the economist - after the storm; how to make the best of recovery (october3-9, 2009)

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Print edition October 3rd 2009
The world this week
Politics this week
Business this week
KAL's cartoon
Leaders
A “new normal” for the world economy
After the storm
The People's Republic at 60
China's place in the world
Iran, the world and the bomb
At the tipping-point
Germany's election
Merkel's moment
Markets
Please do feed the bears
Letters
On the Goldstone report, Singapore, free trade,
aircraft air, BRICs
Briefing
China's other face

The red and the black
United States
Reviving America's schools
Ready, set, go
Barack Obama and Guantánamo
Better safe than sorry
Foiling terrorist attacks
Home-grown bombers
Manufacturing's future
Wanted: new customers
Regulating greenhouse gases
Enter the EPA
The Nevada Senate race
Forgetting his roots?
Lexington
Blanche Lincoln's balance
The Americas
Mexico's troubled oil industry
How many Mexicans does it take to drill an oil well?
Ecuador's president
Correa and the golden ponchos
Education in Uruguay
Laptops for all
Honduras's power struggle
Cracks within and without
Asia
Pakistan's Swat valley
The law in whose hands?
Sri Lanka's internally displaced
A view framed by barbed wire

America and Myanmar
Re-engagement rings
Natural disasters
A season of calamity
China's National Day
Party like it's '49
Banyan
From Saigon to Kabul
Middle East & Africa
Diplomacy and Iran
After the storm
The new economic landscape
will be grim unless
policymakers act to foster
growth: leader
A special report on the world economy
The long climb
From Ozzie to Ricky
The hamster-wheel
A fine balance
Separation anxiety
Rolling the hoop
Gandhian banking
Market fatigue
Industrial design
A dull, heavy calm
Sources and acknowledgments
Offer for readers
Business
Corporate finance

Thawing out
JAL asks for another bail-out
Flights in the ointment
EDF gets a new boss
Energetic manoeuvres
Russia's sickly car market
Feast and famine
The boom in smart-phones
Cleverly simple
Xerox buys ACS
Copycats
Drug firms buy vaccine-makers
Shot in the dark
Schumpeter
Thriving on adversity
Briefing
Unrepentant bears
The end is nigh (again)
Finance and Economics
Reforming finance: Living wills
Death warmed up
European banks
Carpe capital
The role of emerging markets
Cosmetic surgery?
Buttonwood
A lot to swallow
Asian currencies
Hot air
Private equity in Asia

Back on the catwalk
American bank bosses
Clearing out the corner office
Economics focus
The dog that didn't bark
Science & Technology
Palaeontology and conservation
Avoiding the heffalump trap
A palaeontological mystery
Dead in the water
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Politics this week
Oct 1st 2009
From The Economist print edition
An earthquake of magnitude 7.6, centred off the coast of the Indonesian island
of Sumatra, caused widespread damage in the city of Padang. Hundreds died
and thousands were trapped under rubble as scores of buildings, including
hospitals, collapsed. A second huge tremor in the area hampered rescue efforts.
A strong earthquake in the South Pacific triggered a tsunami that killed more
than 115 people on several islands, notably Samoa and American Samoa, where
Barack Obama declared a disaster.
Flooding in Manila, the capital of the Philippines, and surrounding areas left
nearly 300 people dead or missing. The government was criticised for not
preparing for the arrival of Typhoon Ketsana, which brought the biggest deluge
for more than 40 years, submerging the capital and affecting some 2m people. See article
China marked the 60th anniversary of the founding of the People’s Republic with an imposing military
parade through Tiananmen Square in Beijing, showing off missiles and other new weaponry. See article
Kurt Campbell, an American assistant secretary of state, held a meeting in New York with U Thaung,
Myanmar’s science minister. It was the first such high-level contact between the countries in a decade,

and followed an announcement by Hillary Clinton, the secretary of state, that America would respond to
overtures from the Burmese junta seeking engagement. See article
A new agenda
The G20 ended its summit in Pittsburgh by agreeing to implement a global “framework” to rebalance
members’ economies and co-ordinate efforts at regulating finance. The G20 also said it will take on the
role hitherto played by the G8 of holding big economic summits (the G8 will concentrate on security). See
article
A smattering of Democrats joined Republicans on the Senate Finance Committee to vote down the “public
option” of a government–run health-insurance plan. But Democrats defeated a Republican amendment
restricting federal funds for abortion.
The Obama administration upped the ante on negotiations in Congress over a bill to lower greenhouse-
gas emissions when it said it would use the “power and authority” of the Clean Air Act to impose such
reductions on the worst-polluting facilities. See article
Testing patience
In the run-up to a meeting in Geneva on October 1st between Iran and a group
of six countries (the United States, Britain, France, Germany, China and Russia)
to discuss the Islamic Republic’s nuclear programme, pressure mounted after a
new uranium-processing facility was discovered near the city of Qom. Iran also
conducted two days of missile tests. See article
At least 157 people were killed by the security forces in Guinea’s capital,
Conakry, according to a local human-rights group, after thousands of people
gathered in a stadium to protest against continuing military rule. See article
The International Criminal Court at The Hague said it would bring charges
against Kenyans it deems responsible for their country’s post-election violence nearly two years ago,
when more than 1,300 people died. The court took responsibility for the prosecutions after a deadline
AFP
AFP
expired for Kenya’s own government to set up a tribunal. Kenya’s anti-corruption chief, Aaron Ringera,
resigned only weeks after being reappointed by President Mwai Kibaki.
Outside the law

