since they could not agree, and since itwas also difficult to explain how the flumight have travelled from that remote andpoorly connected region to the rest of theworld, the theory fell by the wayside. DrHumphries gave it new life when he point-ed out that China, though neutral in thewar until 1917, nevertheless played a roleearlier than this date by providing Alliedforces with a body of workers—the Chi-nese Labour Corps—who were recruitedfrom provinces, including Shanxi, andshipped via Canada to Europe.

Dr Humphries’s hypothesis is weak-ened by work published the year follow-ing his proposal, by Michael Worobey, anevolutionary anthropologist at the Univer-sity of Arizona, Tucson. Dr Worobey sug-gests that the 1918 human flu virus was ge-netically related to a virus circulating inNorth American birds at the time. Thetruth, though, is unlikely to be known un-less and until a comparison can be madebetween the genetic sequence of the 1918virus (which was determined in 2005, byJeffery Taubenberger and Ann Reid of theArmed Forces Institute of Pathology inWashington, DC) and the sequences ofeach of the putative ancestors, of which, atthe moment, no known samples exist.

The Blue DeathWhatever its origin, once Spanish flu gotgoing it spread rapidly. It traversed theworld in three waves, of which the sec-ond—that of the northern-hemisphere au-tumn of1918—was the most severe. For thatreason, the autumn of 2018 is marked bymany as the epidemic’s centenary.

That second wave was preceded by amilder one in the spring of 1918 and suc-ceeded by a final wave, intermediate in se-verity between the other two, in the earlymonths of 1919. The disease lingered on,though, until at least March 1920, withcases being reported that month in Peruand Japan. Indeed, Dennis Shanks, an epi-demiologist at the Australian Army Malar-ia Institute, in Queensland, recently report-ed that the epidemic continued on somePacific islands for another year, with casesstill being reported in New Caledonia aslate as July1921.

In the mind of Paul Ewald, an evolu-tionarybiologist at the Universityof Louis-ville, in Kentucky, the 1918 virus’s globalreach and its particular virulence wereshaped by a common factor. Both were aconsequence of the trench warfare of theWestern Front.

Its virulence, in Dr Ewald’s view, was aresult of the abnormal evolutionary envi-ronment that the trenches provided. Nor-mally, natural selection causes a virus thatis transmitted directly from host to host to

moderate its virulence. The longer the hoststays alive, the more new hosts that initialvictim is likely to come into contact with.Less virulent strains are thus favoured, andso spread. Observation shows that suchdrops in virulence do, indeed, happen inmost influenza epidemics.

Dr Ewald, however, suggests that thewar forced the 1918 virus down a differentevolutionary path. The large numbers of

youngmen packed into trenches in easternFrance for days or weeks on end were, firstof all, living cheek by jowl, making conta-gion easy, and, second, quite likely to die ofcauses other than influenza before theycould pass it on. In these circumstances thestrategy favoured by selection would be tobreed rapidly in a new host’s body, shed-ding lots of virus particles as this happens,even if that risks killing a host—for the host

The Economist September 29th 2018 Science and technology 77

2 may soon be unavailable anyway. Historians confirm that the virus did in-

deed race through the trenches, killing as itwent. Those soldiers who survived thentook it home with them when they wenton leave. This process was exacerbated bythe demobilisation which followed the ar-mistice of November 1918 that ended thefighting, with American, Australian, Cana-dian and New Zealand troops returninghome, and also soldiers from the Europeancombatants’ colonies in Africa and Asia.

Most of those who fell ill from Spanishflu experienced nothing more than thesymptomsofordinaryflu—a sore throat, fe-verand a headache. The unlucky, however,began to have difficulty breathing. Theirfaces took on a mahogany hue and theybled from their noses and mouths. Mahog-any deepened to blue, an effect doctorsdubbed “heliotrope cyanosis”, and beforelong their entire bodies turned black.

The actual cause of death in most caseswas pneumonia brought on by opportu-nistic bacteria. This made diagnosis com-plicated—for in 1918 the concept ofa “virus”was a newish one. Most ofthe world’s doc-tors therefore thought they were dealingwith a bacterial infection. The 1918 influen-za thus appears in historical records undera kaleidoscope of labels ranging from thecommon cold to pneumonic plague. Thatis one reason why estimating the death tollaccurately is hard.

At the molecular level, the explanationfor the virulence ofthe Spanish fluremainsunknown. But there are clues. Shortly afterDr Taubenberger and Dr Reid had workedout its genetic sequence, a group led by Ter-rence Tumpey, a virologist at the Centresfor Disease Control and Prevention in At-lanta, Georgia, reconstructed the virus byfeeding itsgenes to cultured human kidneycells in a dish, and forcing them to churnout viral particles in the way that humanlung cells do during the normal process ofinfection. This reconstructed virus is now

being studied at high-security biocontain-ment facilities in America.

One promising line of inquiry is the 1918strain’s version of haemagglutinin, a sur-face protein that helps the virus break intoa target cell (see box on previous page).When this is swapped into a strain of virusnormally almost harmless to mice, itmakes that strain deadly.

Such work is controversial. Some criticspoint to possible military applications.Those working in the area, such as Dr Tum-pey, prefer to emphasise its potential helpto the job ofcreating better flu vaccines.

Neveragain?The glittering prize of such work would bea universal vaccine—something that pro-tects recipients against all possible ver-sions of the virus. One approach to creat-ing such a vaccine exploits the observationthat, although the convoluted head of thehaemagglutinin molecule (which is the tar-get of most existing vaccines), is highlyvariable in its composition, the stem thatanchors it to the rest of the virus is not. Avaccine aimed at the stem might thus beuniversally effective.

Vaccines which employ this principleare already in clinical trials. But even ifthey do work, they might not be as univer-sal as their supporters hope. Sceptics pointto a phenomenon called imprinting, thatmight cause a “universal” vaccine’s effica-cy to vary between individuals who havehad different histories ofexposure to flu.

Imprinting is the name given to the ob-servation that an immune system mountsits most effective response to the first flustrain it ever encounters. A memory of thisfirst response is retained by the system andsubsequent responses are therefore likelyto be poor matches for new and differentstrains, whethercaught from someone elseor introduced by inoculation as vaccines.To the extent that haemagglutinin’s molec-ular stems really are the same in different

strains, the effects of imprinting should bediminished. But they may not be abol-ished entirely.

