FEBRUARY 25TH–MARCH 3RD 2017

Should robots pay tax?

The man who would beat Le Pen

Time to be tougher on Iran

The last diamond mine

Clean energy’sdirty secret

The Economist February 25th 2017 5

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Volume 422 Number 9029

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Contents continues overleaf

Contents

1

The challenger to Le PenEmmanuel Macron has gonefrom no-hoper to a seriouscandidate. Now comes thehard part, page 39. Populistsare on a roll, but Marine Le Penfaces an uphill battle, page40. Martin Schulz breathesnew life into Germany’s SocialDemocrats, page 41

On the coverThe renewables revolution iswrecking the world’selectricity markets. Here’show to fix them: leader, page9. Wind and solar energy aredisrupting a century-oldapproach to providingelectricity, pages 16-18

7 The world this week

Leaders

9 Renewable energyClean energy’s dirty secret

10 Gender budgetingMaking women count

10 Brazil’s pensionsGeronto-generosity

11 Iran and AmericaNo blank cheque

12 Diamonds and marriageA girl’s new best friend

Letters

13 On Kenya, American law,voting, Russia, data

Briefing

16 Renewable energyA world turned upsidedown

Asia

19 Women in South AsiaThe missing middle

20 Mongolia’s financesThis might yurt

20 Security in PakistanRole reversal

21 Mining in South-East AsiaShafted

22 Buddhism in ThailandThe missing monk

23 BanyanThe Philippine pivot to China

China

24 Punishing North KoreaOf killers and coal

25 Ethnic harmonyTourism in the troubledwest

United States

26 Environmental protectionRevenge of the polluters

27 A new NSAMcMaster and servant

28 Replacing ObamacareCost-sharing is caring

28 Deporting migrantsDragnet and scissors

29 The DemocratsBoot-edge-edge

30 Wrongful convictionsCriminal injustice

31 LexingtonDissent in the age of Trump

The Americas

32 Brazil’s pensionsStop showering the oldwith gold

33 Protecting wildlifeSaving jaguars

33 Chile’s plutocratsBashing billionaires

34 BelloThe costs of crime

Middle East and Africa

35 Iran and AmericaA new confrontation

36 Western SaharaThe never-ending dispute

37 South AfricaLetting the mentally ill die

37 The battle for MosulRaging

38 EducationLessons from Liberia

Europe

39 France’s EurophilecandidateMacron on the march

40 Mme la Presidente?Marine Le Pen’s odds

40 Western BalkansRussian overtures

41 The German left is backSPD recovery

42 CharlemagneThe armies of Europe

Diamonds The sparklingengagement ring may not have a future as a symbol ofcourtship: leader, page 12. DeBeers is ramping up productionat a giant new project inCanada. It could be the world’slast big diamond mine, page 46

Iran The Trump administrationis right to keep up the pressureon a belligerent force in theMiddle East: leader, page 11.How far is America prepared togo? Page 35

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6 Contents The Economist February 25th 2017

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Women Powerful femalepoliticians in South Asia havenot empowered the women whovote for them, page 19. An ideato make governments live upto their promises to women:leader, page 10. A mechanismto generate policies thatsupport equality between menand women is good for growth,page 60

Kraft Although their bidfailed, the investors who tookon Unilever are neverthelessupending the food industry,page 50

Robots A tax on automation isan intriguing but misguidedsolution to workers’ woes: Freeexchange, page 61. Three testsfor telling whether tech firmsare in a bubble: Schumpeter,page 54. Artificial intelligenceis creating variety in the chipmarket and trouble for Intel,page 49

Science From the meeting ofthe American Association forthe Advancement of Science:space weather, seabed minerals,anti-asthma bacteria, anti-disease mosquitoes, and thefirst migrants to the NewWorld, pages 63-66

Britain

43 Reducing immigrationKeep out

44 Agriculture and BrexitPicking fights

45 BagehotWhat next for Remainers?

International

46 The last diamond mineThe future of forever

Business

49 The semiconductorindustrySilicon crumble

50 3G’s modelBarbarians at the plate

51 Independent filmsIndie blues

51 Toy companies in JapanA grown-up business

52 Aarusha HomesRoom to grow

53 French entrepreneurshipDeep-tech startups

54 SchumpeterTech-firm valuations

Finance and economics

55 Fintech in ChinaThe age of the appacus

58 Trade statisticsLies, damned lies and…

58 Securitisation in EuropeLimping along

59 Fannie Mae and Freddie MacStill possessed

60 Feminism and fiscal policyGender budgeting

61 Free exchangeShould robots pay tax?

Science and technology

63 Space weatherTales of wonder

64 AsthmaFour good bugs

64 OceanographyFruits de mer

65 EpidemiologySnap!

66 Peopling the AmericasCheckpoint

Books and arts

67 International corruptionJackpots for despots

68 Sleeper trainsEnd of the line

68 “Les Misérables”Novel of the century

69 Richard HolmesRomantic biographer

70 Boris Nemtsov, the moviesA future that wasn’t

72 Economic and financialindicatorsStatistics on 42 economies,plus a closer look atsovereign-wealth funds

Obituary

74 Norma McCorveyRoe v Wade’s Jane Roe

The Economist February 25th 2017 7

1

A series of terrorist attacksstruckPakistan, including oneon a Sufi shrine that killed 88people. The army blamedinfiltrators from Afghanistan,sealed the border and shelledwhat it said were terroristbases on the Afghan side.

In Afghanistan, policesurrounded the house ofAbdul Rashid Dostum, thevice-president, in an attempt toarrest nine bodyguards, whohave been accused ofbeatingand raping a political rival.

A former policeman from thePhilippine city ofDavaoclaimed he had run a vigilantegroup that had murderedcriminals at the behest of themayor at the time, RodrigoDuterte, who became presi-dent in June.

The IMF agreed to lendMongolia $440m to help itweather a balance-of-pay-ments crisis, paving the wayfor further loans from theAsian Development Bank,Japan and South Korea.

China said it would suspendimports ofcoal from NorthKorea, all but eliminating oneof the isolated communiststate’s main sources of rev-enue. Malaysia, meanwhile,said it was looking for severalNorth Korean officials in con-nection with the murder of thehalf-brother ofKim Jong Un,the North Korean dictator.

A court in Hong Kong sen-tenced the territory’s formerchiefexecutive, Donald Tsang,to 20 months in prison formisconduct while in office. MrTsang was found guilty of

failing to declare that he hadrented a flat in the Chinese cityofShenzhen from a majorshareholder in a broadcastcompany that Mr Tsangapproved licences for.

Tightening the borderAmerica’s Department ofHomeland Security publishedguidelines to implementDonald Trump’s executiveorder cracking down on illegalimmigrants. Among otherthings, the new rules make itmuch easier to deport peoplewho cannot prove they havebeen living in the United Statesfor two years.

Mike Pence went to Europe toassure America’s allies that it isstill committed to NATO,whatever his boss may havesaid. But the vice-presidentalso called on Europeans toboost defence spending tohonour their commitment tothe military alliance.

Mr Trump selected a newnational security adviserfollowing the defenestrationofMike Flynn. Lieutenant-General H.R. McMaster is anarmy officer who was widelypraised for his commandduring the Iraq war, where hepursued a successful counter-insurgency strategy in the cityofTal Afar.

Too close to callEcuador’s presidential elec-tion looked likely to go to asecond round in April, accord-ing to the electoral commis-sion. With nearly all the votescounted, Lenín Moreno, thecandidate backed by the presi-dent, Rafael Correa, is wellahead but appears to havefallen short of the 40% re-quired to avoid a run-off. Hewill probably face GuillermoLassom a conservative banker.

José Serra resigned as Brazil’sforeign minister, because ofhealth problems. He was twicean unsuccessful candidate forthe presidency.

The last redoubtIraq’s army launched its mainassault on western Mosul,having captured the easternhalfof the city from IslamicState last month. The fightingin the western half is expectedto be harder. In Syria, Kurdishgroups advanced against IS

positions in the country.

An Israeli soldier who killed awounded Palestinian attackerin Hebron a year ago wassentenced to 18 months in jail.Many were outraged, eitherbecause they thought thesentence too light; or becausethey thought he should nothave been charged at all.

South Africa’s High Courtblocked a move by the coun-try’s president, Jacob Zuma, towithdraw from membershipof the International CriminalCourt, saying that he may notdo so without consultingparliament. Some Africans seethe court as targeting Africadisproportionately.

A famine was declared in partsofSouth Sudan, caused by acivil war and economiccollapse. It is the first famine tobe declared anywhere in theworld in six years.

The centre groundIn another twist to the Frenchpresidential race, FrançoisBayrou, a centrist politician,announced that he would notrun but would instead backEmmanuel Macron, a formereconomy minister who isrunning as an independent.Although Mr Macron’s cam-paign has gathered momen-tum, Marine Le Pen, the leaderof the right-wing NationalFront, still leads polls for thefirst round.

Selahattin Demirtas, the leaderof the pro-Kurdish Peoples’Democratic Party in Turkey,was convicted of insulting theTurkish state (ie, criticising thepresident). The same day, acourt upheld a conviction for

terrorism of the other leader ofthe party. The trial also beganof47 former soldiers foralleged involvement in lastyears’ coup attempt.

Britain’s Brexit bill, which willpermit the government tonegotiate the country’s depar-ture from the EU, was debatedby the House ofLords, Parlia-ment’s unelected upper house.Theresa May raised eyebrowsby perching herselfon thesteps of the royal throne; it isthree decades since a primeminister last attended a debatein the Lords. Meanwhile, Jean-Claude Juncker, the presidentof the European Commission,warned Britain that it shouldexpect a hefty bill and wouldnot leave the EU “at a discountor at zero cost”.

Cressida Dickwas appointedas the new commissioner ofLondon’s Metropolitan Police,the first woman to head Brit-ain’s biggest force. Ms Dickwasin command ofa botchedoperation that led to the killingofan innocent man after theterrorist attacks on London’stransport network in 2005. Asubsequent inquiry exonerat-ed her ofany blame.

Matteo Renzi stepped down asthe leader of Italy’s rulingDemocratic Party amid criti-cism that he has failed to meetthe challenge of the Five StarMovement, a rising populistparty. Mr Renzi resigned asprime minister in December.

Keeping it in the familyThe president ofAzerbaijan,Ilham Aliyev, appointed hiswife as vice-president. Mehri-ban Aliyeva is a member ofparliament who runs a foun-dation named after the previ-ous president, who was MrAliyev’s father.

Politics

The world this week

8 The world this week The Economist February 25th 2017

Other economic data and newscan be found on pages 72-73

As transient as it was titanic, aproposed $143bn takeover bidby Kraft Heinz for Unileverwas withdrawn just a few daysafter it was leaked to the press.The deal would have been oneof the biggest mergers onrecord, creating a behemoth inconsumer products. Kraft’smajor shareholders are Berk-shire Hathaway, Warren Buf-fett’s investment company, and3G Capital, a Brazilian private-equity firm with a reputationfor stringent cost-cutting at itstakeover targets. Unileverswiftly rejected its advances,but in a rapid response itlaunched a wide-rangingreview of its business.

Discount offerEnding months ofuncertaintyabout a takeover deal that wassigned last summer, Verizonsaid it would pay $350m lessfor Yahoo following two bigcyber-attacks on the internetcompany’s users that tookplace before the deal wasagreed, but which came to lightonly late last year. The hackingofup to one billion Yahooaccounts was the largestbreach ofprivate data yet,prompting a rethinkat Verizonabout its offer. It will now pay$4.5bn for Yahoo.

Apple lodged an appeal at theEuropean Court of Justiceagainst the European Commis-sion’s ruling that the companyowes Ireland €13bn ($14bn) inback taxes because of illegalstate aid. Apple said, amongother things, that the commis-sion had overstepped its mark,did not understand Irish law,and denied it had receivedpreferential tax treatment fromthe Irish government. Its maincontention is that the centre ofits profit-driving activities isAmerica and that is where itshould be taxed. A hearing willbe held in the autumn.

Amazon announced that itwould increase its Britishworkforce by a quarter, adding5,000 jobs to its current head-count. Apple, FacebookandGoogle have made similarcommitments to increase their

presence in Britain recently.American tech companiesseem to be less worried thanfinancial firms about the pros-pect ofBritain leaving the EU.

Jio, a mobile network in Indiathat has shaken the country’stelecoms industry by offering afree service, announced that itwould start charging a smallfee for unlimited data. Callswill still cost nothing.

Cheap as shipsHanjin Shipping was declaredofficially bankrupt and itsremaining assets ordered to beliquidated. The South Koreancontainer line filed for bank-ruptcy protection last August,which led to its ships beingdenied entry to ports in casethey could not pay the portfees. Hanjin was one of theworld’s biggest shipping com-panies a decade ago. It wassunkby a worldwide glut inshipping capacity and anunsustainable debt load.

BHP Billiton, Anglo Ameri-can and Glencore were thelatest mining companies toreport healthy profits, helpedby cost-cutting and a reboundin commodity prices. AngloAmerican reported an annualprofit of$1.6bn; in 2015 it hadmade a loss of$5.6bn. Coreearnings for the year at Glen-

core, which is also a commod-ity trader, rose 18% to $10.3bn.BHP Billiton’s profit for the lasthalfof2016 was $3.2bn; in thesame period a year earlier ithad recorded a $5.7bn loss.

Special prosecutors in SouthKorea questioned in custodythe de facto head ofSamsungElectronics, following hisarrest in an influence-peddlingscandal that has rocked thegovernment. Lee Jae-yong isbeing investigated for alleged-ly paying $36m in bribes inorder to smooth the merger oftwo Samsung affiliates in 2015.

A write-down in the valuationof its Swiss private bankcon-tributed to a 62% fall in annualpre-tax profit at HSBC, to$7.1bn. Revenue dropped, by afifth. Meanwhile, LloydsBanking Group, anotherBritish bank, made an annualprofit of£4.2bn ($5.7bn), its bestsince 2006. The governmenthas reduced the stake it took inLloyds during the financialcrisis and the bank is expectedto return to full privateownership this year.

Alien habitats?Astronomers discoveredseven planets about the sizeofEarth orbiting a dwarfstarsome 380trn kilometres (235trnmiles) from our own. That is 40

light years away, fairly close asthese things go. Scientists thinkit offers the best chance yet todiscover evidence of life, orwhy life hasn’t evolved, onplanets other than Earth.

Tributes were paid to KennethArrow, who has died aged 95.His writings in economicsadvanced the study ofgametheory, social choice, majorityvoting, welfare theory, endoge-nous growth, contracts, andmore. He was a co-recipient ofthe Nobel economics prize in1972 for his workon the generalequilibrium ofmarkets. Thenaged 51, he remains the youn-gest economist to be awardedthe prize. At the time he wasdescribed in the New YorkTimes as “a humanist, a schol-ar who has always tried toapply fundamental theoryto…social problems”.

Business

The Economist February 25th 2017 9

ALMOST150 yearsafterphoto-voltaic cells and wind tur-

bines were invented, they stillgenerate only 7% of the world’selectricity. Yet something re-markable is happening. Frombeing peripheral to the energysystem just over a decade ago,

they are now growing faster than any other energy source andtheir falling costs are making them competitive with fossil fu-els. BP, an oil firm, expects renewables to account for halfofthegrowth in global energy supply over the next 20 years. It is nolonger far-fetched to think that the world is entering an era ofclean, unlimited and cheap power. About time, too.

There is a $20trn hitch, though. To get from here to there re-quires huge amounts of investment over the next few decades,to replace old smog-belching power plants and to upgrade thepylonsand wires thatbringelectricity to consumers. Normallyinvestors like putting their money into electricity because it of-fers reliable returns. Yet green energy has a dirty secret. Themore it is deployed, the more it lowers the price ofpower fromany source. That makes it hard to manage the transition to acarbon-free future, during which many generating technol-ogies, clean and dirty, need to remain profitable if the lights areto stay on. Unless the market is fixed, subsidies to the industrywill only grow.

Policymakers are already seeing this inconvenient truth asa reason to put the brakes on renewable energy. In parts of Eu-rope and China, investment in renewables is slowing as subsi-dies are cut back. However, the solution is not less wind andsolar. It is to rethinkhow the world prices clean energy in orderto make better use of it.

Shockto the systemAt its heart, the problem is that government-supported renew-able energyhasbeen imposed on a marketdesigned in a differ-ent era. Formuch ofthe 20th century, electricity was made andmoved by vertically integrated, state-controlled monopolies.From the 1980s onwards, many ofthese were broken up, priva-tised and liberalised, so that market forces could determinewhere best to invest. Today only about 6% of electricity usersget theirpowerfrom monopolies. Yet everywhere the pressureto decarbonise power supply has brought the state creepingback into markets. This is disruptive for three reasons. The firstis the subsidy system itself. The other two are inherent to thenature of wind and solar: their intermittency and their verylow runningcosts. All three help explain why powerprices arelow and public subsidies are addictive.

First, the splurge of public subsidy, of about $800bn since2008, has distorted the market. It came about for noble rea-sons—to counter climate change and prime the pump for new,costly technologies, including wind turbines and solar panels.But subsidies hit just as electricity consumption in the richworld was stagnating because of growing energy efficiencyand the financial crisis. The result was a glut ofpower-generat-ing capacity that has slashed the revenues utilities earn from

wholesale power markets and hence deterred investment.Second, green power is intermittent. The vagaries of wind

and sun—especially in countries without favourable weath-er—mean that turbines and solar panels generate electricityonly part of the time. To keep power flowing, the system relieson conventional power plants, such as coal, gas or nuclear, tokick in when renewables falter. But because they are idle forlong periods, they find it harder to attract private investors. So,to keep the lights on, they require public funds.

Everyone is affected by a third factor: renewable energy hasnegligible or zero marginal running costs—because the windand the sun are free. In a market that prefers energy producedat the lowest short-term cost, wind and solar take businessfrom providers that are more expensive to run, such as coalplants, depressing power prices, and hence revenues for all.

Get smartThe higher the penetration ofrenewables, the worse these pro-blems get—especially in saturated markets. In Europe, whichwas first to feel the effects, utilities have suffered a “lost de-cade” of falling returns, stranded assets and corporate disrup-tion. Last year, Germany’s two biggest electricity providers,E.ON and RWE, both split in two. In renewable-rich parts ofAmerica power providers struggle to find investors for newplants. Places with an abundance of wind, such as China, arecurtailing wind farms to keep coal plants in business.

The corollary is that the electricity system is being re-regu-lated as investment goes chiefly to areas that benefit from pub-lic support. Paradoxically, that means the more states supportrenewables, the more they pay for conventional power plants,too, using“capacitypayments” to alleviate intermittency. In ef-fect, politicians rather than markets are once again decidinghow to avoid blackouts. They often make mistakes: Ger-many’s support for cheap, dirty lignite caused emissions torise, notwithstanding huge subsidies for renewables. Withouta new approach the renewables revolution will stall.

The good news is that new technology can help fix the pro-blem (see page 16). Digitalisation, smart meters and batteriesare enabling companies and households to smooth out theirdemand—by doing some energy-intensive work at night, forexample. This helps to cope with intermittent supply. Small,modular power plants, which are easy to flex up or down, arebecoming more popular, as are high-voltage grids that canmove excess power around the networkmore efficiently.

The bigger task is to redesign power markets to reflect thenew need for flexible supply and demand. They should adjustprices more frequently, to reflect the fluctuations of the weath-er. At times of extreme scarcity, a high fixed price could kick into prevent blackouts. Markets should reward those willing touse lesselectricity to balance the grid, just as they reward thosewho generate more of it. Bills could be structured to be higheror lower depending how strongly a customer wanted guaran-teed power all the time—a bit like an insurance policy. In short,policymakers should be clear they have a problem and thatthe cause is not renewable energy, but the out-of-date systemofelectricity pricing. Then they should fix it. 7

Clean energy’s dirty secret

The renewables revolution is wrecking the world’s electricitymarkets. Here’s what to do

Leaders

10 Leaders The Economist February 25th 2017

1

IT IS easy to be cynical aboutgovernment—and rarely does

such cynicism go unrewarded.Take, for instance, policy to-wards women. Some politiciansdeclare that they value wom-en’s unique role, which can beshorthand for keeping married

women at home looking after the kids. Others create wholeministries devoted to policies for women, which can be a de-vice for parking women’s issues on the periphery of policywhere they cannot do any harm. Still others, who may actual-ly mean what they say, pass laws giving women equal oppor-tunities to men. Yet decreeing an end to discrimination is verydifferent from bringing it about.

Amid this tangle of evasion, half-promises and wishfulthinking, some policymakers have embraced a techniquecalled gender budgeting. It not only promises to do a lot ofgood for women, but carries a lesson for advocates of anycause: the way to a government’s heart is through its pocket.

What counts is what’s countedAt its simplest, gender budgeting sets out to quantify how poli-cies affect women and men differently (see page 60). Thatseemingly trivial step converts exhortation about treatingwomen fairly into the coin of government: costs and benefits,and investmentsand returns. Youdon’thave to be a feminist torecognise, as Austria did, that the numbers show how lower-ing income tax on second earners will encourage women tojoin the labour force, boosting growth and tax revenues. Orthat cuts to programmes designed to reduce domestic violencewould be a false economy, because they would cost so muchin medical treatment and lost workdays.

As well as identifying opportunities and errors, gender

budgeting brings women’s issues right to the heart of govern-ment, the ministry of finance. Governments routinely bataway sensible policies that lack a champion when the moneyis handed out. But if judgments about what makes sense forwomen (and the general good) are being formed within the fi-nance ministry itself, then the battle is half-won.

Gender budgeting is not new. Feminist economists have ar-gued for it since the 1980s. A few countries, such as Australiaand South Africa, took it up, though efforts waxed and wanedwith shifts in political leadership—it is seen as left-wing andanti-austerity. The Nordic countries were pioneers in the West;Sweden, with its self-declared “feminist government”, may bethe gold standard. Now, egged on by the World Bank, the UN

and the IMF, more governments are taking an interest. Theyshould sign on as the results are worth having.

Partly because South Korea invested little in social care,women had to choose between havingchildren, which lowerslabour-force participation, or remaining childless, which re-duces the country’s fertility rate. Gender budgeting showedhow, with an ageing population, the country gained fromspending on care. Rwanda found that investment in clean wa-ter not only curbed disease but also freed up girls, who used tofetch the stuff, to go to school. Ample research confirms thatleaving half a country’s people behind is bad for growth. Vio-lence againstwomen; failing to educate girlsproperly; unequalpay and access to jobs: all take an economic toll.

Inevitably there are difficulties. Dividing a policy’s costsand benefits between men and women can be hard. Some-times, as with lost hours ofschool, the costs have to be estimat-ed. Redesigning the budgeting process upends decades ofpractice. If every group pressing for change took the same ap-proach, it would become unmanageable. In a way, though,that is the point. Governments find it easy to pay lip-service towomen’s rights. Doing something demands tough choices. 7

Gender budgeting

Making women count

An idea to help governments live up to theirpromises

BLESSED with tropical beach-es, bossa nova and balletic

footballers, Brazil seems like amarvellous place to be young. Itis an even better place to growold. That is because Brazil hasamong the world’s most gener-ous pension systems. Sadly, the

past is now beginning to catch up with it.Brazilians start drawing their pensions when they are 58

years old on average, eight years younger than Americans and14 than Mexicans (see page 32). Members of some groups canretire even earlier. Female teachers, forexample, need to spend

just 25 years in the classroom to get a full pension and evenfewer for a partial one; many leave before they turn 50. Wid-ows inherit their spouses’ full pension (provided they are 44 orolder) without giving up their own. In the OECD, a club ofmostly rich countries, pensions replace an average of around60% ofpre-retirement income; in Brazil, 80%.

Plush pensions have their origins in the constitution adopt-ed in 1988, which sought to conferasmanyrightsaspossible onBrazilians who had suffered under two decades of militaryrule. The constitution also recognises rights to education andhealth, but giving a pensioner a monthly cheque is easier.

Geronto-generosity hurts everyone else. The pensions billconsumes more than half the government’s non-interest

Brazil’s pensions

Geronto-generosity

Brazil’s pensionsGovernment spending as % of GDP

0

5

10

15

1991 2000 10 16

At last the government is trying to fixa system that threatens the country’s future

The Economist February 25th 2017 Leaders 11

1

2 spending and, if nothing is done, will within ten years gobbleup 80%. As a share of GDP, Brazil spends 50% more on pen-sions than do members of the OECD on average. Yet it has onlyhalf as many over-65-year-olds as a share of the population.The skewed system diverts money from schools, clinics andinfrastructure and lurespeople outofthe workforce. The ongo-ing pension deficit from year to year accounts for more thanhalf the budget deficit of 8.9% of GDP. That is a big reason whyBrazil’sbenchmarkinterest rate isashigh as12.25%. Extravagantpensions thus make it hard for the economy to grow. The coun-try is undergoing the longest and deepest slump on record. IfBrazil is to restore confidence in its economic future, it must dosomething about its pensions.

A good startMichel Temer, Brazil’s president, therefore deserves credit forproposing reforms that would make a big difference. Earliergovernments tweaked the system. The reforms proposed byMr Temer, who became president last year after the impeach-ment of his predecessor, Dilma Rousseff, would go much fur-ther. First, they would apply a minimum pension age of 65 toalmost everyone (female teachers included). The stipulationof the pensionable age would be removed from the constitu-tion, making it easier to raise the threshold as lives lengthen. Toqualify for the most basic pension, all but the poorest wouldhave to contribute for 25 years, rather than just 15. Benefitsabove that floor would no longer rise in step with the mini-

mum wage, which increased by 80% in real terms in the de-cade to 2015. Beneficiaries will not be able to draw more thanone pension; widows will receive smaller ones.

IfMr Temer gets this through the reform-shy congress with-out disfiguring changes, it will be an astounding achievement.Besides mitigating the pension crisis, it would raise hopes forother reformsofBrazil’sbigbut ineffective state, forexample oflabour laws and taxes. The real has appreciated against thedollar by more than any other emerging-market currency overthe past year, a sign that markets are betting on success.

That is not certain. MrTemerhas already enacted one big re-form, a constitutional freeze on increases in public spendingabove inflation, but that made nobody feel poorer. The pen-sion plan is the main way of putting the freeze into practice. Itwill be felt, especially by people near retirement, who willhave to work longer than they were expecting. Ms Rousseff’sleft-wing Workers’ Party (PT), now the main opposition, hopesto fan their resentment. The PT thunders that Mr Temer isdumping the costs of the crisis on workers. The unelected pres-ident does not have the right to carry out reform, it claims.

In fact, MrTemerwon an election as Ms Rousseff’s running-mate; his presidency and congress, which began debating thereform this month, are constitutionally legitimate. They haveno choice but to act. The reform proposal does not fix pen-sions, but it is a good start. Without it, the economic crisis willdeepen and Brazil’s long-term prospects will darken. It is thetonic that the country needs. 7

AVIGDOR LIEBERMAN, Isra-el’s pugnacious defence

minister, is not one to mince hiswords. Speaking on February19th at this year’s Munich Securi-ty Conference, he described thechallenges facing the MiddleEast as “Iran, Iran and Iran”. De-

legates from the Arab states present might not have relishedbeing seen to agree with the Zionist enemy, but that did notstop them. Saudi Arabia’s foreign minister reckoned that theIranians have only “stepped up the tempo of their mischief”since the negotiation in 2015 of a nuclear deal between Iranand the world’s six leadingpowers. And the regional actors arehardly alone in their hostility. The Trump administrationplaced Iran “on notice” at the start of this month and imposeda limited new set of sanctions, following a medium-range bal-listic missile test (see page 35); Iran responded by testinganoth-er one. Is a fresh confrontation, even a conflict, brewing againso soon after the deal of2015 was supposed to have ushered inan era ofpeaceful coexistence?

Perhaps not; but that depends above all on Iran. The hard-liners who are in charge in Tehran need to reconsider their pri-orities. Judgingby theiractionsand rhetoric, theyappear to be-lieve that the nuclear agreement (formally known as the JointComprehensive Plan ofAction) marked the end ofa process ofrehabilitation. In fact, it goes only part of the way.

The purpose of the deal was to put tight limits on Iran’s des-tabilising enrichment programme—nothing more, nothingless. Under its terms, Iran agreed to rejiga reactor so that it can’tmake weaponisable plutonium. It also dismantled most of thecentrifuges it had been using to make enriched uranium andeliminated almost all its stockpile of the stuff. The restrictionsare to last 15 years and even after that, Iran’s nuclear activitieswill remain under a highly intrusive inspection regime. In re-turn, the rest of the world agreed to lift the UN-mandated eco-nomicsanctions thathad crippled Iran’seconomyafter the nu-clear threat started to cause alarm in the mid-2000s.

Now for the next stepBoth sides have kept their part of the bargain; the uranium andthe centrifuges are dealt with, Iran shows no sign of deliberatecheating, and the UN Security Council’s nuclear-related eco-nomic sanctions have all been lifted. Although Donald Trumphas inveighed against the deal, in office he has shown no signofseeking to scrap it. Mostobservers, includingeven the Israeliarmy and intelligence services, think it would be a mistake todo so. However—and this is a crucial point—other sanctions onIran remain. America, in particular, still has a large array ofthem, imposed a decade earlier to penalise a number of Irani-an transgressions, especiallyhuman-rightsabuses, support forterrorism and the development of weapons of mass destruc-tion, including the missiles that can be used to deliver them.

These sanctions were tightened several times by the gener-

Iran and America

No blank cheque

The Trump administration is right to keep up the pressure on a belligerent Iran

12 Leaders The Economist February 25th 2017

2 ally doveish Barack Obama to punish Iran for a missile test.The law that mandates them was extended for ten more yearsin December. The vote in Congress was hardly a cliffhanger:the Senate backed the extension by 99-0 and the House by419-1. American firms are still banned from doing businesswith Iran, though the president can always waive sanctions.After the nuclear deal, Mr Obama did so in many areas, for in-stance letting Boeing join Airbus in selling planes to Iran.

None of these prior sanctions had anything to do with thenuclear programme and everything to do with Iran’s record ofmaking trouble, which it continues unabated. Iran is helpful intaking on Islamic state. But, as Mr Lieberman noted, it stillposes the largest threat to the stability of the Middle East. ItsShia proxy armies, aided by the Quds force, its own overseasspecial-forces unit, have extended its hard power far beyondits borders. Iraq is now virtually an Iranian client state. Hizbul-

lah, an Iranian marionette, is the strongest force in Lebanonand menaces Israel. In Syria Iran props up the vile regime ofBashar al-Assad. In Yemen it arms and trains the Houthi rebelswho overthrew the government two years ago. Bahrain andSaudi Arabia, which both have large Shia populations, accuseit oforganising terror cells in their countries.

America should not tear up the nuclear deal. It is not per-fect, but it was better than confronting an Iran only monthsfrom possessing nukes. But sticking with the nuclear deal doesnot stop America from being tough elsewhere. Indeed, re-sponding to missile-tests and other transgressions signals thatthe world will react to nuclear breaches, too. Until Iran stopsacting as though it is hellbent on recreating the Sassanian em-pire, Mr Trump is right to apply targeted sanctions against theindividuals and companies that are helping the Middle East’schiefempire-builder puffitselfup. 7

PEACOCKS strut; bowerbirdsbuild lovenests; spiders gift-

wrap flies in silk. Such courtshiprituals play an important role inwhatCharlesDarwin called sex-ual selection: when the femaleof a species bears most of thecosts of reproduction, males use

extravagant displays and gifts to demonstrate their “reproduc-tive fitness” and females choose between them. For humanmales, shards of a crystalline form of carbon often feature. Adiamond engagement ring signals a man’s taste, wealth andcommitment, all to persuade a woman that he is a good bet.

This particular courtship gift was dreamed up by an adagency for De Beers, the cartel that sold almost all of theworld’s diamonds throughout the 20th century. In the 1930s itstarted to promote a linkbetween diamonds and marriage. Di-amonds’ unmatched hardness would symbolise love’s endur-ance and their “fire”, orbrilliance, its passion. Two months’ sal-ary, the firm suggested, was what the ring should cost—a goodinvestment since, as the admen said, “A diamond is forever.”

Now, that promise is dimming (see page 46). Though agrowing Chinese middle class will probably prop up demandfor a while, millennials in Western countries seem keener onmemorable experiences than on bling. Diamonds’ image hasbeen blemished by some beingmined in warzones and sold topay for the fighting. Meanwhile, laboratory-grown “synthetic”diamonds, long fit only for industrial use, are becoming goodenough to compete with gems from out of the ground.

But the long-term threat to diamonds’ lustre ismore surpris-ing: that their price could plummet. In recent years regulators(and market forces) have undermined De Beers’s cartel by lim-iting the share of other producers’ stones that it can buy. Nowresponsible for just a third ofglobal sales, the company can nolonger manage supply by stockpiling gems when demandturnsdown. It is spending lesson advertising, since itno longergets the lion’s share of the benefits. But the very value of dia-monds lies in being scarce and coveted—that is, costly. In the

jargon, they are “Veblen goods”, named after a 19th-centuryeconomist: prestige-enhancing trinkets for which a higherprice encourages buyers. With most products, lower prices in-crease demand; with diamonds, they could kill it.

Greater equality for women might seem to render male-courtship displays redundant. But mating preferences evolvedover millennia and will not change quickly. If diamonds wereto cease being a way to signal a man’s marriageability, whatmight take their place?

A different gift, perhaps. In China skewed sex ratios meanthat a prospective bridegroom must own an apartment andshower his future in-laws with cash. But a glittering stone goesto the woman, not her family. And it is more than a gift: it is astatus symbol, demonstrating that even as a man approachesthe expensesofmarried life, he can still splash out on a bauble.Ora man could rely on more generic forms ofdisplay, such as afancy degree, good job or sharp suit. But these can impress onewoman as easily as another, or several simultaneously. Hemust show commitment—a need not unique to courtship. Sal-vadoran gangsters get extravagant tattoos; Japanese yakuza cutoff a fingertip. These visible signs of allegiance make it hard todefect, and impose heavy costs. But as marriage proposalsthey would fall short. Few women would feel proud to carryaround their fiancé’s severed pinkie.

Love is a multifaceted thingMany millennial women seek a mate who is creative, charita-ble and earns enough not to live with his parents. The million-aire founder ofa startup that makes an app to teach yoga to or-phans would be ideal. As a token of his commitment, a suitormight offer the object of his affections 51% of his shares—somuch nicer than a joint bank account. Less eligible men couldoffer instead to link Uber accounts, thus entwining the cou-ple’s reputations: their joint five-star rating would be at risk ifeither misbehaved. Uber-linking would also allow each tokeep track of the other’s whereabouts, discouraging infidelity.Whatever ultimately replaces diamonds, it will surely be digi-tal, not worn on a digit.7

Diamonds and marriage

A girl’s new best friend

The diamond engagement ring maynot have a future as a symbol ofcourtship. What could replace it?

The Economist February 25th 2017 13

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

Fighting terror in Kenya

“Food for the hyenas” (Febru-ary18th) misrepresented theworkcarried out by theKenyan government in battlingjihadism. Our domestic securi-ty operations are not the rene-gade actions that you portray.They form part ofa nationalstrategy to counter violentextremism, launched in Sept-ember 2016. The suggestionthat they will lead to electionviolence is not credible. Thevote in 2013 passed offpeace-fully despite the doom-mon-gering ofmany internationalobservers and Kenya today iseven more secure.

Our plan includes thereintegration of returningjihadists and pre-emptiveanti-radicalisation measures. Itis formulated in tandem withthe UN Global Counter-Terrorism Strategy andintegrates ideas put forward bythe UN secretary-general andthe African Union.

Like many countries, Kenyafaces serious challenges withdomestic and internationalterror networks. But attackshave decreased and co-oper-ation between police andinformants is on the up. Wewill face down extremismforcefully, diligently, and fairly. MAJOR-GENERAL (RTD) JOSEPHNKAISSERRYInterior cabinet secretaryNairobi

Legal opinion

Your review ofStephen Press-er’s bookwas far too simplisticon the liberal-conservativedivide over how to understandthe “rule of law” (“Whoserules, whose law”, February4th). You said that Republicanssee this as “based on precedentand written statutes”, whereasDemocrats think it should “bediscretionary values andallowed to incorporateexternal information”. Butliberal legal thinkers, likeconservatives, also believe inprecedent and following stat-ute. Disagreements arise overthe scope ofprecedents andinterpretation ofstatutes, butno one (save possibly ClarenceThomas) gives no weight toprecedent.

Moreover, it was Repub-lican appointees on theSupreme Court who aban-doned a century ofprecedentin the Citizens United cam-paign-finance decision. Thesame five-to-four majority alsogutted the statutory VotingRights Act, holding its coreprovision to be unconstitution-al based in part on the “ex-ternal information” that, in theRepublican appointees’ view,“things have changed dramati-cally” 50 years after itsenactment.

As for Antonin Scalia’sfocus on “original intent” tokeep the constitution and lawsfrom being “stretched by un-elected judges”, it seems im-possible to adhere fully to thatview. The Supreme Court’sruling in Brown v Board ofEducation (1954), holding thatracially segregated publiceducation violates the equalprotection clause of the 14thAmendment, is universallyaccepted as the right decision.Yet when Congress sent the14th Amendment to the statesfor ratification in 1866, schoolsin the District ofColumbia,established by Congress, weresegregated by race.THOMAS ROWEProfessor of law emeritusDuke UniversityDurham, North Carolina

Voting block

Being myself15 years old, I readwith interest your leader call-ing for the voting age to belowered to 16 (“Vote early, voteoften”, February 4th). Youargued that “A lower votingage would strengthen thevoice of the young and signalthat their opinions matter.”However, you must considerprecisely what citizens ofmyage would be inclined to votefor. For example, the vast ma-jority ofDemocratic primaryvoters aged 18-24 supportedBernie Sanders, partly becauseofhis irresponsible promise offree college education.

Adding a large number ofpeople like me to the voterrolls, all ofwhom have littleexperience in the workforce,would increase support forSanders-style populism overClinton-style pragmatism. Job

experience helps developeconomic literacy. Loweringthe voting age to includepeople who lack this would domore harm than good.JACOB LADNERPhoenix

The obvious answer to apathyamong millennials is to turnvoting into a video game. Atthe start players would be ableto vote for, say, dog-catcher. Butas they acquired more pointsfor experience, they would beentitled to vote in more impor-tant elections.

Joking aside, there is some-thing to be said for “earning”the right to vote by requiring atleast a token effort. People whoare disinclined to vote are alsodisinclined to study the issues.Your opinion ofmeasuresaimed at making voting effort-less depends on whether youthink the primary purpose ofdemocracy is fostering theillusion ofparticipation, orfostering good government.CHRIS TRUAXSan Diego

Back to reality

Grand bargains are very rare ininternational life, and theatmospherics for one betweenAmerica and Russia couldn’tbe worse (“Courting Russia”,February11th). Ministers andeven sensible commentatorstalkglibly ofa new cold war,without really reflecting on thecosts and hazards of the oldone. The relationship betweenRussia and the West sankdangerously low last autumn;there was a real possibility ofmilitary confrontation. Weneed to find a way backfromall this. And the initiative willneed to come from the over-whelmingly stronger, and thusless at risk, of the two sides.

The real question is not aboutgrand bargains but whetherDonald Trump should belooking for less dramatic waysto improve relations.

The list ofproblems wherecommon ground is worthlooking for is long: Islamicextremism, cyber-warfare,strategic arms reduction andnuclear terrorism. But the keyissue where polite opinioncontinues to insist on ob-duracy is economic sanctions.Really? I have not met a West-ern official who can explainwhat sanctions are now for.They have changed Russianpolicy not a jot. The economy,predicted to implode, is nowgrowing again. Vladimir Putinis still president and rides highin the polls. Indeed he may bequietly relying on the mainte-nance ofsanctions to get thoseextra nationalist voters out onhis behalfat the presidentialelection in March 2018. Arethey really worth it? SIR TONY BRENTONBritish ambassador to Russia2004-08Cambridge, Cambridgeshire

Data is no singularexception

A letter from David Chaplin inthe February11th issue promot-ed the use of“data” as a singu-lar noun. This missed the pointthat the word is routinelyawarded its due as a pluralnoun in scientific and medicalliterature in accord with itsLatin etymology. Pointing toother plurals that have beenreduced to singulars is likesaying that several crimesagainst the English languagejustify yet another.

The use of“datum”, I admit,is unusual. However, theattribution of“data” as a singu-lar noun would yield sen-tences such as “The editors ofThe Economist is uneducatedin the Latin derivation ofEnglish terms.”BARRY MALETZKYPortland, Oregon7

Letters

16 The Economist February 25th 2017

1

FROM his office window, PhilippSchröder points out over the Bavarian

countryside and issues a Bond villain’slaugh: “In front of you, you can see thedeath of the conventional utility, all fi-nanced by Mrand Mrs Schmidt. It’s a beau-tiful sight.” The wind blowing across Wild-poldsried towards the Alps lazily turns theturbines on the hills above. The south-fac-ing roofs of the houses, barns and cow-sheds are blanketed with blue photovolta-ic (PV) solar panels. The cows on the greenfields produce manure that generates bio-gas which warms the Biergarten, the sportshall and many of the houses where the2,600 villagers live, as well as backing upthe wind and solar generators in winter.All told, the village produces five timesmore electricity than it needs, and the vil-

lagers are handsomely rewarded for theirgreenness; in 2016 they pocketed about€6m ($7m) from subsidies and selling theirsurplus electricity.

It hardly looks like the end of the world;but Mr Schröder, who works at Sonnen, anenergy-storage firm, has a point. Many en-vironmentalists want the world’s energysystem to look like Wildpoldsried’s. Andthe things it is based on—subsidies for in-vestment, very little spending on fuel, andmoving electricity generation to the edgeof, or off, the grid—are anathema to elec-tricity markets and business models devel-oped for the fossil-fuel age.

Few greens would mourn them. But thefall in utility revenues that comes with thespread of places like Wildpoldsried is notjust bad news for fossil-fuel-era incum-

bents in the generation and transmissionbusinesses. It is also becoming a problemfor the renewables themselves, and thusfor the efforts to decarbonise the electricitysupply that justified their promotion in thefirst place.

In 2014 the International Energy Agen-cy (IEA), a semi-official forecaster, predict-ed that decarbonising the global electricitygrid will require almost $20trn in invest-ment in the 20 years to 2035, atwhich pointthe process will still be far from finished.But an electricity industry that does notproduce reliable revenues is not one thatpeople will invest in.

Less dear, still disruptiveThe fight against climate change has seenhuge growth in the “new” renewables,wind and solar power, over the past de-cade, both in developed countries and de-veloping ones. In 2015 governmentspoured $150bn into supporting such in-vestment, with America, China and Ger-many taking the lead. But Wildpoldsried isstill very much the exception, not the rule.In 2015 such sources accounted for only 7%of electricity generated worldwide. Over80% of the world’s energy still comes fromfossil fuels (see chart 1 on next page). Interms of reducing climate risks there is along way to go.

The good news is thata decade of subsi-dy-driven growth has brought with it fall-ing costs. Renewables are still on the priceyside in many places, but they are gettingless so; in some places wind, in particular,is reasonably competitive. This suggeststhat theirgrowth might soon need a lot lesssubsidythan ithasattracted to date. Robustcarbon prices would give renewables fur-ther advantages, but they have as yetproved hard to provide. The EU’s emis-sions-trading scheme is a perennial disap-pointment: still, hope springs eternal, aswitness a recent attempt to persuade thenewAmerican administration ofthe bene-fits of a revenue-neutral economy-widecarbon tax devoted to providing $2,000 toevery family offour in rebates.