The de facto government of Honduras reacted to the return of Manuel Zelaya, the ousted president, by
suspending constitutional freedoms. It closed a television channel and a radio station and expelled a
delegation from the Organisation of American States. Mr Zelaya is holed up in the Brazilian embassy in
Tegucigalpa, the capital. See article
American officials confirmed that during a six-day visit to Havana in September a senior American
diplomat held talks with Cuba’s deputy foreign minister. The administration of Barack Obama has said it
wants to talk to Cuba about practical matters, such as immigration.
Some three years after it was first mooted by Hugo Chávez, the Bank of the South got some promises of
cash. Argentina, Brazil and Venezuela each offered $2 billion. Mr Chávez hopes it will be an alternative to
the World Bank. Four other South American countries will be members, but Chile, Colombia and Peru are
not joining.
A court in Ecuador named a new judge to hear a case in which $27 billion in damages is being sought
against Chevron, an American oil company, for alleged pollution by Texaco, which it bought in 2001. The
court accepted the previous judge’s request to stand down after Chevron released secretly taped images
which, it claimed, implicated him in a bribery scheme.
Magic Merkel
The German election produced a convincing victory for the centre-right. The
Christian Democrats’ leader, Angela Merkel, will remain as chancellor, but will
form a new coalition with the liberal Free Democrats. The centre-left Social
Democrats saw their share of the vote slump to 23%, the lowest since 1932. See
article
Portugal’s election was won by José Sócrates, the Socialist incumbent, but his
party lost its absolute majority. See article
Romania’s government lost its majority after the Socialist party pulled out of
the ruling coalition in protest against the sacking of the interior minister, Dan
Nica.
On the eve of Ireland’s second referendum on the European Union’s Lisbon treaty, a group of Czech
senators asked the constitutional court to rule (again) on the text. This may further delay ratification even
if Irish voters say yes.
Both sides claimed vindication from a report by a group of European experts into the causes of last year’s

war between Russia and Georgia. It found that the Georgians fired the first shots, but had been
provoked by the Russians. See article
Britain’s Gordon Brown made his last speech to the Labour Party conference before an election due by
June next year. See article
The justices on Britain’s new Supreme Court were sworn in, replacing the law lords in the House of Lords
as the highest court of appeal in most cases and marking the first break of the judiciary from Parliament
in centuries. See article
A
P
Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved.
Business this week
Oct 1st 2009
From The Economist print edition
Ken Lewis said he would step down as chief executive of Bank of America by the end of the year. Mr
Lewis has had a rough time ever since BofA took over Merrill Lynch amid the financial maelstrom in
September 2008. The deal was welcomed at first, but BofA had to ask the government for an extra $20
billion in funding to help smooth its acquisition. Mr Lewis also became a lightning rod for general criticisms
over bank bonuses when huge rewards were paid to Merrill executives after the merger. These are now
the subject of multiple investigations.
America’s Federal Deposit Insurance Corporation proposed a novel solution for rebuilding its deposit-
insurance fund, depleted after a spate of seizures. Banks will pay three years’-worth of premiums, or $45
billion, upfront. But they will be able to record this on balance-sheets over time. This should enable the
FDIC to avoid having to borrow from the Treasury, for now.
The European Central Bank’s second tender of unlimited one-year funds at 1% interest attracted much
less demand than its first offer. In June the ECB provided a record €442 billion ($620 billion) to banks, but
the take-up this time was only €75 billion.
Sortie
BNP Paribas unveiled a €4.3 billion ($6.3 billion) rights issue, the proceeds of which it will use to help
pay back the €5.1 billion it received in a bail-out from the French government. Meanwhile, UniCredit and
Intesa Sanpaolo, Italy’s two biggest banks, declined offers of state aid in favour of raising cash from

investors instead. See article
Xerox announced that it would buy Affiliated Computer Services for $6.4 billion, the latest example of
a company that makes technology hardware adding data services to its business. As with Dell’s recent
proposal to buy Perot Systems, Xerox should obtain a more stable revenue stream from ACS, which gets
around 40% of its income from government-related contracts. See article
Cisco Systems made a $3 billion offer for Tandberg, a Norwegian company specialising in
videoconferencing. Cisco hopes the acquisition will help it extend its reach in videoconferencing to smaller
companies and consumers.
Can’t make a connection
India’s Bharti Airtel and South Africa’s MTN called off their merger talks shortly before a conclusive
deadline. It is the second time in two years that the telecoms companies have failed to combine and
create what would be a mobile-phone behemoth stretching across Africa, South Asia and the Middle East.
The South African government had insisted that MTN retain a large element of control over the business.
In the biggest deal among several acquisitions in the drugs industry this week, Abbott Laboratories
agreed to pay $6.6 billion for the pharmaceutical business of Belgium’s Solvay, a conglomerate. Abbott
gains a range of Solvay’s medicines, such as its treatment for high cholesterol, and also its flu vaccines,
the worldwide market for which is expected to rise significantly over the next few years.
Britain’s Serious Fraud Office sought the attorney-general’s consent to prosecute BAE Systems in a
politically contentious case, which centres on allegations that the defence company bribed several
governments to win contracts. See article
General Motors said it would phase out its Saturn range of cars after a rescue deal put together by
Roger Penske, a former racing driver, and Renault abruptly fell apart.
Amid renewed optimism about the start of a revival in America’s moribund
housing market (with the S&P/Case-Shiller index of home prices in 20
cities rising for a third consecutive month in July) data from the Treasury
for the second quarter showed that the number of homes at some stage of
being foreclosed had reached almost 1m; completed foreclosures now
exceed 130,000.
A learning curve
The yen advanced to an eight-month high against the dollar, fuelling fears