Imprinting probably shaped the 1918pandemic. One of its surprises was thatpeople in their twenties and thirties wereparticularly vulnerable, while the elderly—normallya high-riskgroup forflu—were ac-tually more likely to survive than they hadbeen in flu seasons throughout the previ-ous decade. The first flu virus that most ofthose who were young adults in 1918 wereexposed to as children was the one thatcaused the pandemic of the 1890s. This be-longed to viral subtype H3N8 (subtypesare named after particular versions of hae-magglutinin and a second surface protein,neuraminidase, that they contain), andwas thus a different beast from the H1N1

strain with which they were confronted in1918, so imprinting would have harmedtheir response.

By contrast, there is evidence that thosewho were elderly in 1918 had often been ex-posed when young to viruses circulatingearlier in the 19th century which containedH1 or N1. In their cases, imprinting wouldhave helped their resistance mechanisms.

Understanding imprinting could assistefforts to predict who will come off worstin a future pandemic, and to build a betteruniversal vaccine. The imprinting story isunlikely to be simple, though. Forexample,there seems to be cross-reactivity betweensome subtypes of influenza, meaning thatexposure to one offers protection againstanother. America’s National Institute ofAllergy and Infectious Diseases is plan-ning a large study of imprinting in infants,to explore these effects.

The better vaccines promised by thissort of research are one arm of an effectiveresponse to a new pandemic. The other isearly detection. The world has, thankfully,moved on from the point where a high-ranking health official can stand up fourmonths into a flu pandemic and be igno-rant of the situation in countries beyondhis own. But the ability ofa virus to spreadaround the world has increased hugely.

Troops demobilised after the first worldwar went home by railway and ship. Now,passenger airliners mean that a virus inone part of the planet could cross to thatplace’s antipodes in a day. Moreover,though humanity at large is not as crowd-ed together as were the troops in thetrenches, the world’s population has qua-drupled since 1918. About half of it nowlives in cities, with a proximity betweenneighbours unknown to the far more ruralworld of a century ago. Monitoring sys-tems are much better than they were in1918, so the chances are that a threateninginfluenza outbreak would be picked upquickly. But the conditions needed for apandemic to happen do exist. As with lib-erty, so with health: the price of retaining itis eternal vigilance.7One of 500m

78 The Economist September 29th 2018

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CHINA’S “Sputnik moment” came onMay 27th 2017. On that day an algo-

rithm thrashed Ke Jie, the world’sbestplay-er of Go, an ancient and demanding Chi-nese board game. Mr Ke’s defeat byAlphaGo, an artificial intelligence (AI) sys-tem developed by DeepMind, a Britishfirm that had been bought by Google, wasas much a blow to China’s psyche as theSoviet satellite was to America’s self-es-teem in 1957. Within months, China an-nounced ambitious plans to dominate AI

by 2030.Kai-Fu Lee thinks it will succeed. He is

well placed to judge. He moved from Tai-wan to America at 11, earned a PhD in AI inthe 1980s and has been a seniormanager atAmerica’s mightiest tech firms, includingApple, Microsoft and Google. Now he runsa Chinese venture-capital fund, whichgives him a ringside seat for the contest be-tween what he calls the two “AI super-powers”, China and America.

He thinks China will win because it hasthe edge in the fourdeterminants ofAI suc-cess: brains, capital, regulation and data.His verdict on the last three criteria is large-ly persuasive. For example, China’s inter-net economy generates vastly more datathan any other, particularly in the area ofpayments—many Chinese merchants es-chew coins and currency in favour of digi-tal money. Meanwhile, whereas Americancities are restricting self-driving cars, thedistrict of Xiong’an, 60 miles south of Beij-

the form of copying products, smearingopponents, or even legal detention”—thatis, getting the police to arrest a rival.

By contrast, American firms are com-placent, sticking comfortably to their dis-tinct corners of the web—Facebook in so-cial media, Amazon in e-commerce, and soon—with little real rivalry among them. Hemocks them for their “mission statements”and “core values” that blind them to mar-ket opportunities.

Values are the missing character in MrLee’s narrative; or rather, he thinks they area distraction. The West is enamoured ofthe idea that innovation and creativity re-quire free speech, Mr Lee says. Yet China’sgrowth debunks that platitude. Thoughthe free-flow of ideas may be necessary inthe social sciences, in apolitical technol-ogies the Chinese system has alreadyproved to be innovative.

As for the troves of data that make AI

systems work, Mr Lee believes that Chi-nese consumers’ willingness to give up pri-vacy for convenience is a huge boon to itscompanies in the AI race. “It’s up to eachcountry to make its own decisions on howto balance personal privacy and publicdata,” he writes. “There’s no right answer.”

The ghost in the machineThese are controversial claims. For exam-ple, Mr Lee fails to consider how consumerinterests may change, especially as peoplebecome wealthier and more demandingof government. He ducks the urgent ques-tion of state surveillance, which (for in-stance) is being used in Xinjiang provinceto repress individual freedom. The reti-cence is understandable; there is a lot ofmoney at stake, after all.

His long-term vision is stark. By his reck-oning, as many as half of all jobs in Ameri-ca will be vulnerable to automation with-in 20 years; he expects something similar

ing, is being built from scratch to accom-modate them (along with 2.5m people).The mayors of Chinese cities are splashingcash on AI startups.

MrLee’sanalysisofbrainpower is morenuanced. The West has the best research-ers, he acknowledges, and they still offerbenefits. But, he argues, they are no longerparamount. The era of AI breakthroughshas been superseded by an age of imple-mentation—getting the algorithms to workon everyday problems. Now the main ad-vantage lies in having millions of “tinker-ers”. And China does.

His observations will unsettle his erst-while colleagues in Silicon Valley. Com-pared with Chinese entrepreneurs—whoare street-smart, hungry and ruthless—“thevalley’s companies look lethargic and itsengineers lazy.” One group grew up amidpoverty and upheaval, Mr Lee notes; theother are children of suburban accoun-tants and dentists. In his view, Chinese en-trepreneurs are “gladiators”, who have as-similated “the lessons learned in thecoliseum”, namely “kill orbe killed”. He re-counts dirty tricks and anticompetitiveruses. “The only recourse when an oppo-nent strikes a low blow is to launch a moredamaging counterattack, one that can take

Artificial intelligence

The gladiator’s edge

In its competition with America to dominate artificial intelligence, reckons awell-placed insider, China will prevail

Books and artsAlso in this section

79 A wrong turn on campus

80 Rules for collecting art

81 A tale of slavery and escape

81 William Boyd’s new novel

AI Superpowers: China, Silicon Valleyand the New World Order. By Kai-Fu Lee.Houghton Mifflin Harcourt; 272 pages; $28

The Economist September 29th 2018 Books and arts 79

1

2 to happen in China eventually. Again, hepredicts China will cope better, since itseconomy is at an earlier stage of evolutionand itsworkers will adjust more flexibly. Atthe same time the existing economic mod-el of developing countries, based on low-cost labour, will collapse, with no obviousalternative. The world will devolve into aneo-imperial order, in which, if they are totap into vital applications, other countrieswill have to become vassal states of one ofthe AI superpowers.

