The $10 billion man

Face value
Feb 24th 2005
From The Economist print edition

Having turned round Nissan, Carlos Ghosn is about to run Renault as well

IT IS said that he could add $10 billion to the market value of Ford or General Motors with a stroke of his pen. But Carlos Ghosn is not about to sign up as chief executive of either firm. Instead, in May, he will become the boss of Renault, France's second-largest carmaker, while continuing to head Nissan, Japan's number two car firm. To ease the transition, this week he named Toshiyuki Shiga as Nissan's chief operating officer.

Although Renault and Nissan have cross-shareholdings and a deep alliance, their relationship deliberately stops well short of outright merger. Perhaps that is why it has been so successful, avoiding the integration pain that has marred, for instance, Daimler-Benz's takeover of Chrysler. In his book, “Shift: Inside Nissan's Historic Revival”, published in English last month, Mr Ghosn says that the strength of the alliance “can be found, on the one hand, in its respect for the identities of the two companies, and on the other, in the necessity of developing synergies.”
Certainly the benefit has flowed both ways since the Franco-Japanese deal was done in 1999.

First, Renault rescued Nissan, buying a stake (now 44%) and installing its Mr Ghosn as chief operating officer (and later chief executive). Mr Ghosn turned huge losses into a $7 billion profit and wiped out debts of about $23 billion. This has helped to prop up Renault's sagging profits in recent years. Nissan's latest operating profit margin is about 11%, making it the world's most profitable volume carmaker. Mr Ghosn's reputation soared as he set, then met, ambitious targets.

Now he is to be the first executive to try to run two big carmakers at once. No one has ever revived a carmaker as spectacularly as he has—much less attempted an encore. But then the industry has never seen anyone like the larger-than-life Mr Ghosn. Born in Brazil to a Lebanese immigrant family, he went to a French school in Lebanon before studying engineering at the Ecole Polytechnique in Paris. Few Frenchmen speak four European languages and get by in Japanese as well. He first made his name by turning around Michelin's business in Brazil, then America, before being hired by Renault. He was soon nicknamed “le cost killer” as he revived Renault in the mid-1990s.

In 1999, when Louis Schweitzer—Renault's now soon-to-depart chief executive—decided to link up with Nissan, he knew that Mr Ghosn, already his intended successor at Renault, was the man to put in charge of rescuing the Japanese firm. Mr Ghosn's “Nissan Revival Plan” involved shedding 20,000 jobs and closing five factories, a drastic move in conservative Japan. He also abandoned the cosy keiretsu family-of-firms system, a pillar of Japanese industry. Nissan's shares in keiretsu suppliers were sold to pay off debt. He slimmed down Nissan's product range, but accelerated development of new models.

A second plan, “Nissan 180”, launched in 2002, stands for reversing the company's decline by adding 1m in sales by October this year, achieving an operating margin of 8% and eliminating its debt. With sales in North America topping 1m, Nissan is on course to hit the last remaining target, before a new plan is unveiled in April. Then it will be up to Mr Shiga to hit those targets, under his boss's watchful eye. If he lives up to expectations, Mr Shiga could be in line to succeed Mr Ghosn as chief executive at Nissan within a few years.

Mr Ghosn attributes his success to the way that he works through cross-functional teams. He thinks that when people from different backgrounds work together under pressure they come up with more creative solutions. He proved the value of this technique when he successfully merged Michelin's American tyre business with another firm in the teeth of a recession. His personal style is brisk and direct, but not without warmth.

My other car firm's a Renault

And yet why risk everything by adding to his workload? Both Renault and Nissan have concluded that they have no choice but to share a boss for the next few years. To put a Japanese executive into Mr Ghosn's chief-executive shoes immediately might have signalled a return to the old days of consensual dithering and blind respect for seniority. To put a Frenchman in would have seemed too aggressive. Mr Ghosn's diverse international background made him more acceptable in Japan. He was not seen as an invading Frenchman. Indeed Ghosn-san has become a sort of national hero in his adopted country.

Mr Ghosn will devote the first few months in his new role to “re-discovering Renault”, mostly in Paris. Then, he says, he will spend 40% of his time in Paris, 35% in Tokyo, 15% in America and the other 10% in places such as China, Thailand, Brazil and Turkey. Needless to say, he has the use of a long-range executive jet. Over time, Mr Ghosn expects the executive teams of both Renault and Nissan to become more international.

America could prove his biggest challenge. First, he has to manage Nissan's headlong expansion there: the firm stumbled last year, with quality problems in vehicles made by inexperienced workers at a new factory in Canton, Mississippi. Mr Ghosn reacted by taking direct charge of the American business, which he will continue to run hands-on for another year, in addition to his many wider responsibilities. He drafted in 200 engineers from Japan to sort out the Canton factory and improve quality. It was a reminder that not everyone can keep up with Mr Ghosn's rapid pace.

Mr Ghosn's predecessor at Renault always dreamed that the alliance with Nissan would help the French brand to re-enter the huge American market, where some foreign car brands make huge profits. But Mr Ghosn seems more cautious. He thinks America poses huge risks. Renault has failed twice there before. But if he can make the transformational European-Japanese alliance a two-pronged success in America, Mr Ghosn will truly deserve to be called the $10 billion man.

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

Screeching to the precipice

Feb 28th 2005
From The Economist Global Agenda

Argentina appears to have persuaded most of its bondholders to accept a deeply discounted debt-restructuring offer. But the country’s financing problems will continue unless it can coax back capital stashed abroad by its citizens

WHEN Argentina started restructuring its $81 billion-plus-interest in defaulted debt last month, it was billed as the biggest game of chicken in financial history: the government vowed not to improve its offer, worth broadly 30 cents on the dollar, and bondholders promised never to accept it. Now it seems that despite their threats of lawsuits, asset seizures and collective rejection of the Argentine ultimatum, the creditors swerved practically before they got into the car.

Not so long ago, most analysts were predicting that at best 70% of bondholders would accept the offer, which closed on Friday February 25th. Most now reckon that as many as 80% of creditors have participated. The Argentine Bond Restructuring Agency, which represents little guys in Germany and Austria, accepted the deal at the last minute. And a significant number of other retail investors, tired of the hassle, may have sold out to more sophisticated players who hope to take quick profits once Argentina is re-admitted into the emerging-market bond index. The official results may not be announced until Thursday. But if the acceptance rate is as high as reports now suggest, it should win the blessing of the International Monetary Fund (IMF), which must decide whether to roll over the $14 billion Argentina still owes it.

The success of the government’s negotiating strategy—which was not to negotiate at all but to offer a take-it-or-leave-it package instead—is a political triumph for Argentina’s president, Néstor Kirchner. As his Peronist party heads into legislative elections in the autumn, he can claim that he faced down the foreigners and won.

The foreigners have been chasing their claims since Argentina’s government stopped servicing its debt more than three years ago, on December 23rd 2001. It was the biggest sovereign default in history. Despite liberal help from the IMF, the government could not meet the punishing yields exacted by skittish investors or balance its books in the midst of a protracted recession. It devalued the peso, then decoupled it altogether from the dollar, dismantling the “convertibility system” that had killed hyperinflation a decade before. At its worst, the peso lost three-quarters of its value, wreaking havoc on the finances of banks, companies and households, which could no longer meet their dollar liabilities. But hyperinflation did not return, and after the economic meltdown of 2002, Argentina’s newly competitive exchange rate helped it grow once again.

Standard & Poor’s, a rating agency, has said that after the restructuring it will rate Argentina a B-minus debtor, a status that Ecuador did not attain for five years after its default. Foreigners will probably not want to lend to the Argentine government directly for a while after taking a 70% loss—twice the average haircut in recent sovereign defaults—and the government will still be left with a public debt equal to 80% or more of GDP. But the country’s new credit rating should increase access to capital for its best-behaved companies. Other immediate benefits include a smaller chance that lawsuits against the government will succeed and a better relationship with the IMF, which might allow Argentina more time to repay the Fund money it owes and soften the conditions that govern the debt.

Most important, greater confidence in Argentina (and its soaring equity markets) may bring home some of the $150 billion or so its citizens hold abroad. The return of flight capital is a practical necessity for the country to keep growing. Its galloping GDP growth, 8.8% in both 2003 and 2004, owes a lot to high soyabean prices and the use of capacity left idle by the economic collapse in 2001-02. Commodity prices have already declined from their peaks and capacity constraints are likely to be felt again this year, so fresh capital will be needed. Mr Kirchner has hardly wooed external direct investors: his government is yet to lift the freeze imposed during the crisis on rates charged by most foreign-owned utility firms. This has exacerbated worries that contracts in Argentina are not worth the paper they are printed on.
The president seems to be betting that a successful restructuring will increase domestic investment from its current level of 17% of GDP to more than 20%, enough to sustain impressive growth throughout the economic cycle. Only time will tell if the Argentines cheering his “patriotic” intransigence towards the international financial community are willing and able to shoulder the burden themselves.

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

Collywobbles

Feb 25th 2005
From The Economist Global Agenda

This week, America’s financial markets saw a few ghosts, and shivered

THE markets were looking for an excuse to turn tail, and this week they got more than one. Spooked by fear of inflation, high oil prices and a revolt by Asia’s central banks, bonds, the dollar and shares all headed south, in that order. By the evening of Wednesday February 23rd, some poise had been regained. But the ease with which things went wrong—albeit just a bit—has left many wondering just how robust is the consensus view that all’s for the best in this best of all possible financial worlds.

The problems started last week, when Alan Greenspan, the chairman of the Federal Reserve, professed himself puzzled by the “conundrum” presented by the flattening yield curve: the more he raised short-term rates (six times since June 2004, by 25 basis points on each occasion), the more already-low long-term rates fell. Markets don’t like it when the man who sets interest rates says he doesn’t understand them. The gloom deepened when new figures on February 18th showed that core producer-price inflation was at its highest in six years: could Mr Greenspan be behind the curve on inflation? Bond prices headed smartly down, as investors suspected that the Fed’s chairman might see a solution to both problems in lifting interest rates more smartly up.

The next blow fell on February 21st, when South Korea’s central bank, with most of its $200 billion of foreign reserves in dollars, said it planned to diversify away from the currency. Then, with Europe and America gripped by a cold wave, the price of a barrel of oil for April delivery rose back above $50. The scene was set for a sell-off, and on February 22nd the S&P 500 fell by 1.5%; the dollar lost 1.1% against the euro and the same against the yen; long-dated Treasuries continued to fall in price; oil futures rose still more and so did gold futures. Stockmarkets around the world, mostly in sympathy but with problems of their own, slid too.

The sweepers came in overnight to clear away the mess, and by the end of the week things looked better. South Korea’s central bank made it clear that it did not intend to sell dollar assets, just to buy fewer in future. Like other central banks, it has been quietly taking on fewer bonds from the American Treasury and more from other issuers for some time anyway. A mild increase, of 0.2%, in American core consumer prices (ie, not counting food and energy) in January calmed—perhaps temporarily—the previous week’s fears of renewed inflation. And a second take on last quarter's growth numbers—GDP grew by 3.8% at an annual pace, not 3.1% as first reported—confirmed that America's exports were doing rather better than earlier counts suggested. Share prices climbed part of the way back; the yield on Treasury long bonds dropped again; the dollar strengthened against both the euro and the yen; and oil and gold prices slipped back a bit.

How important was this week’s stumble? On the numbers, not very: this was no 1987-style rout. But there has been so little volatility in share prices in the past two years that any sharp change is unsettling. The VIX (or volatility index, alias the “investor fear gauge”) is a contract on the Chicago Board Options Exchange that tracks the implied volatility underlying the S&P 500. As the chart shows, volatility used to be high, touching 45 in August 2002 and then a lower peak of 34 early in 2003. Since then it has headed downwards. On February 22nd, the index jumped by 17.5%—and still only just cleared 13. Mark Hulbert, a columnist for MarketWatch, an online news service, points out that, if historical levels of volatility prevailed, we should expect the stockmarket to gain or lose 2% once a month or so. This week’s fall, though the largest in 21 months, was nothing to write home about.

Investment analysts have two theories on volatility and market performance, and unfortunately they contradict each other. One lot believes that low volatility suggests share prices will fall, as it means that investors are too complacent. They have been predicting a market meltdown for some time. The other group believes that low volatility suggests rising markets, as well-informed investors are rightly confident. The chart supports the latter: while the VIX has been having a near-death experience, share prices have headed up.

What matters most for share prices—or ought to—are the discounted value of companies’ future earnings and the relative attraction of other investments, both of which reflect the state of America’s and the world’s economy. The reason for this week’s wobble is that America’s two greatest vulnerabilities—its dependence on one set of foreigners to buy its bonds and on another to sell it oil—were exposed side by side. VIX or no VIX, not for the last time.

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

In the eye of the investor

Buttonwood
Feb 22nd 2005
From The Economist Global Agenda

Efficient markets are producing boring returns these days. Is investing in one of the least efficient—art—a better bet?

NOT long ago, Buttonwood dropped in on the auction rooms at Sotheby’s, on London’s New Bond Street. The room was full, the bidding brisk. It brought back the heady days of the late 1980s, when it seemed that anything in a frame could be sold for a fortune and all the upwardly-mobile talk was of investing’s newest asset class. That was before the art market collapsed in 1991, of course, and the world’s two most prestigious auction houses found themselves in court explaining how they happened to have fixed prices between them.

Those heady days are back, it seems, and the price of art is once again making headlines. The London season kicked off earlier this month with sales at Christie’s and Sotheby’s that raised more than £110m ($205m), well up on takings a year earlier. They built on strongly recovering sales throughout 2004. One highlight last year was the $3m paid for Maurizio Cattelan’s life-sized wax image of Pope John Paul being felled by a meteorite. From the ridiculous to the sublime, another was the sale of Picasso’s “Boy with a Pipe”, which, at $104m, displaced Van Gogh’s “Portrait of Dr Gachet” as the world’s most expensive work of auctioned art.

Financial types have not been slow to note that art is hot again. At least half a dozen investment funds devoted to art have recently been set up or are being mooted, and another six or so may emerge this year.

What is new this time around is that a host of analytical tools is making it possible to approach the art market with a degree of financial dispassion. The other novelty is that the vehicles are being constructed specifically along the lines of hedge funds, private-equity funds and mutual funds, allowing investors to buy shares in a pool of art. As Bruce Taub, the former Merrill Lynch investment banker who set up Fernwood Art Investments, points out, this is another step down the long highway of democratising investment by securitising assets (bundling them up and selling shares in the resulting pool). Just as mutual funds made shares more accessible to average investors, so these art funds have the potential to open up the world of painting and sculpture to those who do not have generations of farmland or oil money behind them.

It is easy to see why investors might be interested: art seems to offer a way to ginger up returns on traditional financial assets. Art outperformed the S&P 500 stunningly over the five years from 1999 to 2004, according to the Mei/Moses art index created by two professors from New York University’s Stern School of Business (see chart below). That gap dwindles to nothing over half a century, but what matters, says Michael Moses, is that returns on art are not correlated with returns on shares. Owning both art and stocks can reduce the volatility of a portfolio by up to 20% while returning about the same amount, he reckons.

Britain’s Barclays Capital tests this theory in detail in the latest edition of its Equity Gilt Study, published on February 22nd. Barclays looks at how art and other assets performed over different phases of the business cycle and over different periods of time, using data from 1970 onwards. Art does best when the economy is growing, and it survives the ravages of inflation better than most, it transpires. Art prices rise when bond returns slump, and move broadly in tandem with property and (less so) commodities. Because its price bounces around so much, investors have to hold art for at least 35 years to be certain of real annual returns. All in all, and subject to tonnes of caveats, the best portfolio mix for a pension-fund investor, in particular, with a horizon of ten years or more would include a 10% weighting in art.

Those caveats, though, are important. The art market is hugely “inefficient”—ie, you lose your shirt if you don’t know your way around. Art is diverse, hard to value, expensive to trade and often impossible to unload at a profit. Even the best indices say only so much about art as an investment: they do not include private sales or, usually, works that fail to find a buyer at auction.

The new art funds think they have got round some of those drawbacks. Philip Hoffman, who used to work for Christie’s and last year founded the Fine Art Fund, says that more than 80% of its purchases are made directly from owners and attract no commission. Because the fund is closed-ended (investors have to leave their capital in for ten years), it can buy art on the spot for cash at good prices and cannot be forced to sell at a loss to meet redemptions. He says that it has already bought and sold some works with a profit of more than 45%.

Fernwood’s Mr Taub admits the drawbacks exist but sees virtue in necessity. The inefficiencies in the art market mean that knowledgeable investors can get the sort of performance that they could hardly hope for in the relentlessly analysed equities market. One of the two funds that Fernwood will launch this spring will reflect the skills of classic collectors, spreading risk by buying art over eight asset categories and permitting investors to come and go at fixed intervals. The other will reflect the practices of art-market professionals, amassing a war chest for opportunistic buying.

Buttonwood is all for diversifying portfolios, and thinks art is at least as jolly as pork bellies. But there are a few worries. One is that no matter how sophisticated the portfolio analysis used, it is simply not possible to discount mathematically the chances that Damien Hirst’s polka dots are going to appeal more in 20 years than Jeff Koons’s dinner plates. And this market, with more than $1 trillion in assets, is virtually unhedgeable.

Another concern is that most of the funds will be more lightly regulated than ordinary retail vehicles. Since they seem to be requiring a minimum investment of $250,000 from people with liquid assets of at least $5m, this may be fair enough. But there is talk that the ante could be as little as $50,000 through “feeder” banks, and that looks more questionable.

History prompts a third reflection. In the 1980s, Japanese buyers dominated the market for Impressionist and Modern art. Their bidding spree was backed by what turned out to be largely illusory wealth created by a bubble in share and property prices at home. The bubble burst, a lot of art was unloaded quickly and Japan has yet to emerge convincingly from the recession that followed. The Japan of two decades ago was very different from the America and Britain de nos jours, but the level of asset prices here nowadays does provide food for thought. Van Gogh’s “Portrait of Dr Gachet” made headlines when a Japanese businessman bought it for $82.5m in 1990. Fewer recall that it changed hands some years later for one-eighth as much.

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Read more Buttonwood columns at www.economist.com/buttonwood

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

Worries about weapons, contd

Feb 24th 2005
From The Economist Global Agenda

America is angry that the European Union plans to lift an embargo on sales of weaponry to China, which in turn is angry that Japan and America have identified Taiwan as a joint security concern

DESPITE all the fence-mending that has taken place during George Bush’s tour of Europe, some transatlantic disagreements could not be prevented from spilling into the open. The most awkwardly visible of these is the European Union’s planned lifting of its embargo on arms sales to China, which the United States opposes. On Tuesday February 22nd, Mr Bush said that: “There is deep concern in our country that a transfer of weapons would be a transfer of technology to China which would change the balance of relations between China and Taiwan.” If the EU went ahead with the lifting of the ban, he added, it would have to “sell it” to America’s Congress, which, he suggested, might retaliate with restrictions on technology transfers to Europe.

The EU will lift its Chinese arms embargo, introduced after the 1989 Tiananmen Square massacre, later this year. This, the Union hopes, will open the door not only to profitable weapons sales but to closer trade relations in general with an emerging economic superpower. In an effort to assuage American concerns, the Europeans say they will limit the transfer of advanced technology by strengthening their “code of conduct” for arms sales; and that they will inform the Americans of any arms sales that would have been prohibited under the embargo. This week, France’s President Jacques Chirac said the embargo would be lifted under conditions that Europe and the United States “define together”.

That looks like wishful thinking. American opposition to lifting the ban runs deep. The Bush administration fears that it might enable the Chinese to develop the kind of sophisticated military systems used in Iraq by America and its closest allies. It also worries that these could be passed from China to rogue states or groups. Earlier this month, Congress voted overwhelmingly to condemn the EU’s planned lifting of the embargo. Some American politicians point out that the Chinese human-rights abuses that led to the embargo, such as the detention of dissidents, remain a serious worry. Others focus on regional security. Writing in the Wall Street Journal this week, Henry Hyde, chairman of the House of Representatives’ international-relations committee, said: “EU security policy toward China is on a collision course with America’s extensive security interests in Asia.”