that a stronger Japanese currency will hurt Japan’s exports and hamper its
recovery. Hirohisa Fujii, the new finance minister, gave mixed policy
signals, saying there was nothing “abnormal” about the currency’s upward
trend of recent weeks, but adding that he has never said he would not intervene if the yen became too
strong. See article
HSBC decided that from February its chief executive will be based in Hong Kong. The bank will keep its
global headquarters in London. It explained Michael Geoghegan’s move to Hong Kong, where it was
founded in 1865, as part of its strategy to ready the group “for the shift in the world’s centre of economic
gravity from west to east”.
Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved.
KAL's cartoon
Oct 1st 2009
From The Economist print edition
Illustration by KAL
Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved.
A “new normal” for the world economy
After the storm
Oct 1st 2009
From The Economist print edition
The new economic landscape will be grim unless policymakers act to foster growth
IN THE political dictionary he first published in 1968, William Safire, who died on September 27th, devoted
an entry to the word “normalcy”. The term was made popular by Warren Harding, campaigning for
America’s presidency in the wake of the first world war. It was inescapable after the terrorist attacks of
September 11th 2001. Normalcy is what people call normality when they no longer take it for granted. No
surprise, then, that the word reappeared in the communiqué released by the leaders of the G20 group of
big economies after their Pittsburgh summit on September 24th-25th. After the wrenching economic crisis
of the past year, people crave stability and predictability—in short, normalcy. But how far off is it? And
what will a “normal” world economy look like after the biggest financial bust since the Depression?
The new normal
Glance at share prices or short-term growth forecasts and you might feel comforted. Output has stopped

shrinking in all the world’s big economies. In its latest forecasts the IMF reckons global GDP will expand by
3.1% next year, 1.2 percentage points faster than it forecast in April. Global stockmarkets have rallied by
64% since their trough. Corporate finance, once frozen, is thawing fast (see article). Bearish analysts are
once again having to justify their pessimism (see article).
Yet closer inspection suggests caution. Despite a welcome return to growth, the world economy is far from
returning to “normal” activity. Unemployment is still rising and much manufacturing capacity remains idle.
Many of the sources of today’s growth are temporary and precarious. The rebuilding of inventories will not
boost firms’ output for long. Across the globe spending is being driven by government largesse, not
animal spirits. Massive fiscal and monetary stimulus is cushioning the damage to households’ and banks’
balance-sheets, but the underlying problems remain. In America and other former bubble economies,
household debts are worryingly high, and banks need to bolster their capital. That suggests consumer
spending will be lower and the cost of capital higher than before the crunch. The world economy may see
a few quarters of respectable growth, but it will not bounce back to where it would have been had the
crisis never happened.
That realisation alone should temper some of the optimism buoying financial markets. But the prospect of
a “new normal” (a phrase popularised by Mohamed El-Erian, the boss of Pimco, a fund manager) still
spans at least two distinct possibilities. One is that the world economy returns roughly to its pre-crisis rate
of growth, without regaining the ground lost. That, the IMF points out, is what happens after most
financial crises. The second, more depressing possibility is that growth stays at a permanently lower rate,
with investment, employment and productivity growth all feebler than before.
Illustration by Jon Berkle
y
The difference between these outcomes is huge, as our special report on the world economy points out.
Persistent damage to economies’ growth potential would result in a darker future of sluggish income gains
and diminished expectations. That, above all, is what policymakers must avoid. To do so, they must pull
off several tricky manoeuvres: shoring up demand now without wrecking the public finances; containing
unemployment without inhibiting the shift of workers from old industries to new ones; and, more than
anything else, fostering innovation and trade, the ultimate engines of growth.
Shoring up demand is the most urgent task. It is no secret that global spending must be rebalanced:
indebted American consumers must cut back, while thrifty countries should spend more and save less. In

China this means a stronger currency, bigger social safety-nets and an overhaul of subsidies to increase
the share of national income going to workers. Germany and Japan need structural reforms to boost
spending, especially in services. What has long been lacking is the political will—and here the G20 seemed
to make progress. The Pittsburgh communiqué promised to subject members’ economic policies to “peer
review”. These reviews may prove toothless, but the commitment to them is a step forward.
Private spending in surplus economies will not soar overnight. The world economy will rely more on
governments for longer than anyone would like. Premature fiscal repairs could jeopardise the recovery, as
America learned in 1937 and Japan rediscovered 60 years later. Governments must eventually fix their
balance-sheets, but only when the private sector is strong enough—and it must be done in a way that
boosts economies’ growth potential. The bulk of the adjustment should come from spending cuts. Where
revenues must rise, taxes on consumption or carbon are better than those on wages or profits.
Out with the old
Governments must also combat joblessness without ossifying their labour markets. High unemployment
can do lasting damage, as people lose their skills or their ties to the world of work. This danger justifies
efforts to slow lay-offs or encourage hiring. But not all such remedies are equal. Some of the most popular
of today’s schemes—such as paying employers to cut hours rather than jobs, as in Germany—try to
preserve the labour force in aspic. Economies must be free to reinvent themselves and allow thriving
industries to replace ailing ones.
The path of productivity growth will determine the nature of the new normal more than anything else. In
the rich world, innovation sets the pace. Elsewhere, trade is often more important. Both are now under
threat. Cash-strapped companies are skimping on research and development. Emerging economies are
having to rethink their reliance on exports for growth. Both rich and poor governments will be tempted to
intervene. They should avoid cosseting specific industries with subsidies or protection. Allowing market
signals to work will do more to boost productivity than cack-handed industrial policy.
Add all this up and the difficulties are formidable. “A sense of normalcy should not lead to complacency,”
the G20 communiqué says, with both rhyme and reason. The storm has passed. But policymakers have a
lot to do—and a lot of mistakes to avoid—if they are to make the best of the recovery.
Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved.
The People's Republic at 60
China's place in the world