Is he right? For the most part, probablynot. True, AI represents the new space race,and China and America are set to lead it.But Mr Lee’s comparative analysis of Chi-nese and Western capitalism suffers (ironi-cally) from a lack of data. China has hadonly 30 years’ experience of capitalism

since Deng Xiaoping’s reforms took hold:not enough to discover whether its no-holds-barred approach is indeed more effi-cient than a rules-based system of compe-tition. It took several nasty financial disas-ters in the late19th and early 20th centuriesfor the West to constrain its own worstbusiness practices, the better to let its ani-mal spirits flourish. A financial crash mayyet temper Chinese hubris.

Despite its futuristic theme, Mr Lee’sbook fits into a familiar genre of businessscare stories. In the 1960s the French wereaflutter about “Le Défi Américain” by Jean-Jacques Servan-Schreiber; in the 1980sAmericans were paralysed by Ezra Vogel’s“Japan as Number One”. “AI Superpow-ers” should be taken seriously. But it is notthe final word.7

AFTER John McCain died, a clip from hisrun for the presidency in 2008 resur-

faced on social media. “No, ma’am,” hetells a woman at a rally who describes Ba-rack Obama as “an Arab” who can’t betrusted; “he’s a decent family man, a citi-zen.” To many observers, the incident epi-tomised McCain’s integrity. A few heardsomething different—an implication, inthat “No, ma’am”, that Arabs and goodfamily men were mutually exclusive cate-gories. Rather than exhibiting a now-anti-quated bipartisan civility, McCain had be-trayed his unconscious prejudice.

That response encapsulates some ofthe disturbing intellectual trends chroni-cled in “The Coddling of the AmericanMind”: a willingness, even eagerness, totake offence; a determination to interpretother people’s words as bleakly as possi-

ble, regardless of intent; and a Manicheanworld view in which a political opponentmust always be wrong. On the contrary,plead Jonathan Haidt and Greg Lukianoff,“A faux pas does not make someone an evilperson.” Alongwith othershibboleths thathave taken root in American universities—and spread beyond them, and beyondAmerica—this kind of hypersensitivitycloses down debate, the authors say. It alsoleaves young people ill-equipped for life’sinevitable frictions.

Their book grew out of an article in theAtlantic in 2015. As they point out, the sortof shenanigans that concerned them then,such as the rise of “trigger warnings” and“micro-aggressions” and the hounding ofteachers for imaginary thought-crimes,have multiplied and worsened. In “TheCoddling” they narrate a few ofthese rum-puses, such as the riotovera visiting speak-er at the University of California at Berke-ley in 2017, and what, in effect, was astudent coup at Evergreen State College inWashington in the same year. Staff whoshould have known better have some-times been complicit in the mayhem.

For all these lurid episodes, though, thebigproblem on manycampuses is lessvigi-lantism than self-censorship. As the au-thors note, “students at many colleges to-day are walking on eggshells”. The mainvictims, they emphasise, are not disinvitedspeakers but the agitators themselves,whom they see as worryingly fragile andconfused. Just as many Americans de-scribe commercial wants as needs (“I needa Coke”), so too many students mix up theconcepts of safety (which it is the authori-ties’ job to ensure) with emotional comfort(which is nobody’s look-out). They con-strue objectionable opinions as invalid,even as a form of violence. They are proneto “catastrophising”, or interpreting asdisastrous what is merely undesirable.

Three basic misconceptions underpinthis hypochondriacal outlook, Mr Haidtand Mr Lukianoff write. First, that a per-son’s feelings, such as over whether a re-markis racist, are always right. Second, thathumankind can be split into good and badpeople, whereas, as Solzhenitsyn put it,“the line dividing good and evil cutsthrough the heart of every human being”.Finally, that risk is best avoided, or “Whatdoesn’t kill you makes you weaker”.

A further dispiriting conviction lurks atthe heart of modern campus radicalism:the notion that each racial group, genderand sexuality is fundamentally different,destined (at best) to coexist in siloedspaces, safe or otherwise. As the authorslament, that diverges sadly from the idealof common humanity that informed boththe civil-rights movement and, later, thedrive for gay equality.

What has gone wrong? A lot, they con-tend. The Western world is safer for chil-dren than ever, yet because its perils aremore widely advertised, it feels more dan-gerous. Parents have become overprotec-tive, inducing anxiety in their offspringlong before they get to college. Social me-dia exacerbate the nerves through perpetu-al judgments, comparisons and opportu-nities for bullying. They amplify bad newsand isolate teenagers from contrary opin-ions. Technology also helps to isolate themliterally: time spent in sociable and riskyplay is declining.

Tellingly, the cohort that most exhibits

Intellectual life in America

Unsafe spaces

The real victims ofoutrage at American universities are the students themselves

The Coddling of the American Mind:How Good Intentions and Bad Ideas areSetting Up a Generation for Failure. ByGreg Lukianoff and Jonathan Haidt.Penguin Press; 352 pages; $28. AllenLane; £20

80 Books and arts The Economist September 29th 2018

1

2 these symptoms are not millennials but“iGen”—people born from the late 1990s,who grew up with Facebook and Twitterand began to matriculate in 2013. They alsoreached adulthood in an atmosphere ofpolitical rancour, in which partisan alle-giance was increasingly determined byshared enmities rather than values, and asAmerica’s first black president was suc-ceeded by a man who numbers some“very fine people” among the neo-Naziswho marched in Charlottesville.

If the causes of these shoddy intellectu-al habits mostly lie beyond the campus, so,the authors argue, do the consequences.“Nothing isofmore importance to the pub-lic weal, than to form and train up youth inwisdom and virtue,” reckoned BenjaminFranklin, one of many thinkers cited in“The Coddling”. If the Enlightenment val-ues of reason and empiricism wither atuniversities, they will struggle in the out-side world too.