At the centre of those interests lies Taiwan. Since the mid-1990s, China has been engaged in a rapid military build-up on the coast facing the island, which Beijing views as a rebellious province. This has increased tensions with America, which is legally committed (under the Taiwan Relations Act of 1979) to provide Taiwan with the means to defend itself. Although the Americans have recently appeared to play down this obligation, military confrontation with nuclear-armed China over Taiwan is all too possible. Some worry that all it would take is a miscalculation or misunderstanding.

In 1995 and 1996 China staged large-scale military manoeuvres in the Taiwan Strait, including firing unarmed missiles close to Taiwan's two main ports. China has fired no more missiles since, but has positioned large numbers of truck-mounted short-range ballistic missiles along the coast. It has also increased deployments of longer-range missiles that could target American bases in Japan or on the Pacific island of Guam, about 1,500 miles from Taiwan. And it is working to develop land-attack cruise missiles, which could be fired across the 100-mile strait and penetrate even the most sophisticated anti-missile defences that Taiwan is acquiring from America.

Under Bill Clinton, America stepped up contacts with the Taiwanese armed forces. In 2001, after Mr Bush became president, the Republican administration further strengthened these ties. Mr Bush also offered to sell Taiwan a huge package of advanced weaponry and help it buy submarines. Reports suggest that there are now more American military programmes in progress with Taiwan than with any other American ally.

Though Taiwan has run its own affairs for more than half a century, China continually threatens to retake it by force if it ever formally declares independence. Taiwan has enjoyed de facto independence since the end of the Chinese civil war in 1949, when Chiang Kai-shek’s Nationalist forces retreated to the island after being defeated on the mainland by Mao Zedong’s Communists. Nowadays, most western countries do not formally recognise Taiwan as an independent country, though in practice they deal with it as if it were.

A more assertive neighbour

Unlike America, Japan has stepped gingerly around the issue of Taiwan in recent years, which is why Beijing reacted so angrily to the new joint security arrangement between Japan and America that was announced on February 19th. The two called on China to be more open about its military affairs and, for the first time, Japan said it viewed Taiwan as a shared security concern with the United States—in the past they have preferred to waffle on about dealing with problems “in areas surrounding Japan”. China barked back that the statement violated its sovereignty. The kerfuffle has strained Beijing’s ties with Tokyo and Washington at a time when the three are supposed to be working together (along with South Korea and Russia) to curb North Korea’s nuclear ambitions.

Japan’s increased assertiveness is all the more unsettling for China because of Japan’s plans to reform its pacifist constitution and modernise the role of the Self-Defence Force (its de facto military). A relaxation of the constitution would make it easier in principle for Japan to participate in overseas military actions (it has already sent non-combat troops to Iraq). This could remove an obstacle to Japanese forces helping America protect Taiwan in the event of a Chinese attempt to invade the island.

China’s relations with Japan and America could deteriorate further in March when, at its next annual plenary meeting, China’s National People's Congress (the legislature) may enact an anti-secession law. This would give China, at least from its own perspective, a stronger legal basis for invading Taiwan. On Thursday, Taiwan's top policymaker on China, Joseph Wu, gave warning that enactment of the law could lead to the postponement of projects aimed at deepening economic integration with the mainland. China and Taiwan recently exchanged direct charter flights for the first time in 56 years, and Taiwan is considering easing barriers to investment in China by chipmakers, banks and chemicals firms. With this is mind, the Chinese might balk at implementing such provocative legislation. Reclaiming Taiwan by a process of slow economic assimilation is just as much a part of China’s long-term strategy as is military aggression.

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

Candid words on Russia's drift from democracy

Feb 24th 2005
From The Economist Global Agenda

Vladimir Putin and George Bush have had a “candid” discussion about American fears that the Russian leader is sliding back into his country's old, authoritarian ways. Despite differences on this, the two leaders agreed on other important issues—and emerged from the summit still apparently friends

BEFORE meeting Vladimir Putin in the Slovakian capital, Bratislava, on Thursday February 24th, George Bush had urged European Union leaders to join him in pressing Mr Putin to recommit himself to “democratic reform”, following several recent moves in which the Russian leader has seemed to be taking Russia back towards its authoritarian past. After their summit, the American president used the word “candid” to describe their discussion on this matter. As Mr Bush breezily reiterated to the assembled reporters the concerns he had expressed about the rule of law, press freedom and other democratic institutions in Russia, Mr Putin stood beside him, stony-faced.

Mr Putin insisted Russia would not slide back towards totalitarianism and defended his much-criticised decision to abolish direct elections for Russia's regional governors—arguing that he was not simply installing placemen, as many suspect. Candidates for governor would have to be approved by the elected regional assemblies, said Mr Putin, arguing that this was no less democratic than the electoral-college system used to choose American presidents.

The public expressions of concern over Mr Putin's authoritarian drift that Mr Bush made during his European tour this week have encouraged a challenge to the Russian leader from Mikhail Kasyanov, whom the president sacked as prime minister a year ago. Shortly before the Bratislava summit, Mr Kasyanov called a news conference in Moscow to attack Mr Putin's record on basic rights and signal that he intended to challenge him for the presidency in the 2008 elections, at the head of a pro-democracy coalition.

Mr Putin can hardly have welcomed Mr Bush's interference in Russian politics, so it would be unsurprising if the word “candid” was diplomatic language for angry exchanges between the two summit leaders. Nevertheless, despite their differences, they did reach a number of important agreements, including pledges to continue co-operating in the fight against terrorism and in preventing the spread of nuclear weapons. Mr Bush also reiterated his strong backing for Russia's entry to the World Trade Organisation (WTO), which may happen as soon as this year.

Perhaps most importantly, the two leaders seemed to end the summit still friends and still in agreement that it is in their countries' common interest to be allies instead of adversaries.
There was a time when a meeting between the American and Russian leaders was a summit of the world’s two great, rival powers. Nowadays, it is a meeting between the world’s one main power and a medium-sized country whose global importance is still fading but which still has plenty of scope for troublemaking—and a huge nuclear arsenal. After meeting Mr Putin for the first time, in June 2001, Mr Bush seemed optimistic both about the direction Russia would take under its new leader and the prospects for good relations between their two countries. A few months later, Mr Bush’s confidence seemed justified, when, in the wake of the September 11th attacks, Mr Putin offered America his support in defeating global terrorism.

This initial confidence has taken several knocks in the intervening four years. Hopes that Mr Putin would be a liberaliser and moderniser have been belied by his crushing of opposition voices and independent media in Russia; by the disregard for the rule of law that he has shown in destroying Yukos, an energy giant; by his brutal military campaign to try to crush separatism in Chechnya; and by the scrapping of elections for regional governors.

It is not just Mr Putin’s illiberal actions at home that have upset Mr Bush but his foreign policies too. The Russian leader sided with France and Germany in opposing the American-led war in Iraq. He is also helping Iran to build its civilian nuclear capabilities (which, America fears, could aid the Islamic republic’s clandestine atomic-weapons programme). And he is negotiating to sell advanced military hardware to Syria.

At the time of the Iraq invasion, Condoleezza Rice—now Mr Bush’s secretary of state, and a specialist in Russian affairs—urged the American president to punish France and ignore Germany but to forgive Russia for its opposition to the war. Now, though, Mr Bush is under growing pressure to toughen his line with the Russian leader. In America’s Senate last week, two of its most senior members, John McCain and Joe Lieberman, proposed expelling Russia from the Group of Eight (G8) over its record on democracy and human rights. In the latest edition of the Weekly Standard, an influential voice of Mr Bush’s key “neo-conservative” constituency, James Goldgeier and Michael McFaul argue that Mr Putin’s authoritarianism may be the worst setback so far to the wave of democratisation that has swept the globe since the 1970s, from Latin America to Asia. Thus, they said, it was imperative for Mr Bush to make plain his concerns at the summit.

But what carrots and sticks can the American president offer his Russian counterpart? Despite the calls in Washington for some sort of sanctions, Mr Bush is still backing Russia's bid to join the WTO because he believes that having to live by its rules will strengthen the rule of law in Russia. He is also unlikely to contemplate anything so drastic as expelling Russia from the G8. There is no point even thinking of promoting “regime change” in Russia: whatever the flaws in the country’s electoral process, and despite recent protests by pensioners, there is no doubt that Mr Putin is still genuinely popular among Russians. They share his belief in the need for a strong, centralised leadership and his suspicion of westerners’ motives for peddling democracy.

Mr Putin is supposedly obliged to stand down in 2008 but he is quite likely to seek some more or less legitimate reason to stay in power after then—Mr Kasyanov would face an enormous challenge in trying to unseat him.

Following the Reagan strategy

Messrs Goldgeier and McFaul say in their Weekly Standard paper that Mr Bush should follow the twin-track strategy that Ronald Reagan adopted in relations with the Soviet Union in the 1980s: simultaneously offering serious co-operation on strategic matters of interest to the Russians (eg, reaching new agreements on dismantling nuclear weapons and liberalising American trade with Russia in advance of its joining the WTO) while wielding the stick, selectively, to prod Russia back towards democracy (eg, persuading other members of Community of Democracies to downgrade Russia’s status in the forum; or continuing to draw former Russian satellites, such as Ukraine and Georgia, into the democratic fold).

Mr Bush realises that such a strategy would be much more effective if the EU joined in. Pressure from the Union has helped to foster democracy in many of the former Russian satellites, a number of which have already joined the club. That said, EU membership for Russia is a very distant prospect indeed, so it would hardly be plausible to dangle it in front of Mr Putin. Furthermore, Mr Putin’s bargaining power in his relations with the EU is greatly strengthened by his having something Europe craves—plentiful oil and gas—and by his having things that terrorists and rogue states crave—nuclear know-how and materials.

However, what Mr Putin craves is a seat at the world’s top tables, and due respect for him and his country from the West’s main powers. Thus if America and Europe applied the right mix of incentives and pressures—and worked together in applying them, instead of letting Mr Putin play them off against each other, as he has often done—then there should be some scope for constraining his autocratic tendencies, if not converting him into a genuine born-again democrat.

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

The best medicine?

Feb 22nd 2005
From The Economist Global Agenda

Novartis has made two acquisitions that propel it to the top position among the world's generic drugmakers. Has the Swiss pharmaceutical giant found the best way to hedge against the problems that beset makers of branded drugs? Or should it stick to making patented blockbusters?

THE world’s big pharmaceutical companies are not generally fans of generic drugmakers. These firms wait around for patents to expire on money-spinning blockbuster drugs and manufacture copies that sell at a fraction of the price of the originals, unburdened as they are with the huge costs of research and development (R&D) borne by the makers of branded drugs. Novartis, the world's sixth-largest drug company, is not so stand-offish. On Monday February 21st, the Swiss drug giant announced that it would pay $8.3 billion to acquire Germany's second-largest generic drug firm, Hexal, and a 67.7% stake in Eon Laboratories, an affiliate that is one of America's biggest generic suppliers. The deal moves Novartis above Teva Pharmaceutical Industries, an Israeli firm, to become the world's leading maker of generic drugs through its Sandoz division. Novartis hopes that its foray into generics will insulate it from the problems faced by the rest of the world's leading drug companies.

Recent results suggest that most big drug companies are in relatively good shape at the moment, though this disguises looming problems. Big Pharma relies on blockbuster drugs for its profits but the supply is dwindling. Drug pipelines everywhere are looking near-empty. In 2002, America's Food and Drug Administration approved just 18 new drugs, though in 2004 the number increased to 34. This compares with an average of 59 new drugs a year launched by big companies between 1998 and 2002. These firms spend up to 20% of their revenues on R&D but the time needed to develop drugs is getting longer—and 40% of products do not progress all the way through the development process. Moreover, less than a third of new drugs these days are first or second in their class and it is hard to charge blockbuster prices for the mediocre medications and line extensions that make up the rest of the new products.

Adding to the gloom is the risk that blockbuster drugs sometimes cause more harm than good to both patient and drug company. Merck, an American drug giant, suffered terribly after the withdrawal last September of Vioxx. It faces the prospect of billions of dollars of claims after studies concluded that taking the painkiller increased the risk of heart problems in some patients. In June, Eliot Spitzer, New York's business-bashing attorney-general, launched a lawsuit against GlaxoSmithKline (GSK) for allegedly suppressing data that linked one of its antidepressants to heightened suicide risks for children. Pfizer's Celebrex, which uses the same COX-2 inhibitors as Vioxx, was last week criticised by American regulators for increasing the risk of heart problems. But the drug will stay on the market as it was concluded that the product did more good than harm.

Since 1990, 14 drugs have been withdrawn from the American market, which accounts for 45% of the world’s $378 billion retail drug sales per year, according to Public Citizen, a consumer group. Of those, only Lotronex, a treatment for irritable-bowel syndrome in women, has been re-introduced.

As patents expire, pharmaceutical giants can find themselves in a vulnerable position. In August 2000, a ruling cut three years off the patent for Prozac, Eli Lilly's hugely successful antidepressant, causing the company's shares to drop by 30% in one day. Another patent ruling on Zyprexa, the firm's current bestseller with sales of over $4 billion last year, is expected shortly. Some drug companies have struck back through the courts. In America, the lapsing of patents can be delayed automatically if drugmakers sue rival generic firms. Patent rules can be bent in a variety of ways to delay generic drugmakers from bringing previously patent-protected products to market. Some big drug firms are also suspected of colluding with generic rivals—ie, paying them—to delay bringing non-branded products to market. A Department of Justice investigation is currently under way.

Novartis is embracing a generic-drug market that has ballooned in the past few years as health-care providers have sought to put a brake on the ever-rising costs of treatment. The generic market will be worth some $100 billion a year by 2010, according to Daniel Vasella, Novartis's chief executive, and he has said that he wants a 10% slice. Mr Vasella claims that big buyers, such as Wal-Mart in America and health-care providers in emerging markets, want to be able to buy a full range of patented and generic products from one supplier.

Novartis is not the only big firm making moves into generic drugmaking. Last year, Pfizer launched a generic version of one of its epilepsy medicines to take some sales from non-branded competition. Sanofi-Aventis has said that it will move further into the generic business, and GSK has licensed some products with expiring patents to generic companies for a share of the profits. On the other hand, Roche, a Swiss rival to Novartis, has said that it sees no future in entering the generics market.

The business is certainly a tough one. If several firms choose to copy a drug, prices soon tumble. The best-placed firms are those with the lowest costs, and at present these are mainly in India. After this week’s deal, some 15% of Novartis's revenues will come from generics but profits from that segment could be slender compared with those from blockbusters. Novartis may be wise to seek a measure of stability in an industry beset with ups and downs, but it could experience some unwelcome side-effects.

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

On the trail

FINANCE & ECONOMICS

Banking for Native Americans

Feb 17th 2005 COMANCHE COUNTY, OKLAHOMA
From The Economist print edition

The market in financial services for Native Americans is growing, thanks not least to Indian-owned banks

THE heart of the Comanche Indian nation sits on a hilltop next to Interstate 44 in south-central Oklahoma. From here the 12,000-member tribe, self-proclaimed “Lords of the Plains”, oversees businesses that include four casinos, a funeral home, a housing authority, a water park and a museum. The tribal budget has ballooned to $11m this year, thanks largely to money from gambling. Now there are plans for a 5,000-seat convention hall and a hotel. Despite past discrimination from some local bankers, the Comanche leadership—its chairman has a graduate degree from Harvard and the chief financial officer ran a defence-contracting business—is talking with institutions including Merrill Lynch, Lehman Brothers, Bank of America and Bank of Oklahoma about finance for the project.

Changes are afoot in Indian country, and financial institutions are taking notice. Recently Wells Fargo and J.P. Morgan Chase were among the sponsors of “Res 2005” in Las Vegas, an annual trade fair focused on economic development for Native Americans. But despite the efforts of big banks such as Wells Fargo, which has approved commercial loans and credit lines of about $1.5 billion, as well as mortgages, and Washington Mutual, which is in the mortgage business, tribal leaders contend that most of the nation's 2.4m Native Americans remain underserved. Hence the trend toward native-owned banks.

Robert Williams, an expert on tribal law at the University of Arizona, says that Indian country is increasingly divided between the haves (the minority of tribes, like the Comanche, with successful gaming ventures) and have-nots (everyone else). Generally, Native Americans are much poorer and less familiar with banking services than the average American. They are more likely to be denied conventional home-purchase loans. Tribal banks are stepping in to plug the gaps.

The North American Native Bankers Association, a trade body, counts 19 banks nationwide that are owned by tribes or by individual Native Americans. Of these, 11 are in Oklahoma, a state with a rich mix of Indian groups but without huge reservations. Most of the banks are small, with average assets of only $79m, but several are growing fast, and serve not only Indians but other Americans too.

One tribal bank gaining national attention is Bank 2, based in Oklahoma City. Wholly owned by the 40,000-member Chickasaw tribe and with $62m in assets (on September 30th 2004), it is a growing player in the national market for mortgage lending to Indians, thanks in part to effective use of a federal home-loan guarantee programme known as Section 184 and a partnership with Fannie Mae, one of America's giant mortgage companies. About half of Bank 2's customers are Indians, and it does business with more than 80 tribes, including the Comanche. So far it has made no loans tied to casinos. Ross Hill, its president, and J.D. Colbert, who runs its Native American business, both former Federal Reserve officials, often criss-cross the country, speaking not only to prospective customers but also to other tribes about starting their own banks.

In Denver, a coalition of 18 Indian tribes, two Alaskan native groups and a tribal insurance consortium runs a venture called Native American Bank. The bank, which has assets of $52m, focuses on underserved Indian communities in remote places. Its president, John Beirise, a non-Indian formerly with Continental Bank in Chicago and Mercantile Bank in St Louis, says that one of his unexpected challenges has been “the pervasiveness of politics” in Native American communities and the way it slows change.

Indeed, some say that tribal politics and legal issues hinder Indians' economic advance more than a lack of banks does. “Banks are an effect, not a cause, of economic development,” argues Joe Kalt, co-director of a Harvard programme on Indian economies. Questions of land trust and sovereignty complicate business dealings with tribes, although a growing number of groups are adopting the uniform commercial code and granting waivers that allow banks and other businesses to recoup damages should things go wrong.

Steve Stallings, Wells Fargo's senior executive for native banking, says on the other hand that dealing with tribes is “no different from doing business with certain kinds of regulated industries, doing international business.” Even so, the lending system gets clogged. Mr Stallings estimates he could double his bank's volume of Indian mortgage lending if trust issues were resolved more easily.

Even non-casino tribes are getting more sophisticated about the political and legal reforms needed to get business and finance moving. “They're like little developing countries,” says Mr Kalt. Apparently, some people may even see them as models: he was recently invited to Poland, a country undergoing an economic transition of its own, to lecture on American Indian constitutions.

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

A martyr for the Amazon

LATIN AMERICA

Dorothy Stang

Feb 17th 2005 SÃO PAULO
From The Economist print edition

The land battles behind a murder

“DO YOU know what a sobbing monkey sounds like?” Dorothy Stang once demanded of a group of state legislators. She knew, because she had heard monkeys screaming as their habitat was being burnt down. Sister Dorothy, an American nun, had befriended the forest, its wildlife and, especially, poor migrants eking out a living in the Brazilian Amazon. She thus made enemies of loggers and land grabbers, for whom nature and the poor are obstacles. On February 12th she was murdered in Anapu, a district along the Trans-Amazon highway in Pará state where she had worked for 20 years.

Her death has provoked as much shock and grief as the slaying in 1988 of Chico Mendes, who led a struggle by rubber tappers to be able to harvest the forest without destroying it. Yet the Amazon produces an incessant flow of martyrs, most quickly forgotten. Of the 1,349 deaths in land conflicts in Brazil between 1985 and 2003, more than a third were in Pará, according to the Comissão Pastoral da Terra, a group linked to the Catholic Church.

Behind the violence is a toxic mixture: land is cheap but potentially valuable, its ownership uncertain and the state impotent. In Anapu, for example, in the 1970s the then-military government, eager to develop the Amazon, doled out land-use rights. Most did nothing productive, so the government reclaimed the land. In the 1990s Anapu attracted poor migrants, some fleeing land wars in southern Pará. These became Sister Dorothy's flock. She campaigned to obtain land for them and preached that earning a livelihood and conserving the forest could be reconciled.