Oct 1st 2009
From The Economist print edition
The world has accepted that China is emerging as a great power; it is a pity that it still does not
always act as one
FOR a country that prides itself on its “peaceful rise”, it was an odd way to celebrate a birthday. The
People’s Republic of China marked its diamond jubilee on October 1st with a staggering display of military
muscle-flexing (see article). Goose-stepping soldiers, tanks and intercontinental ballistic missiles filed
through Tiananmen Square, past the eponymous Gate of Heavenly Peace, where, 60 years ago, as every
Chinese schoolchild is taught (wrongly, it now seems), Mao Zedong declared that the Chinese people had
“stood up”.
For many Chinese, daily life remains a grim struggle, and their government rapacious, arbitrary and
corrupt (see article). But on the world stage, they have never stood taller than today. China’s growing
military, political and economic clout has given the country an influence of which Mao could only have
dreamed. Yet Chinese officials still habitually complain that the world has not accepted China’s
emergence, and wants to thwart its ambitions and “contain” it. America and others are trapped, lament
these ascendant peaceniks, in a “cold-war mentality”. Sometimes, they have a point. But a bigger
problem is that China’s own world view has failed to keep pace with its growing weight. It is a big power
with a medium-power mindset, and a small-power chip on its shoulder.
Seventy-six trombones and better nukes
Take that spectacular parade. What message was it meant to convey to an awestruck world? China is a
huge, newly emerging force on the world scene. And it is unapologetically authoritarian, as were Japan
and Prussia, whose rises in the late 19th century were hardly trouble-free. Nor is China a status quo
power. There is the unfinished business of Taiwan, eventual “reunification” with which remains an article
of faith for China, and towards which it has pointed some 1,000 missiles. There is the big, lolling tongue of
its maritime claim in the South China Sea, which unnerves its South-East Asian neighbours. And China
keeps giving reminders of its unresolved wrangle with India over what is now the Indian state of
Arunachal Pradesh, which it briefly overran in 1962. Nor has it reached agreement with Japan over
disputed islands.
China’s intentions may be entirely peaceful, but its plans to build aircraft-carriers are shrouded in secrecy
and it is modernising its nuclear arsenal. A modicum of anxiety about its ambitions is more than just cold-

war paranoia. And those prey to it will have been reassured neither by the October 1st parade nor by the
massive military build-up and the increasingly sophisticated home-grown weapons technology it flaunted.
Illustration by Jon Berkley
None of this is to deny that China is playing a constructive—and vital—role on a number of international
fronts. A year ago there was much scepticism about whether the huge fiscal boost it announced for its
economy was genuine. Its insistence that its main role in responding to the crisis would be to keep China’s
economy growing smacked of an excuse for inaction. The stimulus, however, did prove real and effective
(though it was imposed without debate). Also, China has been a helpful part of the global recovery effort.
At last month’s G20 summit in Pittsburgh it even signed a communiqué committing itself to a process of
economic co-operation and IMF-assisted mutual assessment. How far China’s decision-making, opaque
even to its own officials, will be submitted to outside scrutiny is questionable. But for a government so
fiercely insistent on the inviolability of its own sovereignty, this was a big step.
It has also softened this same principle as applied to some of its nastier diplomatic friends, such as
Myanmar and Sudan. Flouting its hallowed doctrine of “non-interference”, it has nudged them into slightly
less hostile stances towards the West. North Korea would probably not be a nuclear power today if China
had been prepared to exert more pressure on it in the past. But at least China now plays host to the six-
party process aimed at getting it to ditch its nukes, and is trying to bring it back to the negotiating table.
Wen Jiabao, the prime minister, is off to Pyongyang on October 4th. Elsewhere, China has forsaken
belligerence for courtship. Despite those missiles, it at present seems more intent on winning Taiwan by
sending tourists to buy it than soldiers to conquer it. And it has agreed with Japan on the joint exploration
of some disputed gasfields.
Yet as a constructive international partner in multilateral diplomacy, China still seems to dabble—to pick
and choose the issues where it is willing to help. It will find expectations running ahead of it: the more it
proves it can contribute, the more will be demanded of it. There is no shortage of issues, from climate
change to virus-containment, where its role is crucial. But the image that it would like to cultivate, as a
responsible, unthreatening, emergent superpower, is constantly being undercut by two of its leaders’
habits.
One is the knee-jerk resort to hysterical propaganda and reprisals when a foreign country displeases it by
criticising its appalling treatment of political dissidents, or accepts a visit from the Dalai Lama or other
objects of the Communist Party’s venom. The other is its readiness to put its perceived economic self-

interest ahead of strategic common sense. That is the message from its reluctance to contemplate
sanctions against Iran. Much as it would abhor a nuclear-armed Iran, China does not want to jeopardise
important supplies of oil and gas. And this is merely one among many countries, especially in Africa,
where China may be suppressing its global political influence for the mirage of energy security.
Were you watching, Mrs Wang?
China’s leaders rightly point out that theirs is still a poor country which will naturally give priority to lifting
its economic development. And this in one sense answers the question about the message conveyed by
the National Day parade: its main audience was not the outside world, but China’s own people. With no
popular mandate, the government’s legitimacy relies on its record in making China richer and stronger.
The display of strength, showing how well it has done in this, hints at its own lack of confidence. For those
worried about where China’s rise might lead, that the government is so insecure is not a comforting
thought.
Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved.
Iran, the world and the bomb
At the tipping-point
Oct 1st 2009
From The Economist print edition
Testing the big powers’ anti-proliferation promises
DID the UN Security Council’s 15 members mean a word of their unanimous promise during the recent
General Assembly meetings to protect the peace and security of all nations from the spread of the bomb?
The discovery of a plant for making potentially weapons-usable uranium, dug secretly into a mountain on
a military compound near the city of Qom, means that the test of their sincerity is Iran.
The talks between Iran and six countries—America, Britain, France, Germany, Russia and China—that got
under way this week in Geneva define a tipping-point. If Iran can be enticed or, more likely, prodded out
of its serial nuclear deceit, the world will indeed be safer. But if Russia and China go on blocking efforts to
squeeze Iran hard enough to get it to mend its ways, the dangers (and probably nuclear weapons
themselves) are likely to proliferate alarmingly.
The Iranian nuclear challenge becomes clearer with each piece of damning intelligence. The latest
revelation shows an accelerating effort that also includes work to produce plutonium, another potential
bomb ingredient (see article). And with the Qom discovery, the timeline has shortened for Iran to be able

