Reading newspaper in English ( P.7 )

Welfare in the age of robots
Berning out in California
French resistance strikes again
Walmart v Amazon
JUNE 4TH– 10TH 2016

Chinese science: shooting for the stars

Free speech under attack


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The Economist June 4th 2016 3

Contents
6 The world this week

On the cover
Curbs on free speech are
growing tighter. It is time to
speak out: leader, page 9.

The many ways freedom of
speech is in retreat, page 51.
Where the state sits by as
Islamists murder secular
speakers, page 53.
University protesters
believe they are fighting for
justice; their critics think
open discourse is
imperilled, page 54

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Volume 419 Number 8992

Published since September 1843
to take part in "a severe contest between
intelligence, which presses forward, and
an unworthy, timid ignorance obstructing
our progress."
Editorial offices in London and also:
Atlanta, Beijing, Berlin, Brussels, Cairo, Chicago,
Lima, Mexico City, Moscow, Mumbai, Nairobi,
New Delhi, New York, Paris, San Francisco,
São Paulo, Seoul, Shanghai, Singapore, Tokyo,
Washington DC

Leaders
9 Free speech
Under attack
10 Strikes in France
Don’t cave in, Mr Hollande
12 Rethinking welfare
Basically flawed
14 Indian banking
Of banks and bureaucrats
14 Shopping in America
Walmart v Amazon
16 Fighting corruption
Raking up the muck
Letters
18 On anti-Semitism,
Brexit, Ban Ki-moon,
referendums, egg shells
Briefing

21 Universal basic incomes
Paradise to come
Asia
25 Japanese politics
A tax rise delayed
26 Africans in India
They don’t love us
27 Banyan
Sino-American rivalry
China
28 Education
The class ceiling
29 Commemorating
Tiananmen
Hong Kong’s struggle
to remember
United States
30 Bernie Sanders
California, here we come
31 The campaigns
Heard on the trail
31 Chicago
Predictable policing
32 Refugees
Their own public Idaho
34 Lexington
Trumpology

The Americas
35 Brazil’s economy

Nowhere to go but up
36 Poverty in Argentina
Gutted community
37 Bello
Peru’s election
Middle East and Africa
38 Railways in Africa
Puffed out
39 Crimes against humanity
One dictator down
40 Nigeria’s life coaches
Yes you can!
40 Palestine
A museum without
exhibits
41 Syria’s war
Never-ending horror
41 Western Sahara
Leader of a lost cause
42 Arab innovation
Free the geeks
42 Qatar
The other Wahhabi state

43
44
44

45

46
47

Europe
France on strike
To the barricades
Turkey’s Kurds
War of attrition
Germany and the
Armenian genocide
Name and shame
Corruption in Romania
Death of an antiseptic
salesman
Russia’s empty elections
United Russia, divided Putin
Charlemagne
For the love of pizza

Britain
48 Brexit and the union
Tug of war
49 Muslim retail market
Modesty sells
50 Bagehot
Pity the Brexpats

Bernie Sanders
The Democratic challenger
thinks he still has a shot at the

nomination. He’s wrong, page
30. Heard on the trail, page 31

French strikes This time
François Hollande must not
cave in: leader, page 10.
France tries to end its
industrial conflicts before
Europe’s football
championship starts, page 43

Brexit: the union and the
expats A vote to leave could
lead to a second Scottish
independence referendum.
But the place to fret about
most is Northern Ireland, page
48. Britain’s long-overlooked
diaspora could pay a high
price on June 23rd: Bagehot,
page 50

1 Contents continues overleaf


4 Contents

The Economist June 4th 2016

International

51 Free speech
The muzzle grows tighter
53 Bangladesh
Muted by machetes
54 Campus protests
The colliding of the
American mind
56 A youthful trend
Don’t be so offensive
Universal basic income
Proponents underestimate
how disruptive it would be:
leader, page 12. Arguments for
a state stipend payable to all
citizens are being heard more
widely, pages 21-24. Reasons
to be less afraid about the
march of machines, page 67

Education in China
Meritocratic exams for
university admission are no
remedy for deep inequalities
in education, page 28. Fraud,
bureaucracy and an obsession
with quantity over quality still
hold Chinese science back,
page 73

Business

57 Walmart
Thinking outside the box
60 Digital celebrities
From smartphone
to cinema
60 Price-fixing
No truck with cartels
61 Morocco’s factories
Factories in the sun
62 Apple in India
Forbidden fruit
63 Schumpeter
The evolution of Mr Thiel
Finance and economics
65 Reforming Indian banks
Bureaucrats at the till
66 Buttonwood
The productivity puzzle
67 China’s currency
Bending, not breaking
67 Automation
Workers v robots, round two
68 Crypto-currencies
Etherised
68 Aircraft finance
Crowded skies
71 SMEs in developing
countries
Caught in the middle
72 Free exchange

Israel’s economy

Science and technology
73 Chinese science
Schrödinger’s panda
74 An update on AIDS
HIV’s slow retrenchment
74 Zika and the Olympics
Stay or shift?
75 Avoiding sunburn
Patched up
76 Black holes
We want information
76 Peppered moths
Jumping to attention
Books and arts
77 Developing-world
economics
The rise and fall of nations
78 Johnson
Language peeves
79 The 100-year life
Live long and prosper
79 The meaning of grit
Passion and perseverance
80 Tate Modern
Home of the brave
84 Economic and financial
indicators
Statistics on 42 economies,

plus a closer look at
manufacturing activity
Obituary
86 Jane Fawcett
The deb who sank the
Bismarck

Peter Thiel The tech
billionaire has morphed from a
libertarian into a corporate
Nietzschean: Schumpeter,
page 63

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M.C.I. (P) No.034/09/2015 PPS 677/11/2012(022861)



6

The Economist June 4th 2016

The world this week
Politics

Industrial unrest spread
throughout France. A week
after a blockade of oil refineries led to panic at the petrol
pumps, the country was crippled by another round of
strikes, as transport workers
joined the picket lines. The
dispute, over the government’s
modest reforms to loosen
labour-market restrictions, has
pitted unionised workers
against the Socialist government of François Hollande.
The UN’s refugee agency

reported that at least 880
migrants were feared
drowned in a single week in
the Mediterranean. In the first
five months of 2016, 2,510 had
died trying to make the crossing to Europe, up by 35% compared with the same period
last year.
In Brussels the European Commission issued a formal objection to changes made by the
Polish government in December to Poland’s constitutional
court, which potentially endanger the rule of law. The
government, led by the
Eurosceptical Law and Justice
party, now has to address the
criticisms; failure to do so
could lead to sanctions or to
Poland losing its voting rights
in the European Union.
After two decades of work,
Switzerland officially opened
the Gotthard base train
tunnel, the world’s longest, at
an event attended by European leaders, including Angela
Merkel. At 57.5km (35 miles) the
Gotthard base is 7km longer
than the Channel Tunnel.
When it starts operating in
December it will increase the

capacity for transporting
freight along the Rotterdam-toGenoa corridor.

sure. It used to buy rifles and
hire military instructors from
the dictatorship.

Breaking the rules
Luis Almagro, the secretarygeneral of the Organisation of
American States, called an
emergency meeting to consider suspending Venezuela
under the organisation’s
“democratic charter”. He is the
first head of the OAS to invoke
the charter against the will of a
member state. But a group of
countries led by Argentina is
seeking to delay the meeting in
order to allow more time for
mediation between Venezuela’s populist government and
the opposition.

Mohamed Kuno, the plotter
behind the attacks on Garissa
University in Kenya last year
in which 148 people were
murdered, was killed in Somalia, according to officials.

Brazil’s interim anti-corruption minister, Fabiano Silveira,
resigned after recordings were
leaked in which he appears to
advise a high-ranking politician on how to defend himself in an investigation of the

multibillion-dollar Petrobras
scandal. He is the second
minister to resign in similar
circumstances since Michel
Temer became Brazil’s interim
president in May.

Fighter jets bombed Idlib, a
rebel-held provincial capital in
northern Syria, killing over 20
people. Russia denied it was
responsible for what was the
heaviest bombardment of the
city since a partial ceasefire
was declared last February.
Iran said it was banning its
citizens from joining the pilgrimage to Mecca in September in protest at Saudi Arabia’s “obstacles”. Hundreds of
Iranians were among some
2,400 pilgrims killed in last
year’s stampede at Mecca, but
the two countries have failed
to agree on compensation.

China’s capital, Beijing, is
planning to introduce a congestion charge, possibly later
this year, according to state
media. The rapid growth of a
car-owning middle class has
reduced traffic in parts of the
city to a crawl during peak

hours. Cars are already sometimes banned from being used
at certain periods of the week.
America’s defence secretary,
Ashton Carter, said China
could be erecting a “great wall
of self-isolation” by undercutting principles that other countries have sought to establish
for use of the seas, the internet
and management of the global
economy, which reflected “the
region’s distant past, rather
than the principled future”.
China responded by saying
that some Americans’ minds
were “stuck in the cold war”.

Not letting the memory fade

Libyan forces pushed Islamic
State fighters back from two
coastal towns near oil installations, reducing its control
of the Mediterranean shore.

