A valuable alternative to empire-building

Buttonwood

Apr 19th 2005
From The Economist Global Agenda

Companies are buying back their own shares in record quantities. In many cases, their shareholders should thank them for it

COMPANIES are reeling in their shares hand over fist these days. First-quarter corporate results have brought a new batch of buyback programmes—and much food for thought. In the past week alone, BASF, a German chemicals group, has announced a new €1.5 billion share buyback, on top of the €1 billion programme it has just completed.

Citigroup and Merrill Lynch, two giants of American finance, have unveiled repurchase plans worth $15 billion and $4 billion respectively. Kerr-McGee, an American oil company, said it would buy back up to $4 billion-worth of its shares. BP, a British oil giant, Franco-Belgian bank Dexia and Germany’s Deutsche Börse are also buying back shares.

The specifics are slightly different in each case. Citigroup’s shares have seriously lagged those of other banks and it has recently sold off its Travelers insurance operation, while Kerr-McGee is fighting off a boardroom attack by that inveterate corporate raider, Carl Icahn. But they have one thing in common: more cash (or unused debt capacity) than they know what to do with.

In all, S&P 500 firms were sitting on $619 billion in cash at the end of 2004, as corporate profitability rose and earnings outstripped investment. Two revealing statements indicate the problem, for such in fact it is. In July 2004, Microsoft said it would hand back about $32 billion to shareholders in the form of a special dividend. On February 28th, Warren Buffett lamented that a $43 billion wodge of cash on Berkshire Hathaway’s balance sheet had caused the investment firm to underperform the S&P 500.

Share buybacks are growing fast. In 2004, repurchases by S&P 500 firms totalled $197 billion—51% higher than in 2003—according to Standard & Poor’s. Howard Silverblatt, an equity-market analyst at the firm, reckons total repurchases could be higher this year; others suspect that capital expenditure and other pressures may reduce the figure. Regardless of detail, these are record levels for the S&P 500. And it’s not just American firms that are buying back shares, as it would have been ten years ago before regulatory and tax changes made buybacks more popular elsewhere.

Have corporate bosses run out of more productive things to do with their money? With the world in its third year of solid, if slowing, growth, are buybacks a sad reflection on threadbare late-cycle capitalism? Is there perhaps skulduggery afoot, with bosses trying to jack up earnings per share and share prices so that their own stock-based compensation schemes are worth more? Or do buybacks in fact create more value for shareholders than letting bosses keep the money to squander on misguided acquisitions?

Companies buy back their shares for three main reasons: they think their firm is undervalued and want to tell the market so; they want to have enough shares in hand to satisfy employees exercising their stock options without having to “dilute” current owners or see their balance sheet become too skewed towards equity; or they don’t see any more profitable investment opportunities and want to hand back the unusable cash to shareholders. This last is particularly persuasive when interest rates are low and cash represents a dead weight on the balance sheet.

When a company chooses to buy back its shares, this spreads earnings over a smaller equity base and raises earnings per share. If there is no investment in sight with greater long-term returns, if the shares’ price is less than the cost of the cash to buy them, and if the level of earnings is maintained (a big if), the buyback adds value and a higher share price should result.

Is this in fact what is happening?

There are lots of studies based on data from the 1980s and 1990s showing that share prices rise when a buyback is announced—by a lot, if the repurchase is at a substantial premium to market value, by a small percentage if it is at the market price. The longer-term boost is greater, according to studies of American and Canadian buybacks by finance professors David Ikenberry, Josef Lakonishok and Theo Vermaelen, especially for firms that were trading previously on humble market-to-book multiples.

Updating these studies to incorporate more recent repurchase announcements, Mr Vermaelen and Urs Peyer of INSEAD conclude that these trends still broadly apply. They also show that companies which say publicly that they are buying back their shares because they think them undervalued tend to get a warmer welcome from the market than those that mention dilution or increasing earnings per share.

Just last week, Bloomberg reported that of 1,500 companies which had announced share buybacks in America between 2002 and April 2004, two-thirds were trading above the S&P 500 after 12 months. So it seems that, on average, companies are able to time the market by taking advantage of an undervalued share price. And if they think that their stock is no longer undervalued, or if they come across a better investment prospect, they simply won’t complete the repurchase. Mr Ikenberry, who runs the finance department at the University of Illinois, reckons buyback programmes often represent “good stewardship”.

There is another benefit for companies that buy back shares: they are likely to be able to raise equity finance later more cheaply, say Matthew Billett and Hui Xue from the University of Iowa. This is so not only because repurchasing shares is likely to raise their price; their shares also resist better the normal downdraft that accompanies a new share issue.

The structure of ownership matters too. In Britain, Steve Young of Lancaster University and Dennis Oswald of the London Business School found an unusual concentration of external shareholders (ie, fewer insiders, more institutions) among firms announcing buybacks, and also spotted a link to better corporate governance. A group of European academics, published by the Centre for Economic Policy Research, suggest that companies where short-term institutions are heavily represented tend towards paying out through buybacks, while those where long-term investors predominate are more inclined to rely on dividends.

So are share buybacks, however wimpy they make management look, the best way to create value at the moment? Yes, in many cases. Will they continue at present levels? All things being equal, yes again. The fall in employee stock-option plans in America is reducing one pressure for buybacks, but the trend towards shorter-term investment horizons is perhaps increasing pressure from another quarter. Share prices are unlikely to rise to the sort of heady level that would make repurchases uneconomical. And chief executives are sadly reduced figures these days, where capital allocation is concerned. If even Mr Buffett can’t find anything to buy, who can?

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Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.

A coup by Congress and the street

Apr 25th 2005
From The Economist Global Agenda

Ecuador’s leader, Lucio Gutiérrez, has been booted out of power. It marks the third time in nine years that the Andean country’s elected president has been ousted by Congress and street protests

IT WAS intended as a bold statement of authority, but it merely showed how desperate the position of Ecuador’s president, Lucio Gutiérrez, had become. On April 15th, Mr Gutiérrez, flanked by armed forces’ commanders, announced that he was dissolving the Supreme Court—for the second time in four months—and imposing a state of emergency in Quito, the capital. In defiance, several thousand protesters immediately took to the streets, calling for Mr Gutiérrez to be sent packing too.

As the army sat on its hands, within hours the president was forced to lift the emergency. Each day the demonstrations, led by Quito’s middle class, swelled; two people were killed. On April 20th, Congress heeded the clamour on the streets: 60 of its 100 members voted for an Orwellian resolution which accused Mr Gutiérrez of “abandoning his post” and appointed in his place the vice-president, Alfredo Palacio. To the end, the president insisted he would not step down. But the police chief resigned, saying he would not repress the people. Finally, the army hustled Mr Gutiérrez out of the presidential palace. He took refuge in the Brazilian embassy as an arrest warrant was issued against him. Brazil granted him political asylum, and on Sunday morning, after the new president had agreed to let him go, he was smuggled past crowds outside the embassy and flown to Brasilia with his wife and one of his children.

Thus ended a battle for power, and for control of the courts, between a heavy-handed and unpopular—but legitimately elected—president and the rapacious clans that dominate the country’s Congress. Since his election in 2002, Mr Gutiérrez survived by playing the country’s political parties against each other. But it was a game in which he finally ran out of cards.

Dr Palacio, a cardiologist and former health minister from the coastal city of Guayaquil, was estranged from Mr Gutiérrez. He and his backers accused the ousted president of behaving like a dictator when he dissolved the court for the first time in December. Maybe so. But for the third time in nine years an elected president has been ousted in Ecuador, an oil-rich republic of notoriously fissile politics, by Congress and protesters in the streets.

Nor is Ecuador the only Andean country where democracy is under strain. Bolivia, too, has been racked by protests and road-blocks by radical groups, backed by various social movements. Among these groups’ demands are more provincial autonomy, more jobs and a bigger slice of the profits from the country’s substantial gas reserves. Carlos Mesa, the popular but weak president, threatened to resign twice in March; he may not survive much beyond August, when the constitution allows a new general election. Long the third-biggest producer of cocaine, if the country’s shaky government loses authority, Bolivia, to some, risks becoming an ungovernable narco-state.

Courting the populists

A mestizo (mixed race) former army colonel who himself had taken part in a coup in 2000, Mr Gutiérrez was elected with backing from left-wing parties. Once in office, he opted for orthodox economic policies, causing his backers to desert him. But his real problems began last November, when the conservative Social Christian Party (PSC) moved into opposition, backing a specious effort to impeach him.

To defeat this, Mr Gutiérrez forged a new alliance with two retrograde populist outfits. One is led by Abdalá Bucaram, a former president who had fled to Panama to escape corruption charges. The price of their support: the dissolution of the Supreme Court, dominated by the PSC, and its replacement with one sympathetic to the new alliance.

The opposition’s outrage intensified in March, when the new court’s president dropped the charges against Mr Bucaram (aka el loco, the madman). He promptly returned home and vowed to lead “a revolution of the poor”, in the mould of Hugo Chávez, Venezuela’s president. That caused Mr Gutiérrez’s new alliance to start to unravel. And it prompted daily protests, in Quito and other cities, calling on the president to go.

Ecuador remains in limbo. Some of the protesters called for new elections. But the first task for Congress is to decide how to choose a new Supreme Court. The court will have to decide whether to reverse its predecessor’s decisions, such as that to exonerate Mr Bucaram.

Mr Gutiérrez made mistakes. But he did some things right. Helped by higher oil prices, Ecuador’s economy grew by 7% last year. For the first time in decades, the government posted a fiscal surplus. His economic team’s efforts to reform a bloated state were thwarted by an opposition that never really let the president govern.