But pushing renewables into the elec-tricity market has had effects on more thantheirprice; it has hit investment, too. In richcountries governments have imposed re-newables on electricity systems that hadno need for new capacity, because de-mand is in decline. Investment in supplybeyond what the market required has pro-duced gluts and pushed down prices. InAmerica this has been somewhat maskedby the shale-gas revolution, which hascaused a bigger shift in the same direction.In Europe the glut of renewables is morestarkly seen for what it is. Wholesale elec-tricity prices have slumped from around€80 a megawatt-hour in 2008 to €30-50nowadays.

The result has been havoc for the old-style utilities. Germany’sbiggest electricity

A world turned upside down

WILDPOLDSRIED

Wind and solarenergy are disrupting a century-old model ofproviding electricity.What will replace it?

Briefing Renewable energy

The Economist February 25th 2017 Briefing Renewable energy 17

1

2 companies, E.ON and RWE, both split intwo last year, separating their renewablesand grid businesses from indebted andloss-making conventional generation. EY,a consultancy, calculates that utilitiesacross Europe wrote off €120bn of assetsbecause of low powerprices between 2010and 2015. Investment in non-renewables isvery low. “Never in recent history has thedeployment of capital been more difficultthan it is right now within the energy in-dustry,” says Matt Rennie, who analysesthe global-utilities market at EY.

It is not just that efforts to shift to renew-able power have added new sources ofsupply to an already well-served market.In an industry structured around marginalcosts, renewables have a disruptive punchabove their weight.

Electricity markets, especially thosethat were deregulated in the late 20th cen-tury, typically work on a “merit order”: atany given time they meet demand by tak-ing electricity first from the cheapest sup-plier, then the next-cheapest, until theyhave all they need; the price paid to all con-cerned is set by the most expensive sourcein use at the time. Because wind and solardo not need to buy any fuel, their marginalcosts are low. They thus push more expen-sive producers off the grid, loweringwholesale prices.

If renewables worked constantly thatwould not, at first blush, look like a pro-blem for anyone except people generatingexpensive electricity. But renewables areintermittent, which means that in systemswhere the infrastructure was designed be-fore intermittency became an issue—al-mostall ofthem, in practice—fossil-fuel, hy-droelectric and nuclear plants are neededmore or less as much as ever at times whenthe sun doesn’t shine and the winds don’tblow. And if such plants are shut out of themarket by low-cost renewables, they willnot be available when needed.

In the long run, and with massive fur-ther investments, electricity grids rede-signed for systems with a lot of renewableenergy could go a long way to solving this

problem. Grids with lots of storage capaci-ty built in; grids big enough to reach out tofaraway renewables when the nearbyones are in the doldrums; grids smartenough to help customers adapt demandto supply: all have their champions andtheir role to play.

But long-run solutions do not solveshort-term constraints. So for now coun-tries with lots of renewables need to keepolder fossil-fuel capacity available as astandby and to cover peaks in demand.This often means additional subsidies,known as capacity payments, for plantsthat would otherwise be uneconomic.Such measures keep the lights on. But theyalso mean that fossil-fuel production ca-pacity clings on—often in particularly dirtyforms, such as German power stationspowered by brown coal, or backup dieselgenerators in Britain.

From dull to death spiralProperly structured capacity paymentsmake it sensible to invest in generators thatcan be switched on when renewable ener-gy is not available. But what will make itsensible to continue investing in renew-ables themselves?

When they are a small part of the sys-tem, renewables are insulated from the ef-fects that their low marginal costs have onprices, because as long as there are someplants burning fossil fuels the wholesaleprice of electricity will stay reasonablyhigh. So utilities could buy electricity fromrenewable generators, often on fixed-pricecontracts, without too much worry.

But the more renewable generatorsthere are, the more they drag down prices.At times when renewables can meet all thedemand, making fossil-fuel prices irrele-vant, wholesale electricity prices col-lapse—or sometimes turn negative, withgenerators paying the grid to take the stuffaway (the power has to go somewhere).The more renewables there are in the sys-tem, the more often such collapses occur.

Rolando Fuentes of Kapsarc, an energythink-tank based in Saudi Arabia, claims

the world is caught in a vicious circle: sub-sidies fosterdeployment ofrenewables; re-newables depress power prices, increasingthe need for financial support. Theoretical-ly, if renewables were to make up 100% ofthe market, the wholesale price of electric-ity would fall to zero, deterring all new in-vestment that was not completely subsi-dised. He calls this vicious circle theclean-energy paradox: “The more success-ful you are in increasing renewables’ pene-tration, the more expensive and less effec-tive the policy becomes.”

Francis O’Sullivan, of the Massachu-setts Institute ofTechnology, says the trendis already visible in parts of America withabundant solar energy. Utilities which arerequired to have renewables in their port-folios, such as those in California, used tooffer companies investing in that capacitygenerous long-term contracts. But researchbyBloombergNewEnergyFinance (BNEF),a consultancy, shows that, as such utilitiescome closer to meeting their mandates, so-lar-power developers are being offeredshorter-term fixed prices with a highersubsequent exposure to variable whole-sale prices. That reduces the incentive to in-vest. Solar “cannibalises its own competi-tiveness away,” Mr O’Sullivan says. “It eatsits own tail.”

At the turn of the century, according tothe IEA, one third of investment in electric-ity markets flowed into “competitive” sec-tors thatwere exposed to wholesale prices;the rest went into regulated utilities, trans-mission grids and the sort of fixed-pricecontracts where the renewables got theirstart. By 2014 the share of investment in thecompetitive sectors was just 10% of the to-tal. It is a fair bet that, the more renewablesare exposed to competition by contractspegged to wholesale prices, the more peo-ple will shy away from them as well.

Ever-lower capital costs, particularly insolar, could go some way to bucking thistrend, making investments cheaper evenas they become more risky. But if low-mar-ginal-cost renewables continue to pushprices down, there will come a time whenprivate investment will dry up. As Mal-colm Keay of the Oxford Institute for Ener-gy Studies puts it, “The utility businessmodel is broken, and markets are, too.”

Renewables do not just lower prices;when used bycustomers, they also eat intodemand. Consider Australia. It has 1.5mhouseholds with solar cells on their roofs.There are a number of reasons for this. It isa sunny place; installing PVs was until re-cently generously subsidised; and electric-ity bills are high. In part that is to pay forsome of the subsidies. In part it is becausethey pay for the grid, which has been be-coming more expensive, not least becauseit has had to deal with a lot more renew-ables. The IEA says that in parts of south-ern Australia, grid upgrades have doublednetwork costs since 2008-09. Despite cuts

1Big growth, small share

Source: BP

Primary-energy consumption, worldwideTonnes of oil equivalent, bn

Non-hydro renewables, share of power generationBy region, %

0

2

4

6

8

10

12

14

1995 2000 05 10 15

Oil

Coal

Natural gas

0

2

4

6

8

10

12

1995 2000 05 10 15

Asia PacificWorld

AfricaMiddle East

Hydroelectric

Nuclear

Non-hydro renewables

Europe and EurasiaS. & Central AmericaNorth America

18 Briefing Renewable energy The Economist February 25th 2017

2 to subsidies, Australian PV installations areexpected to triple over the next decade.

When fewer people rely on the grid,there are also fewer left to share the costs.Phil Blythe of GreenSync, a Melbourne-based company that works with utilities tomoderate the fluctuations of renewableenergy, warns that his country faces an in-cipient “utility death spiral”. The more cus-tomers generate their own electricity, themore utilitieshave to raise prices to the cus-tomers that remain, which makes themmore likely to leave the grid in turn. Itwon’t happen overnight, he says: but it is“death by a thousand cuts”.

From dromedary to duckIn California there is an icon for the effectthat domestic renewables have on the de-mand for grid electricity, and thus on therevenues of utilities: it is called the duck(see chart 2). Every year more Californianconsumers have solar cells. As a result, ev-ery year electricity demand during the dayfalls, and revenue falls accordingly. Similareffects are seen in Germany, where thereare now1.4m PV users—mostly domestic. Itis one of the reasons—subsidies are anoth-er—why domestic electricity prices havestayed high there while wholesale priceshave fallen.

These home generators are not just re-ducing demand for grid electricity; oftenthey are allowed to feed surplus powerfrom their PVs into the grid, competingwith other generators. In many Americanstates utilities grumble about the “net me-tering” rate they are required to pay suchpeople—especially in states like Nevadawhere they have been required to creditthe electricity fed in at the retail price, rath-er than the wholesale price. And rooftopsolar installationscontinue to grow, with 12states more than doubling their deploy-ment in 2016, according to BNEF. Business-es and industrial users are also becomingbig consumers ofrenewable energy, whichpotentially reduces their dependence onthe grid, and thus the amount theywill payfor its services.

The response to these problems is notto abandon renewables. The subsidieshave helped costs of wind and solar to fallprecipitously around the world. Competi-tion is often fierce. Recent auctions for off-shore wind farms in the North Sea and so-lar developments in Mexico and AbuDhabi have shown developers slashingprices to win fixed contracts to supplyclean electricity for decades to come. The“levellised cost of electricity” for renew-ables—the all-in cost of building and oper-ating a plant over its lifetime—is increasing-ly competitive with fossil fuels in manyplaces. Especially in sunny and windy de-veloping countries with fast-growing de-mand, they offer a potentially lucrative,subsidy-free investment opportunity.

But it does mean changing the way theworld buys, sells, values and regulateselectricity to take account of the newmeans by which it generates it. “Thinkingof wind and solar as a solution by them-selves is not enough. You need flexibilityon the otherside. It onlymakes sense if thisis a package deal,” says Simon Müller ofthe IEA. Elements of that package are al-ready appearing. Markets that sell com-moditised kilowatt-hours need to be trans-formed into markets where consumerspay for guaranteed services. A lot morestorage will be needed, with products likethose of Sonnen in Wildpoldsried and thePowerwalls made by Tesla fighting forspace in people’s homes. Smart grids bol-stered by big data will do more to keep de-mand in line with supply.

In Wildpoldsried Mr Schröder dreamsof electricity-users inviting friends roundfora glassofwine to showofftheir newso-lar kits and batteries. “We’ll soon be at a

point where people say, ‘You’re so yester-day. You get your power from the grid.’ ”But peer pressure is unlikely to be decisive.Bruce Huber ofAlexa Capital, which helpsfund renewable-energy investments, saysbusiness consumers are probably going tobe more influential in driving the adoptionofthese technologies than households, be-cause they will more quickly see how theymight cut their bills by using demand-re-sponse and storage. “For the last 100 yearseveryone has made money upstream.Now the added value is coming down-stream,” he says.

Waiting for enlightenmentMr Huber likens the upheaval facing utili-ties to that seen in the telecoms industry ageneration ago, when a business modelbased on charging per second for long-dis-tance calls was replaced by one involvingthe sale of services such as always-onbroadband. This is bad news for the verti-cally integrated giants that grew up in theage of centralised generating by the giga-watt. Jens Weinmann, of ESMT Berlin, abusiness school, names dozens of tech-likefirms that are “nibbling” away at bits ofutilities’ traditional business modelsthrough innovations in grid optimisationand smart-home management systems.With a colleague, Christoph Burger, he haswritten of the “big beyond” in which do-mestic energy autonomy, the use of theblockchain in energycontracts, and crowd-sourcingofPV installations and other tech-nological disruptions doom the traditionalutility. Already, big Silicon Valley firmssuch as Google and Amazon are attempt-ing to digitalise domestic energy, too, withhome-hubs and thermostats.

But how this nibbling leads to a systemthat all can rely on—and who pays for theparts of it that are public, rather than priv-ate, goods—remains obscure. The processwill definitely be sensitive to politics, be-cause, although voters give little thought toelectricity markets when they are working,they can get angry when prices rise to cov-er new investment—and they scream bluemurder when the lights go out. That sug-gests progress may be slow and fitful. Andit is possible that it could stall, leaving cli-mate risks largely unabated.

Gettingrenewables to today’s relativelymodest level of penetration was hard andvery expensive work. To get to systemswhere renewables supply 80% or more ofcustomers’ electricity needs will bringchallenges that may be far greater, eventhough renewables are becoming compar-atively cheap. It is quite possible that, as MrSchröder predicts, Mr and Mrs Schmidt inWildpoldsried will lay waste the world’sconventional electricity utilities whilesharing Riesling and gossip with the neigh-bours. But that does not mean that theywill be able to provide a clean, green alter-native for everyone.7

2Who gets the bill?

Source: California ISO

California, electricity load requirementTypical spring day, gigawatts

00:00 06:00 12:00 18:00 24:00

10

12

14

16

18

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It may not get all the way there

The Economist February 25th 2017 19

For daily analysis and debate on Asia, visit

Economist.com/asia

1

ON THE Indian subcontinent, as in noother part of the world, women have

risen to the pinnacle of politics. IndiraGandhi of India, Benazir Bhutto of Paki-stan and AungSan SuuKyi ofMyanmarareall famous names. Less well known is thatSri Lanka was the first country ever to electa woman prime minister, or that it has alsohad a female president. For22 of the past 25years Bangladesh, a largely Muslim coun-try with more people than France and Ger-many combined, has been led by a wom-an. And the chief ministers of numerouscountry-sized Indian states, from WestBengal in the east to Tamil Nadu in thesouth, have also been women. India’s de-mocracy is not pretty; these are the win-ners ofbare-knuckle contests.

Yet for all such headline-grabbing suc-cesses, the fine print tells a different story.Although there hasbeen steadyprogress insuch things as stamping out female infanti-cide and spreading women’s education,statistics continue to reveal a stark sex di-vide. At 27%, the share of Indian womenwho work, for instance, is less than half thelevel in China or Brazil (and also in neigh-bouring Bangladesh, although slightlyhigher than in Pakistan).

In 2012 a household survey found thatfour-fifths of Indian women needed theirhusband’s or family’s permission to visit alocal clinic. A third said they would not beable to go alone. More than half also said

proportion of women in the lower housewas 6%.

It is only in village and district councilsthat women hold much sway, but this ispartly due to laws that assign either a thirdor half of seats to female candidates. Earli-er this month tribesmen objecting to ef-forts to impose a women’s quota in localelections rioted in Nagaland, a state on theborder with Myanmar that is one of thefew exceptions to such rules. Naga men in-sist that local custom precludes female vil-lage chiefs.

Such troubles reveal one cause of slowprogress to sexual equality: Indian politi-cians have generally found it more reward-ing to cater to subgroups defined by caste,religion, ethnicity, language or local griev-ance, rather than to broader categoriessuch as women. This is equally true of fe-male politicians, and of regional leadersless constrained by democracy. Sheikh Ha-sina, the current, iron-fisted prime ministerof Bangladesh, has recently moved to re-duce the legal age of marriage from 18 to 16.Given that child marriage is already com-mon, especially in the impoverished coun-tryside, women’s-rights activists are upset.But analysts explain that apa, or “big sis-ter”, who has hounded opposition partiesincluding Islamists, is looking for ways todeflect conservative anger.

In order to succeed female politicians inthe region often make a point of actingtough. Mamata Banerjee, the diminutivebut formidable chief minister of West Ben-gal, once dragged a male colleague out ofthe well of parliament by the collar whenshe was an MP in Delhi. Like Sheikh Ha-sina and Mayawati, a formerchiefministerof Uttar Pradesh, as well as Jayalalithaa, arecently deceased former film star andlong-serving chief minister of Tamil Nadu,Ms Banerjee has carefully repressed her

theycould notvisit a shop, oreven a friend,without someone else’s approval. Formany, the very idea of going out wasalarming: 70% said they would feel unsafeworking away from home, and 52%thought it normal for a husband to beat hiswife if she ventured out without tellinghim. In November, following a shock gov-ernment move to scrap higher-denomina-tion banknotes, a domestic violence hot-line in the city of Bhopal in central Indiaregistered a doubling of calls, largely fromwomen whose spouses had discoveredthey had secretly been saving cash.

On your bikeFor wealthy and middle-class Indianwomen, freedoms have steadily grown:Anubha Bhonsle, a television anchor, re-calls the strangeness of being the sole fe-male driver of a motor scooter on manystreets when she started commuting 15years ago. “No one would give a secondglance now,” she says. Yet in many profes-sions women remain rarities. Barely10% ofthe 700 judges in India’s higher courts arefemale, and only17% ofthe 5,000 officers inthe Indian Administrative Service, the elitecorps ofbureaucrats that runs the country.

Women are scarce even in politics. Inthe lower house of India’s parliament only12% of MPs are women. State legislaturesare similarly male. True, women’s share ofseats has risen, but slowly: 50 years ago the

Women in South Asia

The missing middle

DELHI

Powerful women have not empowered women

AsiaAlso in this section

20 Mongolia gets another bailout

20 A run of terrorist attacks in Pakistan

21 Trouble for miners in South-East Asia

22 A stand-off at a Thai temple

23 Banyan: the Philippine pivot to China

20 Asia The Economist February 25th 2017

1

2 sexuality. These women are ostentatiously“married” to their cause or their party.

Such care is understandable. Male ri-vals have not shied from using sex to ma-lign female politicians. One party leader inUttar Pradesh lost his job for accusingMayawati, who comes from a downtrod-den caste, of “selling tickets like a prosti-tute”. A colleague went further against So-nia Gandhi, the leader of the oppositionCongress party. Absurdly, he accused thehead of the Gandhi dynasty of havingworked for a Pakistani escort agency.

With so many obstacles blocking thepath to power, it is hardly surprising that somany ofthe region’s successful female pol-

iticians got a head start. Amrita Basu ofAmherst College finds that more than halfof India’s female MPs in the past decadehad family members who preceded themin politics. Quite often such dynastic linkshave been dramatic. Ms Suu Kyi in Myan-marand Sheikh Hasina are both daughtersof slain independence heroes. SoniaGandhi and Khaleda Zia, a former Bangla-deshi prime minister and bitter rival toSheikh Hasina, are both widows of assas-sinated leaders. Both Jayalalithaa andMayawati entered politics as devoted lieu-tenants to charismatic, populist politi-cians; in Jayalalithaa’s case hermentoralsoplayed the lead in many ofher films.

Forwomen to playa more normal polit-ical role in the subcontinent, perhaps it is infilms, and in popular culture in general,that change needs to happen first. All toooften on the region’s screens, actresseswho are paid a fraction of what male starsget portray women who lack agency intheir lives. There is, though, an inkling ofchange. This season’s blockbuster and al-ready the highest-earning film in Bolly-wood history, “Dangal”, tells the heart-warming story of sisters who becomechampions in the male-dominated sportofwrestling. Yet the main hero isnot one ofthe girls, but the father, a former wrestler,who bends them to his will. 7

Mongolia’s finances

This might yurt

WHEN Jim Anderson first lived inMongolia in 1993, there was one

local word foreigners could not help butlearn: baikhgui, which translates as “ab-sent” or “unavailable”. Bread? Rice?Electricity? Often as not, they were baikh-gui, he recounts in a blog post for theWorld Bank, for which he has returned toMongolia as country director. Even thoselucky enough to have American currencyto spend in “dollar shops” received sticksofchewing gum as change.

Mongolia thought it had left thosedays far behind. A mining boom (copper,coal, gold) has transformed the country,filling the shops with goods and the citieswith cranes. From 2009 to 2014, the econ-omy grew by 70%. In 2012 alone, it attract-ed foreign-capital inflows equivalent tosome 54% of its GDP. But since 2014 com-modity prices have fallen, foreign-directinvestment has reversed and a numberofdaunting debt payments have creptcloser. Mongolia’s foreign reserves havedwindled from over $4bn in 2012 to littlemore than $1bn at the end ofSeptember,equivalent to about four months’ im-ports. Foreign creditors were about to

learn the word baikhgui. Enter the IMF. This month it agreed to

lend Mongolia about $440m over threeyears to help it avoid default and rebuildits reserves. Assuming the agreement isapproved by the fund’s board, it shouldunlockanother $3bn or so from the AsianDevelopment Bank, the World Bank,Japan, South Korea and others.

China should also help. Irked by theDalai Lama’s visit in November, it im-posed new duties on Mongolian goodsand delayed lorries at the border. A littleover 50% ofMongolians identify as Bud-dhist. But almost all the country’s exports(84%) are sold to China, making it themost China-dependent exporter in theworld (see chart). Mongolia’s govern-ment has apologised for the “misun-derstanding” caused by the visit and saidit will not permit a repeat. It now hopesChina will extend a 15bn yuan ($2.2bn)swap line.

The strings attached to the IMF’s loanare more conventional. They includekeeping the central bankout of“quasi-fiscal” activities: it had bought cheap-ratemortgages worth 1.95trn togrog ($787m),helping to support a housing bubble in acountry known for nomadism. At theIMF’s urging, the government is alsodistancing itself from the management ofthe Development BankofMongolia, astate lender that accounts for over a fifthofcredit in the country.

Mongolia’s prospects should improve.Copper and coal prices have recoveredsomewhat. The economy will also bene-fit from heavy investment in Oyu Tolgoi,a copper mine operated by Rio Tinto. ButMongolia has turned to the IMF twice ineight years. If it does not manage the nextcommodity cycle better, it might find thatits benefactors’ patience is baikhgui.

The IMFbails Mongolia out—again

The great thrall

Source: IMF

Goods exports to China, % of total, 2015

0 30 60 90

Mongolia

North Korea

Solomon Islands

Turkmenistan

Hong Kong

Myanmar

Australia

IN THE space offive days in mid-February,Pakistan suffered ten acts of terrorism, af-

fecting all four of its provinces. On Febru-ary 13th a suicide bomber killed 15 peopleoutside the provincial assembly in Punjab,including two senior police officers. OnFebruary 16th more than 80 were killedand over 200 injured when another sui-cide bomber targeted the throngs of wor-shippers at Lal Shahbaz Qalandar, a Sufishrine in the southern province of Sindh.Yet more bombs killed police and soldiersin Balochistan, Khyber Pakhtunkhwa andthe Federally Administered Tribal Areas(FATA), along the border with Afghanistan.

The attacks are all the more shockingbecause deaths from terrorism in Pakistanhave fallen dramatically in recent years(see chart), the result of a sustained coun-ter-terrorism campaign by the security ser-vices. Swathes of territory once lost to mil-itants have been recovered. OperationZarb-e-Azb, launched in 2014 to retakeNorth Waziristan, a part of FATA that had

Security in Pakistan

Role reversal

ISLAMABAD

Pakistan blames Afghanistan fora spateof terrorist attacks

Waning horror

Source: South Asia Terrorism Portal *To February 19th

Pakistan, deaths from terrorism, ’000

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2008 09 10 11 12 13 14 15 16 17*

The Economist February 25th 2017 Asia 21

1

2 become a jihadist stronghold, was a turn-ing point. Until then, fretful politicians hadpostponed confrontation with the Teh-reek-e-Taliban Pakistan (TTP), the Pakistanioffshoot of the militant Muslim group thatruled Afghanistan until the American in-vasion of 2001 and threatens its govern-ment to this day.

It was a faction of the TTP that claimedresponsibility for the attack on the Punjabassembly. Islamic State, the extremistgroup that controls parts of Iraq and Syria,said it was responsible for the bombing ofthe Qalandar shrine, although it is likely tohave worked through a local group. ButPakistan’s army identified a third culprit:Afghanistan. It said the Afghan govern-ment was not doing enough to stamp outmilitant groups, and that the militants, inturn, were using Afghanistan as a base toplan attacks in Pakistan. It closed all bordercrossings and shelled what it said weremilitant camps on the Afghan side of theborder. The army also demanded the im-mediate arrest of 76 terrorists it said wereliving in Afghanistan.

It is true that Islamic State, the TTP andmany other groups have bases inside Af-ghanistan. Afghan spooks may well pro-vide them some assistance (in 2013 Ameri-can special forces caught a leader of theTTP on his way to Kabul for secret talks).But the beleaguered government in Kabul,which has lost much of its territory to theTaliban insurgency, is in no position to sat-isfy Pakistan’s demand that it detain partic-ular militants. They are based in areaswhere its writ is minimal or non-existent.

Moreover, the Afghan government isbeleaguered in partbecause the Afghan Ta-liban has itself long enjoyed sanctuary onPakistan’s side of the border. This week theAfghan government announced that itsforces had killed Qari Saifullah Akhtar, aTaliban leader repeatedly captured and re-leased by Pakistan. With many more of theTaliban’s leaders, bomb-makers and in-doctrinators beyond the reach of Afghantroops and their allies in NATO, it hasproved impossible to defeat the 16-year in-surgency. Yet Pakistan has shielded the Ta-liban because it sees the group as its onlyally in Afghanistan, a country it fears is toocosy with India, its arch-rival.

While the army harasses Afghanistan,there is much that Pakistan could do tofight terrorism domestically. A NationalAction Plan drawn up in the wake of themassacre of more than 130 schoolboys bythe TTP in Khyber Pakhtunkhwa in 2014has not been fully implemented. Regula-tion and reform of madrassas, religiousschools that fostermilitancy, has been half-hearted. Notorious peddlers of sectarian-ism remain at large. It does not help thatthe army wants an even bigger role in do-mestic security—a source of tension withthe civilian authorities. There is nothingAfghanistan can do about all that. 7

IN THE more rugged, poor and far-flungareas of the vast archipelagoes of Indo-

nesia and the Philippines, mining is one ofthe few industries that shows much pro-mise. Last year the Philippines exportednearly $1.7bn of minerals and ore—4% ofthe country’s exports. Mining employsover 200,000 people. By the same token,the Indonesian unit ofFreeport McMoRan,an American firm that operates Grasberg, avast copper and gold mine high in themountains of Papua, has paid more than$16.5bn in taxes over the past16 years. Free-port plans to expand Grasberg; over thenext 25 years it expects to cough up a fur-ther $40bn. Yet the governments of bothcountries are imperilling this bonanza.

Three years ago, in an effort to boost theeconomybyspurringdomesticprocessing,Indonesia banned the export of unrefinedmetal ores. (Smelting copper ore adds little

value, so it was exempted.) Mining col-lapsed: the output of bauxite, from whichaluminium is refined, fell from 56m tonnesin 2013 to 1m tonnes in 2015 (see chart).Some firms did begin building expensivesmelters—but not nearly enough to processall the ore that had previously been mined.Indonesia now has the capacity to process3m tonnes of bauxite a year, for example.Instead, the law’s most noticeable effectswere the closure ofhundreds ofmines, theloss of thousands of jobs and a collapse ingovernment revenue from mining.

In January the government—in searchof jobs and revenue—relaxed the ban, al-lowing some exports of unprocessed nick-el and bauxite for the first time in fouryears. But, perhaps to show that it was nota soft touch, it also insisted that all miningfirms operating under an older, more se-cure form of mining licence, includingFreeport, convert them into a newer sort inorder to receive export permits. Freeport,which has a controversial history in Indo-nesia, has refused. It has halted productionand suspended investment. It is also layingoff workers. “You cannot produce a pro-duct that you are not allowed to sell,” saysits boss. The company has also mutteredabout international arbitration, elicitingsplutters from the minister ofmines.

Indonesia’s ore-export ban made thePhilippines the world’s leading nickel pro-ducer, but that may soon change. On Feb-ruary 3rd Gina Lopez, the environmentsecretary (and a longtime green activist be-fore joining government), ordered 23 of thecountry’s 41 mines to close permanently,

Mining in South-East Asia

Shafted

JAKARTA AND MANILA

Indonesia and the Philippines tell a gift horse to open wide

In a hole

Source: United States Geological Survey

Indonesia, mining production, 2010=100

0

50

100

150

200

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300

2010 11 12 13 14 15

Bauxite

Nickel ore

Copper concentrate

22 Asia The Economist February 25th 2017

2 and another five to suspend operations in-definitely, for alleged environmental viola-tions. Most of the mines to be closed pro-duce nickel, and are responsible foraroundhalf the country’s annual output of530,000 tonnes. On February 14th Ms Lo-pez cancelled another 75 mining projects,some still in the exploratory stage, on thegrounds that they would harm ecological-ly sensitive areas.

The industry has cried foul. Ronald Re-cidoro ofthe ChamberofMines in the Phil-ippines, a trade group, said that his mem-bers had not seen copies of the audits thatled to the closures, nor have there beencases filed against them for violations ofthe clean water and air acts (Ms Lopez hasinvited companies to inspect the audits inheroffice). He also notes thata governmentteam that reviewed the audits recom-

mended fines or suspensions, not closures.They fear that Ms Lopez intends to inter-pret environmental regulations so strictlyas to make mining impossible.

Both countries may yet pull back fromthe brink. In the Philippines, mines remainopen during what will doubtless be alengthy appeal process. Carlos Domin-guez, the finance minister, says that he re-minded Ms Lopez that “it was importantfor her to follow due process.” A lawyer inJakarta predicts that “mine owners will begiven relatively short extensions of theright to export and this will be reviewed ona regularbasis with the threat ofbeing shutdown.” Miners make convenient politicalvillains. But neither Indonesia nor the Phil-ippines can afford to let political posturingdeprive them of much-needed revenuefrom rising commodity prices. 7

SOME people think he has fled abroad.Others say he may have died. For more

than a year the authorities in Thailandhave been trying to get hold ofPhra Dham-machayo, the reclusive former leader of acontroversial Buddhist sect who is wantedfor questioning in a fraud case. On Febru-ary 16th a group of officers finally gainedaccess to the vast religious complex whichhis Dhammakaya movement maintainson the outskirts of Bangkok. Instead of lo-cating the septuagenarian monk—oftenpictured in signature sunglasses—theyfound an empty bed stuffed with pillows.

By February 22nd more than 4,000 po-lice and soldiers were lingering outside theDhammakaya compound—waiting tocomplete a full sweep of the massive sitebut apparently hindered by monks anddevotees who had blocked its dozen en-trances. A spokesman for the sect claimedthat 30,000 people were still inside theproperty, having ignored orders to leave;there have been scuffles at its gates. Apira-dee, a retired civil servant helping to feedDhammakaya followers who had gath-ered in support outside the police cordon,said she has never seen anything like it.

Founded in the 1970s, the Dhamma-kaya movement claims about 3m follow-ers around the world. It is by far the mostinfluential temple in Thailand. It bears aloose resemblance to the evangelicalmega-churches that increasingly beguilethe world’s Christians. Dhammakaya’smostly middle-class adherents complainthat older Buddhist temples have grown

complacent and materialistic. They insist,rather grandly, that the Bangkok com-pound, with its vast stadium, is meant tobecome a kind ofBuddhist Vatican.

But Dhammakaya has fierce opponentsboth within the Buddhist establishmentand outside it. Critics denounce it as a cultthat peddles wacky theology, and warnthat it misleads wealthy urbanites intothinking that they can purchase religiousmerit. (The most serious of the several alle-gations against Phra Dhammachayo re-lates to a case in which an acolyte funded adonation with cash embezzled from a

credit union.) Thailand’s ruling junta wor-ries that the movement’s leaders are sym-pathetic to the cause of Thaksin Shinawa-tra, a populist former prime ministertoppled in 2006 whose lingering influencethe generals and their backers are deter-mined to stamp out.

Last year the junta abandoned severalattempts to drag Phra Dhammachayo outfor questioning, fearful of the outrage thatmight follow were soldiers to be picturedmanhandling monks. The latest effortlooks more concerted. It may not be a coin-cidence that the operation began shortlyafter the installation of a new Supreme Pa-triarch (Thai Buddhism’s most seniormonk). That job is usually filled accordingto a strict hierarchy but had been heldopen for several years after conservativeclergy refused to endorse the expected suc-cessor—in part because of worries that hewas too close to Dhammakaya. The juntatookthe unusual step ofaskingKingVajira-longkorn, who succeeded his father in De-cember, to solve that dispute; he anointeda less controversial alternative, SomdetPhra Maha Muniwong, who hails from thesmaller and more orthodox of Thailand’stwo main Buddhist orders.

Monks at the Dhammakaya temple saythat they have not seen their former abbotfor months. They say the real aim of theraid is to shut the entire temple down. Thegenerals may yet decide to backaway fromthe fight, as they have done previously.Theycould perhapsclaim that the searchesthey have already conducted are enoughto declare the operation complete. Thatmight look like a defeat, but it is hard to es-cape the conclusion that the Dhammakayamovement is running out of powerfulfriends. With the royal succession—whichsome had feared would be tumultuous—safely behind it, Thailand’s conservativeestablishment is reasserting itself, in reli-gion as in politics. 7

Buddhism in Thailand

The missing monk

PATHUM THANI

The junta feuds with an influential sect

The Vatican, Mecca…and Dhammakaya

The Economist February 25th 2017 Asia 23

FOR some relief from the congestion, fumes and hustle of Ma-nila, take a day-cruise to the island ofCorregidor. Guarding the

entrance to Manila Bay, the “Gibraltar of the East” has seen thejunks thatbroughtChinese trade and Islam, galleons that broughtSpanish Catholicism and, in 1898, the warships of CommodoreGeorge DeweythatbroughtAmerican rule. In 1941came Japaneseinvaders who, as tour-guides tell it, made sport of throwing Filipi-no babies in the air and catching them on bayonets.

The shared memory of the second world war—the rearguarddefence ofCorregidorbyAmerican and Filipino soldiers, the hor-rors of occupation such as the “Bataan death-march” of POWs todistant internment camps, and the triumphant return of GeneralDouglas MacArthur in 1944—goes a long way to explain the affec-tion ofmany Filipinos for America. It is hard to imagine other for-mer colonised peoples putting up, or putting up with, the “Broth-ers in Arms” statue on Corregidor: it depicts an American GI (talland strong, with a helmet) holdingup a Filipino buddy (short andwounded, with a bandana).

Such comradeship assuages some of the resentment Filipinosfeel at the mixofbrutalityand paternalism ofAmerican rule. Sev-enty years after independence, the Philippines feels like an off-shootofAmerica: in its spoken English, its system ofgovernment,its gun culture, and its love of fast food and Hollywood. The PewResearch Centre, which polls global opinion, ranks the Philip-pines as the most pro-American ofthe countries it surveys: 92% ofFilipinosexpressed a favourable viewofAmerica in 2015, an evenbigger share than in the United States itself.

These days the expansionist power in Asia is China. A poten-tial flashpoint for a future war lies barely 170 nautical miles fromCorregidor—a ring of reefs and rocks called Scarborough Shoal. Abig fishing ground, and a former bombing range for Americanand Filipino forces, it was seized by China in 2012. Were it to builda military base there, as it has done in the nearby Spratly Islands,Scarborough Shoal would be as a dagger aimed at Manila.

It is time, surely, for the brothers to linkarmsagain. The troubleis, Rodrigo Duterte, the hard-man president, wants to turn hisback on America. The Philippines is not a vassal state, putang-ina(“son of a whore”), he exclaimed when asked whether BarackObama might object to his bloody war on drugs. A month later,

on a visit to Beijing, “Rody” announced his country’s “separa-tion” from America, and its dependence henceforth on China.The Chinese leadership promised some $24 billion worth ofloans and investments. High on Mr Duterte’s wishlist is a newrailway to connect Manila with development zones at Subic Bayand Clark Field, former American bases abandoned in the early1990s during a previous surge ofFilipino nationalism.

China in and America out: on the face of it a geopolitical revo-lution is under way, breaking the chain of American alliances inthe Pacific that contain China. Control ofScarborough Shoal, anda friendly government in Manila, would make it easier for Chi-nese nuclear submarines to slip into the Pacific Ocean withinmissile range ofAmerica.

Yet, rhetoric aside, strikingly little has changed. Americanforces are still helping Filipino ones against jihadists and upgrad-ingFilipino bases to challenge China’s ambition in the South Chi-na Sea. The promised billions have yet to materialise. To some,MrDuterte’spivot isa pirouette, intended to getboth powers, andJapan, to woo the Philippines. More plausibly, he is spinning incontradictions. Mr Duterte says that only two out offive ofhis ut-terances are true, and the rest “jokes”. But which is which?

Grown-ups in the cabinet are masters at managing his tan-trums. The “separation” from America is recast as diplomatic “di-versification”, while keeping close ties with America. The threatto abandon the mutual defence treaty of 1951 is but a revision toannual joint exercises. The call to “setaside” the rulingofan inter-national tribunal against China’s trespass on the Philippines’ ex-clusive economic zones around Scarborough Shoal and theSpratlys is no surrender, just a choice not to discuss it for now.

Mr Duterte’s anti-Americanism is real enough. He bears per-sonal grudges against Americans (and claims to have been mo-lested as a boy by an American priest). A self-declared leftist, heblames America for the legacy of violence of his home island ofMindanao, plagued by communist and Muslim insurgencies.

But the president, although popular, is constrained by a pro-American system. Westerners are told to heed what the govern-ment does, not what Rody says. Rattled businessmen hope theharm will be limited. It helps that Mr Duterte has stopped insult-ingAmerica. One reason is thathe hasmore or less suspended hiswar on drugs—not because of growing qualms over the death ofthousands of Filipinos, but out of embarrassment over the grislykilling ofa South Korean businessman by crooked policemen.

A populist axisThe other reason is the arrival of Donald Trump, whom Mr Du-terte regards as a kindred spirit. And yet, even for Mr Duterte, MrTrump is probably a menace, not a friend. Though suspicious ofChina, the American president’s resentment of costly alliancesraises doubt about whether he would defend the Philippines.That could invite Chinese adventurism.

Mr Trump’s dislike of global trade and immigration presentsanother danger. The gift of English has made the Philippines awinner from globalisation: remittances from millions of workersabroad (many in America), and the outsourcing of call centresand other backroom tasks by big American firms, have poweredthe economy. Right now, Mr Trump may care most about the lossof manufacturing jobs to Mexico and the influx of migrants fromthe Muslim world. But in trying to make America great again hemay well make the Philippines poorer. Then Mr Duterte reallywould have good reason to curse America. 7

Pivot or pirouette?

Rodrigo Duterte, the president of the Philippines, says he is turning his backon America

Banyan

24 The Economist February 25th 2017

For daily analysis and debate on China, visit

Economist.com/china

FEWtelevision dramasboasta plot as far-fetched as the one that has unfolded in

North-East Asian geopolitics over the pasttwo weeks. Days after North Korea tested aballistic missile on February 12th, twowomen assassinated the half-brother ofKim Jong Un, North Korea’s leader, bythrowing chemicals in his face at a Malay-sian airport. The alleged killers said theywere duped into taking part, believing theattackwas a prankfor a TV comedy. Malay-sian police suspect that a North Koreandiplomat in Malaysia may have beenamongthe organisers, several ofwhom arethought to have fled to Pyongyang.

Amid such skulduggery, China’s an-nouncement on February 18th that itwould suspend importsofcoal from NorthKorea, from the next day to the end of thisyear, seemed a little mundane. But China’sstate-controlled media played up the deci-sion. Global Times, a newspaper in Beijing,said the move would make it harder forNorth Korea to exploit international differ-ences over the imposition of UN sanctionsaimed at curtailing its nuclear programme.China appeared to be signalling to theworld that it was ratcheting up pressure onits troublesome friend, as the Americanshave long insisted it should.

Or it may just be posturing. On Febru-ary 21st China’s foreign ministry softenedthe message somewhat. It said importswere being suspended because China had

have hoped that Mr Kim, who favours eco-nomic opening, would one day replace hishalf-brother. With his death “you lose oneoption”, says Jia Qingguo ofPekingUniver-sity. It has reminded China that North Ko-rea’s dictator is doggedly determined torule in his own way, regardless of China’sor anyone else’s views.

Growing frustration with North Koreais evident in China’s more relaxed attitudetowards criticism of its neighbour. In 2013an editor of a Communist Party-controlledpublication was fired for arguing in an arti-cle that “China should abandon North Ko-rea.” These days, academics often air thatidea. Debate about North Korea now ragesopenly online, largely uncensored (exceptwhen people use it as a way of attackingtheir own regime, jokingly referred to as“West Korea”). The murder of Kim JongNam unleashed a torrent of ridicule to-wards his country by Chinese netizens.China still sees North Korea as a usefulbuffer against America’s army deployed inthe South. But it increasingly regards theNorth as a liability as well, says Mr Jia.

In America’s court?China would clearly like its tough-sound-ing approach to encourage President Don-ald Trump to rethink his country’s strategyfor dealing with North Korea. America hasbeen reluctant to enter direct talks becausethe North has blatantly cheated on pastdeals—knowing that China would contin-ue to prop it up. With China more clearlyon America’s side, the Americans wouldhave greater confidence, Chinese officialshope. Mr Trump has previously said hewould be happy to have a hamburgerwithMr Kim and try to persuade him to give uphisnukes. The trouble is, MrKim sees thoseweapons as the one thing that guaranteesthe survival ofhis odious regime. 7

already bought as much coal from NorthKorea this year as it was allowed to underthe UN’s sanctions, to which China gave itsapproval last March. But North Korea-watchers doubt that China could have im-ported its yearly quota of 7.5m tonnes in amere six weeks. It had not appeared likelyto reach its annual limit until April or May.And exceeding that cap had not been ex-pected to matter much to China. In 2016 itimported about three times the permittedamount, usinga loophole that allows tradeif it helps the “livelihood” of ordinaryNorth Koreans.

Advancing the date of the suspension,if that is what happened, would certainlyhave sent a strong message to North Korea,which depends on coal exports for muchof its foreign currency. Announcing themove so publicly, and unexpectedly, willhave shown to North Korea that China isready to take the initiative instead of wait-ing to be prodded by America, as it usuallydoes when North Korea offends.

The test of an intermediate-range mis-sile will have rattled China. It suggestedthat North Korea has learned how to firesuch weapons at short notice, from hard-to-detect mobile launchers. The murder ofKim Jong Nam may have been an even big-ger blow. Mr Kim had been living on Chi-nese soil in the gambling enclave of Ma-cau, probably under Chinese governmentprotection. Some Chinese officials may

China and North Korea

Shock and ore

BEIJING

Fed up with Pyongyang’s missile tests and murders, China blocks coal imports

ChinaAlso in this section

25 Tourism and turmoil in the far west

The Economist February 25th 2017 China 25

YAKS graze on grassland near the turqu-oise waters of Karakul, a lake in the far

western region of Xinjiang. Further south,towards the border with Pakistan, the im-posingwallsofa ruined hilltop fort atTash-kurgan mark a stop on the ancient SilkRoad (see map). With such a rich landscapeand history this region should be a magnetfor Chinese tourists. Instead the area thataccounts for more than one-sixth of Chi-na’s land mass is better known for violentunrest. The picturesque charms of the lakeand fort can be enjoyed in near solitude.

For decades Xinjiang has been rackedby a low-level insurgency involving ethnicUighurs—a mostly Muslim minority manyof whose members chafe at rule from Bei-jing. Most recently, on February 14th, at-tackers with knives killed five people andinjured another five in a remote oasistown. Thousands of paramilitary troopshave since paraded through three cities inXinjiang in shows of “thunderous power”aimed at Uighur terrorists.

Chinese officials have long hoped thattourism would help to reduce unrest inXinjiang by creating jobs and boostingwealth. High-spending travellers from Chi-na’s interior, they believe, can spread bon-homie and thereby strengthen “ethnic un-ity” between the Turkic-speaking Uighursand the Han Chinese who make up morethan 90% of the country’s population. Theauthorities in neighbouring Tibet, wheremany people similarly resent the centralgovernment’s control, have also looked totourism as a salve. In both regions, how-ever, their hopes have been dashed.