They were making progress. Some 400 families had settled on land that INCRA, the federal land-reform agency, has earmarked for “sustainable development projects”, in which 80% of the land would stay as forest. But the former beneficiaries, or people who thought they had bought the rights from them, continued to covet an area that is flat, stocked with high-value timber and close to a main road. There were at least ten disputes over land ownership in the settlement where two men shot Sister Dorothy.

Stung by accusations that it had ignored death threats against her, the federal government promised to punish the killers (a rare event) and sent 2,000 troops to the area. But that does not amount to the steady rule of law needed to curb violence and rampant deforestation. Federal and state governments lack both the determination and the resources to supply this. Roberto Smeraldi, of the Brazilian branch of Friends of the Earth, detects “a lot of goodwill” but “very little” action in the two years since Luiz Inácio Lula da Silva became Brazil's president.
The government roused itself late last year, suspending logging licences and demanding that landholders prove their title, an attempt to bring order to the Amazon's Wild-West property market. Loggers and land-grabbers mobilised, blocking a main road and threatening to poison rivers. This month the government retreated, reinstating the licences and lifting the deadline for re-registering property.

But Sister Dorothy's murder may have been, in part, a backlash against progress. Two “extractive reserves” of the sort championed by Chico Mendes were recently created near Anapu, one of them the “largest area of sustainable use on the planet”, says Nilo D'Avila of Greenpeace, an NGO. And land reform is at last taking hold in Anapu. Land-grabbers “were feeling cornered,” thinks Ana Paula Santos Souza of Fundação Viver, Produzir e Preservar, an NGO in Pará. Sister Dorothy's work may yet outlive her.

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

The new money men

BUSINESS SPECIAL

Hedge funds

Feb 17th 2005 NEW YORK
From The Economist print edition

Investors have made a trillion-dollar bet that hedge funds will bring them rich returns. But will they?

IT SEEMS an unlikely trend. In recent years the fund-management industry has been mauled for its excessive and opaque fees, deceptive marketing and rampant conflicts of interest. At the same time, however, not only has the industry flourished, but it has done so in its costliest, highest-leveraged and least transparent segment: hedge funds. Instead of shunning such unregulated funds, investors have been falling over themselves to grab a piece of the action.

Whereas the size of the mutual-fund industry in terms of assets and offerings has merely returned to its level of 2000, hedge funds have doubled in size and number, according to Hedge Fund Research, a consultancy (see chart 1). In 2004 alone around 400 new hedge funds were created, bringing the known total (many others escape scrutiny) of 7,000 into rough parity with the number of mutual funds.

The start-up fever is especially acute in the many hedge-villes dotting Greenwich, Darien, Rowayton and other lovely, affluent towns in southern Connecticut. New funds begin daily, some in spare rooms in someone's home, others in waterfront offices with parking for yachts. In Manhattan, midtown office towers serve as hedge-fund warehouses. Tiny windowless offices house unknown operators trying to build a track record. Full-floor suites filled with lavish artwork, gyms and kitchens that bubble over with superb (and healthy) food are the domain of successful funds. The same is true in Boston, San Francisco and London.

While there have been numerous pronouncements that the tide will soon turn, nothing suggests this is imminent. Quite the opposite. Initially sold only to wealthy individuals, then the family offices of wealthy individuals, increasingly hedge funds are now being sought out by large institutions. Foundations and endowments, the least regulated component of the institutional world, came first; company and public pensions are now piling in. The State of New York announced in January that it might put some of its $88 billion pension fund into hedge funds, joining those managing the pension funds of teachers in Texas and Ohio as well as public employees in Chicago and California. If institutions merely meet the amount they currently intend to invest in hedge funds, another $250 billion will be flowing into the industry, according to Greenwich Associates, a consultancy.

What might hold them back is not desire, but capacity. Such is the popularity of hedge funds that many of the largest are closed or, as they say in the trade, “soft-closed”, meaning that entry requires special pleading—and many plead. Caxton Associates, Moore Capital, Renaissance Technologies, SAC Capital Advisors, Maverick Capital, and Highbridge Capital Management, all carrying excellent records and managing billions of dollars, are considered too inaccessible to be included in a Standard & Poor's index of investible funds. Unable to get into established winners, investors are pouring money into managers with no track record but good pedigrees. Last November, Eric Mindich, formerly of Goldman Sachs, raised $3 billion for a new fund. His old partner, Dinakar Singh, will open an equally big fund this month. It is widely believed that either one could have raised two or three times as much money.

Given the enthusiasm, at the very least it should be clear what all these customers are buying. In fact, that is a surprisingly hard question. Unlike mutual funds, which are strictly defined under America's 1940 Investment Act, hedge funds operate under exemptions to the law. Theoretically that limits their audience to sophisticated and affluent investors. In reality, clever lawyers, lots of money and astute marketing have expanded the exemption so that they can be sold to anyone, do almost anything and keep whatever they do, and who they do it for, a secret.

Some hedge funds actually hedge, meaning they attempt to invest in a manner that offsets adverse market movements. But since they also want to capture returns, the hedge is never complete and many funds do not even bother (see chart 2). Responding to institutional demand, notes Greenwich Associates, some new hedge funds restrict themselves to holding long positions in common stocks, just like ordinary mutual funds or, for that matter, traditional accounts managed by brokers on behalf of clients.

Hedge funds have some common characteristics. They are usually pooled investments (like mutual funds) structured as private partnerships (unlike mutual funds). Many carry substantial leverage and are quite rigid about the flow of money from clients. Initial “lock-ups” for as long as four or five years are not uncommon; rarely is money allowed to come in or go out more than monthly. This restriction allows hedge funds to take positions in the most illiquid corners of the market including options, futures, derivatives, and unusually structured securities.

Where's the money?

Increasingly, the large funds that have succeeded flit from one area to another. Last year and the year before, when lots of companies were coming out of bankruptcy and the economy was improving, successful funds dominated the market for distressed debt. Since hedge funds can account for more than half the daily volume on the New York Stock Exchange and can have an equally large presence in every other financial market, where they might be today is anyone's guess.

Investors value this ability to embrace opportunities, magnify returns through leverage, and take difficult positions because of a stable base of assets. But they have not always been so keen. Mutual funds, if structured correctly, can have the same characteristics (though there are some liquidity restrictions). A big reason why mutual funds approach investing differently is that when they tried to take a flexible approach in the mid-1990s they were torn apart by consultants and customers for so-called “style drift”. Complaints reached a crescendo in 1996 when Jeffrey Vinik was hounded out of running what was then the single largest fund, Fidelity's Magellan, for moving from stock to bonds just a bit before the investment cycle turned.

Under pressure from the press and pension consultants, most (but not all) mutual funds began to follow narrow pre-designated benchmarks that were tightly limited to a class of investing, such as shares of companies included in the S&P 500 index, or an even narrower subset, for example a mid-cap benchmark. That helped performance in the soaring equity markets at the end of the last decade, but also contributed to their wretched results during the bear market of 2000 to 2002. It also undermined mutual-fund fee structures. Customers realised that much of the funds' performance simply mimicked the relevant index. Many chose to invest in index funds instead, because these charge far smaller management fees. (Perhaps appropriately, Mr Vinik, who has been something of a genius in identifying trends, reincarnated himself as an outstanding hedge-fund manager.)

The bear market prompted many investors to think it might be good to have money with an investment manager who knows when to invest and, ideally, where to invest, and works within a format that allows him to do so. Relatively good returns, meaning better performance than the market, has become a bit less important than absolute returns (ie, not losing money, especially when the market falls). Mr Vinik's move into bonds would now be considered within the context of astute risk control. Institutions aspire to hire managers who can provide high “alpha”, meaning risk-adjusted returns. But it may amount to much the same thing—making money and not losing it.

A clever mutual-fund manager could, of course, pursue this approach in the new environment. But it has become much more sensible to start a hedge fund. Why? Because, to cite a phrase of the moment, a hedge fund is “a compensation scheme masquerading as an asset class”. Whereas the average mutual fund charges 1% or 2% of assets, and smart buyers can pay a fraction of that, hedge funds charge 1% or 2% plus a big slug of profits, typically 20%, but often more. One well-known, but secretive, fund based on Long Island is reputed to charge 5% of assets plus 44% of profits. Another leading fund charges no maintenance fee but 50% of profits. An industry consultant says he has seen a new fund that will receive 80% of any excess above a guaranteed return linked to a well-known index. Even these huge costs do not really reflect what investors pay, since most hedge funds agree to conduct business through a prime broker, which extracts fees through stock- and bond-lending charges, as well as trading costs based on the fund's net asset value.

The benefits of this kind of relationship for a manager and for the Wall Street firms are obvious. In a report published in 2003, Bernstein Research reckoned that the size of the hedge-fund industry was one-sixth that of the mutual-fund industry, but already provided more revenues. If true, the situation is now even more dramatic. People attracted to the idea of working in the investment world for the money (a sizeable percentage) cannot shift into hedge funds fast enough. Nor can the investment banks, which are losing good employees but enjoy the solace that many become exceedingly good customers.

To bank or to hedge?

Institutional Investor's obsessively read list of most-highly-paid hedge-fund managers starts with familiar names (George Soros: $750m), but 16 others made at least $100m in 2003. As impressive as the earnings are at the top, they are even more striking viewed from the bottom. Business-school graduates note that a job at investment banks often lasts only until the first bump in the market. Salaries are high, but pressure from those above you is higher still and there is constant carping about costs. A bad year at a hedge fund may result in unemployment, but a good year means good compensation amid excellent resources: costly data terminals and abundant creature comforts, such as fresh fruit, flowers and parties.

Banks might gripe about these comparisons were they not battling so hard for hedge-fund business. At a time when mutual and pension funds have become ever more reluctant to pay the traditional five cents a share for trades, hedge funds pay up to four times that amount if in the process they can receive good ideas or particularly effective execution. This makes sense because the hedge fund's compensation is tied to outperformance, not efficiency.

And trading is just the beginning for banks. Hedge funds want hot issues, structured derivatives, margin, stock-lending for short sales and the equivalent for fixed-income, clearing and settlement, customer support and marketing. The money coming from all these transactions and fees is enormous. Svilen Ivanov of the Boston Consulting Group reckons hedge funds received $45 billion in revenues last year, of which one-third to half was profits. Although there is some overlap in the numbers, investment banks collected $15 billion either directly from hedge funds or because of them, producing $6 billion in profits. For individual firms, hedge funds were critical to last year's performance. They produced one-quarter of Goldman Sachs's profits, estimates Guy Moszkowski of Merrill Lynch, and only a slightly smaller slug of Morgan Stanley's returns.

Performing for whom?

Oddly, given the spectacular wealth that hedge funds produce for their own managers and for investment firms, they do not, overall, seem to produce much wealth for clients. Certainly the highest-performing funds have produced breathtaking returns. Renaissance has earned almost 40% annually for more than a decade, SAC in excess of 30%. There are many others with excellent records. But there are good reasons to believe that these are rare exceptions.
Whatever the merits of high fees—the ability to attract talent, a performance-oriented incentive structure that discourages bloat—they are almost certainly exceeded by the problems.

The most evident is the drag which high fees put on performance. Historically, an investor able to outperform the broad market by two percentage points annually has been considered something of a genius. But that barely covers the maintenance of the average hedge fund. High fees tied to performance also encourage hedge funds to take big risks. Winners might just be lucky and their luck may be offset by the losses of others. A third problem caused by high fees is attrition. Successful managers become rich, possibly too rich to care about work, in just a few years. Managers that disappoint are quickly put out of business by angry clients, or they may shut down voluntarily because earning a performance bonus will require catching up to a prior “high-water mark” first. Last year around 270 funds closed. The available information on hedge funds suggests they typically last only a few years.

That adds complexity to the task of selecting a fund that will do well in the future. It also plays havoc with any indices used to track hedge-fund performance. A paper* published last November by Burton Malkiel, a professor at Princeton, and Atanu Saha, of the Analysis Group, a consultancy, presents a frightening picture of what is left out of the most commonly cited benchmarks. Hedge funds report their performance only when they want to, and consequently stop reporting in the months that they are collapsing. Unsuccessful hedge funds may never report. Clever hedge-fund organisers may seed many funds, operate them for a few years, then announce in public only the most successful ones, “backfilling” the performance data from prior periods—ie, projecting what the fund might have earned before it existed if it had pursued the same strategy. Worst of all, bad funds tend to disappear along with their records. Only one-quarter of the 600 funds that reported data in 1996 still exist. Recalculating results, Mr Malkiel concludes that for all their vaunted talent, hedge funds perform less well than cheaper mutual funds.

A second paper, in the Journal of Investment Management**, concludes that, because of their double fee structure, hedge funds of funds (ie, funds that buy into dozens of other hedge funds, following the “fund of funds” approach that has become common in the private-equity market) perform worse than individual hedge funds. Yet such funds have become popular, especially with investment consultants, because they are seen as diversifying risk.

And even this somewhat patchy record may overstate the potential for hedge-fund success. Hedge-fund returns, relative to market returns, have been fading. This may be true for a number of reasons, including low interest rates (hedge funds often hold big cash balances while they wait for bright ideas); the result of so many hedge funds getting into the business and, often, pursuing the same strategies; the possibility that the supply of hedge funds has outstripped the talent to run them; or simple chance. “Why should the appeal of rich fees be limited to smart managers?” asks Howard Marks of Oaktree Management, a hedge-fund adviser in Los Angeles.

Nor do hedge funds represent a fresh start for their scandal-tainted industry. A small fund named Canary Capital was at the heart of the late-trading, market-timing scandal. Other funds have been prosecuted for allocating fees to brokers who never executed trades; violating fiduciary obligations by shifting good investments to personal accounts; and using funds for personal expenses. All of these are hard for outsiders to detect.

Dog for sale, $10m

The largest area of transgression, and one that is almost certain to arise more in the future, is the incorrect valuation of securities held in funds. All securities are, to some degree, hard to price. The less liquid they are, the harder this becomes and hedge funds specialise in illiquid securities. Even if a hedge fund wants to value its portfolio correctly, it could make mistakes. If it had other motives—and because compensation is a multiple of returns this cannot be ruled out—disaster could follow.

The SEC has brought 51 cases (11% of all its enforcement actions) against hedge funds, claiming damages in excess of $1 billion. Known prosecutions, as well as others that have yet to be disclosed, encompass around 400 funds. In only three of these cases were investors made whole, a result the SEC blames in part on the fact that it is able to investigate a fund only in response to receipt of a complaint.

That is due to change next year. Last December, William Donaldson, chairman of the SEC, pushed through new regulations for hedge funds. Funds will have to register, meaning they will have to acknowledge their existence and submit to inspection by the SEC of their books and records. It would be no surprise if a series of announcements were to follow about hedge funds repricing their assets downwards and also, perhaps, reviewing how much they charge for compensation (the details of performance bonuses are complex and there is an assumption that they are mostly resolved in favour of managers).

Whether the new rules will act as a deterrent to abuses by managers or, more importantly, whether they will do anything to slow the industry's momentum remains to be seen. The bigger it grows, the more the boundaries between hedge funds and traditional asset management are blurring. But on current trends, hedge funds' second trillion dollars of assets will arrive even faster than the first.

* “Hedge funds: Risk and Return”. Working paper.
** “Fees on Fees in Funds of Funds” by Stephen J. Brown, William N. Goetzmann and Bing Liang.
Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.

Finding something to crow about

FINANCE & ECONOMICS

Asian equities

Feb 17th 2005 HONG KONG
From The Economist print edition

Usually, investors look to Asia for growth. Time to think of income

FOR investors in Asian shares, the stars have been aligned auspiciously in the past two years. Traditionally regarded as a play on world economic growth, the region's equities have benefited from strong global expansion, rapid corporate restructuring after the technology bubble and, latterly, recovery from the SARS outbreak. As profits have soared, so have stockmarkets. The MSCI Asia (ex-Japan) index rose by over 40% in 2003 and by 14% last year.

February 11th, however, was the first day of the year of the rooster—a bird that can jump but not fly, as CLSA, a Hong Kong broker, notes. Stockmarket forecasts have lost altitude, not without reason. With global growth softening and interest rates rising, notably in America, investors' appetite for risk may at last be fading. Asian exporters face slower growth abroad, high raw-material prices, growing competition from China and diminishing returns from cost cutting. “Asia is the manufacturing centre of the world and manufacturers enjoy almost no pricing power at all,” says Eddie Wong, chief Asian equity strategist at ABN Amro, a Dutch bank.

According to Markus Rösgen, Citigroup's regional head of strategy research, this means that Asian companies' earnings will grow by less than 3% this year, after 45% in 2004. Expecting weaker profits at technology companies in particular, he would not be surprised if earnings fell by 10-15%. He is not the only pessimist. Institutional funds have already grown warier. A survey by Merrill Lynch of regional money managers, published on February 15th, found that the percentage who think the case for owning Asian equities is strengthening fell from 39% in December to 33% in January and 29% in February.

In such an environment, what might coax investors into parting with their money? Malaysia might: a revaluation of the ringgit, which some think possible, would boost the foreign-currency value of domestic assets. In Indonesia, there are high hopes that the new president, Susilo Bambang Yudhoyono, will crack down on corruption and encourage foreign direct investment. The Thai stockmarket, last year's laggard, should benefit from the overwhelming re-election of free-spending, business-friendly Thaksin Shinawatra. By contrast, China may be best avoided while it struggles to control its runaway growth; Taiwan is too exposed to a faltering technology industry; and South Korea remains mired in credit-card debt.

For industries rather than countries, manufacturers, particularly exporters, are likely to stay squeezed between slowing revenues and rising costs. Energy and mining stocks are exposed to China's appetite for commodities, which may slow as the economy cools. For technology firms, the overproduction of semiconductors, flat screens and computers does not bode well. However, industries focused on domestic consumers, such as banks, utilities, telecoms and retailers should fare better. And Asian shares still look cheap: using prospective 2005 earnings, CSFB's Stewart Paterson puts their price-earnings ratio at 12, against a consensus of 16 for Japan and America and 15 for Europe.

Although Asia may not offer investors supercharged earnings growth, it can certainly provide income. Since the 1997-98 financial crisis, companies have slashed debt and cut reckless overinvestment. Average gearing has fallen sharply, to a 25-year low, notes Mr Rösgen, while the ratio of capital spending to sales has fallen by half, to 8%. Nor are managers blowing the cash on mergers, on which only $10 billion was spent last year. Instead, they are paying it to shareholders. CLSA calculates that dividends grew by 25% a year between 1998 and 2004 (see chart). Indeed, Asian equities now boast a higher yield, 3.3%, than European shares (3.2%) or American ones (2.1%). “This is further proof of the transformation of Asian attitudes to shareholders. Asia is a lot less risky than it used to be,” says Percival Stanion, head of asset allocation at Baring Asset Management in London.

Tighter capital discipline should make Asia a safer, more stable place for investors and, in the short run, a more rewarding one. In the longer run, Asia ought to regain some of its appetite for risk. Its growth prospects, after all, are still remarkable—even if the rooster stays earthbound.

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

A wise investment?

LEADERS

Hedge funds

Feb 17th 2005
From The Economist print edition

Investors need to become much more sceptical about hedge funds

WHEN an opaque investment fund that does no hedging (in other words, it takes no positions designed to offset other bets) calls itself a hedge fund, charges the sky-high fees of a typical hedge fund and has wannabe customers banging on its door, it is time to ask: what is going on?

The rise of hedge funds is not new. But the funds continue to grow strongly, attracting billions in new money and piquing the interest of investors who, until recently, would never have considered them. Among the new customers are some of America's biggest public pension funds, whose beneficiaries almost certainly have no idea that some of their savings are about to be poured into such murky investments.

As more and more hedge funds are created across a widening range of investment styles, so they are having an ever greater impact on the structure and efficiency of capital markets. With little outside scrutiny, hedge funds can move vast sums at speed as they seek out opportunities.