Whatever respite it now enjoys, Ecuador’s democracy is deeply discredited. The system is corrupt—but corruption charges are used as a political weapon. Mr Gutiérrez owed his election to his claim to be a political outsider. In the end that may have been his problem.

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.

A heady cocktail

Apr 27th 2005
From The Economist Global Agenda

Big international brands drive the spirits industry. Pernod Ricard’s purchase of Allied Domecq gives it the range and reach to challenge Diageo, the world leader—and threatens to leave the competition near the bottom of the barrel. Might consumers suffer too?

TAKE a dash of Ballantine’s whisky and a splash of Beefeater gin, add a measure of Courvoisier cognac and Sauza tequila, top it with Tia Maria and finish with a shot of Malibu. Divide between Pernod Ricard and Fortune Brands and the bar bill comes to £7.4 billion ($14 billion).

On Thursday April 21st, France’s Pernod Ricard announced the acquisition of most of the assets of Allied Domecq, a British distiller. The deal blends together the big brands of the number two and three in the spirits business and puts Pernod in a position to challenge the outright leader, Diageo, another British firm. America’s Fortune Brands will chip in £2.8 billion and also walk away with some of Allied’s leading drinks. This will leave the world’s other spirit-makers, mainly family-controlled concerns, trailing far behind with fewer opportunities to restock their own drinks cabinets with big-selling tipples.

In fact, Pernod and Ricard started life as family firms making distinctively French spirits flavoured with aniseed. The pair combined in 1975 better to defend their slice of home territory from the encroachment of foreign spirits. The company made its impression on the world by participating with Diageo—itself the product of a huge merger between Guinness and Grand Metropolitan—in the $8.7 billion purchase of Seagram’s drinks business in 2001. Pernod acquired a third of the assets and now owns 12 of the world’s top 100 spirit brands, including Chivas Regal whisky and Martell brandy, as well as a substantial wine business topped with Australia’s Jacob’s Creek.

The deal with Fortune gives Pernod several more global brands, including Beefeater, Ballantines, Malibu, a popular coconut-flavoured rum, and liqueurs such as Kahlúa and Tia Maria. The French firm will also get its hands on the Perrier-Jouët and Mumm champagne houses and a range of wine businesses including New Zealand’s Montana. To allay the concerns of competition authorities, Fortune, which makes office equipment and golf balls as well as Jim Beam bourbon, will take on Courvoisier, Sauza and Canadian Club whisky. However, regulators may still have some grounds for concern, for instance over Pernod’s ownership of both Beefeater and Seagram gin.

The thirst for highly profitable global brands drives the drinks industry. Last year Allied Domecq’s nine main brands made up 32% of the volume of drink sold by the firm, but provided 44% of its net revenues of £2.6 billion and half its profits. Allied’s commitment to its premium products is clear in that it concentrated nearly 60% of its advertising and promotional budget on pushing these money-spinners. Pernod and Diageo enjoy similarly handsome returns from their worldwide brands. Diageo, which had revenues of £8.9 billion in 2004, holds nine of the 20 biggest.

All three companies also have a long tail of steady-earning but generally less profitable local brands. Some of those belonging to Pernod and Allied may now be sold as the combined firm concentrates on the global blockbusters. Allied’s fast-food outlets, including Dunkin’ Donuts and Baskin-Robbins, which sells ice-cream, may also go, bringing in perhaps £1 billion.

The takeover will help Pernod to make up ground on Diageo, doubling its size by most measures and raising its annual revenues to some €5.8 billion ($7.5 billion). It will also cut costs by over €300m a year, the French firm says, through exploiting economies of scale in distribution. And it will boost Pernod’s presence in America, the world’s biggest market for spirits, as well as adding significant businesses in Latin America and Asia. With volumes flat or falling in developed markets, future growth depends on either taking market share from rivals or making headway in emerging markets.

There has been talk of a rival offer for Allied, though some competitors are more likely to counter-bid than others. Diageo is already too big in most markets not to raise the concerns of competition watchdogs. LVMH, a French luxury-goods conglomerate that owns Hennessy cognac, has said it is not interested. Bacardi (which owns five top brands) is an old-style, family-controlled firm that would have trouble raising large sums of cash to bid. The most likely white knights are Brown-Forman (owner of Jack Daniels whiskey) and Constellation Brands (Hardy wine, Corona beer). On Wednesday, Allied announced that it had received a preliminary joint offer from the two American companies, in conjunction with two private-equity groups, but said it was too early to tell whether this would develop into a full offer.

The smart money is still on victory for Pernod. If the French firm does indeed win, a new competitor will soon be breathing down the neck of Diageo, looking to overtake its 30% share of the world market for strong drinks. That will worry the British giant, but might it also be bad news for consumers? A $150-billion-a-year industry largely split between two corporate giants is, some fear, more likely to promote oligopolistic behaviour than price-squeezing competition. The world’s drinker may have to wait before unscrewing a celebratory bottle or two.

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.

If you can't beat 'em, join 'em

Apr 25th 2005
From The Economist Global Agenda

The New York Stock Exchange's proposed merger with Archipelago, an all-electronic market, could transform the venerable floor-based exchange beyond all recognition. But not everyone is happy with the deal

IF JOHN THAIN, the chief executive of the New York Stock Exchange (NYSE), learned anything in his many years at Goldman Sachs, it was: if in doubt, cut a deal. The one he unveiled on Wednesday April 20th—the purchase of the all-electronic Archipelago exchange—may transform his 212-year-old, floor-based, not-for-profit mutual company into the world’s most modern financial market.

The deal, which is subject to approval by shareholders and regulators, would give the NYSE’s 1,366 seat-holders (and owners) 70% of the new company and $400m in cash. Archipelago shareholders would get the other 30%.

This continues the wave of consolidation that has seen the number of electronic exchanges dwindle from a dozen in the 1990s to about five. More matches may follow: NASDAQ, the world’s largest electronic stockmarket, is expected soon to announce a takeover of Instinet, a brokerage firm and electronic trading network controlled by Reuters, for about $1.8 billion. Because trades gravitate to the most active exchanges which offer the most liquidity, peripheral markets, notably regional exchanges, have withered away.

This changed a bit over the past decade as the NYSE began to lose some market share to new, faster, cheaper all-electronic rivals exemplified by Archipelago. Meanwhile, its reputation was tarnished by successful prosecutions of Big Board traders who put their own interests ahead of their customers’, and by weaknesses in its self-regulatory function. Seat prices slid—although they have risen strongly in recent weeks.

Now Mr Thain has made strides on all fronts. The NYSE is to spin off its regulatory arm into a separate, not-for-profit entity, removing potential conflicts of interest. And it will become a listed, for-profit company without following the lengthy route, via de-mutualisation and a public offering, that has taken other exchanges years. (It took the Pacific Stock Exchange five years to de-mutualise and it has yet to list its shares, according to Dale Carson, the exchange’s spokesperson.) The merger also gives the NYSE a way into NASDAQ-listed stocks, in which Archipelago has a 25% market share, and the growth business of derivatives trading.

Many hurdles still lie ahead. In becoming a for-profit company, for instance, the NYSE will have to manage a difficult change in its relationship with other Wall Street firms, which were part of the mutual structure but are now competitors as well as customers.

Also, for now at least, the Archipelago merger only brings the two firms under the same roof; it does not knit them together. There are no plans yet to integrate the two exchanges’ technical platforms or businesses, calling into question the synergies behind the deal. So NYSE and Archipelago shareholders will continue to have competing interests. In particular, NYSE owners, many of whom are traders with an interest in the continued existence of a trading floor, are likely to resist moves towards an all-electronic format, and may even stymie the deal. “The merger won’t go down quietly,” says Benn Steil, a financial expert at the Council of Foreign Relations.

Already there is disquiet. Some of the exchange's biggest brokers, fearing that the deal will leave them short-changed, are angry that Goldman Sachs was allowed to act as adviser to both companies—especially since the investment bank owns both a share of the NYSE (as one of its seatholders) and a 15% stake in Archipelago. This, the critics assert, constitutes a gross conflict of interest. Hoping to capitalise on this frustration, Kenneth Langone, a former NYSE director, is trying to assemble a rival bid for the exchange. However, he has an awkward relationship with some of the regulators who have a say in approving any deal, including Eliot Spitzer, New York's attorney-general.

Assuming the NYSE's merger with Archipelago does go ahead, the ultimate test of its success will be whether it lowers the cost of trading. Richard Grasso, Mr Thain’s predecessor, who was booted out after a scandal over the size of his pay packet, did not manage this in his long tenure. If Mr Thain can meld the two businesses and pull this off, the deal will be a brilliant coup. If he fails, the NYSE will continue to have a struggle on its hands.

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.

Putting up the barricades

Apr 25th 2005
From The Economist Global Agenda

America's Congress is taking a harsher line on trade, particularly with China. The Bush administration is also getting into the act, with the treasury secretary and even the newly nominated trade representative talking tough. Is America turning protectionist?

THESE are not happy times for the dwindling band of free-traders in Washington, DC. Trade sceptics are on the move on two fronts: raising the barricades against the Chinese and refusing to lower them for the Central Americans.

Politicians blame China and its fixed exchange-rate regime for America's trade deficit. But Congress is also sceptical about the Central American Free Trade Agreement. Although CAFTA is small beans in economic terms, failure to get it through would spell ill for any global trade deal at the World Trade Organisation (WTO).

China-bashing has captured the headlines. On April 6th, 67 senators voted against dumping a bill proposed by Charles Schumer, a Democrat from New York, that would impose a 27.5% tariff on all goods from China unless Beijing adjusted its currency—which is fixed to the dollar at an artificially low exchange rate—within six months. Not only is the legislation utterly against WTO rules, it would cause havoc for the American economy. But Mr Schumer has been promised a vote by July, and his bill may well pass the Senate.