The central authorities have spent bil-lions of dollars trying to make it work. Abreathtaking high-altitude rail line linkingTibet with the national network wasopened in 2006. A bullet-train service be-

tween the Tibetan plateau and Xinjiangwas launched in 2014. Expressways havebeen built across deserts; airports openedat oxygen-starved elevations.

In Tibet, these efforts have helped tofuel a tourism boom. Visits to Tibet in-creased fivefold between 2007 and 2015 to20m, according to government figures. Thetotal number is misleading, since a touristis often counted multiple times, whenchecking into a hotel or visiting an attrac-tion, for instance. But the growth appearsto be real, despite annual bans on visits byforeign tourists from late February to thebeginning of April—the traditional seasonfor protests. The impact on Tibet’s stability,however, has been far less impressive. Thetourism industry in Tibet is dominated byethnic Hans, who can communicate betterwith the travellers. Tibetans often com-plain they have seen little benefit.

By official reckoning, tourist arrivals inXinjiang have also risen fast, albeit un-evenly. Numbers dropped in 2014 follow-

ing attacks blamed on Uighur terrorists inother parts of the country (unrest in Tibethas tended to be more peaceful). To shoreup the battered tourism industry, the gov-ernment tried subsidising hotel rooms andplane tickets. It even offered cash incen-tives of 500 yuan ($80 at the time). Thismay have helped: there were nearly 60m“visits” to the region in 2015, nearly triplethe number in 2007.

Few of the tourists, however, go tosouthern Xinjiang, the area most troubledby separatist unrest and most in need ofaneconomic lift. Visitors’ fears ofviolence arereinforced, not assuaged, by shows of forcesuch as those staged by the security ser-vices in recent days. Armoured personnelcarriers are a frequent sight in urban areas.Airport-style security is ubiquitous. Somebuildings are fenced with barbed wire;guards check for bombs under cars enter-ing their grounds.

In Kashgar (pictured), where separatistsentiment is strong among Uighurs and at-tacks blamed on terrorists have been par-ticularly common, shopkeepers complainthat the tourist trade has died. One says hisfamily has had a hat shop in the city for 40years, but sales are down by a third thisyear and prices are falling. At the “Karsuscenicarea” on the edge ofthe Taklamakandesert the toiletand ticketingfacilities havenever even opened. A viewing platform,swings and a shaded area underumbrellasare used mainly by local (Han) staff andtheir families.

All the building of new infrastructuremay be doing little to cheer Uighurs, either.Many of the workers who are upgradingthe highway to Pakistan, a project due to becompleted this year, are from outside theprovince. And as for bonhomie, evidenceofits spread in Xinjiangis scant. Tourists of-ten prefer to visit Han-dominated areas;those who visit Uighurones sometimes of-fend locals by entering mosques in tightshorts or ignoring signs telling them not toclimb on ancient ruins.

It does not help that Tibetans and Ui-ghurs are unable to become part of the tou-rism boom themselves. Their movementwithin China and beyond is restricted.Many Tibetans have been refused newpassports since an explosion of unrestacross the region in 2008. Some have beenordered to surrender existing ones. Parts ofXinjiang launched a similar policy lastyear. In some areas people need official ap-proval to travel abroad.

The police are also monitoring travelwithin Xinjiangmore closely. This week allvehicles in Bayingol prefecture were or-dered to install a satellite navigation sys-tem so people “can be tracked whereverthey go”, as an official put it. The authori-ties say the measure should “safeguard sta-bility”, because terrorists often use cars tostage attacks. Visitors to Bayingol’s scenicgrasslands may not be reassured. 7

Ethnic harmony

Journeys to the west

KASHGAR

China hopes that tourism will bind its ethnic-minorityregions more closely withthe rest of the country. The strategy is failing

Kashgar

Tashkurgan

KarakulLake

T i b e t a n P l a t e a u

Bayingol

T I B E T

X I N J I A N G

Taklamakan

Desert

Lhasa

QINGHAI

GANSU

Urumqi

Beijing

26 The Economist February 25th 2017

For daily analysis and debate on America, visit

Economist.com/unitedstatesEconomist.com/blogs/democracyinamerica

1

TO STAND on a pontoon besides theAnacostia River, which runs for 8.5

miles through Maryland and the southernpart ofWashington, DC, is to gauge the pro-gress America has made in cleaning up itswaterways. The Anacostia, which emptiesinto the Potomac close to the Capitol, wasonce a slow-flowing garbage dump; on arecent sunny afternoon, hardly a soda canor plastic bag ruffled its sluggish brownsurface, over which cormorants fizzed likearrows, rigid with intent. They are a signthat the river’s ravaged fish stocks are be-ginning to recover. But you still wouldn’twant to eat them.

Forty-five yearsafter the federal govern-ment became obliged, under the CleanWater Act (CWA), to try to make America’smain waterways “fishable and swimma-ble”, the Anacostia is, despite the recentprogress, in a disgusting state. Each year,two billion gallons of sewage and storm-water flow into it, making the water socloudy with faeces that light cannot pene-trate it. The weeds and mussels that oncecarpeted the river-bed are long gone. It iscoated with black ooze, over ten feet deepin places, saturated with polychlorinatedbiphenyls, heavy metals and other indus-trial pollutants. Anacostia fish, often cov-ered with toxic lesions, are poisonous, yetfrequently consumed, a study suggests, by17,000 mostly poor people.

The state of the Anacostia, and hun-

spread of television, which publicisedsuch disasters as Californian peasoupersand the burning Cuyahoga river in Ohio,had helped foster public demand for ac-tion; the CWA passed the Senate 86-0.

This provoked a backlash from indus-try, which in turn led Ronald Reagan, andmore forcefully George W. Bush, to turnagainst environmental protection. Bothappointed weak EPA directors and tried toreplace environmental rules with weakeralternatives. Yet they ended up retreatingunder the legal furore this caused. The po-litical argument against environmentalprotection isnotoften legallybased—as thefate of Mr Pruitt’s challenges to the EPA, al-most all of which were co-sponsored byrepresentatives from industry, indicates.None of the 14 has so far succeeded.

Mr Pruitt claimed to be championingstates’ rights. His critics say he was an in-strument of industry, and they seem tohave a point. The EPA wasformed, with au-thority to dictate standards to the statesand intervene where they fail to imple-ment them, precisely because their envi-ronmental stewardship had proved to beinadequate. MrPruitt’s legal argumentsarea mixed bag, moreover. His most impor-tant, that the CPP stretches the EPA’s au-thority, is taken seriously by legal experts.But other challenges brought by Mr Pruitt,including a failed attempt to scupper amulti-state clean-up ofChesapeake Bay, onwhich some of the recent progress on theAnacostia is built, appeared frivolous.

His lack of success also indicates howhard it will be to poleaxe the EPA, as thepresident has vowed to do. Some of MrObama’s recent regulations, including oneto control methane leakage from drillingoperations on federal lands, are liable to bescrapped by the Republican-controlledCongress, under a little-used procedure

dreds of other polluted waterways, is a re-buke to the argument, levelled by DonaldTrump and otherRepublicans, that the EPA

is runningwild. At a rally in Florida on Feb-ruary 18th, Mr Trump said the agency was“clogging up the veins of the country withthe environmental impact statements andall of the rules and regulations”. Address-ing staff at the EPA on February 21st, its in-coming director Scott Pruitt, who as attor-ney-general of Oklahoma sued the agency14 times, suggested the unclogging wouldinvolve ending the agency’s regulatory“abuses”. As The Economist went to press,Mr Trump was reported to be preparing ex-ecutive decrees to begin that effort. He isexpected, for example, to try to replace theClean Power Plan (CPP), Barack Obama’smain effort to reduce greenhouse-gasemis-sions from thermal power-stations.

This is such a familiar Republican as-sault—even if Mr Trump may mean to gofurther than his predecessors—that it isworth noting that environmental protec-tion was once a bipartisan concern. TheEPA was founded by Richard Nixon, in1970, to implement a flurry ofenvironmen-tal laws, including the CWA and Clear AirAct, that were also backed by Republicans.Two decades ofrapid post-war growth hadput America’s air and waterways undergreat pressure, which the states, locked infeverish economic competition with eachother, had proved incapable of easing. The

Environmental protection

Revenge of the polluters

WASHINGTON, DC

Scott Pruitt, scourge ofenvironmental protection, takes over the EnvironmentalProtection Agency

United StatesAlso in this section

27 A new national security adviser

28 Replacing Obamacare

28 Deporting undocumented migrants

29 The future of the Democratic Party

30 Wrongful convictions

31 Lexington: Cheerful dissent

The Economist February 25th 2017 United States 27

1

2 called congressional review. Most cannotbe, however. They would have to be re-placed, through a long process of draftingand review, then defended against legalchallenges. To replace the CPP would takeMr Pruitt at least a couple ofyears.

Reducing the EPA would be easier ifCongress were to amend the environmen-tal legislation underpinning the EPA’srules—for example, by binning the provi-sionsofthe Clean AirActon which the CPP

rests. But there is currently no chance thiscould evade the Democratic filibuster inthe Senate, and many Republican con-gressmen would not welcome the fight.Around 60% of Americans say they are infavour ofmore environmental protection.

A third possibility is more insidious. MrPruitt could try to sabotage his agency byordering it to provide less regulatory over-sight. That would get ugly; EPA workers arealreadyrebellious, as illustrated by a recentprotest by dozens against their new boss’snomination, in Chicago. It would also be

damaging; though perhaps less so than MrTrump might expect. Far from being the lib-eral attack-dogofhis imagining, the agencyis already thinly stretched and environ-mental groups correspondingly accus-tomed to filling in the gaps.

The most hopeful development on theAnacostia, for example, takes the form of a$2bn sewage overflow system, which isdue to come into use in 2018. It has beenbuilt by DC Water, which manages muchof Washington’s sewage system, after itwas sued over its discharges into the riverby environmental groups. They had tiredof the EPA’s failure to take action. Though168 drains will still flow into the river,bringing dog faeces and gasoline from thecapital’s roads, this should make the Ana-costia swimmable for the first time in de-cades. “We’re getting close to dramatic pro-gress,’ says Emily Franc, who serves as theAnacostia’s riverkeeper, a non-govern-mental watchdog role. “This is no time forthe EPA to pull back.”7

THE 22 national security advisers whoserved Donald Trump’s predecessors

included two army or marine generals. OnFebruary 20th Mr Trump equalled thattally in less than a month, by appointingLieutenant-General H.R. McMaster to suc-ceed the disgraced Mike Flynn.

Like the belligerentMrFlynn, whom MrTrump sacked after 24 days in the job, afterit was revealed that he had lied about aprivate conversation with a Russian dip-lomat, General McMaster appears to con-form to the president’s idea ofa fire-breath-ing war-fighter. He is stocky, bullishlycharismatic and as a tank commander inthe first Iraq war was decorated for battle-field prowess. After bumping into an Iraqiarmoured column, General McMaster’stroop of nine American tanks destroyedover 80 Iraqi tanks and other vehicleswithout suffering a loss.

Also like MrFlynn, who wasonce an in-novative intelligence officer, GeneralMcMaster is a freethinker. His doctoral the-sis in military history was a ruthless take-down of the pliant Vietnam-era militaryleadership, later published as a book enti-tled “Dereliction of Duty”. Yet there thecomparison ends. By the time of his ap-pointment, Mr Flynn was known as a badmanager, obsessed with jihadism and sofeverishly partisan that he represented athreat to the treasured neutrality of the

armed forces. General McMaster is hugelyrespected by his peers, among whom he isconsidered one of America’s mostthoughtful soldiers.

He is perhaps best known for his ex-ploits in the second Iraq war. Deployed in2005 to the northern city of Tal Afar, incommand of a cavalry regiment, heshowed it was possible, at least temporar-ily, to pacify even the most violent and baf-fling parts of the country. By the time Gen-

eral McMaster arrived there, the city hadbeen overrun by insurgents and retakenbloodily by the Americans, but with toofew American or Iraqi troops to control it.

Acting largely on his own initiative, heproceeded to put in place a model counter-insurgency regime. He ensured his officersstudied Islamic culture, which at that timefew American soldiers did, used force se-lectively and sparingly, and took pains tounderstand and work with the grain ofAfari ethnic politics. He was lionised byAmerican journalists, who, it is true, tendto lose their hearts to any successful battle-field commander; Tal Afar, now the sceneof a fierce battle between the Iraqi armyand Islamic State, did not stay quiet forlong. Yet in his hunger to listen and learn—from Iraqis, his soldiers and even visitingjournalists—General McMaster stood out.

His subsequent career has if anythingbeen more distinguished. Championed byanother charismatic counter-insurgencyspecialist, General David Petraeus, whowas also considered by Mr Trump for thevacant national security post, but in effectruled himself out of contention by insist-ing he be allowed to pick his staff, GeneralMcMaster helped run operations for theNATO mission in Afghanistan, after it wasreinforced by Barack Obama in 2010. Morerecently, as head of the Army CapabilitiesIntegration Centre, based in FortEustis, Vir-ginia, he has led an effort to design and pre-pare the future American force that willemerge from the two wars in which hemade hisname. He has received fresh plau-dits in that role; David Barno, a formerAmerican commander in Afghanistan,called him perhaps “the 21st-centuryarmy’s pre-eminent warrior-thinker”.

This does not mean General McMasterwill be a good national security adviser, aperniciously difficult job, at which only afew have excelled. And they—led by BrentScowcroft, who advised Gerald Ford andGeorge H.W. Bush, and Stephen Hadley,

A new national security adviser

McMaster and servant

WASHINGTON, DC

H.R. McMaster is an improvement on his predecessor

HR sent this guy

28 United States The Economist February 25th 2017

1

2 who steered George W. Bush—tended to beknown for tact and scrupulous impartial-ity. General McMaster is better known as astraight talker and a risk-taker, albeit by theconformist standards of his profession. MrTrump, who is as prickly and ill-informedabout global affairs as he is admiring ofgenerals, may not find him easy to workwith. Indeed, General McMaster is so dif-ferent from Mr Flynn it is tempting to won-deron whatcriteria MrTrump appoints hisnational security advisers. Even so, at thesecond attempt, he has picked well.

This also points to the biggest puzzleabout the 45th president. Mr Trump hassurrounded himself with amateurish andideological advisers, led by Stephen Ban-non, who have been responsible for muchof the administration’s early haplessness.He has also hired some sensible and ac-complished cabinet secretaries, such asJames Mattis, the defence secretary, and,based on early reports, Rex Tillerson, thesecretary of state. This group is believed tobe opposed to, and possibly contemptu-ous of, Mr Bannon’s agenda—and GeneralMcMaster looks like a fine addition to it. Sowhose advice will Mr Trump follow? Theanswer is unclear. Yet the stability of theworld may depend on it.7

AS REPUBLICAN congressmen were be-rated by constituents this week for

their desire to repeal the Affordable CareAct (see Lexington), wonks in Washingtoncontinued to work on a replacement. PaulRyan, the Speaker of the House, has prom-ised a health-care bill soon after politiciansreturn from their districts on February27th. If they are to cool the protesters’ zeal,Republicans must keep health insuranceaffordable foreveryone who alreadyhas it.That means deciding what to do about thesubsidies Obamacare gives to 10m low-and middle-earners who buy coveragethrough government-run websites. MrRyan promises to replace the law’s means-tested tax credits with a discount for every-one, varyingnotwith income butwith age.Would such a switch work?

Republicans have always hated theACA’s handouts. Because they shrink ifpeople earn more, theydiscourage toil. TheCongressional BudgetOffice hasestimatedthat Obamacare reduces the total numberof hours worked by 1.5-2%, which is equiv-alent to 2.5m full-time jobs by 2024. Mak-ing tax credits universal would lessen that

number. And because the old pay more forhealth insurance than the young—a gapthat will widen if the Republicans loosenrestrictive pricing regulations—increasingsubsidies with age makes some sense.

Such a tax credit, though, would not begenerous enough for all buyers. The aver-age Obamacare subsidy adds up to about$3,600 per person. Many receive muchmore. Two non-smoking 55-year-olds to-gether earning $56,500, the median house-hold income, get $4,800 each just to helppay for premiums, according to the KaiserFamily Foundation, a think-tank. Accord-ing to The Economist’s calculations, if MrRyan spread the cash around all 22mAmericans who buy health insurance di-rectly, rather than through their employer,it would average only about $2,000 each.

That is close to what Tom Price, the newhealth secretary, proposed in 2015 for 35-to49-year-olds (older folk would have got$3,000). Republicans say it is enough, be-cause costs will fall once insurance is de-regulated. But unless prices fall dramatical-ly, many low-earners would probablyhave to downgrade to insurance coveringonlycatastrophes. Afterderegulation, suchplans might include chilling limitations,such as caps on how much insurance willpay ifa person becomes chronically ill.

That would be sickening, especially asmost affluent Americans benefit from sub-sidised health care. Fully 155m workers gethealth insurance from their employerwithoutpaying taxon this income-in-kind.

The tax exemption cost $268bn (1.4% ofGDP) in 2016, enough to pay for Obama-care’s subsidies six times over (see chart).Hated by economists, it encourages firmsto give their workers more generous healthbenefits rather than more pay. One-third ofthe benefit flows to the top fifth of earners.

Unfortunately, Mr Obama could notshrink the tax-break, having vilified JohnMcCain, hisopponent in the 2008 election,forproposingto scrap it. Instead, he createdthe so-called “Cadillac tax” on expensiveplans, which is due to come into effect in2020. Messrs Price and Ryan would doaway with that and instead cap the exemp-tion—a simpler approach. It would be bestto get rid of it completely. Doing so couldfund a universal tax credit of $1,500 with-out touching Obamacare’s means-testedpayments, The Economist reckons. Unfor-tunately, killing the perkwould be very un-popular. Just askMr McCain.

Making premiums affordable is onlythe first step. People must also be able topay their medical bills up to the pointwhere their insurance coverage kicks in.The ACA limits such payments for low-earners, and reimburses insurers accord-ingly. Those reimbursements, though, arecurrently held up in court after the Housesued to stop them in 2014. On February 21stit filed to delay legal proceedings. Decidingwhat to do about the case—in which MrPrice is now the defendant—is yet anotherheadache for the Republicans. 7

Replacing Obamacare

Cost-sharing iscaring

WASHINGTON, DC

The perils ofreplacing Obamacare’ssubsidies for the poor

The opposition

Unhealthy budgeting

Sources: CBO;The Economist

*Including tax exclusions †Children’sHealth Insurance Programme

US federal subsidies for healthinsurance for under-65s2016, $bn*

0 100 200 300

Medicaid/CHIP†

Employer coverage

Health exchanges

Subsidy perperson, $’000

3.6

1.7

4.1

AT ONE point as a candidate for presi-dent, Donald Trump vowed to expel

all 11m undocumented immigrants esti-mated to live in America. At other pointshe also talked about concentrating depor-tation efforts on “bad people”, which is infact a fair description of his predecessor’spolicy. “They will be out so fast your headwill spin,” he told Bill O’Reilly, a televisionhost, last August. Two Department ofHomeland Security (DHS) memos pub-lished on February 21st offer a detailedlook at Mr Trump’s definition of badness,and it is broad. The documents refer to theproposed wall along the southern border,reaffirm the goal of increasing the numberof border patrol and immigration officers,and herald the revival of a policy encour-aging local law enforcement agencies toact as immigration agents. The memos alsosignal an overhaul of priorities on whomto deport, with the aim of increasing the

Deporting undocumented migrants

The dragnet andthe scissors

LOS ANGELES

Congress and the courts will poke holesin the president’s deportation plans

The Economist February 25th 2017 United States 29

1

2 number who could be removed speedily.Towards the end ofhis second term, Ba-

rack Obama ordered federal agents to fo-cus on deporting undocumented immi-grants suspected of terrorism and thosewith criminal convictions. In 2011 67% ofthose removed from the interior of thecountry had criminal records. By 2016 theshare had increased to 92%. The new guid-ance says that federal agents should nottarget only those convicted of crimes. “Un-der Obama there were 2m people eligiblefor removal. Now the number could be be-tween 8 and 11m. Basically everyone with-out papers has become a priority,” saysJose Magaña-Salgado of the Immigrant Le-gal Resource Centre, an advocacy group.

The government plans to end a policycolloquially known as “catch-and-re-lease”. This allows unauthorised immi-grants who are deemed not likely to ab-scond ora threat to public safety, to wait forthe results of their cases outside detention.Under the new guidelines, immigrantswith pending deportation cases will eitherbe locked up or monitored, for examplewith ankle bracelets. The administration isalso reconsidering who should be eligiblefor extra-swift removal.

At present, only undocumented immi-grants caught within 100 miles of the bor-der who have been in the country for lessthan 14 days can be deported without ahearing. The administration may changethe rules so that any unauthorised immi-grant who has been in America for lessthan two years can be deported withoutgoing before a judge. This would be muchspeedier than the standard deportationprocess, under which immigrants must re-ceive a removal order from an immigrationcourt. The system is a mess. Nationallythere are over 500,000 immigration casespending with around 300 judges to hearthem. The average immigration case hasbeen open for 677 days.

The president has a mandate to enforce

immigration laws. The country has immi-gration laws that have not been enforced.But even the supposedly softer Obama re-gime deported hundreds of thousands ev-ery year. It spent more on immigration en-forcement than on the FBI, DrugEnforcement Agency, US Marshals and Bu-reau of Alcohol, Tobacco and Firearms,combined. The Trump administrationwould spend even more: completinga bor-der wall, recruiting 10,000 new Immigra-tion and Customs Enforcement (ICE) offi-cers and 5,000 border patrol agents.

Just the border-patrol part of that couldadd $910m to a $3.8bn staffing budget. Aleaked DHS document suggests the wallcould cost $21.6bn. The abolition of catch-and-release policies would require morelock-ups, which now house around40,000 detainees and cost the governmentaround $128 per inmate each day. Convinc-ing Congress to appropriate enough mon-ey might prove difficult, despite Republi-can dominance of Congress. “This pits thetraditional concerns of Republicansaround governmentspendingagainst theirdesire for border security,” says John Sand-weg, a former ICE chiefunder Mr Obama.

The courts may also take a pair of scis-sors to a deportation dragnet. “Embeddedin the memos is the idea that the govern-ment is going to put due process to the sidein order to pursue a plan of mass deporta-tion,” says Omar Jadwat, a lawyer for theImmigrants’ Rights Project of the Ameri-can Civil Liberties Union, another advoca-cy group. He says expanding the list ofthose eligible for speedy removal is likelyto invite lawsuits. In the meantime, saysMatt Barreto of the University of Califor-nia, Los Angeles, the new guidance willhave another effect on undocumented im-migrants. They are likely to withdraw fromwider society. He suspects they will be lesslikely to report crimes, visit hospitals, oreven send their children to school for fearofbeing caught. 7

ICE air to Guatemala

“IN TERMS of the next chair of the DNC,however, the question is simple,” ac-

cording to Bernie Sanders. “Do we staywith a failed status-quo approach or do wego forward with a fundamental restructur-ing of the Democratic Party?” For SenatorSanders the way forward is Keith Ellison, acongressman from Minnesota, whom he isbacking as next boss of the Democratic Na-tional Committee (DNC). The endorse-ment came shortly after Joe Biden, the for-mer vice-president, announced hissupport for Tom Perez, a veteran of theObama administration.

The contest for the DNC chair, whichwill be decided on February 25th in Atlan-ta, hasbecome a proxyfightbetween thosewho believe that the party must move leftto prosper and those who think this wouldbe suicide. Mr Ellison is backed by Eliza-beth Warren, the populist senator fromMassachusetts, as well as the AFL-CIO, afederation of unions with 12m members,but also by pragmatic establishment typessuch as Chuck Schumer, the Senate’s mi-nority leader, and his predecessor, HarryReid, who are intent on making use of theSanders supporters’ momentum. NeitherBarackObama norHillaryClinton explicit-ly backed Mr Perez, but an endorsement bythe loyal Mr Biden is almost as good as anod from the former president and theDemocratic presidential nominee.

The tussle between Mr Perez and Mr El-lison, the front-runners among the nine

The future of the Democratic Party

Boot-edge-edge

CHICAGO

Who should lead the Democrats aftertheircalamitous defeat?

Buttigieg, Maltese falcon

30 United States The Economist February 25th 2017

2Wrongful convictions

Criminal injustice

IN NOVEMBER1999, a 25-year-old Kan-san named Tom Bledsoe confessed to

the rape and murder ofa 14-year-old girl.Just days later, however, Mr Bledsoerecanted, pinning the crime instead onhis younger brother, Floyd. When thejury gave its verdict in April 2000, it wasFloyd, not Tom, who was sent to prison, awrongful conviction that would cost himmore than 15 years ofhis life before hewas exonerated in December 2015. Withcases like this in mind, Kansas legislatorsare considering introducing a law thatwould give wrongfully convicted Kan-sans $80,000 for each year spent in pri-son. At the moment, as in some otherstates, Floyd is entitled to nothing.

Had he been convicted in neigh-bouring Colorado, which passed a law in2013 giving those exonerated $70,000 foreach year they are locked up, Mr Bledsoewould have received $1.1m. Today, 31states and the District ofColumbia pro-vide compensation in such cases. Pay-ments vary considerably by state. InTexas, which accounted for a third of allexonerations in 2016, individuals areawarded $80,000 for every year ofpri-

son. In California, they receive $100 perday, or $36,500 per year. In Wisconsin,one of the least-generous states, exonerat-ed individuals are entitled to just $5,000for every year spent behind bars.

Mistakes by the criminal-justice sys-tem are not uncommon. According to theNational Registry ofExonerations, atUniversity ofMichigan Law School,courts overturned 165 wrongful convic-tions in 2016, or more than three a week.Since 1989 it has recorded a total of1,991.

Those exonerated in Kansas and the 18other states without compensation lawsmust instead seekpayment through civillitigation, or by convincing lawmakers topass separate bills on their behalf. Thiscan yield generous payouts but is expen-sive, time-consuming and often un-successful. Adele Bernhard at New YorkLaw School has likened it to a lottery.

Yet compensation statutes remaincontroversial. Some lawmakers believethat, since wrongful convictions are rare,a formal process for correcting them is asolution in search ofa problem. Othersargue that money would be better spenton victims ofcrime. Another worry isthat statutes written carelessly couldreward guilty individuals. These con-cerns have slowed the passage of legisla-tion. Between 2000 and 2009, more thana dozen states passed compensationstatutes. Since then, just four states—Washington, Colorado, Minnesota andMichigan—have passed such laws. Sever-al others including Pennsylvania, Geor-gia, and Arizona have tried and failed.

The Kansas bill, which would in-troduce a scheme like Texas’s, faces oppo-sition too. At a hearing on February 14th aRepublican state senator asked whetherthe proposed law would allow someoneto engineer their own wrongful convic-tion, serve time in prison and then provetheir innocence, swindling the state outofa big payout. “With all due respect,” MrBledsoe told the committee, “no one intheir right mind would do that.”

Texas is generous when fixing its mistakes

State of pay United States, compensation for wrongfulimprisonment per year of incarceration, 2017, $’000Selected states

Sources: “Statutory compensation for the wronglyimprisoned”, by Tina Simms, 2016; press reports

0 20 40 60 80

Kansas

Texas

Colorado

Florida

Michigan

North Carolina

Virginia

Ohio

California

Louisiana

Missouri

Wisconsin

Proposed

contenders for the job, could be a boon forPete Buttigieg (pronounced boot-edge-edge), the 35-year-old mayor of SouthBend, Indiana. “We don’t want to relive2016,” says Mr Buttigieg, alluding to thefierce battles between Mr Sanders and MrsClinton in the Democratic primaries. MrButtigieg presents himself as the compro-mise candidate who can bridge the dividebetween the Sanders and Clinton camps,build alliances with progressive organisa-tions such as the American Civil LibertiesUnion and connect with the white work-ing class as well as minorities.

Mr Buttigieg joined the race late, butpicked up momentum quickly. He baggedthe endorsementoffive formerDNC chairsas well as nine mayors of cities such asNew Orleans and Austin, Texas. HowardDean, another former DNC chair and for-mer presidential candidate, thinks Mr But-tigieg has a shot at winning. If he wereelected, the former Rhodes scholar andHarvard graduate would be the youngest,and first openly gay, chairman of the DNC.He would bring to the job his experiencesas mayor, navy officer and nerd at McKin-sey, a management consultancy (a CV re-markably like that ofTom Cotton, a Repub-lican senator with big ambitions).

How do South Benders see theirmayor? Though he was not the favourite towin, Mr Buttigieg was elected with 74% ofthe vote in 2011 and with over 80% of thevote in 2015. Most of the struggling rustbeltcity’s citizens don’t begrudge him usingSouth Bend as a springboard for his politi-cal ambition, says Elizabeth Bennion of In-diana University, South Bend. They see theprogress he has made with the demolitionof 1,000 derelict houses in 1,000 days, thepartnership he has fostered with NotreDame, a rich Catholic university outsidethe city, and the technology and data com-panies he is trying to bring in. “There wasalways a sense that he is destined for big-ger things,” says Ms Bennion.

Indiana’s Republicans pay Mr Buttigiegcompliments in the form of withering re-marks. He doesn’t see any political futurefor himself in Indiana, which is why heneeds an exit, says Pete Seat, a spokesmanfor Indiana’s Republicans. Mr Buttigiegpitches himself as someone who can wineven in a staunchly Republican state that isthe home of Mike Pence, the vice-presi-dent, says Mr Seat, but South Bend has tra-ditionally been a Democratic fief. The citylast had a Republican mayor in 1972.

The victor will replace Donna Brazile,who took over as interim DNC chairmanafter Debbie Wasserman Schultz resigned.Her departure followed leaked e-mailsfrom DNC staff about how to obstruct MrSanders when he seemed to threaten MrsClinton’s smooth ride to the party’s nomi-nation. To be on the ballot, a candidateneeds 20 signatures from among the 447voting DNC members. The ballots were

sent out on February 22nd, the day of atelevised debate on CNN with eight con-tenders for the DNC’s top job. Memberswill vote in as many rounds as are neces-sary for one candidate to receive 224 votes.

Mr Sanders is right: electing Mr Ellisonwould mark a new chapter for a party thatis trying to recover from one of the lowestpoints in its history. Mr Ellison is the first-ever Muslim congressman and co-chair ofthe Congressional Progressive Caucus. He

has flirted with black nationalism andmarched with the Nation of Islam, a politi-cal-religious movement founded in De-troit, his home town. An early and ferventsupporter of Mr Sanders, he too favours amix of sensible progressive proposals andUtopian schemes. He may not be best-placed to work out how to win back thestatehouses and governors’ mansionsDemocrats have lost in recent years. TheMidwestern mayor seems a better bet. 7

The Economist February 25th 2017 United States 31

IF THE gravest threat to democracy is indifference, have somefaith in Donald Trump’s America. For the president is not just

good at rallying throngsofhisown supporters. He isalso firinguphis critics in a way that offers some echoes of the Tea Party move-ment that sprang up to oppose BarackObama in 2009.

Consider the long lines of constituents wrapped around ahigh school in Virginia Beach on February 20th, sacrificing theirtime on a public holiday to meet their Republican congressman,Scott Taylor. Undistracted by a mild, golden-hued evening wor-thyofearlysummer, almost1,000 localswaited in line forseats. Aminority were conservatives, wearing the Make America GreatAgain hats that signal Trump-allegiance or carrying signs de-manding that Mr Taylor—a 37-year-old former Navy SEAL com-mando, elected to Congress for the first time last year—shouldvote to repeal the Affordable Care Act (ACA), also known as Oba-macare. A larger number carried home-made signs that spoke of“resistance” to Mr Trump or demanded that Mr Taylor “Chooseour Country over your Party!” Some were old hands at activism,alerted to attend by the local Democratic Party or by Indivisible,an anti-Trump group with chapters nationwide. Others used theTown Hall Project, a new volunteer-run database that logs oppor-tunities to meet elected politicians—after rowdy meetings inplaces including Utah and California, some skittish members ofCongress declined to hold public events in the recess that beganon January17th, or held virtual “tele-townhalls” instead.

As was the case with many Tea Party groups eight years ago,the crowd at Kempsville High School was older, whiter and moreaffluent than the national average. A forensic scientist queuing tosee Mr Taylor held a placard opposing a wall on the Mexican bor-der with the (tongue-in-cheek) slogan: “How Will We Get Avoca-dos?” As in 2009, some concerned citizens noted that this wastheirfirst time at a political meeting, and expressed fears that a ty-rannical president is about to wreck the country.

Back in Mr Obama’s first term, Tea Party types fretted that gov-ernment-run health care amounted to European-style socialism.Some muttered that the first black president might be a secretMuslim. In 2017 Trump-sceptic citizens in Virginia Beach voicedfour broad worries. First, they questioned Republican promisesto repeal and replace Obamacare as soon as possible, expressing

special concern for people with pre-existing medical conditions,who have a right to buy insurance cover under the ACA, whilepaying not much more than healthy folk. A local man with a seri-ous illness told Mr Taylor: “Without the ACA I wouldn’t be alive.”Second, they wanted theirnew congressman to backan indepen-dent investigation into Russian meddling in the presidential elec-tion, and to demand that Mr Trump release his tax returns. Third,as residents of a coastal district, they sought assurances that MrTaylor takes climate change and the threat ofrising sea levels seri-ously—unlike Mr Trump, who stood accused of being anti-sci-ence. Finally, a striking number of the 700 people filling the audi-torium (a further 200 waited outside) queried the cost ofproviding Secret Service protection each time Mr Trump spendsthe weekend at his Florida estate, or for the president’s grownsons when they go on business trips, for instance to open a golfclub in Dubai—a “disgusting” expense, one constituent said.

As in 2009, forceful complaints have an impact on politicians.Mr Taylor is a fairly conventional small-government Republicanwho won his heavily military district by 23 percentage points. Butthe presidentwon the districtbyonly three points—in part, thinksMr Taylor, because Candidate Trump dismayed locals by lashingout at the parents ofa Muslim-American soldier killed in Afghan-istan, after they rebuked him for anti-Islamic bigotry. Mr Taylorstressed moments where he has bucked his party, for instance invoting for gay rights. He emphasised his co-sponsorship of a billto ensure that those with pre-existing conditions must be offeredinsurance (though his bill does not say how to make such coveraffordable). He backed a bipartisan Senate probe into Russianelection-meddling and called on Mr Trump to release his tax re-turns. He said he disagrees with Stephen Bannon, the president’schiefpolitical aide, havinga principal’s seaton the National Secu-rity Council. He condemned talk of Muslim travel bans as “un-constitutional”, though he defended MrTrump’s right to order ex-tra vetting for arrivals from terror-prone countries. He fudged thequestion ofwhether humans are to blame for climate change.

Herbal teaThere are also differences from 2009. In theirheyday, Tea Party ac-tivists ringingly promised to take their country back, certain thatAmerica is a majority-conservative country. Jump eight years,and—at least in Republican-leaning Virginia Beach—demonstra-tors sounded more anxious, even defensive. They talked of pre-serving as much of Obamacare as they could, and of stiffeningtheir congressman’s spine to serve as a check on Mr Trump.Aware that the president has called critics “paid protesters” and“so-called angry crowds”, they brought voting cards showingtheir local addresses and wore stickers bearing their postal zipcodes. “We weren’t bused in,” a woman assured Lexington.

Those precautions reflect an alarming change since 2009: acollapse in belief that there is a single, shared version of the truth.Too often, today’s political opponents do not just disagree, theyexpress disbelief. “There’s room for nuance,” Mr Taylor pleadedat one point, defending his view that environmental regulationsare necessary but can go too far. A woman silently held up a signreading “Not True”. A bloc of Trump voters, who had taken thepresident’s description of the press as “the enemy” to heart,yelled “Bullshit!” or “Fake news!” when he was criticised. A dis-mayingly plausible scenario involves Mr Trump’s election tear-ing the country further apart. Still, the deadliest foe ofdemocracyis sullen, despairing apathy. Celebrate dissent.7

Dissent in the age of Trump

Protesters are confronting members ofCongress in a way not seen since the Tea Party’s rise

Lexington

32 The Economist February 25th 2017

1

THE faded modernist façades along Co-pacabana’s beachfront hark back to

Brazil’s optimistic past. The seaside prome-nade, where walking sticks outnumber G-strings, offers a glimpse of its demographicfuture. A quarter of the inhabitants of thispart of Rio de Janeiro are 65 or older, mak-ing it one of the oldest places in Brazil. Butthe rest of the country is catching up fast,thanks to a drop in birth ratesand rising lifeexpectancy. Over-65s, who make up 8.5%of the population now, will reach Copaca-bana’s share by 2050. The country is dan-gerously unprepared for that shock.

To see why, visit the Copacabanabranch of the National Institute of SocialSecurity (INSS), which administers statepensions for Brazilians employed in theprivate sector. Elizete Ribeiro, a vivaciousmasseuse, does not look ready to be pen-sioned off. She is just 56 years old. But, hav-ing paid into the system for 30 years, she isentitled to a basic pension worth the mini-mum wage (937 reais, or $304, a month).The lawyer helping her, Jorge Freire, bene-fits from a separate public-sector scheme.He retired as an employee of Rio de Janei-ro’s state court system when he was 52. Hisretirement cheque, at first the same as hisfinal salary, is bumped up every time cur-rent court workers get a pay rise.

The form-filling at the INSS outpost, re-peated millionsoftimes, means trouble forBrazil. Pension spending is already theequivalent of 12% of GDP, half as muchagain as the average among members of

nomic recovery and Brazil’s financial sta-bility depend on its success.

Brazil’s geriatric generosity came fromlaudable impulses. The constitution adopt-ed in 1988 sought to break away from thecountry’s history of elitism and inequality,further entrenched under two decades ofmilitary dictatorship. Among the newrights was a basic pension for men over 65and women over 60, whether or not theypaid into the system. People who do payin, like Ms Ribeiro, can claim benefits earli-er. The government linked benefits to theminimum wage, ensuring that they wouldalmost always go up and never down.

This has made Brazil a land of youthfuland prosperous pensioners. Its citizens col-lect pensions when they are 58 on average;Mexicans toil into their 70s. Brazilians onaverage incomes get pensions worth four-fifths of their pre-retirement earnings,which is generous by most countries’ stan-dards. Widows and widowers inherit thefull pensions of their deceased spouses,which they can combine with their own.

This accumulation of rights has be-come an economic cluster bomb. Inflatedby big increases in the minimum wage,pensions now account for more than halfof the government’s non-interest spend-ing. The recession has brought down therevenues to pay for them. Without achange, government pension spendingcould reach a fifth of GDP by 2060. Publicdebt will jump to scary levels sooner: by2019 it could be 98% of GDP, up from 70%now. That prospect is one reason for Bra-zil’s double-digit interest rates. The pen-sion splurge hurts the economy in otherways, for example by withdrawing em-ployees prematurely from the workforceand taking money away from educationand infrastructure.

The reform Mr Temer is proposingwould reduce the pension problem tomore normal proportions. It would set a

the OECD, a club of mostly rich countriesthat have many more senior citizens (seechart). The combined annual shortfall ofthe pension schemes is 4.8% ofGDP, equiv-alent to more than half the governmentbudget deficit. The state of Rio supportsmore public-sector pensioners than work-ing civil servants; for every police colonelon active duty five are retired. The state isnearly bankrupt. Without corrective ac-tion, Brazil faces an equally bleakfuture.

Michel Temer, the country’s centre-right president, hopes to arrange for abrighter one. He took office last year afterthe impeachment of his left-wing prede-cessor, Dilma Rousseff, and in the midst ofthe country’s worst recession on record.This month congress began debating hisplan to reform the pension system. Eco-

Brazil’s pensions

The burden on the young

RIO DE JANEIRO

The president has a chance to enact a landmarkreform

The AmericasAlso in this section

33 Saving jaguars from themselves

33 Bashing Chile’s billionaires

34 Bello: The costs of crime

Latest available

Brazil’s golden oldie blowout

Sources: OECD; World Bank; Previdência Social

Population aged 65 years and over, as % of total

Gov

ern

men

t sp

endi

ng

onpe

nsi

on b

enef

its,

% o

f G

DP

0

5

10

15

20

0 5 10 15 20 25 30

Brazil

FranceGreece

Italy

Japan

South KoreaMexico

Poland

Turkey

United StatesOECD average

China

The Economist February 25th 2017 The Americas 33

1

2 minimum pensionable age of 65 years formen and women, and oblige them to worklonger than they do now in order to claimthe maximum allowable pension. Futurerises in the retirement age to keep up withlonger lives would not require amendingthe constitution. Only the lowest pensionswould be linked to the minimum wage.Widows’ benefits would be reduced.

These and other measures would sta-bilise pension spending at around currentlevels, says Paulo Tafner, a pensions ana-lyst. They would give the economy a short-term boost, in part by encouraging the cen-tral bank to reduce interest rates more rap-idly. The stockmarket has strengthened onhopes that congress will enact it.

Because the reform requires a constitu-tional amendment, both houses must passit with three-fifths majorities. Ms Rous-seff’s Workers’ Party decries it as an attackon the poor, though it will not touch bene-ficiaries of the lowest pensions. A politi-cian from Mr Temer’s coalition accuses thegovernment of “demographic scaremon-gering”—as ifageing were unpredictable.

Despite such grumbling, Mr Temer hasa good chance of getting the reformthrough reasonably intact. A poll for hisParty of the Brazilian Democratic Move-ment reportedly shows that Brazilians aresplit evenly for and against the reform. Thegovernment is trying to tip the balance,with adverts in newspapers and videosbeamed at passengers in airports. MrTemer himself is unpopular. But if hecleans up the pension system, Brazilianswill have reason to thankhim.7

LAST year ended triumphantly for An-drónico Luksic, head of Chile’s richest

family. On December 23rd he won a slan-der suit against a politician who had calledhim a “criminal” and “a son of a whore”.But his sense of vindication was cloudedby pain. Four days earlier, as he left thecourthouse, a mob, angry about a hydro-electric project in which he had invested,threw stones at him. One struckhim on thehead; police whisked him away.

Plutocrats are unpopular in lots ofplaces, but Chileans seem to regard theirswith particular suspicion. MORI, a pollingfirm, asked Chileans in 2015 to choosewhich among five power centres had themost clout: 59% chose businessmen overthe government, the presidency, congressand the media. Asked by Latinobarómetro,another pollster, if they had any confi-dence in private enterprise, just 32% saidyes, the second-lowest rate among18 coun-tries. Chileansoften say that seven families“own” the country. Together, their wealthis the equivalent of17% ofGDP. The Luksicsalone are worth $14bn, equivalent to about6% ofGDP, according to Forbes.

Chile is in many ways the most moderncountry in South America. Its institutionsfunction reasonably well, its educationalstandards are among the highest and itslevels of crime and corruption are amongthe lowest. Yet that has not brought equali-ty. Although poverty has fallen sharply, in-come distribution is more skewed in Chilethan in any other member of the OECD, aclub of mainly rich countries (though notunusually so for Latin America). Just 5% ofChileans regard the distribution of incomeas “fair” or “very fair”, the lowest share inLatin America, says Latinobarómetro. “It’sprecisely because Chileans can see howwealthy their country is—from thePorsches and Maseratis in the streets ofsome areas—that they’re so angry abouthow that wealth is shared out,” says MartaLagos ofLatinobarómetro.

Mr Luksic, the grandson of a Croatianimmigrant and a Bolivian heiress who set-tled in Antofagasta a century ago, is typicalof his class. He attended The Grange, aposh private school in Santiago. The Luk-sics made their first fortune from mining,then expanded into banking, shipping, themedia, drinks, energy and manufacturing.Antofagasta plc is listed on London’s stockexchange. Other businesses are groupedinto Quiñenco, a family holding company,ofwhich Mr Luksic is chairman.