That can be useful. Authoritative observers, including Alan Greenspan, chairman of the Federal Reserve, credit hedge funds with adding a layer of robustness to the financial system. It is true that hedge funds' willingness to take on risk means that they have been a helpful influence on some bankruptcy proceedings and emergency refinancings. They have also brought much-needed liquidity to neglected corners of financial markets. And their habit of selling against unwarranted price rises can act as a restraint on bouts of irrational exuberance.

But hedge funds can also be risky. The imminent collapse in 1998 of Long-Term Capital Management, a big hedge fund, compelled the New York Fed to step in (perhaps wrongly) with a rescue plan to stop a cascade of other failures. Since then, the hedge-fund industry has mushroomed and become more controversial. Are the high fees which hedge funds charge really justified by performance better than that offered by conventional funds? Can they really protect customers from losing money when markets are falling, as some claim? And, perhaps most pressing, is it right that hedge funds, once sold only to the very wealthy and financially aware, are increasingly being touted as safe for relatively unsophisticated investors?

The answers to these questions are respectively: no; mostly no; and a definite no. Hedge funds have lately been receiving more attention from regulators, and rightly so. Beginning next year, America's Securities Exchange Commission (SEC) will require the management companies of all hedge funds with American customers to register their existence—although not yet details about the actual funds themselves. This newspaper was against the idea of registration when it was first mooted last year. Given how the industry has developed, however, this relatively light-touch form of regulation now seems appropriate. Knowing how many funds there are and who owns them is useful information that is currently impossible to obtain.

But should regulators go much further? Although there is a stronger case today than there was a year ago for more regulatory intervention, on balance it is not strong enough to justify reams of new rules. Tie hedge funds up in too much red tape and they will lose the very characteristics that have made them useful as well as popular. And it is not as if the funds are entirely unobserved. They are subject to anti-fraud law. Moreover, the banks that lend to them and the brokers that allow them to leverage their trading positions all have a keen interest in knowing their customers.

Keeping watch

Such a hands-off approach will look awfully complacent when a big hedge fund blows up, or when some hedge-fund scandal hurts small investors. But strict regulation gives no assurance that those things will not happen. More onerous rules could lull investors to the risks of hedge funds rather than keep them wide awake. Nevertheless, the industry should be watched with special care. It is a cliché to say that the best form of investor protection is caveat emptor; it is also true. In the case of hedge funds the maxim applies with special force. If they took the trouble to inform themselves, many investors would conclude that hedge funds are not for them.

Investors of all sorts, you have been warned. If you want to take your chances with hedge funds, understand what you are doing—and, if you are a pension-fund trustee, do it with liability insurance tucked into your back pocket. All investments need to be watched. Right now, it seems, hedge funds need to be watched more carefully than most.

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

The gatekeeper

FINANCE & ECONOMICS

Italian banks and the EU

Feb 17th 2005 PARIS
From The Economist print edition

The European Commission tells Italy to open its banking market

EUROPE'S much-promised single market in financial services is taking a long time to create. It might never be finished, indeed, without a fight or two. So it may be a good sign that, after only a couple of months in his job, Charlie McCreevy, the European Union's commissioner for the internal market, is squabbling with Antonio Fazio, governor of the Bank of Italy.

On February 8th Mr McCreevy wrote to Mr Fazio, asking him “to correct the impression” that he is trying to stop foreigners buying their way into Italy's banking market. Several newspapers had reported an unofficial deal between Mr Fazio and the Italian government to block foreign takeovers. Before his official reply was acknowledged on February 17th, the governor had responded indirectly, in a speech last weekend. Foreigners, he said, own on average 17% of the capital of Italy's four largest banks, compared with 7% of Germany's top four and 3% of France's.

That's not the point, says Oliver Drewes, a spokesman for Mr McCreevy: “We are talking about foreigners taking a controlling stake in Italian banks.” According to Italian banking law, the purchase of any more than 5% requires Mr Fazio's nod. On his watch, which began in 1993, no foreign institution has bought a majority stake, although a few have grumbled that they would have but for Mr Fazio's opposition. So far Banco Bilbao Vizcaya Argentaria, Spain's second-biggest bank, has acquired 15% of Banca Nazionale del Lavoro; Santander Central Hispano, Spain's number one, has 8.6% of Sanpaolo IMI. ABN Amro, a big Dutch bank, owns slices of Capitalia and Banca Antonveneta.

Mr Fazio is over-protective because his country's banks are likely to be on several shopping lists should cross-border European bank mergers begin in earnest. Italy's banking market is fragmented and its banks are small. UniCredit, the largest by market capitalisation, ranks only 15th in Europe. It could be bought for a fraction of the price of a top German or French bank.

The governor might be trying to protect the banks' corporate customers too. Loans to large companies such as Parmalat, a dairy group that went spectacularly bust in 2003, and Fiat, a struggling carmaker, are not priced on an economic basis, says Alessandro Roccati, of Fox-Pitt, Kelton, an investment bank; a foreign buyer would surely reprice them, making the companies' restructuring harder than it already is. Small and medium-sized firms might also find credit tighter were their banks bought by unsympathetic foreigners.

As long as Mr Fazio is in charge, Italy's big banks will stay in domestic hands. Parliament is discussing a proposal to limit his term (remarkably, the central-bank governor enjoys life tenure) and to transfer the approval of bank mergers to the antitrust authority, but Italian lawmaking is notoriously slow. The commissioner could take Italy to the European Court of Justice, but Mr McCreevy's people say that is still miles off. The banks' foreign suitors may simply have to wait, and hope that Mr Fazio's successor is more amenable.

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

Small country, big ambitions

BUSINESS

Icelandic businessmen abroad

Feb 17th 2005
From The Economist print edition

Icelandic businesses are making big acquisitions across Europe

THEY are well-heeled, these Icelanders. Brave, too. Last year's flow of Icelandic takeovers in Europe looks ready to become a flood—not all of it into companies much fancied by other investors.

Bravest of Iceland's brave is the Baugur Group, run by Jon Asgeir Johannesson. Born as a supermarket but now an investment house in retailing of many sorts, last autumn it bought Magasin du Nord, a Danish department-store group which, after three years of losses, expects to lose $30m more in 2004-05, on turnover of about $350m. Last week, a Baugur-led consortium completed the $1.25 billion takeover of Britain's Big Food Group, which had begun losing money on sales of some $9 billion. On February 9th, another struggling British supermarket chain, Somerfield, revealed it was a target. A bid is only a possibility, but could exceed $1.9 billion. Baugur had already bought British real estate, besides clothing and jewellery stores, and London's famous toy-shop, Hamleys.

Among other Icelandic buys, in December SIF, a seafood group, bought Labeyrie, a French food firm, for $675m (debt included); Bakkavor, a supplier of chilled meals, has bought 20% of Geest, a large British firm in that line, and is now studying a full bid; Icelandair holds 10% of Britain's low-cost airline easyJet. Actavis, a maker of generic drugs chaired by Thor Bjorgolfsson, who made his first pile in Russian brewing, has bought drugmakers in Bulgaria, Serbia and Turkey, and is now buying into India, as a road into the American market. Only 4% of its $500m-or-so turnover today comes from Iceland.

The Icelandic banks helping to finance these acquisitions are themselves buyers. The biggest purchase so far came last year from Kaupthing Bank, Iceland's largest. After earlier lesser but sizeable buys in Finland, Norway, Sweden and Switzerland, it paid $1.25 billion for FI-Holding, a Danish bank strong in corporate lending. In Britain, by early 2004 it held 19.5% of Singer & Friedlander, an investment bank. Burdaras, an Icelandic investment company, later bought a 9.5% stake, and many expect a full Icelandic bid for the London bank, now valued in the market at $950m.

Burdaras itself is 50.2%-owned by three arms of Landsbanki, Iceland's number two, which has overseas ambitions of its own. Formerly state-owned, Landsbanki was privatised in 1998-2003. In 2000 it bought Heritable Bank, a small British housing-finance bank, and in 2003 a private-banking operation in Luxembourg. It has just agreed to buy one of Britain's few surviving independent stockbrokers.

All this from an island of only 300,000 people. Not all the money is Icelandic: SIF, for instance, paid for Labeyrie partly via a syndicated loan in London. Yet it raised $300m, mainly from local sources, in a later share issue; and this soon after a Kaupthing issue had raised $550m. What is the source of Iceland's financial muscle?

A broad answer is almost 14 years of deregulating and privatising government. Specifically, Iceland, like Luxembourg or Ireland, has become a friendly place for financiers and, like Switzerland, is not subject to EU tax-prying: Burdaras's biggest shareholder is Landsbanki's Luxembourg private bank. And corporate profits, taxed at 50% in 1991, and, after cuts, still at 30% in 2001, now pay 18%, the lowest tax-rate in the OECD after Ireland and Hungary.

Few as they are, Icelanders are also feeling richer. After a slide in 2001-02, the economy is back to 4-6% growth. And, with inflation and interest rates mostly low, house prices, bonds and equities have soared in recent years, encouraging a sharp rise in household borrowing. Some of this has gone, indirectly, into investment overseas. Local banks meanwhile have borrowed heavily abroad; an OECD estimate out this week suggests that the country's external debt may have risen by some $6 billion in 2004. A chunk of this has flowed out again into the overseas-investment spree. After all, there are not a lot of attractive opportunities for Iceland's ambitious businessmen at home.

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

Bargain of the century

BUSINESS

Italian business

Feb 17th 2005
From The Economist print edition

How to double your money in Italian retailing

THERE are many ways of making money quickly in retailing. Philip Green, a British entrepreneur, took just two years to make a paper profit of £1 billion ($1.9 billion) by reviving BHS, a once-struggling British high-street chain. Another lucrative strategy is illustrated by the joint-venture between IFIL, a listed Italian investment company controlled by the Agnelli family (which also controls Fiat, Italy's largest industrial group), and Auchan, a private firm that is France's third-largest supermarket operator.

IFIL and Auchan are jointly breaking up La Rinascente, until two years ago a listed Italian retail firm. The process is nearly complete. This week, Lazards, an investment bank, opened bids for Grandi Magazzini and UPIM, La Rinascente's department-store chains. Analysts anticipate that the bids for the stores, whose value lies mainly in their property, will exceed €800m ($1.04 billion).

This money will be split between the two partners in the joint-venture that began in 1997. On completion of the sale of the department stores, IFIL will have turned its share of the joint-venture into cash—some €1.75 billion in total when other sales are also counted. Auchan has taken its share in a mixture of cash and assets. In March 2003, when IFIL and Auchan completed an offer for the 41% of La Rinascente's shares that they did not own, thereby delisting it, the implied value of the whole group was €1.77 billion. So IFIL and Auchan have doubled their money since taking La Rinascente private.

In 2003, La Rinascente's operating profit improved only modestly amid stiff competition. So how did IFIL and Auchan do it? The timing of their offer to La Rinascente's minority shareholders was certainly opportune: the price of the ordinary shares had slumped from an average of €5.90 in 2000 to €3.34 just before they made their offer which, at a 33% premium to that price, was accepted by most minority shareholders.

Offer documents sent to shareholders are supposed to contain sufficient information to allow a proper evaluation of the offer. In those sent to La Rinascente's shareholders, which were approved by Consob, Italy's stockmarket regulator, IFIL and Auchan did not hint at a break-up of the group. On the contrary, they talked of their own “implementation of medium-to long-term strategies” and of plans for La Rinascente to continue “in the various sectors in which [it] operates”. The joint-venture agreement would run until 2022 (though, from 2012, IFIL could force Auchan to buy it out).

Astonishingly, the offer documents contained no information about the market value of La Rinascente's extensive property portfolio. This portfolio, whose book value at historic cost was €1.27 billion, included plums such as 38 shopping centres (most with an Auchan hypermarket), shops in prime city-centre sites, and the valuable Rinascente building in the heart of Milan.

Yet just months after the offer was completed, the market value of the 38 shopping centres (alone) was established at €861m, following competitive bidding. An American property group was selected to buy 49% of a new La Rinascente subsidiary, Gallerie Commerciali Italia (GCI), to which the centres were sold. Following this deal La Rinascente in effect paid a special dividend worth nearly €300m each to IFIL and Auchan.

Late last year, Auchan agreed to pay €1.06 billion to IFIL to buy it out of La Rinascente's supermarket chains and of the controlling stake in GCI. This deal thus valued La Rinascente's food-retailing arm at €2.12 billion. Curiously, IFIL did not seek expert opinion on the appropriateness of the price for this, the most valuable part of the joint-venture. Nor did it invite competitive tenders—which might also have yielded a significantly higher price.

IFIL says that as La Rinascente is still pursuing its medium-term to long-term strategy, statements in the offer documents are consistent with the subsequent break-up. It adds that no valuation of the property assets was included in the offer documents because these contained public information only; and that there was no third-party involvement in the sale of the food business to Auchan because IFIL's board members felt confident about the terms of the deal. Consob, one of whose jobs is to ensure that investors are provided with meaningful information in offer documents, said that the relevant officials were too busy to respond to The Economist's questions.

Just under 1% of La Rinascente's shares remain in the hands of minority shareholders, who declined the opportunity to sell to IFIL and Auchan. These shareholders, too, have doubled their money. Asked who these shareholders are, IFIL replied: “We do not know.”

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

Telecomglomerate

BUSINESS

Communications

Feb 17th 2005
From The Economist print edition

A new breed of telecoms firm emerges

THE telecoms business in America, as well as being built with wires and switches, has been based on imaginary divisions: between local and long-distance calls; wireless and wire-line; regional and national service; voice and internet. But recent deals by America's two biggest “Baby Bells” to buy long-distance operators have laid to rest this old, fictional industry structure. A new corporate beast is emerging: the telecomglomerate, competing across all categories of communications.

On February 14th, Verizon, a large regional telecoms operator, said that it would acquire MCI, a long-distance provider, for $6.7 billion. Provided the deal goes through—some MCI shareholders still prefer a higher bid by Qwest—the combined firm will have annual revenues of over $90 billion and 250,000 employees. Along with the agreement two weeks ago by SBC, another regional Bell company, to buy AT&T, it brings to a close America's long-distance phone industry.
The logic behind both deals is to enable the regional operators, which have near-monopolies on local calls in their area, to move into supplying communications services to businesses, a lucrative market. Yet the deals will ultimately mean much more. They will end the old non-aggression pact among regional operators to avoid competing in each other's territory. Competition will come—first for business and, later, for residential customers—not across copper wires, but from wireless and fibre lines for internet access.

Both Verizon and SBC will be new “oligopolies” able to offer the full gamut of communications services, says Raul Katz of Adventis, a telecoms consultancy. Eli Noam, the director of Columbia University's Institute for Tele-Information, calls the consolidation a natural evolution to achieve scale and diversify risk. “The telecom industry has moved from utility to volatility, and it is difficult to survive in the commodity part of the business,” he says.

Ironically, MCI was devoured by the very competition it instigated. Founded in 1963 as Microwave Communications Inc, it set up wireless towers for radio dispatchers, and eventually took on AT&T's monopoly in 1968. In its first years, the joke was that it had more lawyers than linemen; the firm even placed its headquarters one block from America's telecoms regulator. Its 1974 antitrust suit against AT&T culminated in the 1984 break-up of “Ma Bell”. MCI was bought by WorldCom in 1998 and disappeared, until its name was resurrected after WorldCom emerged from bankruptcy protection in 2004 following an $11 billion accounting scandal.

The sudden removal of America's long-distance companies by the regional operators poses new regulatory questions, just as America's politicians debate revising the nation's telecoms laws and a new chairman of the Federal Communications Commission (FCC) has to be appointed to replace the current boss, Michael Powell, who steps down in March. Together, it heralds a massive overhaul of America's telecoms regulatory landscape.

“The new FCC chairman either has a big eraser or a new pen—one or the other,” says Reed Hundt, the FCC chairman from 1993 to 1997. Whether there are fewer rules or more, however, the mergers are expected to be approved by regulators with conditions, such as to ensure transparency for internet pricing for businesses.

But the new telecoms war will be not just between the telecomglomerates, Verizon and SBC, and the remaining Baby Bells, but among cable firms, too. They are now offering phone and internet service, just as telecom firms are now vying to offer TV service. Battle lines are being drawn.

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

Valentine's Day divorce

BUSINESS

General Motors and Fiat

Feb 17th 2005
From The Economist print edition

Fiat and General Motors celebrate the end of an affair

FULL-PAGE adverts ran in Italian newspapers on February 15th, announcing the settlement of Fiat's dispute with General Motors (GM). The ads celebrated the return to purely Italian ownership of a great national asset and called for Italians to rally round and support it. Before the deal was done, Fiat Auto, the world's weakest volume carmaker, had owned a put option which could in theory have forced the American firm to buy it. In return for €1.55 billion ($2 billion) from GM, that option has been given up. GM also gave up its 10% stake in the Italian firm and agreed to scrap a joint-venture formed with Fiat to make engines and gearboxes.

Despite the joy professed by both firms, there does not really seem much to celebrate. In effect, Fiat has escaped from an industrial liaison that was supposed to be its salvation. The compensation, though higher than most industry observers expected GM to pay, amounts to only 18 months' outflow of cash from Fiat Auto. Since the alliance was formed five years ago, GM's European arm and Fiat have racked up huge losses. GM refused to put any more money into Fiat when asked to do so two years ago.

GM's spin doctors have hailed this week's deal as a great result for its shareholders. In return for over $4 billion (the original investment plus the exit fee), GM's boss, Rick Wagoner, points to cost savings resulting from the joint-venture worth $1 billion a year (mostly from joint purchasing contracts with Fiat) and to a half share in a diesel-engine factory in Poland. GM has also acquired important intellectual property rights in diesel technology, an area where it was weak. These gains will survive the end of the joint-venture.

Yet, in fact, the marriage proposal to Fiat was one of the daftest decisions made by GM in many a year. It agreed to the put option only because it was terrified that Fiat's controlling Agnelli family would engineer the sale of the firm to DaimlerChrysler instead, thereby crushing GM's Opel and Vauxhall brands. Ironically, given DaimlerChrysler's dismal record with other acquisitions, GM might actually have benefited from another Teutonic takeover.

Fiat, for its part, has bought some more time and the freedom to cast around for other help. One possibility is to float Ferrari, in which it holds a 56% stake, to raise more cash. Already Fiat has decided to take Maserati out of Ferrari and put it into Fiat Auto alongside Alfa Romeo: between them these premium brands, if managed properly (for a change), could help save Fiat Auto, though it still suffers from massive over-capacity in its plants.

Fiat's chief executive, Sergio Marchionne, has also talked about doing one-off joint-ventures with the likes of PSA Peugeot Citroën, with which it already shares a factory making vans and people carriers. But who would want to get more deeply involved with a firm as weak as Fiat? Chinese manufacturers (already picking at the scraps of MG Rover), desperate for engine technology and an entrée to Europe might be tempted. What would Fiat's ads hail then? The return of Marco Polo?

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

In this Madrid 'museum,' every masterpiece is green

from the February 23, 2005 edition - http://www.csmonitor.com/2005/0223/p14s03-trgn.html

By Irene Woodbury Contributor to The Christian Science Monitor

MADRID - I've never traveled to India, but I have stood in awe under a 90-foot Himalayan cedar. Wandering the tranquil pathways and greenhouses of Madrid's majestic Royal Botanical Garden, I've also marveled at cactus from Madagascar, shrubs from Siberia, tropical greenery from Africa, and wisteria from East Asia.

What good fortune that a break in a week-long spring rain led my husband and me to the imposing wrought-iron gates of this regal Madrid landmark.

Inside, we found an oasis of haunting beauty - a striking panorama of plants, trees, and flowers from five continents that captivated us with its grandeur.

The 18th-century garden is a favorite haunt of Madrilenos. It is not just one of Europe's oldest and most diverse botanic gardens, neatly compact on 20 acres, but it is set right in the middle of this frenetic, noisy city of 3 million. That makes it a cozy urban retreat, a no-stress zone for locals and visitors alike.

Few attractions in any big city are so wonderfully convenient and yet easy to miss. Abutting Madrid's main promenade, the traffic-choked Paseo del Prado, the garden is perfectly positioned near Madrid's three great art museums. Across a courtyard looms the Prado; the Thyssen-Bornemisza and the Reina Sofia are within a 10-minute walk. The elegant Ritz is close by, and the bustling city center, Puerta del Sol, but a few minutes away.