Still defiant, but going to jail
Escalating tensions
South Korean officials said that
North Korea tried to launch a
missile from its east coast,
which flew for a few seconds
before exploding. China urged
calm. Barack Obama called

North Korea “a big worry”.

Hissène Habré, the president
of Chad from 1982 to 1990, was
found guilty of crimes against
humanity, rape and torture by
a court in Senegal set up under
the auspices of the African
Union. Around 40,000 people
died under the dictator’s reign
of terror before he fled Chad
for exile in Senegal. He is the
first ex-head of state to be
convicted in another country’s
national court-system, rather
than at a special tribunal.
Uganda announced it has cut
all military ties with North
Korea after international pres-

Rodrigo Duterte, presidentelect of the Philippines, was
embroiled in more controversy. Just days after a reporter
was killed in Manila he said,
“If you’re an upright journalist,
nothing will happen to you,”
but “just because you’re a
journalist, you are not exempted from assassination if you’re
a son of a bitch.”
Prosecutors in Singapore
opened a money-laundering

probe into 1MDB, a Malaysian
state-investment firm. It is the
city-state’s biggest-ever inquiry
of its kind. Bail was denied to a
former wealth manager at the
branch of a Swiss private bank,
who faces charges in connection with the investigation.

Barack Obama visited Hiroshima, the first president of
the United States to go there
since America dropped an
atom bomb on the city in
August 1945. Mr Obama called
again for a world free of nuclear weapons, though under
his administration America
has upgraded its nukes, as
have Russia and China.
Donald Trump, the putative
Republican candidate for
president, announced that he
would be in Scotland at the
reopening of one of his golf
courses on June 24th. The date,
a day after Britain votes on
whether to remain in the EU,
may not be a coincidence.
Although Mr Trump appears
not to know the meaning of
“Brexit” in interviews, he has
expressed a desire that Britain

should leave the club (Europe,
1
not his golf club).


The Economist June 4th 2016
figures came with the usual
warnings about their reliability. Other indicators, such as
weak private investment and
exports, suggest the economic
picture is more mixed.

Business
2016 GDP forecasts
% increase on a year earlier
0

2

4

The world this week 7

6

8

India
China
United States

Britain
Euro area
Japan
Source: OECD

In its latest twice-yearly global
assessment, the OECD warned
that the world economy is
“stuck in a low-growth trap”.
The organisation said monetary policy alone could no
longer be relied on to deliver
growth and governments
should be using the fiscal tools
at their disposal, such as increases in investment spending, to stimulate demand. It
also pointed to several downside risks to global growth, the
most immediate of which
would be if Britain votes to
leave the European Union in a
referendum on June 23rd.
The OECD forecast that
Brazil’s economy will shrink
by 4.3% this year. Official data
this week showed that the
country’s GDP contracted by
5.4% in the first quarter compared with the same period
last year. Although bad, many
economists were expecting the
figure to be much worse.
Shinzo Abe, Japan’s prime
minister, delayed a controversial rise in the country’s

sales tax until 2019. The increase, from 8% to 10%, was
supposed to take place next
April, having already been
postponed once. An initial rise
in the tax in 2014 was widely
blamed for throwing Japan
into recession.

Tiger, tiger, burning bright
India’s economy grew by 7.9%
in the first three months of the
year compared with the same
quarter in 2015. For the fiscal
year ending March 31st GDP
rose by 7.6%, the fastest pace in
five years. The government
was quick to take the credit,
pointing to its pro-business
reforms. But India’s impressive

Consumer spending in America grew by 1% in April compared with March, the biggest
increase in nearly seven years.
The data will be taken as more
evidence that the economy is
racing ahead by those who
want the Federal Reserve to lift
interest rates again this month.
Martin Senn, who stepped
down as chief executive of
Zurich Insurance in December, committed suicide at his

holiday home in Klosters.
Three years ago the company’s
finance director also took his
own life, prompting soulsearching about the stresses
faced by busy executives. An
independent investigation into
that incident concluded that
the insurer’s leadership was
not putting undue pressure on
management.
Yusuf Alireza unexpectedly
quit as chief executive of
Noble Group, Asia’s biggest
commodities-trading firm.
Noble, which is based in Hong
Kong, has been hit by the
slump in commodity prices
and faces allegations from a

research outfit that it overstated its assets, which the company denies. On the day that
Mr Alireza’s departure was
announced Noble also said it
would sell its profitable American retail-energy business; the
proceeds will go towards
repairing its balance-sheet.

SoftBank needs to repay the
debt it accumulated to fund a
number of big acquisitions,
including the Sprint network

in America. It is reportedly
looking to offload some of its
other stakes, including in
Supercell, a Finnish mobilegaming firm.

Debt spirals
The Obama administration
detailed new rules to regulate
providers of payday loans.
Such lending is aimed at people on low incomes and attracts very high interest rates.
The government wants lenders to do more to assess a
borrower’s ability to repay.

A jury in California rejected
Oracle’s $9 billion claim that
Google infringed its copyright
on Java by wiring the software
into Android phones. Oracle
took ownership of Java when
it bought Sun Microsystems in
2010 and it has been battling
with Google in the courts ever
since. The jury found that
Google’s use of Java came
under the “fair use” element of
copyright law.

Saudi Arabia’s sovereignwealth fund ploughed $3.5
billion into Uber and got a seat
on its board. It is the taxi-hailing app’s biggest single infusion of cash, and brings the

total from its latest round of
financing to $5 billion. The
privately held firm is estimated
to be worth more than General
Motors.
SoftBank, a multinational
telecoms and internet group
that is based in Japan, decided
to sell $7.9 billion-worth of the
shares it holds in Alibaba,
which will reduce its stake in
the Chinese e-commerce
company from 32% to 28%.

High maintenance
A former director at Barclays in
New York was charged with
allegedly passing inside information on forthcoming mergers to his plumber, who has
pleaded guilty to using the
illegal tips to make money on
the markets. The director has
yet to enter a plea. The plumber repaid the banker in part by
refurbishing his bathroom, but
this apparently did not include
plugging financial leaks.
Other economic data and news
can be found on pages 84-85

The Economist June 4th 2016 9

Leaders

Under attack
Curbs on free speech are growing tighter. It is time to speak out

I

N A sense, this is a golden age
for free speech. Your smartphone can call up newspapers
from the other side of world in
seconds. More than a billion
tweets, Facebook posts and blog
updates are published every single day. Anyone with access to
the internet can be a publisher, and anyone who can reach Wikipedia enters a digital haven where America’s First Amendment reigns.
However, watchdogs report that speaking out is becoming
more dangerous—and they are right. As our report on page 51
shows, curbs on free speech have grown tighter. Without the
contest of ideas, the world is timid and ignorant.
Free speech is under attack in three ways. First, repression
by governments has increased. Several countries have reimposed cold-war controls or introduced new ones. After the collapse of the Soviet Union, Russia enjoyed a free-for-all of vigorous debate. Under Vladimir Putin, the muzzle has tightened
again. All the main television-news outlets are now controlled
by the state or by Mr Putin’s cronies. Journalists who ask awkward questions are no longer likely to be sent to labour camps,
but several have been murdered.
China’s leader, Xi Jinping, ordered a crackdown after he
took over in 2012, toughening up censorship of social media,
arresting hundreds of dissidents and replacing liberal debate
in universities with extra Marxism. In the Middle East the overthrow ofdespots during the Arab spring let people speak freely
for the first time in generations. This has lasted in Tunisia, but

Syria and Libya are more dangerous for journalists than they
were before the uprisings; and Egypt is ruled by a man who
says, with a straight face: “Don’t listen to anyone but me.”
Words, sticks and stones
Second, a worrying number of non-state actors are enforcing
censorship by assassination. Reporters in Mexico who investigate crime or corruption are often murdered, and sometimes
tortured first. Jihadists slaughter those they think have insulted
their faith. When authors and artists say anything that might
be deemed disrespectful of Islam, they take risks. Secular bloggers in Bangladesh are hacked to death in the street (see page
53); French cartoonists are gunned down in their offices. The jihadists hurt Muslims more than any others, not least by making it harder for them to have an honest discussion about how
to organise their societies.
Third, the idea has spread that people and groups have a
right not to be offended. This may sound innocuous. Politeness is a virtue, after all. But if I have a right not to be offended,
that means someone must police what you say about me, or
about the things I hold dear, such as my ethnic group, religion,
or even political beliefs. Since offence is subjective, the power
to police it is both vast and arbitrary.
Nevertheless, many students in America and Europe believe that someone should exercise it. Some retreat into the absolutism of identity politics, arguing that men have no right to

speak about feminism nor whites to speak about slavery. Others have blocked thoughtful, well-known speakers, such as
Condoleezza Rice and Ayaan Hirsi Ali, from being heard on
campus (see page 54).
Concern for the victims of discrimination is laudable. And
student protest is often, in itself, an act of free speech. But university is a place where students are supposed to learn how to
think. That mission is impossible if uncomfortable ideas are
off-limits. And protest can easily stray into preciousness: the
University of California, for example, suggests that it is a racist
“micro-aggression” to say that “America is a land of opportunity”, because it could be taken to imply that those who do not
succeed have only themselves to blame.
The inconvenient truth