Just kidsAll that is true and alarming. Mr Haidt’sand Mr Lukianoff’s analysis is wise andscrupulous. Still, another form of oversen-sitivity may colour the angst about cam-pus activism—namely that of older peopletowards the anticsofyoungsters. That is es-pecially true of events at elite institutions.Their alumnae tend to feel proprietorialabout their alma maters; those who didnot attend them often resent those whohave. In reality, only a minority ofstudentstake part in the more egregious sorts ofdis-order that “The Coddling” documents. Inthe spectrum of threats to Western democ-racy, cock-eyed campus politics may notentirely deserve the attention it attracts.

Another mitigating factor—which MrHaidt and Mr Lukianoff acknowledge—isthat, in the headline incidents, at least, bol-shie students are not the only blamewor-thy parties. Harassing speakers is alwayswrong; but sometimes the inviters and thebarrackers are engaged in a cycle of provo-cations rather than a profound contest ofideas. The principle of free speech meansMilo Yiannopoulos, a bilious provocateurwho occasioned the Berkeley riot, is enti-tled to his views. It does not require col-leges to welcome him.

Moreover the boundary between dis-comfortingopinions, which ought to be ac-commodated, and the abhorrent kind isunstable. In 2018, for instance, speakerswho maintain thatwomen are too intellec-tually feeble to vote, or who advocate eu-genics, are unlikely to receive invitationseven from impish contrarians; both weremainstream positions in the fairly recentpast. By contrast, the beliefs that homosex-uality is sinful, or that women belong athome, just about lie within the sphere oflegitimate discussion. In 50 years they maynot—and impatient studentswill complainabout something else. 7

WHEN David Hammons’s massiveportrait of the Rev Jesse Jackson as a

blue-eyed blond man, “How Ya Like MeNow?”, was shown in New York in 1989 itwas attacked by assailants wieldingsledgehammers. They thought the African-American politician was being insulted.Mr Hammons incorporated the damageinto the piece, but for almost 20 years after-wards he refused to sell it. Until he metMitchell Rales.

One of the founders ofDanaherCorpo-ration, an industrial-design and innova-tion conglomerate, Mr Rales has quietlybecome one of America’s most energeticcollectors of modern art. Now he and hiswife Emily, a gallery director, are puttingsome of their artworks on show at theirnewly enlarged Glenstone Museum,which opens on October 4th. One of thecentrepieces of the display will be MrHammons’s portrait, which in the mael-strom of America’s racial politics seemsonly to have grown more relevant.

Apart from the Hirshhorn Museum andSculpture Garden, Washington does nothave much in the way ofmust-see contem-porary-art galleries. That is one reasonwhy Glenstone, 18 miles (29km) from thecity centre in what used to be Maryland’sfox-hunting country, is likely to prove a hitwith Beltway art-lovers and tourists. Entrywill be free, but only 400 visitors will beadmitted each day. Tickets for the first twomonths were snapped up almost as soonas they were released.

In contrast to Crystal Bridges, the im-posing museum that Moshe Safdie de-signed for Alice Walton, the Walmart heir-

ess, in Arkansas, the 11 galleries inGlenstone’s $200m extension are set lowin the landscape, in a circle looking over acentral pond. The picture window at theBeyeler Foundation near Basel was an in-spiration, as were the proportions of theMenil Collection in Houston. The archi-tect, Thomas Phifer, is known for his use ofnatural light and his choice ofmaterials. AtGlenstone there is only concrete, glass,wood and stainless steel. On bright daysno electric lighting will be needed.

In a collection that focuses on the post-war period, especially German and Amer-ican Expressionists, the Raleses’ acquisi-tion policy is as rigorous as Mr Phifer’s de-sign. Each artist they buy has to have beenexhibiting for at least15 years. For example,they identified Wade Guyton as a risingpost-conceptual artist early in his career,but waited until he had completed a de-cade and a half of shows before acquiringany ofhis work. They do not buy at art fairsand rarely at auction. Instead they rely onwell-known dealers, such as Gagosian,Hauser & Wirth and David Zwirner.

If those rules seem conservative, theunderlying aspiration is bold. The couplewant each work to represent a pivotal mo-ment in the development of a particularartist, or in the history of art itself. Aligh-iero Boetti, an influential member of theItalian Arte Povera movement, made morethan 150 versions ofhis embroidered “Mapof the World”. The one at Glenstone is thefirst. If key works are not available—as, forinstance, they have not been in the cases ofVasily Kandinsky or Kazimir Malevich—they do not buy that artist at all.

The resulting collection is less edgythan those assembled by Charles Saatchiin the 1970s or (more recently) by PatriziaSandretto Re Rebaudengo, an up-and-com-ing collector from Turin. Instead Glenstoneoffers top-quality work by establishednames. For example, Cildo Meireles isprobably the most important living Brazil-ian artist. Glenstone has two magnificentworksbyhim: “Red Room” and “Glovetrot-

Art museums

The Rales rules

POTOMAC, MARYLAND

Anewshowcase forone ofAmerica’sfinest contemporary-art collections

Inside the mind of Louise Bourgeois

The Economist September 29th 2018 Books and arts 81

2

THE word “vicious” recurs in “Washing-ton Black”, Esi Edugyan’s masterful

novel about the exploits of an escapedslave. There are vicious gazes, vicioussounds, vicious murders and even a vi-cious boil, glistening with poison. A deathfrom suicide is “vicious”, but so is a moth-er’s love (“She loved me with a vicious-ness”). The crowd at a hanging is “all teethand vicious anticipation”. The word beatslike a metronome through this wondrousbook, capturing the nastiness and brutal-ity of the world as seen by a young blackman in the early19th century.

The man in question is George Wash-ington Black, or “Wash”, who was borninto slavery on a Barbados sugar planta-tion but tellshis tale asan18-year-old “Free-man, now in possession of my own per-son”. His story is gripping. As a boy of tenor 11, he is plucked from the cane fields toassist his master’s eccentric brother, Chris-topher Wilde, or “Titch”, an inventor whohas grand notions about air travel and theequality ofmen.

What began as an apprenticeship ofconvenience—little Wash was the right sizeto join Titch in his “Cloud-cutter”, or hot-air balloon—evolves into a kind of friend-ship. Wash proves a quickstudy and prodi-gious artist, capable of capturing the natu-ral world in paint. A sudden tragedy turnsthem both into fugitives; a strange turn inthe Arctic leaves Wash alone, with a smallpurse of money, a price on his head and aslave-catcher on his trail.