We came across this treasure almost by accident, as we emerged from a side door of the Prado to clearing skies one afternoon. A mere 100 yards distant sat the main entrance of the Real Jardin Botanico.

Over the wet days, we'd had our fill of wall-to-wall Goyas and Picassos, and now one look inside at the splendor of Eurasian trees and arbors covered with Chinese flowers had us yearning for masterpieces of the greener variety.

We weren't disappointed: 30,000 plants and 1,500 trees from hundreds of countries awaited us.
It's not necessary to be a botany expert, or even a garden enthusiast, to enjoy the flora and fauna as well as the fountains, statues, grape arbors, crammed greenhouses, pavilion art gallery, and flourishing fern and rock gardens.

One step inside and we were on the first of three themed terraces. Beckoning was a brilliant array of tulips in raspberry, crimson, orange, lemon, and luminous white. Nearby were trimmed hedge enclosures holding pink and red poppies amid patches of white pansies.

I was also drawn to rhododendrons from Japan and Korea and six-foot-tall Japanese camellia bushes with pink, salmon, and creamy white blooms. Their sweet, heavy fragrance was complemented by the delicate aroma of Chinese peonies with their yellow stamens peeking coyly through voluptuous pink petals.

Though spring had barely sprung, the garden was also rich with the sights and scents of daffodils, exotic red-flowered bushes with pods of white buds (Pieris formosa), white and burgundy hyacinths, European primroses, South African irises, and a pink and white European ground cover (Aubrieta deltoidea). Everything is labeled in Latin, with information in Spanish, sometimes English, also provided.

The garden's springtime tableau is especially dazzling, but summer, fall, and winter are also spectacular. Many of the flowers and shrubs bloom on the same schedule they do in their original countries, as if they maintain a nostalgic longing for - or irreversible genetic link to - their native lands.

The city's weather is an almost perfect mix of Atlantic and Mediterranean conditions that sustains everything from Tasmanian daisies and Manchurian geraniums to Canary Island date palms.

The garden is open year-round. While every season has its delights, May to August are particularly resplendent, as thousands of wild and cultivated roses from around the world bloom profusely.

Towering above them are the garden's magnificent trees. Among the lemon, lime, orange, palmetto, and apple varieties are hundreds more from a myriad of cultures and climates. Some have survived the Peninsular War (1808-14) and Spain's Civil War (1936-39).

Madrid, which is said to have more trees than any other big city except Tokyo, maintains a list of hundreds of Singular Trees of the Community of Madrid, which are outstanding for their bearing, history, and age.

I had never expected to see a pomegranate tree in Madrid. But there it was, 200 years old, 23 feet high, and sprouting fresh leaves when I encountered it at the end of a path. Equally exotic was a 75-year-old Japanese raisin tree that captivated me with its graceful bearing.

Towering above both was a 130-foot Caucasian elm. Each time I saw this native of the Caucasus, I marveled at its oval symmetry, conveyed by long, leafy branches soaring from a short trunk. Beside it was a Chilean Quillaja saponaria (soapbark tree). Gazing at them, I felt like a privileged traveler on a round-the-world botanic adventure.

A cypress - estimated to be 220 to 240 years old - is the oldest tree in the garden. It may have been here before the garden was established in this spot in 1774.

Beyond the dazzling flowers on the first terrace were kiwi vines and raspberry bushes, just emerging from their winter respites, plus vegetable patches and scores of herbal plants.
In 1755, King Ferdinand VI commissioned his botanist-surgeon, Jose Quer, to create the garden as a center for botanic studies and to grow medicinal plants for him and his subjects.

The garden was originally on the banks of the Manzanares River, south of Madrid, until 1774, when King Charles III bought land on Paseo del Prado and moved it for easier access. From its inception, the garden was open to the public.

Although the royal family no longer owns the garden, they attend important ceremonies and enter and exit through the King's Gate on the Paseo.

On the second terrace, among statues of distinguished 18th- and 19th-century botanists, are plants representing 12 evolutionary schools of plant life from the prehistoric era to the present.

The third terrace, designed as a classic romantic garden, became our favorite lunch spot. Toting bags of food, we'd make our way to the wooden benches around a small duck pond with a dignified bust of Carl Linnaeus, known as the father of botany, in its center. "Background music" was provided by doves and magpies.

I grew fond of these picnics - and the Royal Botanical Garden - but our vacation was coming to an end. Our final visit was on a Friday in mid-April.

A cool rain had intensified the garden's vivid hues and fragrances. The olive trees were sprouting new leaves; the wisteria was spreading rampantly onto a linden tree; and more pink blooms were apparent on the Himalayan clematis.

Walking through the gate, I sadly realized I wouldn't be back for a while, and thought of T.S. Eliot's line from "The Waste Land": "April is the cruellest month."

• The Royal Botanical Garden (Real Jardin Botanico) is at 2 Plaza de Murillo, Madrid 28014; Phone: 011 34 91 420 30 17; www.rjb.csic.es (in Spanish only).

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'A rose by any other name...' in Spanish

from the February 23, 2005 edition - http://www.csmonitor.com/2005/0223/p14s01-trgn.html

By Barbara Wysocki Contributor to The Christian Science Monitor

BARCELONA, SPAIN - Every April 23 the streets of Barcelona fill with red roses and Shakespeare as the proud Catalans celebrate the feast of their patron, Sant Jordi. Why does the Mediterranean city that inspired Picasso and the celebrated Spanish architect Gaudi overflow with flowers and books?

When spring is at its full power, the Barcelonans and visitors head outside to celebrate a cultural festival that merges a noble dragon slayer with the deaths of two literary lions. The day also offers a potpourri of bookish events and the chance to dance like a Catalan.

Legend has it that Sant Jordi - Saint George - got the rose tradition started when blood splattered by one of his defeated fire-breathing foes sprouted into a rosebush. The story says that the chivalrous saint then bestowed a sanguine blossom on his recently rescued princess.
While many around the world give roses on Saint Valentine's Day, in Barcelona they've been exchanging them on April 23 since the 15th century. Today dragon rescue is rarely required, so 21st-century men retain their hero status by buying 6 million long-stemmed beauties in one day. It's a rare señora or señorita who strolls Barcelona's Las Ramblas or Passeig de Gracia without a bouquet.

Sant Jordi's Day isn't an official holiday, but the couples and families walking arm in arm on these wide avenues don't look as if they're headed for work.

Just steps from every flower stall are booksellers lining those famous shopping streets, hugging narrow passageways, and dotting city squares such as Placa de Catalonia and Placa Nova.
More than 300 bookstalls, festooned with the red and yellow of the Catalan flag, honor Miguel de Cervantes and William Shakespeare. Both authors died on the same day, April 23, 1616. This year marks the 400th anniversary of the publication of "Don Quixote," and portions of that classic are set in Barcelona.

For these ambling readers, choosing from overwhelming hardcover and paperback options may be the most strenuous challenge. Not every book on display is great literature, but since this vernal fiesta is also known as the Day of Lovers, women shop for the perfect books for the men they love.

UNESCO has designated April 23 as International Book Day, and 400,000 books will be purchased in Barcelona, according to local officials, so there's a lot for booksellers and book buyers to love. Mysteries, cooking, how-to, and fiction for young and old are among the carefully wrapped packages that are carried home before the petal-strewn streets are empty.

Especially prized are the Catalan-language volumes. The region's native tongue has undergone periods of neglect and suppression. From 1939 until the early 1950s, the Franco regime forbade the printing of books and periodicals in Catalan, according to Thomas Harrington of Trinity College in Hartford, Conn.

The people of Catalonia, located in the northeast corner of Spain, view themselves as a "cultural nation," adds the associate professor of modern languages and literature. It's ironic that in the 1920s, when Barcelona publisher Vincente Clavel proposed a day to honor books, he focused on Cervantes, a Castilian writer. It wasn't until 1926 that books were honored on the same day as Catalonia's patron saint.

During the decades when their language and customs were suppressed, Barcelonans embraced Sant Jordi's Day with extra vigor. Today, book browsers from all nations feel at home in the city that has declared 2005 its Book and Reading Year. Described by the local tourist office as "365 days to exchange experiences and acquire new knowledge," there are opportunities to do both on Sant Jordi's Day.

In addition to the open-air bookstalls, the city's publishers and bookstores will host 200 authors and illustrators, many of them available to autograph their work.

If autographs aren't sufficient inducement, many buyers will be lured by discount prices. And street performances will be in abundance. Notable among the many plays, concerts, and lectures is a photographic exhibit, "Who's Who in Catalan Letters." To see it at the Palace Moja, just step off Las Ramblas at Carrer Portaferrissa.

To get a complete listing of the day's activities, check at Barcelona's main tourist office, which is downstairs in the southeast corner of Placa de Catalonia. It's also the place to register for walking tours that highlight the history and architecture of Picasso's old haunts, and the even older haunts of the Gothic Quarter.

If you prefer to be your own guide, buy a copy of "Walks Through Literary Barcelona," which is due out in April.

It's wise to save those walks for a day when the streets are not so full. Marta Balletebo-Col, a filmmaker and Catalan native, warns that on Sant Jordi's Day, "The crowds might make you dizzy, and it almost always rains."

Rain or shine, it's a short walk down the Avenue del Porta de L'Angel that begins at Placa de Catalonia. Along the way there's a delectable mix of cafes and chocolatiers.

This is a pace-yourself kind of day, so there's plenty of time to enjoy a stop to listen to a dark-haired youth, all fluid grace, as he plucks his harp. Stop by the blues guitarist who's staked out an alley, and don't bypass a barrel-chested tenor on the steps of the Archdeacon's House. He often moves his audience to tears.

From there it's two steps up into the chapel of Santa Lucia, then a turn around the Cathedral of Santa Eulalia, which dates to the 13th century. It's always soothing to visit the cloister with its chorusing geese.

The only time you should look at your watch is to be sure to arrive in the Placa Sant Jaume by early evening.

All the other music fades away as prosperous-looking matrons and dignified men greet each other in the historic square. Though the air is too perfumed with roses, they could be assembled in an elegant drawing room.

Instead, they are sandwiched between Barcelona's City Hall and the Palace of the Generalitat, a pleasing mix of Gothic and Renaissance architecture. For many years, Sant Jordi's Day was one of the rare chances to see the 15th-century rooms that house the Catalan government, but authorities have talked about changing that.

Fortunately, the most important traditions do not change. Under the watchful gaze of the statue of Sant Jordi, a small band, or cobla, climbs onto the temporary stage. The crowd quiets. It is time for the Sardana, the folk dance that defines Catalonia.

The first notes come from the flaviol, a tiny high-pitched flute. Then the brass begins. Finally the strings connect the haunting melody.

Spontaneously, men and women in the crowd join hands and form circles. They pile jackets, purses, and shopping bags in the center as the human circumference grows. Their step is light, deliberate, and utterly joyful. No one is a bystander here; those who do not dance begin to sing softly.

Beneath the music and movement, the oblong stones that rest where Barcelona's Roman forum once stood now join the past and present. Faces alight with pride and pleasure, the dancers move to left and right. They raise their hands high in homage to Sant Jordi and the proud people of Catalonia.

• For more information, see the websites www.anyllibre2005.gencat.net (in Spanish; click on "other languages, if necessary), www.spain.info/TourSpain/ home?language=en, and www.barcelona turisme.com (click on the English icon if needed); e-mail teltur@barcelona turisme.com or nuevayork@tourspain.es; or telephone (212) 265-8822.

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Columbus in Seville?

from the February 23, 2005 edition - http://www.csmonitor.com/2005/0223/p14s02-trgn.html

By Brendan Sainsbury Contributor to The Christian Science Monitor

SEVILLE, SPAIN - I am standing in the Plaza del Triunfo in central Seville, facing south, with my head tilted at an angle of roughly 45 degrees. In the foreground rises the world's third largest cathedral, with its fine Moorish courtyard and its ingeniously designed Giralda bell tower. Medieval stone statues guard the perimeter walls, and inside, a patio of leafy orange trees has been laid out in perfect symmetrical lines.

I crane my neck to take it all in - the unique mix of Muslim and Christian styles, the chaotic fusion of some of the most inspired architecture the world has ever produced.

The Cathedral of Seville is a colossus without equal. Understandably, I'm not the first visitor to be awed by its bold Gothic beauty. Byron, Hemingway, Bizet, and Rossini all came here - with their poems and their songs, their pens and their quills - in pursuit of a legend.

Some cities seduce you at the airport. Others infiltrate your senses in a more subtle way. Seville in Andalucia is one of the latter variety, a place of strange contradictions and colorful contrasts; vicissitudes that alter and shift, often all in the space of 24 hours. You can hear it in its music and taste it in its tapas. With Flamenco-filled passion you can feel it in the vibrancy of its bustling streets. Indefinably, as you drive through the sun-bleached suburbs, the atmosphere quickly grabs hold of you and draws you in.

It's hard to let it go.

People have been flocking here for centuries in search of characters, real and imagined: the hot-blooded Carmen and her string of jealous lovers, the artist Murillo and his dark religious paintings, the Gypsies who reside in the Triana district across the river, with their mysterious musical prowess.

But for me the lure was of a slightly different nature.

"Christopher Columbus is buried in a mausoleum inside," says Andreas, the hardworking waiter in a cafe on Avenida de la Constitucion.

He takes a pen out from behind his ear and points it instructively at the huge southern door of the cathedral. I give him a supportive nod and finish my espresso, but I'm cynical to say the least.

I've already done my Columbus homework. The great explorer's death in 1506 - rather like his rags-to-riches life story - is shrouded in mystery.

First, there are the Dominicans, who will tell you that he was buried in the West Indies; then there are the Cubans, who will suggest that he was interred in Havana. Now there are the Spanish....

"Santo Domingo? Havana? No way, amigo," proclaims the paper seller on Calle Feria. "Without a doubt, I can assure you, he never left Valladolid," the Spanish city where he died.

"What?"

The plot thickens.

With a few hours to spare at the end of a busy week, I am treating myself to a walking tour of the city center. The challenge isn't formidable. In the not-so-distant past I worked as a tour guide in Seville. I had the local geography down cold. I was pretty sure I'd nailed the Columbus myth, too.

Or had I?

I never tire of visiting Seville Cathedral. So large is the gloomy interior of this strangely majestic monument that I'm apt to discover something new at every turn. Built originally as a mosque by the Moors in the 12th century, it was rededicated to the Virgin Mary after the Christian reconquest of Seville in 1248. When the Spanish took over in 1402, a new cathedral was built in its place.

For the victorious Christians size was everything. The building of the cathedral itself took more than 100 years to complete, and the altarpiece - an intricate portrayal of 45 scenes from the life of Jesus - was the life's work of just one man.

They've even reclassified the building since I was last here, ranking it as the largest church in the world - ahead of St. Peter's in Rome when measured by volume, at least - although the Italians might not agree on the revised ranking.

I pay my entrance fee and negotiate the crowds in the small museum by the door. Where to investigate first? The Giralda is always a good starting point. The bell tower was a minaret left over from the old mosque, built as part of a magnificent trilogy of religious monuments in the 1190s by the great sultan El-Mansour of the Almohad dynasty (the other two are in Rabat and Marrakech in Morocco).

There are no stairs to the top - just a long ramp that ascends through 35 staggered levels. Legend has it that the sultan, in the days before elevators, liked to be able to ride up on his horse in order to take in the stupendous view.

I can see why. To get the real scale of Seville Cathedral you have to get up above it and look down, rather than up. Huge stone buttresses dwarf the surrounding shops with their dramatic Gothic simplicity. Highly skilled craftsmanship promotes a sense of harmony and balance that interplays between the inherently different Christian and Islamic styles. The tiny specks in the street below remind you of the sheer grandiose scale of a building that took more than a century to construct.

"We're going to construct a building so large that future generations will think we were mad," the designers and builders wrote.

Yes, they were mad all right.

Meanwhile, somewhere on the narrow lookout gallery at the top of the bell tower an interesting debate about Columbus's final resting place ensues.

"Santo Domingo," exclaims a young student to a couple of his less-than-convinced colleagues.

"He was buried in Santo Domingo on the Island of Hispaniola. They've proved it, I'm telling you."

When in Seville, the great explorer is hard to avoid.

Let's track back. Christopher Columbus died in 1506 in Valladolid, Spain, in relative obscurity. It was only after his death that his legend flourished and his remains went on a kind of transglobal odyssey. In 1509 they were moved from Valladolid to La Cartuja monastery in Seville. Then in 1537, on the instructions of his son's widow, they were transferred to the New World, along with those of his son Diego, and interred in Santo Domingo, on the island of Hispaniola.

So far, so good.

The confusion arises in 1795, when the Spanish, after becoming embroiled in the revolutionary conflicts that were wracking Europe, ceded Santo Domingo to France and, in order to preserve the legend of "their" celebrated explorer, shipped his remains off to Havana, Cuba, for safekeeping. Here they lay until 1898, when Spain, having lost a three-month war with the United States, ceded Cuba to the Americans and shipped Columbus back to Seville. Or did they?
In 1877 workmen renovating the cathedral in Santo Domingo dug up a second coffin, inscribed with the fateful words "Herein lies Christopher Columbus."

One man, many unanswered questions.

So where do the remains of Columbus lie? Did the Spanish move the wrong body to Cuba in 1795? (That of his son Diego, perhaps?). To date, nothing has been able to settle the question. But scientists from the University of Granada are seeking authorization to travel to the Dominican Republic to test the remains there.

Meanwhile, back downstairs in the dim light of the cathedral, I make my way to the southern door or Puerta de Principes and the bronze-carved Mausoleum of Seville's famous adopted son. The coffin, carried respectfully by four ceremonial pallbearers representing the four old kingdoms of Medieval Spain, looks rather grand and imposing in its pride of place. It gives away no secrets about its contents.

Then again, why should it?

Maybe some mysteries have a right to remain that way.

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Economists want to know: Do Europeans work less because they believe less in God?

from the February 22, 2005 edition - http://www.csmonitor.com/2005/0222/p12s01-woeu.html

By Joshua S. Burek Staff

A century ago, German sociologist Max Weber put forth a novel theory of economic growth. In "The Protestant Ethic and the Spirit of Capitalism," Mr. Weber argued that Calvinist ideals fostered a disciplined work-and-save attitude that accelerated the creation of wealth. The implication - that Protestant economies outperform Catholic ones - has drawn skepticism ever since.

But today, researchers are reexamining whether there might be a link between religious belief and economic performance.

In a 2003 study of nearly 60 countries, Harvard researchers Robert Barro and Rachel McCleary found that certain religious beliefs did contribute to economic growth. Notably, they concluded that a belief in hell was a slightly more potent economic spur than a belief in heaven.

Last year, Niall Ferguson, a professor of history at Harvard University, examined the connections between faith and work ethic in light of divergent trends he found in the United States and Europe.

Religious belief in North America has "been amazingly resilient" amid big economic gains, he says, disputing the notion that wealthier countries necessarily become less religious.

But abroad, Ferguson noted that a decline in European working hours coincided with a decline in faith. "Americans don't in fact do better work than Frenchmen," he wrote. "They just do more work. A lot more." Between 1979 and 1999, the average US working year lengthened by nearly 4 percent. Yet in Germany, France, and Spain, that figure dropped by at least 10 percent. "Europeans now seem to believe in holidays, not in holy days," he adds.

This divergence, Ferguson, argues, coincides with a period of European de-Christianization, and American re-Christianization. "It's extremely hard to establish a causal relationship between changes in belief and changes in economic behavior," he cautions. But, he says, "something of Weber's theory seems to work."

Material prosperity, of course, is not the point of most religious teachings. And religion is clearly not the sole determinant of economic performance. China's official atheism hasn't stopped its rapid gains. Growth has been weaker in Muslim nations, where belief in potential damnation is high. And Ferguson notes that previous generations of Americans emphasized high levels of saving. Today, he says, they "work very hard in order to consume very hard."

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What place for God in Europe?

from the February 22, 2005 edition - http://www.csmonitor.com/2005/0222/p01s04-woeu.html

Across Europe,the conflicting currents of secularism, Christianity, and Islam are compelling Europeans to wrestle with their values as never before. In this first installment of a three-part series, the Monitor examines the forces that are shaping European identity - and explores why the Continent is debating what role, if any, religion should play in public life.