Intolerance among Western liberals also has wholly unintended consequences. Even despots know that locking up
mouthy but non-violent dissidents is disreputable. Nearly all
countries have laws that protect freedom of speech. So authoritarians are always looking out for respectable-sounding
excuses to trample on it. National security is one. Russia recently sentenced Vadim Tyumentsev, a blogger, to five years in prison for promoting “extremism”, after he criticised Russian
policy in Ukraine. “Hate speech” is another. China locks up
campaigners for Tibetan independence for “inciting ethnic hatred”; Saudi Arabia flogs blasphemers; Indians can be jailed for
up to three years for promoting disharmony “on grounds of religion, race...caste...or any other ground whatsoever”.
The threat to free speech on Western campuses is very different from that faced by atheists in Afghanistan or democrats
in China. But when progressive thinkers agree that offensive
words should be censored, it helps authoritarian regimes to
justify their own much harsher restrictions and intolerant religious groups their violence. When human-rights campaigners
object to what is happening under oppressive regimes, despots can point out that liberal democracies such as France and
Spain also criminalise those who “glorify” or “defend” terrorism, and that many Western countries make it a crime to insult a religion or to incite racial hatred.
One strongman who has enjoyed tweaking the West for hypocrisy is Recep Tayyip Erdogan, president of Turkey. At home,
he will tolerate no insults to his person, faith or policies.
Abroad, he demands the same courtesy—and in Germany he
has found it. In March a German comedian recited a satirical
poem about him “shagging goats and oppressing minorities”
(only the more serious charge is true). Mr Erdogan invoked an
old, neglected German law against insulting foreign heads of
state. Amazingly, Angela Merkel, the German chancellor, has
let the prosecution proceed. Even more amazingly, nine other
European countries still have similar laws, and 13 bar insults
against their own head of state.
Opinion polls reveal that in many countries support for free
speech is lukewarm and conditional. If words are upsetting,
people would rather the government or some other authority
made the speaker shut up. A group of Islamic countries are lobbying to make insulting religion a crime under international 1

10 Leaders

The Economist June 4th 2016

2 law. They have every reason to expect that they will succeed.

So it is worth spelling out why free expression is the bedrock of all liberties. Free speech is the best defence against bad
government. Politicians who err (that is, all of them) should be
subjected to unfettered criticism. Those who hear it may respond to it; those who silence it may never find out how their
policies misfired. As Amartya Sen, a Nobel laureate, has pointed out, no democracy with a free press ever endured famine.
In all areas of life, free debate sorts good ideas from bad
ones. Science cannot develop unless old certainties are queried. Taboos are the enemy of understanding. When China’s
government orders economists to offer optimistic forecasts, it
guarantees that its own policymaking will be ill-informed.
When American social-science faculties hire only left-wing
professors, their research deserves to be taken less seriously.
The law should recognise the right to free speech as nearly
absolute. Exceptions should be rare. Child pornography
should be banned, since its production involves harm to children. States need to keep some things secret: free speech does
not mean the right to publish nuclear launch codes. But in
most areas where campaigners are calling for enforced civility
(or worse, deference) they should be resisted.
Blasphemy laws are an anachronism. A religion should be
open to debate. Laws against hate speech are unworkably subjective and widely abused. Banning words or arguments
which one group finds offensive does not lead to social harmony. On the contrary, it gives everyone an incentive to take offence—a fact that opportunistic politicians with ethnic-based
support are quick to exploit.
Incitement to violence should be banned. However, it
should be narrowly defined as instances when the speaker in-

tends to goad those who agree with him to commit violence,

and when his words are likely to have an immediate effect.
Shouting “Let’s kill the Jews” to an angry mob outside a synagogue qualifies. Drunkenly posting “I wish all the Jews were
dead” on an obscure Facebook page probably does not. Saying
something offensive about a group whose members then start
a riot certainly does not count. They should have responded
with words, or by ignoring the fool who insulted them.
In volatile countries, such as Rwanda and Burundi, words
that incite violence will differ from those that would do so in a
stable democracy. But the principles remain the same. The police should deal with serious and imminent threats, not arrest
every bigot with a laptop or a megaphone. (The governments
of Rwanda and Burundi, alas, show no such restraint.)
Areopagitica online
Facebook, Twitter and other digital giants should, as private organisations, be free to decide what they allow to be published
on their platforms. By the same logic, a private university
should be free, as far as the law is concerned, to enforce a
speech code on its students. If you don’t like a Christian college’s rules against swearing, pornography and expressing disbelief in God, you can go somewhere else. However, any public college, and any college that aspires to help students grow
intellectually, should aim to expose them to challenging ideas.
The world outside campus will often offend them; they must
learn to fight back using peaceful protests, rhetoric and reason.
These are good rules for everyone. Never try to silence
views with which you disagree. Answer objectionable speech
with more speech. Win the argument without resorting to
force. And grow a tougher hide. 7

Strikes in France

Don’t cave in, Mr Hollande
The game that really matters is the political one, not football

F

RANCE has been looking
forward to staging a big spectacle this month. Euro 2016, an
international football tournament second in importance
only to the World Cup, kicks off
in the Stade de France near Paris
on June 10th, the first of 51
matches around the country ending with the final on July 10th.
But a spectacle of a different sort is attracting attention to
France early, and for the wrong reasons: industrial unrest,
which threatens to spread chaos and spoil the party.
Last week a blockade of oil refineries led to panic among
motorists as petrol stations ran dry. This week the havoc
spread to the railways. Pilots at Air France have voted to disrupt flights. A national day of strikes is threatened on June 14th,
when the Senate, the upper house, is due to consider the
changes to France’s labour laws which are at the centre of the
dispute.
At issue are modest reforms designed to tackle the country’s high unemployment, which remains stubbornly at 10%.
The law would ease rigid collective-bargaining rules and make
firing workers slightly less complex. But this is not the direction

of change that France’s Socialist president, François Hollande,
promised when he was elected four years ago, pledging to fight
austerity and soak the rich (see page 43). Fearful of a rebellion
by left-wingers in his own party, his prime minister, Manuel
Valls, decided to ram the measures through the National Assembly using executive powers that allow a law to be approved by a motion of confidence, rather than voted on directly. The country’s biggest union, the hard-left
Confédération Générale du Travail (CGT), has opted to confront the government in the time-honoured French way—and
at a moment of maximum pressure, with Euro 2016 looming.
This time, no surrender
The last thing the government wanted was further trouble for

a tournament already beset by heightened concerns over terrorist attacks (this week the State Department warned
would-be American travellers that Euro 2016 was a potential
target). Mr Hollande, his approval rating at a dismal 13%, is
poorly placed for a showdown. And the labour reforms, already diluted to an extent that has cost the support of the main
employers’ groups, might seem an odd cause for the Socialist
leader to fight for. At this point, with mass protests growing,
past French administrations would have climbed down. Ten 1



12 Leaders

The Economist June 4th 2016

2 years ago it was a centre-right president, Jacques Chirac, who

abandoned a controversial labour reform after weeks of student demonstrations. That followed similar retreats in 1986,
1994 and 1995.
Caving in once again in 2016 would be a mistake. The government should resist even the sort of messy compromise that
seems to be tempting it as a means of avoiding disruption at
Euro 2016—making concessions to the CGT on restructuring efforts for the national railways, say, in exchange for its acquiescence on the labour laws. Such a compromise would be

against the spirit of the reforms, which aim to dilute the role of
national law and branch agreements.
Mr Valls says that he is determined to hold his ground. If he
and Mr Hollande want to show that they are serious about the
change France needs, this is their moment. For once, they must
be frank with the French about why these labour-market reforms are a step towards job creation and growth, and in everyone’s interest. Disruption of the coming football tournament
would be a shame. But for the sake of France’s future, it is the
political game that the government has to win. 7

Rethinking the welfare state

Basically flawed
Proponents of a basic income underestimate how disruptive it would be

W

ORK is one of society’s
most important instituWorldwide, as % of GDP
tions. It is the main mechanism
60
through which spending power
55
is allocated. It provides people
with meaning, structure and
50
identity. Yet work is a less gener1980
90
2000
12
ous, and less certain, provider of
these benefits than it once was. Since 2000 economic growth
across the rich world has failed to generate decent pay increases for most workers. Now there is growing fear of a more
fundamental threat to the world of work: the possibility that
new technologies, from machine learning to driverless cars,
will cause havoc to employment.
Such worries have revived interest in an old idea: the payment of a “universal basic income”, an unconditional government payment given to all citizens, as a supplement to or replacement for wages (see pages 21-24). On June 5th Swiss
citizens will decide in a referendum whether to require their
government to adopt a basic income. Finland and the Netherlands are planning limited experiments in which some citizens are paid a monthly income of roughly €1,000 ($1,100).