Wash’s struggle to forge a life amid cru-

elty (and some odd luck) spans severalcontinents, none of them very hospitableto a lone black adolescent with a head forscience and a disfiguring burn, which heacquired during one of Titch’s experi-ments. Ms Edugyan makes him a giftedstoryteller; his keen observations bear thehallmarks of his artistic sensibility. Eye-lashes are “blackas the legs offlies”; the let-ters of the alphabet resemble “nurse’sstitches” to his initially illiterate eyes. Occa-sionally his teenage powers of insightstrain credulity, but readers will enjoy hisprecocious company.

Ms Edugyan’s depiction of this dark

period is vivid and captivating (like herprevious novel, “Half Blood Blues”,“Washington Black” has been shortlistedfor the Man Booker prize). The Canadianauthor is too subtle a novelist to belabourher story’s contemporary relevance, but,like the moral stain ofhuman bondage, it ispalpable all the same. At a time whenblackness still invites unwarranted vio-lence, youngWash’s hard lessons resonate.

Most profound, perhaps, is his recollec-tion that even as a child his nightmares didnot feature clawed monsters. “I knew thenature of evil; I knew its benign easy face,”he recalls. “He would be a man, simply.” 7

Slavery and escape

Flight to freedom

Washington Black. By Esi Edugyan. Knopf;352 pages; $26.95. Serpent’s Tail; £14.99

British fiction

Keys to the heart

IN AN illustrious career spanning 20works offiction, William Boyd has

covered a broad range ofgenres andtones. Early books such as “A Good Manin Africa” and “An Ice-Cream War”seemed inspired by Evelyn Waugh; laterworks such as “Brazzaville Beach” and“Armadillo” deal with weighty contem-porary themes. “Restless” and “Waitingfor Sunrise” are espionage thrillers. Someofhis best-loved novels, such as “AnyHuman Heart”, are globe-trotting histori-cal yarns. His moreish new one, “Love isBlind”, belongs in this last group.

Brodie Moncur is a Scottish piano-tuner—a profession Mr Boyd expertlyevokes—and the son ofa loathsomefire-and-brimstone preacher. The19thcentury is drawing to a close. Moncurlongs to escape the suffocation of themanse, and accepts an offer from AinsleyChannon, boss of the Edinburgh pianomanufacturer for which he works, tomove to its Paris showroom. There Mon-cur enterprisingly arranges for the firm tosponsor John Kilbarron, “the Irish Liszt”,who in return plays Channon pianos athis concerts.

Kilbarron lives with his brother, thesinister Malachi, and a Russian operasinger, Lika Blum, with whom Moncurfalls violently in love. The two begin anaffair, Moncur ensuring that he becomesindispensable to the ailing and volatilepianist. Love may be blind, but it is cer-tainly benighted, constantly threatenedwith discovery, by the lowering presenceofMalachi and, most troublingly of all,by Moncur’s tubercular lungs.

The second halfof the book is a kindofcat-and-mouse game, which ends, as anumber ofMr Boyd’s narratives do, on a

remote island, on which its amiablyflawed protagonist washes up. As muchas the finely orchestrated plot, the joy ofthe story lies in its perfect period detail,the exquisitely sketched settings and acast ofsupporting characters who, as inthe best novels of the era in which thebook is set, spring to technicolour life: acigarette-puffing female doctor in StPetersburg, an American anthropologistresearching sexual mores in the Anda-man Islands, a rakish convalescent inNice. Historical figures are sprinkledamong the invented ones. The author’sprose is characteristically faultless.

These somewhat old-fashioned narra-tive skills tend to appeal more to readersthan to novelty-seeking prize juries. But,as with Moncur’s piano-tuning, practis-ing a craft to this degree of refinement isan impressive feat. This sweeping tale oflove and revenge, fate and free will, sur-render and control will delight its au-thor’s many fans.

Love is Blind. By William Boyd. Knopf; 384pages; $26.95. Viking; £18.99

The food of love

ter”, both of which have been shown atTate Modern in London. Similarly, LouiseBourgeois, a Franco-American sculptorwho died in 2010, spent decades probingher relationship with her father in psycho-analysis. One ofthe most celebrated worksthat resulted is the uncanny installationcalled “The Destruction of the Father” (seeprevious page), which Bourgeois made in1974 and Glenstone recently acquired.

Brice Marden, an American minimalist,had never undertaken a commission be-fore the couple invited him to respond tothe monumental Rothko chapel at the Me-nil Collection. Mr Marden wanted hispainting to be exactly 39 feet (11.9 metres)long, with precisely six feet of white wallon either side. So the Raleses built him agallery all of his own, exactly 51 feet wide,not an inch more or less. 7

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Fellowships

Economic data% change on year ago Budget Interest Industrial Current-account balance balance rates, % Gross domestic product production Consumer prices Unemployment latest 12 % of GDP % of GDP 10-year gov't Currency units, per $ latest qtr* 2018† latest latest 2018† rate, % months, $bn 2018† 2018† bonds, latest Sep 26th year ago