By Peter Ford Staff writer of The Christian Science Monitor

PARIS - As he urged closer ties with Europe Monday, President Bush played down the current political disputes. "No power on earth will ever divide us," he said.

That may be true when it comes to Iran's nuclear program. But his remark ironically hints at a transatlantic chasm over US and European values, and the role each side assigns to a fundamental facet of human life: religious faith.

Two events last year neatly frame the challenge: In the United States, a California man tried to remove "One Nation, Under God" from the Pledge of Allegiance. Americans cried foul - roughly 90 percent wanted to keep the phrase - and on June 15, the Supreme Court halted the bid on procedural grounds.

Three days later, in Brussels, officials agreed on the final text of the European Union's new Constitution. The charter made no mention of God, despite calls that it recognize Europe's Christian roots.

Indeed, its secularism has led to jokes that Europe is one big "blue" state. But Europeans aren't laughing. Buffeted by the crosscurrents of secularism, Christianity, and Islam - and mindful of a history of religious violence - they are wrestling with their values and identity as never before.
"The clash between those who believe and those who don't believe will be a dominant aspect of relations between the US and Europe in the coming years," says Jacques Delors, a former president of the European Commission. "This question of a values gap is being posed more sharply now than at any time in the history of European-US relations since 1945."

Religion's role in public life, and its influence on politics, have been center-stage questions worldwide since Sept. 11, 2001. But the debate in Europe has been complicated by the continent's difficulty in integrating its fast-growing Muslim immigrant minority. It has been sharpened by tragedies such as the bombing of a Madrid train station last March, and the brutal murder of Dutch filmmaker Theo van Gogh by an Islamic extremist last fall.

Those incidents "will reinforce secularism" in Europe, predicts Patrick Weil, a sociologist of religion at the Sorbonne in Paris. "The tendency now in Europe is to say we have to be clear on the limits to religious intervention" in public life. "We are not going to sacrifice women's equality, democracy, and individual freedoms on the altar of a new religion."

Secularists who think like that are swimming in friendly waters in Europe, where religious convictions and practice have dropped sharply in recent decades, and where mainstream churches - especially the Catholic Church - continue to lose members and influence.

Today, just 21 percent of Europeans say religion is "very important" to them, according to the most recent European Values Study, which tracks attitudes in 32 European countries. A survey by the Pew Forum on Religion and Public Life found that nearly three times as many Americans, 59 percent, called their faith "very important."

Although a Gallup poll found last year that 44 percent of Americans say they attend a place of worship once a week, the average figure in Europe is only 15 percent, although the picture varies widely across the Continent.

Godless secularism?

For some Europeans, that slump marks a defeat for moral values at the hands of godless secularism.

"The new soft totalitarianism that is advancing on the left wants to have a state religion," complains Rocco Buttiglione, the Italian politician whose ambition to become the European commissioner for justice was thwarted last year by the European Parliament, which objected to his description of homosexuality as a sin.

"It is an atheist, nihilistic religion - but it is a religion that is obligatory for all," Mr. Buttiglione adds.

Luis Lopez Guerra, the Spanish government's point man in its campaign to wrest from Catholic influence social legislation on questions such as abortion, divorce, and gay marriage, sees things differently.

He wonders why, in a country where less than half the population ever goes to church, he should have found a Bible and a crucifix on his desk, along with the Constitution, when he was sworn in as undersecretary at the Ministry of Justice a year ago.

The Spanish government's plans to legalize gay marriage this spring, to liberalize divorce and abortion laws, and to permit stem-cell research, do not represent an attempt to impose an atheist state religion, he insists. Rather, he says, they "extend civil rights and make the law independent of Catholic dogma.

He adds, "The government has a responsibility to represent the majority of the people. Our policy has to depend on the people's will, not on the preferences of the Catholic church."
Spain is currently the front line in the Vatican's rear-guard battle to retain church influence over public policy in Europe. But with public opinion ranged firmly on the government's side, there seems little it can do but make its displeasure known.

Pope John Paul II lashed out at Madrid recently, accusing authorities of "restriction of religious freedom" and "relegating faith to the private sphere and opposing its public expression."
The changes in Spain, Catholic church leaders worry, are part of a broader trend. Cardinal Renato Martino, head of the Pontifical Council for Justice and Peace, recently attacked "a new holy inquisition ... motivated predominantly by prejudice toward all that is Christian."

Other traditional churches have felt the same cold winds. The president of the French Protestant Federation, Jean-Arnold de Clermont, warned Prime Minister Jean-Pierre Raffarin last December of a climate of "secularist zeal" that was undermining all faiths.

Such zeal has known peaks and troughs over the centuries, but it is not new to Europe, where political leaders and ordinary citizens experienced religion and felt its weight in ways quite unknown to Americans.

The differences are rooted in the 18th century, when the Enlightenment, the philosophical revolution that laid the foundations of the modern Western world, was interpreted quite differently by Americans and Europeans in one crucial respect.

Enlightenment divergence

In Europe, says Grace Davie, an expert on religion at Exeter University in England, "the Enlightenment was seen as freedom from religion ... getting away from dogma, whereas in the [US] it meant freedom to believe."

In America, a country founded in part by religious dissidents fleeing an oppressive government, "religious groups are seen as protecting individuals against the interference of the state," says Mr. Weil.

In Europe, on the other hand, the post-Enlightenment state "is seen as protecting individuals from the intrusion of religious groups," Weil argues, after centuries during which the official church, be it Catholic or Protestant, had always been closely identified with temporal powers.

While religion and democracy have always been intertwined in America, where churches were at the forefront of battles against slavery and in favor of civil rights, this has by no means been the case in Europe. There, estab-lished churches in countries such as Spain and France long opposed political reform.

European mistrust of public religion is heightened even further, however, when it is mixed with patriotism in the kind of rhetoric that President Bush often uses.

"God and patriotism are an explosive mixture," cautions Nicolas Sartorius, an éminence grise of the Spanish left who spent many years in jail during Gen. Francisco Franco's dictatorship. The dictator's guiding ideology, he recalls pointedly, was known as "Catholic nationalism."

After a tortured, centuries-long history of wars fought over religion, in whose name millions died, Europeans are deeply skeptical today of patriotic exhortations infused with religious meaning, says Karsten Voigt, German Chancellor Gerhard Schröder's adviser on relations with Washington.

And nowhere is this truer than in Germany, he adds. "The mixture of patriotism and religion is anathema and heresy in German religious life because it was misused and went too far in the past," Mr. Voigt explains. "Remember, German soldiers in World War I wore belt buckles reading 'Gott Mitt Uns' [God With Us]."

Dominique Moisi, one of France's most respected political analysts, agrees. Viewed from this side of the Atlantic, "the combination of religion and nationalism in America is frightening," he says. "We feel betrayed by God and by nationalism, which is why we are building the European Union as a barrier to religious warfare."

How values affect policy

EU members have gone further than any other group of nations in pooling their national sovereignty in the interests of collective security. It's a concept completely foreign to the US, where Bush has repeatedly insisted that he will do whatever he sees fit to protect Americans.
That divergence "is a matter of principle, a matter of values," says Martin Ortega, an analyst at the EU's Institute for Security Studies in Paris. "Europe's history has led Europeans to a more cosmopolitan worldview, which tries to understand 'the other,' " he suggests.

One of the implications of this approach, Mr. Ortega argues, is that a ban on the use of force except in extreme circumstances has become a European value, just like its corollary: reliance on international law.

That, too, sets Europe apart from America in a fundamental way when it comes to coping with world crises.

The differences were stark over the war in Iraq. They persist with regard to Iran, where Europe's three largest nations are pursuing diplomatic efforts to prevent Iran from enriching uranium - efforts the US has refused to join.

The values gap is evident in Washington's wariness of multilateral approaches to world affairs: The US has rejected the Kyoto treaty, designed to slow global warming, which came into force last week, while the EU embraced it. And Europe supports the International Criminal Court, which the US opposes.

Some European leaders, eager to mend diplomatic fences with the US, fear that such different perspectives could tempt Washington to dismiss Europe as an unreliable ally.

"In some segments of conservative US opinion, anti-European feeling is on the rise," worries Mr. Voigt. "They see us as soft on terrorism, or as simply immoral."

On the contrary, retorts Ortega, who describes himself as a Catholic believer, "I interpret my religion in a more modern, humane, and universal manner. I find the American manner quite antiquated. For example, I'm sure that when President Bush applied the death penalty in Texas, or decided to use force in Iraq, he felt it compatible with his religious beliefs."
In fact, the fundamental values that Europe and the US proclaim are almost identical.

Few Americans would quibble over the proposed EU Constitution's declaration that "the Union is founded on the values of respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights." It goes on to promote "tolerance, justice, solidarity, and equality between women and men."

Philosophical differences

These shared sentiments, however, flow from different metaphysical head waters. In his inaugural address last month, Bush founded his commitment to human rights on the belief "that every man and woman on this earth ... bear[s] the image of the Maker of Heaven and Earth."

That thinking does not sit well in Europe, where human rights are rooted in a tradition of secular humanism, which holds that mankind is capable of ethical conduct and self-fulfillment without recourse to the supernatural.

In Europe, secularism is not understood as necessarily hostile to religion. In France, the term denotes a level playing field, on which the state allows all religions to operate freely, but stands aside. Elsewhere, it means an indifference to faith. More generally, secularism refers to an approach to life grounded not in religious morality but in human reason and universal ethics.
At the same time, European governments have chosen to adopt a broader set of moral values in setting their foreign policy than they see apparent in US policy, which to them often seems wholly focused on "the war on terror."

That leads them to attach more importance to issues such as the en-vironment and poverty, as British Prime Minister Tony Blair and French President Jacques Chirac stressed in speeches to the World Economic Forum in Davos, Switzerland, earlier this month.

Though the broad moral values at the foundations of public policy in Europe draw clearly on Christian inspiration, the established churches are equally clearly losing their grip on social attitudes to personal moral questions.

A look at the dramatic fall in birthrates all over Europe reveals how faithfully couples are following Catholic teaching on contraception. And as religion's importance fades in people's lives, their permissiveness increases, the European Values Study found.

For example, of the 10 countries where religion is most important to people's lives, eight are among the 10 least tolerant of euthanasia. An increasing number of European governments are following Britain's lead in legalizing stem-cell research, with public support, despite opposition from Catholic leaders.

But even if churches are emptying across Europe, and citizens are reluctant to imbue policy with religious significance, that hardly makes the Continent atheist, pollsters and religious leaders say.

Rather, suggests Archbishop John Foley, the US head of the Vatican's Council for Social Communications, "many people in Europe consider it poor taste to mention your beliefs. It is perceived as rendering other people uncomfortable."

While only 41 percent of Europeans say they believe in a personal God, another 33 percent believe in a spirit, or life force.

It is on that reservoir of spirituality that religious leaders of several faiths hope to draw, in order to bring religion back from the margins of public life in Europe. And they are finding encouragement from some unlikely sources.

In France, perhaps the most militantly secular society in Europe, and which this year celebrates the 100th anniversary of a law separating church and state, one of the men most likely to succeed Jacques Chirac as president broke a strict political taboo late last year.

In a book-length series of interviews entitled "The Republic and Religion: Hope," Nicolas Sarkozy, the president of the ruling conservative Union for a Popular Movement, broached controversial subjects such as state funding for religious institutions.

He was motivated by a feeling that would be banal in the US, but which for a French political leader is almost revolutionary: "That the religious phenomenon is more important than people think, that it can contribute to peace, to balance, to integration, to unity and dialogue," he wrote. "The Republic should debate this, and reflect on it."

• Sophie Arie in Rome and Mark Rice-Oxley in London contributed to this report.

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MEXICO CITY BRIEFING February 2005

News this month

Save our mayor

Mexico City residents are scrambling to save their mayor, Andrés Manuel López Obrador, from standing trial over a controversial land deal. The populist, left-leaning mayor is alleged to have ignored a court order to stop building a road on expropriated land on the city's outskirts. Federal authorities are fighting to strip Mr López Obrador (known as “AMLO”) of his immunity from prosecution. Standing trial could impede his chances in Mexico's 2006 presidential election, a race he has been tipped to win.

The mayor’s Party of the Democratic Revolution has been working to mobilise support, sending text messages to mobile phones, flooding the city government's website with supportive banners and issuing lapel ribbons (which even a delegate from the rival National Action Party has sported). In the event, Mr López Obrador says that he is prepared to launch his presidential bid from jail.

Back together

Never one to let President Vicente Fox get the better of him, Mr López Obrador has reappointed Marcelo Ebrard, his right-hand man, after the president sacked him as city police chief. Back in the mayor’s cabinet, Mr Ebrard is now serving as minister for social development.
After a lynch mob killed two policemen on the outskirts of the city in 2004, Mr Fox seized the opportunity to undermine Mr López Obrador, a political rival, and sacked Mr Ebrard. But despite Mr Fox's best efforts to discredit him, the former police chief is the party favourite to take over the mayor’s job when Mr López Obrador begins his run for president.

Roll on, Metrobus

Mexico City's long-awaited “metrobus” may soon be a reality. The first terminal for the 18-metre super-buses is rising on the central island of Avenida Insurgentes, a thoroughfare notable for its congested lanes and exasperated traffic cops. The city’s transport authority has promised to have the bus running by the end of March, and may introduce 33 more “transport corridors” around the city later on.

The new bus will ply a 20km route along a dedicated lane on Avenida Insurgentes, from Indios Verdes to San Angel, carrying 250,000 passengers a day at speeds reaching 80kph. The state-of-the art buses have one of the cleanest engines available on the market. With 80 of these replacing 250 of the wheezing minibuses that belch up and down Insurgentes, experts predict a 50% reduction in pollution along the thoroughfare.

A nicotine-coloured haze

It will take far more than metrobuses to curb Mexico City's toxic emissions problem, which it now appears to be exporting. A new year-long study will measure how far the capital's pollution migrates beyond the Valley of Mexico into other states and even continents.

Every morning, about 3.5m cars carry some of the metropolitan area’s 20m people to work. During the cooler early hours of the day, the toxic gases released are trapped by the cold-air cap and the surrounding mountains. But later in the day, prevailing winds move the pollution up into the atmosphere to heights of 5,000m above sea level, where they are high enough to travel freely. America's National Centre for Atmospheric Research has lent Mexico two Hercules C-130 aeroplanes equipped for scientific missions. These will monitor how much of the city's tea-coloured haze is escaping, and where it is going. This is one Mexican export nobody wants.

Something to carp about

The punters who drift along the tranquil canals of Xochimilco on Sundays with a picnic and a bucket of cold beer are blissfully unaware of the battle that rages in the waters beneath their toes. The canals are infested with a plague of killer carp, which are devouring the water's native inhabitants and even eating the canal banks.

Introduced to the canals 40 years ago as a potential new source of food, the carp have seized power and dominate pond life. The Mexican salamander (or “walking fish”), a rare native breed, is particularly threatened, as the carp munches away the roots of plants beneath the water line, the salamander's preferred spawning ground. The carp may not even be safe to eat these days—experts suspect they may be contaminated with heavy metals. All this has brought a second plague down on local dwellers, this time of university academics and science experts, brandishing a $180,000 grant from the Xochimilco borough authorities. They have five months to come up with a solution to save the salamanders from the carp. Watch this space.

Catch if you can

March 2005

Picasso's Illustrated Books, 1944-1969

Until February 28th 2005

Endless praise for Picasso's paintings often sidelines his spectacular talents as a draughtsman. This show gives us 92 of his prints and drawings, many of them rarely seen in public. They come from eight different books that he illustrated for some of his writer friends, including Ramón Reventós, Robert Desnos and Rafael Alberti.

The works here are on loan from Spain's Bancaja Bank collection, which has one of the most complete selections of Picasso’s graphic works. While in Chapultepec Castle, you can also visit the recently restored private rooms of the Emperor Maximilian, a French ruler of Mexico for a brief stretch in the mid-19th century.

Museo Nacional de Historia, Castillo de Chapultepec, first section of the Bosque de Chapultepec, San Miguel Chapultepec. Open: Tue-Sun,10am to 6pm. Tel: +52 (55) 5241 3100.

HONG KONG BRIEFING February 2005

News this month

Hello, I love you

On January 20th, China Netcom, the mainland’s second-largest fixed-line carrier, bought a 20% stake in Pacific Century Cyber Works (PCCW), a Hong Kong telecoms giant, for US$1 billion. The deal makes China Netcom the second-largest shareholder of PCCW, a company that is deeply in debt. More importantly for both, it gives PCCW a foothold for mainland expansion. This deal will reportedly not diminish the role of its former majority shareholder, chairman Richard Li, whose stake will fall about five percentage points to 25.5%. China Netcom will nominate three non-executive directors on the PCCW board, one of whom will be non-executive deputy chairman.

Mr Li, the son of Asia’s richest man, Li Ka-shing, has trumpeted the mainland's fast-growing telecom market. Zhang Chunjiang, China Netcom’s general manager, described the deal as a “win-win transaction”, explaining that PCCW's experience in Hong Kong's competitive market promises important lessons for expanding China Netcom.

A public plea

Hong Kong's government has noisily defended its choice of developer for Cyberport, a controversial business park that launched in 2003. Critics complain that the project was awarded in May 2000 to Richard Li, son of Li Ka-shing, Asia's most powerful tycoon, without a formal tendering process. But John Tsang, the technology and commerce secretary, published a formal rebuttal in six newspapers on January 26th, and released more than 20 letters with PCCW, Mr Li's telecoms firm, to prove that the deal was carefully vetted. The row comes amid mounting suspicion that the government is keeping all but the most powerful developers out of the running for one of the world’s most lucrative developments, a proposed 40-hectare cultural district on Victoria Harbour in West Kowloon.

Mr Tsang explained that the deal's hasty approval was an effort to capitalise on the booming economy of the late 1990s. Construction started just as the economy lurched in 2000, and the development has been struggling ever since. The deal awarded PCCW the right to defray US$2 billion in land-cost repayments until the project started making money. But only US$214m has been repaid so far, mostly from the sale of luxury apartments (the total occupancy rate is 42%). Critics allege that Mr Li promised to substantially minimise the government's risks in building Cyberport.

Red scare

Chinese New Year celebrations were disrupted when more than 600 anthills of dangerous red fire ants were found across Hong Kong. Customs agents suspected the ants (native to South America) were inadvertently imported in shipping containers along with tangerine trees, which are traditionally displayed during New Year's celebrations (this year on February 9th). The agents began holding thousands of the trees at the border. After the red ant discovery was made official on January 29th, the number of trucks delivering the trees fell from 1,000 a week to 220. Anthills were also found near the site of Hong Kong’s Disneyland, due to open in September.

Huang Huahua, the governor of Guangdong, a neighbouring Chinese province, confirmed in late January that ants had also been found in flower and fruit nurseries in the city of Shenzhen. Officials admitted that mainland provinces were warned about the ants two months earlier. Strict customs inspection controls were put in place there on January 17th, but Beijing officials only notified Hong Kong about the problem a week later. The ant's bite causes a burning sensation and leaves a white pustule on the skin. An attack from a swarm can lead to chest pains, nausea, shock and, in rare cases, a coma or death. The species is estimated to cause more than US$1 billion in damage a year to American agriculture. Taiwan reported a death from the ants in October.

Wishing destruction

Hong Kong began the year of the Rooster with one of the worst possible omens: the branch of a world-famous “wishing tree” snapped off, injuring a 62-year-old man and a four-year-old boy. While the man is nursing his broken leg in the hospital, the tree continues to bow under the weight of paper wishes that are tied to oranges and then thrown at the tree. Chinese superstition has it that if a thrown wish hooks on to a branch, it will come true. The weight of wishes and bugs in the fruit were named as chief culprits after the snapping of the eight-metre branch on February 12th, the 4th day of Chinese New Year celebrations. Officials also suggested the gold and red paper had weakened the tree by blocking the sun.

A ban on throwing wishes at the tree was put in place on February 14th after locals and holidaymakers from the mainland continued to try their luck. The Chinese banyan tree, thought to be about 80 years old, attracted crowds of wishers in 2003 when Hong Kong endured the SARS outbreak. A HK$2.8m toilet was built nearby, in the style of a temple, to accommodate queues of visitors.