People from all points on the ideological spectrum, from trade
unionists to libertarians, are supporters. It is an idea whose
day may come. But not soon.
The basic income is an answer to a problem that has not yet
materialised. Worries that technological advance would mean
the end of employment have, thus far, always proved misguided; as jobs on the farm were destroyed, work in the factory was
created. Today’s angst over robots and artificial intelligence
may well turn out to be another in a long line of such scares. A
much-quoted study suggesting that 47% of today’s jobs could
be automated in the next two decades looks too gloomy, for example (see page 67). Machines may one day be a match for
many workers at most tasks. But that is not a reason to rush to
adopt a basic income immediately.
If the need for a basic income is unproven, the costs are certain. Its universality is designed to encourage citizens to think
of the payment as a basic right. However, universality also
means that the policy would be fantastically costly. An economy as rich as America’s could afford to pay citizens a basic income worth about $10,000 a year ifit began collecting about as
much tax as a share ofGDP as Germany (35%, as opposed to the
current 26%) and replaced all other welfare programmes (inLabour costs

cluding Social Security, or pensions, but not including health
care) with the basic-income payment.
Such a big jump in the size of the state should make anyone
wary. Even if levied efficiently, on an immovable asset like
land, tax rises on this scale would have unpredictable effects
on growth and wealth creation. Yet an income of $10,000 is
still extremely low: it would leave many poorer people, such
as those who rely on the state pension, worse off than they are
now—at the same time as billionaires started getting more
money from the state.
A universal basic income would also destroy the conditionality on which modern welfare states are built. During an experiment with a basic-income-like programme in Manitoba,
Canada, most people continued to work. But over time, the

stigma against leaving the workforce would surely erode: large
segments of society could drift into an alienated idleness. Tensions between those who continue to work and pay taxes and
those opting out weaken the current system; under a basic income, they could rip the welfare state apart.
Lastly, a basic income would make it almost impossible for
countries to have open borders. The right to an income would
encourage rich-world governments either to shut the doors to
immigrants, or to create second-class citizenries without access to state support.
Basic questions
Make no mistake: modern welfare states leave plenty to be desired. Disability benefits are for many people an unsatisfactory version of a basic income, providing those who will no
longer work with enough to get by. But rather than upend society with radical welfare reforms premised on a job-killing
technological revolution that has not yet happened, governments should make better use of the tools they already have.
Labour-market reforms—to crack down on occupational licensing, say—would boost employment growth. More generous wage subsidies, such as an earned-income tax credit,
would help people stay out of poverty. Long-overdue public
investment in infrastructure would foster demand. Relaxing
planning restrictions would create jobs in construction, and
homes for workers in places with robust economies.
A universal basic income might just make sense in a world
of technological upheaval. But before governments begin
planning for a world without work, they should strive to make
today’s system function better. 7



14 Leaders

The Economist June 4th 2016

Indian banking

Of banks and bureaucrats

Proposed reforms to India’s financial system are welcome but insufficient

B

ANKS are usually reliable barometers of the health of the
economies they help finance. So
news in recent days that India’s
lenders have lost over 200 billion rupees ($3 billion) in the
most recent quarter sits oddly
with zippy growth in GDP of
7.9%. A revving economy may help the banks overcome their
weakness. Far likelier is the opposite outcome: that the Indian
economy ends up being damaged by its lenders.
Most of the trouble lies in India’s state-owned banks, a network of 27 listed but government-controlled entities that account for 70% of India’s banking system by assets (see page 65).
Their share prices have tumbled ever since the Reserve Bankof
India (RBI), the central bank and regulator, sensibly forced
them to confess to past mistakes. A staggering 17% of the loans
they made in a mini credit boom around 2011 have either had
to be written off or are likely to be.
Corporate lending, particularly to powerful Indian conglomerates, is at the root of the problem. Some of the dodgy
loans have soured because of bad luck: mining projects have
been hit by slumping commodity prices. Some reflect bad
judgment: loans to infrastructure developers have proved
bankers to be wildly optimistic about the ability to get stuff
built in bureaucratic India. And some reflect bad faith: politicians in the previous government leant shamelessly on public
banks to supply money to their cronies in business.
To its credit, the government of Narendra Modi, in office
since 2014, has cracked down on this kind of corruption. Along
with Raghuram Rajan, governor of the RBI, it has been willing
to air the financial system’s problems. A recently passed (but

not yet operational) bankruptcy law will give banks power to
foreclose on defaulting borrowers, many ofthem tycoons who

have historically run rings around their bankers. The government even wants to consolidate the 27 banks into less than half
that number, over the objection of trade unions.
It needs to be still bolder. The priority is to be more scrupulous about cleansing the financial system of sour loans. The
option of setting up a “bad bank” to remove the dud assets
from ailing lenders’ balance-sheets has been ruled out. The
funds earmarked to recapitalise the banks, which now have
the most threadbare equity cushions in Asia, are insufficient.
Credit-rating agencies are warning that the banking miasma is
a threat to India’s sovereign rating.
Muddling through is a tried-and-tested strategy when it
comes to struggling banks. Europe is a past master at this approach and the result is a banking industry that has been unable to support growth. This ossification may be starting in India, where loans to industry are growing by a meagre 2% a year.
By contrast, America forced recapitalisations on its banks after
the 2007-08 financial crisis—a painful exercise for all sides, but
one that was rewarded with a swift return to health. America
is the example for India to follow. An early confirmation of a
second three-year term for Mr Rajan, who will otherwise depart in September, would send the right message.
Banks, not bureaucrats
A government that describes itself as “pro-market” should also
lay out a path to the privatisation of state-owned lenders. It is
no coincidence that private-sector banks have experienced
only a small fraction of the losses of state-backed rivals. Mr
Modi should also aim to scrap socialist-era rules that force all
banks to make a fifth of their loans to support farming and that
dictate where they can open branches. The government has
made some welcome changes. But until it abandons its belief
that a state-owned banking system is the right way to allocate
credit, India’s banks will hold the economy back. 7

Shopping in America

Between Bentonville and Bezos
Lessons from the two giants of American retailing

F

OR decades a titan has towered over America’s shopping landscape. Walmart is not
just the world’s biggest retailer
but the biggest private employer
and, by sales, the biggest company. Last year its tills rang up
takings of $482 billion, about
twice Apple’s revenue. But now the beast of Bentonville must
cope with an unfamiliar sensation. After ruling as the undisputed disrupter of American retailing, Walmart finds itself being disrupted.
The source of the commotion is online shopping, specifical-

ly online shopping at Amazon. E-commerce accounted for $1in
every $10 that American shoppers spent last year, up by 15%
from 2014. Amazon’s North American sales grew at about
twice that rate. Walmart’s share of America’s retail sales,
which stands at 10.6%, is still more than twice Amazon’s, but it
peaked in 2009 at nearly12%. In January Walmart said it would
close 154 American stores. It may need to shut more.
Walmart’s “supercentres” once offered an unmatched combination of squeezed prices and expansive choice, but this formula is losing its magic (see page 57). Discounters and other
competitors are rivalling Walmart’s low prices at the same
time as Amazon’s warehouses can beat its range.
Amazon is also offering something different. Whereas Wal- 1

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16 Leaders

The Economist June 4th 2016

2 mart has strived to help Americans save money, Amazon is ob-

sessed with helping them save time. Amazon has become a
new kind of big-box retailer, with warehouses placed strategically around America to speed deliveries to customers. Innovations such as Dash, which lets you press a button in your
kitchen to order soap or coffee, could turn Amazon from an online store into something like a utility.
Walmart is fighting back. It is spending billions in the hope
of growing even larger. It is offering more goods to more customers, in stores and online. With its legendary attention to detail, it is making its operations even more efficient. For instance,
it will save more than 35 truckloads of buttercream icing this
year, after spotting that its bakers were leaving too much icing

in the bottom of their tubs. By using 27 different boxes rather
than 12 to deliver online goods, the firm reckons it can save
7.2m cubic feet of cardboard boxes a year.
Last month sunny results sent up its share price by 10%. Yet
far from offering comfort to other retailers hoping to knit together physical and online businesses, Walmart’s fightback
shows how hard it will be for them to repel Amazon.
Other retailers cannot rival Walmart’s size—still its most potent weapon. Nine out of ten Americans live within ten miles

of a store owned by Walmart. That gives it a unique advantage
in e-commerce, because it can both ship from its stores and let
consumers pick up baskets of goods that they ordered online.
Its vast grocery business, which is harder to move online than
non-perishable goods, provides further protection. Although
investments have squeezed Walmart’s profits, the firm can afford to invest more than any other in information technology.
Space race
For smaller, worse-managed firms selling clothing, shoes and
so on, the prognosis is bleaker. Since April 1st shares in some of
America’s most famous retailers, including Macy’s, Gap and
J.C. Penney, have plunged by more than 25%, in part because of
the march of online firms. In the age of Amazon only those
that offer better service, greater convenience or an experience
that is hard to mimic online will do well. TJX, which offers
brand-name goods at a discount, is thriving, because customers prefer hunting for treasures that are physically there in front
of them. Customers come to Nike’s shops not just for trainers
but for running clubs. Walmart is betting that it has the brawn
and the brains to be in this group. However, others have less
cause for hope. 7