The Schumer bill's success, which has surprised even its sponsor, is accelerating other measures. Two more senators, Susan Collins and Evan Bayh, are touting the Stopping Overseas Subsidies Act, which would allow American firms to get countervailing duties to make up for Chinese subsidies, including a subsidised exchange rate. China is not currently subject to America's anti-subsidy law as it is deemed a “non-market economy” (which makes it easier for American firms to file anti-dumping cases against it). But declaring China a market economy for the purposes of subsidies, and a non-market economy for the purposes of anti-dumping, is against WTO rules.

Nobody in Congress, alas, seems to care about breaking WTO rules. The aim is to be seen to be bashing China loudly. Mr Bayh is holding up the confirmation of Rob Portman, the Ohio congressman whom George Bush has nominated for US trade representative, until his bill is voted on. Meanwhile, in the House of Representatives, Duncan Hunter, a conservative Republican, and Tim Ryan, a Democrat, have cooked up a law that allows American companies to use “exchange-rate manipulation” as a reason for demanding protection under America's trade laws. And the Congressional China Currency Action Coalition has filed a Section 301 petition asking the Bush administration to file a formal case to the WTO complaining about the yuan.

In the 1980s, a rising trade deficit—at that time with Japan—fuelled protectionist pressure in Congress. Ronald Reagan introduced the notorious “voluntary export restraints” on Japanese steel and cars. The Reagan team also abandoned its laisser-faire attitude to currency markets and, through the Plaza Agreement, engineered a sharp drop in the dollar.

The current bout of China-bashing is not a replay of the 1980s. Back then, large American firms, particularly the Detroit car giants, led the clamour for protection. Now big business, which relies heavily on Chinese inputs, is quieter. The shouting comes from smaller American suppliers. And even the noisier business groups, such as the National Association of Manufacturers, are relatively nuanced. Though the NAM wants Beijing to revalue the yuan, it does not support the Schumer bill.

Less encouragingly, the political and economic risks are bigger this time round. In the 1980s Japan, for all its faults, was always viewed as a democratic ally in Asia. By contrast, China is now seen as a nasty communist regime and a dangerous rival. In the mid-1980s, America's current-account deficit was smaller, 3.5% of GDP in 1985 compared with 6.3% today, and its debt stock lower. Today, America is the world's biggest debtor, with China as an important creditor. A sharp reversal in China's appetite for American Treasury bonds could send interest rates soaring.

This might come sooner rather than later, according to Alan Greenspan, the chairman of the Federal Reserve. In testimony before the Senate budget committee last week, he stated that the Chinese government’s massive exchange-rate interventions were causing growing imbalances in the domestic economy that will force China to abandon its currency peg. Over the weekend, the head of China's central bank also gave a speech indicating that the yuan could be revalued in the near future (though he blamed international pressure, rather than internal imbalances). Once this happens, the People's Bank of China can stop stockpiling dollar reserves—meaning its demand for American government securities will also dry up. Critics wonder if Congress, which has made little effort to curb America’s soaring budget deficits, has quite thought things through.

For now, the Bush administration seems to be trying to muddle along. It has increased its rhetoric about the need for China to fix its exchange rate. It said this at the G7 meeting of finance ministers on April 16th, and, when the Treasury issues its twice-yearly report on currencies later this month, it is likely to come close to calling China a “currency manipulator”—a term last applied to Beijing in 1994. Even Mr Portman, an ardent free-trader, sounded a harsh note on China during an appearance before the Senate finance committee on April 21st. Saying that the Chinese “do not always play by the rules”, he promised to take a firmer stance than his predecessor, Robert Zoellick. This seems to have garnered approval on both sides of the aisle—though not from Mr Bayh, who said that words were no substitute for action.

The Bush team hopes to keep this sort of grandstanding to a minimum. But the China-bashing in Congress presents a danger. At worst, this frenzy could result in a series of illegal (in WTO terms at least) protectionist bills becoming law. Even if things do not get that far, the China effect will complicate an already tough struggle to get CAFTA through.

Aside from a handful of passionate free-traders, Democrats are solidly opposed to the Central American trade deal, thanks largely to a massive lobbying campaign by the unions. The unions believe (correctly) that if CAFTA is defeated, Mr Bush's trade agenda will lie in tatters. In the face of determined union opposition, Mr Bush is already having trouble persuading many Democrats. Alarmist news about imports from China makes this task much harder.

Another set of CAFTA sceptics—the textile lobby—ought to be brought on board by fears of China. The Central American agreement is in part a way of staving off Chinese textile imports, which have surged since the quota regime ended this January. Without CAFTA, Central America's textile industry is likely to be decimated by Chinese competition. With the special duty-free access that CAFTA grants, Central American textile firms—and the American companies that supply them with material—may survive.

The Bush team is busy making this argument to textile groups. But the opposition against free trade of any sort in hard-hit textile states like the Carolinas is considerable. The White House is thus getting more overt with its bribes, such as its decision to consider safeguard quotas against Chinese imports for several textile products. (The European Union said on April 22nd that it is mulling similar restrictions.)

Another powerful southern lobby, the sugar industry, is proving even harder to placate. Outrageous import quotas keep the domestic price of sugar at double that of the world price. CAFTA would allow more imports in from Central American countries, but still less than 2% of US sugar production. For the sugar lobby—and the 15 or so Republican politicians who follow its bidding—that is still too much.

The betting is that, with enough presidential involvement and vote-buying, Mr Bush may get CAFTA through in the next couple of months. Until he does, there will be little appetite in the White House to give the China-bashing in Congress the cold shoulder that it deserves.

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.

Point of no return?

Apr 19th 2005
From The Economist Global Agenda

At a meeting in Delhi, the leaders of India and Pakistan have declared that their peace process is now “irreversible”. Not so. But with the two nuclear-armed countries now prepared to compromise on previously entrenched positions, a settlement over the disputed territory of Kashmir is no longer unimaginable

RARELY have hopes for a lasting peace between India and Pakistan seemed so bright. Pakistan’s president, General Pervez Musharraf, this week paid his first visit to India since a disastrous summit in 2001. This time, an international cricket match gave the excuse for an “informal” visit that nevertheless bore all the trappings of a summit. It achieved no great breakthrough but, if General Musharraf and India’s prime minister, Manmohan Singh, are right, managed something even better: to show that “the peace process was now irreversible”.

It is not, of course. As General Musharraf himself pointed out, in the absence of a “final settlement”, the dispute over which the two countries have fought three wars, Kashmir, could erupt again at any time. For the time being, however, both countries are preoccupied not with the risk of renewed conflict, but with the potential benefits of peace.

The co-operative mood had been set by the opening, on April 7th, of a bus route between Srinagar, capital of Indian-held Kashmir, and Muzaffarabad, capital of the Pakistani part, for the first time since partition in 1947. Pakistan joined India in condemning an attack on some of the buses’ passengers on the eve of their departure from Srinagar. The service brought the hope of reunion to separated Kashmiri families, but also had huge symbolic importance. It showed that both countries were prepared to compromise on long-held positions: Pakistan on its objection to an arrangement that might be seen as turning the “line of control” that divides Kashmir into an international border; India on its original insistence that passengers would have to carry passports.

In Delhi, General Musharraf and Mr Singh agreed to increase the frequency of the buses, which initially will travel only once a fortnight. They also agreed to let goods lorries ply the route, to open others and to agree meeting points along the line of control for divided families and trade. The hope is that a “soft border” will both improve the lives of Kashmiris on either side and bring a final settlement closer. Beyond Kashmir, there were moves designed to promote bilateral trade, such as reactivating a moribund joint economic commission. A dispute over a dam being built in Indian Kashmir—the trickiest bilateral economic issue of the moment—was simply ignored in the leaders’ joint statement.

All of this fits in with a strategy pursued by India since Mr Singh’s predecessor, Atal Bihari Vajpayee, whom General Musharraf also visited, offered Pakistan “the hand of friendship” two years ago. It has sought to build confidence through increasing contacts, expanding economic ties, and taking advantage of the popularity in both countries of moves towards peace.

In doing so, it has had to counter the suspicions of many in Pakistan and Kashmir that India was seeking to enmesh Pakistan in a spider’s web of minor accords without ever tackling the central dispute: Kashmir. Both countries claim all of the territory, though India has long let it be known that it would settle for the status quo. Many in Kashmir itself, however, yearn for independence from both countries. For 15 years, the Indian part has suffered a bloody insurgency, abetted by Pakistan.

In Delhi, General Musharraf met separatist leaders from Indian-held Kashmir. Moderates among them have welcomed recent peace moves, while bemoaning the lack of a Kashmiri seat at the negotiating table. But hardliners accused General Musharraf of betrayal. No longer, as they would like, and as Pakistan used to argue, is a settlement of the dispute seen as a precondition to improved relations. Rather, it is hoped that, in a benign bilateral climate, a solution might emerge.

That still looks a tall order. General Musharraf argued that the route to a settlement would have to stay within three guidelines: India’s insistence that no boundaries can be redrawn; Pakistan’s refusal to accept the line of control; and the two countries’ agreement that borders must become less important. But the first two of these are mutually incompatible; and the flexibility and vagueness needed to blur the contradiction seem at odds with General Musharraf’s insistence that there must be a “final settlement”.

Yet the two leaders have agreed that they will not “allow terrorism to impede the peace process”. That is a striking promise, implying both that Pakistan is distancing itself further from “freedom fighters” in Kashmir, and that India is not going to react to every terrorist attack as if it were an act of Pakistani aggression. True peace may be a long way off, but the threat of war is no longer just one atrocity away.

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.