Chile’s plutocrats

Bashingbillionaires

SANTIAGO

A tight-knit elite provokes resentment

RANCHERS in Colombia’s Meta depart-ment can be vengeful folk. From time

to time jaguarsemerge from a clump offor-est, streak across the savannah and attackone of a panic-stricken herd of cows.When that happens, ranchers hunt the of-fender down and shoot it. That practice isendangering the cats’ survival. Panthera, acharity that manages “corridors” for jag-uars that stretch from Argentina to Mexico,guesses that just 5,000 of the cats are left inlos llanos, Colombia’s scorching savannah.It has come up with a less violent way ofprotecting both the jaguars and the cattle.

The idea is to teach cattle self-defence,or rather to breed the instinct into them.The cows that graze in los llanos are mostlyZebu, which are popular with ranchers fortheir fast growth, large size and white

hides. But they have an unfortunate habitoffleeing in all directions when danger ap-proaches. Panthera’s idea is to replace pan-icky Zebu with cattle that stand theirground, or to interbreed the two. EstebanPayán, who directs Panthera’s operationsin northern South America, chose SanMartineros, a little-known subspecies ofCriollo cattle descended from Spanishfighting bulls. Few jaguars dare to chal-lenge a massed group of 500kg (1,100-pound) San Martineros, their horns lev-elled. Docile with humans, they are fiercedefenders of territory and their young. MrPayán recounts thatSan Martineroschasedaway a puma before it could eat a capybarait had killed in their paddock. 

Eugenics seems to work. Since 2012 MrPayán has been working with Eduardo En-ciso, a rancher in Meta, who already hadsome San Martinero cattle. Mr Enciso re-ports that both purebred San Martinerocows and the offspring of Zebus that havebeen inseminated by San Martinero bullsdo indeed stick together when jaguars ap-proach. Cattle that are just a quarter SanMartinero may be just as brave, says MrPayán. No jaguars have attacked cattle onLas Pampas, Mr Enciso’s 4,000-hectareranch, since the programme began, hesays. Zebu-only ranches in the area suffer adozen attacks a year.

Panthera is trying to get other ranchersto adopt the technique, but just four haveso far expressed interest. Some contendthat smaller San Martinero bulls cannotmount their Zebu cows, though Mr Encisodenies this. Certainly, there is nothingwrong with their libidos, he says. Perhapsmore important, butchers think San Marti-neros are scrawny and dislike their reddishhue (hybrids can look like either variety ora mix of both). Mr Enciso insists that SanMartinero meat is more delicious than thatof purebred Zebu. If diners develop a tastefor it, perhaps fewer jaguars will be shot.7

Protecting wildlife

Stand yourground beef

SAN MARTÍN, META DEPARTMENT

Cows that are good at self-defence arealso good for jaguars

Red hide, black belt

34 The Americas The Economist February 25th 2017

2

THIS month police in the Brazilian stateofEspírito Santo went on strike for ten

days, during which 143 people were mur-dered and all hell broke loose in Vitória,the state capital. In Reynosa, on Mexico’sborder with the United States, two al-leged robbers were beaten, bound withduct tape and dangled from a footbridge,with a message from a drug baron pinnedto them. On February 17th a gunmankilled five people and injured nine at ashopping centre in Lima. A day later inFlores Costa Cuca, a small town in west-ern Guatemala, an 83-year-old womanand her disabled grandson were mur-dered, prompting calls for the army to pa-trol the streets.

A casual scan of newspapers in LatinAmerica and the Caribbean in any weekreveals a grave problem: violent crimehas become an epidemic. The region ac-counts for only 9% of the world’s popula-tion but 33% of its murders. Its homiciderate of24 per100,000 people is four timesthe world average. Worryingly, murdershave become more common even as so-cioeconomic conditions have improved(see chart). Robberies are increasing, too;some 60% involve violence. No wonderpolls show that crime has replaced theeconomy as the main public concern inLatin America.

As well as inflicting immeasurable suf-fering, violent crime is a big obstacle toeconomic development. In a pioneeringreport published this month, researchersat the Inter-American Development Bank(IDB) set out to measure its impact on theregion’s economies. In the average LatinAmerican country the annual cost ofcrime is 3.6% ofGDP, they reckon.

That may not sound much, but it istwice as high as the equivalent figure indeveloped countries and is equal to theregion’s spendingon infrastructure and to

the income of the poorest 30% of the pop-ulation, points out Laura Jaitman, the re-port’s lead author. She stresses that this is aconservative estimate: it coversonly the in-come lost by the victims of crime and byprisoners; private spending on security byfirms (in the formal economy) and house-holds; and public spending on policing,the criminal courts and prisons. Factor inindirect costs, such as investment forgone,and the true cost ofcrime is higher.

The average conceals wide variations.In Honduras the cost of crime is a whop-ping6.5% ofGDP, forexample. Chileans, bycontrast, are less likely to be murdered thaninhabitants of the United States. Murderrates and the cost ofcrime in different partsof Brazil vary as widely as they do acrossthe region as a whole.

Organised-crime syndicates, with ori-gins in the drug trade, help to explain whymurders have soared in recent years inMexico, parts of Central America, Venezu-ela and parts of Brazil. But the problem ofviolent crime goes well beyond the druggangs. In some ways crime in Latin Ameri-ca is similar to that in the rich world. It ishighly concentrated in certain parts of cer-

tain cities. The vast majority of perpetra-tors and victims are young men. Oftenthey are badly educated and come frombroken families.

A new report by the World Bank rec-ommends strategies to prevent crime thathave worked elsewhere—everythingfrom early-childhood education to focus-ingpolice workon crime “hot spots”. Thatwould certainly be an improvement onthe “iron-fist” approach favoured bymany Latin American politicians, whichinvolves mass incarceration for long peri-ods in hellish prisons and the applicationof a de facto death penalty by securityforces against young male suspects.

Yet if crime is so much more prevalentin Latin America than in other regions it issurely because the returns from it, relativeto those in the legal economy, are higherand, especially, because the chances ofbeing caught are lower. Less than 10% ofmurders in the region are solved.

That highlights two fundamental fail-ures. The first is that too many young mencommand only low-paying and insecurelegal jobs. Some 20m 15- to 24-year-olds inthe region neither study nor work at all.This points to the need for targeted skillsprogrammes.

Second, the police, the courts and theprisons often fail to do their jobs. EspíritoSanto shows that even a bad police forceis better than none. But not much better:last year the state’s murder rate was still37.4 per100,000 people.

Not all is gloom. Colombia and otherparts of Brazil have seen sustained falls inmurder rates, partly because ofbetter pol-icing. In Chile this month a Spaniard wasarrested for attempting to bribe a police-man (with 30,000 pesos, worth $47). Else-where, though, many governments arefailing in their most basic duty, to keeptheir citizens safe.

Stop the carnage

Crime and enrichment

Source: World Bank

Latin America

*Income of $10-50 per day†Living on $2.50 or less per day

0

10

20

30

40

0

10

20

30

40

1995 2000 05 10 12

Homicide ratePer 100,000 people

Middle class*Extremely poor†

Population, %:

Bello

Many Latin American governments are failing in theirmost basic task

Breadth and heft attract hostility. Envi-ronmentalists say his mining and energyprojects scar the landscape. Many Chil-eans think Mr Luksic’s companies, alongwith all Chilean business, should payhigher taxes. Journalists say he wields un-due influence. His bank made a large loanto a company owned by the Chilean presi-dent’s daughter-in-law after he met withher; he later apologised. Such connectionsfeed Chileans’ suspicions that the big deci-sions are made by a clique over a bottle ofCarmenère or a game ofgolf.

Aseries ofcollusion cases, often involv-ing companies in sectors with little compe-

tition, give such suspicions weight. Firmswere caught fixing prices and setting mar-ket quotas in such products as pharmaceu-ticals, poultry, and toilet paper. The threeprice-fixing pharmacy chains control 90%of the country’s drugstore business; thechicken cheats sell 93% of the poultry.

A low point for the reputation of busi-ness came a week before Mr Luksic’s vic-tory in court. At the Christmas dinner ofAsexma, a business association, its chair-man gave the economy minister an inflat-able sex doll, which he suggested might“stimulate the economy”. Photographs ofmiddle-aged men in suits chortling with a

naked doll confirmed Chileans’ view ofthe business elite as a boys’ club out oftouch with modern norms.

Though Mr Luksic thinks he has beenunfairly maligned, he admits that he andhissorthave a problem. After the politiciandefamed him last April he answered witha YouTube video, an unusual tactic forsomeone who usually shuns the limelight.While denouncing his accuser he also con-fessed that “we’ve made mistakes…. Wehave to be much more rigorous in how webehave.” He was speaking about his busi-ness, but it sounded like a mea culpa fromChilean business at large.7

The Economist February 25th 2017 35

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

Economist.com/world/middle-east-africa

1

CHAOTIC, fractious and bafflingly in-consistent though the Trump adminis-

tration may be, on one issue it appears un-ited: Iran. There is ample evidence thatsince the signing in mid-2015 of the deal tocurb Iran’s nuclear programme, known asthe Joint Comprehensive Plan of Action,Iran has taken advantage of the easing ofsanctions and the unfreezing of about$100bn worth of overseas assets to projectits power across the region with greaterboldness. Barack Obama, the new teambelieve, let it offthe hook.

Since the deal, Iran has stepped up itssupport for Bashar al-Assad in Syria to thepoint where, with Russian air support, hisregime’s survival appears assured for theforeseeable future. Iran has also workedwith Russia to supply Hizbullah, a Leba-nese Shia militia fighting in Syria, withheavy weapons. It has poured other Shiamilitias into Syria from Iraq, Afghanistanand Pakistan. In Iraq, meanwhile, Iranian-backed militias are fighting alongsideAmerican-supported Iraqi security forcesagainst Islamic State (IS). But once IS isejected from Mosul, they will be a potentweapon in Iran’s attempt to turn Iraq into adependent satrapy. In Yemen the civil waris a proxy struggle between Sunni Gulf Ar-abs, who back the recognised government,against Shia Houthi rebels whom Iran sup-plies with training and weapons, includ-ing anti-ship missiles that have been firedat American warships in the Red Sea.

Meanwhile, Iran’s elite Islamic Revolu-

ly taken the nuclear issue off the table forthe next decade or so and which has stronginternational support.

Instead, the emphasis will be on rigor-ous enforcement. Minor Iranian transgres-sions, such as the recent breach of theamount of heavy water Iran is allowed tohold for its reactors, will not be tolerated.Should Iran be caught deliberately cheat-ing, America could try to persuade othersignatories to the deal (France, Germany,Britain and the European Union, but prob-ably not Russia or China) that some sanc-tions should “snap back”.

The nuclear deal only lifted nuclear-re-lated sanctions on Iran. Others remain inplace, relating to ballistic-missile activity,support for terrorism and human-rightsabuses. More could be imposed for furthermissile tests or violations of UN embar-goes on arming Hizbullah in Syria and theHouthis in Yemen. America also maintainsstrict rules about illicit financial activity—Iran is believed by many to be a serial of-fender—and doing business with any com-mercial entities linked to the Revolution-ary Guards, who have fingers in most ofthe Iranian economy. Nor does the Trumpadministration have to strain, as John Ker-ry (Mr Tillerson’s predecessor) did, to reas-sure international banks that they wouldnotbe penalised forfinancingdeals in Iran.Even with Mr Kerry’s encouragement, thebanks remained cautious.

Alongside sanctions, confrontingIran islikely to require a military component,though it, too, will have to be calibrated.Iran’s aim is to establish an arc of controlthat runs through Baghdad, Damascus andBeirut. Mr Mattis has been told to come upwith a plan to prevent this. More directhelp for the Saudis and Emiratis in Yemenis likely, as is aggressive patrolling of inter-national waters to stop supplies of weap-ons from Iran getting to the Houthis. Amer-ican warships, dangerously buzzed by

tionary Guards Corps has conducted a se-ries of tests of ballistic missiles capable ofdelivering a nuclear warhead in defiance,though not clear violation, of UN SecurityResolution 2231, which underpins the nuc-lear deal. The latest, on January 29th, re-sulted in the US Treasury slapping newsanctions on several Iranian individualsand companies connected to the missileprogramme. The response was measured(and probably dusted off from somethingprepared by the Obama administration).But it was backed up by a statement fromthe short-lived national security adviser,Mike Flynn, that Iran was “officially beingput on notice” about its behaviour.

What did he mean by that?Mr Flynn, however, was vague about whatthat involved. It is one thing to decide thatIran must be confronted and pushed back,quite another to know how to do it with-out running the risk of plunging Americainto another Middle Eastern war and in-creasing turmoil in a region that alreadyhas plenty of it.

The future of the nuclear deal is also indoubt. During the presidential campaignMrTrump described it as the “worst deal inhistory”, and congressional Republicanshave little affection for it. But given the in-creased influence of James Mattis, the de-fence secretary, and Rex Tillerson, the sec-retary of state, there is little appetite in theadministration for unilaterally abrogatingan international agreement that has large-

Iran and America

A new confrontation

Howfar is the newadministration prepared to go?

Middle East and AfricaAlso in this section

36 Rising tension in Western Sahara

37 The battle for Mosul

37 A health-care scandal in South Africa

38 Education in Liberia

36 Middle East and Africa The Economist February 25th 2017

2 Iranian patrol boats, may not be as re-strained in their response as before. In Syr-ia, it looks as if there will be an attempt toprise apart the alliance between Russiaand Iran. There will be an offer to Moscowof military co-operation against IS and rec-ognition of Russia’s role in deciding theterms of a future settlement. If that fails, asis probable, Mr Mattis may decide thatAmerica will need more than the handfulof special forces it currently has on theground in Syria. He was unimpressed byMr Obama’s policy to speak loudly andcarry a small stick.

The biggest challenge will be Iraq. MrMattis, on a visit to the country this week,said that the 6,000 American forces assist-

ing in the fight against IS would be stayingon for some time after the fall ofMosul. Heknows thatwithout theirpresence, and thepolitical influence it buys, there will be lit-tle to stop Iran from installing a new gov-ernment of its choosing.

Iran may well be, as Senator LindseyGraham said on February19th, “a bad actorin the greatest sense of the word”. But it is aresourceful one. Any attempt to confront itrisks escalation. Mr Trump’s trusted advis-er, Stephen Bannon, believes that Americais engaged in a civilisational struggle likelyto lead to “a majorshootingwar in the Mid-dle East again”. It is for Mr Mattis and MrTillerson to plot a course that restrains Iranwithout fulfilling that prophesy. 7

ACCORDING to the map sold in the giftshop at the airport in Laayoune, the

capital of Western Sahara, the territory be-longs solely to Morocco. But the airport it-self contains signs that this is contestedland. Planes bearing the UN’s marking siton the runway, while its soldiers, sportingblue berets, roam the arrivals hall. They arethere to keep the peace between Moroccoand the Polisario Front, a nationalist move-ment that has fought for independence formore than 40 years.

Fears are growing of a return to armedconflict. Provocations by Morocco have in-furiated Polisario, which has responded inkind. Since last summer the UN has stoodbetween the two enemies, just 120 metresapart, in the remote area of Guerguerat.Diplomats worry that an itchy trigger fin-

ger could restart the 16-year war that theUN helped end in 1991. “The threat to peaceand security is probably the worst we haveseen since then,” says a UN official.

Hostilities between Morocco and Poli-sario began shortly after Spain, the colo-nial power, withdrew from Western Saha-ra in 1975, when Morocco annexed theterritory. A ceasefire agreement in 1991promised a referendum on independence,but no vote was held. Morocco was thusleft in control of two-thirds of the territory,including Laayoune, while Polisario runsthe remainingpart. Theyare separated bya2,700km (1,700-mile) sand berm, built bythe Moroccan army and sown with mines.

Morocco moved south of the berm lastAugust, when it began paving a road inGuerguerat, ostensibly to combat smug-

gling (but probably also to facilitate trade).Its deployment of security forces with theconstruction crews was seen as a violationof the ceasefire agreement. In response,Polisario also began building new struc-tures and positioning armed elements inthe area. The secretary-general ofPolisario,Brahim Ghali, paid a visit to the region inDecember, stoking the tension.

The standoff in Guerguerat is a symp-tom of much deeper problems. While Mo-rocco’s portion ofWestern Sahara containsvaluable phosphates, oil and fish stocks,the Polisario’s third provides little of value.Many Sahrawis continue to live in refugeecamps in neighbouring Algeria, whichsupports the cause of Western Sahara.“Refugees born and raised in exile are beat-ing the drums for war,” writes HannahArmstrong, an analyst.

Many Sahrawis also believe that theUN will not stand up to Morocco. The king-dom expelled some 70 UN workers lastspring after Ban Ki-moon, then the UN’ssecretary general, described Morocco’spresence in Western Sahara as an “occupa-tion”. (Ithas since let some, butnot all, backin.) Morocco spends large sums of moneylobbying governments, and threatensthose that are unsupportive. It dresseddown America’s ambassador last yearover a report that criticised its human-rights record. And it has reacted angrily torulings by European courts that dismissedits claim to Western Sahara.

Some hope that Morocco’s readmissionto the African Union (AU) on January 31stwill help to resolve the dispute. The king-dom left the AU’s predecessor, the Organi-sation of African Unity, in 1984 after a ma-jority of the member states recognisedPolisario and granted it membership as theSahrawi Arab Democratic Republic(SADR). By returning, Morocco is supposedto accept the AU’s protocols, which statethat members’ borders (including those ofthe SADR) are inviolable.

Others, though, believe Morocco willinstead work from within the organisationto undermine the AU’s support for Polisa-rio. Indeed, NasserBourita, Morocco’s dep-uty foreign minister, has said as much.“Not only does Morocco not recognise—and will never recognise—this so-called en-tity,” Mr Bourita told Le Desk, a website, re-ferring to SADR. “It will redouble its effortsso the small minority ofcountries, particu-larly African, which recognise it, changetheir positions.”

Morocco’s claims to Western Saharawere rejected by the International Court ofJustice in 1975, but most Moroccans still feelthat it is part of their country and that au-tonomy is a fair solution—or, at least, willbe when Morocco fully embraces democ-racy. Most Sahrawis, though, are holdingout for the referendum that was promised.The alternative, some now say, is not au-tonomy, but a return to war. 7

Western Sahara

The never-ending dispute

LAAYOUNE AND RABAT

Backin the spotlight, the fate ofWestern Sahara is no closer to resolution

They say they want a referendum

The Economist February 25th 2017 Middle East and Africa 37

1

IT HAS been a disaster in agonising slowmotion. To cut costs, health officials in

Gauteng province (South Africa’s eco-nomic hub, which includes Johannesburgand Pretoria) decided to transfer psychiat-ric patients from specialised private hospi-tals to care homes run by charities. Familymembers, psychologists and advocacygroups all warned that this could be dan-gerous for the patients. They pleaded withQedani Mahlangu, the provincial healthminister, and even went to court to try tostop the move, arguing that vulnerablepeople were being rushed into dodgyhomes. Ignoring their concerns, Ms Mah-langu went ahead. Some 1,300 patientswere moved over several months last year.An ombudsman’s report described thisprocess as a “cattle auction”, with carehomes jostling over which patients theywanted. Some sent pickup trucks to fetchthem. Disabled patients were tied downwith bed sheets for transport. Families didnot know where their loved ones hadgone. Soon, patients were dying.

The extent of the horror is still beingun-covered. Last week South Africa’s healthombudsman, MalegapuruMakgoba, told aparliamentary committee that more than100 patients had died. More bodies are stillunclaimed. His report into the scandal, re-leased earlier this month, describes “negli-gent and reckless” conduct, including bygovernment officials and the care homes,none of which was properly licensed.Some of the homes are described as “con-centration camps”: patients were skinnyand starving. Freddie Collitz, aged 61, whosuffered from depression, died with a headwound, blisters on his ankles and a sore onhis nose. Carers told his family he had fall-en on the lawn. His death was listed as dueto “natural causes”. Many other patientsdied of pneumonia, diarrhoea and dehy-

dration. Neighbours ofthe Precious Angelshome, where 20 people died, reportedhearing screams. Bodies were stacked in arundown morgue.

South Africans are shocked that such atragedy could have happened despite allthe warnings. “[Ms Mahlangu] and her ad-ministration knew of the risks before em-barking on this project and watched as thetragedy unfolded,” said Section 27, a civil-society group. “They did nothing to stopit.” Another group, Treatment Action Cam-paign, compared it to the Marikana massa-cre, when 34 striking mineworkers wereshot dead by police.

The deaths of more than 100 people, inappalling conditions, further dents themoral authority of the African NationalCongress (ANC), which hasgoverned sincethe end ofapartheid. The scandal may alsodamage the party at the polls: the ANC re-ceived a narrow54% ofthe vote in Gautengprovince in the 2014 elections (comparedwith 62% nationally). Both Johannesburgand Pretoria slipped from the party’s con-trol in last year’s local polls.

Letting the vulnerable dieMs Mahlangu has resigned—an almost un-heard-ofcase ofa South African official vo-luntarily stepping down as a result of scan-dal. Opposition parties want to presscriminal charges against her. Jack Bloom,the shadow health minister for the opposi-tion Democratic Alliance, notes that MsMahlangu admitted that patients had diedonly after he quizzed her about it in theGauteng legislature. Her disclosure that 36had perished led to the investigation. Buteven then, the ombudsman’s report said,she did not grasp the full extent of the di-saster: the death toll at the time was actual-ly 77. “The horror is that this could havebeen covered up,” Mr Bloom says. 7

South Africa

Horror show

JOHANNESBURG

The deaths ofmore than 100 psychiatric patients have exposed governmentarrogance and neglect

IRAQ’S prime minister, Haider al-Abadi,had vowed to recapture Mosul from the

so-called Islamic State (IS) by the end of2016. In the weeks leading up to the battlefor Iraq’s second-largest city, Americanmilitary commanders echoed him: victorywould be swift, they pledged. But with thejihadists still in control of half the city andthe hardest part of the battle yet to come,these predictions now looknaive.

In the rush to dislodge IS from its largesturban stronghold, Iraq’s security forces ap-pear to have underestimated the militants’ability to cause carnage. Although vastlyoutnumbered, the jihadists have usedsnipers, booby traps, improvised land-mines and hundreds of suicide-bombersto bog down Iraqi security forces. Elabo-rate tunnel networks have allowed IS to es-cape bombing runs from American war-planes and to ambush Iraqi forces in areassupposedly cleared.

The grinding urban combat has taken aheavy toll on Iraqi troops. Some units ofthe country’s Golden Division—American-trained special forces that have spearhead-ed the assault on the city—have seen morethan half their men killed or wounded.The UN said that almost 2,000 Iraqi troopswere killed across the country in Novem-ber alone, triple the number in the previ-ous month, when the battle for Mosul be-gan. The government refuses to releasecasualty figures, but in December the of-fensive ground to a halt as commanderswaited for reinforcements to arrive.

So far Iraqi security forces, backed byAmerican-led coalition warplanes, havecaptured the eastern halfof the city, whichis split in half by the Tigris river. On Febru-ary 19th, more than four months since thestart of the battle, they launched the nextphase of the operation: to retake the west.The fighting will be even tougher. The oldcity’s narrow alleyways will force Iraqitroops to dismount from their armouredHumvees, making them easier prey for IS

suicide-bombers and snipers.There is also a larger civilian popula-

tion in the west, further complicating theoperation. The Iraqi government hasdropped leaflets urging the 750,000 or soresidents to stay in their homes. But withheavy fighting and siege-like conditionstaking an increasing toll on civilians, theUN believes thatasmanyashalfcould flee,adding to the 160,000 who have alreadyleft the city’s east and its surrounding vil-lages since the battle began.

The battle for Mosul

Going west

BEIRUT

Iraqi forces launch the toughest phaseoftheiroperation against IslamicState

38 Middle East and Africa The Economist February 25th 2017

2

AT A school in the township of WestPoint, Monrovia, a teacher should be

halfway through her maths lesson. Insteadshe is eating lunch. A din echoes aroundthe room of the government-run school as70 pupils chat, fidget or sleep on theirdesks. Neither these pupils nor the rest ofLiberia is learning much. Bad teaching, alackofaccountability and a meagre budgethave led to awful schools. Fourteen yearsof civil war and, more recently, the Ebolavirus have stymied reforms. Children’sprospects are shocking. More than one-third of second-grade pupils cannot read aword; since many are held back, teenagersoften share classes with six year olds (seechart). In 2014 only 13 candidates out of15,000 passed an entrance exam to the Uni-versity ofLiberia. In 2013 none did.

George Werner admits that when hewas made education minister in 2015, “myheart sank.” But he soon got to work. He re-moved 1,892 dead or retired teachers fromthe government’s payroll, saving $3.3m or7% of the tiny education budget ($45.6m).In September Mr Werner went further,launching Partnership Schools for Liberia(PSL), a pilot which, if successful, could in-spire similar innovation across Africa.

PSL is based on charter schools inAmerica and academies in England. Ineach case independent operators run freeschools that are at least partly funded by

the government. In the PSL scheme eightoperators, three of which are for-profitgroups, have taken over a total of 93 publicschools. A randomised controlled trial willanalyse whether their pupils do betterthan peers in traditional schools.

But just six months in, PSL is under fire.Education International, a global group ofteachers’ unions, and ActionAid, a charity,are funding an investigation into the pro-gramme. Their opposition is partly ideo-logical: they do not like for-profit schools.But two of their concerns are pertinent—in-deed, Mr Werner and the researchers eval-uating the PSL project also recognise them.

The first is that the PSL schools play bydifferent rules. There is a cap of 65 on mostof their class sizes, for example, which hasprompted allegations that some operatorsare turfing out less clever pupils. Thatwould be unfair and against the rules ofthe pilot. But even if it were happening, itwould not alter the results of the evalua-tion. Justin Sandefur of the Centre for Glo-bal Development, the research group lead-ing the trial, notes that operators will beheld accountable for the results of all chil-dren originally at the pilot schools—includ-

ing any who were later turned away.The second concern is cost. The govern-

ment pays for teachers’ salaries. Operatorsalso receive $50 per pupil per year from apot of philanthropic cash managed by theministry and Ark, a London-based educa-tion charity. Most spend extra money ontop of that. Operators have submitted esti-mates of their costs ranging from $60 tomore than $1,000 per child per year.

ForMrWerner, questionsabout the costof the project are most acute when he con-siders the role of Bridge InternationalAcademies. Bridge, a chain of for-profitschools, has raised $140m from investorssuch as Mark Zuckerberg. But it is not closeto breaking even, losing about $1m amonth as a result of its high fixed costs,such as having a research team in America.

One way Bridge is trying to turn a profitis to run public schools as well as privateones. Liberia is thus a test case. As part ofthe pilot, Bridge runs 25 schools there,more than any other provider. Josh Na-than, Bridge’s academic director in Liberia,said that the firm would like to cover all2,700 schools around the country.

Charles Cooper, a Liberian business-man, speaks for many sceptics of theBridge method. He says the scripts, whichteachers read from tablet devices, are like a“lobotomy”, as teachers no longer have tothinkfor themselves. The scripts are bossy:teachers must “write today’s date” and“erase the board”, for example. But Bridgesays these ensure that teachers teach.

Bridge’s financial model is more worry-ing than its pedagogical one. It is seeking$9m from its philanthropic backers for itswork in Liberia (about $1,000 per pupil).Around $5.5m of its proposed budget forLiberia is for staff costs for employees out-side the country. The success of PSL doesnot rely on that ofonly one group, but suchfigures raise doubts about whether Bridgecan ever run a cheap enough operation in aplace like Liberia.

Susannah Hares of Ark says that highercosts in PSL’s earlyyearsare notnecessarilya sign of failure. Per-pupil spending shouldcome down ascostsare spread acrossmoresites. But she adds that if the pilot is to ex-pand widely there must be evidence thatthe world’s fourth-poorest country can af-ford it, even with money from donors. (Li-beria receives more in aid—$842m in 2014—than its gross national income of$720m.)

On February 22 Mr Werner announcedthat, from September, PSL would add an-other 100 or so schools. Expansion wouldirk critics. But they should remember howbad things are. Far too many educationministers choose to accept the status quo.PSL is an experiment, and one worth try-ing. Unfortunately, with an election due inOctober, a new government could scrapthe scheme. In Liberia, where exams areproving too tough for too many, thatwouldrepresent the biggest failure ofall.7

Education

Lessons fromLiberia

MONROVIA

A war-ravaged state where little worksconsiders charterschools

It says here, be good

Late for school

Source: Ministry of Education*6- to 7-year-oldsin most countries

Liberia, second-grade* students by actual age 2015, ’000

0

5

10

15

20

6 7 8 9 10 11 12 13 14 15

Still, the jihadists are slowly losing con-trol of their caliphate. The Pentagon be-lieves many of the group’s senior bureau-crats are starting to leave Raqqa, IS’s capitalacross the border in Syria, as air strikes onthat city intensify. With Kurdish-ledground forces slowly encircling Raqqa,smugglersare helpinggrowingnumbers ofIS low-level fighters flee the battlefield ordefect to rival jihadist groups in Syria. Thegroup’s finances have also taken a hit, withrevenue (largely from taxation, oil and ran-soms) declining from up to $1.9bn in 2014to, at most, $870m in 2016, according to a re-port from Kings College London.

The fall of both Mosul and Raqqa,which American commanders believemay happen within sixmonths, will deal ahuge blow to the jihadists. Even so, IS islikely to endure. It has already begun toswitch to insurgent-style tactics, setting offcarbombs in Baghdad and eastMosul withgrowing frequency. The jihadists may bedown; they are far from out. 7

The Economist February 25th 2017 39

For daily analysis and debate on Europe, visit

Economist.com/europe

1

FRANCE’S most pro-European presiden-tial candidate tookhis campaign to Lon-

don thisweekto a rapturouswelcome. Em-manuel Macron, a 39-year-old formerSocialist economy minister, was there tocourt the French vote abroad, and is exact-ly the sortofupbeat, international-mindedtech enthusiast that London’s latte-drink-ing French voters adore. Campaigning asan independent for votes on the left andthe right, Mr Macron has pulled off the as-tonishing feat of hauling himself up fromrank outsider to joint second place in thepolls. But the closer he gets to a shot at theFrench presidency, the tougher his cam-paign is turning out to be.

A few days before Mr Macron turnedup in London, he had been in more hostileterritory: the Mediterranean naval port ofToulon, traditionally held by the right. Theentrance to his rally was blocked by scoresof enraged National Front (FN) supportersand pieds-noirs (ethnic French who residedin Algeria during colonial rule), chanting“Macron traitor!” On a trip to Algeria thatweek, he had called France’s colonisationof the north African country a “crimeagainst humanity”.

The rally went ahead all the same. MrMacron told the audience that he was “sor-ry” ifhe had “wounded” anybody, but thatFrance needed to confront all sides of itshistory. The venue was a little over halffull, and the atmosphere flat. The crowd

floor office at the Elysée Palace cheerfullymulling over plans to write a book, or per-haps teach philosophy. Today, the offices ofEn Marche!, the movementhe founded lastyear, are filled with youngpeople in sweat-shirts, and feel like a cross between astart-up and a student society. He has at-tracted policy heavyweights, such as JeanPisani-Ferry, an economist, and the sup-port of François Bayrou, a centrist who hasdeclined to run himself. And he is recruit-ing candidates from all backgrounds tostand at parliamentary elections in June.The objective, says Mr Macron, is to reject“yesterday’s choices”, pursue “radical nov-elty” in politics, and build “a new France”.

Not your regularGillesYet, besides his inexperience, two obsta-cles in particular lie ahead if Mr Macron isto beat Mr Fillon into the second round.One is whether he can find a way to speakto a broader electorate, beyond the metro-politan voters with a university degreewho favour him. “He’s too intellectual,”says a retired antique dealer, in a café over-looking the port in Toulon, where the air-craft carrier Charles de Gaulle is dockedwhile undergoing repairs. Mr Macron’sovertly pro-European politics are unfash-ionable in parts of France these days. Hissupport forGermany’s open-borderpolicytowards Syrian refugees—he says it “savedour collective dignity”—collides with apopular mood of rising nationalism. AndMr Macron’s embrace of technological dis-ruption does not resonate with those whofear they will be its next victims. “He isquite weak among manual workers andemployees, and it’s not possible to con-struct a successful candidacy withoutthem,” says Jérôme FourquetofIfop, a poll-ing group.

The second is how far his poll success is

seemed motivated as much by curiosity asconviction. Jean-Luc, a high-school mathsteacher, said he had never been to a politi-cal rally and was “intrigued” by Mr Mac-ron. Robert, a retired salesman, said he vot-ed for François Fillon, the centre-rightcandidate, at his party’s primary but wasnow “looking for a way out”. (Mr Fillon isunder investigation for having employedfamily members on the parliamentarypayroll, despite little evidence that theydid much work.) It was Mr Macron’s “dif-ferentwayofdoingpolitics” thatappealed,said a retired naval worker and Socialistvoter; he was not yet sure ofhis vote.

With two months to go before the first-round, the French presidential election hasbecome more unpredictable than any inrecent history. The only near-certainty isthat the FN’s Marine Le Pen will win one ofthe two places in the run-off. This hasturned the election into a race to face her.Though she has staged almost no rallies,Ms Le Pen tops first-round polling, withabout 26% of the vote (see page 40). Overthree-quarters of her voters say they aresure of their choice. For Mr Macron, who isneck-and-neck with Mr Fillon in secondplace, this share is just 45%.

That Mr Macron is in this position is re-markable enough. This, after all, is a youngman who in July 2014, after quitting his jobas deputy chief of staff to President Fran-çois Hollande, could be found in his top-

France’s Europhile candidate

The anti-Marine

PARIS AND TOULON

Emmanuel Macron has gone from no-hoperto serious candidate. Nowcomes thehard part

EuropeAlso in this section

40 Russian soft power in the Balkans

40 Mme la Presidente?

41 The Martin Schulz effect in Germany

42 Charlemagne: The armies of Europe

40 Europe The Economist February 25th 2017

1

2 down to an engaging personality ratherthan a convincing programme. The coun-try, he says, needs “vision”, not scores ofpolicy ideas that promptly get shelved bypresidents in power. But his reluctance tobe too precise has left Mr Macron open tothe charge of ambiguity. Asked which ofhis policies they liked best, supportersquestioned in Toulon were unable to an-swer. Mr Macron is due shortly to unveilmore specific plans which, perhaps tacti-cally, he has long avoided. Yet this carriesfresh risks. Some of the ideas he sketchedout in “Révolution”, the bookhe publishedlast year, are profoundly radical, certainlyforFrance. He wants to curb the overall lev-el of public spending; have the state takeover the employer- and union-run unem-ployment benefit system in place since thesecond world war; and devolve most ne-gotiations on working conditions to com-panies. He is liberal, he says, “in a Nordicsense”. Getting the right balance betweenwhat France needs, and what the Frenchwill vote for, will be perilous.

A historically unusual opportunity iswithin Mr Macron’s grasp: the chance ofbeating all established party candidatesinto the second round, and from there intothe presidency. Polls suggest that he wouldbe a more solid run-off candidate againstMs Le Pen than would the damaged Mr Fil-lon. Under the Fifth Republic, no indepen-dent has ever pulled off such a feat. Thenagain, none has had such a remarkable op-portunity to do so. 7

Mme la Presidente?

France’s chances

JOURNALISTS often joke that threeexamples make a trend. Following thevotes for Brexit and Donald Trump, a

victory by Marine Le Pen of the NationalFront (FN) in France’s presidential elec-tion would complete the anti-global-isation trifecta. She has dominated thepolls ever since news broke that FrançoisFillon, her centre-right rival, had paid hiswife and children about €1m ($1.05m)over the years for jobs critics call fake. Buta deeper analysis shows that Ms Le Pen ismore likely to end the streak than tocontinue it.

After last year’s surprises, many peo-ple stopped trusting polls. This is mis-guided: in both cases, surveys correctlypredicted that the race would be tight. Ifpolls in France are similarly reliable, MsLe Pen’s chances in the first round of theelection are excellent. The Economist hasaggregated 100 French polls (a techniquethat is still rare in France, though it is derigueur in Britain and America). We findthat if the first round were held today, MsLe Pen would carry 26.1% of the vote.Emmanuel Macron and Mr Fillon wouldtrail with 19.7% apiece.

These figures could change, but bigshifts are rare. According to a database ofFrench polls since 1965 compiled by twopolitical scientists, Will Jennings andChristopher Wlezien, surveys 60 daysbefore the first round have been off byjust three percentage points on average.Using this record to run 10,000 computersimulations shows Ms Le Pen as theheavy favourite. She wins the first round77% of the time, and is a 96% shoo-in tomake the run-off.

The race for second place is muchtighter. Mr Fillon’s chances ofmaking therun-offhave fallen from 79% to 50%,slightly more than Mr Macron’s 47%.Benoît Hamon, the Socialist candidate,manages just 5%.

However, the second round is a differ-ent story entirely. When voters are askedto pickbetween Ms Le Pen and Mr Fillon,she loses by13 percentage points. Against

Mr Macron, it is 20. At this stage, voterstend not to change their minds: in presi-dential elections since 1981, the averagepoll ofa potential run-off70 days out hasalso missed by only three points. If theyare similarly reliable this time, Ms Le Penhas less than a 5% chance ofvictory.

Ofcourse, unusual events cannot beruled out, and many voters are still un-certain. Betting markets give Ms Le Penodds of28%-43%. Punters may thinkfurther scandals could fell whoever facesher in the second round. Should it be MrFillon, leftist voters who dislike himmight stay home. But such a drop inparticipation would have to be huge tomatter. If the polls hold, even ifevery FN

supporter actually votes, a fifth of oppos-ing voters would have to drop out for MsLe Pen to win. That is much larger thanthe shifts in Britain and America.

The most likely outcome is that his-tory will repeat itself. In 2002 Jean-MarieLe Pen, Marine’s father and the FN’sfounder, snuck into the presidentialrun-off, only to lose by 64 points. Just14months ago, the FN topped nationalfirst-round polls for regional elections.But its opponents teamed up, and it failedto win a single region. Perhaps this timewill be different. But ifMs Le Pen wins, itwill be a far bigger shockeven than thevotes for Brexit and Mr Trump.

Populists are on a roll, but Marine Le Pen faces an uphill battle

Jean-LucMélenchon

Ménage à trois

Sources: National polls; W. Jenningsand C. Wlezien; The Economist

*Based on 10,000simulations per day

France, probability of reaching second round, %*Selected presidential candidates

January February

2017

0

20

40

60

80

100Marine Le Pen

Emmanuel MacronFrançois Fillon

Benoît Hamon

“HERE are the Russian missiles!” chor-tles Viacheslav Vlasenko, co-direc-

tor of the Russian-Serbian HumanitarianCentre in Nis, a town in central Serbia. Hegestures at the contents of his warehouse:tents, generators, inflatable boats and oth-er goods one would expect to use in disas-ter relief. The centre, which shares a build-ing near the airport with several local ITcompanies, is simply a facility for respond-ing to floods, forest fires and other emer-gencies, says Mr Vlasenko.

Yet Western analysts worry that it maybe somethingmore: a spyingpost oreven afoothold for Russian intervention. As theinfluence of America and the EuropeanUnion has receded in the western Balkans,Russia has been trying to fill the vacuum. Ithas stepped up military co-operation withSerbia, and may have been involved in arecent alleged coup attempt in Montene-

gro. Moscow’s goal is to stop Serbia, Bos-nia, Macedonia and Montenegro fromjoining NATO and to turn them away fromthe West.

The most striking allegations againstRussia concern a purported coup attemptin Montenegro last October, on the day ofthe country’s elections. Authorities arrest-ed 20 Serbian suspects. On February 19ththe country’s state prosecutoraccused Rus-

sian “state organs” of having mastermind-ed the plot in order to prevent the country’simminentaccession to NATO. Russia calledthe claim “absurd”.

Russia also backs Serbia’s refusal to re-cognise the secession of Kosovo in 2008.Hashim Thaci, Kosovo’s president, says hefears Russian influence is growing (alongwith that of Islamists and nationalists) be-cause the EU is too consumed with its own

Western Balkans

Russian overtures

NIS

Moscowfights Serbia’s turn towardsEurope

The Economist February 25th 2017 Europe 41

2 problems to pay attention to the region.The centre in Nis, established in 2012, is

helping to win friends. Russia had alreadyhelped to clear unexploded ordnance leftbehind by NATO’s bombing during theKosovo warof1999. In 2014 Russia used thecentre to fly in emergency relief whenfloods hit the region. Since then Russia hashelped put out forest fires, provided tentsfor migrants and trained emergency re-sponders. Between 2014 and 2017, this aidwill total $40m. A recent poll showed thatSerbs wrongly believe Russia is one oftheir main benefactors, even though themore than €3bn ($3.16bn) that the EU hasprovided since 2000 dwarfs Russian aid.

Last November, Russia gave Serbia sixageing MiG-29 warplanes. This plays wellamong Serbs, 64% of whom see NATO as athreat. Serbia’s annual military exerciseswith Russian troops help reassure its pro-Russian electorate, while the government-friendly media plays down the more fre-quent exercises with NATO. The two coun-tries have a free-trade agreement, though itexcludesSerbia’smostvaluable export, thecars manufactured at Fiat’s Serbian plant.This is a perennial source of irritation, andprobably one reason why a long-promisedvisit by Dmitri Medvedev, Russia’s primeminister, has still not taken place.

Moscow’s skilled influence-peddlinggroups are certainly active. A recent studyfound 109 organisations devoted to pro-moting good relations with Russia. All ofthe country’s mainstream news outletsrun stories by Sputnik, a state-controlledRussian news agency. Nationalist websitesglorify Russian military might and deni-grate Albanians and the West; one recentlylauded Vladimir Putin for “punching”Croatia by blocking certain imports.

But it is not clear what Mr Putin can dofor his local admirers. Marko Jaksic, an ac-tivist in Mitrovica, a mostly Serbian townin Kosovo, used to plaster posters of theRussian leader all over town. But Russiahas done nothing to help Kosovo return toSerbian rule. “Serbs are always waiting forsomething from Russia,” he says, “but it ishoping against hope.” 7

S E R B I A

MACEDONIA

B O S N I A

ALBANIAGREECE

KOSOVO

MONTE- NEGRO

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Sarajevo

CR

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Pristina

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NisMitrovica

EU members

Candidates:

Potential

Official

150 km

THE small branch office of Dilek Kolat, aSocial Democratic (SPD) politician in

Berlin’s Friedenau district, is packed withlocals who have turned up for a discussionon the topic “What is social justice?” Aftertwo hours the answer is, unsurprisingly,unclear. But the crowd’s enthusiasm is un-dimmed. Many sense that Martin Schulz,the SPD’s candidate for chancellor, may ac-tually defeat Angela Merkel, the ChristianDemocratic (CDU) incumbent, in the elec-tion on September 24th—and believe thatif he does, social justice might be morethan a matter for philosophical debates.

Mr Schulz’s selection as candidate inlate Januarycaused an extraordinarysurgein the polls (see chart). The SPD, currentlythe juniorpartner in the coalition with MrsMerkel’s conservative bloc, nowrunsneck-and-neck with it, each drawing just above30%. If Germans could elect their chancel-lor directly, he would defeat Mrs Merkel49% to 38%, according to Forschungs-gruppe Wahlen, a pollster.