United States +2.9 Q2 +4.2 +2.9 +4.9 Aug +2.7 Aug +2.5 3.9 Aug -442.8 Q2 -2.7 -4.8 3.07 - -China +6.7 Q2 +7.4 +6.6 +6.1 Aug +2.3 Aug +2.1 3.8 Q2§ +68.3 Q2 +0.6 -3.6 3.49§§ 6.87 6.63Japan +1.3 Q2 +3.0 +1.1 +2.2 Jul +1.3 Aug +0.9 2.5 Jul +198.9 Jul +3.8 -3.8 0.10 113 112Britain +1.3 Q2 +1.5 +1.3 +1.0 Jul +2.7 Aug +2.4 4.0 Jun†† -106.3 Q1 -3.5 -1.7 1.59 0.76 0.75Canada +1.9 Q2 +2.9 +2.3 +2.5 Jun +2.8 Aug +2.2 6.0 Aug -53.4 Q2 -2.5 -2.3 2.42 1.30 1.24Euro area +2.1 Q2 +1.5 +2.1 -0.1 Jul +2.0 Aug +1.7 8.2 Jul +465.7 Jul +3.4 -0.7 0.51 0.85 0.85Austria +2.3 Q2 -4.0 +2.9 +4.8 Jul +2.2 Aug +2.1 4.9 Jul +9.5 Q1 +2.2 -0.3 0.57 0.85 0.85Belgium +1.4 Q2 +1.6 +1.6 -2.3 Jul +2.2 Aug +2.0 6.2 Jul +0.2 Mar -0.1 -1.1 0.89 0.85 0.85France +1.7 Q2 +0.6 +1.7 +1.8 Jul +2.3 Aug +2.0 9.2 Jul -9.0 Jul -1.1 -2.4 0.83 0.85 0.85Germany +1.9 Q2 +1.8 +2.0 +1.2 Jul +2.0 Aug +1.8 3.4 Jul‡ +320.6 Jul +7.6 +1.7 0.51 0.85 0.85Greece +1.8 Q2 +0.9 +2.0 +1.9 Jul +1.0 Aug +0.8 19.1 Jun -2.5 Jul -1.2 -0.2 4.04 0.85 0.85Italy +1.2 Q2 +0.7 +1.2 -1.3 Jul +1.6 Aug +1.4 10.4 Jul +58.5 Jul +2.5 -2.0 2.91 0.85 0.85Netherlands +3.1 Q2 +3.3 +2.8 +1.9 Jul +2.3 Aug +1.6 4.8 Aug +95.1 Q2 +9.7 +1.3 0.65 0.85 0.85Spain +2.7 Q2 +2.3 +2.7 +2.8 Jul +2.2 Aug +1.7 15.1 Jul +20.0 Jun +1.4 -2.7 1.36 0.85 0.85Czech Republic +2.7 Q2 +2.8 +3.0 +10.3 Jul +2.5 Aug +2.2 2.3 Jul‡ +1.5 Q2 +0.6 +1.0 2.20 21.9 22.1Denmark +1.4 Q2 +0.8 +1.6 +7.4 Jul +1.0 Aug +1.1 3.9 Jul +19.7 Jul +7.4 -0.7 0.47 6.35 6.32Norway +3.3 Q2 +1.5 +1.6 -2.3 Jul +3.4 Aug +2.3 4.0 Jul‡‡ +28.0 Q2 +7.4 +5.4 1.99 8.11 7.91Poland +5.1 Q2 +4.1 +4.6 +5.0 Aug +2.0 Aug +1.8 5.8 Aug§ -0.8 Jul -0.7 -2.0 3.24 3.64 3.65Russia +1.9 Q2 na +1.7 +2.8 Aug +3.1 Aug +3.0 4.6 Aug§ +64.6 Q2 +4.3 +0.3 8.77 65.9 57.8Sweden +2.4 Q2 +3.1 +2.8 +2.3 Jul +2.0 Aug +2.0 6.1 Aug§ +13.4 Q2 +3.6 +0.9 0.68 8.81 8.15Switzerland +3.4 Q2 +2.9 +2.2 +8.7 Q2 +1.2 Aug +0.8 2.6 Aug +71.7 Q2 +9.7 +0.9 0.13 0.97 0.97Turkey +5.2 Q2 na +4.0 +7.9 Jul +17.9 Aug +13.3 10.2 Jun§ -54.6 Jul -6.1 -3.4 18.49 6.10 3.55Australia +3.4 Q2 +3.5 +2.9 +3.4 Q2 +2.1 Q2 +2.1 5.3 Aug -41.8 Q2 -2.6 -0.9 2.75 1.38 1.27Hong Kong +3.5 Q2 -0.9 +3.4 +1.6 Q2 +2.3 Aug +2.2 2.8 Aug‡‡ +13.8 Q2 +4.3 +2.0 2.44 7.81 7.81India +8.2 Q2 +7.8 +7.3 +6.6 Jul +3.7 Aug +4.6 6.4 Aug -49.5 Q2 -2.4 -3.6 8.07 72.6 65.4Indonesia +5.3 Q2 na +5.2 +9.0 Jul +3.2 Aug +3.6 5.1 Q1§ -24.2 Q2 -2.5 -2.6 8.21 14,908 13,374Malaysia +4.5 Q2 na +5.0 +2.5 Jul +0.2 Aug +0.9 3.4 Jul§ +11.2 Q2 +2.6 -3.3 4.11 4.14 4.21Pakistan +5.4 2018** na +5.4 +0.5 Jul +5.8 Aug +5.4 5.9 2015 -18.1 Q2 -5.8 -5.4 10.15††† 124 105Philippines +6.0 Q2 +5.3 +6.6 +11.8 Jul +6.4 Aug +5.1 5.4 Q3§ -5.1 Jun -1.4 -2.8 7.17 54.3 50.9Singapore +3.9 Q2 +0.6 +3.5 +3.3 Aug +0.7 Aug +0.6 2.1 Q2 +64.6 Q2 +19.7 -0.7 2.56 1.37 1.36South Korea +2.8 Q2 +2.4 +2.8 +0.9 Jul +1.4 Aug +1.6 4.0 Aug§ +74.0 Jul +4.6 +1.0 2.41 1,115 1,137Taiwan +3.3 Q2 +1.6 +2.6 +1.3 Aug +1.5 Aug +1.7 3.7 Aug +84.5 Q2 +13.1 -0.9 0.91 30.7 30.2Thailand +4.6 Q2 +4.1 +4.1 +0.7 Aug +1.6 Aug +1.2 1.0 Jul§ +48.2 Q2 +9.3 -2.9 2.60 32.5 33.2Argentina -4.2 Q2 -15.2 +0.5 -7.0 Aug +34.2 Aug +27.3 9.6 Q2§ -33.8 Q1 -4.5 -5.6 11.26 38.8 17.6Brazil +1.0 Q2 +0.7 +1.6 +4.0 Jul +4.2 Aug +3.8 12.3 Jul§ -15.5 Aug -1.0 -7.0 9.45 4.06 3.17Chile +5.3 Q2 +2.8 +3.9 -1.5 Jul +2.6 Aug +2.4 7.3 Jul§‡‡ -3.6 Q2 -2.0 -2.0 4.56 663 634Colombia +2.5 Q2 +2.3 +2.7 +3.5 Jul +3.1 Aug +3.3 9.7 Jul§ -10.6 Q2 -2.8 -1.9 6.93 2,999 2,931Mexico +2.6 Q2 -0.6 +2.1 +1.3 Jul +4.9 Aug +4.5 3.3 Aug -19.7 Q2 -1.7 -2.3 8.00 18.9 18.0Peru +5.4 Q2 +12.5 +4.1 +1.0 Jul +1.1 Aug +1.4 6.3 Aug§ -3.2 Q2 -1.7 -3.1 na 3.30 3.27Egypt +5.4 Q2 na +5.4 +5.4 Jul +14.2 Aug +17.0 9.9 Q2§ -7.7 Q1 -2.4 -9.7 na 17.9 17.7Israel +3.9 Q2 +1.8 +3.7 +1.5 Jun +1.2 Aug +1.1 4.2 Jul +7.5 Q2 +1.8 -2.4 2.00 3.59 3.53Saudi Arabia -0.9 2017 na +1.0 na +2.3 Aug +2.6 6.1 Q1 +19.9 Q1 +7.4 -3.4 na 3.75 3.75South Africa +0.4 Q2 -0.7 +1.5 +1.8 Jul +4.9 Aug +4.8 27.2 Q2§ -12.1 Q2 -3.3 -3.6 9.08 14.2 13.4

Source: Haver Analytics. *% change on previous quarter, annual rate. †The Economist poll or Economist Intelligence Unit estimate/forecast. §Not seasonally adjusted. ‡New series. **Year ending June. ††Latest 3 months. ‡‡3-month moving average. §§5-year yield. †††Dollar-denominated bonds.