Unrest that riles Tokyo and worries Beijing

Apr 20th 2005
From The Economist Global Agenda

Beijing and Tokyo remain at loggerheads after a third weekend of anti-Japanese protests in cities across China. The Chinese authorities seem reluctant to quell the unrest, but they are also worried that the outpouring of nationalist feeling will prove hard to handle

“IT’S a scary country,” Japan’s trade minister, Shoichi Nakagawa, said of China last week, following demonstrations in several Chinese cities by thousands of protesters, some of whom smashed the windows of Japanese shops and restaurants and threw stones at Japanese diplomatic buildings. For all their seeming reluctance to quell the unrest, Chinese leaders probably find it scary too.

The protests first turned violent in the south-western city of Chengdu on April 2nd, and erupted with particular fury in Beijing a week later. They were the biggest to take place in China since tens of thousands took to the streets across the country in 1999 in response to the bombing of China’s Belgrade embassy by American aircraft during the Kosovo war. Those protests, initially condoned by the authorities, fizzled out after three or four days, when the government made it clear that enough was enough. This time the government has appeared more hesitant.

Indeed, there were further disturbances on the weekend of April 16th-17th, with protests staged in at least ten Chinese cities, including Shanghai, Xiamen and Guangzhou. In the biggest of these, a crowd estimated at 20,000 attacked the Japanese consulate in Shanghai with stones and bottles. The latest wave of unrest came during a visit to China by Japan’s foreign minister, Nobutaka Machimura. Fence-mending was not on the agenda: Mr Machimura sought an apology for the anti-Japanese violence but was rebuffed by his Chinese counterpart, Li Zhaoxing, who insisted that China had nothing to say sorry for.

In a country where public protest is usually quickly suppressed, anti-Japanese sentiment has proved hard for the authorities to handle. The ruling communist party bases its legitimacy in part on its (somewhat overstated) record of fighting Japanese occupation forces in the 1930s and 1940s. It traces its intellectual origins to a movement inspired by anti-Japanese protests in 1919. Animosity towards Japan is regarded as the hallmark of a patriot.

The authorities’ dilemma is reflected in their handling of these protests, which began as a show of opposition (on the grounds that Japan has failed to show sufficient contrition for its wartime atrocities) to Japan’s campaign for a permanent seat on the UN Security Council. They were fuelled by a decision by Japan’s education ministry to approve a school textbook (unlikely to be widely adopted) that plays down the extent of the atrocities. Chinese officials expressed outrage at the book, but quietly banned coverage of the protests in the Chinese-language media. Calls for a boycott of Japanese goods, widely circulated on the internet, also went unreported in the state-controlled press.

In Beijing, the authorities mobilised thousands of police and paramilitary troops to guard the Japanese embassy and ambassador’s residence, and to patrol the route of the march. Yet the security forces took no action as protesters threw stones and plastic bottles at the diplomatic buildings and overturned a car. Activists said the protests were unauthorised. In China, this makes them illegal. Yet no arrests were reported in connection with the Beijing protests. And not until April 19th did the authorities order the protests to stop. A foreign-ministry spokesman said that it was up to Japan to “reflect carefully” on the situation.

Chinese officials are doubtless thinking carefully too. Last week, Japan said it would soon allow Japanese gas companies to explore in an area of the East China Sea claimed by both countries, a move that has further riled Chinese nationalists. And the year is replete with potential flashpoints: May 4th (the anniversary of the 1919 protests), July 7th (Japan’s full-scale invasion of China in 1937), the 60th anniversary on August 15th of Japan’s surrender, and September 18th (the Japanese occupation of Manchuria in 1931).

This week, another front opened up in the dispute when Tokyo's High Court rejected an appeal for compensation by Chinese survivors of biological-warfare experiments conducted by Japan during the second world war. China's state media responded by calling for the site where the experiments took place to be given UN World Heritage status. Kofi Annan, the UN's secretary-general, called on the two sides to patch up their differences at a summit of Asian and African leaders this week.

China’s government worries that if it is seen as too weak towards Japan, or cracks down too hard, the protesters could turn against the party. In the last century, pro-democracy unrest in China was often closely linked with patriotic demonstrations. Many participants in the recent protests have been university students, a group kept under particularly close watch by the authorities since the student-led protests in Tiananmen Square in 1989. The internet and mobile phones have enabled rapid mobilisation (organisers say more than 20m people have signed an electronic petition against Japan’s UN bid). The nationalist genie, once unbottled, could prove hard for China to restrain.

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.

Will the walls come falling down?

Apr 20th 2005
From The Economist Global Agenda

House prices have been growing at a breakneck pace in many developed countries. This has encouraged householders to keep spending even during the global slowdown. But now that housing markets are looking soft, consumers may be forced to retrench

AMERICAN homeowners, particularly those who have just bought their properties, are full of reasons why the run-up in house prices in recent years will continue indefinitely. These days, however, this is beginning to sound like so much whistling in the dark. While prices rose by 11.2% in 2004, the rate of increase slowed markedly in the fourth quarter, to only 1.7%. On Tuesday April 19th, the Commerce Department announced that housing starts fell by 17.6% in March, the sharpest monthly decline since 1991. The next day, the Mortgage Bankers of America (MBA), an industry group, reported that mortgage applications had fallen the previous week, despite a slight dip in interest rates. Investors who thought that real estate was a haven from the volatility of the equity markets might be getting a little nervous.

But worse may come. House prices have received an enormous boost in recent years from falling interest rates, which enabled homeowners to sell their properties for a higher price without a commensurate increase in the buyer’s monthly mortgage payment. But as interest rates have started to rise, buyers have turned to increasingly risky forms of financing in order to keep their monthly payment from bankrupting them. The MBA reports that over a third of new applications in recent weeks have been for adjustable-rate mortgages, up from just 12% in 2001. Anecdotal evidence suggests that “interest only” mortgages, which allow borrowers to make no payments on principal for a period of years, are also on the rise.

These changes have allowed more marginal homebuyers to clamber on to the housing ladder. But if interest rates rise as economists expect, many of those buyers will find it difficult to keep up their payments. And with many putting so little down—a fifth of American mortgages in 2003 were for more than 90% of the purchase price—any fall in house prices could leave a lot of them with negative equity, forcing them to default.

The increasing riskiness of mortgages is not the only sign that America is experiencing a housing bubble. The ratio of house prices to rents is well above its historical average, as is the ratio of prices to median incomes. And people seem increasingly to be basing their house-buying decisions on the notion that the large capital returns of the past few years—house prices in America are up by 65% since 1997—will continue indefinitely. As with a stockmarket bubble, if this confidence is shaken, prices could begin to fall rapidly.

Not merely an American folly

America is not the only country that has been experiencing a big run-up in prices. Its market isn’t even the most frothy. Between 1997 and 2004, house prices more than doubled in Australia, Britain and Spain, and nearly tripled in South Africa and Ireland (see table). And while America’s ratio of house prices to rents is 32% higher than its average value from 1975 to 2000, by that metric houses are even more overvalued elsewhere: by at least 60% in Britain, Australia and Spain, and by 46% in France.

Inflated house prices may have been a key factor in helping these countries weather the global slowdown in 2001. When household wealth is increasing, particularly housing wealth, consumers respond by saving less and spending more; economists call this the “wealth effect”. Explosive house-price growth thus encouraged consumers to keep their spending steady despite external shocks. It is probably not a coincidence that Germany, one of the few European countries where house prices have not been rising, fared far worse during the slowdown than its neighbours or America.

Unfortunately, when housing markets decline, the same process works in reverse: consumers have to cut back their spending and save more to compensate for lost home equity. Lower consumer demand generally means a slowdown in GDP. The sharper the correction, the greater the effect on the overall economy.

But how far will the market really fall? Prices have already begun to soften in places like London and New York, particularly at the high end, but it is possible that in most places price increases could simply moderate, giving incomes and rents time to catch up. An IMF study on asset bubbles estimates that 40% of housing booms are followed by housing busts, which last for an average of four years and see an average decline of roughly 30% in home values. But given how many homebuyers in booming markets seem to be basing their purchasing decisions on expectations of outsized returns—a recent survey of buyers in Los Angeles indicated that they expected their homes to increase in value by a whopping 22% a year over the next decade—nasty downturns in at least some markets seem likely.

A fall in American house prices could be bad news not just for American homeowners, but for the rest of the world. Robust American demand has supported export-driven growth in many economies, particularly emerging markets and Asia. If American consumers have to raise their abysmal savings rate, exporting nations will feel the pinch. And given the parlous state of the Japanese and European economies, it seems unlikely that they will be able to pick up the slack—particularly if many European countries are coping with the fallout from their own housing bubbles.

Most worryingly, a collapse in American export demand could trigger a vicious cycle. In order to keep their currencies low against the dollar, and thus boost exports to America, Asian central banks have been accumulating dollar reserves, which they have poured into Treasury bonds. This has increased the supply of capital in America, and thus been at least partly responsible for the borrowing binge that fuelled the housing boom. If house prices fall, and suddenly poorer Americans have to cut back on their purchases, this will shrink the supply of cheap credit from Asian central banks, pushing up interest rates and causing house prices to fall even further. Those who thought that housing was a haven may be in for a nasty surprise.

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.

In John Paul's footsteps

Apr 20th 2005
From The Economist Global Agenda

The choice of Joseph Ratzinger, an arch-conservative German, as pope is unsurprising. It will delight traditionalist Catholics but disappoint those hoping for more flexibility than John Paul II offered on controversial issues, such as birth control, homosexuality and euthanasia

“HABEMUS Papam.” On Tuesday April 19th, the world’s Catholics heard the words they had been waiting for: “We have a pope.” The senior cardinal deacon of the Catholic church announced to an enormous throng in St Peter’s Square in Rome that Joseph Ratzinger was now Benedict XVI. He is the first Germanic pope since 1523.