It is too early to tell whether this popu-larity is a “soap bubble” destined to pop,says Manfred Güllner of Forsa, anotherpolling firm. As the former president of theEuropean Parliament, Mr Schulz is well-known in Brussels, but he is still fresh inBerlin, untainted by domestic politics.

Yet his effect has been to awaken thebase ofa party that, like its centre-left cous-ins elsewhere in Europe, seemed to havelost its way. The SPD last won an election in1998, when Gerhard Schröder becamechancellor. Mr Schröder implemented abatch of market-friendly labour and wel-fare reforms. Today it is conservatives wholaud this so-called “Agenda 2010” for mak-ing Germany competitive and slashing un-

employment. The Social Democrats haveturned against their own reforms, de-nouncing a neoliberal turn towards lowerwages and away from social justice. Be-tween 1998 and 2013 the number of peoplevoting for the SPD almost halved, to 11m.

Mrs Merkel shrewdly helped this trendalong, employing a strategy of “asymmet-ric demobilisation” to keep SPD voters athome. Under the rubric of modernisingher Christian Democrats, she poachedsome leftist policies, such as eliminatingthe draft, scrapping nuclear power and en-acting a minimum wage. And she gov-erned, from 2005 to 2009 and again since2013, in a coalition with the Social Demo-crats that made them look to many voterslike an indistinguishable centrist blob.

Such disheartened Social Democrats,many of them blue-collar workers, nowfeel energised byMrSchulz. His language isearthy and simple, where Mrs Merkel’s isoften technocratic. His grizzled looks tes-tify to a life of hardship and perseverance.In his youth Mr Schulz dropped out of highschool, hoping to play professional foot-ball. After a knee injury derailed that plan,he took to drink and even contemplatedsuicide. But in 1980 he turned his lifearound, becoming a teetotaller, a book-store owner and later the mayor of hissmall home town.

That history speaks to many voters. MrSchulz is “an alcoholic who fell from gracebut rose again”, says Jan Richter, one ofthose attending the debate at Mr Kolat’s of-fice. He is “a man out of real life”, chimes inAurel Marx, who sports a beard andtwirled handlebarmoustache and makes aliving running an eight-room brothel. MrSchulz “has succeeded against the discrim-ination of society and now has the gall tosay ‘I want to be chancellor.’ That rocks,”Mr Marx adds.

The passion Mr Schulz inspires couldmake him a mobilisation machine. He hasalready been hinting at a rollback of Agen-da 2010. The left’s rising enthusiasm makesMrs Merkel’s strategy of asymmetric de-mobilisation impossible. Meanwhile,turning out her own base will be harderthan usual. Many voters have yet to forgiveher open-armed refugee policies in 2015,and the CDU’s conservative sister party inBavaria, the CSU, has spent much of thepast two years criticising her.

Mrs Merkel will probably start by wait-ing for Mr Schulz to make mistakes. As thecampaign heats up, however, she will haveto play to her party’s conservative base,thinks Timo Lochocki of the German Mar-shall Fund, a think-tank. If the bail-out ofGreece, say, returns to the headlines, theCDU could take a hawkish line, while themore lenient Mr Schulz might emphasiseEuropean solidarity. And on labour-mar-ket regulations, taxes and more, Germanyis in for a clearer ideological clash than inany recent election. 7

The German left is back

Miraculousrecovery

BERLIN

Martin Schulz breathes newlife into theSocial Democrats

SPD-y ascent

Source: National polls

Germany, average voting intention by party, %

Nov Dec2016

Jan Feb2017

0

10

20

30

40

CDU/CSU

SPD

Greens

FDPThe Left

AfD

42 Europe The Economist February 25th 2017

THE triceratops had a gentle existence that belied its fierce ap-pearance, keeping to itself and maintaining a strict vegetarian

diet. But in hisneglected classic Tarzan the Terrible, EdgarRice Bur-roughs conjured the Gryf, a horrifying dagger-toothed descen-dantofthe three-horned dinosaur that roamed the African plainsand snacked on the locals. Europe is contemplating a similar evo-lutionarypath as it gets to gripswith an American administrationthat has tired of playing T. Rex alone. Can the herbivorous powerof the past, which has long delighted in the soft tools of diplo-macy, trade and aid, really transform itself into a slavering,armed-to-the-teeth carnivore?

Donald Trump’s team has spent much of the last week in Eu-rope cleaning up the boss’s mess. At the Munich Security Confer-ence, James Mattis, the defence secretary, called NATO (which MrTrump had written off as obsolete) “the best alliance in theworld”. In Brussels, Mike Pence, the vice-president, assured hisaudience of America’s “strong commitment” to the EuropeanUnion, a club the president has dismissed as a “vehicle for Ger-many”. Europeans remain baffled by the mixed messages ema-nating from Mr Trump’s administration. It is as if Henry Kissin-ger’s old (and apocryphal) question about whom to call when hewants to speak to Europe has been reversed, quips Hans Kund-nani, an analyst at the German Marshall Fund in Washington.

But on one issue the president is in full agreement with histeam. Like his predecessors, Mr Trump grouches that America’sNATO alliesare notpaying theirbills. Only fourother countries inthe 28-member alliance meet its target of spending 2% of GDP ondefence. Mr Trump’s threat to withdraw America’s security guar-antee is probably a bluff. But he has other cards to play, includingcuts to joint training programmes. Last week General Mattiswarned his fellow NATO defence ministers that continued Euro-pean miserliness might see America “moderate” its commitmentto the alliance.

America is right to make these demands, say some ambassa-dors; in 2014 all 28 allies vowed to meet the 2% target within a de-cade. Indeed, MrTrump ispushingata partlyopen door. The longdecline in European defence spending bottomed out in 2015. Rus-sia and terrorism have restored history to Europe, and economiesare growing again. Almost all NATO governments are raising de-

fence spending in real terms, to the delightofJensStoltenberg, thesecretary-general. But some, particularly in Europe’s south andwest, still balkat shelling out for what feel like distant threats.

Their arguments are well trodden. The 2% target is mercilesslycrude. Few would argue that Greece, which meets the goal partlybecause its economy has collapsed, has a more effective fightingforce than Norway, which devotes a large share of its 1.5% to R&D

and sends hundreds of troops to places like Afghanistan. The alli-ance hasnine specificmeasures for ranking itsmembers, but theyremain classified and thus less politically potent than the 2% tar-get. Europe’s problems lie in fragmentation as much as resources;NATO’s European members spend over four times as much ondefence as Russia, but use 27 different types of howitzer and 20fighter aircraft. The European Parliament reckons that joining upthe EU’s defence market could save €26bn ($27bn) a year.

And so as the debate heats up, the herbivores are baring theirwide, flat molars. Just before Mr Pence’s visit, Jean-ClaudeJuncker, the president of the European Commission, irritatedsome in NATO by urging the Europeans not to bow to Americanpressure. A more expansive understanding of security was need-ed, he suggested; add development to the mix and the Europeansstackup rather better. Angela Merkel, the German chancellor, de-livered a similar message, in more diplomatic terms, in Munich.

Ifpayingforboreholes in Namibia rather than reconnaissancedrones in Lithuania sounds like special pleading to America, itserves a distinct purpose in Berlin. Mrs Merkel needs a story topersuade sceptical German voters of the wisdom of ramping upmilitary spending from its current level of just1.2% ofGDP. Warmwords about preserving security through non-military means of-fer one. (Wolfgang Ischinger, head of the Munich conference, sug-gests a 3% target for military, development and humanitarianspending.) “Europeanising” defence is another. Germany is pur-suing various security arrangements with other EU countries. MrJuncker is backing an EU defence fund for common research andprocurement, and for capital spending to be excluded from thecommission’s rules on fiscal deficits. Whatever helps the medi-cine go down.

Beware the German GryfMr Trump cannot be accused of expedience—he has attacked se-curity freeloaders fordecades. But he is hardly assured ofsuccess.Germans in particular will chafe at devoting more money to acause they dislike to please a foreign president they detest. Slam-ming American-inspired militarism could prove a useful cam-paign tactic for Martin Schulz, a Social Democrat who wants tothwart Mrs Merkel’s bid for re-election in September (see page 41).And grand talk about joint European procurement and opera-tions could easily be stymied by pressure from national defencechampions interested only in securing the next juicy contract.

Indeed, Mr Trump’s warnings could even prove counter-pro-ductive. Other European countries might grow nervous at theemergence of Germany as a military superpower with seriousexpeditionary capabilities, should it choose to travel down thatpath. Furthermore, many countries will never reach the 2% target.But threats from the White House could force them to hedgeagainst American withdrawal, notes François Heisbourg, aFrench security analyst. Make NATO conditional, and you forceyour partners into independence, and a foreign policy that maynot suit American interests. Even the gentle triceratops some-times used its horns to charge predators. 7

The Gryfs of Europe

Donald Trump wants Europe’s herbivores to spend more on defence

Charlemagne

The Economist February 25th 2017 43

For daily analysis and debate on Britain, visit

Economist.com/britain

1

DESPITE its vote to leave the EuropeanUnion, plenty of Europeans still seem

keen to move to Britain: in eastern Euro-pean cities such as Kiev and Chisinau leaf-lets promising “English visas” still flutter.Marion, a lawyer who recently moved toLondon from Paris, says that Brexit barelyfeatured in her decision. “I guess that emo-tionally I still find Brexit hard to believe.”Britain’s government, however, is busythinking ofways to keep them out.

Since June’s referendum result, manyhave wondered anxiously whether Britainwill remain part of the EU’s single marketafter Brexit. The pound tumbled whenTheresa May, the prime minister, said thatshe planned to leave it. People have wor-ried less, however, about the economic im-pact of the government’s post-Brexit immi-gration policy. This is strange: the impact ofslashing the number of foreigners allowedinto Britain could be as serious as anythingthat could happen to trade.

In the year to September net migration(immigration minus emigration) was un-der 300,000, split about evenly betweenEU and non-EU folk. Ithasbeen high by his-torical standards (see chart) since themid-2000s, when citizens from new,poorer EU members acquired the right tomove to Britain.

Despite the continuing influx, net mi-gration into Britain is hardly out of control,at least compared with other rich coun-tries. On average annually it amounts to

Britons continuing to quit the country eachyear. If settling in Europe becomes harderfor Britons after Brexit, that may not hap-pen. Even if the rules are changed, thenumber of non-Britons settling each year,minus the number leaving, would have tofall to around 150,000.

Net migration of family members andrefugees is around 70,000. On February22nd the government largely prevailed in acase in the Supreme Court, allowing it toset tough income requirements on thosewho want a loved one to join them. Theruling’s wording, however, implies thattightening these rules furtherwill be tricky.Meanwhile, reducing immigration by un-skilled workers from outside the EU is diffi-cult since it is almost non-existent, saysJonathan Portes ofKing’s College London.

About half of the EU nationals emigrat-ing to Britain move into less-skilled jobs.Cutting that sort might reduce net migra-tion by EU workers to 50,000 (a slowingeconomy is already helping). Halving netmigration of foreign students, say by re-stricting the growth ofuniversities (thoughthat would hamper a lucrative industry),might reduce it to 50,000. But that mightstill leave total net migration at around150,000. If the government is serious abouthitting its tens-of-thousands target, it mayhave to restrict skilled migration. 

That would sit oddly alongside its re-cent white paper on Brexit, which prom-ised to “encourage the brightest and thebest to come to this country”. And it wouldweaken Mrs May’s negotiating hand. In2015 combined net migration from Ameri-ca and India was about 30,000. Cuttingthat would be awkward for the prime min-ister, who is desperate to strike post-Brexittrade deals with both.

How would the economy cope if thetens-of-thousands target were reached?Firms reliant on foreigners are worried.

about three times the attendance at a Man-chester United football match. Comparedwith their population, Ireland, Australiaand Canada see far more new arrivals.

But British concern about immigrationhas little to do with raw numbers. Even in1995, when net migration was well under100,000, two-thirds of Britons wanted itcut. No reference to immigration appearedon the ballot paper, but politicians believethat the Brexit vote represented a desire to“take back control” of the country’s bor-ders. Since then Mrs May and AmberRudd, the home secretary, have repeated along-standing commitment to cut annualnet migration to the “tens of thousands”.

That will be no easy task. The govern-ment will have to count on about 50,000

Reducing immigration

Keep out

Lowerimmigration could yet impose a big economiccost afterBrexit

BritainAlso in this section

44 Farmers and Brexit

45 Bagehot: What next for Remainers?

Up and away

Source: ONS

Britain, long-term international migration, ’000

1970 75 80 85 90 95 2000 05 10 16600

400

200

0

200

400

600

800

+

–

Immigration

Emigration

Net migration

44 Britain The Economist February 25th 2017

2 Food manufacturers are vulnerable: 40%of such workers are non-British. Skilled in-dustries would also suffer: a quarter of sci-entific researchers are foreign-born.

It may be for that reason that David Da-vis, the Brexit secretary, this week hintedthat Britain is not about to shut the dooreven on unskilled EU migrants. OtherBrex-iteers, however, counter that ending thesupply of cheap workers would shake upBritain’s business model for the better.Firms would invest in labour-saving tech-nology, boosting Britain’s low productivi-ty. One study ofAmerican tomato-growersfinds some evidence to support this thesis.If productivity rose, those workers left be-hind might see higherwages. Britonsmightalso see less competition for jobs.

But these effects are likely to be small. Ifthe benefits of investing in technologywere so great, bosses should have alreadydone so. And many jobs—such as carework—are not easily performed by robots.In these industries, many firms will eitherbecome less profitable or go under.

Few economists see lower immigrationleading to a wage bonanza for locals. Onepaper calculates that cutting migration tothe tens ofthousands could boost wages inindustries most affected by it by an imper-ceptible 0.2-0.6% by 2018.

And these tiny increases would bedwarfed by a slowdown in the widerecon-omy. According to research by Katerina Li-senkova of Strathclyde University, annualnet migration of 100,000 would lowerGDP perperson by1% in the longterm. Oth-ers reckon the economic cost of lower mi-gration could match that of the hit to tradefrom Britain leaving the single market.

The biggest loser from slashing immi-gration would be the public finances. Na-tive Britons are ageing rapidly; the numberwho are ofworkingage is shrinking. Whencounting only native-born folk, Britain hasa higher “old-age dependency ratio” (thenumber of elderly people as a share ofthose of working age) than that of manyEuropean countries, including France, andit is worsening fast. This drives up spend-ing on health care and pensions.

As it stands, the flow of people into andout of Britain tilts the numbers favourably,improving the dependency ratio. Britainexports old, creaky people and importsyoung, taxpayingones. More than 100,000British pensioners live it up in sunnySpain; meanwhile, up to 100,000 working-age Spaniards brave the British cold.

With low net migration, Britain’s elder-ly would be more burdensome. Workerswould need to be taxed more heavily topay for care for their elders. The govern-ment’s fiscal watchdog suggests that by themid-2060s, with annual net migration ofabout 100,000, public debt would beroughly30 percentage pointshigher than ifthat figure were 200,000. Taking back con-trol comes with a whopping bill. 7

IF THE Church of England is the Conser-vative party at prayer, then the National

Farmers’ Union (NFU) is the party at work.Unlike the prelates, however, farmers arealready grappling with the adverse conse-quences of the referendum vote last Juneto leave the European Union. Worryinglyfor them, Theresa May’s governmentseems in no rush to help. Concerns aremounting among this core Tory politicalconstituency that agriculture might turnout to be the patsy in the much-toutedpost-Brexit trade deals.

The greatest anxiety for farmers, andthe food industry as a whole, is about ac-cess to labour. The food-processing indus-try is dependent on EU migrants; they rep-resent 120,000 of its 400,000 workers.Horticultural and fruit farmers also relyheavily on both permanent and seasonalworkers from the rest of the EU, to pickpro-duce from strawberries to apples. They re-quire about 85,000 workers annually toharvest their crops. Alison Capper, an ap-ple farmer in Herefordshire, employs fivefull-time staff but 70 more seasonally; lastyear all 70 came from abroad. The NFU

claims that the effects of Brexit are alreadybeing felt. The percentage of foreign EU

workers recruited in the sector who failedto turn up for jobs they had already accept-ed rose from a paltry 2% at the beginningof2016 to a worrying 8% by September.

Some European workers may be put offby the fall in the pound; others are anxiousabout their immigration status in Britain.Ms Capper says that the lead-times on re-

cruitment are so long that she is alreadyworrying about next year’s harvest, nevermind this year’s.

With a tight labour market, few localsare available to pick fruit. Instead, farmershave proposed a revival of the SeasonalAgricultural Workers Scheme, whichgranted temporary visas but ended in 2013,extending it to both EU and non-EU work-ers. But the agriculture secretaryand prom-inent Brexiteer, Andrea Leadsom, refusedto make any promises about the prospectsfor such programmes when she spoke atthe NFU’s annual shindig in Birminghamon February 21st. Hoping for clarity, the de-legates were disappointed by Ms Lead-som’s reticence.

Indeed, she seemed determined to giveas fewdetails aspossible about the govern-ment’s intentions. Minette Batters, the dep-uty head of the NFU, complains that“Brexit concerns every aspect of farming,but we still have no idea what the plan is.”Trade is a good example. The latest figuresshow that sales of British agricultural pro-ducts to developingcountries such as Indiaare growing. But the EU remains a crucialmarket; it takes most of Britain’s lamb andmutton exports, for instance.

Farmers worry that the governmentmight concede access to Britain’s domesticagricultural market in return for othercountries opening up their services sectorsto British banks, or their vehicle markets tocar exports. For all its political clout andstewardship of the land, agriculture con-tributes less than 1% of GDP; manufactur-ing and financial services contribute 10%each. Even as they see Ms Leadsom offer-ing them no reassurances on labour ortrade, farmers are watching the prime min-ister making post-Brexit promises to thebosses of foreign car firms based in Britain.

Most concede that their business couldbe more efficient. That would reduce theirdependence on cheap foreign labour.Automated milking and drones are invogue at the moment. But delicate fruitswill have to be picked by hand for the fore-seeable future. Potatoes are picked by ma-chines but actual people have to sort themto check their quality before they can besold to supermarkets. Farmers are uncer-tain whether to invest heavily in new tech-nology at the same time as they face thewithdrawal of £3bn ($3.74bn) worth of EU

subsidies, another subject on which MsLeadsom was quiet this week.

Wearied by decades of excessive EU

regulation, probably a majority of farmersvoted for Brexit. But now that reality is be-ginning to bite, farmers argue that the timehas come for the Tories to repay some ofthe loyalty that rural Britain has shownthem. They might not matter much interms of simple economics, but farmersshould start getting bolshie like the Frenchif Brexit becomes too damaging, says MsBatters. Tractors, to the barricades. 7

Agriculture and Brexit

Picking fights

BIRMINGHAM

Farmers may be among the first to feelthe effects ofBrexit

The Economist February 25th 2017 Britain 45

DURING his unsuccessful campaign to become president ofthe European Council in 2009, Tony Blair’s acolytes would

boast that their man could “stop the traffic” in capitals. He wasbox office, he could turn heads, he could make people listen. In aspeech in London on February 17th the unpopular former primeminister proved he still has that quality. Where other pro-Euro-pean politicians waffle and prevaricate, he was crisp and frank:Brexit will be terrible for Britain, it cannot come “at any cost”, vot-ers were “without knowledge of the terms” when they cast theirballots. Mr Blair’s intervention elicited a tsunami of furious re-sponses from bulge-eyed Brexiteers seemingly opposed to hisvery right to speakout. They protested too much.

To be sure, the speech was politically unrealistic. The pros-pects of the electorate being moved to “rise up” against Brexit inthe coming months are low. The Labour Party, from right to left, iscatatonic. The Liberal Democrats and the Scottish National Party,though robustly anti-Brexit, are small. Remainers on the Conser-vative benches are mostly cowed and Theresa May is resolute.Public opinion will probably move slowly, however disastrousthe Brexit negotiations seem once the prime minister starts thetwo-year process on March 9th. Voters do not tend to concludethat they were “wrong”; often they are too busy with their lives tonotice that their opinions are changing and simply reimaginetheir original position. Polls in 2003 showed a majority for Brit-ain’s involvement in the Iraq War, but most people today recallhaving opposed it at the time. More likely in the short term is thatthe negative effects of Brexit—an investment exodus, say—will belaid at the door of“Remoaners” who “talk the country down”.

Yetdespite this, and MrBlair’sundoubted political toxicity, hisargument was important. This was the first big occasion onwhich a top politician had argued that Brexit should not happendespite the vote. Critics dismiss this as proof that the private-jet-bound Mr Blair is out of touch. But his logic was sound. The refer-endum result, now treated as a sacred unquestionable in West-minster, isonlyasdurable and bindingas the political reality it ex-presses. And the reality of Brexit may well change this.Anti-immigration voters will not be satisfied by whatever door-slam Mrs May achieves. The economic dislocation of pulling outof the EU’s single market, combined with the falling pound, will

hurt living standards. The promises of bonus billions for publicservices will come to look like a bad joke. These are the makingsof “Bregret”. Mr Blair is merely proposing to help that processalongand, ifhe succeeds, to carryout the will ofa now anti-Brexitpublic and stop the whole process. Bagehot can reasonably dis-agree only with his timing. Replace “stop” with “reverse” and youhave a sensible political strategy.

There are two problems. First, the Remainers are divided.Those who stood together during the referendum campaign lastsummer have fragmented into five groups which, to Brexiteers,look uncannily and unfairly (because they are not progressing)like the five stages of grief. The first is denial: public figures likeA.C. Grayling, a philosopher, who simply seek to stop Brexit in itstracks. The second is anger: Mr Blair and others who accept thereferendum result but want to stop Brexit by changing opinions.

The third is bargaining: those Remainers who, like many ofthose who spoke up this week in House of Lords debates, acceptthat it will happen but want to moderate it or at least placate theirRemainer supporters by grumbling. Many of these middle-grounders resented Mr Blair’s speech as an unhelpful polarisa-tion of the debate. The fourth category corresponds to depres-sion: that segmentofpolitical opinion sure thatBrexit will be “po-tentially catastrophic” (as Margaret Beckett, a former foreignsecretary, put it) but convinced that little can be done. The fifth isacceptance: the stage attained most comprehensively by MrsMay, who opposed Brexit but is now enacting it in its harshestform. Even discardingthe lastofthese scattered tribes, whathopeis there ofuniting them into a force that can push back Brexit?

The second problem is that many Remainers—of all descrip-tions—are still living last year’s referendum. For those who thinkBrexit should proceed with limited opposition, that vote is al-most all that matters in British politics today. For those who thinkBrexit should be smashed, it was a festival of deceit and demo-cratic infamythatmustbe overcome. Both are wrong in their way.The accepters should not abandon the anti-Brexit argumentsthey put with such gusto during the referendum campaign. Theopposers should not assume that voters will simply admit theywere wrong about Brexit: shifting opinions is slow work.

So Remainers must embark on a giant job of consolidation,melding together their agendas, groups and goals. They must berealistic about the immediate future and ambitious about thelong term. Yes, push for the softest possible Brexit now, but aimover the following years to negotiate a newly close relationshipwith the rest of the EU; perhaps gradually rejoining the singlemarket or, one day, rejoining the union altogether.

Keep stopping the trafficIn other words, Remainers need to disengage from the last battle,the referendum, before they engage with the next, however hardit is to predict when this will come. In practice that means build-ing the foundations ofthe next “In” campaign: popularisingyard-sticks by which Brexit’s success (or otherwise) may be measured,setting expectations of Britain outside the EU, running single-is-sue campaigns that raise the salience ofthe issues at stake (invest-ment, the benefits of migration, international influence), holdingBrexiteers to account for the commitments they make, gatheringe-mail addresses and nurturing the networks that might, once thetime is right, take Britain back into the European fold. If the publicis to turn against Brexit, it will ultimately do that on its own terms.The taskofconvinced Remainers is to be ready.7

Rebuild, and they will come

To win Britain’s next EU referendum, Remainers must move on from the last

Bagehot

46 The Economist February 25th 2017

1

GAHCHO KUÉ is too far north for trees.In the few snowless months, its sur-

roundings in Canada’s Northwest Territo-ries resemble a sprawling archipelago, asmuch lake as land, dark ponds stretchingflat to the horizon. Wolverines roam, aswell as bears, foxes, hares and caribou,though the herdshave dwindled. There areno roads, no pipes, no electricity cables. Soit seems strange when, flying over the tun-dra, a giant truck appears, then another,then a steel factory, rows of trailers and abig grey pit, deepening by the day.

De Beers, the world’s biggest diamondcompany, marked the opening of its Gah-cho Kué mine in September. Local indige-nous leaders prayed for the mine, beatingdrums. Bruce Cleaver, the firm’s chiefexec-utive, and MarkCutifani, the bossof itspar-ent company, Anglo American, stood by aceremonial fire, flames tilting in the wind.

Now the hard work is under way. Thearea is so sodden that staff bring in heavysupplies just once a year, in the depths ofwinter, when they can build a thickroad ofice (pictured above). Acaravan bearing fueland equipment is slowly crossing the tun-dra. At the mine, their colleagues are work-ingdayand night to ramp up to full produc-tion, with the aim of extracting more than12,000 carats (2.4kg) ofdiamonds each day.Gahcho Kué is an astonishing endeavour,the biggest new mine in the world in over a

synthetic ones mostly used in industry—were formed more than 1bn yearsago deepbelow cratons, the oldest part of contin-ents. There, between Earth’s core and itscrust, the pressure was high enough andthe temperature low enough for carbon tocrystallise into its hardest form. There dia-monds would have remained were it notfor molten rock rushing through the man-tle and drawing diamonds, garnets andother minerals with it, like a furious riverpulling dirt from its banks, before eruptingthrough Earth’s surface faster than thespeed ofsound.

Some of the gems settled in river beds,as in Brazil, or were swept to the coast, as inNamibia. Others remained encased in ex-tinct volcanoes, or pipes, and ended upburied under soil or lakes. De Beers’s rich-est diamond mine was found beneathsand in Botswana in 1972, within the Kaap-vaal craton that spans southern Africa.

Speculation that diamonds might befound in Canada dates from the 19th cen-tury, when gems were found studdedthrough the American Midwest. In 1888,the year Cecil Rhodes founded De Beers inSouth Africa, a 22-carat stone was un-earthed near Milwaukee. Glaciers, it wasposited in 1899, might have carried the dia-monds south. It was decades before explo-ration took off. De Beers began quietlyscouring Canada in the 1960s, but it wasnot until 1991 that BHP, one of its rivals,found kimberlite, an igneous rock, withenough diamonds to merit a mine. Withinthree years more than 100 companies hadfanned out across the wilderness, rushingto claim some 200,000 square kilometres.At Gahcho Kué, geologists used aerial sur-veys and soil sampling to follow trails ofminerals back to their kimberlite pipes.

The objects of these frenzied searches

decade. De Beers has no plans for another. It is a turning-point for one of the

world’s oddest industries. The diamondbusiness gained its sparkle around 1866,when a farmer’s son picked up a glisteningpebble on the bank of the Orange river inSouth Africa. Formostofthe next150 years,De Beers would dominate the global mar-ket. Success depended on manipulatedsupply and skilfully cultivated demand.

Square-cut orpear-shapedMuch has changed since then. De Beerscan no longercontrol the market. Though itis the biggest producerby value, it accountsfor only a third of global sales, down from45% in 2007. It faces many uncertainties,from synthetic diamonds to changing rela-tionships with polishers and cutters. Itsloosening grip is reflected in increased vo-latility: its sales fell 34% in 2015, beforebouncing back by 30% last year. Mean-while the source of the demand that drivessales—the link between diamonds andlove—looks weaker than it used to.

But one forecast seems solid: there willbe fewer new diamonds. De Beers contin-ues to seek new places to mine, but hasslashed its exploration budget. Anotherbig find is unlikely. The supply of new dia-monds is expected to peak in the next fewyears, before beginning a slow decline.

Natural diamonds—as opposed to the

The last diamond mine

The future of forever

NORTHWEST TERRITORIES, CANADA

Production of the world’s most valuable gem may be about to peak

International

The Economist February 25th 2017 International 47

1

2 have intrinsic value for scientists. Gemsdeemed flawed by jewellers interest themmost: inclusions in diamonds can carrysamples from hundreds of kilometres be-low the surface. Evan Smith, a scientist atthe Gemological Institute of America, re-cently studied inclusions in shards cutfrom diamonds of unusual size and quali-ty. His findings, reported in Science, a jour-nal, are the first proof that the deep mantleis peppered with metallic iron—a clue tothe long-ago chemical reactions thatshaped Earth.

But diamonds’ principal value hasnothing to do with science. They have longbeen revered for their beauty—in Septem-ber Mr Cutifani reminded Gahcho Kué’svisitors that the ancient Greeks regardeddiamonds as the tears of the gods. Theirmodern status, though, is a corporate cre-ation, a story inextricably linked with thatofDe Beers itself.

Diamonds had been rare before 1866;the South African finds threatened to sendprices plunging. Rhodes founded De Beersto consolidate the area’s mines and to re-strict sales. By his death in 1902, the firm ac-counted for90% ofthe world market. Morediscoveries were made in the 20th century,notably in Siberia in the 1950s, Botswana inthe 1960s and Australia in the 1970s. But DeBeers kept tight control of supply, both byowning mines and by buying diamondsfrom others.

All I need to please meThat alone would not have turned DeBeers into an empire. As essential was itsscheme for conjuring up demand. In 1938the company, then led by the Oppenhei-mer family, hired N.W. Ayer, an advertisingagency in New York, to coax Americans tobuy more rocks. It dreamed up the notionthat a diamond ring should be an essentialdisplay of love and status, its gift a rite ofpassage. In the ensuing decades De Beersand its marketers penned slogans—mem-

orably, “a diamond is forever”—and invent-ed social rules, urging men to spend twomonths’ pay on a gift for their affianced.That benchmark not only permitted highmargins, but suppressed the second-handmarket—to the benefit of both the firm andits customers, who could be reassuredtheir investment would hold its value.

The marketing worked. In 1939, 10% ofAmerican brides received a diamond en-gagement ring. By the end of the century80% did. The result was a unique industry,controlled by a single company that wasboth marketer and miner, a capital-inten-sive business built on an ephemeral link tolove, its success due to strangled supplyand inflated demand.

But by the 1990s De Beers’s grip hadstarted to loosen. The Argyle mine in Aus-tralia left the De Beers cartel in 1996, fed upwith the giant’s terms. New discoveries inCanada, a civil war in Angola and the col-lapse of the Soviet Union all made supplyharder to manage, meaning that more dia-monds were sold outside the cartel. Con-cern that diamond sales were financing Af-rican conflicts threatened the gem’s image.In 2000 De Beers said it would no longercontrol the market so strictly, but sell in-stead to vetted buyers. Legal settlements inAmerica and Europe followed, barring thecompany from monopolistic behaviour.

De Beers is adjusting to the new era. Itsfirst challenge is an unfamiliarone: to grap-ple with competitors. ALROSA, Russia’sstate-owned diamond company, producesmore stones than De Beers, though it earnsless (see chart). New firms have croppedup, too, some buying mines from De Beersas it sought to shore up its balance-sheet.

De Beers’s partners, meanwhile, havebecome more demanding. Botswana’sgovernment owns 15% of the firm; SouthAfrica’s state investment fund owns 14.5%of Anglo American. De Beers’s mining op-erations in Botswana and Namibia arejoint ventures with the governments there.

Both countries share the proceeds fromsales of diamonds mined within their bor-ders, and can also sell some diamonds in-dependently, enabling them to test theprices that De Beers is getting and furtherloosening the firm’s control over supply.

Even in countries where De Beers doesnot have a joint venture with the govern-ment, it depends on local co-operation.Winning government approval for Gah-cho Kué required more than 15,000 pagesof environmental reviews. The firm want-ed to expand a mine in Ontario, but a near-by indigenous group withheld its consent.

The limits of De Beers’s power havebeen revealed in the past two years. De-mand slumped in China in late 2014,prompting retailers to buy fewer polisheddiamonds. Companies that cut and polishstones became weighed down by excessinventory. But the tools De Beers onceused to use to prop up prices were no lon-ger at hand. There are legal restrictions onthe share of excess diamonds it may buy.Because it controls just one-third of themarket, any production cuts have limitedeffect on total supply. In fact, the firm mayeven have made matters worse. Contractswith its customers sometimes encouragethem to overpurchase—if they turn downtoo many of the stones De Beers offersthem, they risk being allocated a smallershare in future.

There are signs of recovery. Bain, a con-sultancy, estimates that rough-diamondsales rose by 20% in 2016. De Beers is be-coming more flexible, easing rules for buy-ers of its stones. More frequent reporting ofits sales should help investors understandthe business. It also signals to competi-tors—withoutengaging in collusion—whenthe market is deteriorating, enabling themto adjust accordingly. “The value of trans-parency will come to exceed the value ofsecrecy,” argues Fraser Jamieson of J.P.Morgan, a bank. Even so, excess inventorymay yet drag down the market. Some jew-ellers have recently reported slacksales.

Mr Cleaver, an Anglo American veter-an, became the boss of De Beers in July.“The fundamentals of the industry remain

Little pets get big baguettes

Source: Bain & Company

Global rough-diamond sales, $bn

0

3

6

9

12

15

18

2007 08 09 10 11 12 13 14 15

De Beers

ALROSA

Rio Tinto DominionDiamond

PetraDiamonds

Other

Argylemine

Source: Bain & Company *Estimate

2007-16*Carats, m

50

25

0

25

02007 16

Global diamond productionCarats, m

Russia

Botswana Australia Angola SouthAfrica

Zimbabwe Namibia OtherCanadaCongo

7.8 13.9

21.7Botswana

Zimbabwe

Congo

Angola

Other 1.7

Russia

Australia

South Africa

Namibia 1.6

2016*total

Canada

16.0

8.8 2.6

13.640.8

GahchoKué mine S i b e r i a

48 International The Economist February 25th 2017

2 very good,” he says. In the coming years,he thinks, De Beers will benefit from risingincomes, particularly in China and India.Its own research shows that diamonds stillcapture the imagination: 26% of youngAmerican brides say they dreamed abouttheir future engagement rings years beforebeginning a relationship.

But a long-term risk looms over the in-dustry: one dayyoungcouplesmayno lon-ger want diamonds at all. They are a “Veb-len good”, as items that gain their valuesolely from their ability to signal status arenamed, after Thorstein Veblen, an econo-mist who wrote about the spending of therich. For Veblen goods, the normal law ofsupply and demand does not hold: higherprices support demand, rather than sup-pressing it. If a big gap opens up betweenthe number of diamonds offered for saleand the number of people willing to buythem at high prices, diamonds could suffera big, sustained fall in value and the entirebusiness could cease to make sense.

Today’s 20- and 30-somethings grew upas De Beers lost its monopoly and, wary ofhelping competitors, cut spending on theadvertising that had done so much tocreate demand for diamonds in the firstplace. In recent years the company’s mar-keting budget accounted for roughly 1% ofsales, down from about 5% in the 1990s, ac-cording to Morgan Stanley. At the sametime the notion of“conflictdiamonds” per-colated through the popular conscious-ness—a movie called “Blood Diamond”,starring Leonardo DiCaprio with a Zimba-bwean accent, wasreleased in 2006. Youngcouples, who earn less than their parentsdid at their age, may prefer to spend theirmoney elsewhere.

Complicating matters, those who dowant a diamond now have an alternative.Synthetic diamonds have been availablefor decades, but only recently has the pro-cess become cheaper and the result morerefined. In 2015 a company called New Dia-mond Technology made a ten-carat pol-ished diamond of excellent quality, an un-precedented feat. Sales of syntheticdiamonds are thought to amount to just 1%ofthe rough-diamond market. But synthet-ic-diamond sellers are appealing to youngshoppers’ concerns for social and environ-mental causes—Diamond Foundry, backedbyMrDiCaprio, boasts that itsproducts are“as rock-solid as your values”.

So De Beers is trying to boost the allureof natural gems. “Long-term demand isonly going to be there if we continue togenerate it,” says Mr Cleaver. That meansstudying consumers; few other firms ob-sess over both mining-truck depreciationand romance among young Chinese.

It also means new advertisements.Some centre on De Beers’s Forevermarkbrand, a tiny code etched in a diamondthat explains the gem’s provenance. Otherspending is for the industry as a whole. In

2015 De Beers and other miners formed agroup to pool money for generic diamondadvertisements. Its first campaign ran inAmerica before Christmas, with the slogan“Real is rare”. YouTube videos show NickCannon, best known as the ex-husband ofMariah Carey, a singer, interviewing cou-ples about their engagements.

It is unclear if this will persuade youngromantics to spend thousands on dia-monds. If synthetics grow in popularity,De Beers may need to become more ag-gressive. Already, it is suing a synthetic-dia-mond company in Singapore for infringingits intellectual property. Its own synthetic-diamond operation, for industrial uses,holds more than 450 patents.

As the company works to shore up de-mand, there is a source ofsolace. For over acentury it has fretted that big new finds

would lead to plunging prices. “Our onlyrisk,” Rhodes declared, “is the sudden dis-covery of new mines, which human na-ture will work recklessly to the detrimentofus all.” But it seems that threat is waning.

In total, explorers have sampled fewerthan 7,000 kimberlite pipes. Of these just15% have held diamonds and just1% (about60) have held enough of them to justifybuilding a mine. De Beers continues to ex-plore in Canada, South Africa, Botswanaand Namibia—the only thing worse thanfinding a big new source would be some-one else finding it first. Some fancy tech-nology is supposed to help. A “Supercon-ducting Quantum Interference Device”,for example, searches for changes in mag-netic fields below Earth’s surface, whichmight indicate the presence ofkimberlite.

But De Beers regards any big discover-ies, by itself or anyone else, as unlikely.“The best and easiest deposits are alreadyfound,” says Des Kilalea, an analyst. The

company’s Canadian exploits are a re-minder of just how arduous new minescan be. Mountain Province, a firm thatnow works with De Beers, discoveredGahcho Kué’s first pipe in 1995. The inter-vening years brought a separate, failedmine for De Beers in Canada, lengthy ne-gotiations with local officials and, at last,the construction ofGahcho Kué itself.

That required draining part of a lake. Tobring in building supplies, the companyhad to build the winter road. Staff wouldplough snow off a pond, drill through thinice, then pump up water to make the icethicker, laying down a few inches at a time.This was repeated over120km, at tempera-tures often plunging to -40°C, until the icewas thick enough to support a 500-tonnemining shovel, broken into dozens ofpieces. In total, building Gahcho Kué cost$1bn. That was deemed worthwhile, com-pared with the costs of finding and open-ing a mine elsewhere.

Other companies have a few minesplanned. De Beers is now focused on ex-panding existing mines, not building newones. New technologies may help liberatemore diamonds from kimberlite more effi-ciently. Even so, Bain estimates, productionwill peak in 2019. Supplies of new dia-monds will then start to fall, sinking by1-2% each year until 2030.

For now, aircraft shuttle staff to GahchoKué, dropping off miners to work for two-week stretches. Nearly half the staff are lo-cals, and a fair share are indigenous. “Wewant jobs, just like everybody else,” saysEddie Erasmus, grand chief of the Tlichopeople. Among the mine’s maze of trailersare features typical of any big-companyworkplace. There is a gym. Signs in the caf-eteria remind staff to eat fruits and vegeta-bles, though many prefer heartier fare. RobCoolen, who oversees the ice road, beganwork at Gahcho Kué before the mine wasbuilt, sleeping in a tent on the tundra. Cof-fee and bacon, he says, are essential.

The cafeteria sometimes shudders withthe reverberations of a blast from the pit.Outside, work goes on day and night. Staffpile kimberlite onto huge trucks, then haulthe rocks to the processing plant. There, theore passes through breakers, crushers andscrubbers until pebbles are sent through aseries of X-rays and lasers, jets of air sepa-rating diamonds from worthless stones.

When love’s gone, they’ll lustre onNo workers at Gahcho Kué touch the dia-monds with bare hands. Only a few seethe gems before they are sent off by planeto be valued. In September Mr Coolenstood atop a steel grate in the processingplant, the platform shaking as giant scrub-bers churned beneath. “Occasionally yousee one,” he shouted above the din, “andit’s just gorgeous.” The mine is expected toreach full production in March. By 2030, itsdiamonds extracted, it will close. 7

Get that ice or else no dice

The Economist February 25th 2017 49

For daily coverage of business, visit

Economist.com/business-finance

1

“WE ALMOST went out of businessseveral times.” Usually founders

don’t talk about their company’s near-death experiences. But Jen-Hsun Huang,the boss of Nvidia, has no reason to be coy.His firm, which develops microprocessorsand related software, is on a winningstreak. In the past quarter its revenues in-creased by 55%, reaching $2.2bn, and in thepast 12 months its share price has almostquadrupled.

A big part ofNvidia’s success is becausedemand is growing quickly for its chips,called graphics processing units (GPUs),which turn personal computers into fastgaming devices. But the GPUs also havenew destinations: notably data centreswhere artificial-intelligence (AI) pro-grammes gobble up the vast quantities ofcomputing power that they generate.

Soaring sales of these chips (see chart)are the clearest sign yet of a secular shift ininformation technology. The architectureof computing is fragmenting because ofthe slowing of Moore’s law, which until re-cently guaranteed that the power of com-puting would double roughly every twoyears, and because of the rapid rise ofcloud computing and AI. The implicationsfor the semiconductor industry and for In-tel, its dominant company, are profound.

Things were straightforward whenMoore’s law, named afterGordon Moore, afounder of Intel, was still in full swing.Whether in PCs or in servers (souped-up

quickly enough to be able to handle, for in-stance, machine learning and other AI ap-plications, which require huge amounts ofdata and hence consume more number-crunching power than entire data centresdid just a few years ago. Intel’s customers,such as Google and Microsoft togetherwith other operators of big data centres,are opting for more and more specialisedprocessors from other companies and aredesigning their own to boot.

Nvidia’s GPUs are one example. Theywere created to carryout the massive, com-plex computations required by interactivevideo games. GPUs have hundreds of spe-cialised “cores” (the “brains” of a proces-sor), all working in parallel, whereas CPUshave only a few powerful ones that tacklecomputing tasks sequentially. Nvidia’s lat-est processors boast 3,584 cores; Intel’sserver CPUs have a maximum of28.

The company’s lucky breakcame in themidst of one of its near-death experiencesduring the 2008-09 global financial crisis.It discovered that hedge funds and re-search institutes were using its chips fornew purposes, such as calculating com-plex investment and climate models. It de-veloped a coding language, called CUDA,that helps its customers program its proces-sors for different tasks. When cloud com-puting, big data and AI gathered momen-tum a few years ago, Nvidia’s chips werejust what was needed.

Every online giant uses Nvidia GPUs togive their AI services the capability to in-gest reams of data from material rangingfrom medical images to human speech.The firm’s revenues from selling chips todata-centre operators trebled in the past fi-nancial year, to $296m.

And GPUs are only one sort of “acceler-ator”, as such specialised processors areknown. The range is expanding as cloud-computing firms mix and match chips to

computers in data centres), one kind ofmicroprocessor, known as a “central pro-cessing unit” (CPU), could deal with most“workloads”, as classes ofcomputing tasksare called. Because Intel made the mostpowerful CPUs, it came to rule not only themarket for PC processors (it has a marketshare ofabout 80%) but the one for servers,where it has an almost complete monopo-ly. In 2016 it had revenues ofnearly $60bn.