to build a bomb secretly or—just as alarming to its neighbours, suddenly interested in nuclear skills
themselves—to achieve the capacity to assemble one at speed. The window for a negotiated restraint on
Iran’s nuclear activities in which others could have confidence is closing fast.
Iran and the six face fateful choices. So far Iran has evaded or strung out talks, as its uranium-enrichment
machines have spun on. Yet the discovery near Qom gives Iran a chance to change tack—though it has
forgone several such chances in the past. This week’s talks open the first formal, direct negotiations
between America and Iran in 30 years. On the table, despite the violent clampdown after Iran’s stolen
election which kept Mahmoud Ahmadinejad as president, is an offer from the six not just of diplomatic and
trading ties, and talks on regional security that would acknowledge Iran’s growing clout. If Iran tells
inspectors the truth and curbs its most dangerous nuclear activities, there would also be co-operation in
other advanced nuclear technologies, including the civilian power-generation that it claims to be its sole
aim.
Iran has so far shrugged off the offer, calculating that it can eventually win much of this anyway, and
keep a foot in the nuclear door. Nuclear-armed India, it notes, was once a pariah and is now courted by
America with offers of nuclear help. Everyone knows a military strike against its nuclear sites would be
fraught with danger, not least that Iran would soon be back in the nuclear business with bigger scores to
Reuters
settle.
Cover price
And sanctions? Curbs on some Iranian banks and businesses have inconvenienced the regime. But Russia
and China have vetoed anything—a ban on oil and gas investment, closing ports to Iranian ships, cutting
off lots more of its banks—that would hurt enough to force it to choose between its own future and its
nuclear plans. Russia is wary of Iran causing trouble in the combustible Caucasus. China has greedily
scooped up oil and gas contracts that others have declined. Both have been happy to see Iran tweak
America’s nose.
But Qom shows why business-as-usual is dangerous. The Security Council’s anti-nuclear promise was
meant to launch a big diplomatic effort to shore up the battered Nuclear Non-Proliferation Treaty. Unlike
India, Iran has signed up to the treaty’s non-nuclear rule. Persistently letting it cheat will cripple global
anti-proliferation. If Russia and China continue to give Iran cover, that is the price the world will pay.
Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved.

Germany's election
Merkel's moment
Oct 1st 2009
From The Economist print edition
Angela Merkel has got the centre-right coalition she wanted. Now she should use it
IT WAS a good result, for both Germany and Europe. After the September 27th election, Chancellor
Angela Merkel will escape from the cage of the “grand coalition” between her Christian Democrats (CDU)
and the Social Democrats (SPD) by forming a new centre-right coalition with Guido Westerwelle’s Free
Democrats (FDP). The sclerotic and unwieldy grand coalition found it hard to discuss, let alone implement,
many of the reforms that Germany needs, including to its tax and welfare systems, and to health care and
the labour market. Now Ms Merkel has been set free to push for change.
The big worry is that she may be too timid (see article). She was badly burned four years ago when her
brief embrace of reform led to a sharp fall in her party’s ratings. This time the CDU did even worse than in
2005, winning its lowest share of the vote in 60 years. But the exceptionally good result for the pro-
market, liberal FDP should strengthen Mr Westerwelle’s bargaining power in a new coalition. He will insist
on tax simplification, and ideally also on tax cuts. Yet Ms Merkel has already hinted that she does not
favour more labour-market reforms and will stick to the outgoing government’s planned minimum wage.
With Germany just emerging from recession and unemployment likely to rise, her innate caution and
fondness for consensus will put her off more radical change.
She can afford to be bolder. The opposition SPD is in disarray after winning its lowest share of the vote in
almost 80 years and seeing the Left Party, with which it refuses to work, creep close to 12%. The centre-
right has a majority not only in the Bundestag, the lower house, but also in the Bundesrat, the upper
house made up of state representatives, which it will retain so long as it keeps control of North Rhine-
Westphalia next May. And the case for change in Germany is urgent. Although the economy is reviving,
the banks (especially state-owned Landesbanks) are troubled and growth will remain sluggish. Further
ahead, Germany has to cope with a shrinking and ageing population, a fast-growing public debt and the
need to switch from dependence on exports towards more consumption. This agenda is sure to need more
reforms.
Reform is hard for any government, but the FDP’s ideas for lower taxes and further liberalisation are
promising. Lower taxes should stimulate growth. And the wisest response to high unemployment is to

deregulate labour markets and eschew minimum wages. German experience of limited reform six years
ago and the evidence from other countries like Denmark both demonstrate that the best way to encourage
employers to hire is to make it easier for them to fire.
EPA
A centre-right coalition may pursue a more sensible energy policy as well. Both parties favour extending
the life of Germany’s nuclear-power stations, so the new government should overturn the 2000 decision to
phase out all of them by 2022. With Ms Merkel in the chancellery, and with Mr Westerwelle likely to be
foreign minister in place of the SPD’s Frank-Walter Steinmeier, there is also more chance of the
government responding to Germany’s growing dependence on Russian gas not by pandering to the
Russians but by helping to liberalise the energy market in the European Union.
Better abroad, too
Mr Westerwelle is somewhat more pro-American and may be less likely than his predecessor to urge early
withdrawal of German troops from Afghanistan (see article). By being tougher on Russia, he will at a
stroke improve German relations with central and eastern Europe. One foreign-policy blot on the new
coalition’s copybook is that it may be even warier of Turkish membership of the EU—but neither Mr
Westerwelle nor Ms Merkel is likely to torpedo Turkey’s accession talks, which are anyway proceeding at a
snail’s pace. In short, with a bit more zeal for reform, the new black-yellow government could be just
what Germany needs.
Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved.
Markets
Please do feed the bears
Oct 1st 2009
From The Economist print edition
The financial world needs its pessimists
NOBODY loves a party-pooper. When asset prices are going up, most people are inclined to celebrate. The
bears who argue that asset prices are about to fall tend to get dismissed as out of touch (dotcom sceptics
supposedly “just didn’t get it”) or are likened to stopped clocks: occasionally right, but mostly wrong. If
they dare to make money out of their beliefs by selling short (betting on falling prices) when a crisis hits,
bears are decried as economic vandals and politicians call for their activities to be banned.
The word “bear” brings to mind an irrational, angry creature that lashes out at anything in its path. Of