Fighting corruption

Cleaning up
More visible scandals may mean that a country is becoming less corrupt

A

CAR slams into a tree at
speed, and is crushed. Inside, the Romanian police find
the body of the chief executive
of a company that makes detergents for hospitals—one under
investigation for watering down
its products and leaving patients
to die from drug-resistant infections. The Hexi Pharma scandal
(see page 45) sounds like something out of “The Third Man”.
For many foreigners, it confirms Romania’s reputation as a
kleptocracy riddled with malfeasance and graft.
Romania is certainly rotten. But the Hexi Pharma affair is
evidence of how much the country is doing to tackle corruption. After investigative journalists exposed the case in late
April, it was quickly taken up by the judiciary. This has become
much more independent under pressure from the European
Union, which Romania joined in 2007. The new general prosecutor, appointed in April by a president elected on an anti-corruption platform, is pursuing Hexi Pharma zealously. Laura
Codruta Kovesi, the dauntless head of the country’s anti-corruption directorate, says her agency is also investigating. Last
year it prosecuted over 1,250 officials and helped force the
prime minister from power. At last month’s global corruptionfighting summit in London, Ms Kovesi was treated as if she
were a rock star.
It is a common paradox: the world often becomes aware of
corruption when someone is doing something about it. That
leads people to conclude that things are getting worse when
they are, in fact, getting better. The incentives for countries can
thus be perverse. Investors long shrugged off the graft that permeated Brazil’s political system. Then, in 2014, crusading pros-

ecutors revealed that the state-owned oil company, Petrobras,
had funnelled hundreds of millions of dollars to officials and
parties in exchange for contracts. The next year Brazil’s score
on the Corruption Perceptions Index compiled by Transparency International, a global watchdog, fell by five points.
Guatemala has suffered a similar fate. Since 2008 the country has hosted a pioneering UN-backed independent prosecuting agency known as CICIG. Last year it uncovered graft at the
customs agency and brought down the president and vicepresident. Yet in 2015 the country’s score on Transparency
International’s index got worse. Dan Hough, a corruption expert at Sussex University, notes that Britain’s score on the
Transparency International index declined after the parliamentary expenses scandal of 2009, though the excesses had
been taking place for decades—and, in the scheme of things,
Britain was not especially venal. It was the exposure, not the
activity, that created the perception of corruption.
Make an honest country of them
The tendency to see countries as dirtier when they start to
clean up will not surprise students of British or American history. The impression that both countries were unusually sleazy in the late 1800s is largely due to the rise of reform and progressive movements dedicated to making politics honest. The
question is whether countries such as Romania, Brazil, Guatemala or China will be able to follow the same path.
They may not. The Orange revolution in Ukraine and the
mani pulite (clean hands) prosecutions in Italy failed to sanitise
those countries’ politics. Still, if a country like Romania is embroiled in scandals, voters and investors should applaud, not
despair. When crooks make the front page, it is often because
someone honest has put them there. 7


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18

The Economist June 4th 2016

Letters
Anti-Semitism and the left
The Anti-Defamation League’s
research confirms Bagehot’s
assertion that anti-Semitic
opinions are not widespread

among the British public, but
are disturbingly prevalent in
Britain’s Muslim population
(May 7th). ADL’s Global 100
poll, released in 2014, showed
just 8% of British respondents
agreeing with a majority of the
11 anti-Semitic stereotypes
presented, compared with 27%
in Germany and 37% in France.
Our follow-up poll in 2015
showed a slight increase to 12%,
though the score for British
Muslims was 54%.
Although we did not ask
about political affiliation in
our polls, we have long observed on the far-left in Britain,
as in America and elsewhere, a
demonisation of Israel with
Nazi analogies and conspiracy
theories and broad tolerance
within those political circles
for anti-Semitic statements. If
these noxious attitudes cannot
be eliminated, they must be
criticised and kept out of the
political mainstream.
ERIC HORODAS
Chair
International Affairs

Anti-Defamation League
New York
It is quite devastating that only
52% of British Muslims think
homosexuality should be legal
(“Integration nation”, May
21st). However, in 1983 68% of
British Catholics said homosexuality was mostly or always wrong, according to the
British Social Attitudes study.
By 2013 the figure had dropped
to 2%. Will living in an increasingly liberal Britain cause
Muslim attitudes to change,
just as it did for Catholics?
TIM RICHARDSON
Melbourne, Australia
Farmers’ views on Brexit
Your Brexit brief on agriculture
(“We plough the fields and
scarper”, May 21st) referred to
two surveys which suggested
most farmers back the Leave
campaign. The surveys had a
potential for self-selecting bias.
Farmers certainly have diverse
views on whether Britain

should continue its membership of the EU. Our own telephone poll suggests over half
the members of the National
Farmers’ Union plan to vote to
remain in the EU and over a

quarter may vote to leave. But
many are undecided.
Because farmers want more
information we commissioned our own impact assessment, referred to in your article, of potential Brexit
scenarios. Farmers’ key concerns are access to the single
market, fairness with respect to
farm-support payments, proportionate and science-based
rules and access to labour.
There is a lot of uncertainty.
We need the best possible
access to the EU single market
and as yet no clear model of
future trade with the EU has
emerged. The Leave campaign
has officially committed to
continuing farm-support
payment at its current rate, but
they have also suggested other
uses for the money.
For those who advocate
that we stay within the EU, it is
clear that there is massive
scope for improvements. We
want to see proportionate and
science-based regulations that
allow us to compete fairly in
the EU and international markets. What is the EU’s strategy
for achieving this?
MEURIG RAYMOND
President

National Farmers’ Union
Stoneleigh Park, Warwickshire
I think we need a referendum
to decide if we should Remain
in or Leave the Eurovision
Song Contest.
RAY ROBERTS
Budapest
Ban Ki-moon’s record
Your readers deserve a more
complete portrait of Ban
Ki-moon’s tenure as UN secretary-general (“Master, mistress
or mouse?”, May 21st). He has
indeed helped secure consensus on the landmark agreement on climate change. But
Mr Ban has also championed
women’s equality and backed
his words with actions, shattering glass-ceilings across the
UN by appointing a record
number of women to high-

level positions.
In the face of often unrelenting opposition, Mr Ban is
a staunch advocate of human
rights on contentious issues
such as xenophobia in Europe,
the persecution of gays and
lesbians in Africa or the denial
of the Holocaust in Iran. He
has modernised the UN by
strengthening peacekeeping

operations, streamlining the
bureaucracy and overhauling
its IT systems. Never has so
much information about UN
budgets and activities, and
even personal financial disclosures of senior officials,
been so readily available.
As one who grew up as a
recipient of UN aid in warravaged Korea, Ban Ki-moon
speaks from the heart. This
helps him connect where it
counts most: with the suffering
peoples of the world.
STEPHANE DUJARRIC
Spokesman for the UN secretarygeneral
New York
Show some initiative
James Madison may have had
a sceptical regard for referendums (“Let the people fail to
decide”, May 21st). But Thomas
Jefferson was more insightful:
I know of no safe depository of
the ultimate powers of the
society but the people themselves: and if we think them
not enlightened enough to
exercise their control with a
wholesome discretion, the
remedy is not to take it from
them, but to inform their
discretion by education.

David Cameron’s principal
shortcoming, and that of the
many politicians who default
to plebiscites when they lack
the courage to decide, is the
failure to educate.
GREG PARSTON
London
Referendums may indeed be
the best way to decide “oncein-a-generation national questions”. It is, however, unfair if
those who support a change,
such as the Leave campaign on
Britain and the EU and the Yes
campaign on Scottish independence, then clamour for a
second referendum if they do
not get their way the first time.

Their opponents have no such
option: if they lose, the decision is irrevocable. There
should, therefore, be a rule that
such a referendum can only be
held every, say, 30 years.
ANTONY BLACK
Dundee
I am the eggman

Recycling egg shells for use in
plastics put me in mind of the
war years (“A cracking yarn”,

May 14th). My aunt lived in the
country and kept chickens. She
would wash and grate the
shells until they were very fine
and she would then put the
eggshell powder into various
foods, such as homemade
jams. She said she would get
extra calcium for her bones.
She never got osteoporosis or
any other bone problem and
lived until she was 88.
I never ate her eggs as she
fed her hens on fish meal made
from fish bones she grated and
I could taste the fish.
ROSEMARIE PALLISER
Aigues-Mortes, France
All yolks aside, but shelling out
money for the R&D of new
products is not really such an
eggcellent idea. As a poultry
grower, I feed the shells of my
chicken’s eggs back to them for
the minerals needed for the
next clutch. Since your scientist has to keep buying unshelled eggs, selling them back
to a supplier might be a more
albumentary solution.
VI NOVIELLO
Long Branch, New Jersey 7

Letters are welcome and should be
addressed to the Editor at
The Economist, 25 St James’s Street,
London sw1A 1hg
E-mail:
More letters are available at:
Economist.com/letters


Executive Focus

19

Chief Executive Officer
London-based
DIRECTOR LEGAL AFFAIRS DIVISION
The World Trade Organization, based in Geneva, Switzerland, is seeking to fill
the position of Director in the Legal Affairs Division.