Cardinal Ratzinger was chosen on the second day of the conclave of the college of cardinals, on the fourth ballot. This was a quick choice: the cardinal was a well-known figure going into the conclave (one betting website had given him three-to-one odds of winning). He was a close aide to Pope John Paul II, who died on April 2nd, and, as head of the Congregation for the Doctrine of the Faith, had been the official guardian of the church’s doctrinal orthodoxy since 1981. As such, he was an unsurprising choice.

But to many, he will inevitably be a disappointing one. Many Catholics and non-Catholics alike had hoped that the new pope might be different from pontiffs past. One reason was doctrine. The papacy of John Paul II is remembered for the geopolitical changes, including the fall of the Berlin Wall, in which he played a part. But while the world changed, the church’s doctrine did not: John Paul refused to budge on priestly celibacy, homosexuality, euthanasia, ordination of women, birth control and just about every other point of controversy. He ruled with a sceptre of iron, centralising the church's power.

Some hoped that the new pope would be a progressive figure, perhaps like John XXIII, who surprised many by convening the liberalising Vatican II council in the 1960s. But Cardinal Ratzinger—known by some as the “panzer cardinal”—is a doctrinal arch-conservative, and not shy about it. Now that he has been chosen (as the church has it) by the Holy Spirit, he is unlikely to change his ways. The new pope attended Vatican II and supported it at the time, but has since come to think that it may have gone too far. In 1972 he founded a journal, Communio, and has since used it to make the intellectual case for doctrinal permanence.

But the church’s reputation has been wounded by a number of developments linked to its hewing to a conservative line. Some blame clerical celibacy for the rash of paedophilia cases that have rocked the church in recent years. And the refusal to condone the use of condoms has helped the spread of AIDS; the church has not only refused to change its stance, but has even promoted shoddy science purporting to show that condoms are ineffective in preventing transmission of HIV.

This inflexibility is seen as having alienated many Catholics from regular church attendance in the religion's traditional heartland, Europe. Just a quarter of Italians attend mass weekly. The cardinals may have chosen a European to try to stem the church’s decline on the continent. But John Paul II, despite being wildly popular, could not reverse its decline in his native Poland, where it is no longer socially obligatory to attend mass. It is hard to see his arch-conservative successor doing better in liberal Europe.

Hence a second line of speculation: that the cardinals would choose the first-ever pope from Latin America, Africa or Asia. Of the world’s 1.1 billion Catholics, almost half a billion live in Latin America, where there has been less of a fall in piety than in Europe. But Protestant groups have been winning converts in the region, and the cardinals could have sent an embracing signal by choosing a Latin American pontiff. Cardinal Oscar Andrés Rodríguez Maradiaga, a Honduran who has focused on poverty and criticised globalisation, was seen as one possible choice. Alternatively, the church could have broken new ground with less risk by choosing a conservative from another poor region where Catholicism is growing, not shrinking: Africa. Much pre-conclave speculation centred on the doctrinally orthodox Cardinal Francis Arinze, from Nigeria.

Cardinal Arinze was tipped by some because he had headed the Vatican body that maintains links with other religions, and was thus seen as a man who could develop the church’s dialogue with them—crucially, with Islam. John Paul broke new ground here. He apologised to Jews for Catholic passivity during the Holocaust, prayed at a Syrian mosque and took steps to heal the rift between Catholics and adherents of the various eastern Orthodox churches. Will Benedict XVI continue the trend? As a cardinal he signed a document proclaiming the Catholic church superior to all others. But John Paul did not repudiate that document as pope, and yet managed to reach out.

In his first mass as pope, on Wednesday, Benedict spoke of the need for a “full and visible unity of all the followers of Christ”, and of “an open and sincere dialogue” with other religions. But as Cardinal Ratzinger several days earlier, he had sharply criticised the creation of new “sects” (Vatican code for evangelical groups) which lead Christians into “error”. The world must wait to see how unifying such a doctrinaire figure can really be.

Finally, there is the question of how long Benedict will, as he put it in his words to the faithful in St Peter’s Square, toil “in the vineyard of the Lord”. John Paul was just 58 when elected pope in 1978, and travelled extensively during one of the longest papacies in history. At 78, Benedict is the oldest man to be made pope since the 18th century, and his voice trembled slightly as he spoke to the crowd in Rome. Of course, it may not have been age. Even a confident man like the new pope might be forgiven a little nervousness upon assuming control of the world’s biggest church during a pivotal time in its history.

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.

Seeking a cure for legal headaches

Apr 18th 2005
From The Economist Global Agenda

The world’s leading drugmakers face a growing threat from generic-drug manufacturers, a faltering pipeline of future blockbuster medications and a poor public image. Several court cases are highlighting their battles to stay healthy in the long term

FOR an industry that purports to make its customers well, “Big Pharma” has its fair share of ills. Last week, Eli Lilly saw off a legal assault by generic drugmakers on one of its blockbuster medicines, giving heart to other patent-holders that face similar attack. But an adverse decision for the big drug firms in a case to be heard before America’s Supreme Court on Wednesday April 20th could add time and expense to the development of blockbuster drugs—just as the supply of potential new medicines rebounds. And soon, personal-injury lawsuits related to Vioxx, a failed blockbuster sold by Merck of America, will come to court, showing the potentially huge costs of getting things wrong.

Big drug companies are struggling with a central plank of their business model: patent protection for branded drugs. A judge ruled last week that Eli Lilly’s patent on Zyprexa, a treatment for schizophrenia, remained valid despite attempts by three generic-drug companies—America’s Ivax, Israel’s Teva Pharmaceuticals and India’s Dr Reddy’s Laboratories—to persuade him otherwise. The “composition of matter” case turned on the fundamental molecular build of the drug. The judge decided that olanzapine, the active ingredient in Zyprexa, was suitably dissimilar to another compound developed by Lilly that is now out of patent protection.

The result is a huge relief for Lilly. Zyprexa provided it with $4.4 billion in sales last year, a third of its total. And Lilly knows suffering at the hands of generic drugmakers. In 2000, when its patent on Prozac was cut short by three years after a court ruling in favour of non-brand predators, its shares plunged by 30% in a day. But it may yet need a handful of its famed anti-depressant: an appeal in the Zyprexa case seems likely.

The ruling will cheer several other companies facing similar assault in America. Pfizer’s Lipitor, a cholesterol medicine, and Plavix, a blood thinner produced by Bristol-Myers Squibb and Sanofi-Aventis, will have their patents challenged later this year or early next.

In general, composition-of-matter lawsuits are considered harder to win than other avenues of attack employed by generic drugmakers to hack away at the thicket of patents that guard blockbuster medicines. That is because branded drugmakers deem patents covering molecular structure to be their most prized, and thus work harder to make them bomb-proof and fight harder when they are threatened. The outcome of the two cases later this year will shed more light on where the balance of power lies between Big Pharma and the generic upstarts.

The case coming before the Supreme Court this week will highlight another area of weakness for the big drug companies. New drug launches have slowed to a trickle in recent years. The number approved by America’s Food and Drug Administration (FDA) fell to a low of 18 in 2002 compared with an average of 59 in the previous three years, though the number rebounded to 34 in 2004. The costs of testing new drugs have spiralled in recent years, and if Integra LifeSciences prevails in its case against Merck, a German drug firm (no longer related to its American namesake), these could escalate.

The case concerns exemptions on patent protection for certain compounds. Drugmakers are allowed to use compounds patented by rivals if it hastens FDA approval for their own drugs. However, in a case first brought before the courts in 1996, Integra claims that Merck infringed its patent on peptides by using them more widely than merely to assist in securing approval for a new medicine.

Merck is supported by many of the big drug companies—despite being the alleged patent-infringer in this case; Lilly, Wyeth and Pfizer have filed supporting briefs to the Supreme Court. The drug giants fear that a victory for Integra would make drug development more complicated, perhaps adding several years and many millions of dollars before products could come to market.

Disreputable or misunderstood?

Big drug companies have also suffered several blows to their reputations in recent months. Quite apart from a general public perception that they are vastly profitable because they charge too much for their wares, they have been hurt by the forced withdrawal of high-profile drugs and a growing suspicion among consumers about their ethics.

In a court hearing last week, the American Merck argued for the dismissal of the first personal-injury lawsuit brought against Vioxx, a heart medicine. Merck withdrew the drug in 2004 after it was linked to increased risk of heart problems in some patients. The case, the first of many, will come to court in May, and Merck will have to pay out an estimated $15 billion if all the claims against it are successful. And last week Pfizer was forced to withdraw Bextra, a painkiller that contributed 2.4% of its revenues in 2004, after it was linked to a rare but fatal skin complaint.

Eliot Spitzer, New York’s attorney-general, launched a lawsuit last year against GlaxoSmithKline (GSK) for allegedly suppressing data linking anti-depressants to the risk of suicide in children. This prompted initiatives by some drug firms to disclose clinical-trial results. GSK is facing a class-action lawsuit in America from investors who allege it concealed problems with Paxil, an anti-depressant.

The failure of a single blockbuster can have serious consequences for a drug firm’s finances and reputation. An adverse court ruling can delay future blockbusters—and the threat from generic competitors is anyway never far away. At the moment, the world’s pharmaceutical giants seem to be holding their own in court. They will be glad that the hefty profits on offer in the business have enabled them to retain the very best legal counsel. But smart lawyers alone will not keep them on top.

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.

Running out of puff?