This unipolar world is starting to crum-ble. Processors are no longer improving

The semiconductor industry

Silicon crumble

SANTA CLARA

Howthe rise ofartificial intelligence is creating newvariety in the global chipmarket, and trouble for Intel

BusinessAlso in this section

50 3G’s model for consumer firms

51 Independent film

51 Toy companies in Japan

52 Housing India’s upwardly mobile

53 Paris’s digital scene

54 Schumpeter: Tech valuations

New chip on the block

Sources: IDC;Thomson Reuters

*Central processing unit†Graphics processing unit

Global sales revenue% change on a year earlier

Share prices, January 1st 2012=100

20

0

20

40

+

–

2012 13 14 15 16

2012 13 14 15 16 17

CPU* GPU†

0

250

500

750

1,000Nvidia

Intel

50 Business The Economist February 25th 2017

1

2 make their operations more efficient andstay ahead of the competition. “Findingthe right tool for the right job”, is how UrsHölzle, in charge oftechnical infrastructureat Google, describes balancing the factorsofflexibility, speed and cost.

At one end ofthe range are ASICs, an ac-ronym for “application-specific integratedcircuits”. As the term suggests, they arehard-wired for one purpose and are thefastest on the menu as well as the most en-ergy-efficient. Dozensofstartupsare devel-oping such chips with AI algorithms al-ready built in. Google has built an ASIC

called “Tensor Processing Unit” for speechrecognition.

The other extreme is field-programma-ble gate arrays (FPGAs). These can be pro-grammed, meaning greater flexibility,which is why even though they are trickyto handle, Microsoft has added them tomany of its servers, for instance those un-derlying Bing, its online-search service.“We now have more FPGAs than any otherorganisation in the world,” says Mark Rus-sinovich, chief technology officer at Azure,the firm’s computing cloud.

Time to be paranoidInstead ofmakingASICS orFPGAs, Intel fo-cused in recent years on making its CPU

processors ever more powerful. Nobodyexpects conventional processors to losetheir jobs anytime soon: every serverneeds them and countless applicationshave been written to run on them. Intel’ssales from the chips are still growing. Yetthe quickening rise of accelerators appearsto be bad news for the company, says AlanPriestley ofGartner, an IT consultancy. Themore computing happens on them, theless is done on CPUs.

One answer is to catch up bymaking ac-quisitions. In 2015 Intel bought Altera, amakerofFPGAs, fora whopping$16.7bn. InAugust it paid more than $400m for Ner-vana, a three-year-old startup that is devel-oping specialised AI systems ranging fromsoftware to chips. The firm says it sees spe-cialised processorsasan opportunity, notathreat. New computingworkloads have of-ten started out being handled on special-ised processors, explains Diane Bryant,who runs Intel’s data-centre business, onlyto be “pulled into the CPU” later. Encryp-tion, for instance, used to happen on sepa-rate semiconductors, but is now a simpleinstruction on the Intel CPUs which run al-most all computers and servers globally.Keeping new types of workload, such asAI, on accelerators would mean extra costand complexity.

If such integration occurs, Intel has al-ready invested to take advantage. In thesummer it will start selling a new proces-sor, code-named Knights Mill, to competewith Nvidia. Intel is also working on an-other chip, Knights Crest, which will comewith Nervana technology. At some point,

Intel is expected also to combine its CPU’swith Altera’s FPGAs.

Predictably, competitors see the futuredifferently. Nvidia reckons ithasalready es-tablished its own computing platform.Many firms have written AI applicationsthat run on its chips, and it has created thesoftware infrastructure for other kinds ofprogrammes, which, for instance, enablevisualisations and virtual reality. One de-cades-old computing giant, IBM, is also try-ing to make Intel’s life harder. Takinga pagefrom open-source software, the firm in 2013“opened” its processor architecture, whichis called Power, turning it into a semicon-ductor commons of sorts. Makers of spe-cialised chips can more easily combinetheir wares with Power CPUs, and they geta say in how the platform develops.

Much will depend on how AI develops,says Matthew Eastwood of IDC, a marketresearcher. If it turns out not to be the revo-lution that many people expect, and ush-ers in change for just a few years, Intel’schances are good, he says. But if AI contin-ues to ripple through business for a decadeor more, other kinds ofprocessor will havemore of a chance to establish themselves.Given how widely AI techniques can beapplied, the latter seems likely. Certainly,the age of the big, hulking CPU which han-dles every workload, no matter how big orcomplex, is over. It suffered, a bit likeHumpty Dumpty, a big fall. And all of In-tel’s horses and all of Intel’s men cannotput it together again. 7

Jorge Paulo Lemann (pictured), a Brazilianinvestor, is ill-accustomed to failure. OnFebruary 17th Kraft Heinz, backed by Mr

Lemann’s3G Capital, said ithad bid $143bnfor Unilever, a maker of food and personalproducts. 3G has gobbled many a consum-er firm, slashed costs, then bought an evenbigger one. Even so, the Unilever bid wassurprising in its audacity—the mergerwould have been the second-largest ever.As shocking, it collapsed two days later.

Kraft Heinz had hoped to continue talksin private, but news of its offer leaked out.Its management appeared to have badlymisjudged the depth of Unilever’s attach-ment to its culture and its pursuit of long-term, “sustainable” growth. Unilever’sout-right rejection meant that 3G and WarrenBuffett, who was expected to help fund adeal, faced the prospect of going hostileagainst a revered firm. It was a rare stum-

ble. But the episode doesn’t spell the end ofits model. More deals are likely. And KraftHeinz is already changing how Unileverand other rivals operate.

Times are hard for big consumer com-panies, once among the world’s most sta-ble. Shoppers increasingly want productsthey deem healthier, more natural or “au-thentic”. New competitors have emergedonline. In middle-income markets, localactors are gaining ground fast—in Brazil,Botica Comercial Farmacêutica peddlesnearly 30% of perfume, says RBC Capital,an investment bank, and in India Ghari In-dustries sells more than 17% ofdetergent.

Food companies are experiencing aparticularly sudden shift. The volume ofproducts sold by big American food firmshas dropped even as they have cut pricesfor consumers, notes Alexia Howard ofSanford C. Bernstein, a research firm. Thismonth General Mills and J.M. Smucker,two food manufacturers, lowered their es-timates for future revenue. Nestlé, a Swissfood giant, has just abandoned an overlyambitious sales target which it had missedfor four years in a row.

3G offers a simple answer: slash costsand merge. Its best-known strategy, “zero-based budgeting”, requires managers tojustify their expenses from scratch everyyear. After 3G applies the method at onecompany, it buys another and fuses them.Mr Lemann and his partners combined astriking number ofbig brewers to form An-heuser-Busch InBev; last year it acquiredthe firm’s next closest rival, SABMiller.Kraft Heinz was formed through deals thatalso involved Mr Buffett. On February 21stanother company backed by 3G said itwould buy Popeyes, a fried-chicken chain,for $1.8bn.

The perception of 3G’s ruthlessnesscomes chiefly from the fact that it has over-seen the sacking of thousands of workersat the firms it owns. Kraft Heinz decided to

3G’s model

Barbarians at theplate

The investors who own Kraft Heinz areupending the food industry

Rejected suitor

The Economist February 25th 2017 Business 51

1

2 close seven factories in North America,boosting its profits. Its sales have fallen infour of the six quarters since the two com-panies combined, grist for those who saythat slashing costs limits growth.

Others deem its strategy admirablyclear-eyed. 3G likes to fosteran “ownershipmentality” among its managers, with fi-nancial rewards linked to the company’sperformance. Kraft Heinz looks after pro-mising brands, such as Heinz mustard.Where necessary, it allows ailing lines towither. Unilever, by contrast, continues tosupport its declining spreads business, ar-guing that it still produces cash. Calls todump the division are by now so intensethat Warren Ackerman, an analyst at So-ciété Générale, a French bank, calls the po-tential move “Sprexit”. It is not all cuts, ei-ther: Kraft Heinz will significantly increasespending on advertising this year.

Unilever, meanwhile, is deemed an ex-emplar of responsible capitalism. Paul Pol-man, its chief executive, states that pro-ducts that meet the highest standards ofsocial and environmental sustainabilityperform better than products that don’t.For now, though, its operating-profit mar-gin is well below that of Kraft Heinz (seechart), a firm that advocates of sustainabil-ity in business say pays insufficient atten-tion to questions such as water use.

In spite of the gap in culture, Unilever isone of many companies that are partlymimicking Kraft Heinz. Last year the An-glo-Dutch giant introduced some zero-based budgeting, forexample for its spend-ing on marketing. Kellogg, General Millsand Campbell Soup, all American foodmakers, are among those that have madesimilar announcements. In January MrPolman said he planned to require manag-ers to invest more in the company, to boostthe “owner’s mentality” among his staff.

Some investors are now pushing Un-ilever to do more. On February 22nd, withcommendable speed, the company an-nounced a wide-ranging review of its busi-ness. It said it wants to find ways to “accel-erate delivery of value”. In the meantime,3G seems certain to be looking around forits next prey. 7

More Beanz

Source: Bloomberg *Adjusted EBITDA

Operating profit margin*, %

KraftHeinz

Unilever

2010 11 12 13 14 15 160

10

20

30

40

Heinz

Kraft FoodGroup

3G & Berkshire Hathawayacquire Heinz

Kraft Heinz merger

ITMIGHTseem a great time for indie cine-ma. The Academy Awards on February

26th will be something of a showcase forfilms not financed by a major studio.“Manchester by the Sea”, a contender forsix Oscars, including best picture, was adarling of the Sundance Film Festival lastyear. Kenneth Lonergan’smasterpiece (onescene is pictured) about family and losshas earned $46m in cinemas in Americaand Canada, a spectacular return on itsproduction costs of$8.5m. Amazon, whichbought distribution rights, will benefit.

Movie buffs can find all manner offilms online that are made more cheaplystill. “The Break-In”, a horror film shot byJustin Doescher on his girlfriend’s iPhonefor less than $20, has earned him morethan $20,000, with more than half a mil-lion people having watched at least part ofit on Amazon’s streaming-video platform.

For every success story there are thou-sands of indie films that go unwatched.The digital age has made it easier than everto make a film, but also harder than ever tobreak through the clutter of entertainmentoptions to an audience. Chris Moore, a pro-ducer of “Manchester by the Sea”, com-pares the output of indie films now to treesfalling in the forest. “Nobody is making adollar offthis business”, he says.

Mr Moore may be dramatising but onlya little. Indie filmshave alwaysbeen a riskybet for investors. Since 2002 the median re-turn on investment at the box office forfilms released in North America with bud-gets of less than $10m has been 45 cents onthe dollar, which is under half the medianreturn of films with a budget of more than$100m, according to an analysis ofdata col-lected by The Numbers, a film-industrywebsite. There are also more flops thanever before. In 2016 almost two-thirds ofthe 675 films that reported boxoffice resultsearned less than $1m. In 2002 only half ofthe total released failed to reach that figure.

One problem is that fewer people aregoing to cinemas. Howard Cohen of Road-side Attractions, which distributed “Man-chester by the Sea”, worries about theyoung, smartphone-addicted generationthat has grown up without the cinema-go-ing habit. When they do flock to the cine-ma it is for blockbusters.

Another problem is that the DVD mar-ket has crashed. Sales and rentals of filmsin all physical formats in America plum-meted from $25bn in 2005 to $12bn lastyear, according to The Numbers. Such an-

cillary income has in the past made a bigdifference in getting an indie film to breakeven. Consumers are using Netflix andsites like it instead, where they dispensed atotal of$6.2bn in America last year.

Netflix and Amazon have injected cashinto some of the best indie films, but theireffect for lesser titles is likely to be mixed.Amazon allows filmmakers to upload ti-tles directly to its platform to be discov-ered, as “The Break-In” was. But most mi-nor films disappear online, since a viewercan scroll through only so many options.Even the streaming sites themselves, saysAnne Thompson of IndieWire, a website,admit that “a cold start on one of their plat-forms can be very cold indeed”.7

The independent-film business

Indie blues

NEW YORK

Happy endings are rarer than everforthose trying to profit from indie films

Atypical success

WILLIAM ELLIOT GRIFFIS, an Ameri-can educator who travelled to Japan

in the 1870s, noted that in the previous twoand a half centuries, “the main business ofthis nation was play”. He described toysh-opsfilled as full asChristmasstockings andplenty of grown-ups “indulging in amuse-ments which the men of the West lay asidewith their pinafores”.

Griffis would have found it familiarwalking today around Hakuhinkan ToyPark, one of the largest toy stores in Tokyo.Teens, office workers and grandparents aremostly to be seen perusing its 200,000-odd knick-knacks across five floors. Its di-rector, Hiroyuki Itoh, says he wants thestore to be a place where everyone canplay. After work, suited salarymen cometo spend ¥200 (under $2) for a five-minutewhizz around a 36-metre slot-car racetrack.

Toy companies in Japan

State of play

TOKYO

Toymakers bounce backin the land ofadult nappies

52 Business The Economist February 25th 2017

2Aarusha Homes

Room to grow

IF SEVERAL hundred million Indians domigrate from the countryside to cities

between now and 2050, as the UN ex-pects, it will be a fiendishly busy fewdecades for VivekAher, who runs a low-cost hostel, one offive, on the outskirts ofPune, a well-offcity three hours’ drivefrom Mumbai. A fair few of the newarrivals will have their first experience ofurban living bunking in one of the hos-tels’ 1,350 beds. Should recent experiencebe anything to go by, most of the newarrivals will test Mr Aher’s patience bytacking posters on his hostel’s walls, orendlessly complaining about the Wi-Fi.

India has two main drags on eco-nomic growth. One is the difficulty offinding a job, especially in the placespeople live. The other is a chronic short-age ofcheap housing. Aarusha Homes,Mr Aher’s employer, started in 2007 tohelp people seize economic opportuni-ties far from home. Its rooms are basicand cheap. They include up to six beds, abathroom for every three or four resi-dents, some common areas and little else.

Rent ranges between 3,500 and 10,000rupees ($52-$149) a month including food.

Most ofAarusha’s tenants are young,many of them taking first steps into themiddle-class as IT or business-processingoutsourcing professionals. Paying up tosix months’ deposit for a city flat is be-yond their means, as is the down pay-ment for a motorbike that would allowthem to live far from their employer.Aarusha’s successful pitch is that itshostels are safer than slums or informal“guest houses”, especially for women. Itnow has 4,300 beds in 1,300 roomsspread out over 20 hostels in four cities.The typical tenant stays for six months.Satyanarayana Vejella, the firm’s co-founder, plans to raise another $10m toincrease capacity by12,000 beds in near-ly 70 new hostels, all in the next twoyears. Operating-profit margins are in themid-teens.

The chain’s backers include invest-ment funds who seeksocial as well asfinancial returns. The latter would beimproved if the chain dodged taxes byoperating in the informal economy, likemuch of its competition, but it sticks tothe formal side. The problems it faces arethose confronted by any Hilton or Hyatt:finding properties big enough to offerover100 beds is hard. Tenants have to bechased for payments. An attempt to caterto blue-collar workers at an even lowerprice didn’t workout. So Aarusha isreliant on the IT and outsourcing sectors,which are hiring less eagerly than before.

Aarusha can probably depend oncontinuing strong demand for a roomfrom which to make sense of it all beforepeople can get their own places. Thehostels have something ofa communalfeel, and parents find them reassuringbecause residents put up with not beingable to drink, smoke, or mingle with theopposite sex. Soon enough, they willhave moved on, taking their aspirationsand their posters with them.

PUNE

The road to Indian prosperity is paved with cheap and cheerful hostels

Rite of passage

In another corner a gaggle of universitystudents fiddle with displays of toys fromthe era of their childhoods.

Playthings aimed at the over-20s makeup 27% of Japan’s domestic toy sales, ac-cordingto figuresfrom Euromonitor, a mar-ket-research firm. That grown-up portionof the market has been crucial for Japan’sthree biggest players, Bandai Namco, Taka-raTomy and Sanrio, as the country’s birthrate has slumped. Since the 1970s the pro-portion of under-15s has halved, to 12% ofthe population. By 2060 it is likely to be 9%.

Fumiaki Ibuki of Toy Journal, a 114-year-old trade magazine, says Japanese toy com-panies are pioneers in adapting to ageing.Despite a sluggish economy, the sector has,in the past two years, done its best in a de-cade: in the fiscal year ending in 2015, salesin core categories (excluding video games)rose bya tenth on the previousyear, to over¥800bn. Mr Ibuki says toymakers are tak-ing a “borderless” approach: selling to awider age range, and teaming up withtrend-driven sectors like tech and fashion.

When Bandai’s Tamagotchi, virtualpets housed in an egg-shaped toy, werebooming in the mid-1990s, women in their20sand 30swere bigbuyers. The same age-group snapped up Licca-chan, Japan’s an-swer to Barbie, made by TakaraTomy. Thefirm now has an adult range; its “Cappuc-cino One-Piece” doll, modelling a hounds-tooth dress, sells for ¥12,000.

A stigma against adults having fun,strong in the aftermath of the secondworld war, has faded. Many want to recap-ture their youth, not so much by playing,but by collecting and displaying toys, saysHarold Meij, the boss of TakaraTomy—so,for its premium Tomica model-car range,the company uses vintage designs thatadults admired as boys. Having only onechild later in life, as more Japanese now do,means that parents have more to spend ontheir offspring. Children are said to have“six pockets”: two from their parents, andfour from their grandparents. Spending ontoys per child has stayed steady.

During the global financial crisis of2008, cheap impulse-buy toys took off,such as trading cards and coin-operatedmachines that dispense capsules of smalltoys—usually of well-known charactersfrom Japanese comic books and televisionseries—known as gachapon (for the soundmade when the dial is cranked and the sur-prise trinket falls into the receptacle).

The big themes in the toy industry arecollectability and intellectual property(IP). A recent hit was a watch branded “Yo-kai”, after the word in Japanese for super-natural spirits, by Bandai, which chatterswhen users slot plastic medals into its face.It exemplifies a popular strategy: Yo-kai,whose hero wears the watch, began as acartoon series in 2013; was adapted for TV;and made into a hit video game. Bandaithen won the merchandise rights.

The model is known as “media mix” inthe industry. Toymakers are now “morelike IP trading companies”, says Junko Ya-mamura ofNomura, a securities firm in To-kyo. Bandai, which rearranged its internaldivisions from product-type to charac-ter-IP groups a few years ago, managesabout 200 of the latter, but only a handfulare its own. It has partnered with Dentsu,an advertising giant, to promote anime.

Such tie-ups are also a low-risk way oftrying out new figures. Gudetama, an egg-

yolk character that suffers from depressionand is now a millennial anti-hero, wasdreamed up through a collaboration be-tween Sanrio (best known for its “HelloKitty” franchise) and the Tokyo Broadcast-ing System. Gudetama first appeared on ashort televised animation, filling the gapbetween two daytime programmes. Theseusually make no profit. But when the storyof a character catches on, toy- and film-makers end up splitting fat profits. It allmakes for a sizzling recipe.7

The Economist February 25th 2017 Business 53

EUROPE will never create a hub of techfirms and investors to rival Silicon Val-

ley, many experts on entrepreneurshipconcur. Its markets are still fragmentedalong national lines, flows of capital intothe region are limited and because of lin-gering, conservative attitudes to risk, fewstartups grow to rival American champi-ons. “Europe is toxic”, argues OussamaAmmar, an outspoken founder of an incu-bator in Paris. “Life that should happen,does not happen”, he says.

But some digital life does flourish,spread among cities rather than fixing inone spot. Fintech firms cluster in London.Gamers and music-sharing sites do well inthe Nordic countries. Berlin has a crop ofcompanies that go beyond the kind of me-too consumer sites incubated by Rocket In-ternet, a notorious startup factory: newcompanies with expertise in the “internetof things”, for example. Milan, with strongmedical universities, has flourishing bio-tech startups.

The most strikingcase offresh growth isin Paris. Mention of France has long elicit-ed sighs from venture capitalists. Its rigidlabour laws and hefty taxes on wealth andon stock options have meant that SiliconValley has more than its fair share of entre-preneurial French immigrants. Efforts bythe government to help startups with taxrelieffor research have mostly taught foun-ders to complete forms rather than win cli-ents, say observers. Genuine local success-es—such as BlaBlaCar, a ride-sharingservice, or Criteo, which serves targetedads online—looked like exceptions, not evi-dence ofwider success.

Yet recently, Nicolas Brusson, a co-foun-der of BlaBlaCar, says he has witnessed anupsurge in entrepreneurial ambition inFrance. A venture-capital investor saysthere has been a “huge shift in mindset”among founders of firms: they are now ex-pert not only as inventors but as designersofbusiness plans. Henning Piezunka at IN-

SEAD, a business school near the capital,says that a “new vibe” and a more globalattitude are also evident in the wideninguse ofEnglish.

Venture capital is beginning to gush.Last year France saw 590 rounds of capitalraising, more than any country in Europe,according to Dealroom, which watchestech-industry trends. Although slightlymore capital went to startups in Britain(€3.2bn) than in France (€2.7bn), the rate ofincrease in France wasdramatic (see chart).

One reason for the French gains is thatearlier investments in infrastructure forstartups are starting to pay off. Establishedbusiness figures, such as Mr Ammar andXavier Niel, who started Iliad, France’sfourth-largest mobile operator, whichowns the brand Free, have set up trainingfacilities and incubator firms that are nowproducing entrepreneurs. Four years agoMr Niel (pictured) co-founded 42, a com-puter-programming school with a capaci-ty of 2,500 students that charges no tuitionfees. It trains programmers even from un-expected corners such as the capital’s trou-bled housing projects, and has opened asister campus in Fremont, California, nearSilicon Valley, encouraging ties.

Mr Niel’s next step, in April, will be toopen what he says will be the world’s larg-est incubator, called Station F, in centralParis. It will have over 3,000 workstations.Last month Facebook’s Sheryl Sandberg

said her firm will take spaces in Station F,lauding French talent. She said the countrynow has “some of the most innovativetechnology companies in the world”.

The main factor behind all the new ac-tivity is a change in graduates’ aspirations.A member of the board ofone engineeringschool near the capital says that there isclearly new entrepreneurial ambitionamong students, especially those who doan internship with a startup abroad. He es-timates that a fifth of graduates from hisschool now try launching their own firms,a big increase on five years ago.

Graduates are particularly keen on star-tups in the so-called “deep tech” sector—in-volving, among other things, artificial in-telligence (AI), machine learning and bigdata. Philippe Botteri of Accel, a venture-capital fund, who oversees investments inEurope, says80% ofhisfirm’sactivity thesedays is in deep tech, an area in which Euro-peans, often in possession of specialisedand further degrees in engineering andmaths, have advantages. France hasemerged fastest in the last few years as atop destination for capital, he says, largelybecause its graduates have particularstrength in these fields.

Julien Lemoine, for example, co-found-ed Algolia, a startup with funds from Accelthat provides customised search servicesusing AI. From an office with glass walls incentral Paris (and from a sister office thatopened in San Francisco in 2015) his firmserves 2,300 paying clients globally—two-thirds of revenues come from America. Al-golia will employ 200 people by the end ofthe year, up from 60-plus now. His staffonly speak English. From the start Algoliasought clients globally, while tapping a lo-cal pool of recruits. Those hired in France,notes Mr Lemoine, are far more loyal thanjob-hopping staff in Silicon Valley.

It is a similar story at Shift Technology, aParis-based firm founded by three mathsgraduates. It uses AI to detect fraudulent in-surance claimson behalfofbig insurers. Je-remy Jawish, one of the firm’s co-founders,saysParis isa suitable space to grow simplybecause it is “the next AI centre”. When hewas in university, the dream was to be abanker in London but “noweveryone isex-cited about AI startups”, he says. Cisco andFacebookhave both setup AI operations inParis to attract local talent, he notes.

The old problems have not vanished, ofcourse. Stiff labour laws still make firingpermanent staffdifficult, a particular head-ache for young, fragile firms. But here, too,change may be in the air. At least one can-didate competing in the upcoming presi-dential election is well-disposed towardsthe technology sector. Emmanuel Macronchampioned digital growth when he waseconomy minister; this weekin London heurged French expats to come home “to in-novate”. France might have been slow toget started, but it is catching up fast. 7

French entrepreneurs

Less misérable

PARIS

The rise of“deep tech” startups boosts the French capital’s digital scene

The Niel effect

Source: Dealroom

Venture capital raised by European companies€bn

0

1

2

3

4

2012 13 14 15 16

Germany FranceBritain

54 Business The Economist February 25th 2017

IS THE technology industry in La La Land? There are alarmingsigns. House prices in San Francisco have risen by 66% more

than in New Yorkover the past five years. Even at the height ofthedotcom bubble in 2001, the gap was lower, at 58%. Shares of tech-nology firms trade on their highest ratio to sales since the turn ofthe century. Fourof the world’s most valuable firms are tech com-panies: Apple, Alphabet, Microsoft and Amazon. Snap, a tiddlerwith $400m ofsalesand $700m ofcash losses in 2016, isexpectedto list shares on March 1st that will give it a valuation of over$20bn.

For companies and investors in any industry, it is hard to workout if you are living in a bubble. To help, Schumpeter has createdthree sanity tests for global tech firms. These examine their cash-flow, whether investors differentiate between companies, andwhether forecasts of their future earnings suffer from a fallacy ofcomposition. The exercise suggests that tech valuations arefrothy, but not bubbling.

The first test is cashflow, and the industry passes it with flyingcolours. In 2001 about half of all listed tech firms were unable toconvert their sales into hard dollars. Times have changed. In thepast12 months the biggest150 technology companies generated amighty $350bn of cashflow after capital expenditures—higherthan the total cashflow over the same period ofall the non-finan-cial companies listed in Japan, for instance.

In a bubble, investors bid up the value of assets regardless oftheir quality. The prices of good and bad tulips soared alike in17th-century Holland, and in 2008 subprime debt was almost asvaluable as Treasury bonds. So the second test is whether buyersare differentiating clearly between tech firms, of which there arethree broad types. Some, such as Samsung and Apple, are matureand profitable. At other firms, including Alibaba, Tencent, Face-book and Alphabet, sales are growing at an annual rate of over20%, with high margins. Then there are “blue-sky” firms that areunprofitable but have explosive sales growth. Uber and Snap areexamples.

One wayto gauge whether investorsare sensiblyvaluing eachcategory differently is to calculate companies’ duration, or howmuch of their current market worth is expected to be realisedsoon and how much relies on pots of gold being found far intothe future (see chart). Schumpeter has crunched the numbers for

the world’s ten biggest tech firms and for three rising stars, split-ting their market value into three parts: value which has alreadybeen realised in the form ofnet cash held, the present value ofex-pected earnings in the next four years, and the value attributableto what happens after 2020. Samsung and Apple are not growingmuch but are low-risk: over 40% of their value can be explainedby cash and near-term profits. The raciest firms, such as Tesla, areexpected to generate over 90% of their value after 2020. Thesefirms could well crash and burn. The good news is that investorsare placing their most eye-watering valuations on a fringe ofsmallish companies that are growing very fast indeed.

The third test is whether there is a fallacy of composition. In abubble the bullish claims of individual companies aren’t plausi-ble once you add them all up. In the dotcom era the market-sharetargets of internet-service providers added up to well over 100%.In the subprime crisis every bankclaimed that it had offloaded itsrisks onto other banks. The technology industry is less vulner-able to criticism on this front. The aggregate profits of the top fivetech firms are expected to rise from 6% of American corporateearnings last year, to 10% by 2025: bold, but not implausible. Man-agers are not anticipating the same profit stream twice. For exam-ple, Facebook is not expected to become a force in search, whileGoogle is not expected to conquer social media.

Although the lunatics have not taken over the asylum, thereare, however, pockets of excess. Even though their valuations arenow starting to deflate, there are still too many privately heldtechnology firms with stretched valuations of $1bn-10bn. World-wide, such companies have a total worth of $350bn. When itcomes to facing up to failure, too, the industry’s record is bad.Twitter’s sales may shrink by 14% this quarter compared with ayear earlier, and it is losing money. Past company failures in thetech business suggest that once decline sets in, it takes only twoyears or so for a firm to lose a quarter or more of its sales. Yet Twit-ter is sticking to its line that rapid growth will soon return.

Truly amazingAnotherworry is Amazon. It is one ofthe most optimistically val-ued firms, with 92% of its current worth justified by profits after2020. Outside investors have a lot at stake because it is huge, witha market value of$410bn. About a third ofthis value is justified byits profitable cloud-computing arm, AWS. But the rest of the firm,which straddles e-commerce, television and films, as well as lo-gistics, barely makes money despite generating large sales. Nor isit growing particularly fast for its industry. To justify its valuationyou need to believe that it becomes a sort of giant utility for e-commerce which by 2025 cranks out profits of around $55bn ayear, or probably more than any other firm in America.

The final worry is that technology firms are flouting the lawsof corporate finance, which hold that there is a relationship be-tween a company’smarketvalue, itsprofitsand the sums ithas in-vested. New entrants should be attracted by the fact that compa-nies are winning huge valuations from tiny investments, in turndragging profits and valuations back down. As a group, the big-gest ten technology firms have $8 ofmarket value forevery dollarthey have sunk in net fixed physical and intangible assets. ForSnap the figure is $36, and for Tencent it is $53. Ifnew competitorsdo not, or cannot, emerge, then competition authorities are likelyto intervene more than they do now. It sounds odd, but the mainvaluation riskfor many of the world’s tech giants is that they rakein too much money.7

A trip to the shrink

The good, the mad and the ugly

Sources: Bloomberg; company reports

*Present value †Latest‡Implied by latest funding §Reported IPO value

Market value of technology firms, %

0 20 40 60 80 100

Samsung

Apple

Alphabet

Microsoft

Oracle

Intel

Facebook

Alibaba

Uber‡

Tencent

Snap§

Amazon

Tesla

nil

4.0

22

1.0

0.5

10

51

54

175

52

406

22

145

Sales,% increaseon a yearearlier†

net cashComprising: until 2020profits*: after 2020

Three sanity tests forwhether tech firms are living in a bubble

Schumpeter

The Economist February 25th 2017 55

For daily analysis and debate on economics, visit

Economist.com/economics

1

CHINESE banks are not far removedfrom the age ofthe abacus. In the 1980s

they used these ancient counting boardsfor much of their business. In the 1990smany bank employees had to pass a basicabacus test. Today the occasional click-clack, click-clack can still be heard in vil-lages as tellers slide their abacus beads upand down the rack.

But these days the abacus is mainly asymbol, more likely to be used in thebranding of China’s online-finance com-panies than as a calculating tool. At leastthree internet lenders have paid homage toit in theirnames: Abacus Loans, Small Aba-cus and Modern Abacus. The prominence,so recently, of the abacus is testament tohow backward Chinese banking was ashort time ago. The rise of the online lend-ers shows how quickly change has come.

By just about any measure of size, Chi-na is the world’s leader in fintech (short for“financial technology”, and referring hereto internet-based banking and invest-ment). It is far and away the biggest marketfor digital payments, accounting for nearlyhalfofthe global total. It is dominant in on-line lending, occupying three-quarters ofthe global market. A ranking of the world’smost innovative fintech firms gave Chi-nese companies four of the top five slotslast year. The largest Chinese fintech com-

looked to developed countries for ideasabout how to manage its financial system.When it comes to fintech, the rest of theworld will be studyingChina’s experience.

The rise offintech in China ismost nota-ble in three areas. The first, obvious in dailylife, is mobile payments. China’s middle-class consumers, emerging as the internettookoff, have alwaysbeen inclined to shoponline (see chart1on next page). This madethem big, early adopters of digital pay-ments. China also had a late-starter advan-tage. Developed economies long agoswapped cash for plastic (credit and debitcards). China was, until a decade ago, over-whelmingly cash-based.

The shift to digital payments acceler-ated with the arrival of smartphones,bought by many Chinese who had neverowned a personal computer. Today 95% ofChina’s internet users go online via mobiledevices. Alipay, the payments arm of Ali-baba, an e-commerce giant, soon becamethe mobile wallet of choice. But it quicklyfaced a challenge, when Tencent, a gaming-to-messaging company, launched a pay-ment function in its wildly popular We-Chat phone app, tapping its 500m-stronguser base. Baidu, China’s main search en-gine, followed with its own wallet.

SmartpursesCompetition has sparked a stream of inno-vations, especially in the way mobile appscan connect online to face-to-face retailtransactions. QR codes, the matrix-like barcodes that generally failed to catch on inthe West, have become ubiquitous in Chi-nese restaurants and shops. Users simplyopen WeChat or Alipay, scan a QR codeand make a payment. And phones them-selves can serve as payment cards: with

pany, Ant Financial, has been valued atabout $60bn, on a par with UBS, Switzer-land’s biggest bank.

Howdid fintech get so big in China? Theshort answer is that it was the right thing atthe right time in the right place. Even afterChinese banks tucked away their abacus-es, they remained remarkably unsophisti-cated for a high-speed economy. People ac-cumulated wealth but had few goodoutlets for investing. Entrepreneurs werefull of ideas but struggled to get startuploans. Consumers were spending butneeded wads ofcash to do so.

New technology offered a way to vaultover these many contradictions. Duringthe past decade China became the countrywith more internet users than any other—more than 700m. A potential revolutionbeckoned butploddingstate-owned bankswere slow to respond. The terrain wasopen for battalions of hungry companies.Some entrepreneurs had roots in e-com-merce, others in online gaming, manywere just first-timers.

Today, the promise offintech in China isgreat. It is shaking up a stodgy banking sys-tem and helpingbuild a more efficient one,especially for consumers and small busi-nesses. But limitations are also clear. Banksare fighting back. And regulators, tolerantso far, are wading in. For years China has

Fintech in China

The age of the appacus

SHANGHAI

Good technology, stodgy banks and soaring wealth make China a leader in fintech

Finance and economicsAlso in this section

58 Trade statistics

58 Securitisation in Europe

59 Fannie and Freddie

60 Feminism and fiscal policy

61 Free exchange: Taxing robots

Buttonwood is away

56 Finance and economics The Economist February 25th 2017

1

2 another click, users display their own barcodes, which shopkeepers then scan. Andit is as easy for people to send money toeach other as it is to send a text message—avast improvement over the bricks of cashthat used to change hands.

Many of the payment functions withinWeChat or Alipay exist elsewhere in theworld, but in disaggregated form: Stripe orPayPal for online shops processing pay-ments; Apple Pay or Android Pay for thoseusing their phones as wallets; FacebookMessenger or Venmo for friends transfer-ring money. In China all these differentfunctions have been combined onto singleplatforms. Adoption is widespread. Forabout 425m Chinese, or 65% of all mobileusers, phones act as wallets, the world’shighest penetration rate, according to Chi-na’s ministry of industry and informationtechnology. Mobile payments hit 38trnyuan ($5.5trn) last year, up from next tonothing five years earlier—and more than50 times the size of the American market.

Small is beautifulA second area where China has becomethe global leader is online lending. In mostcountries, banks overlook small borrow-ers. This problem is especially acute in Chi-na. State-owned banks dominate the fi-nancial system, with a preference forlending to state-owned companies. Theabsence of a mature system for assessingconsumer credit-risk adds to banks’ reluc-tance to lend to individuals. Grey-marketlenders such as pawn shops provide fi-nancing but at usurious interest rates.

Fintech has started to fill this gap. E-commerce was again the launch-pad: on-line shopping platforms developed loanservices, and are using their customers’transactions and personal information tocreate credit scores. (How the governmentmight eventually harvest data for socialcontrol is cause for concern, but for nowlenders are merely trying to master the ba-sics of credit ratings.) Shoppers on Alibabaand JD.com, China’s two biggest e-com-merce portals, can conveniently borrowsmall amounts, typically less than 10,000yuan. According to Ant Financial (Ali-

baba’s financial arm, spun out in 2014),60% ofborrowers in this category had nev-er used a credit card. On their platforms,Ant and JD.com also lend to merchants,many ofwhom are the kinds ofsmall busi-nesses long ignored by banks.

However, e-commerce lending is intrin-sically cautious. Its targets are clients al-readywell-known to the bigshoppingplat-forms. For the more radical side of China’sonline lending, look instead at the explo-sion of peer-to-peer (P2P) credit. From just214 P2P lenders in 2011, there were morethan 3,000 by 2015 (see chart 2). Initiallyfree from regulatory oversight, P2P soonmorphed into China’s financial Wild West,brimming with frauds and dangerousfunding models. More than a third of allP2P firms have already shut down.

Yet P2P lenders still have a big role toplay in China. Despite a string of headline-grabbing collapses, the industry has con-tinued to grow. Outstanding P2P loans in-creased 28-fold from 30bn yuan at the startof 2014 to 850bn yuan today. The onlinelenders answer a basic need, like China’sgrey-market lenders of old, but in moderngarb and, thanks to all the competition, of-fering credit at lower interest rates.

In other countries, P2P firms typicallylend to clients online and obtain fundingfrom institutional investors. The most suc-cessful lenders in China flip that approachon its head. Because of the lack of consum-er credit ratings, they vet borrowers in per-son. Lufax, China’s biggest P2P firm, oper-ates shops—more than 500 in 200cities—for loan applicants. And for fund-ing, Chinese P2P firms draw almost entire-ly on retail investors. More than 4m peopleinvest on P2P platforms, up by a third overthe past year. The platforms can then di-vide loans into small chunks, parcellingthem out to investors to disperse risks.

This points to the third area of China’sfintech prowess: investment. Until recent-ly, Chinese savers faced two extreme op-tions for managing their money: stash it inbank accounts, where interest rates wereartificially low, but it was as safe as theCommunist Party; or punt on the stock-market, about as safe as playingbaccarat ina casino in Macau. “In the middle therewas nothing,” says Huang Hao, vice-presi-dent of Ant Financial. Fintech has openedthat middle ground.

In the West asset managers increasinglyworry that they face a wave of disinterme-diation as investors migrate online. In Chi-na asset managers barely had a chance toserve as intermediaries in the first place;the market skipped into the digital stage. Inlarge part this resulted from a generationaldivide that is the inverse of the globalnorm: the best-paid workers in China tendto be younger, the country’s first big gener-ation of white-collar workers. They aremuch more likely to be willing to trustweb-based platforms to manage their

money. “In America people love technol-ogy, too, when they are 22. They just don’thave any money,” says Gregory Gibb, Lu-fax’s chiefexecutive.

The biggest breakthrough was thelaunch of an online fund by Alibaba in2013. This fund, Yu’e Bao (or “leftover trea-sure”), was promoted as a way for peopleto earn interest on the cash in their e-com-merce accounts. The appeal, though,turned out to be much broader. Investedthrough a money-market fund, Yu’e Bao of-fered returns in line with the interbankmarket, where interest ratesfloat freely (seechart 3 on next page). This meant that sav-ers could get rates that were more thanthree percentage points higher than thosebanks offered. And risk was minimal, be-cause their cash was still ultimately in thehands of banks. Yu’e Bao attracted 185mcustomers within 18 months, giving it600bn yuan ofassets under management.

As is so often the case in China, new en-trants soon appeared. In 2014 Tencentlaunched Licaitong, an online fund plat-form linked to WeChat. Within a year, ithad 100bn yuan under management. Lu-fax, meanwhile, outgrew its P2P roots totransform itself into a financial “supermar-ket”, offering personal loans, asset-backedsecurities, mutual funds, insurance andmore. Robo-advisers (firms that use algo-rithms and surveys to let users build port-folios) also have China in their sights.

Give me your penniesAnd it is not just about wealthy investors.In the West people generally need deeppockets before they can afford to buy intoproducts such as money-market funds. InChina all it takes is a smartphone and aninitial buy-in of as little as 1 yuan. WeChat,with 800m active accounts, and Ant, with400m, can afford to be generous.

How to gauge the impact of fintech inChina? Measured against the rest of thecountry’s colossal financial system, the va-rious fintech pieces are puny. Apps and on-line lenders might have massive userbases, but they are mainly comprised ofconsumers and small businesses, not thehulking state-owned enterprises and gov-

1Clickaholics

Source: eMarketer

Retail e-commerce sales, worldwideShare of total, %

FORECAST

China

United States

Rest of world

0

20

40

60

80

100

2010 12 14 16 18 20

2Peerless

Source: Wind Info

China, peer-to-peer lending

2014 15 16 170

1

2

3

4

5

0

0.2

0.4

0.6

0.8

1.0

Number of operatingplatforms, ’000

Outstandingloan balance,

yuan trn

The Economist February 25th 2017 Finance and economics 57

2 ernment entities that form the backboneof the banking system. The outstandingbalance of P2P credit is roughly 0.8% of to-tal bank loans. Credit provided by the e-commerce firms adds up to even less. Earn-ings from mobile payments amount tobarely 2% ofbankrevenues.

Wei Hou, an analyst with Bernstein Re-search, reckons that the fintech firms willgrab less than a twentieth of banks’ busi-ness by 2020. That is hardly to be sneezedat, since it comfortablyequates to 1trn yuanin revenues. But it is not the kind of radicaldisruption that fintech’s more ardent evan-gelists often foretell.

Nevertheless, just looking at the overallsize of fintech is insufficient. In the marketsegments they have set their sights on, fin-tech firms have made a big mark. Digitalpayments account for nearly two-thirds ofnon-cash payments in China, far surpass-ing debit and credit cards. P2P loans makeup about a fifth ofall consumer credit.

What’s more, fintech firms have pro-voked a competitive response. Take thecustomer experience at China’s biggestbanks: it has improved markedly over thepast few years. Once-cumbersome online-banking portals are much easier to use.

Even more important, banks are alsochanging their business models. Proddedin part by the online investment funds,they have moved away from their plain-vanilla deposit-taking roots. Their focushas shifted to “wealth-management pro-ducts” (WMPs), deposit-like investmentswhich they sell to their clients, often viamobile apps. Returns are as high as any-thing on Alipay or Tencent. The banks’apps are not as slick, but not far off, andthey feel far safer, with their reassuringlyphysical thousands of branches. The out-standing value ofWMPs has reached morethan 26trn yuan, quadrupling in five years.WMPs have brought new risks into the fi-nancial system, in particularconcerns overbanks’ funding stability. But they have ar-guably done more to promote interest-rateliberalisation than any regulatory edict.

And banks have come to appreciatetheir own strengths: branch networks; sol-id reputations; and riskcontrols. “You can’t

say that banks or fintech firms are betterpositioned. Both need each other,” says LiHongming, chairman of Huishang Bank,the main lender in Anhui, a big centralprovince. Fintech upstarts have alsolearned that lesson. Look at Wheat Fi-nance, one of the country’s earliest P2P

lenders, established in 2009. Amy Huang,Wheat’s CEO, says her initial goal was tochallenge banks on their home turf. Butshe soon realised that banks have insuper-able advantages, with their stable, low-costfunding bases. Instead of battling them,Wheat is becoming their partner: 70% of itsrevenues come from sellingdigital servicesto banks.

Regulatory attitudes are also shifting.China’s government initially gave fintechcompanies a free hand, a striking contrastto its heavy policing of traditional banks.The hunch was that fintech firms weresmall enough for any problems to be man-ageable, and might produce useful innova-tions. This wager paid off: the rise of mo-bile payments and online lending owemuch to light regulation.

But the era of benign neglect is over. In2016, provoked in part by the P2P scandals,China introduced regulations to covermost fintech activities. Most of the rulesare aimed at making fintech safer, not atcurbing it. Firms can no longerpursue theirmost ambitious strategies. Individuals, forinstance, can borrow no more than200,000 yuan from any one P2P lender.