course, like their animal counterparts, some bears can be very wild indeed. The most excitable bears are
not so much polar as bipolar. They dabble in conspiracy theories and talk of the collapse of civilisation and
the need for investors to sell all paper assets, buy gold and retreat to Idaho. But bulls can be
overenthusiastic too, talking of new eras in which asset prices will reach undreamed-of heights (remember
the book “Dow 36,000”?). Over the past 20 years it has been the repeated interventions of central banks
to rescue bulls, not bears, that have contributed to the current mess by encouraging too much risk-taking.
Those interventions, by shoring up stockmarkets with cheap money, have made life even more difficult for
the bears. Historically, the odds have been against them. Share prices have tended, over the long run, to
go up. If bears predict a crash and are proved wrong, they look like fools; if they are proved right, they
suffer with everyone else when the economy dips. Those pessimists who work for investment banks come
under pressure to change their views; banks are in the business of selling securities. Fund managers who
turn bearish too early can lose their jobs or their clients. The safest places for bears are the worlds of
academia, journalism and consultancy, where people are expected to hold strong opinions.
Smarter than the average bull
But the world needs to nourish its bears. They were right about most things in the past ten years:
dotcoms and American houses were indeed overvalued, and rapid credit growth did make America’s
financial system and the global economy vulnerable. It was bears who asked awkward questions of Enron,
a failed energy-trading company, and who were most sceptical about the structured-credit products that
now clog up banks’ balance-sheets. This decade, investors have lost more money listening to the bulls
than to the bears.
So when the bears say, as they do now (see article), that the stockmarket rally is built on sand, they are
worth listening to. On historical measures, Wall Street looked cheap only briefly, earlier this year, and now
looks expensive again. The rally has once more been driven by interest-rate cuts. That rich-world central
Alam
y
banks feel the need to keep rates close to zero shows how many economic problems remain.
Legend has it that Roman generals, when making their triumphal marches, were followed by a slave
whispering “Remember, you are mortal.” The bears play that role for investors. Their arguments should be
countered with reason, not ridicule. And the right to sell short should not be restricted arbitrarily. If
regulators want to prevent future bubbles, they need to let the bears roam as freely as possible.

Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved.
On the Goldstone report, Singapore, free trade, aircraft air, BRICs
Oct 1st 2009
From The Economist print edition
Israel and Gaza
SIR – I thought that your criticism of the UN Goldstone report on the conflict in Gaza was flawed
(“Opportunity missed”, September 19th). First, Richard Goldstone’s charge that Israel implemented a
deliberate and systematic policy to inflict suffering on civilians in Gaza is not, as you said, the “central
organising premise” of his report. Rather it is the conclusion of the report, arrived at after a serious
examination of the evidence, and despite Israel’s refusal to co-operate. You said that “if Israel really had
wanted to make Palestinian civilians suffer, the toll could have been vastly higher.” But this hypothesis,
which equates some restraint with legally mandated restraint, ignores the weight of dozens of punitive
Israeli attacks that the report documents, including the destruction of food factories, farms and water
wells.
Second, it is wrong to suggest that Israel is being held to higher standards in Gaza than those to which
American and European forces have been held in Kosovo, Iraq and Afghanistan: if the laws of war are
violated those forces are exposed by NGOs and the UN. There has been no evidence in those conflicts of a
deliberate infliction of suffering on civilians by American or European forces, as there was in Gaza by
Israeli forces.
Third, while the initial Human Rights Council mandate calling for an inquiry into the Gaza fighting was
biased, the superseding mandate under which the UN inquiry was undertaken was not. The Goldstone
report is fiercely critical of Hamas’s behaviour, as it is of Israel’s, and rightly so. It calls on both sides to
conduct genuine and credible investigations of war crimes and possible crimes against humanity, and to
hold to account forces found to have violated the laws of war.
Finally, you concluded that the Goldstone report has made the job of peacemakers in the Middle East
more difficult. In fact, impunity for past violations of the laws of war is one important reason for the
polarisation and lack of trust that has hampered peace negotiations for decades. The “opportunity missed”
is not the Goldstone report, but its unjustified rejection by Israel and The Economist.
Kenneth Roth
Executive director

Human Rights Watch
New York
* SIR – We were dismayed to read your argument that the Goldstone report will not help Israel “hold its
politicians and soldiers to the highest standards of Israeli and international law.” On the contrary, the
report’s most important recommendation is for both Israel and Hamas to thoroughly investigate
themselves, and punish soldiers and commanders who violated the law.
We join with Israeli human-rights organisations including Soldiers Breaking the Silence and Rabbis for
Human Rights, in calling on Israel to launch an independent investigation that will honestly examine its
conduct during the war and to take steps to remedy the behaviour of those in the Gaza operation who
went too far.
Rabbi Brian Walt
West Tisbury, Massachusetts
Rabbi Brant Rosen
Evanston, Illinois
Co-founders
Ta’anit Tzedek-Jewish Fast for Gaza
* SIR – You insisted that Israel attempted to “direct civilians out of danger zones.” The entire Gaza Strip
was a danger zone, and Israel refused to allow civilians to leave, excepting only those who held passports
from other states. As most Gazans are stateless, virtually all of the population was helpless in the face of
this ruthless policy. Israel maintains its illegal blockade today.
Marshall Carter-Tripp
El Paso, Texas
* SIR – Your rubric, “eyeless in Gaza”, would be better used to describe the lack of media access during
the Gaza war last winter. The Israel Defence Forces banned media crew from accessing Gaza, and the
only television reporting was by an Al Jazeera team who were in place before the war started. Their
reporting was shown on PBS in America and on Channel 10 in Israel.
Martin Hird
New York
* SIR – It is disappointing to read that Shimon Peres, a Nobel peace-prize winner, believes that every
country in Israel’s situation would have done the same (“Israel in the dock”, September 19th). Israel