84 The Economist September 29th 2018Economic and financial indicators

The Economist September 29th 2018 Economic and financial indicators 85

Other markets% change on

Dec 29th 2017

Index one in local in $Sep 26th week currency terms

United States (S&P 500) 2,906.0 -0.1 +8.7 +8.7

United States (NAScomp) 7,990.4 +0.5 +15.7 +15.7

China (Shenzhen Comp) 1,447.9 +1.7 -23.8 -27.8

Japan (Topix) 1,821.7 +2.0 +0.2 -0.1

Europe (FTSEurofirst 300) 1,509.6 +1.6 -1.3 -3.4

World, dev'd (MSCI) 2,189.3 +0.5 +4.1 +4.1

Emerging markets (MSCI) 1,046.0 +1.5 -9.7 -9.7

World, all (MSCI) 525.3 +0.6 +2.4 +2.4

World bonds (Citigroup) 931.2 +0.1 -2.0 -2.0

EMBI+ (JPMorgan) 791.7 +0.9 -5.3 -5.3

Hedge funds (HFRX) 1,262.1§ nil -1.1 -1.1

Volatility, US (VIX) 12.9 +11.8 +11.0 (levels)

CDSs, Eur (iTRAXX)† 67.6 +13.6 +49.9 +46.6

CDSs, N Am (CDX)† 61.0 +8.7 +24.3 +24.3

Carbon trading (EU ETS) € 20.2 -8.2 +148.8 +143.4

Sources: IHS Markit; Thomson Reuters. *Total return index.†Credit-default-swap spreads, basis points. §Sep 25th.

The Economist commodity-price index2005=100

% change onone one

Sep 18th Sep 25th* month year

Dollar Index

All Items 135.8 138.4 -0.5 -5.4

Food 139.3 141.2 +0.9 -6.5

Industrials

All 132.1 135.5 -1.9 -4.2

Nfa† 128.7 126.8 -6.0 -3.7

Metals 133.6 139.3 -0.3 -4.4

Sterling Index

All items 187.8 191.3 -2.6 -3.6

Euro Index

All items 144.3 146.0 -1.1 -5.5

Gold

$ per oz 1,199.3 1,202.6 -0.6 -7.6

West Texas Intermediate

$ per barrel 69.9 72.3 +5.5 +39.3

Sources: Bloomberg; CME Group; Cotlook; Darmenn & Curl; FT; ICCO;ICO; ISO; Live Rice Index; LME; NZ Wool Services; Thompson Lloyd &Ewart; Thomson Reuters; Urner Barry; WSJ. *Provisional†Non-food agriculturals.

Markets % change on

Dec 29th 2017

Index one in local in $ Sep 26th week currency terms

United States (DJIA) 26,385.3 -0.1 +6.7 +6.7

China (Shanghai Comp) 2,806.8 +2.8 -15.1 -19.6

Japan (Nikkei 225) 24,033.8 +1.5 +5.6 +5.2

Britain (FTSE 100) 7,511.5 +2.5 -2.3 -4.8

Canada (S&P TSX) 16,169.3 +0.1 -0.2 -3.6

Euro area (FTSE Euro 100) 1,195.7 +1.5 -1.2 -3.3

Euro area (EURO STOXX 50) 3,433.2 +1.9 -2.0 -4.1

Austria (ATX) 3,383.4 +0.2 -1.1 -3.2

Belgium (Bel 20) 3,743.6 +0.3 -5.9 -7.9

France (CAC 40) 5,512.7 +2.2 +3.8 +1.5

Germany (DAX)* 12,385.9 +1.4 -4.1 -6.2

Greece (Athex Comp) 701.9 +1.8 -12.5 -14.4

Italy (FTSE/MIB) 21,646.3 +1.7 -0.9 -3.1

Netherlands (AEX) 552.4 +1.7 +1.4 -0.8

Spain (IBEX 35) 9,524.8 +0.4 -5.2 -7.2

Czech Republic (PX) 1,100.8 +0.2 +2.1 -0.7

Denmark (OMXCB) 906.3 +1.0 -2.2 -4.5

Hungary (BUX) 35,996.0 -1.1 -8.6 -14.3

Norway (OSEAX) 1,072.1 +3.7 +18.2 +19.2

Poland (WIG) 59,450.6 +2.3 -6.7 -11.0

Russia (RTS, $ terms) 1,160.8 +2.4 +0.6 +0.6

Sweden (OMXS30) 1,658.3 +1.7 +5.2 -2.3

Switzerland (SMI) 9,080.1 +1.6 -3.2 -2.6

Turkey (BIST) 99,148.8 +2.6 -14.0 -46.6

Australia (All Ord.) 6,307.8 +0.2 +2.3 -4.8

Hong Kong (Hang Seng) 27,816.9 +1.5 -7.0 -7.0

India (BSE) 36,542.3 -1.6 +7.3 -5.6

Indonesia (IDX) 5,873.3 nil -7.6 -15.9

Malaysia (KLSE) 1,798.7 -0.1 +0.1 -2.2

Pakistan (KSE) 40,909.9 -1.0 +1.1 -10.2

Singapore (STI) 3,239.1 +2.0 -4.8 -6.8

South Korea (KOSPI) 2,339.2 +1.3 -5.2 -9.0

Taiwan (TWI) 10,974.2 +1.1 +3.1 nil

Thailand (SET) 1,749.9 nil -0.2 +0.2

Argentina (MERV) 33,943.3 +2.5 +12.9 -45.3

Brazil (BVSP) 78,656.1 +0.6 +3.0 -15.9

Chile (IGPA) 27,077.1 -0.1 -3.2 -10.3

Colombia (IGBC) 12,317.9 -0.1 +7.3 +6.8

Mexico (IPC) 49,606.1 nil +0.5 +3.9

Peru (S&P/BVL)* 19,604.0 +2.2 -1.9 -3.8

Egypt (EGX 30) 14,612.2 +3.6 -2.7 -3.4

Israel (TA-125) 1,493.2 -0.1 +9.4 +5.9

Saudi Arabia (Tadawul) 7,893.6 +2.1 +9.2 +9.2

South Africa (JSE AS) 56,570.2 +0.2 -4.9 -17.1

Indicators for more countries and additionalseries, go to: Economist.com/indicators