The Cherie Blair Foundation for Women supports women entrepreneurs
in developing and emerging economies to build and expand their
businesses, and in doing so, benefit not only themselves but also their
families and communities.

Reporting to a Deputy Director-General, the successful candidate will lead the Legal
Affairs Division, which is primarily responsible for assisting dispute settlement panels
and arbitrators in resolving trade disputes between WTO Members. The Division is
also responsible for providing legal advice on WTO agreements and other issues of
international law and the law of international institutions as they may arise to the
Director-General (DG) and the WTO Secretariat, to the Dispute Settlement Body (DSB)

and other WTO bodies and, as appropriate, to WTO Members. The Division also serves
as Secretary to the DSB in Special Session, prepares reference material on WTO law,
and carries out technical assistance and outreach activities.

The Foundation has reached more than 136,000 women in over 90
countries to date. It has built creative, impactful and large scale
partnerships with the private sector and works closely with international
development actors on entrepreneurship, gender and technology. Since
its establishment in 2008, the Foundation has raised over £14 million
for women’s economic empowerment. The organisation has a strong
culture of learning and emphasises the importance of results-oriented
partnerships.

The successful candidate must demonstrate an expert level of knowledge in
international trade law, public international law, and international dispute settlement
mechanisms and have an excellent knowledge of economic and legal issues relating
to the WTO.

The Foundation is seeking a new Chief Executive who will build on
its accomplishments, drive change and take the organisation to its
next stage of growth. We are seeking a passionate, energetic change
leader and people manager who has substantial experience in
international development, entrepreneurship, gender and technology.
Applicants should demonstrate a thorough commitment to the Cherie
Blair Foundation for Women’s mission and values of empowerment,
inclusiveness and accountability.

Extensive management experience with broad supervisory responsibilities in a legal
environment is required, as is extensive practical experience with dispute settlement
mechanisms. The successful candidate must have the skills to guide, empower and

motivate a team of approximately 40 staff members to excel in their jobs and to build
a team culture that consistently delivers high-quality results. Significant management
and organizational skills are essential as is the ability to interact and work with others
in a diverse international setting in a harmonious and effective way.
Candidates are required to have an advanced university degree in law, including studies
in public international law and international trade law and should be licensed or be
eligible to be licensed to practice law in at least one municipal jurisdiction. At least
fifteen years as a legal practitioner in either the public or private sectors, including
considerable practical experience in trade law and trade litigation, is required.
For more details regarding this position and to apply, please visit the WTO’s
e-recruitment website at www.wto.org. The application deadline for the
position is 8 June 2016.

The Economist June 4th 2016

We value diversity and welcome applications from people from all
sections of the community. The role will be based in London, with
international travel. Salary is competitive and will be commensurate
with experience.
For the full job description, please visit:
www.cherieblairfoundation.org/vacancies
To apply, please send a full curriculum vitae and a cover letter
addressing the role and person specification to Helen Hayes at hhayes@
cherieblairfoundation.org by 17:00 BST on 24 June 2016.



Briefing Universal basic incomes

Sighing for paradise to come

Maricá, Olten and Zurich

Arguments for a state stipend payable to all citizens are being heard more widely

T

HE future is a paradise of technological
abundance, some say, in which paid
work is optional and no one goes without.
A tiny glimpse at what that future might
look like is on offer in the village of Maricá,
a small seaside town just a short drive from
Rio de Janeiro. In December 2015 each of
the town’s 150,000 residents became eligible to receive a monthly payment worth
just under $3, financed with the help of
Maricá’s share of Rio state’s oil royalties.
The sum is small but for Washington
Quaquá, the mayor of Maricá and architect of the payments plan, the idea is a big
one. He says he is guided by “an ethical precept” that may realise his lifelong dream of
an egalitarian society. His programme is an
example of a “universal basic income”: a
no-strings cash payment to everybody in a
given jurisdiction.
The idea has a long pedigree, endorsed
by great figures of the enlightenment such
as the Marquis de Condorcet and Thomas
Paine. Three centuries on, a handful of governments around the world, mostly in rich
countries, are launching experimental basic-income programmes, or at least considering the idea. Finland will roll out a trial
programme next year, in which some citizens will receive unconditional cash grants
of up to €800 ($900) per month. Similar

programmes are being mulled in several
Dutch cities. On June 5th the Swiss will
vote on a constitutional change to intro-

duce a basic income for all citizens.
Political activists and thinkers across a
broad array ofideologies, from libertarians
to social liberals to the hard left, are intrigued, or even keen. The Cato Institute,
an American think-tank which spends
much of its time calling for a smaller state,
published a sympathetic analysis of the
policy in 2015. It feels that, though it might
prefer a world with no government redistribution, a basic income is the simplest,
least intrusive and least condescending
way to provide redistribution if redistribution there must be.
American liberals including Paul Krugman, an economist and columnist, and
Robert Reich, a former labour secretary, are
also interested. Along with writers such as
Anthony Atkinson, a British economist,
and Andy Stern, an American union
leader, they see a basic income (in some
form) as a way of expanding the welfare
state to reduce growing inequality (see
chart 1 on next page). The idea also has
some support in the further reaches of the
left as, in the words of a paper published in
1986, “A capitalist road to communism”.
Unsurprisingly, given the Utopian and
libertarian flavour of the idea, Silicon Valley is interested, too. This is not, though,
simply faddishness. The idea ofa universal

basic income has long been tied up with
worries about accelerating technological
change. The basic income, or “social cred-

The Economist June 4th 2016 21

it”, put forward in the 1920s by C.H. Douglas, a British polymath, was born of the
worry that technology was opening up a
gap between total output and the income
earned by workers. He suggested that governments could make up the gap by issuing every citizen with a “national dividend”. (The first novel by Robert Heinlein,
a canonical 20th-century science-fiction
writer much rated in libertarian circles,
consists largely of arguments in favour of
social credit and nudism, both of which he
saw as central to his Utopia.)
Some of the people behind today’s
technological change see universal basic
income in similar terms—a way of assuring
a living for all in a world of robots and artificial intelligence. To the extent that such
disruption is part of their business model,
this beneficence is also a way to neutralise
complaints about the havoc their innovations may wreak. Albert Wenger, a partner
at Union Square Ventures, a technologyoriented venture-capital firm, argues in favour of the policy in a new book “World
After Capital”. Sam Altman, the founder of
Y Combinator, a startup incubator, plans to
pilot a basic income of $1,000-2,000 a
month in Oakland, a city in California. “Fifty years from now...it will seem ridiculous
that we used fear of not being able to eat as
a way to motivate people,” is how Mr Altman puts it.
Startup statists

Backers make other arguments, too. Workers could take more time to train and explore different careers. The security of a basic income could boost enterprise, because
leaving a job and using up savings to open
a business are more palatable prospects in
such a world. So is finding fulfilment in un1
remunerated ways.


22 Briefing Universal basic incomes
2

The Economist June 4th 2016

A basic income could also help to right
certain old injustices. Women do the lion’s
share ofthe world’s unpaid labour. In most
of the world, they work more hours a day
than men do, but command a lower share
of financial resources, largely because they
take on more unpaid child care and responsibilities for the family home. A universal basic income would shift purchasing power toward people who do work
which, though valuable to society, is not rewarded financially.
As well as offering the possibility of a
simpler and perhaps fairer welfare state,
supporters of a universal basic income say
it answers fears that paid work will break
down as a mechanism for distributing purchasing power. In recent years, across
many rich economies, the wages earned
by the typical worker have grown pitifully
slowly—and by less than GDP per person
(see chart 2).
Low wages appear to be necessary to

coax firms into taking on new employees,
often in very low-productivity jobs that
could potentially be done by machines instead. This could be a temporary phenomenon; the workers at the bottom of the income scale may eventually shift into
better-paid work, or future generations
may cleverly invent new sources of employment for themselves. If it is a permanent state of affairs, though, then a basic income might be a way of making sure that
everyone shares in society’s progress, at
least to some extent.
But how such a step might be made to
work, and what harmful effects it might
have, are still open questions. The Swiss
government, which is arguing for a “no”
vote in this month’s referendum, worries
that a basic income would be ruinously expensive and morally corrosive, leaving the
country with unsustainable public finances and a society of unmotivated loaf1

Parting company
Gini coefficients*
0=perfect equality, 1=perfect inequality

1985

2013†
0.20 0.25

0.30

0.35

0.40

United States
Britain
Japan
New Zealand
Italy
Australia
Canada
Luxembourg
Germany
Sweden
Finland
Norway
Denmark
OECD average
Source: OECD

*Post taxes and transfers

†Or latest

2

The audacity of hope
2000=100
GDP per person:
Earnings*:

Britain
Britain

United States
United States
120
115
110
105
100
95

2000 02
Sources: BLS;
ONS; OECD

04

06

08

10

12

15

*Full-time workers’ median earnings

ers. Both supporters and critics agree that
universal basic incomes would challenge
the centrality of paid work to the way people live. A world with them in place could

be as different from today’s as that of public education and guaranteed pensions
was in the 1950s, compared with a century
before, when the loss of a job could mean
starvation for a worker and his family.
Welfare review
The reforms introduced by Otto von Bismarck, the German chancellor who
created the world’s first modern welfare
state, were intended to undermine support
for socialism and build working-class
backing for the German empire. The system he put in place was conceived as an insurance against the woes of hardship, rather than as a natural entitlement. Over the
following century, as trade unions sought a
better deal for labourers, work was a central principle of organisation. Those reforms created the developed countries’
modern welfare systems: some sort of unemployment benefit, health-care provision, universal education and state pensions.
Universal-income ideas such as those
championed by Douglas were for the most
part peripheral during the rise of the welfare state. In the 1970s, in part because of
flaws that were becoming apparent in the
existing structures, they briefly interested
mainstream policymakers. They were experimented with in Canada, where Douglas’s ideas had always had a following. In
Alaska a basic income was discussed as a
way to distribute oil riches. George McGovern, the Democratic candidate in the
1972 American election, proposed a “demogrant” of $1,000 ($5,700 at today’s
prices) to every citizen, a policy drawn up
by James Tobin, an economist.
McGovern lost 49 of the 50 states, but a
reform to the welfare state that was similar,
in some ways, still went ahead. In 1975
Congress created the Earned Income Tax
Credit (EITC). It was a sort of “negative income tax”, an idea promulgated by the
economist Milton Friedman, which provided support in inverse proportion to a

worker’s income. Like Tobin’s demogrant,
Friedman’s idea was in part a response to
worries about the “poverty trap” in existing welfare systems. The way that benefit
programmes cut off at particular income
thresholds provided a strong incentive for
recipients not to earn too much.
The demogrant avoided the trap by not
phasing out benefits as incomes rose. The
EITC lessened it by tapering away only
gradually. For the unemployed, this increased incentives to work by amplifying
the income earned by the lowest-paid.
Two things made the second policy much
easier to sell: it was cheaper, and it was
only available to those in work. Britain,
France and others adopted EITC-like working-tax credits in the 1990s and 2000s.
Wage subsidies were increasingly seen as
important for battling poverty.
Today three decades of unequal economic growth, the pain that followed the
financial crisis in 2008 and the disruptive
potential of digital technologies have once
again focused attention on the welfare of
the struggling working class. One response, in much of the developed world,
has been to raise minimum wages. But
economists warn that minimum pay can
only rise so much before employment suffers. Rising labour costs encourage firms to
look for labour-saving alternatives, an investment in productivity which might be
good for GDP but would exacerbate the
shortage of jobs for less-skilled workers.
Populist politicians argue, wrongly if

seductively, that the key to boosting worker welfare is to undo the liberalising measures of the previous generation. Supporters of a universal basic income, on the
other hand, claim that the re-engineering
of the welfare system they envisage could
allow societies to enjoy the fruits of dynamic economies while also ensuring they
are widely spread.
Their argument runs as follows. The
wage-subsidy approach to welfare has
gained ground because it has real effects on
poverty, it maintains incentives to work
and it doesn’t cost all that much. America’s
spending on its EITC programme, for example, is just 8% of its spending on public pensions. But it has three problems, too.
Though such subsidies reduce the povertytrap effect, they do not eliminate it; generous wage subsidies that phase out as incomes rise reduce the incentive to find better-paying work, because some of the gain
received from a raise is offset by a reduction in benefits. A gently sloping phase-out
answers the problem to some extent, but it
also increases costs, with more of the
workforce qualifying for at least some of
the benefit.
Those cost increases highlight a second
concern, of political economy. The targeting which keeps these programmes cheap
also limits their constituencies. That makes
them cuttable. In recent years austerity- 1


The Economist June 4th 2016
2 minded governments have been more

willing to gut means-tested welfare payments than to take an axe to entitlements
such as universal pensions. It is harder to
build broad support for programmes
which, by design, are aimed at a small underprivileged part of the citizenry. Programmes for the poor, who have little to

spend on lobbying and also tend to vote
less, are vulnerable to being chopped.
Perhaps most importantly, such taxcredit policies begin to break down if there
is no prospect of jobs that make use of people’s skills. When manufacturing jobs that
were the keystone to a regional economy
move abroad, for example, people with
few prospects look for alternative means
of support, such as disability benefits. In
most age groups in Britain the share of population claiming disability benefits is systematically and substantially above the
level of the 1980s, despite efforts to control
growth in disability-benefit costs. Since
1988, America’s disability payments have
risen from one in ten of every social-security dollar spent to one in five. Those unable to find work or get on such programmes sink deeper into poverty. In
America many are slipping through the
cracks of a conditional welfare system: the
number of people living in extreme poverty rose sharply between 1996 and 2011,
from 636,000 to 1.5m, according to Luke
Shaefer of the University of Michigan and
Kathryn Edin of Harvard University.
A universal basic income might solve
these problems. As Tobin argued, a flat basic-income payment eliminates the poverty trap. Since the benefit would not phase
out, there would be no reduced incentive
to seek additional work hours or income.
Because it would be paid to all citizens, its
advocates hope that it would enjoy the political support of an entitlement programme, and come to be seen as a right of
citizenship. And it would clearly benefit

Briefing Universal basic incomes 23
people with no prospect of work, and thus
most of those in extreme poverty.

But that still leaves very hard questions,
of which the toughest is cost. Any universal basic income generous enough to make
a dent in poverty would be very expensive. As Mr Atkinson notes, a universal basic income worth a given percentage of the
average income (measured as GDP per person) requires a proportional rise in tax collection as a share of GDP. In other words, a
basic income of 15% of average income
would require tax revenues of 15% of national income dedicated to it. That is a lot
of tax for not much basic income (only
about $8,000 in America, in this example).
Some of the money needed could be
drawn from other welfare programmes
displaced by the basic income. The most
generous states in the OECD, a club of
mostly rich countries, spend nearly a third
of GDP on social programmes. In Finland,
where such spending, less the share devoted to health, accounts for about a quarter of GDP, dividing what is spent across all
citizens would yield a payment of close to
$10,000 for every man, woman and child;
in America the same exercise would yield
a payment per person of about $6,000 (see
chart 3).
This would transfer a lot of money from
today’s welfare recipients to people already in work. The largest group of losers
would be old-age pensioners, the people
who, in most countries, already enjoy a basic income (one that in America costs more
than ten times as much as EITC does).
It is possible that providing a less generous basic income to all could help sever the
link between receipt of a pension and retirement, encouraging more of a balance
between work and leisure for adults of all
ages. It might also help the governments of
countries with ageing populations manage

demographic change, by encouraging older workers to stay working for longer, and

3

Popular pennies
Public social spending, excluding health care
As % of GDP, 2013 or latest

0

5

10

15

20

25

Denmark

10.9

France

9.2

Finland

9.3

Italy

7.5

Sweden

9.7

Germany

8.3

Norway

10.7

Netherlands

7.7

Japan

5.7

OECD average

6.1

Britain

6.2

New Zealand

4.8

Australia

5.7

United States
Canada
Source: OECD

$’000 per
person, at
PPP*, 2015

6.0
4.6

*Purchasing-power parity

by balancing the fiscal burden of government income support across people’s lives.
But politically, the scope for reductions in
pensions is likely to be slim. It is hard to see
how a universal basic income of even
moderate ambition would not require

new forms and levels of taxation.
As a share of GDP, taxes on income and
profits in the OECD range from about12% in
America and Britain to 33% of GDP in Denmark. The share has fallen as often as it has
risen over the past decade or two. It is plausible that the tax take, especially in the
countries with the lowest share, could go
up without many adverse effects. If America is unlikely to become Denmark, it might
nevertheless become Australia, with a 15%
share of GDP taken in such taxes. That
would represent half a trillion extra dollars
a year.
Raising taxes on income and profits has
its risks, though. It increases incentives for
avoidance and evasion, and reduces the incentives for the most productive workers
to work and for companies to invest. An alternative would be to increase income
through more efficient taxes, such as valueadded tax (VAT). Most European countries
raise at least 10% of GDP through taxes on
goods and services, primarily VAT. America, in contrast, raises only 4.5% through taxes on goods and services, none of which is
collected in VAT form. But although a VAT
is efficient, it is also regressive, hitting
poorer people relatively harder.
In some places payments for natural resources could provide some funding. Oil
revenue pays for most of the Maricá
scheme, and allows Alaska’s Permanent
Fund to pay an annual dividend to each of
the state’s citizens (last year’s was $2,072).
Not every state has a commodity that it can 1