argues that as it is under the constant threat of attack there is nothing wrong with smashing its
neighbour. The same line of thought is used by those arguing that Hamas’s firing of rockets into Israel can
be forgiven, as they see themselves still engaged in a struggle to regain what they once lost and have
suffered many years of desolation.
With his words, Mr Peres excuses Israel. He lowers himself to the same simplistic, revenge-driven
rationale that has been fuelling this conflict for so many years. Each sees the other as aggressor.
Moreover, one wonders what Mr Peres would consider to be “legitimate” if an attack on Israel amounted to
the same destruction and death than the one brought upon Gaza. A nuclear strike perhaps?
Emmanuel Steins
Istanbul
Singapore’s media laws
SIR – Banyan’s column wrongly stated that “not for the first time” the Far Eastern Economic Review “is
banned in Singapore” (September 26th). The journal has never been banned in Singapore. At one time its
circulation was restricted, but copies with the advertisements blanked out were circulated freely. This
ensured the free flow of information, but prevented the Review from profiting commercially from engagin
g
in our domestic politics.
Under our laws, offshore newspapers wishing to circulate in Singapore must post a security bond and
appoint a local representative for service of legal process. The weekly Review had complied with these
rules, as The Economist currently does itself. Unfortunately, in 2006 the monthly Review declined to
comply and voluntarily discontinued circulating in Singapore.
Michael Eng Cheng Teo
High commissioner for Singapore
London
SIR – Your assessment of the demise of the Review neglected another remarkable change that contributed
to its ending: the development of a free press in Asia. When I arrived as a Review correspondent in Seoul
in June 1987, Chun Doo-hwan was the supreme leader and Kim Dae-jung was under house arrest. To the
south, Taiwan was in the waning days of martial law. The Philippines had only recently had its democratic
revolution. Indonesia’s would be many years later. The story was much the same from Ulan Bator to Kuala
Lumpur. The Review exploited a growing thirst for knowledge about Asia at a time when government

control of the region’s domestic press gave it something close to a monopoly. The explosion of news that
came with democracy and the rise of the internet were the blows that felled an increasingly outmoded
style of journalism.
Mark Clifford
Executive director
Asia Business Council
Hong Kong
Trading shots
SIR – It is not clear to me how a single set of tariffs by America on a solitary set of products—cheap
Chinese tyres—defines Barack Obama’s central point of view on trade (“Economic vandalism”, September
19th). It is illogical that a country like America, with a persistent $600 billion trade deficit, could be
viewed as anything but a champion of free trade. Rather, we may want to consider why America’s trading
partners, many with persistent trade surpluses, would consider it good business to have any tariffs on
anything coming from their leading trading partner. How can China, with a $200 billion trade surplus with
the United States, justify any tariffs on American products? It is so lopsided as to make it easy for true
enemies of free trade to have their way.
Christopher Pontrelli
Principal
Ernst & Young
New York
* SIR – You missed an important factor when discussing America’s protectionist measures. While from
1950 to 1985 Japan was the leading eliminator of American industries, in the past 20 years China has
emerged as the economic destroyer for American manufacturers. China continues to keep its domestic
market largely closed to foreign suppliers. It copies, reverse-engineers and acquires technology or pays
trivial sums in royalties for highly valuable know-how. The Chinese people do work very hard to derive
benefits from international trade but the China-United States relationship is at best $1 to America for each
$5 to China.
China’s surplus from its trade with the United States is nearly as great as its 10% annual GDP growth. Its
accumulation of dollars from trade borders on the miraculous. If China doesn’t want to spend the money,
then it has little choice but to store the hoardings in American securities. Instead of complaining about

minor protectionist measures, China, and The Economist, should demand a dramatic reduction in imports
by this most heavily indebted and financially irresponsible nation.
Robert Vambery
Professor of international business
Pace University
New York
Venting air
SIR – Fallacies about the air quality on aircraft simply will not go away (“Breathing more easily”,
September 19th). You said that “typically an airline will strike a balance by using a 50:50 mixture of fresh
and recirculated cabin air” and that “pilots can reduce the amount of fresh air to save fuel. Some are
thought to cut it back to only 20%.” This contains oily overtones of conspiracy, an insinuation that is
offensive to those of us who fly aeroplanes for a living.
Pilots cannot tinker with a jet’s air-conditioning system to change the ratio of fresh to recirculated air as
this is predetermined by the jet’s manufacturer. It is neither arbitrary nor adjustable from the cockpit. On
virtually all modern aircraft, the rate and volume of airflow is pretty much automatic. On the Boeings that
I fly we have direct control over temperature, but only indirect control over flow. When both engines are
turning and everything is operating normally, the flow is perfectly adequate. Only when there’s a
malfunction are the settings changed.
Airbus aircraft do provide a way for pilots to vary airflow, but not in the way you describe. The controllers
have three positions, labelled “hi”, “norm” and “lo”. The norm position is used the majority of the time,
the hi position is activated when a rapid change in cabin temperature is needed. The lo position can be
used when a plane is less than half full and it provides minor fuel savings. From a passenger’s perspective
the change is barely noticeable.
Patrick Smith
Boston
A new BRIC block
SIR – It is about time we got rid of the term “the BRIC economies” (Brazil, Russia, India and China) in
which Russia was always the odd man out (“A good war”, September 19th). I hereby coin a more useful
acronym: CHIBI—China, India, Brazil and Indonesia. It’s still a somewhat eclectic mix, but the
constituents’ roles in international events are much more likely to be correlated over the next century.