World GDPContribution to growth*, percentage points

Sources: HaverAnalytics; IMF;The Economist

*Estimates based on 63 economiesrepresenting 87% of GDP. Weighted

GDP at purchasing-power parity

2014 15 16 17 180

1

2

3

4

United States India China

Euro area Rest of world

The world economy grew by 3.56% in thesecond quarter of 2018 compared with ayear earlier, according to our estimates.That is almost exactly the same as the3.57% expansion rate observed in thefirst quarter. Trends vary between re-gions: growth rates continue to rise inAmerica and India, but are levelling off inChina and the euro area. According to theOECD, a think-tank, growth is also becom-ing more uncertain because of increasedrestrictions on trade, the lack of clarityover Brexit and building financial risks. Itexpects global growth to level off in thecoming years, and has tempered itspredictions for both 2018 and 2019, from3.9% down to 3.7%.

86 The Economist September 29th 2018

WHAT struck Shan Tianfang most, ashe walked into the studio for his first

radio broadcast at the end of the 1970s, wasthe lack of things. No brightly paintedscreen to set the scene for his pingshu, orstorytelling. No blockofwood on the table,to make the audience pay attention or toscare them stiff. No folded fan to snap openfor a surprise, simper behind, or whipthrough the air as a sword. A traditionalstoryteller needed only those three props.Still, he could manage. With the side of hisleft hand, he could bangemphatically. Andwith his voice alone he could evoke thecreaking wingbeats of a flying bird, thepealing, descending glugs of a man takingpoison or the power of an adversary, “thecorners of his eyes and brows showing athousand streams ofkilling aura”.

The thing he missed most was an audi-ence. He was used to the teeming teahouses of north-east China, packed withold folk smoking in bamboo chairs andchildren running round. Here there wereonly two sound guys in headphones. Heremembered, though, that for his first offi-cial performance in an Anshan tea house,in 1956 when he was 23 and faint withnerves, he had tried his routine on a fewcolleagues first. A few were as good as acrowd. So he told “The Three Heroes andFive Gallants” to the sound guys, improvis-

ing and with lots of slang as usual, watch-ing closely to see where they laughed, andwhere they dozed off.

That broadcast, he later found out, washeard by100m people. It brought him suchfame that by the end of a 60-year career hehad performed more than 12,000 episodesof more than 100 stories on 500 TV and ra-dio stations. He had filled stadiums. Hishoarse, smoky voice, “cloud covering themoon” as the saying went, was listened toeverywhere, by farmers in fields, workerscommuting and, especially, by taxi drivers,to while the traffic away. “Wherever a wellhas water”, people tuned in to him.

He had grown up in Liaoning provincebefore the Communist revolution of 1949,his mother (“The Pale Girl”) an actress andhis father a player of the three-stringedlute. But he knew from childhood, as heshook the money-basket round after theirshows, that this was not much of a living.Folk arts might be centuries old, but theyhad low social status. He hoped to be adoctor or an engineer, until the collapse ofhis parents’ marriage threw him back onpingshu to maintain his seven sisters. Fateordained it so. He had always been good atmemorising, diligent at practice, and aftermore instruction he was happy to spendthe decade from 1956 to 1966 playing thetea-house circuit.

His favourite stories were always theclassics, not least China’s four great novels:the medieval “Romance of the Three King-doms”, “The Journey to the West”, wherean intrepid monk went searching for Bud-dhist texts, “The Dream of the Red Cham-ber”, in which 40 main characters por-trayed a noble family’s 18th-centurydecline, and “Water Margin”, with its wildband of 108 scheming outlaws. Some sto-ries had hundreds ofchapters, each endingwith a coy “To be continued”. As a keenstudent of history he altered some tales abit, playing down the demons and spiritsand giving his listeners, instead, charactersthat made sense. He also turned recentevents into stories, poring over newspa-pers, as soon as the sun came up, to find re-ports of policemen foiling notorious rob-bers. Fighters against injustice touched asoft spot with him: the wrongly court-mar-tialled General Sheng of “I Know YourName Well”, or the “White-Eyebrow Hero”Lord Bao, China’s most righteous judge,whose story he had been telling all andsundry since he was five years old.

During the Cultural Revolution, how-ever, he fought injustice himself and lost.The builders of the New China did notneed his old tales, those remnants of theimperial and feudal system. They sent himto the far north-east, his teeth knocked outto silence him, to cut hay and cart manure.He escaped, and lived with his family onthe streets for four years, selling artificialflowers. In 1978 he was rehabilitated,though with a mouth full ofpainful plasticthrough which he had to learn to speakagain. He summed up life then in oneword, “Endure”. But it rapidly got better.

The last green treeIn the hectic consumerist China of the late20th century he cut a deliberately quaintfigure. On television, in plain robes beforea screen of ancient symbols, he did notmove from behind his table, letting hishands, eyes and voice paint scenes, charac-ters, emotions, even abstractions. Theyoung loved him as much as the old, andthe government declared him an InheritorofChina’s Intangible Cultural Heritage; hisfans called him “an eternal electric wave”and an evergreen tree. Kind words, but hestill worried that he had no obvious suc-cessor to carry on the oral tradition.

To stave off silence he set up a storytell-ing academy in Beijing, put his favouritetales into 47 books and blogged on SinaWeibo. Yet most of that was words writtendown. His gravelly voice was what mat-tered: so much so that a channel was set upin 2005 just to keep broadcasting his sto-ries. At an episode a day, the stock wouldlast until 2036. Ever since that first studioperformance he had reminded China thatit needed those tales, after all. Despite itsrush to modernity, it needed him. 7

Tradition’s voice

Shan Tianfang, China’s favourite storyteller, died on September11th, aged 84

Obituary Shan Tianfang

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