Some of the regulations, though, alsoconstrain what fintech firms can hope toachieve. The central bank is overseeing thecreation of an online-payments clearanceplatform. It wants transparency: all digitalpayments will be visible to the centralbank. But it could neutralise one of themain advantages of Ant and Tencent, forc-ing them to share transaction data withbanks. It seemed, fora time, thatChina’s in-ternet titans might go after banks’ crownjewels, when they obtained licences to run

online banks. But the government has re-quired that they act in partnership with ex-isting banks for even the most basic func-tions such as deposits and withdrawals.

Yet this is not the end of the road. Antand Tencent still have hundreds of mil-lions of users between them on apps thatoffer a wide range offinancial services andproducts. They just need to persuadeenough users to view them not simply asmobile wallets but as mobile brokers andlenders. AsLufaxand JD.com hone their of-ferings, they, too, will grow more powerful.Regulations have placed speed bumpsalong their path. But the path is still there.

The Chinese are comingChina’s fintech champions are also tryingto break into new territory abroad. We-Chat’s mobile wallet is usable internation-ally, mostly in Asia for now. Ant has invest-ed in mobile-finance companies in India,South Korea and Thailand. But replicatingtheir successes in other markets will not bestraightforward. Much of their repertoirewas devised specifically to address defi-ciencies in China’s financial system. Andanything that touches on core bankingabroad will require local incorporationand adherence to local regulations—head-winds against global expansion.

China’s bigger impact is likely to be in-direct. Its fintech giants have shown whatcan be done. For emerging markets, the les-son is that with the right technology, it ispossible to leapfrog to new forms of bank-ing. For developed markets, China offers avision of the grand consolidation—appsthat combine payments, lending and in-vestment—that the future should hold.

And the biggest lesson ofall: it is not up-starts versus incumbents but rather a ques-tion ofhow banks absorb the fintech inno-vations blossoming around them. China,an early adopter of the abacus, is, after along period of dormancy, once again blaz-ing a trail in finance. 7

3Treasure trove

Sources: Bloomberg; Thomson Reuters

China

2013 14 15 16 170

1

2

3

4

5

6

7Yu’e Bao money-marketfund, seven-day annualised yield, %

One-year bankdeposit rate, %

58 Finance and economics The Economist February 25th 2017

1

MIGHT Donald Trump’s promise toshake up America’s trade policy ex-

tend to its statistics? According to a reportin the Wall Street Journal, discussions areafoot on changing the way trade figures aretallied. The Bureau of Economic Analysis,the country’s main statistical body, callsthis “completely inaccurate”. But in tradeas elsewhere, the new administrationseems prone to using statistics as a drunkusesa lamppost—forsupport rather than il-lumination.

The proposal reportedly involves strip-ping out some of America’s exports fromthe gross numbers. America sold $1.5trn ofgoods abroad in 2016, but of that $0.2trnwere re-exports that left the country muchas they had arrived. This type of trade hasbeen growing, reflecting America’s role asa hub for North American trade. As a shareof its combined exports to Mexico andCanada, re-exports rose from 12% to 20%between 2002 and 2016. Truckers and ship-persbenefit from thiskind oftrade. But crit-ics see it as “padding”, obscuring gloomiertrends in “made in America” exports.

Stripping out re-exports makes nosense when thinking about the overalltrade imbalance unless a correspondingadjustment is made to imports. Taking outre-exports would shrink America’s record-ed exports to countries like Mexico andCanada. Without reducing the importnumber, it would also puff up America’srecorded trade deficit in goods with them,by $54bn for Mexico, and $46bn for Cana-da (more than triple the raw balance).

So excluding re-exports from the totalwould provide Mr Trump with some moreeye-popping figures with which to bashMexico. Abid to tweaktrade statistics neednot be politically motivated, though. Itcould also reflect the (correct) realisationthat standard measures of imports and ex-ports do not always capture what is reallybeing “made in America”. Statisticians dosometimes adjust for re-exports, whichcan mask underlying trends. For example,they routinely strip out from Hong Kong’sfigures its re-exports (a staggering $498bn-worth in 2016, compared with domesticex-ports of $13bn) to avoid double-countingChina’s exports in world-trade totals.

Such adjustments are supposed to dealwith the underlying gripe with re-exports:that they may not reflect a country’s valueadded. But tackling thisproperly involves amuch deeperdig into the data. There is alsoforeign value added embedded in Ameri-

can exports, such as the Mexican parts incars made in Michigan. The imports side isjust as important. American imports fromMexico include both American value add-ed and inputs from other countries. Ac-countingforall this is farmore complicatedthan stripping out just one component.

LuckilyforMrTrump, trade geeks are onthe case. Robert Johnson, a trade expert atDartmouth College, talks of a “quiet revo-lution” in economists’ thinking abouttrade. Aware that gross trade flows do notcapture where value is being created andsent, the WTO and the Organisation forEconomic Co-operation and Develop-ment, a rich-country think-tank, havepainstakingly constructed the very datathat Mr Trump’s administration would beinterested in. The latest available figures,covering 2011, suggest that foreign valueadded makes up 15% of the content ofAmerica’s gross exports. Overall, this is off-

set by a corresponding adjustment to im-ports. America’s overall trade balancewith the rest of the world is not affected bya switch to a value-added measure.

Drilling down into bilateral trade rela-tions, accounting for value added has bigeffects. But these data suggest that somemight not be as large as often assumed.One commonly-cited factoid is that 40% ofMexican exports to America are embed-ded American content. New figures fromthe OECD put that figure at14% (see chart).

That is still high enough to create a lot ofAmerican losers were America to severtrade relations. And the effect on the re-ported trade imbalance between Americaand Mexico is dramatic. Overall, however,switching to the more sophisticated value-added measure of trade flows would notprovide political ammunition as powerfulas ditching re-exports. On a value-addedmeasure, the bilateral-trade imbalance be-tween America and Mexico in 2011 was43% smaller than the gross trade flowswould suggest. The trade deficit with Can-ada would have become 39% smaller.

Focusing on value-added trade data isbetter than looking at the gross flows, butMr Johnson questions whether the debateshould focus on bilateral imbalances at all.When someone incurs a trade deficit witha bookshop and a trade surplus with hisemployer, neither matters in isolation—theoverall balance is important. And for acountry’s trade, that will be most deter-mined by macroeconomic factors. Fid-dling the figures might move the lamppost;it will still leave the future direction oftrade in the dark. 7

Trade statistics

Lies, damned liesand…

Bilateral trade flow data are misleading.But a reported tweakwill not help

Coming back home

Source: OECD

United States, share of Americanvalue added in imports from:As % of total imports, 2011

0 3 6 9 12 15

Mexico

Canada

China

South Korea

Germany

Japan

SECURITISATION, the bundling and re-packaging of income streams as trad-

able securities, goes in and out of fashion.America is still dealing with the falloutfrom the disaster in one part of the mar-ket—sub-prime mortgages—in 2008-09 (seebox on next page). In Europe, the swings inpopularity have been just as marked. Dur-ing the crisis, European securitised assetswere hit by only small losses but the mar-ket suffered from guilt by association. It hassince enjoyed a limited renaissance.

Leading the revival, oddly, are Euro-pean regulators. They have sought not justto rehabilitate, but indeed actively to pro-mote such “structured” finance. As early as2013 the European Central Bank (ECB) waseffusive not only about securitisation’s

ability to spread risks, but also about itsability to channel funding to the economy,including small and medium-sized enter-prises (SMEs). The ECB and the BankofEng-land even published a rare joint paper in2014 making the case for a “better-func-tioning securitisation market in the EU”.

This aim then became one of the mainplanks of the European Commission’s“capital-markets union” initiative—an at-tempt to shift Europe away from overre-liance on banks. A legislative proposal putforward by the commission in the autumnof2015 sought to smooth the way for secur-itisation by setting up common rules andestablishing a special category of “simple,transparent, and standardised” securitisa-tions with fewer regulatory requirements.

Securitisation in Europe

Limping along

Europe’s structured-finance market fails to live up to hopes

The Economist February 25th 2017 Finance and economics 59

2 This law is still in the throes of the EU legis-lative process, but is nearing the end.

Yet despite their best efforts, the marketin Europe remains stunted—just €227bn($251bn) of total issuance in Europe in 2016.The amount actually available to investorsis even smaller: only €88bn was “placed”with (ie, sold to) investors. This is a trendthat has persisted for the past few years(see chart). Rather than bringing new as-sets to market, many banks, particularly insouthern Europe, are securitising existingassets. Their sole purpose is to create collat-eral that allows them to obtain cheap fund-ing from the ECB. Retention is particularlyhigh in Spain and Italy, and for certaintypes of securitisations, such as thosebacked by SME loans, of which over 90%are retained Europe-wide.

Securitisingassets to sell bonds on to in-vestors is not an attractive source of fundsfor most banks. The ECB is simply so muchcheaper. At best, banks are using the tech-nique to offload specific risks or types ofassets, such as non-performing loans. Mat-thew Jones, head of European structuredfinance at S&P Global, a ratings agency,says that the majority of securities on theplaced market come from non-bank lend-ers or private-equity-backed deals.

The forthcoming European law intendsto spur securitisation mainly by changingrules imposed after the crisis. Rules weretightened several times, notably throughthe imposition in 2011ofa risk-retention re-quirement that issuers must hold on to atleast 5% of the value of a securitised tran-saction. The idea was to force issuers tohave an incentive to monitor the credit-worthiness of borrowers, rather than sim-ply selling all sorts of dodgy loans. Capitalrequirements for banks and insurers werealso progressively tightened, to make hold-ing securitised assets much more costly.

Yet even the new proposal, rather thanencouraging securitisation, may have theopposite effect. The European Parliamenthas made a number of amendments tostrengthen it, including one that wouldraise the risk-retention requirement to 10%oreven 20%—which investorsargue wouldstifle the market. Others would determine

that only EU-based entities are eligible toinvest in the securities, and impose va-rious onerous disclosure requirements.

If securitisation looks unappealing, in-vestorsdo have murkieroptions. There hasbeen an increase in the numberofbilateraldeals, including sales of (unsecuritised)loan portfolios. “Synthetic” securitisa-tions, where derivatives are used to trans-fer risks, are also gaining in popularity. Se-curitisation has its shortcomings, points

out Alexander Batchvarov of Bank ofAmerica Merrill Lynch, but the resultingbonds are at least tradable, visible and cov-ered by ratings agencies. In bilateral deals,the risks involved are opaque and cannoteasily be quantified, nor can the exposuresbe easily traded. Members of the EuropeanParliament and others worry about tran-sparency and are still squeamish about se-curitisation. Substitutes for it might beeven more frightening. 7

Security blankets

Source: Bank of America Merrill Lynch

Europe, securitisation, €bn

0

200

400

600

800

2000 02 04 06 08 10 12 14 16

Placed Retained

Fannie Mae and Freddie Mac

Still possessed

ONE unresolved issue from the fi-nancial crisis is the future of Fannie

Mae and Freddie Mac, the two firms thatstand behind much ofAmerica’s housingmarket. Fannie and Freddie purchasemortgages, bundle them into securitiesand sell them on to investors with aguarantee. When America’s housingmarket collapsed a decade ago, the gov-ernment had to bail them out. Its treat-ment of the firms since then has created atitanic legal struggle. Shareholders havecried foul. On February 21st, a federalappeals court upheld a ruling in thegovernment’s favour.

At issue is the Obama administra-tion’s decision in 2012 to hoover up all ofFannie and Freddie’s profits. Until then, ithad received a fixed dividend on itsinvestment. The timing of the shift wasstriking—just before a surge in the firms’profitability. Since 2008 the Treasury hassucked in about $250bn from the firms,30% more than the cost of the bail-out.

The change enraged hedge funds whohad bought Fannie and Freddie’s sharesand found themselves expropriated. Theinvestors’ lawsuit held that the govern-ment overstepped its authority by seizingall profits. A federal court dismissed thatclaim in 2014; it has taken until now foran appeals court to uphold the mostimportant parts of the decision. An oddaspect of the ruling is that it largely ig-nored the substantive arguments butconcluded the court lacked the authorityto curb the government’s actions.

Its ruling sent shares in Fannie andFreddie tumbling (see chart). That re-versed about halfof the rally sparked byDonald Trump’s victory in the presi-dential election. Investors reckon that MrTrump’s administration will be morefavourable to Fannie and Freddie’s in-vestors. Initially Steve Mnuchin, nowtreasury secretary, told a business-newsnetwork that Fannie and Freddie shouldbe privatised again. But in his confirma-tion hearing before the Senate in January,

he seemed to roll back those remarks. The firms are hardly robust. The Trea-

sury is running down their capital by$600m a year. By 2018 they will havenone left. From then on, should the firmsmake a loss, they will need to draw on anemergency line ofcredit from the govern-ment. Doing so would be characterisedby some as a second bail-out.

That worrying prospect should pro-vide some impetus to the search for analternative solution. But it will be hard tofind an ownership structure for Fannieand Freddie that satisfies everyone. Thefirms keep mortgages cheap by lumpingtaxpayers with a staggering amount ofrisk. (If the housing market collapsed, thecost to the Treasury could be 2-4% ofGDP,

according to an analysis by The Econo-mist). Few will want investors to makeprofits on the backofsuch a taxpayerguarantee.

The court did allow the plaintiffs tolitigate some contractual claims. And oneof the three judges in this court dissentedstarkly from the ruling. The government,she noted, had “pole-vaulted” over itsauthority. The plaintiffs were “not allinnocent or ill-informed investors”. Butthey had been betting the rule of lawwould prevail: “In this country, everyoneis entitled to win that bet.”

NEW YORK

Investors in America’s housing-finance giants have a bad day in court

Losing appeal

Source: Thomson Reuters

Share prices, $

Jul Aug Sep Oct Nov Dec

2016Jan Feb

2017

0

1

2

3

4

5

Fannie MaeFreddie Mac

60 Finance and economics The Economist February 25th 2017

LIKE many rich-country governments,Britain’s prides itself on pursuing poli-

cies that promote sexual equality. How-ever, it fails to live up to its word, argues theWomen’s Budget Group, a feminist think-tank that has been scrutinising Britain’seconomic policy since 1989. A report in2016 from the House of Commons Library,an impartial research service, suggests thatin 2010-15 women bore the cost of 85% ofsavings to the Treasury worth £23bn($29bn) from austerity measures, specifi-cally cuts in welfare benefits and in directtaxes. Because women earn less, rely moreon benefits, and are much more likely thanmen to be single parents, the cuts affectedthem disproportionately.

The government does not set out to dis-criminate, says Diane Elson, the budgetgroup’s former chair. Rather, it overlooksits own bias because it does not take thetrouble to assess how policies affect wom-en. Government budgets are supposed tobe “gender-neutral”; in fact they are gen-der-ignorant. Ms Elson is one of the origi-nators of a technique called “gender bud-geting”—in which governments analysefiscal policy in terms of its differing effectson men and women. Gender budgetingidentifies policies that are unequal as wellas opportunities to spend money on help-ing women and which have a high return.Britain has declined to adopt the tech-nique, but countries from Sweden to SouthKorea have taken it up.

Ms Elson and her colleagues argue that,once you breakdown public spending, theopportunities stand out. For instance, if theBritish government diverted investmentworth 2% of GDP from construction to thecare sector, it could create 1.5m jobs insteadof 750,000. Many governments treatspending on physical infrastructure as aninvestment, but spending on social infra-structure, such as child care, as a cost. Yetsuch spending also increases productivityand growth—partly by increasing the num-ber ofwomen in the workforce.

In poorer countries, the bias can bemore explicit. When Uganda first looked atits budget through a gender lens, it discov-ered that little of the spending on agricul-ture was going to support women farmers,though they did most of the work.

What may sound simply like feminisminfiltrating fiscal policy is thus also aboutefficiency. Gender budgeting is good bud-geting, argues Janet Stotsky, who led anIMF survey of such efforts around the

world. You don’t have to be a feminist toaccept that investing in girls’ education orin women’s labour-force participation willgenerate a high return on investment.

Such a utilitarian approach appeals tofinance ministries in a way that pious talkof “women’s empowerment” may not.Ministries can fail to grasp how their bud-gets affect women and girls. In developingcountries, for instance, investment in cleanwater and electricity eases housework,freeing time for mothers to earn moneyand for girls to go to school. Cutting fund-ing may save money in the short term, butwhen women spend their days fetchingwater, growth suffers.

There are plenty of examples of theidea in action. In Rwanda spending aimedat keeping girls in school—such as provid-ing basic sanitation—has led to higher en-rolment. In India the use ofgender budget-ing in a state is a better indicator of girls’school attendance than higher incomes. InSouth Korea a lack of child care has forcedwomen to choose between work and fam-ily. Both female labour-force participationand fertility rates are low—a poor formulafor growth in an ageing country. Genderbudgeting helped the government designprogrammes to reduce the burden of careon women. Around the world, safer tran-sport systems can ease the vast, often un-seen, burden of violence against womenand girls—in medical costs, and lost pro-ductivity and labour, as they are preventedfrom working or learning.

Gender budgeting has won the backingof international financial institutions. MsElson once took the IMF and the WorldBank to task for their bias, arguing that aus-terity forced on countries seeking funds inthe 1980s imposed heavy burdens onwomen. Now the World Bank backs gen-derbudgeting. The IMF used not to see pro-motingsexual equality as its job, but Chris-tine Lagarde, its managing director, nowwants gender-budgeting to play a role inthe advice it gives to member countries.

Not everything has gone well for gen-der budgeting, however. Some initiativeshave proved half-hearted, short-lived orprey to party politics. Egypt introduced theconcept in 2009, encouraged by interna-tional donors; when the donors left, it pe-tered out. Australia was the first country tohave genderbudgeting. But today’s conser-vative government saw it as left-leaningand anti-austerity and dropped it in 2014,the year after it tookoffice.

Going by the numbersOthercountries have issued sexual-equali-ty statements and begun tracking data, buthave not changed budget allocations.Much of their reluctance can be put downto bureaucratic inertia—and the sheer diffi-culty of the process of tracking who getswhat. Fiscal policy is based on the marketeconomy, which generates cash, and ig-nores women’s unpaid labour, and the ex-tent to which it limits theirworkin the mar-ket economy. Rather than rethink thesystem, governments rely on equal-oppor-tunity laws to cut inequality—though theevidence is that they do not.

Professing loyalty to an idea is easierthan acting on its implications. “Everyoneis keen to take on gender equality if it onlymeans marginal changes,” says Ms Elson.“Root-and-branch changes to thinkingabout how the fiscal system supports gen-der equality are much more difficult.” 7

Gender budgeting

The fiscal mystique

Designing budgets to support sexual equality is good forgrowth

A good investment

The Economist February 25th 2017 Finance and economics 61

BILL GATES is an unlikely Luddite, however much Microsoftmay have provoked people to take a hammer to their comput-

ers. Yet in a recent interview with Quartz, an online publication,he expressed scepticism about society’s ability to manage rapidautomation. To forestall a social crisis, he mused, governmentsshould consider a tax on robots; if automation slows as a result,so much the better. It is an intriguing if impracticable idea, whichreveals a lot about the challenge ofautomation.

In some distant future robotswith theirown consciousnesses,nest-eggs and accountants might pay income taxes like the rest ofus (presumably with as much enthusiasm). That is not what MrGates has in mind. He argues that today’s robots should betaxed—either their installation, or the profits firms enjoy by sav-ing on the costs of the human labour displaced. The money gen-erated could be used to retrain workers, and perhaps to financean expansion ofhealth care and education, which provide lots ofhard-to-automate jobs in teaching or caring for the old and sick.

A robot is a capital investment, like a blast furnace or a com-puter. Economists typically advise against taxing such things,which allow an economy to produce more. Taxation that detersinvestment is thought to make people poorer without raisingmuch money. But Mr Gates seems to suggest that investment inrobots is a little like investing in a coal-fired generator: it boostseconomic output but also imposes a social cost, what economistscall a negative externality. Perhaps rapid automation threatens todislodge workers from old jobs faster than new sectors can ab-sorb them. That could lead to socially costly long-term unem-ployment, and potentially to support fordestructive governmentpolicy. A tax on robots that reduced those costs might well beworth implementing, just as a tax on harmful blast-furnace emis-sions can discourage pollution and leave society better off.

Reality, however, is more complex. Investments in robots canmake human workers more productive rather than expendable;taxing them could leave the employees affected worse off. Partic-ular workers may suffer by being displaced by robots, but work-ers as a whole might be better off because prices fall. Slowing thedeployment of robots in health care and herding humans intosuch jobs might looklike a useful way to maintain social stability.But if itmeans thathealth-care costsgrowrapidly, gobbling up the

gains in workers’ incomes, then the victory is Pyrrhic.The thorniest problem for Mr Gates’s proposal, however, is

that, for the moment at least, automation is occurring not too rap-idly but too slowly. The displacement of workers by machinesought to register as an increase in the rate of productivitygrowth—and a faster-growing economy. But since a burst of rapidproductivity growth in the late 1990s and early 2000s, America’seconomy has persistently disappointed on these measures. MrGates worries, understandably, about a looming era of automa-tion in which machines take over driving or managing ware-houses. Yet in an economy already awash with abundant, cheaplabour, it may be that firms face too little pressure to invest in la-bour-saving technologies. Why refit a warehouse when peoplequeue up to do the work at the minimum wage? Mr Gates’s pro-posal, by increasing the expense of robots relative to human la-bour, might furtherdelay an already overdue productivity boom.

When faster automation does arrive, robots might not be theright tax target. Automation can be understood as the replace-ment of labour with capital. To save humans from penury, thereasoning goes, a share of the economy’s capital income needs tobe diverted to displaced workers. Expandingcapital ownership isone strategy; people could own driverless vehicles that operateas taxis, for instance, and rely on the flow of fares for part of theirincome. Taxing robots and redistributing the proceeds is another.

But as machines displace humans in production, their in-comes will face the same pressures that afflict humans. The shareof total income paid in wages—the “labour share”—has been fall-ing fordecades. Labourabundance is partly to blame; the ownersof factors ofproduction in shorter supply—such as land in SiliconValley or protected intellectual property—are in a better positionto bargain. But machines are no less abundant than people. Fac-tories can churn out even complex contraptions; the cost of pro-ducing the second or millionth copy of a piece of software isroughly zero. Every lorry driver needs individual instruction; acapable autonomous-driving system can be duplicated endless-ly. Abundant machines will prove no more capable ofgrabbing afair share of the gains from growth than abundant humans have.

A new working paper by Simcha Barkai, of the University ofChicago, concludes that, although the share of income flowing toworkers has declined in recent decades, the share flowing to capi-tal (ie, including robots) has shrunk faster. What has grown is themarkup firms can charge over theirproduction costs, ie, their pro-fits. Similarly, an NBER working paper published in January ar-gues that the decline in the labourshare is linked to the rise of“su-perstar firms”. A growing number of markets are “winner takesmost”, in which the dominant firm earns hefty profits.

DOS KapitalLarge and growing profits are an indicator of market power. Thatpower might stem from network effects (the value, in a net-worked world, of being on the same platform as everyone else),the superior productive cultures of leading firms, governmentprotection, or something else. Waves ofautomation might neces-sitate sharing the wealth of superstar firms: through distributedshare-ownership when they are public, or by taxing their profitswhen they are not. Robots are a convenient villain, but Mr Gatesmight reconsider his target; when firms enjoy unassailable mar-ket positions, workers and machines alike lose out. 7

I, taxpayer

A taxon robots is an intriguing but misguided solution to workerwoes

Free exchange

Economist.com/blogs/freeexchange

The Economist February 25th 2017 63

For daily analysis and debate on science andtechnology, visit

Economist.com/science

1

SOMETIMES the sun burps. It flings offmighty arcs of hot plasma known as co-

ronal massejections (CMEs). Ifone ofthesehits Earth it plays havoc with the planet’smagnetic field. Such storms are among themost spectacularexamples ofwhat astron-omers call space weather, a subject towhich a session at this year’s meeting ofthe American Association for the Ad-vancement of Science (AAAS), in Boston,was devoted. A big CME can have pro-found effects. In 1859, for instance, a CME

subsequently dubbed the Carringtonevent, after a British astronomer who real-ised its connection with a powerful solarflare he had observed a few days earlier,generated auroras that could be seen in thetropics. Normally, as the names “northern”and “southern” lights suggest, such auroras(pictured above) are visible only from highlatitude. More significant, the Carringtonevent played havoc with Earth’s new tele-communications system, the electric tele-graph. Lines and networks failed, andsome operators received severe shocks.

Today, the damage would be worse. Astudy published in 2013 by Lloyd’s, a Lon-don insurance market, estimated that aCarrington-like event now would causedamage costing between $600bn and$2.6trn in America alone. Ayearbefore thisreport came out the sun had indeedthrown offsuch an ejection—though not inthe direction of Earth. A much smaller

Solar and Heliospheric Observatory,which is a joint European-American ven-ture launched in 1995. Several new sun-watching instruments are planned for thenext couple of years. One is the EuropeanSpace Agency’s Solar Orbiter. Another isNASA’s Solar Probe Plus. A third is a specialtelescope, called DKIST, to be built in Ha-waii. The eventual goal, said DrPellish, is tomake space-weather forecasts as easy androutine as terrestrial ones.

Preparing for the extraterrestrial equiv-alent of hurricanes in this way is surelywise. But space drizzle can cause problemstoo. Even when the sun is quiet, Earth isbombarded by a steady stream of high-en-ergy subatomic particles. Some come fromthe sun, which is always shedding matterin small quantities even when it is notthrowing offCMEs. Others are cosmic rays,which originate from outside the solar sys-tem. Both types, when theysmash throughthe atmosphere, create showers of second-ary particles in their wake. And, as BharatBhuva, an engineer at Vanderbilt Universi-ty in Tennessee, described to the meeting,this shrapnel can cause problems with theelectronic devices on which people in-creasingly depend.

If such a particle hits a computer chip, itcan inject an electrical charge into the cir-cuit. Since chips work their magic by ma-nipulating packets of charge, that cancreate all sorts of problems. Dr Bhuva de-scribed how, in 2008, the autopilot of aQantas airliner had been knocked out by arogue particle. The resulting suddenplunge of about 200 metres injured manyof the passengers, a dozen seriously.

Subtler effects can be just as worrying.During a local election in Belgium in 2003,a single scrambled bit of information, al-most certainly caused by an errant particle,added 4,096 votes to one candidate’s tally.

storm did, however, do serious damage in1989, by inducing powerful currents inQuebec’s grid, blacking out millions ofpeople. It would therefore be useful, Jona-than Pellish of the Goddard Space FlightCentre, a NASA laboratory, told the meet-ing, to be able to forecast space weather inmuch the same way as weather is forecaston Earth. This would permit the most vul-nerable equipment to be disconnected, inadvance of a CME’s arrival, to prevent da-maging power surges.

Sturm und drangIt sounds straightforward enough, but isharder than it sounds. Though CMEs arecommon, they cause problems on Earthonly if they score a direct hit. The so-called“empty” interplanetary space of the solarsystem is, in fact, suffused by a thin soup ofcharged particles. These particles interactwith movingCMEs in ways that are hard topredict. That makes forecasting a storm’strack difficult. On top of this, CMEs them-selves have magnetic fields, with northand south poles, just as Earth does. Theway the poles of a CME line up with thoseof Earth can affect the intensity of the re-sulting electrical activity.

To try to understand all this better anumber of satellites already monitor thesun, looking for, among other things,CMEs. These include a fleet of Americanenvironment-modelling craft and also the

The American Association for the Advancement of Science

Tales of wonder

Boston

This year’s meeting of the AAAS looked at space weather, the cause ofasthma,submarine mining, mosquito traps and the peopling of the Americas

Science and technologyAlso in this section

64 The origins of asthma

64 Mining the oceans

65 Studying disease with mosquitoes

66 Peopling the Americas

64 Science and technology The Economist February 25th 2017

1

2 Since this gave an impossibly high total,the mistake was easily spotted. But had theparticle hit a different part of the circuit itmight have added a smaller number ofvotes—enough to change the outcomewithout anyone noticing. Moreover, as thecomponents from which computer chipsare built continue to shrink, they becomemore sensitive, making the problemworse. A modern computer might expectsomewhere between a hundred and athousand space-drizzle-induced errors perbillion transistorsperbillion hours ofoper-ation. That sounds low. But modern chipshave tens of billions of transistors, andmodern data centres have millions ofchips—so the numbers quickly add up.

The trick is to design circuits to cope.That is where Christopher Frost, whoworks at the Rutherford Appleton Labora-tory, near Oxford, thinks he can help. Heand his team have modified some particleaccelerators in a way that offers designersof electronic equipment the ability to testtheir products—and, crucially, to test themquickly. Dr Frost’s particle beams are mil-lions of times more intense than the radia-tion experienced by real-world devices.They deliver in minutes a dose that wouldtake years to arrive naturally.

This sort of pre-emptive action makessense. The threats from space drizzle (con-stant, though low-level) and from CMEs(rare, but potentially catastrophic) are real.Hardening equipment against drizzle, anddeveloping forecasts that tell you when todisconnect it to avoid CME-induced powersurges, are merely sensible precautions.7

CAN you be too clean? That is the ques-tion posed by the hygiene hypothesis,

which seeks to explain why, as many ill-nesses have become rarer in rich countries,some have become more common. Thehygiene hypothesis posits that the rise ofseveral of these diseases, including asth-ma, eczema and type-1 diabetes (all ofwhich seem associated with malfunctionsof the immune system), has been causedby improvements in hygiene of the sortthat have helped get rid of other illnesses.Exactly how that might happen is unclear.But at the AAAS meeting Brett Finlay of theUniversity of British Columbia, in Vancou-ver, persuasively filled in some of theblanks in the case ofasthma.

Asthma is caused by chronic inflamma-tion ofthe airways, and inflammation isan

immune response. The thinking behindthe hygiene hypothesis is that a lack of ex-posure to parasites and pathogens in whathas become an unnaturally clean environ-mentmeansa child’s immune system doesnot develop appropriately. Evidence thatasthma is a consequence of overcleanli-ness includes the facts that farm-raisedchildren are less prone to it than city-raisedones (farms are full of bacteria and othercritters that provoke immune responses),that those born by Caesarean section aremore prone than others (they do not re-ceive an initial bacterial inoculation frommaternal faeces and vaginal fluids), andthat those treated with antibiotics as ba-bies are also more prone. Dr Finlay there-fore wondered if he could find bacteriawhich might be involved in asthma protec-tion in the guts ofchildren.

To this end he got in touch with the or-ganisers of the Canadian Healthy InfantLongitudinal Development (CHILD) study,which looks at the development of chil-dren from birth to the age of five. He askedif the study’s organisers could include theregular collection of faeces as part of theirprotocol and he thus obtained stool sam-ples taken at the ages of three months, 12months and annually thereafter, the bacte-rial contents ofwhich he analysed.

Asthma does not normally manifest it-self before a child is five, but a tendency towheeze and a reaction to a particular skin-prick test are good indicators that the childin question will eventually become asth-matic. Recording both of these are routineparts of CHILD. Dr Finlay was thereforeable to correlate the composition of an in-fant’s gut flora with the presence or ab-sence of these indicators. When he did sohe found that children deficient, at the ageof three months, in four relatively rare bac-teria, Faecalibacterium, Lachnospira, Rothiaand Veillonella, were 20 times more likelythan those playing host to these species to

manifest the two predictive indicators. Armed with these results he joined

forceswith Philip Cooper, a researcher atStGeorge’s Hospital in London, to try thesame thing in Ecuador. This is a countrywhich has a similar prevalence (20%) ofasthma to that in Canada. The researchersfound that in Ecuador, too, infantile gutbacteria predict susceptibility to asthma—except that in this case a completely differ-ent set ofbugs are responsible.

Bug huntHow the presence in three-month-olds ofparticularmicroorganisms protects againstasthma remains unknown. But the factthat two different sets of them can do soprovides a way to investigate further. It isall a question of finding out what the va-rious bugs have in common.

These discoveries, moreover, offer thepossibility of treatment. If a newborn isfound to be deficient in the relevant bacte-ria, an inoculation of them into that child’sgut, perhaps in the form of an oral pro-biotic, might put matters right. Testing thisidea would, naturally, require clinicaltrials, but it is a promising line of inquiry.Meanwhile, Dr Finlay’s advice to parentsof young children is that, though cleanli-ness may be next to godliness, it is possibleto go too far.7

Asthma

Four good bugs

BOSTON

Certain bacteria protect against adisease that is a growing threat

A bit of muck might have helped

IN THE 1960s and 1970s, amid worriesabout dwindling natural resources, sev-

eral big companies looked into the idea ofmining the ocean floor. They proved theprinciple by collecting hundreds of tonnesof manganese nodules—potato-sized min-eral agglomerations that litter vast tracts ofDavy Jones’s locker. At first sight, thesenodules are attractive targets for miningbecause, besides manganese, they are richin cobalt, copper and nickel. As a commer-cial proposition, though, the idea nevercaught on. Working underwater provedtoo expensive and prospectors discoverednew mines on dry land. Worries aboutshortages went away, and ocean mining re-turned whence it had come, to the pages ofscience-fiction novels.

Now it is back. As Mark Hannington ofthe GEOMAR-Helmholtz Centre for OceanResearch, in Germany, explained to theAAAS, prototype mining machines are al-ready being tested, exploration rights div-vied up between interested parties, andthe legal framework put in place. Next

Oceanography

Fruits de mer

Boston

Plucking minerals from the seabed isbackon the agenda

The Economist February 25th 2017 Science and technology 65

1

2 week the International Seabed Authority,which looks after those parts of the oceanfloor beyond coastal countries’ 200 nauti-cal-mile exclusive economic zones, is issu-ing guidelines for the exploitation of sub-marine minerals. In DrHannington’s view,a gold rush is starting. And he was speak-ing only partly metaphorically.

One of the most advanced projects isthat ofNautilus Minerals, a Canadian firm.In January 2016 Nautilus took delivery ofthree giantminingmachines (two rock-cut-ters and an ore-collector) that movearound the seabed on tracks, like tanks. Itplans to start testing these this year. If allgoeswell the machinescould then start op-erating commercially in Nautilus’s conces-sion off the coast of Papua New Guinea,which prospecting shows contains orewith a copperconcentration of7%. (The av-erage for terrestrially mined ore is 0.6%.)This ore also contains other valuable met-als, including gold.

This approach (which is also that takenby firms such as Neptune Minerals, of Flor-ida, and a Japanese consortium led by Mit-subishi Heavy Industries) is different fromearlier efforts. It involves mining not man-ganese nodules, but rather a type of geo-logical formation unknown at the timepeople were looking into those nodules—submarine hydrothermal vents. Theserocky towers, the first ofwhich was discov-ered in 1977, form in places where jets ofsu-perheated, mineral-rich water shoot outfrom beneath the sea floor. They are foundnear undersea volcanoes and along theocean ridges that mark the boundaries be-tween Earth’s tectonic plates. They gener-ally lie in shallower waters than manga-nese nodules, and often contain morevaluable substances, gold among them.

They are not, though, as abundant asmanganese nodules, so if and when thetechnology for underwater mining is

proved, it is to nodules that people are like-ly to turn eventually. These really are therein enormous numbers. According to DrHannington, the Clarion-Clipperton frac-ture zone, a nodule field that stretches fromthe west coast ofMexico almost to Hawaii,contains by itself enough nickel and cop-per to meet global demand for several de-cades, and enough cobalt to last a century.

Mining, whether on land or underwa-ter, does come at an environmental cost,though. This was the subject of a presenta-tion by Stace Beaulieu of the Woods HoleOceanographic Institution, in Massachu-setts. The nature of that cost depends onthe ecosystem. The deep-sea plains whichhost nodule fields tend not to be home tobig animals, said Dr Beaulieu, but the sedi-ments the nodulesare found in playhost tomicroscopic critters that would be mostupset by the process of trawling that isneeded to bring the nodules to the surface.They might take decades to recover from it.

Hydrothermal vents are an even morepeculiar environment than nodule fields.Unlike almost every other ecosystem, theyare based not on energy from the sun, buton chemicals—particularly hydrogen sul-phide—dissolved in the ejected water thatare used by specialised bacteria to powertheirmetabolisms. This, and their isolationfrom one another in the manner of smalloceanic islands, means vents are host tomany distinct and rare species. Conserva-tionists therefore care about them a lot.

That said, as Dr Beaulieu pointed out,vent life may be more robust than manypeople assume. One of the hazards ofdwelling near an undersea volcano is thatan eruption can destroy your home in aninstant. The creatures that live aroundvents seem able to bounce back from suchcatastrophes fairly quickly, so a visit from amining machine might not be such a disas-ter after all. 7

Crunch time for submarine mining

IMAGINE a small drone that could flyaround sampling animals and people in

an effort to see which pathogens are pre-sent in an area, and what host species har-bour them. That would be invaluable toepidemiologists seeking to understandhow diseases spread, and how to predictand pre-empt their outbreaks. At the mo-ment, such a drone is beyond human tech-nology. But this may not matter, becausenature has already come up with one. It iscalled the mosquito.

Mosquitoes (female mosquitoes, at anyrate) draw blood from animals to feed on.While doing so, they also ingest any blood-born pathogens present in those animals.What a splendid idea, thought Ethan Jack-son and Jonathan Carlson, ofMicrosoft Re-search in Seattle, to design a system thatcaptures mosquitoes so that the pathogensthey have ingested can be studied. Thus, asDrJackson explained to the AAAS meeting,was Project Premonition born.

The core of the project is a portablemosquito trap. The current version of thisis a cylinder about 35cm high, with 64 cellsthe size ofmatchboxes arranged around itsexterior. Each of these cells has a door thatsprings shut in a tenth of a second in re-sponse to the breaking ofan infrared beamthat is shining invisibly inside it. The springis made from a shape-memory alloy—amaterial that, when bent into a newconfig-uration, remains in this new shape until anelectric current is run through it. Then itsuddenly reverts to the old shape. Mosqui-toes are lured to the cells by puffs of carbondioxide (which mimic an animal’s exhala-tions), or skin odours or ultraviolet light. Ifthey enter a cell, they break the beam andspring the trap.

One crucial piece of design is that thetrapscan be tuned to catch mosquitoes ofasingle, target species. Different species car-rydifferentpathogens, so a studyof certaindiseases may well want to trap a particularsort of mosquito. Each mosquito specieshas a characteristic wing-beat frequencyand the beam-detector inside a cell is sensi-tive enough to distinguish between these.It closes only when a member of the de-sired species flies inside.

Once a trap has done its job, it is pickedup and taken to a laboratory where the col-lected insects are extracted, mashed upand analysed metagenomically. Metage-nomics is a technique whereby the DNA ina sample containing material from severalspecies is extracted and sequenced with-

Epidemiology

Snap!

Boston

Howto use mosquitoes to combatdisease

66 Science and technology The Economist February 25th 2017

2 out first being sorted in any way. All spe-cies present thus contribute to the results,which are then matched against a data-base of known sequences, to see what isthere. In this way, Dr Jackson and Dr Carl-son are able to confirm the species of mos-quito captured (for, despite the clever elec-tronics, the traps do occasionally makemistakes), and also the hosts it has fed onand any pathogens it has picked up. Even ifan exact match is not possible for a partic-ular piece of DNA (not all species are in thedatabase), the system can make an educat-ed guess about the genus or family it camefrom. Sometimes, the absence of a match-ing sequence will be because geneticistshave not got around to sampling that par-ticular species. Sometimes, though (partic-ularly with abundant, tiny things like vi-ruses), it will be because the species ispreviously unknown to science. It shouldtherefore be possible to discover new po-tential pathogens in this way.

Dr Jackson and Dr Carlson have testedthe system successfully in Grenada and inHouston, Texas, and are now refining it.One hoped-for refinement is to producetraps light enough to be carried, deployedand collected by actual, human-builtdrones. This will make it possible to de-ploy them in trackless forested areas.These are often home to wild animals thatact as reservoirs for pathogens like Ebolavirus, which are mainly animal infectionsbut sometimes break out to become epi-demic in people. Indeed, an importantpoint about Project Premonition is that it isnot restricted to tracking pathogens whichare actually spread by mosquito but canalso follow those, like Ebola, which arenot. All that is required is for a pathogen tobe in the host’s bloodstream. Mosquitotrapping thus promises to become an im-portant tool in the monitoring and preven-tion of infectious disease.7

Gotcha

HOW America was originally colonisedis a topic of perennial interest at the

AAAS. Until recently, the earliest uncon-tested archaeological evidence of peopleliving in the New World came from SwanPoint, in Alaska. This dates back 14,400years. Linguists, however, maintain thatthe diversity of native languages in theAmericas could not have arisen so quickly.Conventional models of linguistic evolu-tion assume tongues separate in the waypopulations of organisms do—so that theflow of vowels, words and grammaticalstructures between groups must cease be-fore new languages can emerge, just as acessation of gene flow gives rise to newspecies. This suggests it would take at least50,000 years fora single population speak-ing a single language to diversify andspread through the Americas in a way thatyielded the pattern heard today. Since Na-tive Americans’ genes do, indeed, indicatethey all derive from a single population,this discrepancy in timing is a paradox.

That paradox may be close to resolu-tion. Recent digs have pushed the physicalevidence of America’s settlement back intime. Meanwhile, as the meeting heardfrom Mark Sicoli, a linguist at the Universi-ty of Virginia, in Charlottesville, a differentmodel of linguistic evolution brings thecommon ancestor of Native-Americantongues forward. Apply a few error bars tothe results and the two estimates touch—atabout 25,000 years ago.

The problem with explaining linguisticevolution in pure Darwinian terms is thatwords are not genes. Species, once sepa-rate, do not exchange genetic informationbecause they do not interbreed. Lan-guages, though, can exchange grammaticaland semantic elements when they meet,which can speed up diversification. Dr Si-coli thus turned to computational phyloge-neticanalysis, an area oflinguistic researchthat tries to work out whether and howsuch interaction may have taken place.

From the thousand or so Native-Ameri-can languages he chose four dozen spokenin Alaska and northern Canada, the part ofthe Americas closest to humanity’s pointof entry from Asia. He and his colleaguescreated a database that recorded, for eachof them, 116 linguistic features such assounds, parts of words, the functions ofthese parts and the ways a language com-bines words into phrases. They then usedthis to identify the influences of languageson each other. They also added geographi-

cal information, plotting the flow of lin-guistic change along the Pacific coast andthrough the river valleys. This nearlyhalved the time needed to give rise to themodern situation if the languages hadevolved independently from a single com-mon ancestor. That suggests the process ofdivergence may have begun as recently as25,000 years ago.

John Hoffecker, an archaeologist at theUniversityofColorado atBoulder, drew at-tention to a study of an archaeological sitecalled Bluefish Caves. This is in Yukon, aCanadian territory that abuts Alaska.Some of the remains found in these cavesdate back24,000 years. They include stonetools and the bones of horses, caribou andbison, all with marks which imply thosebones have been stripped of their flesh bysuch tools.

A third line ofevidence, a genetic analy-sis, adds weight to all this. It compared 31modern genomes from the Americas, Sibe-ria and various Pacific islands with 23 an-cient genomic sequences from archaeolog-ical sites in the Americas. The comparisonsuggested that Native-American genomesdiverged from their Siberian ancestors noearlier than 23,000 years ago. It alsoshowed that the Native-American line wasisolated for at least 8,000 years before biggenetic splits within it tookplace as peoplespread through their new homeland.

Combining everything, then, it seemsthat the band ofbrothersand sisters whosedescendants first populated the Americaslived somewhere between 25,000 and23,000 years ago. Very neat, if it were notfor the fact that archaeological evidenceappears to show that areas outside Alaskaand Yukon were colonised rapidly, startingsoon after15,000 years ago.