Trial begins

Nina Wang, thought to be the richest woman in Asia, appeared in court on January 28th on charges that she forged her husband’s will. Famous for eccentric clothing and red hair worn in pig tails, Ms Wang arrived at the hearing looking subdued, with plain cropped hair and a maroon outfit. She was released after posting a US$7.1m bail and handing her passport to police. Her next court date is on March 23rd.

The charges against Ms Wang come after a two-year police investigation. But the saga began in 1990 when her husband, Teddy Wang, was kidnapped. When he was legally declared dead in 1999, his wife was named sole executor of a property empire now worth about US$2.3 billion. (The fortune, largely built by Nina Wang, is based around Chinachem, Hong Kong's largest private property developer.) But Wang’s father-in-law, Wang Din-shin, won a civil court case last year accusing her of forging the will. Ms Wang's final appeal of the ruling is expected in July.

Catch if you can

March 2005

Hong Kong International Literary Festival

Asia’s leading literary festival started as a small two-day event five years ago. But it is now a gateway to the West for Asian authors, and a lure for some of the world’s finest writers. The year’s event offers talks and readings by Alan Hollinghurst, who won the Booker Prize last year for “The Line of Beauty”, and Thomas Keneally, who won it in 1982 for “Schindler’s Ark” (later adapted into the Steven Spielberg film “Schindler’s List”). Other attendees include William Dalrymple, a leading non-fiction writer, Jeremy Strong, a top-selling children’s author, and Yu Hua, a Chinese writer who is legendary here for the novels “To Live” and “Chronicle of a Blood Merchant”.

The most anticipated guest is Shirley Hazzard, whose last novel, “The Great Fire”, won America's 2003 National Book Award. It is partly based on her years as a teenage spy for British Intelligence in Hong Kong. Her appearance at the festival will be the first time she has set foot in the city since leaving with her parents in 1948. She refused to visit Hong Kong during the 20 years it took to write the book, fearing her memories would be overpowered by the city's changed face.

LONDON BRIEFING February 2005

News this month

Poor taste and timing

The frosty relationship between Ken Livingstone and the Evening Standard, a tabloid, got even frostier on February 8th when the mayor asked Oliver Finegold, a Jewish reporter at the newspaper, if he was a “German war criminal”. The mayor, who alleges that the journalist was harassing him, also likened Mr Finegold to a “concentration camp guard” and said the Standard comprised “a load of scumbags and reactionary bigots”. The jibes were made as Mr Livingstone left a party honouring Chris Smith, Britain's first openly gay MP.

Mr Livingstone, who is chronically outspoken, may have gone too far this time. Calls for a public apology have come from rival politicians, Holocaust survivors and Tony Blair, the prime minister. The Board of Deputies of British Jews has lodged an official complaint with the Committee on Standards in Public Life, a local-government watchdog. But the mayor has so far refused to back down. In his weekly press conference on February 15th, Mr Livingstone renewed his attack on the Standard, claiming its publishers have waged a 24-year campaign of hate against him. Further ruffling feathers, he said they would have been “at the front of the queue of the collaborators” had the Nazis invaded Britain.

Cut-rate riot

Chaos reigned at the midnight opening of a new Ikea in Edmonton, in north-east London, on February 10th. Dozens were injured as a throng of about 6,000 shoppers besieged the furniture superstore. Some had been queuing for over ten hours, hoping to snatch cut-price deals such as £45 ($85) leather sofas and £30 bed frames. Others abandoned their cars on the busy North Circular road and made a last-minute dash for the store. Citing an “unforeseen volume of customers”, Ikea's management shut up shop less than an hour after opening. Emergency services attended the scene and took six people to hospital.

A spokesman expressed shock at what took place, and pointed out that Ikea had liaised with both local police and the borough council about security arrangements before the event. Indeed, some commentators wondered if Londoners have simply become dangerously obsessive with bargain-hunting. Another stampede at an Ikea opening in Saudi Arabia in September 2004 involved 8,000 shoppers and resulted in 16 people injured and three deaths.

Final bidding

Amid lively media speculation, the International Olympic Committee's evaluation team began a four-day visit to London on February 16th. Their estimation of the city will impact the IOC's choice of host for the 2012 games when it meets in July. As the 16-person delegation arrived, a poll by ICM, a research firm, showed that 74% of Britons favoured the London bid, though only 39% believed it would actually win.

While in London, the IOC delegates toured proposed Olympic venues such as Lord's cricket ground, Wimbledon, the unfinished Wembley Stadium and the main site in Stratford. Meetings with Tony Blair and the queen were also planned. To allay concern about the capital's congested transport infrastructure, the visitors were driven through the five-mile rail tunnel connecting the Olympic Park and St Pancras station in central London. Once completed, the journey time by rail will take just seven minutes. The delegation's visit concludes on February 19th with a presentation on London's multiculturalism, the same day that a free exhibition promoting the bid opens in Trafalgar Square.

Overseas courtship

London's economic and cultural links with China are set to be strengthened with the opening of offices promoting the city in Beijing and Shanghai. Outlining his proposals on February 7th, Ken Livingstone drew attention to the capital's already close ties with the country and the growing importance of Chinese trade. London is home to over 80,000 people of Chinese origin and another 43,000 visited in 2003. It also boasts around 250 Chinese businesses (including those originating from Hong Kong). The hope is that the offices—which among other things will support Chinese companies wishing to locate in London, and vice-versa—will cement the city's position as the gateway for Chinese companies doing business in Europe.

Meanwhile, the fate of London's “Chinatown” in Soho hangs in the balance. Some businesses are moving out, threatened by developers keen on regenerating the area, and lured by growing Chinese communities elsewhere in the capital. Mr Livingstone dodged the issue in his February 13th speech at Chinese New Year celebrations, talking instead about his plan for a new Chinatown in the Thames Gateway area in east London.

Sniffing out snorters

Sir Ian Blair, the Metropolitan Police's new chief, has pledged to target London's middle-class drug-users who think it is “socially acceptable” to snort cocaine. In an interview with the BBC on February 1st, Sir Ian linked the party drug to “misery on the streets of London's estates and blood on the roads to Colombia and Afghanistan”.

The most recent British Crime Survey found that over 600,000 people in England and Wales had taken cocaine in the past year, and 275,000 had done so in the past month. Moreover, the price of cocaine has dropped from £60 a decade ago to about £40 today. In a subsequent interview, Sir Ian hinted that undercover detectives may pose as drug dealers in areas such as Kensington, Chelsea and Islington. Raids on some of London's upmarket nightclubs and drinking venues are also expected.

Catch if you can

March 2005

Turner Whistler Monet

February 10th-May 15th 2005

This touring exhibition, a crowd-pleaser par excellence, attracted more than 50,000 visitors in Paris, and record numbers of advance bookings in London. The show concentrates on the landscape paintings of three important 19th-century artists, exploring the artistic dialogue that wove the men together and encouraging comparisons of their work. James Abbott McNeill Whistler and Claude Monet were friends, and both were influenced by JMW Turner. Expect to jostle with crowds to get close to their portrayals of the Seine, the Thames and Venice's Grand Canal. It is worth queuing for.

Tate Britain, Millbank, London SW1. Tel: +44 (0)20 7887-8888. Tickets: £10/£8. Open: daily 10am-5.30pm. See the museum's website.

DUBAI BRIEFING February 2005

News this month

Keep it clean

Worried that insider trading and rumour mongering could erode investor confidence, stockmarket regulators in Dubai and Abu Dhabi are cracking down on listed firms with weak corporate governance. Securities chiefs at the Dubai Financial Market have issued warnings in national newspapers to brokers and shareholders who spread rumours about earnings, or attempt to manipulate the market. Dubai's sister-bourse in Abu Dhabi has recently decided to suspend companies that air their results outside formal statements to the exchange.

Illicit practices were commonplace in the old over-the-counter market; governance standards have improved significantly since the government launched the two formal exchanges in 2000. Yet suspicious share trades on the eves of major earnings announcements remain a problem.

Great expectations

Dubai has put its name forward to host the 2014 Asian Games— fuelling speculation that it is gearing up to bid for the Olympics two years later. Dubai is investing billions of dollars in its sporting infrastructure, centred around the US$2 billion Dubai Sports City development that will host a network of modern stadiums and a soccer academy run by Manchester United, a leading English team.

Dubai has a strong track record of using sporting events to promote itself on the world stage, including the Dubai World Cup, the world’s richest horse race, and the Dubai Desert Classic, a European Tour golf event that regularly lures top players such as Tiger Woods. From 2006, Team Dubai F1 will compete in the Formula One motor racing grand prix circuit, which may be world sport's most powerful marketing machine. Dubai has not officially announced ambitions for the Olympics. But some close to the city’s sporting power brokers say the possibility has been discussed.

Looking tougher

Dubai’s hotels are finally opening their wallets for top-class security, as terrorism spreads through neighbouring Gulf countries and threatens the city’s growing network of five-star properties. So far, Dubai has been untouched by the Islamic militants seen in Saudi Arabia and Kuwait, despite its blatant ties to the west (Microsoft and HSBC have regional head-offices here, and Marriott, Hilton and Sheraton have hotels as well, among other chains).

Until recently, security at many hotels consisted of little more than low-paid, low-skilled workers whose only credentials appeared to be their brass badges. But consultants at a recent military exhibition in Abu Dhabi said they are now winning lucrative contracts from big hotels in Dubai to employ former special-forces troops to train and run their security operations.

Move over, Mr Trump

Mohammed Alabbar, the wealthy chairman of Dubai’s largest property firm, will host the Arabic-language version of “The Apprentice”, an American TV series. Mr Alabbar runs Emaar Properties, a regional real-estate powerhouse, and is also head of the city’s economic department. He says he wants to inspire young entrepreneurs to create prosperity and much-needed jobs in the Arab world. The winner will get a one-year, $300,000 contract to run an Emaar business.

Mr Alabbar, a charismatic figure whose fortune is estimated at tens of millions of dollars, says he achieved his success despite his unprivileged, middle-class upbringing. He hopes to convince the show's watchers that they can do the same. But his secondary motive is also clear: Emaar Properties is sponsoring the show, and the launch party was broadcast live from the sales office of the Burj Dubai (Dubai Tower), the working title of a skyscraper due in 2007 that will be the world's tallest.

Catch if you can

March 2005

Zenda Alive! at Art Space Gallery

Until March 1st 2005

Following in the success of last month’s Picasso, Miro and Warhol lithograph exhibition, Zenda Alive! is a collection of photographs taken in Afghanistan both before and after the demise of the Taliban. While Sharbat Gula may not be a household name, her portrait certainly is (pictured). Steve McCurry, an American photographer, captured her arresting look and glowing eyes for National Geographic. It is now considered one of the 20th century’s most iconic images.

This show includes photographs by Zalmai Ahad, a former Afghani refugee, and Harriet Logan, a British photographer. Mr Ahad has scooped up prestigious international photography awards, while Ms Logan has won praise for her portraits of Afghani women. Along with the photographs, there is jewellery by Nilufer Tarzi Kuran, and authentic Kabuli textiles by the Tarsian and Blinkey workshop.

Art Space Gallery, the Fairmont Dubai, Sheikh Zayed Rd. Tel: +971 (0)4 332 5523. Open: Sat-Thurs 10am-8.30pm. See the gallery's website.

BERLIN BRIEFING February 2005

News this month

Sweetened Rice

German newspapers in early February were filled with the visit of Condoleezza Rice, America's secretary of state. As part of a quick trip to Belgium, France and Germany, among other countries, Ms Rice visited Berlin, spending the night in a bullet-proof suite at the Intercontinental hotel. During the trip, Ms Rice worked hard to show that her attitude towards Europe had changed since the beginning of the war in Iraq, when she famously quipped “Punish France, ignore Germany, forgive Russia.”

Gerhard Schröder, Germany's chancellor, joked and laughed with Ms Rice during a surprisingly entertaining half-hour press conference on February 4th. Mr Schröder rarely speaks in English for any length of time, but he seemed happy to make an exception for his illustrious guest.

Match-fixing

A 25-year-old Berliner has threatened to bring German football to its knees. Robbie Hoyzer, a football referee, admitted to helping rig seven matches, including one German Cup game. He said a Croatian gambling syndicate paid him €60,000 ($77,000) to ensure that certain teams won unexpected victories. The syndicate, which operated from Berlin's seedy Café King, pocketed about €2m from the scam.

The tale doesn’t end with Mr Hoyzer, who was charged with eight counts of fraud and is now in jail. The disgraced referee claimed that 25 other people, including other referees and football players, were involved in the case. Some of the accused have confessed, but others, including Juergen Jansen, a well-known first-division referee, insist they are innocent. Meanwhile, police have raided the homes of players and referees across Germany in order to nail down the extent of the corruption. With Germany poised to host the World Cup finals in 2006, several sports figures have called for a lifetime ban from football for anyone involved in the case.

Lights, camera, action!

Every February, Berlin enjoys its 15 minutes of Hollywood-style fame during the Berlinale film festival. Though it has long played second fiddle to similar events at Cannes and Venice, it boasts some 400 releases this year. This is Berlin's 55th Berlinale, and activity will centre around Potsdamer Platz. Berliners may gripe about the challenge of getting tickets for the top events, but few doubt that the event is a great boost to the city. A stellar line-up of guests is promised, especially for the presentation of the Golden Bear award on February 20th. Closing time
Germans aren't drinking beer as they used to. That is the verdict following the closure of two large breweries, both owned by the Oetker Group, in early February. Berlin’s 133-year-old Berliner Kindl brewery and the Brinkhoff brewery in Dortmund both shut their doors, making 450 workers redundant.

According to official production statistics, Germans downed 94m hectolitres of beer in 2003, compared with 108m hectoliters in 1994. Waist-conscious 30 and 40-somethings are now opting for bottled water, iced tea and fruit juices over a pint of frothy brew, while younger drinkers favour fashionable “alcopops,” such as Smirnoff Ice or Bacardi Rigo. Small, family-run businesses are feeling the pinch most: many of them are being swallowed up by global brewing conglomerates, such as InBev (the firm formed by the merger of Belgium’s Interbrew and the American Beverage Corporation).

Still, Germany’s more than 1,260 breweries will not go down without a fight. Across the nation (and often in Berlin), brewers are hosting consortiums on how better to package, market and sell their product. One idea is to create drinks that mix beer with cola, juice and even trendy herbs such as ginko. Another is to drop the stodgy brown bottle in exchange for slinkier models.

Is it art?

Berlin's art world seems bent on solidifying its controversial reputation. An exhibition inspired by the Red Army Faction (RAF), a radical left-wing group active during the 1970s and 1980s, has sparked a debate about making terrorism glamorous. Critics claim the display glorifies the bloody deeds of the group, which killed more than 30 people. Some have mused on the role of Felix Ensslin, one of the show's curators, and the son of Gudrun Ensslin, a prominent RAF terrorist, who committed suicide in prison in 1977. But artists at the Kunst-Werke, where the exhibition is on view, claim their work is about the way in which images can traumatise society.

Originally scheduled to open a year ago, the show faltered when Klaus Biesenbach, the founder and former director of the Kunst-Werke, bowed to the show's controversy and withdrew an application for €100,000 ($133,000) worth of state funding. But the curators raised enough private donations to hold the show independently. It features over 100 works by over 50 artists, including portraits of RAF members and their victims.

Catch if you can

March 2005

Is the Sick Man of Europe Recovering?

February 24th 2005

Have Germany’s economic reforms started to bear fruit? Will the country have to face more painful social reforms? Wolfgang Clement (pictured), Germany’s Minister for Economics and Labour, will debate these issues, along with Alexander Dibelius of Goldman Sachs in Germany and Austria; Martin Kanngiesser of Gesamtmetall (the association of metal and electrical industry employers); and Klaus F. Zimmermann of DIW Berlin, the German Institute of Economic Research. Edward Lucas, a senior correspondent for The Economist, will moderate (in German). This event is organised by The Economist, DIW Berlin and the Alfred Herrhausen Society.

After the debate, dutiful attendees can attend a special showing of “No Limits, Just Edges”, an exhibition of works by Jackson Pollock in the adjacent Guggenheim Museum.

To attend, contact Ralf Messer at DIW, tel: +49 (0)30 8978 9569; e-mail: economist@diw.de. The debate starts at 6.30pm at Deutsche Bank AG, Unter den Linden 13-15 (entrance Charlottenstrasse 37-38), 10117 Berlin-Mitte.

ATLANTA BRIEFING February 2005

News this month

Taking action

After years of discussing tort reform, Georgia's state legislators seem poised to act. On February 14th, the state senate passed a bill aimed at reducing the size and number of medical malpractice lawsuits. The bill would cap non-economic damages at $350,000 ($1.05m if more than one defendant is found liable). It also includes a provision that requires a patient suing over emergency care to provide “clear and convincing evidence” of “gross negligence”—a heavier burden of proof.

Patient-safety advocates have opposed the bill, despite a provision requiring an investigation of any doctor who pays three or more malpractice claims. But doctors and businesses have backed it, and Sonny Perdue, Georgia’s Republican governor, is expected to sign it.

A high note

A stunning design was unveiled for the Atlanta Symphony Centre, which will become the Atlanta Symphony Orchestra's permanent home after its scheduled completion in 2011. The soaring, biomorphic structure will feature an in-the-round performance hall with a movable ceiling, and be capped by a steel arch. It was designed by Santiago Calatrava, a Spanish architect whose other works include the Olympic Sports Complex in Athens; Valencia's opera house and the new World Trade Centre Transportation Hub and 80 South Street Tower in New York.

The orchestra, long trapped in the bland and acoustically deficient Woodruff Arts Centre complex, is delighted. But where will the money come from? Initial estimates put the cost of the building at $300m; the orchestra has managed to raise $100m and is looking for another $100m from the state, despite its typical reluctance to commit large amounts of money to arts projects.

Above average

Georgia residents are used to their state getting low marks in national surveys, from education to poverty. So Governing Magazine’s most recent annual survey of state government performance, released in early February, was a pleasant surprise: it gave Georgia a solid “B”, with only five states scoring higher. Noting that Mr Perdue had declared a goal to make Georgia “the best-managed state in the nation” by 2007, the magazine called the state’s human-resources system “likely the best in the country”. But it admitted that Georgia, like many states, had used “dubious budgeting gimmicks” in years past and that the state is not sure of its total assets. In December, Mr Perdue demanded a full inventory of state-run properties.

More problems

Fulton County’s school system, which has 75,000 students and comprises most of the metro Atlanta area, continues to lurch from crisis to crisis. On February 10th Michael Vanairsdale, a retired army colonel who had been named superintendent in January 2004, offered his resignation; his predecessor had only served six months on the job. Mr Vanairsdale resigned during an investigation into cost over-runs: construction of Alpharetta High School, which opened in August 2004, went $4m over budget, and another high school not set to open until August 2005 is nearly $5m over budget. In January the school board set a moratorium on school construction.

In 2002, Fulton County enacted a temporary 1% sales-tax increase, which will last until 2007 and is expected to eventually raise $739m. Where the money is going is up for grabs, though Mr Vanairsdale may have some idea. Although his resignation is effective this March 1st, he will remain on the county’s payroll until March 2006, at a salary of nearly $139,000.

A good beat

Atlanta-born performers are dominating the hip-hop music scene, if the 47th annual Grammy awards, America's highest music honour, can be trusted. Usher, a native crooner with a bombastic Romeo persona, won Best Contemporary R&B Album for “Confessions”. A hit song from that album, “Yeah!” featuring Lil’ Jon, another Atlanta-based performer, and Ludacris, an Atlanta radio-deejay turned rapper, also won for Best Rap/Sung Collaboration. In 2004 OutKast, an innovative duo who met as children in Atlanta, won Best Rap Album. Flaunting the city's range, the Atlanta Symphony Orchestra also went home with an award this year, for Best Choral Performance.