Apr 18th 2005
From The Economist Global Agenda

At the World Bank/IMF spring meetings, held at the weekend, officials agreed that the size and growth of global imbalances—particularly America’s twin deficits—are reason to worry. But so far, no agreement has emerged on a course of action

SPRING in Washington means the arrival of cherry blossom and, less colourfully, the world’s central bankers and finance ministers, for meetings of the World Bank and the International Monetary Fund. As the officials gathered at the weekend, their mood was considerably more sombre than the season. Top of their list of worries is the thought that high oil prices might be pushing the world economy into trouble.

Although oil prices have tumbled recently, back below $50 a barrel on Monday, the policymakers’ concern is understandable. Oil prices are still 70% higher in real terms than they were two years ago. Granted, that pales against the great leaps of 1974, when prices jumped by 185% in real terms, and 1978-79, when they rose by 158%; but it is quite some climb nonetheless.

Lately, official worries have been publicly vented. On April 7th economists at the IMF caused a stir when they suggested the world needed to get used to a “permanent oil shock”. Thanks to strong demand and tight supply, they argued, oil prices would be substantially higher in future than they had been in the 1990s. Jean-Claude Trichet, president of the European Central Bank, recently pointed to the rise in oil prices as an “unwelcome” risk to global economic growth. In a comment reminiscent of the 1970s, he urged consumers to become “good energy savers”.

His remark is not surprising, given that the economies in Europe are stumbling. Unemployment in the euro area is 8.9%; in Germany, France and Spain it is in double digits. Manufacturing in the single-currency zone has stalled. In its latest World Economic Outlook, published last week, the IMF, like other forecasters before it, slashed its forecast for euro-area GDP growth this year, to 1.6%. The world economy’s other weak link, Japan, faltered half-way through 2004 and despite the odd spark has not yet sputtered into life again. High oil prices have helped neither of these giant weaklings.

Even in America, where the strength of the expansion has consistently surprised economists, there are nascent signs of slowdown and worries about oil. With job growth scarcely topping 100,000, the March employment report was much weaker than expected. Retail sales grew by only 0.3% (month-on-month) in March, less than half of what analysts had expected, suggesting that record petrol prices were wearing holes in consumers’ pockets.
No wonder that oil was high on the agenda in Washington last weekend. In the World Economic Outlook, the IMF reckons that global growth in 2005 will be 0.8 percentage points lower than last year. It ascribes around a third of the reduction to higher oil prices. Even that forecast was based on prices slightly lower than they are now. More worrying, economists think that oil prices do not have a linear impact on output. Beyond some point (trouble is, no one knows what) they begin to hit harder.

So far, however, it is perhaps remarkable how little impact rising oil prices have had. Last year, after all, global GDP grew by 5.1%, the fastest rate in a generation. There are several reasons for this. The world economy is much less oil-intensive than it used to be. In contrast to the supply shocks of the 1970s, much of the recent run-up in prices has been caused by rapidly rising demand: oil is dear in part because some economies, especially America’s and China’s, have been growing vigorously. Central banks’ strong reputations for fighting inflation have stopped the translation of higher oil prices into wage-price spirals. These fortuitous conditions may not last, but for now they are good reasons not to be too pessimistic.

High oil prices do, however, exacerbate the real weakness in the world economy: the imbalanced nature of global growth. Behind the robust overall performance lies a stark dichotomy between the robust (America and China, in particular) and the wheezing (Japan and continental Europe). Even though all these countries are oil importers, they have reacted very differently to higher prices. America and China have, so far, shrugged them off, while weaker economies have seen domestic demand shrivel further. This has exaggerated already gaping external imbalances, particularly America’s soaring trade and current-account deficits.

According to statistics released on April 12th, America’s monthly trade deficit reached a record $61 billion in February (see chart). The climb in oil prices may mean another record in March—although much of February’s increase reflected sharp growth in non-oil imports, which were 16% higher than in February 2004.

Brad Setser, a former Treasury official who is now at Roubini Global Economics, an economic-analysis firm, reckons that if non-oil import growth continues at its recent pace and the oil price stays over $50 a barrel, America’s annual trade deficit would reach nearly $800 billion by the end of the year. That said, the figure may not get that high, because $50 oil ought to dampen American consumer demand and hence import growth.

Be happy, it’s spring

It is possible to be sanguine about America’s ever more colossal deficits, just as it is about oil. Certainly, the doomsday scenarios of a dollar crash or a hard landing for the American economy are not in sight. America has had little trouble attracting the necessary capital to fund its soaring deficits. Though Asia’s central banks are still big purchasers, they are not the only ones. Thanks to soaring prices, oil exporters have been building up their surpluses. Russia’s foreign-exchange reserves, for instance, are now over $130 billion. Many of these oil exporters are choosing dollar assets. The dollar has strengthened since the beginning of 2005 and long-term interest rates remain remarkably low.

This calm may explain why the world’s finance ministers have done so little to wean themselves off their addiction to American-led growth and why they spent so much of their time in Washington fretting about oil. That is a pity, for while the oil price seems to be the most imminent risk, the size and rate of growth of the global imbalances are the real reason to worry. And as Rodrigo Rato, the head of the IMF, warned at the weekend, the time to address these imbalances is now, when good economic conditions—in America, and globally—can ease the pain of the transition.

But while everyone seems to agree that there is a real problem, there seems to be little political will to make the necessary changes. Many governments are more than willing to warn others that they need to take action, but no one has yet outlined plans to set their own economic house in order. As long as this stalemate continues, the global imbalances are likely to increase. And you do not need to be a Cassandra to predict that, eventually, they will create a nasty problem.

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.

Unrest that riles Tokyo and worries Beijing

Apr 20th 2005
From The Economist Global Agenda

Beijing and Tokyo remain at loggerheads after a third weekend of anti-Japanese protests in cities across China. The Chinese authorities seem reluctant to quell the unrest, but they are also worried that the outpouring of nationalist feeling will prove hard to handle

“IT’S a scary country,” Japan’s trade minister, Shoichi Nakagawa, said of China last week, following demonstrations in several Chinese cities by thousands of protesters, some of whom smashed the windows of Japanese shops and restaurants and threw stones at Japanese diplomatic buildings. For all their seeming reluctance to quell the unrest, Chinese leaders probably find it scary too.

The protests first turned violent in the south-western city of Chengdu on April 2nd, and erupted with particular fury in Beijing a week later. They were the biggest to take place in China since tens of thousands took to the streets across the country in 1999 in response to the bombing of China’s Belgrade embassy by American aircraft during the Kosovo war. Those protests, initially condoned by the authorities, fizzled out after three or four days, when the government made it clear that enough was enough. This time the government has appeared more hesitant.

Indeed, there were further disturbances on the weekend of April 16th-17th, with protests staged in at least ten Chinese cities, including Shanghai, Xiamen and Guangzhou. In the biggest of these, a crowd estimated at 20,000 attacked the Japanese consulate in Shanghai with stones and bottles. The latest wave of unrest came during a visit to China by Japan’s foreign minister, Nobutaka Machimura. Fence-mending was not on the agenda: Mr Machimura sought an apology for the anti-Japanese violence but was rebuffed by his Chinese counterpart, Li Zhaoxing, who insisted that China had nothing to say sorry for.

In a country where public protest is usually quickly suppressed, anti-Japanese sentiment has proved hard for the authorities to handle. The ruling communist party bases its legitimacy in part on its (somewhat overstated) record of fighting Japanese occupation forces in the 1930s and 1940s. It traces its intellectual origins to a movement inspired by anti-Japanese protests in 1919. Animosity towards Japan is regarded as the hallmark of a patriot.

The authorities’ dilemma is reflected in their handling of these protests, which began as a show of opposition (on the grounds that Japan has failed to show sufficient contrition for its wartime atrocities) to Japan’s campaign for a permanent seat on the UN Security Council. They were fuelled by a decision by Japan’s education ministry to approve a school textbook (unlikely to be widely adopted) that plays down the extent of the atrocities. Chinese officials expressed outrage at the book, but quietly banned coverage of the protests in the Chinese-language media. Calls for a boycott of Japanese goods, widely circulated on the internet, also went unreported in the state-controlled press.

In Beijing, the authorities mobilised thousands of police and paramilitary troops to guard the Japanese embassy and ambassador’s residence, and to patrol the route of the march. Yet the security forces took no action as protesters threw stones and plastic bottles at the diplomatic buildings and overturned a car. Activists said the protests were unauthorised. In China, this makes them illegal. Yet no arrests were reported in connection with the Beijing protests. And not until April 19th did the authorities order the protests to stop. A foreign-ministry spokesman said that it was up to Japan to “reflect carefully” on the situation.

Chinese officials are doubtless thinking carefully too. Last week, Japan said it would soon allow Japanese gas companies to explore in an area of the East China Sea claimed by both countries, a move that has further riled Chinese nationalists. And the year is replete with potential flashpoints: May 4th (the anniversary of the 1919 protests), July 7th (Japan’s full-scale invasion of China in 1937), the 60th anniversary on August 15th of Japan’s surrender, and September 18th (the Japanese occupation of Manchuria in 1931).

This week, another front opened up in the dispute when Tokyo's High Court rejected an appeal for compensation by Chinese survivors of biological-warfare experiments conducted by Japan during the second world war. China's state media responded by calling for the site where the experiments took place to be given UN World Heritage status. Kofi Annan, the UN's secretary-general, called on the two sides to patch up their differences at a summit of Asian and African leaders this week.

China’s government worries that if it is seen as too weak towards Japan, or cracks down too hard, the protesters could turn against the party. In the last century, pro-democracy unrest in China was often closely linked with patriotic demonstrations. Many participants in the recent protests have been university students, a group kept under particularly close watch by the authorities since the student-led protests in Tiananmen Square in 1989. The internet and mobile phones have enabled rapid mobilisation (organisers say more than 20m people have signed an electronic petition against Japan’s UN bid). The nationalist genie, once unbottled, could prove hard for China to restrain.