That could be because the ancestralband and its descendants were confinedfor much of the intervening period to a re-gion known to palaeogeographers as Be-ringia. This was composed of what arenow eastern Siberia, bits ofAlaska and Yu-kon in the Americas, and the Bering Straitbetween them (which was then dry land).Parts of Beringia were habitable wetlandsand grassland steppe. But the North Amer-ican ice sheets to its east would haveblocked any passage beyond. That couldaccount for the 8,000 years of genetic au-tarky in the ancestry of Native Americans,for it was not until the ice sheets retreated(starting about 16,000 years ago), that any-one in Beringia would have been able topass to the rest of the Americas.

To explain how languages might havecontinued to diversify in a genetically sta-ble population within Beringia, Dr Sicolisuggests itsmembersmayhave lived in dif-ferent habitats, separate enough for lin-guistic diversification, but mixing oftenenough to maintain a single gene pool. Theanswer to the question, “how was Ameri-ca peopled?” seems tantalisingly close.7

Peopling the Americas

Checkpoint

Boston

The first migrants to the NewWorld hadto wait 8,000 years to be admitted

The Economist February 25th 2017 67

For daily analysis and debate on books, arts andculture, visit

Economist.com/culture

1

CORRUPTION is never far from thefront page. In recent weeks, thousands

of Romanians protested against plans todecriminalise low-level graft, and Rolls-Royce was hit with a £671m ($835m) penal-ty for alleged bribery. Meanwhile, long-running corruption scandals continue toroil political and corporate leaders in Braziland Malaysia. The growing attention hasspurred governments to pledge action, asdozensdid ata global anti-corruption sum-mit in London last year.

Jason Sharman, professor of interna-tional relations at Cambridge University, isparticularly interested in “grand corrup-tion”: the theft of national wealth by klep-tocratic leaders and their cronies, often inpoor (albeit resource-rich) countries. It is asubject he knows well, having spent over adecade studying the offshore centres andvehicles—shell companies, for example—that are used to hide ill-gotten gains.

The list of light-fingered leaders whofeature in “The Despot’s Guide to WealthManagement” is long. It includes variousdead ones, such as Nigeria’s Sani Abacha,Mobutu Sese Seko of Zaire, Indonesia’sSuharto and Ferdinand Marcos of the Phil-ippines (whose shoe-loving wife, Imelda,graces the book’s cover). These four aloneran off with an estimated $55bn. More re-cent examples include the pre-Arab springleaders of Egypt, Libya and Tunisia, andViktor Yanukovych ofUkraine. The overall

and the Patriot Act), a determination to en-force them—with help from a special anti-kleptocracy unit in the Justice Depart-ment—and congressional backing. Senateinvestigations have highlighted the role ofbanks, lawyers and other “gatekeepers” inenabling grand corruption. America, Brit-ain and Switzerland are especially attrac-tive destinations for foreign wealth be-cause of their sophisticated financialcentres. All three have made strides in tack-ling corruption, but many gaps remain.

Anonymous shell companies, dubbedthe getaway cars of financial crime, are legion in America. Britain also maintains anetwork of opaque offshore satellites, in-cluding the British Virgin Islands. Policeand regulators are keen to know moreabout them, but lack funding. Switzerlandhas shed some of its secrecy and passedlaws to ease asset recovery and repatria-tion, but implementation tends to bepatchy; Mr Sharman thinks weak laws andstrong enforcement do more good thanstrong laws and weak enforcement. Healso includes a chapter on his native Aus-tralia which, he concludes (with help froma private investigator hired to sift throughcorporate records), is “able but unwilling”to stop inflows of iffy money from Chinaand Papua New Guinea.

Many of the difficulties in recoveringstolen assets relate to the border-crossingnature of the theft. The “mutual legal assis-tance” process, used by governments to re-quest or share information about bank ac-counts and company ownership, is clunkyand unreliable. Mr Sharman laments the“inherent difficulty of international legalaction in a world ofsovereign states”.

Investigations become more challeng-ing when the country where the allegedcorruption tookplace refuses to co-operate(usually because those under suspicion

amount that has been pilfered is anyone’sguess, given the murkiness of offshore fi-nance. Estimates for Egypt under HosniMubarak range from $1bn to $70bn. Onecomplicating factor is that much of themoney is siphoned off through “legal cor-ruption”, in business ventures that complywith local laws, often because of legisla-tive tinkering by pliant parliaments.

For a long time governments, even inthe rich world, seemed uninterested inbringing kleptocrats to book. That began tochange in the 1990s, as a result of twothings. The end ofthe cold war tookaway areason to turn a blind eye to theft by headsof client states. That coincided with a shiftin thinkingamongmakersofdevelopmentpolicy, who began to view corruption asone of the main causes of poverty. MrSharman also credits the rise of anti-cor-ruption NGOs and institutions that offerpractical help to track down former lead-ers’ loot, such as the Stolen Asset RecoveryInitiative, a joint UN-World Bankproject.

America has pushed the anti-corrup-tion agenda hardest, with strong laws(such as the Foreign Corrupt Practices Act

Corruption

Despots’ jackpots

Why it is so difficult to hold kleptocrats accountable

Books and artsAlso in this section

68 In praise of sleeper trains

68 “Les Misérables”: a biography

69 Richard Holmes illuminates the past

70 Boris Nemtsov, the movies

The Despot’s Guide to WealthManagement: On the InternationalCampaign against Grand Corruption. ByJ.C. Sharman. Cornell University Press; 261pages; $29.95 and £20.95

68 Books and arts The Economist February 25th 2017

1

2 still wield power). American prosecutorsmade only limited headway in their high-profile case against the free-spending sonof Teodoro Obiang Nguema Mbasogo,president of Equatorial Guinea since 1979.To their credit, America and Switzerlandseem undeterred by such blocking tacticsas they probe the still-unfolding 1MDB

scandal in Malaysia.Even when both sides are willing, diffi-

culties abound. Mr Sharman describes ahost of problems afflicting asset-recoveryefforts after the Arab revolutions in 2011,from basic transliteration headaches toproving under the laws of the host countrythat funds in a particular account were acquired through corruption (which, givenmoney’s fungibility, is especially difficult ifthe account-holder also has legitimate

businesses). Egypt found itself in a frustrat-ing situation. It needed to find “the specificlocation and nature ofstolen assets abroadto recover them”, yet countries holdingthem would co-operate only once Egyp-tians had located these assets. The authori-ties in Cairo became so frustrated that in2012 the government sued the British Trea-sury after it had denied 15 of Egypt’srequests for legal assistance.

So far, little money has been returned toCairo. This fits in with the broader pattern.As of 2014, the worldwide amount oflooted state wealth thathad been repatriat-ed stood at just $4.5bn, compared withhundreds of billions believed stolen. Evenseizures of criminal proceeds in Americaare a mere “pin prick”, according to an offi-cial. But although the extra anti-corruption

efforts have not translated into a big in-crease in recoveries, they may still have adeterrent effect—just as speed limits makea difference to people’s driving, eventhough only a few drivers are fined.

Mr Sharman ends with some sugges-tions for strengthening the fight against themega-thieves: tougher penalties for firmsthat help them, especially banks (fines arepaltry, except in America); blacklisting ofthe worst kleptocracies, with their officialsdenied physical or financial access to theWest; and greater use of tax policy, espe-cially in light of the recent wave of interna-tional tax-transparency agreements. LikeAl Capone, most corrupt officials are alsoguilty of a tax crime. The fact that these arestill only proposals shows just how farthere is to go. 7

Sleeper trains

The end of the line

SLEEPER trains occupy a romanticcorner ofany traveller’s soul. One of

Hercule Poirot’s most gripping adven-tures takes place on the Simplon OrientExpress, which used to run from Paris toIstanbul. A famous scene in Alfred Hitch-cock’s “North by Northwest” features anight train entering a tunnel. James Bond,meanwhile, detects a spy on a sleepertrain after noticing him behave suspi-ciously in the dining car (“Red wine withfish!” Bond mutters).

In some parts of the world, the nostal-gia lives on. The Caledonian Sleeper,complete with smartly dressed waiters,neeps and tatties and a selection of whis-kies, is the best way to travel betweenLondon and Scotland. Elsewhere, how-ever, sleepers are on their last legs. Flightsacross Europe have become so cheap thatfewer and fewer travellers bother withthe wagon-lit. Sensing that the end is nigh,Andrew Martin, a British novelist, haswritten an ode to the sleeper.

“Night Trains” is a potted history ofthe mode, combined with accounts ofjourneys Mr Martin has taken on sleeperroutes across Europe. The reader joinshim on a train to Munich, where he eats atuna sandwich on board. Travelling fromParis to Venice, he thinks he has beenrobbed of€100 ($105). The service to Niceis cancelled, yet such is his love for sleep-ing aboard that he spends the night onthe train as it sits on the platform.

These stories make clear that thegolden age of the sleeper train is long

past. How different things were in the19th century, when a passenger on theOrient Express could dine on gigot demouton à la Bretonne, épinards au sucreand champagne aplenty. The onlymodern-day sleeper train which comesup to Mr Martin’s exacting standards isthe Nordland, which trundles towardsnorthern Norway.

Mr Martin has a singular fascinationwith how much sex everyone had onboard. But the real question that theuninitiated most often asksleeper fanat-ics is: “Do you sleep?” After a read ofMrMartin’s book, the answer would seem tobe a resounding “no”: clanking andshunting wake him up time and again.Still, it is hard not to be won over by hisenthusiasm. Catch the sleeper train,before it’s too late.

Night Trains: The Rise and Fall of theSleeper. By Andrew Martin. Profile Books;248 pages; £14.99

Elegance on wheels

“AS LONG as there are ignorance andpoverty on Earth,” wrote Victor

Hugo in his preface to “Les Misérables”,“books such as this one may not be use-less.” Over the 155 years since it was firstpublished in France and then elsewhere,the novel has never lost its relevance—or itspopularity.

Around 65 film versions (the first in1909) make “Les Misérables” the most fre-quently adapted novel of all time. The firststage musical opened in Philadelphia inJanuary 1863. Since 1980 Alain Boublil andClaude-Michel Schönberg’s operatic melo-drama has been performed more than53,000 times in 44 countries and 349 cities.Yet, from the outset, adapters and trans-lators cherry-picked elements from their supersized source. British admirers had towait until 2008 for a complete English textof the novel in the order in which the au-thor had planned it to be read. Even to lov-ers of “Les Mis”, Hugo’s world-shakingblockbuster can feel like a lost continent.

David Bellos, an English-born professorofFrench literature at Princeton Universityand an eminent translator, navigatesthrough its five parts, 48 “books” and 365chapters with clarity and wit. At once erudite and entertaining, he shows howthe novel’s magic lies in its multitaskingversatility. Hugo’s extraordinary feat is todeliver “an intricately realistic portrait” ofFrance after Napoleon, “a dramatic page-turner” packed with suspense—and a de-monstration of “generous moral princi-

Literary biography

By the book

The Novel of the Century: The ExtraordinaryAdventure of Les Misérables. By DavidBellos. Particular Books; 307 pages; £20. Tobe published in America by Farrar, Straus &Giroux in March; $27

The Economist February 25th 2017 Books and arts 69

1

2 ples” that readers still find appealing today.Hugo, already the author of “Notre-

Dame de Paris” and a literarysuperstar asapoet, playwright and novelist, began in1845 to write his story of a former convictseeking a new life in a society riggedagainst the poor and outcast. Around thequesting figure of Jean Valjean, freed fromthe prison-hulks in 1815 to make his wayagainst the steepest odds, Hugo stitched avast but “very tightly knit” tapestry ofsocial strife and personal rebirth.

The revolution of 1848, in which theradical firebrand discovered that “his headwas with order” although his heart “waswith the poor”, interrupted Hugo’s mam-moth project. It resumed after the exiledwriter, banished by the upstart emperor,Napoleon III, settled on the Channel Is-land of Guernsey: no longer a “brilliantcareerist” but a “stand-alone protester”.

Curiously, this “tiny feudal outpost ofthe British crown” hosted the gestationand birth of a book that won hearts andchanged minds across the world. The edit-ing and printing of the precious manu-script depended on the schedules ofQueen Victoria’s Royal Mail and theGuernsey steamer timetables. In 1861 “thebiggest deal in book history” saw Hugopaid the equivalent of 20 years of a bishop’s stipend: enough “to build a smallrailway”. By late 1862, the year of publica-tion, Charles Wilbour’s English translationwas reported to be “the largest order everplaced for a book in America”.

Save for Hugo’s literary rivals (Alex-andre Dumas likened it to “wadingthrough mud”), everybody loved the longhaul of Valjean’s rehabilitation in the com-pany of characters who soon entered folk-lore: the street-girl Fantine, her daughterCosette, the urchin Gavroche, the studentMarius. Shorn of its condemnation of slav-ery, the novel even circulated in a pirate

edition among Confederate soldiers dur-ing the American civil war. In a weary punon their commander’s name, they dubbedthemselves “Lee’s Miserables”.

From the humane treatment of ex-offenders to the care ofstreet children, “LesMisérables” spearheaded calls for reformand contributed to “the future improve-ment of society”. Few books really changethe world. This one did, long before itbroke box-office records on stage. In themusical Hugo’s hero intones—in a songloved by television talent-show contes-tants—“Bring Him Home”. Mr Bellos doesjust that, as he restores “Les Mis” to itsmaker and his times.7

Nothing miserable about it

RICHARD HOLMES is one of Britain’sbest-known biographers. Ever since

1974, when his first work of non-fiction,about Percy Bysshe Shelley, won the Som-erset Maugham prize, he has delightedreaders with his lives of the great figures ofthe Romantic era.

The serious biographer, he says, has to“step back, step down, step inside thestory” to discover “the biographer’s mostvaluable but perilous weapon: empathy.”Mr Holmes is driven by a “strange, unap-peased sense of some continuous, intenseand inescapable pursuit.” Biography, hesays, is “a simple act of complex friend-

ship”, “a handshake across time, but alsoacross cultures, across beliefs, across disci-plines, across genders and across ways oflife.” The idea of a quest, which seeks bothknowledge and understanding, is centralto his work.

In “This Long Pursuit”, which came outin Britain last autumn and is about to bepublished in America, the 71-year-old MrHolmes is revisiting his old heroes, bring-ing them and their milieux vividly to life.In the process he does a lot to illuminatethe very nature ofbiography itself.

He weaves his reflections around a collection of portraits that are, in essence,distilled miniatures. Among them are thefamiliar figures of Shelley, Samuel TaylorColeridge, John Keats and William Blake,as well as many of the scientists who peo-ple an earlier book, “The Age of Wonder”(2008), itself a quest to uncover “scientificpassion in all its manifestations”.

The destructive divide between the sciences and the arts, which bedevils contemporary life, was, as Mr Holmesshows, neither a natural nor a necessarydivide. (Indeed, the word “scientist” wasnot coined until 1833.) To prove that, MrHolmes draws out the unity that existedbetween the sciences and the arts in theRomantic era. Among the many examplesis the complex friendship between Cole-ridge and Sir Humphry Davy, the chemistwho experimented with nitrous oxide(laughing gas) and whose descriptions ofits effects parallel Coleridge’s account ofopium hallucinations in his famous poem,“Kubla Khan”.

“This Long Pursuit” also explores thelives ofsome of the inevitably less familiarwomen writers and scientists who shapedthis era in surprising ways, despite beingexcluded bystatute from becomingfellowsof the Royal Society until 1945. There isCaroline Herschel, an astronomer whodiscovered eight comets and was the firstwoman in British science to be awarded anofficial salary by the Crown. Margaret Cavendish, often caricatured as MadMadge, wrote poetry that celebrated thewonders of astronomy and protestedagainst the cruelty done to animals in thename of science. Mary Somerville virtual-ly invented popular science writing. MrHolmes argues that the history of Britishscience needs a “subtle revision” because“precisely by being excluded from the fellowship ofthe Society, [women] saw thelife ofscience in the wider world.”

The biographer writes with insightabout how women navigated the societiesin which they lived and wrote. Mary Woll-stonecraft’s life—with all the “revolution-ary hopes and freedoms” that it represent-ed—provides rich material for Mr Holmes.Writer, philosopher, travellerand advocateof women’s rights, Wollstonecraft was aninternational literary celebrity during herlifetime: “a woman of uncommon talents

History and biography

Handshake withthe past

This Long Pursuit: Reflections of a RomanticBiographer. By Richard Holmes. WilliamCollins; 360 pages; £25. To be published inAmerica by Pantheon in March; $30

70 Books and arts The Economist February 25th 2017

2 and considerable knowledge”, read oneobituary when she died after giving birthto the future Mary Shelley, the author of“Frankenstein” and the poet’s wife.

Mr Holmes analyses the downs andups of Wollstonecraft’s reputation, espe-cially in the wake of the intimate and revealing biography by her heart-brokenhusband, William Godwin. The personalin relation to Wollstonecraft—whose lifeVirginia Woolf described as “an attempt tomake human conventions conform moreclosely to human needs”—was deeplypolitical. For a century after her death, shewas reviled; only when the feminist move-ment began gaining traction was her lifeand writing reassessed. Part of the move tobring her to wider attention was made byMr Holmes, the biographer with the hand-shake across time.7

ASMALL girl sits on her father’s shoul-ders, spelling out words on a poster:

Pro-pa-gan-da u-bi-va-et (“Propagandakills”). Thousands of people trampthrough mud, bearing Russian flags andportraits of Boris Nemtsov, a bright andhonest liberal politician, who had beenshot dead two days earlier on a bridge byRed Square. It is March 1st 2015, but it feelslike the start ofa long winter.

“Why did he take the bridge?” asks thelittle girl. “He was crossing the bridge onthe way home, walking a bit in the eve-ning. The view is nice from here,” herfather explains. “But he did good things,”the little girl replies. “He did good things.We should not have let him get killed. Weshould have guarded him.” Doing the rightthing in Russia can often get you killed.

A balloon with a black ribbon flies upinto the low, grey wintry sky. The cameracuts to Nemtsovata railwaystation, flirtingwith Zosya Rodkevich, a 22-year-old anar-chist and documentary-maker. She wouldfilm him for three years, not knowing that“My Friend Boris Nemtsov” would be hisepitaph. “I saw the assignment as a chal-lenge,” read the film’s opening words.“What could be interesting about an old,narcissistic bourgeois? He was 53…He hadbeen deputy prime minister and the ‘heirof Boris Yeltsin’. But he turned out to becool, kind and genuine. We becamefriends. And then he was killed.”

Death changes the view of someone’slife. ButMsRodkevich’swork, one ofsever-al new films on Nemtsov, is a close-up

study ofa living man—boastful, charismat-ic, sincere—and isdevoid ofglossor consid-eration for history. Her camera inhabits hisworld, both physically and mentally. Occa-sionally he would ask: “Why are you film-ing this, silly?” But the camera keeps roll-ing, catching him, variously, asleep on abunkbed in a train, strippingalmost nakedor talking about freedom and the perverselove ofstate power.

Nemtsov climbs a bell tower under ablue winter sky (“Oh, I want to be the bellringer. I will wake Russia right up”). Hekisses women, talks to strangers, sub-mergeshimselfin an ice-hole and gets bun-dled into a police van during Moscowstreet protests in 2012. The man in this filmis not a saint, but a mortal—full of life, energy, pain and love for the country thatonce adored him, but was then taught tohate him.

By 2015, after Russia’s annexation ofCrimea, the Kremlin unleashed a wave ofanti-liberal aggression that shocked Nem-tsov. The former physicist who studied infrasound, laughingly explains to fellowopposition leaders: “Each person has hisown resonant frequency. It depends on thesize of the heart and body mass. If youstrike the heart’s resonant frequency, you’llhave a heart attackand goodbye.”

A hint ofdeath runs through the film. Inthe penultimate scene, he boards a trainback to Moscow from Yaroslavl where hewon a seat on a local council, and hums anold Soviet tune: “Old motif of railroads,eternal youth of railway lines. It seemsyour whole life is ahead. Don’t go wrongwhen you are choosing your route.”

The next shot is of Nemtsov in a coffin,his mother, wife and small daughter stand-ing by his side. The director with the nosering stares into the camera. In the last mi-nute of the film, a funerary violin breaks

into an energetic Soviet song that accom-panies a kaleidoscope of photographs ofNemtsov’s political life.

That minute is expanded in anotherfilm, “The Man Who Was Too Free”, madeby Mikhail Fishman and Vera Krichev-skaya for the second anniversary of Nem-tsov’s death on February 27th. It is not somuch a biography as a cardiogram of Rus-sian political life over the past quarter of acentury with all its seizures and spasms.The sound of a heartbeat runs through thefilm, until it flatlines at the end. It wouldtake Nemtsov’s death to reveal the scale ofRussia’s loss.

At 32 he became Russia’s youngestregional boss, in charge of Nizhny Nov-gorod, which had served, a few years earli-er, as a place of exile for another physicistand humanist, Andrei Sakharov. Nemtsovembodied the hope foran open, democrat-ic and optimistic Russia. His only promiseto his supporters was “not to lie”, which henever broke.

The film is a montage of previously un-seen footage and monologues by peoplewho knew him well. It has no narrator, al-lowing for constantly gnawing questionsabout missed opportunities and historicalalternatives. What if Nemtsov had notmoved to Moscow as the first deputyprime minister? What if the oligarchs whocontrolled the media had not set out to destroy him out of greed and arrogance?What if he had become Russia’s president,as Yeltsin had originally wished? What ifmembers of Yeltsin’s family hadn’t per-suaded the ailing man to appoint VladimirPutin as his successor?

The contrast between the tall, generousNemtsov and Mr Putin is so obvious that,at a preview, a sequence showing the Rus-sian leader made the audience burst outlaughing. But it was not just the Kremlinthat came to fearNemtsov. So, paradoxical-ly, did those who considered him an ally.Mikhail Fridman, one of Russia’s richestmen and a friend of Nemtsov’s, candidlyadmits that he stopped seeing him: “I real-ised that my relationship with him wouldbe toxic for my business, my partners andmy colleagues.”

Whereas the Russian elite shunnedNemtsov for fear of upsetting the authori-ties, Alexei Navalny, an opposition politi-cian who spent a night in prison with him,shunned him for his past links to the Krem-lin. “I sawhim asa man ofthe 1990s, a goodman but one who brought political pro-blems. I did not want him to support meduring the Moscow mayoral elections.”

At the end, Nemtsov, who was alwayssurrounded by people, walks alone atnight on a Moscow street. His voice comesas though from the otherside: “People whofought for freedom in Russia were alwaysin a minority. They moved the country for-ward, often at the cost of their lives…But Iwill come back! Don’t you worry.”7

Boris Nemtsov, the movies

A future thatwasn’t

Two films about a slain politicianuncoverthe darksoul ofmodern Russia

Heroes don’t die

Statistics on 42 economies,plus a closer look at sovereign-wealth funds

Economicdata

Economic data% change on year ago Budget Interest

Industrial Current-account balance balance rates, %Gross domestic product production Consumer prices Unemployment latest 12 % of GDP % of GDP 10-year gov't Currency units, per $latest qtr* 2016† latest latest 2016† rate, % months, $bn 2016† 2016† bonds, latest Feb 22nd year ago

United States +1.9 Q4 +1.9 +1.6 nil Jan +2.5 Jan +1.3 4.8 Jan -476.5 Q3 -2.6 -3.2 2.42 - -China +6.8 Q4 +7.0 +6.7 +6.0 Dec +2.5 Jan +2.0 4.0 Q4§ +210.3 Q4 +2.4 -3.8 3.01§§ 6.88 6.52Japan +1.7 Q4 +1.0 +0.9 +3.2 Dec +0.3 Dec -0.2 3.1 Dec +190.9 Dec +3.7 -5.5 0.10 113 113Britain +2.0 Q4 +2.9 +2.0 +4.3 Dec +1.8 Jan +0.7 4.8 Nov†† -138.1 Q3 -5.4 -3.7 1.28 0.80 0.71Canada +1.3 Q3 +3.5 +1.2 +1.5 Nov +1.5 Dec +1.5 6.8 Jan -53.6 Q3 -3.5 -2.4 1.72 1.32 1.37Euro area +1.7 Q4 +1.6 +1.7 +2.0 Dec +1.8 Jan +0.2 9.6 Dec +399.5 Dec +3.3 -1.9 0.28 0.95 0.91Austria +1.2 Q3 +2.4 +1.5 +2.3 Nov +2.0 Jan +0.9 5.7 Dec +8.0 Q3 +2.5 -1.0 0.61 0.95 0.91Belgium +1.1 Q4 +1.6 +1.2 +0.4 Nov +2.6 Jan +1.8 7.6 Dec +3.4 Sep +1.0 -3.0 0.74 0.95 0.91France +1.1 Q4 +1.7 +1.2 +1.3 Dec +1.3 Jan +0.3 9.6 Dec -26.8 Dec‡ -1.1 -3.3 1.10 0.95 0.91Germany +1.8 Q4 +1.7 +1.8 -0.6 Dec +1.9 Jan +0.4 5.9 Jan +294.5 Dec +8.9 +0.6 0.28 0.95 0.91Greece +0.2 Q4 -1.4 +0.4 +2.1 Dec +1.2 Jan -0.8 23.0 Nov -1.1 Dec -0.3 -7.5 7.34 0.95 0.91Italy +1.1 Q4 +0.8 +0.9 +6.6 Dec +1.0 Jan -0.1 12.0 Dec +50.7 Dec +2.7 -2.5 2.19 0.95 0.91Netherlands +2.3 Q4 +2.0 +2.0 +4.8 Dec +1.7 Jan +0.1 6.4 Jan +57.1 Q3 +8.1 -1.1 0.48 0.95 0.91Spain +3.0 Q4 +2.8 +3.2 -1.6 Dec +3.0 Jan -0.3 18.4 Dec +24.3 Nov +1.8 -4.6 1.75 0.95 0.91Czech Republic +1.6 Q3 +0.8 +2.4 +2.7 Dec +2.2 Jan +0.7 5.3 Jan§ +3.7 Q3 +1.7 nil 0.68 25.6 24.5Denmark +1.1 Q3 +1.6 +1.0 +10.0 Dec +0.9 Jan +0.3 4.3 Dec +24.5 Dec +7.3 -1.4 0.31 7.05 6.77Norway +1.8 Q4 +4.5 +0.6 -2.2 Dec +2.8 Jan +3.5 4.4 Dec‡‡ +18.0 Q3 +4.2 +3.5 1.73 8.37 8.60Poland +2.0 Q3 +7.0 +2.8 +9.0 Jan +1.8 Jan -0.7 8.3 Dec§ -2.5 Dec -0.5 -2.5 3.90 4.08 3.96Russia -0.4 Q3 na -0.5 +2.3 Jan +5.0 Jan +7.1 5.6 Jan§ +22.2 Q4 +2.0 -3.5 8.37 57.9 75.4Sweden +2.8 Q3 +2.0 +3.1 -0.9 Dec +1.4 Jan +1.0 7.3 Jan§ +22.2 Q3 +4.6 +0.2 0.66 8.99 8.50Switzerland +1.3 Q3 +0.2 +1.4 +0.4 Q3 +0.3 Jan -0.4 3.3 Jan +68.2 Q3 +9.4 +0.2 -0.15 1.01 1.00Turkey -1.8 Q3 na +2.4 +1.2 Dec +9.2 Jan +7.8 12.1 Nov§ -32.6 Dec -4.4 -1.1 10.75 3.59 2.94Australia +1.8 Q3 -1.9 +2.4 -0.2 Q3 +1.5 Q4 +1.3 5.7 Jan -47.9 Q3 -3.1 -2.3 2.84 1.30 1.38Hong Kong +3.1 Q4 +4.8 +1.2 -0.1 Q3 +1.3 Jan +2.4 3.3 Jan‡‡ +13.6 Q3 +2.8 +1.3 1.90 7.76 7.77India +7.3 Q3 +8.3 +6.9 -0.4 Dec +3.2 Jan +4.8 5.0 2015 -11.1 Q3 -0.6 -3.8 6.94 67.0 68.6Indonesia +4.9 Q4 na +5.0 +4.3 Dec +3.5 Jan +3.5 5.6 Q3§ -16.3 Q4 -2.1 -2.3 7.50 13,367 13,438Malaysia +4.5 Q4 na +4.3 +4.8 Dec +3.2 Jan +2.1 3.5 Dec§ +6.0 Q4 +1.9 -3.4 4.05 4.45 4.20Pakistan +5.7 2016** na +5.7 +7.0 Dec +3.7 Jan +3.8 5.9 2015 -4.9 Q4 -1.8 -4.6 7.59††† 105 105Philippines +6.6 Q4 +7.0 +6.9 +23.0 Dec +2.7 Jan +1.8 4.7 Q4§ +3.1 Sep +0.9 -2.3 4.96 50.2 47.6Singapore +2.9 Q4 +12.3 +1.8 +21.3 Dec +0.2 Dec -0.5 2.2 Q4 +56.7 Q4 +23.6 +0.7 2.27 1.42 1.40South Korea +2.3 Q4 +1.6 +2.7 +4.3 Dec +2.0 Jan +1.0 3.8 Jan§ +98.7 Dec +7.4 -1.6 2.25 1,143 1,234Taiwan +2.9 Q4 +1.8 +1.4 +6.2 Dec +2.2 Jan +1.4 3.8 Dec +70.9 Q4 +12.9 -0.2 1.12 30.8 33.2Thailand +3.0 Q4 +1.7 +3.2 +0.5 Dec +1.6 Jan +0.2 0.8 Dec§ +46.4 Q4 +10.7 -2.1 2.64 35.0 35.7Argentina -3.8 Q3 -0.9 -2.2 -2.5 Oct — *** — 8.5 Q3§ -15.7 Q3 -2.7 -4.7 na 15.5 15.1Brazil -2.9 Q3 -3.3 -3.5 nil Dec +5.4 Jan +8.1 12.0 Dec§ -23.8 Jan -1.2 -6.3 10.16 3.08 3.95Chile +1.6 Q3 +2.5 +1.7 +0.3 Dec +2.8 Jan +3.8 6.1 Dec§‡‡ -4.8 Q3 -1.6 -2.8 4.19 642 692Colombia +1.6 Q4 +4.0 +1.6 +2.2 Dec +5.5 Jan +7.5 8.7 Dec§ -13.7 Q3 -4.8 -3.8 7.00 2,893 3,316Mexico +2.4 Q4 +2.9 +2.1 -0.6 Dec +4.7 Jan +2.9 3.7 Dec -30.6 Q3 -2.9 -2.6 7.32 19.9 18.1Venezuela -8.8 Q4~ -6.2 -14.1 na na +428 7.3 Apr§ -17.8 Q3~ -2.0 -24.3 10.43 10.0 6.31Egypt +4.5 Q2 na +4.3 +17.2 Dec +28.2 Jan +13.8 12.4 Q4§ -20.8 Q3 -6.9 -12.2 na 15.8 7.83Israel +4.2 Q4 +6.2 +3.5 -1.2 Dec +0.1 Jan -0.5 4.3 Dec +13.3 Q3 +3.3 -2.2 2.30 3.71 3.91Saudi Arabia +1.4 2016 na +1.4 na -0.4 Jan +3.5 5.6 2015 -46.8 Q3 -5.7 -11.4 na 3.75 3.75South Africa +0.7 Q3 +0.2 +0.5 -0.8 Dec +6.6 Jan +6.3 26.5 Q4§ -12.3 Q3 -3.8 -3.4 8.74 13.1 15.2

Source: Haver Analytics. *% change on previous quarter, annual rate. †The Economist poll or Economist Intelligence Unit estimate/forecast. §Not seasonally adjusted. ‡New series. ~2014 **Year ending June. ††Latest 3 months. ‡‡3-month moving average. §§5-year yield. ***Official number not yet proved to be reliable; The State Street PriceStats Inflation Index, Jan 29.53%; year ago 30.79% †††Dollar-denominated bonds.

72 The Economist February 25th 2017Economic and financial indicators

The Economist February 25th 2017 Economic and financial indicators 73

Indicators for more countries and additionalseries, go to: Economist.com/indicators

Othermarkets

Other markets% change on

Dec 30th 2016

Index one in local in $Feb 22nd week currency terms

United States (S&P 500) 2,362.8 +0.6 +5.5 +5.5

United States (NAScomp) 5,860.6 +0.7 +8.9 +8.9

China (SSEB, $ terms) 349.1 +1.3 +2.1 +2.1

Japan (Topix) 1,557.1 +0.2 +2.5 +5.5

Europe (FTSEurofirst 300) 1,472.8 +0.5 +3.1 +3.1

World, dev'd (MSCI) 1,843.1 +0.5 +5.2 +5.2

Emerging markets (MSCI) 945.6 +0.4 +9.7 +9.7

World, all (MSCI) 445.9 +0.5 +5.7 +5.7

World bonds (Citigroup) 884.3 +0.3 nil nil

EMBI+ (JPMorgan) 794.8 +0.3 +2.9 +2.9

Hedge funds (HFRX) 1,224.0§ -0.1 +1.7 +1.7

Volatility, US (VIX) 11.9 +12.0 +14.0 (levels)

CDSs, Eur (iTRAXX)† 73.5 +0.7 +1.9 +1.9

CDSs, N Am (CDX)† 62.5 -0.6 -7.7 -7.7

Carbon trading (EU ETS) € 5.1 +0.2 -22.9 -23.0

Sources: Markit; Thomson Reuters. *Total return index. †Credit-default-swap spreads, basis points. §Feb 17th.

The Economist commodity-price index

The Economist commodity-price index2005=100 % change on one one

Feb 14th Feb 21st* month year

Dollar Index

All Items 150.7 148.6 -0.8 +17.9

Food 160.2 158.7 -2.6 +9.3

Industrials

All 140.9 138.1 +1.4 +30.2

Nfa† 151.0 145.7 +0.1 +34.6

Metals 136.6 134.9 +2.0 +28.3

Sterling Index

All items 220.0 216.7 -0.7 +33.4

Euro Index

All items 177.4 175.3 +1.1 +23.4

Gold

$ per oz 1,226.2 1,234.7 +1.8 +0.8

West Texas Intermediate

$ per barrel 53.2 54.1 +2.8 +80.4

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

Markets% change on

Dec 30th 2016

Index one in local in $Feb 22nd week currency terms

United States (DJIA) 20,775.6 +0.8 +5.1 +5.1

China (SSEA) 3,414.9 +1.5 +5.1 +6.2

Japan (Nikkei 225) 19,379.9 -0.3 +1.4 +4.3

Britain (FTSE 100) 7,302.3 nil +2.2 +3.1

Canada (S&P TSX) 15,830.2 -0.1 +3.5 +5.3

Euro area (FTSE Euro 100) 1,130.0 +0.4 +1.6 +1.6

Euro area (EURO STOXX 50) 3,339.3 +0.5 +1.5 +1.4

Austria (ATX) 2,787.1 -0.7 +6.4 +6.4

Belgium (Bel 20) 3,623.6 +0.1 +0.5 +0.4

France (CAC 40) 4,895.9 -0.6 +0.7 +0.7

Germany (DAX)* 11,998.6 +1.7 +4.5 +4.5

Greece (Athex Comp) 647.1 +3.3 +0.5 +0.5

Italy (FTSE/MIB) 18,884.9 -0.9 -1.8 -1.9

Netherlands (AEX) 499.1 +0.5 +3.3 +3.3

Spain (Madrid SE) 957.0 -1.2 +1.4 +1.4

Czech Republic (PX) 972.7 nil +5.5 +5.5

Denmark (OMXCB) 833.0 +0.6 +4.3 +4.3

Hungary (BUX) 34,112.9 +0.4 +6.6 +6.9

Norway (OSEAX) 770.4 +0.1 +0.8 +3.6

Poland (WIG) 59,451.1 +2.7 +14.9 +17.4

Russia (RTS, $ terms) 1,146.0 -2.3 -0.5 -0.5

Sweden (OMXS30) 1,582.1 +0.5 +4.3 +5.4

Switzerland (SMI) 8,585.9 +1.2 +4.5 +4.9

Turkey (BIST) 88,531.3 +0.7 +13.3 +10.9

Australia (All Ord.) 5,850.1 -0.2 +2.3 +8.8

Hong Kong (Hang Seng) 24,202.0 +0.9 +10.0 +9.9

India (BSE) 28,864.7 +2.5 +8.4 +9.9

Indonesia (JSX) 5,358.7 -0.4 +1.2 +2.0

Malaysia (KLSE) 1,708.1 -0.1 +4.0 +4.8

Pakistan (KSE) 48,981.7 -0.5 +2.5 +2.0

Singapore (STI) 3,122.2 +1.1 +8.4 +10.5

South Korea (KOSPI) 2,106.6 +1.1 +4.0 +9.9

Taiwan (TWI) 9,778.8 -0.2 +5.7 +10.6

Thailand (SET) 1,572.0 -0.1 +1.9 +4.2

Argentina (MERV) 19,915.3 +1.3 +17.7 +20.3

Brazil (BVSP) 68,589.6 +0.9 +13.9 +20.5

Chile (IGPA) 21,870.6 +0.7 +5.5 +10.1

Colombia (IGBC) 9,929.4 -0.4 -1.7 +1.9

Mexico (IPC) 47,195.7 +0.1 +3.4 +7.0

Venezuela (IBC) 34,869.5 +1.7 +10.0 na

Egypt (EGX 30) 12,401.1 -0.4 +0.5 +15.3

Israel (TA-100) 1,289.3 +0.5 +1.0 +4.9

Saudi Arabia (Tadawul) 7,062.9 -0.2 -2.4 -2.4

South Africa (JSE AS) 52,088.6 -0.8 +2.8 +7.4

Indicators for more countries and additionalseries, go to: Economist.com/indicators

Sovereign-wealth funds

Source: Sovereign WealthFund Institute *Some figures are estimates

Assets, December 2016*, $trn

0 0.3 0.6 0.9 1.2 1.5 1.8

China

UAE

Norway

Saudi Arabia

Kuwait

Singapore

Hong Kong

Qatar

United States

Kazakhstan

Russia

South Korea

Australia

Norway has proposed changes to its$900bn sovereign-wealth fund, includingincreasing its stockmarket holdings byabout $90bn. The fund is the world’slargest, according to the SovereignWealth Fund Institute, a think-tank.China has the most assets under manage-ment though: $1.6trn between its fourfunds. Oil-and-gas-based funds make upmore than half of the market by assetvalue and low prices have created chal-lenges for commodity exporters. SaudiArabia is trying to diversify away from oiland intends its Public Investment Fund toplay a central role in the change. SaudiAramco’s initial public offering wouldswell it enormously, but the timing of theshare sale is uncertain.

74 The Economist February 25th 2017

SOMETIMES she just couldn’t settle atanything. At ten she ran away from

home to staywith a girlfriend in a motel. At16 she married a man who took her for aride in his black Ford car, but she left aftertwo months because he beat her. She livedon the streets, slept with women and men,got pregnant by the men. Pot, acid, mesca-lin, she did it all. Work was whatever camealong: barhop, carnival barker, house-painter, cleaner. She got involved in thewhole abortion debate first on one sideand then, when she took Jesus Christ forher personal saviour, on the other. Thatmade her famous, though nobody knewwho the regular Norma McCorvey was.And maybe they didn’t care.

What her mind had been crystal-clearabout though, in the last months of 1969,was that she had to get rid ofher latest preg-nancy. She was 22, and this was her third.The first baby, her daughter Melissa, hadbeen taken away by her mother who saidshe was a filthy whore and not fit to raiseher, and the second baby had been adopt-ed by its father. Now there was anotherone growing in her body. The state of Tex-as, where she lived, banned abortions un-less the woman’s life was in danger. Shecouldn’t say it was. And because she waspoor, she couldn’t go to Mexico (as one ofher lawyers did, and never told her), or rely

on some private doctor to help. When shesaved up her rent money to visit the one il-legal clinic she knew in Dallas, she found ithad been busted the weekbefore. Throughthe window she could see the dirty instru-ments and dried blood on the floor, roach-es and creeping things. All she wanted wasa clean white bed to lay down on in a safeplace. She didn’t have that privilege.

So when she was put in touch with twolawyers, Sarah Weddington and Linda Cof-fee, who wanted to change the law, shewas thrilled. They met over beers and piz-za, and drankto women taking proper con-trol over their own bodies. At some pointshe signed an affidavit which she hopedwould persuade some nice judge to giveMiss Norma McCorvey, aka Miss Jane Roe,permission for an abortion right away, be-cause she was already five months gone.But nobody was bothered about that. Itturned out that she made a good plaintiffonly if she was pregnant and desperate, asthey could see she was with her swolleneyes and the cuts on her wrists, and thecase dragged on so long that her baby wastwo and a half before the Supreme Courtdecided in January 1973 that abortion wasa constitutional right for all Americanwomen. The baby had gone for adoptionagain, and she felt miserable, even thoughshe hadn’t wanted it.

In her sadness she ignored how Roe vWade was going. She didn’t testify, neverwent to court, and read about the decisionin the newspaper like everyone else. Butsuddenly Jane Roe was everywhere, thisunknown woman (or pawn, she felt) whohad won freedom for millions of Ameri-can women, or consigned millions of littleAmerican boys and girls to slaughter, de-pending on your view. And that was her.

She told very few people. Mostly shehid away with her cats and plants and herlover Connie Gonzales, which was diffi-cult also, as lesbians weren’t exactly wel-come in Texas. In the 1980s she took workin the newly legal abortion clinics in Dallaswith their safe, clean white beds, and slow-ly came out to the world. That made herplenty of enemies, who called her a baby-killer and rammed their trolleys into herheels in the Tom Thumb store. But it didn’tmake her the friends she expected. Shewas too simple for the pro-choice people,who seemed to shun herat their rallies andsent a strong hint that she was totally stu-pid, though she had brains and ideas. Shewasn’t their special chosen Jane Roe, andthey didn’t want Norma McCorvey.

This unsettled things in her mind again.The Operation Rescue folks moved in rightnext door to the clinic, with their posters ofbloody fetuses which really freaked herout, and on her smoking breaks she wouldsee them praying for her. She began to hearinfant laughter in the clinic, and when thewomen told her why they had come shewould find herself thinking, that’s not areason. In 1995 she went to church one dayand turned to Jesus right away. The ceilingdidn’t fall down, and lightning didn’t strikewhen she got baptised in someone’sswimming pool; just the best high of herlife. Jesus forgave her for all those dead ba-bies, and now she would help save them.

Still a street kidFor the pro-life cause she got herself arrest-ed, campaigned against Barack Obama,testified in Congress and tried to disruptthe appointment of a pro-choice justice.But she didn’t fit neatly with these people,either. Norma McCorvey was a street kid,rough at the edges and still wild inside. Shestill told tales. If she was going to be a tro-phy celebrity for the anti-abortion cause,as they wanted, she would have to be anideologue and clean-cut like them. Eventhe Rev Flip Benham, who baptised her,called her a money-fisher because shecharged top dollar for interviews. So whatdid he want her to live on? Didn’t she al-ready buy her clothes at the bargain store?

She had never been right for Jane Roe.But she wasn’t wrong, either. Some poorwoman would have to have representedall the rest. And Norma McCorvey was asconflicted about abortion as almost thewhole ofAmerica was. 7

The woman who never was

Norma McCorvey, the “Jane Roe” ofRoe v Wade, America’s most controversialcourt decision, died on February18th, aged 69

Obituary Norma McCorvey