Unfortunately, CHIBI means “dwarf” in Japanese, but it is probably the best of the permutations.
Frank Sheeran
Tokyo
* Letter appears online only
Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved.
China's other face
The red and the black
Oct 1st 2009 | CHONGQING
From The Economist print edition
As the People’s Republic celebrates its 60th birthday, the gangsterism the communists boasted
of vanquishing has staged a comeback
SHORTLY before the 60th anniversary of communist China’s founding on October 1st, police in the south-
western city of Chongqing opened an unusual exhibition. On display, to invited guests only, were 65
luxury cars formerly owned by the bosses of the city’s crime gangs as well as an assortment of jewellery,
guns and drugs. Chongqing, the wartime capital of China, had been a hub of organised crime in pre-
communist days. Now the gangs are back, with roots in the party that almost wiped them out six decades
ago.
In Beijing the huge military parade on October 1st, China’s first in ten years, was intended to show off a
modern, powerful face. The country’s leaders had reason to flaunt their stuff this year. Not only has China
made enormous economic and technological strides since 1999, but it has also weathered the global
financial crisis with remarkable resilience. Officials had worried that widespread lay-offs in export
businesses could lead to social unrest. But, apart from bloody rioting in the far-western region of Xinjiang
in July, fuelled mainly by ethnic rivalry, the past few months have seen no obvious increase in the number
or scale of protests.
As is evident in Chongqing, however, China has another face. Although central authority appears strong,
at the local level public anger is boiling. Double-digit economic growth for much of this decade has
highlighted how corrupt and dysfunctional local government has become. The campaign against organised
crime launched by Chongqing in June demonstrated just how prone China remains, after all those years of
Communist rule, to the age-old scourge of collusion between bureaucrats and gangland bosses. For many
Chinese, life is vastly more affluent now than it was when the Communists came to power. Decent health

care and education are far easier to get. But confidence in local government is threadbare.
Corruption, some Chinese officials argue, is an inevitable by-product of rapid economic growth. But the
cumbersome structure of local government in China also helps it flourish. For centuries Chinese rulers
have pondered how to extend power across such a vast country. In recent years many have debated
whether part of the problem lies with there being too many tiers of government—China has five,
compared with three in America. Some advocate cutting one or two layers. This adds to a sense that, after
60 years of rule, the party is still unsure how best to govern.
It has tried in the past decade to make local legislatures more representative by admitting members of
Getty Images
the newly emerging business elite. But its half-baked moves—involving the same old system of patronage
rather than anything resembling democracy—are now widely blamed for encouraging the spread of
organised crime. Chongqing has become a celebrated, but by no means unique, example.
At village level, a cautious experiment with democracy in the 1990s led to frequent local power-grabs by
gangsters or by party officials in collusion with them. This has been democracy only in name. Criticising
the party is still never tolerated. The job of local governments is not made easier by a flawed mechanism
for sharing tax revenues between the centre and sub-national governments. This leaves many local
authorities with huge responsibilities for providing public services, but without the wherewithal to carry
them out. In poorer parts of China, they often find it hard even to pay their own staff. Yet, in the absence
of any proper public oversight, bureaucracies keep growing.
Chongqing’s mafia problems have come to light only thanks to the local government’s decision to give its
crackdown on gangs a publicity splurge. (Details of the recent exhibition, however, are known only
because a Chinese reporter sneaked in and spread the news in Time-Weekly, a newspaper published in
the southern province of Guangdong.) But gangsterism is ubiquitous. Especially in the past decade, local
governments have staged frequent anti-mafia campaigns. Thousands of gangsters are rounded up every
year. The southern island-province of Hainan, for example, launched a year-long round-up in February.
Streets there are festooned with slogans calling for gangs to be smashed and guns to be handed over.
Chongqing’s latest campaign, however, has aroused particular attention
because it has been directed, unusually, at the kind of people who count:
the wealthy businessmen and powerful officials who control the gangs and
enable them to flourish. Of some 2,000 people detained so far, several are

senior officials, including Wen Qiang (pictured), the head of Chongqing’s
justice bureau. Dozens are police officers. Some are prominent
businessmen who served in legislative or advisory bodies. Press reports
say that the campaign will be extended after the National Day holiday into
Chongqing’s county towns, around the reservoir stretching 660km (410
miles) behind the Three Gorges Dam. Chongqing, though called a
municipality, is in effect a province with a population of 30m covering an
area the size of Scotland. Its capital is also named Chongqing.
The man behind Chongqing’s ambitious drive against the mafia is its party chief, Bo Xilai, who appears to
enjoy enormous political confidence. Mr Bo, who sits on China’s ruling Politburo, is a charismatic member
of a new generation of leaders who are due to assume power in Beijing in 2012. Without his clout, many
residents believe that Chongqing would have found it far more difficult to wage war on the mob. Mr Bo
took up the post two years ago, having previously served as China’s commerce minister and before that
as the governor of the north-eastern province of Liaoning. Many wonder whether his clean-government
drive is intended to burnish his credentials in a looming struggle for power. He is the son of Bo Yibo, one
of China’s late revolutionary founders—hardly a handicap to his ambitions.
According to reports in state-controlled newspapers, Chongqing’s gangsters operated in a wide variety of
businesses, from the wholesale seafood trade to nightclubs and moneylending. They controlled a private
bus network, now taken over by the government, which in recent years had become a popular alternative
to state-run transport. Then there is the usual fare of drugs and prostitution. These have been bad weeks
for the city’s entertainment industry and night-shift taxi-drivers.
The crackdown has exposed how wealthy businessmen used their positions in local legislative and advisory
bodies—people’s congresses and political consultative committees, as they are known—to boost their
prestige and gain access to officials. A few years ago China’s entrepreneurial class was far more politically
marginalised. Only in this decade have its members even been allowed to join the Communist Party.
Chongqing is the biggest example to come to light of what is sometimes dubbed “red-black” (ie,
communist-mafia) collusion since a huge round-up in 2000 of gangsters in Shenyang in the north-east.
That resulted in the executions of a former legislator and businessman and of a deputy mayor. The city’s
mayor, who was also implicated, is now serving a commuted death sentence.
But experts say much has changed since then. A recent book on organised crime, produced by a police-

affiliated publishing house in Beijing, says that in the past decade underworld gangs have been evolving at
an accelerating pace, with some beginning to operate internationally. The author, He Bingsong, writes that
they have fuelled an “unprecedented” rate of growth in criminal activity in China since the turn of the
century: “Some have even taken control of grassroots government, or treat government as their equal.”
Imaginechina
Justice being seen to be done