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.

Time has stopped in Okinawa's jazz clubs

from the April 20, 2005 edition - http://www.csmonitor.com/2005/0420/p14s02-trgn.html

US military occupation intruduced jazz to Okinawa. Now the island has more jazz clubs than most American cities.

By Roger House Contributor to The Christian Science Monitor

OKINAWA, JAPAN - In a small jazz club in Okinawa, Japan, waitress Akiko Chino vocalizes a rendition of "Paper Moon." The aspiring singer struggles to interpret the song phonetically, having memorized the lyrics from a CD. The crowd applauds as she leaves the bandstand, bowing before resuming the work of clearing tables.

When she passes my table, she asks for clarification of a line in the song: "What is a Barnum and Bailey world?" I try to explain, but the barriers of language and cultural history get in the way.
Regardless, her love for jazz will go on. She is typical of many jazz musicians on this tiny island - self-taught, with a limited knowledge of English, but a great dedication to an American art form.
Okinawa has more jazz clubs than most cities in America. Located between mainland Japan and Taiwan, it has a history of Asian and American domination, and was a major battleground inWorld War II. This year marks the 60th anniversary of the start of the American occupation, and the clubs are windows on that time.

In April 1945, the US military occupied Okinawa after a three-month campaign that resulted in some of the heaviest casualties of the war. American marine and naval forces lost an estimated 13,000 men in an invasion met head-on by Japan. About 80,000 Japanese troops were killed. The islandlost one-third of its population, about 150,000 people, caught in the crossfire.

The US administered Okinawa until 1972, when Japan resumed control with the agreement that the American bases would remain. During the years of occupation, the jazz clubs were havens where former enemies came together in the safety of cultural appreciation.

Japanese filmmaker Junji Sakamoto portrayed the impact that jazz had in mainland Japan in the historical feature film "Out of This World - Club Occupation Army." The movie documents the story of Japanese musicians such as singer Toshio Oida and drummer George Kawaguchi devoted to the "enemy music." It shows young Japanese musicians struggling to master jazz in postwar Japan by playing at nightclubs for US enlisted men.

Mr. Sakamoto said he made the film to chronicle the historic relationship between Japanese and American musicians, and to show how former enemies could move beyond the war and form a common bond through appreciation of jazz.

In the postwar period, Okinawans viewed the military bases through a multilayered prism, says Hayashi Oshiro. On one hand, they were considered installations of military oppression; on the other, they were seen as extensions of American abundance and popular culture. Once a week, Okinawans could go to stores and nightclubs on base.

Mr. Oshiro became a jazz fan from going to the base clubs, and he opened an American-style diner, The 50s Café, in the capital city of Naha. He also witnessed the influence on local musicians. They were drawn to both the music, the friendships, and the money earned in tips.
Most people preferred the swing music of the war era, but many others took to the innovative style of bebop. Over time, a few musicians even integrated traditional Okinawan melodies and instruments into their performances.

Some of the first-generation Okinawan musicians went on to careers as entertainers and jazz club owners. A few continue to perform today. One is pianist Yara Fumio. He is a short man with a long goatee. While he questions the need for the continued presence of the military bases, he appreciates the opportunity they provided to learn about jazz.

He owns a club called Gu-Wa Jazz Live in Naha. The name means fable, and the club is a treasured spot for jazz aficionados. A major highlight for the club was hosting a concert by pianist Kenny Barron several years ago. The encounter is still much talked about by local musicians, and an enlarged photograph of Barron surrounded by local musicians is framed and prominently displayed on the wall .

Another first-generation jazz singer is the legendary Sumiko Yaseyama, owner of Interlude, a small piano bar in Naha. She began singing as a teenager during the postwar occupation and become a featured performer in the base clubs. One of the highlights of her later career was recording an album with pianist Mal Waldron in the 1980s - the cover is framed and hanging on the wall at Interlude. In the tiny club, she and a young assistant work as hosts and performers.

No story of the early jazz scene would be complete without recognizing the contributions of musicians from the Philippines. Many originally came to Okinawa to work on the military bases.
Pino Arcaya arrived during the Vietnam War when the US military recruited him as a music teacher. "They sent me $300 and a one-way ticket to Okinawa," he recalls. "The Department of Defense wanted me to teach classical music to family members of the military. After a while I became bored with classical music, so a friend said I should try jazz, and I found it much more interesting."

He began to frequent the base clubs, some of which had hired musicians from the Philippines. One of the players taught him jazz piano. Performing with the club bands led Mr. Arcaya to a job as a pianist at a hotel. About 20 years ago, he opened his own club. "In those days," he says, "I would play at the hotel until 10:30 at night, then rush to my club and start all over again."
His Pino's Place is an intimate and charming jazz club. Behind the bandstand is a charcoal mural of musicians and the motto: "Jazz is the universal language of mankind."

The Okinawa jazz clubs are labors of love, rather than profitable business enterprises. The audiences are comprised of local regulars, tourists from mainland Japan, and older Americans.
The future of jazz in Okinawa rests in the hands of younger musicians, many from mainland cities. Kam's Jazz House in Naha is a laboratory for the next generation. Hidefumi Kamura, who was influenced by the military base jazz clubs on the mainland, came to Okinawa from the city of Yokosuka. Today he is one of the most respected and skilled bebop pianists in Okinawa.

On any given night his band might feature a tenor saxophonist, vibraphonist, trombonist, guitarist, or all of them. The club is a second home for many younger musicians such as Johma Kohsuke. Mr. Kohsuke came to Okinawa from Osaka about five years ago. His interest in jazz derived from listening to Charlie Parker recordings. He studied alone until he achieved a sufficient degree of skill.

Each year, Naha sponsors a jazz concert. In the midst of regional tensions, the theme for 2004 was jazz and peace. The concert featured local favorites such as Hidefumi Kamura and Yara Fumio, but it also introduced musicians from other Pacific islands. Paul Huang's Jazz Band arrived from Taiwan and delighted the audience with aset of bebop.

The Okinawa Jazz Association swing band showcased trumpeter Elio Miyashiro, a Hawaii-born artist who now resides in Tokyo.

The event highlighted the continued appeal of jazz in Okinawa and its larger connection to peaceful coexistence. In a small way, it demonstrated the resilience of jazz as one of the cultural ambassadors of America.

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Why Air America doesn't fly

from the April 21, 2005 edition - http://www.csmonitor.com/2005/0421/p09s01-coop.html

By Brian C. Anderson

NEW YORK - The liberal Air America Radio, just past its first birthday, has probably enjoyed more free publicity than any other enterprise in recent history. But don't believe the hype: Air America's left-wing answer to conservative talk radio is failing, just as previous efforts to find liberal Rush Limbaughs have failed.

Wait a second, you say, didn't I read that Air America has expanded to more than 50 markets? That's true, but let's put things in perspective: The morning talk show hosted by William Bennett, conservative pundit and former Reagan administration official, launched at the same time as Air America and reaches nearly 124 markets, including 18 of the top 20, joining the growing ranks of successful right-of-center talk programs (Mr. Limbaugh is still the ratings leader, drawing more than 15 million listeners a week).

And look at Air America's ratings: They're pitifully weak, even in places where you would think they'd be strong. WLIB, its flagship in New York City, has sunk to 24th in the metro area Arbitron ratings - worse than the all-Caribbean format it replaced, notes the blog "radioequalizer." In the liberal meccas of San Francisco and Los Angeles, Air America is doing lousier still.

So why do liberals fare so poorly on air? Some on the left say it's because liberals are, well, smarter and can't convey their sophisticated ideas to the rubes who listen to talk radio. Former New York Gov. Mario Cuomo, whose own stint as a talk-show host was a ratings disaster, gave canonical expression to this self-serving view. Conservatives "write their messages with crayons," he maintained. "We use fine-point quills."

Yet even if we were to grant the premise that conservative talk radio can sometimes be crudely simplistic - a tough charge to make stick against, say, onetime philosophy professor Bennett or Clarence Thomas's former law clerk Laura Ingraham - how can anyone plausibly believe the right has a monopoly on misleading argument? Moreover, talk-show fans aren't dummies.

Industry surveys show that talk-radio fans vote in greater percentages than the general public, tend to be college educated and read more magazines and newspapers than the average American. Successful talk radio is conservative for three reasons:

• Entertainment value. The top conservative hosts put on snazzy, frequently humorous shows. Kathleen Hall Jamieson, dean of the University of Pennsylvania's Annenberg School for Communication, observes: "The parody, the asides, the self-effacing humor, the bluster are all part of the packaging that makes the political message palatable." Besides, the triumph of political correctness on the left makes it hard for on-air liberals to lighten things up without offending anyone.

• Fragmentation of the potential audience. Political consultant Dick Morris explains: "Large percentages of liberals are black and Hispanic, and they now have their own specialized entertainment radio outlets, which they aren't likely to leave for liberal talk radio." The potential audience for Air America or similar ventures is thus pretty small - white liberals, basically. And they've already got NPR.

• Liberal bias in the old media. That's what birthed talk radio in the first place. People turn to it to help right the imbalance. Political scientist William Mayer, writing in The Public Interest, recently observed that liberals don't need talk radio because they've got the big three networks, most national and local daily newspapers, and NPR.

Unable to prosper in the medium, liberals have taken to denouncing talk radio as a threat to democracy. Liberal political columnist Hendrik Hertzberg, writing in The New Yorker, is typically venomous. Conservative talk radio represents "viscous, untreated political sewage" and "niche entertainment for the spiritually unattractive," Hertzberg sneers.

If some liberals had their way, Congress would regulate political talk radio out of existence. Their logic is that scrapping Air America would be no loss if it also meant getting Limbaugh and Bennett and Sean Hannity off the air.