24 Briefing Universal basic incomes

The Economist June 4th 2016

2 tax that way; but every single state has per-

haps the lowest-hanging of all taxable
fruit—land.
A land tax has the advantage of being
progressive. Unlike taxes on income, land
taxes do nothing to encourage apathy or
avoidance; rather, they provide an incentive to owners to get the most out of their
property. And they can also be lucrative.
The sum value of all land in America, according to one recent estimate, is about $23
trillion, or 1.6 times GDP. A land-value tax
of 5% would raise a little over $1 trillion,
which works out at about $3,500 for every
American, or $8,500 for every American
household.
Thomas Paine would have relished
such a prospect. His case for a basic income
justified it as a quid pro quo for the existence of private property. Before the advent
of private property, he believed, all men
had been able to support themselves
through hunting and forage. When that resort is taken from them, they should be
compensated by means of a “natural inheritance” of £15 to be paid to all men every
year, financed from a “ground rent”
charged to property owners.
What might have seemed like common
sense to Paine, though, might not be so immediately appealing to those hit by a trillion-dollar land-tax bill. Acceptable levels
of taxation do change over time. The original growth of the welfare state provides an

illuminating example. At the turn of the
20th century, government spending was
about 15% of GDP in Britain and less than
10% of GDP in America. By 1960, those percentages had risen to nearly 35% in Britain
and 30% in America.
But the fact that such an increase has
been carried off once does not mean it can
be again. Today’s combination of stagnant
pay and falling labour-force participation
is serious, but it is not on a par with, say, the
Depression or the world wars that bracketed it, which drove the expansion of the
state’s role in the economy (see chart 4).
Things will need to become a lot worse to
generate political support for the radical
changes to budgets and tax systems a universal basic income requires.
And what do you do?
Cost is not the only concern about a universal basic income. Many worry that a
general disengagement from work might
prove alienating, and money for nothing
socially corrosive. (Some on the left also
fear that, by weakening the power of labour and the sense ofsolidarity that comes
with it, a basic income would lead to the
political and economic irrelevance of the
working class.)
People rely on work to provide order to
their day and purpose to their lives, not
just for money to pay for food and shelter,
and may not find purposeful, satisfying alternatives in its absence. Analysis of time

4

Don’t mention the war
Government receipts as % of GDP
50
Britain

40
30

United States*

20
10
0

1930 40 50 60 70 80 90 2000
Sources: OMB; BEA;
Bank of England

15

*Excludes state tax receipts

use by Americans who suffered a loss of
work during the recent recession found
that about half of the spare time went to
leisure, mostly sleeping and watching television. In general retirees who continue to
work part-time are happier than those
who do not work, though it is worth noting
that this is not the case for those who feel

forced to keep working to make ends meet.
In experiments with a guaranteed income in Manitoba, a Canadian province,
in the 1970s overall labour-market participation did not change very much. Later
analysis has suggested that there were
widespread non-economic benefits—less
use of mental-health services, fewer hospital visits and so on. But such experiments,
limited in space and duration and subject
to what is known as the “Hawthorne effect”—change that comes about simply because people know there is an intervention afoot—may not be good guides to the
effects of a universal system.
Plenty also fret that a world of universal
incomes would mean even higher hurdles
to migration than today’s. The evidence
that benefits are a draw to immigrants is
thin—they care more about jobs than the

generosity of the welfare system. But if rich
countries began offering basic incomes
generous enough to live on, migrants
might instead be drawn by the money on
offer. (The payments being considered in
Finland and the Netherlands are vastly
larger than the tiny income available in
Maricá, for example.) Rich countries
would face the choice of paying generous
benefits to immigrants, shutting borders,
or tolerating the growth of a second-class
citizenry of foreign workers without recourse to the welfare state.
These, then, are the questions swirling
around Switzerland ahead of its referendum. The Swiss initiative does not look
likely to pass, both because of its expense

and the fear of subsidising layabouts.
Though surveys show that only 2% of the
Swiss think that a universal income would
stop them working themselves, about a
third think it would scupper the work ethic
of others.
Payment protection
Hans Peter Rubi, a 64-year-old in the small
town of Olten, has no such worries. He
was given a pension of SFr2,600 on being
sent into early retirement, and became an
entrepreneur. “After doing nothing, you get
bored—people want more. After a while of
boredom you might become innovative.”
He has used his pension to start an exotic
ice-cream parlour. The avocado ice cream
is proving difficult to perfect, and the innovation of staying open through the winter
(Olten’s established ice-creamery closes)
has yet to pay off. He needs a good summer
for the business to be profitable; but he can
afford to fail. “My security now is that I
have my basic income. It gives a security to
take a basic challenge.”
In a world of universal basic incomes, it
is possible that the streets would be lined
with mostly empty ice-cream shops, as
people used society’s largesse on projects
no one really needs. It is also possible that
such stipends would give workers the
boost in incomes they have been missing

in recent decades, and the additional leisure time to enjoy it, thus helping to make
businesses like Mr Rubi’s profitable.
It may be, too, that the need for a universal basic income never becomes truly urgent. Silicon Valley visionaries could be
wrong in their belief that a thriving 21stcentury economy will be one where jobs
go to robots faster than new jobs can be
created, and that a universal income is the
way to make that transition humane. The
capitalist system has been remarkably
good at finding new ways to work as it gets
rid of old ones.
But the past is not always a good guide
to the future. The welfare system grew up
to service a model of industrial modernity.
It is failing the poorest in society and may
be at risk from technological upheaval. It
may yet need a radical redesign. 7


The Economist June 4th 2016 25

Asia

Also in this section
26 Nervous Africans in India
27 Banyan: The Sino-American dialogue
of the deaf

For daily analysis and debate on Asia, visit
Economist.com/asia

Japanese politics

Postpone and be damned
TOKYO

Doubts about the prime minister’s economic record are growing

A

LL things considered, the month of May
ended well for Shinzo Abe, Japan’s
prime minister. He hosted his fellow leaders from the rich world’s club, the G7, at a
summit at Ise in Mie prefecture last week. It
went well. He welcomed them at a Shinto
shrine founded 1,300 years ago. Just after
the summit Barack Obama became the
first sitting American president to visit Hiroshima, which an American atom bomb
levelled on August 6th 1945. Japanese of all
ages and backgrounds were moved by his
speech, and by his embrace of a survivor.
Mr Abe basked in the reflected political
glow.
That gave the prime minister ample
cover to announce, on June 1st, that he
would put off raising Japan’s consumption
tax from 8% to 10% from April of next year
to October 2019. This marks the second
such dodge; the previous one occurred in
November 2014. Mr Abe’s advisers would
have preferred to postpone it indefinitely,

but settled for a point after his term as president of the Liberal Democratic Party (LDP)
is currently due to end, in September 2018.
Economically, the postponement looks
prudent. Japan’s economy is struggling.
Many worried that a second tax increase
would knock it flat. When Mr Abe raised
the rate from 5% to 8% in April 2014, the
economy tipped back into recession.
But politically it carries risks. Mr Abe
had promised that the rise would be carried out “without fail”. He said that nothing short ofa massive natural disaster or an

economic cataclysm similar to the global
crisis sparked in 2008 by the collapse of
Lehman Brothers, an investment bank,
would prevent it from going ahead. Neither kind of calamity has materialised. At
the G7 summit Mr Abe tried to persuade
his fellow leaders that the global economy
could be on the brink of a Lehman-scale
crisis, in a vain effort to justify the postponement. He found no takers.
The precedent that Mr Abe set after the
first delay, when he called a snap general
election to seek voters’ approval, seemed
to demand another poll. It could have coincided with one that will be held for half of
the seats in the upper house of parliament
on July 10th. The possibility of such a rare
“double” election prompted fevered speculation for weeks.

Signs of life
Japan

GDP, % change on
previous quarter,
annualised

Shinzo Abe’s
approval rating, %
80

9

70

6

60

3

50

0

+

–

40

3

30

6
9
2012

13

14

Sources: Cabinet office; Kyodo News

15

16

But in the end Mr Abe decided to hold
off, despite his approval rating having risen
above 50% (see chart) after the summit and
Mr Obama’s visit to Hiroshima. The LDP
and its coalition already hold just over
two-thirds of the lower house, with 326 out
of 475 seats. Party strategists reckoned the
risks were all on the downside. Tax rises, of
course, are never popular, but neither are
leaders who fail to keep their promises.
The delay adds to voters’ impression
that Mr Abe’s economic policies are going
astray. On May 31st the main opposition
parties—the Democratic Party, the Japan

Communist Party, and two smaller
groups—filed a no-confidence motion
against the government, citing its failure to
enact the promised tax rise as evidence
that “Abenomics” is failing (thanks to the
government’s majorities in both houses, it
was swiftly voted down).
Quantitative easing, which the Bank of
Japan (BoJ) began in 2013, weakened the
yen while boosting corporate profits and
share prices. But an uptick in the currency,
even as the central bank introduced negative interest rates from January onwards,
has sunk the stockmarket. A recent BoJ survey showed that businesses are gloomier
than they have been for three years. Mild
deflation has returned. Fears that Japan
had recently fallen into recession were assuaged by the news that, in the first quarter,
GDP expanded by an annualised 1.7%. But
the extra day of activity provided by a leap
year contributed to the figures. Underlying
private demand remains weak.
To reverse these trends Japan must hack
through the web of regulations hindering
growth. The latest “Japan Revitalisation
Strategy” proposed by Mr Abe’s government falls well short of the task. With such
woolly goals as restoring consumer confidence and bringing about a “fourth industrial revolution” through IT and artificial
intelligence, it has been roundly criticised. 1