To accomplish this, Rep. Maurice Hinchey (D) of New York has proposed reviving the Fairness Doctrine to protect "diversity of view," and John Kerry recently sent out some signals that he, too, thought that might be a good idea. Under the old Fairness Doctrine, phased out by Ronald Reagan's FCC in the late '80s, any station that broadcast a political opinion had to give equal time to opposing views. A station running, say, Hannity's show, would also have to broadcast a left-wing competitor, even if it had no listeners.

But people listen to conservative talk because they want to, not because federal regulators force them to. To claim that "diversity of view" is lacking in the era of blogs and cable news, moreover, is downright silly. Complaints about fairness are really about driving out conservative viewpoints. Sure, talk radio is partisan, sometimes overheated. But it's also a source of argument and information. Together with Fox News and the blogosphere, it has given the right a chance to break through the liberal monoculture and be heard. For that, anyone who supports spirited public debate should be grateful.

• Brian C. Anderson is senior editor of City Journal, the quarterly published by the Manhattan Institute. © Los Angeles Times.

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Cracks appear in antitax strongholds

from the April 21, 2005 edition - http://www.csmonitor.com/2005/0421/p01s02-uspo.html

Strapped for cash, some GOP governors rethink their stand on taxes.

By Amanda Paulson Staff writer of The Christian Science Monitor

DENVER - This is a state in favor of small government, fiscal responsibility, and a tight control on spending.

Colorado's Taxpayers Bill of Rights - which places strict limits on how the state can draw revenue - is the mantra of antitax true believers everywhere.

So it's perhaps surprising that a proposal to let the state government keep the people's promised tax refund for the next five years is not only being floated, but doing fairly well in polls.

Even more surprising: One of the biggest proponents of that plan is the governor. Just a year ago, he was denouncing any such easing of the bill of rights, known as Tabor, and called it a tax hike.

Bill Owens isn't the only GOP governor to leave behind dearly held antitax ideals when faced with a particularly dire budget crunch. Mitch Daniels, who as President Bush's budget director earned a reputation for attacking government spending, proposed new taxes just eight days after becoming governor of Indiana. The governors of Alabama, Georgia, Idaho, Nevada, and Ohio have also changed course.

Depending on whom you talk to, the trend is either a sign of ideology giving way to pragmatism, or of Republican governors refusing to stand up to their ideals when they're put to the test.

"The fiscal straitjackets a lot of states have been in have the tendency to show the true colors of governors," says Stephen Slivinski, a budget analyst for the conservative Cato Institute.

But taxes, even from ardent conservatives, are sometimes necessary, others say. The idea that all taxes are bad at all times, or that any governor should take such a pre-inauguration pledge, "isn't public policy, it's demagoguery," says Iris Lav, deputy director of the Center on Budget and Policy Priorities, a Washington think tank.

"At the state level, raising taxes or not raising taxes has always been less party line than at the federal level," she adds. "It's not too surprising that even someone who'd been very pro-Tabor like Governor Owens looks and says, 'I'm a governor, my job is to make state government work,' and realize he has to do something."

Possible fallout

Some of the more conservative critics, however, warn that such actions will have political repercussions.

"Those Republican governors who raised taxes or tried to raise them will never move up in national office," says Grover Norquist, president of Americans for Tax Reform. "Mitch Daniels will never be vice president, not now. [Alabama Gov. Bob] Riley will never be vice president, not now. Owens - who was a presidential contender - will never be a candidate."

Mr. Slivinski of the Cato Institute says that many of the political switches on taxes come from second-term governors, who don't have a reelection campaign looming over them. Owens falls in that category, as does Gov. Kenny Guinn of Nevada, who waited until his second term to propose new taxes. He saw his grade on Cato's fiscal report card drop from an A during his first two years to an D on the most recent report card.

Owens received top marks for a second time, but the grade doesn't take into account his latest position on Tabor, says Slivinski. "Within about a week or two of us giving him another A, he announced a plan that's going to drop his grade," he says. "It's going on his permanent record."
Still, the pressure on governors can be intense. And the dilemmas over taxing, even for the most die-hard conservatives, aren't easy, often forcing governors to weigh ideology against cuts to vital state programs such as education and Medicare.

Take Colorado. The combination of Amendment 23, which mandates annual spending increases on K-12 education, and Tabor, which limits government spending to a formula of inflation plus population growth - has severely squeezed many other budget items, in particular higher education.

Owens has called his proposal - which would allow the government to spend beyond the limits and keep the refunds for the next five years - a way to save Tabor and insists it's not a tax increase.

He points to the extra burden Tabor's "ratcheting" effect has on state government: If revenue drops one year, during a downturn, the base for the next year's increases also drops.

"He's trying to fix that," says Sean Duffy, Owens's deputy chief of staff. Otherwise, "You're never able to recover from a recession."

A dangerous precedent?

But for those who see Colorado's strict limits as the ultimate of tax reform, the idea that it could be weakened seems like a dangerous precedent. At least a dozen other states, including Wisconsin, North Carolina, and Texas, are considering Tabors of their own, and its supporters are loath to see it questioned on its home turf.

"We have a governor who's changed horses," says Jon Caldara of the conservative Independence Institute in Golden, Colo. Mr. Caldara, like other Tabor advocates, credits its spending limits during good times with saving Colorado from huge deficits during lean times.
Others would like to see Colorado set aside money for a "Rainy Day Fund" - a safeguard for recessions that's part of some Tabors proposed in other states - rather than increase spending.
Coloradans themselves are often conflicted. Polling shows that majorities both like Tabor and want new spending on roads and schools, says Tom Clark, vice president of the Metro Denver Economic Development Corporation. He considers himself a fiscal conservative but admires Owens's willingness to change course.

"It's very easy to be ideological when everything's going your way. That's a hard lesson conservatives have learned," says Mr. Clark. "Governor Owens finally felt he wasn't elected to be Tabor's defender. He was elected to govern."

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Planet hunters bay at another clue: a belt of cosmic dust

from the April 21, 2005 edition - http://www.csmonitor.com/2005/0421/p02s01-usgn.html

Infrared data show debris that could be distant asteroids - a 'look here' flag in the search for Earth-like planets.

By Peter N. Spotts Staff writer of The Christian Science Monitor

Astronomers have long reasoned that if solar systems anchored by sunlike stars are anything like ours, they'll have comets and asteroids, as well as planets.

Now, researchers appear to be confirming that hunch. A team of scientists announced Wednesday that it has uncovered the first evidence outside our solar system for an asteroid belt around a sunlike star.

In addition, a second team reported earlier this month that it had discovered signs of Kuiper Belt-like structures around six stars with planets. In our solar system, the Kuiper Belt is the cache for comets that swing past the sun every 20 to 200 years.

Together the finds represent the first discoveries of debris disks around mature planetary systems beyond ours. Like the sun's asteroid and Kuiper belts, these disks are thought to be the jumbled leftovers from planet formation. They also could serve as "look here" flags for planet hunters.

The two teams' work is part of a broad 20-year search for examples of major planetary components beyond the sun's. Humans emerged in what by then was a ready-made solar system. To fully understand how that system came together and how it compares with others, researchers have to peer into the wider stellar neighborhood for clues.

"We're trying to find all the constituents of planetary systems - the comet belts, the asteroid belts, big gas-giant planets, and ultimately Earth-like planets," says Charles Beichman, a researcher at the Jet Propulsion Laboratory in Pasadena, Calif., who leads both teams. "We're now pushing into the asteroid belts."

Both efforts rely on the Spitzer Space Telescope, the last of NASA's four orbiting "Great Observatories." Spitzer detects infrared emissions from objects in space - in this case, from dust generated as asteroids and more-distant chunks of planet wannabes collide and crumble.

Dust whose signature could mark an asteroid belt was detected around a star 41 light-years away known as HD69830. From the relatively hot emissions, the team calculates that the asteroid belt lies within 93 million miles (1 A.U.) of the star. Our sun's asteroid belt, by contrast, is centered some 2.7 A.U. away. Moreover, HD69830's purported asteroid belt appears to hold between 18 to 64 times more mass than the sun's - turning the region into a cosmic billiards hall.
If the belt were to exist in our solar system at our asteroid belt's distance, the dust would appear as a brightly glowing arc across the night sky.

The team acknowledges other possibilities, such as a "supercomet" that spews gas and dust as it periodically swings by the star. The dust contains minerals similar to those detected in the 1997 Hale-Bopp comet.

But the dust grains are so small that pressure from the star's radiation would sweep the region clean within 1,000 years. So either astronomers displayed impeccable timing and spotted the dust during a supercomet "flyby," or the dust is being replenished through asteroid collisions.
Astronomers should be able to make a final call after they try to detect gases in the so-called "volatiles" that comets also emit.

If the dust has asteroidal heritage, it could hint at the presence of a planet. Previous surveys suggest the star has no planet - at least in Jupiter's class or larger. But the team notes that the dust's infrared signature shows a sharp drop in temperature with distance, implying a clear outer boundary. Thus, an object farther out - perhaps with the mass of Saturn or less - may be shepherding the belt.

The second team's Kuiper-Belt evidence comes from similar, but far cooler, infrared signatures beyond 10 A.U. from their parent stars.

For planet hunters, the results represent a milestone. "This result is extremely exciting," notes Debra Fischer, an astronomer at the California State University at San Francisco and a member of a prolific planet-hunting team.

She suggests that the star's lack of a gravitational pull from Jupiter-class planet may explain why this asteroid belt survived. It also serves as a stark reminder that some type of planetesimal growth takes place even where large planets haven't been detected. "It seems important to remember this when we give statistics for the fraction of stars that have planets," she holds.

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