Atlanta has been a talent hot-house for some time. It is a home of “crunk” music, a rowdy type of hip-hop epitomised by Lil' Jon. The music industry has noticed. On January 24th, Jermaine Dupri, a local hip-hop mogul, signed a contract to fold his So So Def record label into Virgin Records. Mr Dupri (who produced “Confessions”) reportedly received $20m for the move. He will head the new Virgin Urban label, and is expected to keep Atlanta as his home base.

Catch if you can

March 2005

The Art of Romare Bearden

February 5th-April 24th 2005

Perhaps the premier painter of the Harlem Renaissance, Bearden is known for his vivid collages of African-American life. These beguiling works are deceptively simple: more careful examination surfaces references to Bearden's mainstream contemporaries, cubism and some old masters. His taste for vibrant colours and bopping compositions has spawned many followers.
Bearden also created nearly abstract watercolours and celebratory public murals. This travelling retrospective, organised by the National Gallery of Art, has already made stops in San Francisco, Dallas and New York (at the Whitney Museum) before coming here. It includes more than 130 works, including book illustrations, sculptures and stage sets.

High Museum of Art, 1280 Peachtree St, Atlanta GA 30309. Tel: +1 (404) 733-4400. Open: Tues–Sat 10am–5pm, Sun noon–5pm. Tickets: $10. See the museum’s website.

Taking stock as Kyoto takes effect

from the February 16, 2005 edition - http://www.csmonitor.com/2005/0216/p09s02-coop.html

By Todd Stern

WASHINGTON - Today, after a seven-year Perils-of-Pauline journey to ratification, the famous and infamous Kyoto Protocol on global climate change takes effect. How important an accord is it likely to be?

Kyoto's entry into force is undeniably a substantial achievement. Global warming, after all, poses an enormous risk of heat-induced natural disasters in the decades ahead. The effort to limit global warming is an immense undertaking that requires countries to reduce their use of fossil fuels like oil and coal, and thus affects their entire economies.

Kyoto's contribution lies first in the agreement of most industrial countries to accept a mandatory cap on their greenhouse gas emissions - on average, a 5 percent cut below 1990 levels by 2012 - and second in its inclusion of innovative, US-proposed measures, such as the trading of emission permits, to dramatically lower the cost of emission cuts.

During the critical, three-cornered US-Europe-Japan negotiation that consumed the last several days of the Kyoto talks in December 1997, there was intense debate over how large an emission cut to require, but this debate was not nearly as vital as it seemed at the time.

The real point of Kyoto was never the size of these first emission cuts, but rather the setting of an initial price on carbon (by capping emissions), thereby forcing businesses and consumers to start considering greater energy efficiency and lower-carbon energy sources.

But Kyoto has not lived up to its original promise.

First, it never should have taken this long to bring it into force. The Europeans bear some of the burden for this delay: At the Kyoto meeting itself, and during the next three years of negotiations, they resisted US proposals to cut costs, arguing that the US should be restricted in its reliance on measures like trading emissions permits, even though such measures ensure the biggest environmental bang for the buck. Eventually the EU came around, but not until after squandering three years in which more progress could have been made, while the climate Dream Team of Clinton and Gore were still in the White House.

Second, Kyoto suffers from the absence of the US - by far the world's largest emitter. President Bush had a great opportunity to confound critics by endorsing Kyoto conditionally - pressing for changes that could have addressed industry's concern about issues like the uncertainty of the price tag. Instead, he tossed the treaty overboard, creating a lasting symbol of American unilateralism in foreign policy. Ever since, he has pursued a do-nothing climate policy of modest research and little action, ignoring alarm bells from the EPA, the National Academy of Sciences, the eight-nation Arctic Climate Impact Assessment, even the Pentagon. In doing so, he surely puts his own legacy, not to mention our children, at risk.

What about the road ahead? Under the terms of the protocol, initial talks about reductions for the period after 2012 are to begin this year. But unless and until the US gets off the sidelines, it is unlikely - for reasons of economic competition - that its competitors will commit to a new round of emissions cuts. Nor is there any sign that developing countries would consider even specially tailored commitments, and they certainly won't if the US isn't participating.

The deeper question raised by the struggle to negotiate the protocol and bring it into effect is whether the pursuit of global environmental agreements like Kyoto - painstakingly negotiated among 180 nations, subject to the many compromises such talks require, vulnerable to lengthy ratification battles - is the right strategy for tackling existential problems like climate change, where the US simply cannot afford to fail.

What is at least clear is that the US needs to develop additional approaches relying on national, bilateral, and multilateral action.

As a start, here at home, Congress should enact the climate change bill proposed by Sens. John McCain (R) of Arizona and Joe Lieberman (D) of Connecticut to cap emissions by US industry.
Second, robust state plans, such as new tailpipe standards in California and a regional emissions trading system among Northeastern states, should go full speed ahead.

Third, we should pursue agreements with major countries on measures like shifting subsidies from agricultural products to biofuels, bringing clean coal technology to China, and establishing a joint emissions trading program with Europe and Japan. If you put together the top dozen greenhouse-gas emitters - who are from both developed and developing nations - they'd account for 70 percent of world emissions.

If they reached agreements like these, it could produce meaningful emission cuts while spurring more effective global cooperation.

Kyoto will always be regarded as an important start, and the day may come when full global talks can succeed.

But in the meantime, we need concerted action without delay. The clock is ticking.

• Todd Stern directed President Clinton's climate change initiative from 1997 to 1999 and was the senior White House negotiator in Kyoto. More recently he served as a senior adviser to the International Climate Change Taskforce, a private initiative led by thinktanks from the US, Britain, and Australia to consider the next steps in addressing climate change.

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A race to fix a 30-year-old 'solution'

from the February 17, 2005 edition - http://www.csmonitor.com/2005/0217/p14s01-sten.html

By Mark Clayton Staff writer of The Christian Science Monitor

In Nepal's agricultural flatlands, women line up at village wells with earthen or metal pots. The water they pump out is sweet and apparently clean. Tragically, it's also often laced with arsenic.
In a scene repeated in more than a dozen countries from Hungary to Chile to the United States, tens of millions of people are drinking from arsenic-tainted wells. Ironically, these wells were dug from the 1970s to the present to provide clean water. Some have called it the largest mass poisoning in history.

Now, researchers are racing to fix this three-decade-old mistake.

"The technology isn't rocket science," says Susan Murcott, an engineering professor at the Massachusetts Institute of Technology. "But we have to translate that knowledge into a system that is viable in these different social settings and in decentralized settings."

It's been anything but easy.

For seven years, Ms. Murcott and her graduate students have traveled to Nepal to devise a foolproof arsenic filter. Such a filter must be cheap, easy to make, and simple to maintain - and local people must want to use it, too, she explains. So far, her team has built and tested seven promising technologies, yet all have failed in one way or another. Some were too costly, one was too heavy, still others didn't filter water fast enough.

Finally, last year Tommy Ngai, an MIT graduate student, bought a round plastic bin at a street market in Kathmandu, Nepal. He and the team filled it with layers of sand, brick chips, gravel, and the magic ingredient - a layer of locally bought iron nails, which chemically bind arsenic to them. The filter may just be the MIT team's silver bullet, a combination arsenic and biological filter. Cost: less than $16.

"We're hopeful we may have found a solution," Murcott says.

A solution is needed. Besides 3 million in Nepal, many millions more drink arsenic-tainted well water in India, Peru, Ghana, Nicaragua, Vietnam, China, Argentina, Mexico, Chile, Taiwan, Hungary, Philippines, New Zealand, Mongolia, the United States, and other nations, Murcott says. The problem is worst in Bangladesh. If the MIT arsenic filter was used there, it might relieve some 35 million people who drink the tainted water - about a quarter of the population, according to published estimates.

Still, variations in water chemistry from country to country make a one-size-fits-all solution difficult. So Murcott's filter for Nepal may not work as well in Bangladesh.

Others are also working on the problem, spurred perhaps by the announcement last month of the first "Grainger Challenge Prize." The National Academy of Engineering in Washington, D.C., is offering $1 million for the first device that can remove arsenic from groundwater and also leap the practical hurdles Murcott's team has faced for years.

Two groups, one at Harvard University in Cambridge, Mass., and another at Columbia in New York, are pursuing well-water arsenic solutions. So are scientists at Lawrence Berkeley National Laboratory, the Centers for Disease Control and Prevention in Atlanta, and the World Bank. At least 50 arsenic-removal technologies are already available, but face various challenges, Murcott says.

Ironically, the problem dates back some three decades in a well-meaning but botched attempt to keep villagers in developing countries from drinking - yes - tainted water.

Unintended consequence

For years, health authorities had agonized over villagers drinking from bacteria-infested ponds, streams, and lakes. In the 1970s, the United Nations, World Bank, and others mobilized to fix the problem with "tube wells" - a simple and relatively cheap solution that tapped biologically pure groundwater around 20 to 75 feet deep. Within a few years, millions of tube wells were drilled across the developing world.

Things seemed better at first. Villagers, especially women and children who had lugged water from streams and rivers, walked shorter distances and had time for other pursuits. In Bangladesh, health problems from surface water diminished.

Unfortunately, nobody thought to test the water for arsenic.

"We thought 20 years ago that these tube wells were a nice idea, the water was nice and sweet - well, it was because that's the arsenic taste," says Richard Wilson, a Harvard physicist and expert pursuing his own arsenic solution. "This catastrophe is something the whole world is partially responsible for. We here in the US and in England were advising the Bangladeshis. Nobody told them to test for arsenic."

In the US, the new standard for arsenic set by the Bush administration is a maximum of 10 parts per billion (p.p.b.). More than 50 p.p.b. of arsenic in water is considered hazardous by the Bangladeshi and Nepali governments. Many wells in both nations have arsenic levels 10 to 20 times as high as that.

Dr. Wilson proposes avoiding the arsenic filtering problem entirely by returning to surface water. His organization is financing far shallower surface wells that don't reach down into arsenic-tainted aquifers, and then covering them tightly to prevent biological contamination. The cost: about $1,000 for a well that could supply 300 to 500 people, he says. "You could solve the whole problem in Bangladesh with $200 million reasonably spent.... That's only 20 cruise missiles."

Others have proposed digging far deeper wells that tap into nonarsenic aquifers.

Drunk by the cupful, water with arsenic can be ingested for years before severe symptoms show up. Researchers say such symptoms are now appearing in people who drink from tube wells in a number of countries.

Health authorities in neighboring West Bengal, India, reportedly saw arsenic's effects first in the mid-1980s after a rash of diseases. Not until a decade later in the mid-1990s, however, did authorities in Bangladesh declare a widespread problem with the water.A crisis realized
Even researchers like Murcott, who had been focusing on developing wastewater treatment facilities in emerging nations, became aware of the arsenic problem only in the late 1990s. It was 1998 when she heard about and realized the seriousness of the problem - and began work in Nepal.

About the same time, Ashok Gadgil, a research scientist at the Lawrence Berkeley National Laboratory in Berkeley, Calif., was finishing up an innovative water-purification system for the developing world. His inexpensive system uses ultraviolet light to purify biological contaminants in surface water and is deployed in scores of communities, serving 300,000 people so far.
But by 2000, looking for a new challenge, Dr. Gadgil was hearing from friends back in India about the arsenic problem in West Bengal. He began to ponder how to make a simple filter that was also affordable and easy to use. Then inspiration struck: coal ash.

Coal is widely used for fuel in the region. One byproduct is bottom ash (not the same as fly ash, which contains heavy metals and other impurities), which is sanitary, widely available, and cheap. But most important from a physicist's point of view, it's molecular structure provides a huge surface area to gobble up arsenic. To work as an effective filter, all the coal ash required, he realized, was a special chemical coating to get arsenic molecules to cling to it.

To test his theory, he sent away for about 11 pounds of the ash, which shipped in fall 2001 - just in time to get trapped in the post-9/11 security crackdown. His ash package never arrived.
Frustrated, Gadgil traveled to India to get the ash himself. Doubtful that he'd ever be able to explain his odd package to authorities, he wrapped the gray powdery substance in several plastic bags and hid it in his luggage. "Fortunately I didn't get searched," he says. "But I was definitely sweating, I can tell you."

Back at the lab, Gadgil and a group of researchers spent months struggling to coat the ash with ferric hydroxide, a chemical that binds arsenic. The result: a teabag-like pouch, which filters water spiked with 2,400 p.p.b. of arsenic to just 10 p.p.b. Just a few ounces of the coated ash could make three gallons of water with 400 p.p.b. of arsenic safe to drink. Now, the team hopes to receive grant money to develop the full mechanism for doing the coating, and to test it in Bangladesh or West Bengal, maybe winning the Grainger Prize.

In the meantime, California has granted Gadgil's team $250,000 to develop the technology for use in the state. About 600,000 Californians are drinking pumped groundwater that does not meet new Environmental Protection Agency standards, Gadgil estimates. He thinks this work will have spillover benefits for India and Bangladesh.

"There is enough ash at thermal power stations to treat all the water needed in Bangladesh through the end of the century," he says. "We haven't fashioned our silver bullet just yet, but I hope it turns into one."

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As Huygens peers, Europe cheers

from the February 15, 2005 edition - http://www.csmonitor.com/2005/0215/p06s02-woeu.html

Success of the space probe, flying by Saturn's largest moon Tuesday, gives the European Space Agency new clout.

By Mark Sappenfield and Marc Young

DARMSTADT, GERMANY - When the Cassini spacecraft sped by Saturn's largest moon, Titan, Tuesday in the early hours of the European morning, rocket scientists like Claudio Sollazzo weren't the only ones getting excited.

In the years since Dr. Sollazzo began working with the European Space Agency (ESA), questions from workaday Europeans were typically unvarying - and they were not about distant comets or the vistas of Martian landscapes.

"The first thing they used to ask me was how much it all cost," says ESA's Italian operations manager.

Not anymore. Last month, the Euro- pean-built Huygens probe floated down through Titan's screaming winds and dim light into a place where, scientists suggest, liquid methane falls as rain, courses in cataracts through canyons of water-ice walls, and flows into wide seas.
"Now," Sollazzo says, "even my local baker is excited."

Tuesday marks Cassini's first flight past Titan since it dispatched the Huygens probe. It also serves as an exclamation point on a mission that proved that Europe - long overshadowed by its American and Russian counterparts - has finally established itself as a leader in space exploration.

The Huygens mission was "very significant for the European Space Agency," says Bruce Betts of the Planetary Society in Pasadena, Calif. "ESA hasn't had as long a history or as a high a profile [as NASA or the Russian program] ... but this will help with that."

ESA isn't resting on Huygens's laurels. Later this year, it will launch Venus Express, the first orbiter of our closest planetary neighbor in more than a decade. Early next decade, the Rosetta and BepiColombo spacecraft are expected to dispatch first-ever probes to land on a comet and on Mercury, respectively. And there is already chatter at ESA mission control about returning to Titan - this time with rovers.

Whether or not it happens, it is a sign of the agency's new confidence. "ESA is becoming a bit more like the Americans," says Sollazzo. "We are proud of what we've done, and that has helped management high up become a bit bolder recently."

It's an attitude that belies the modest appearance of ESA mission control here in Darmstadt, 25 miles south of Frankfurt. Wedged between an autobahn on-ramp and the town's main train station, the European Space Operations Center looks more like a basic office park than the endpoint for some of the world's most significant space science.

But ESA has always been about making more with less. Its 15 member nations contribute to a $3.5 billion annual budget - less than one-quarter of NASA's $16 billion allocation. Even with that disparity, however, Huygens showed that ESA can now stand on level footing with the US and Russia.

"The whole Cassini-Huygens mission was one of the most completely integrated collaborative missions ever flown," says Reta Beebe, an astronomer at New Mexico State University in Las Cruces. "This is as near as we've gotten to being equal."

While the effort was certainly a collaboration with the US - Huygens piggybacked a ride to Titan on NASA's Cassini craft - the probe was a European state- ment in silicon and steel: We can do whatever you can do.

They did, and in that moment four weeks ago when photos of an alien landscape began streaming back to Earth, an overlooked collection of European engineers became scientific superheroes.

While the mission might not yet be Star Trek stuff, it was as bold and captivating as modern scientists could imagine. No space program had ever landed a probe on the surface of a planet or moon farther away than Mars. What's more, Titan had been shrouded in mystery. In pictures, it never looked like anything more than an orange cue ball. Obscured by a thick haze, it was the largest piece of unseen real estate in the solar system.

Since Cassini arrived at Saturn last summer, it had whisked above Titan's cloud tops twice, making out only indistinct patterns of light and dark through the haze.Within hours after Huygens arrived last month, though, fantastic pictures popped up on screens of ESA's copper-brown, 1980s-retro control room: Icy highlands washed bare by methane rain, which ran in channels down to vast floodplains, where the methane gradually seeped back into the ground.
Since then, scientists have scoured images and found what look like methane springs. And chemical data suggest cyrovolcanic activity: the eruption of melted water mixed with ammonia.

For Cassini, the Huygens data will help scientists decipher fuzzy pictures from the more than 40 fly-bys to come. For ESA, though, Huygens's squishy splat on the sodden plains of Titan was an important moment. As far back as 1986, ESA sent the Giotto probe hurtling by Halley's Comet, and its more recent Mars Express continues to orbit the Red Planet - all in relative obscurity.
But Huygens has changed that. "Suddenly there is this explosion in interest in what you're doing," says Sollazzo. "ESA is gaining a lot of recognition, and it's about time."

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New rules to stem pollution on factory farms draw fire

from the February 15, 2005 edition - http://www.csmonitor.com/2005/0215/p02s01-uspo.html

Environmentalists say Bush's cooperative approach is toothless, while the EPA sees it as efficient and effective.

By Christopher D. Cook Contributor to The Christian Science Monitor

Living a half-mile downwind from 12,000 hogs has been hard on Sharlene Merk, of Audubon, Iowa. It's beyond smelly; it's a health hazard, says Mrs. Merk, a longtime farmer who, with her husband, once raised hogs.

Ammonia and hydrogen sulfide fumes are a natural byproduct of the animal farms that supply America's meat. But as farms expand - some housing close to 100,000 livestock - so have concerns about air quality and the impact on people nearby. Studies near bigger farms, for example, have documented high rates of respiratory illness in the human population.
With the rise of so-called factory farms, pressure has increased to regulate animal operations like any other industry.

Now the Environmental Protection Agency, in an early signal of the Bush administration's second-term environmental policy, has taken a step in that direction that critics say is two steps back.

The EPA has offered the poultry, pork, and dairy industries a deal: Submit to voluntary air emissions tests and likely future regulation in return for years of legal immunity from the federal Clean Air Act. The agency says this partnership will help it protect the public interest in the most efficient way, by enlisting industry support.

But the agreement is drawing fire from environmentalists and state regulators, who say it could stifle pollution control efforts under way in states.

"[The EPA] is basically backing off on enforcement," says Ed Hopkins, environmental quality director for the Sierra Club. "These facilities are very large polluters, and this agreement gives them an enforcement amnesty until more research is done."

Companies that sign on will pay a one-time civil penalty ranging from $200 to $100,000 depending on their size; a maximum of 28 facilities, perhaps fewer, will be tested for air emissions over a two-year period. All participants would be given immunity for any past or present air-quality violations.

The deal cajoles business to the regulatory bargaining table with the lure of collaborative policymaking and legal amnesty. The meat industry is in fact taking a lead role, crafting many of the agreement's core elements, paying for and helping to direct a government study that could ultimately lead to regulation.

But this partnership stalls attempts to clean up the industry, argue environmental groups and state regulators. They worry that the legal immunity will make it harder to hold some 15,500 large farms across the US - so-called "concentrated animal feeding operations" - accountable.
The Sierra Club, for example, has led a legal action against Tyson Foods, which resulted last month in a settlement in which the company agreed to pay $500,000 to study ammonia emissions at two Kentucky poultry plants, and an undisclosed amount to three nearby residents for alleged air-quality damages.

State regulators, for their part, say the deal's legal-immunity provision could erode their own efforts to rein in factory farm pollution. California, Colorado, Missouri, Iowa, Minnesota, and Oklahoma have all developed their own programs to regulate emissions from animal facilities. States are allowed to impose tougher rules than the federal government, but the EPA agreement could put political pressure on regulators in farm states to tread lightly.
"State and local regulators are steamed because it's going to undermine their ability to regulate these air pollution emissions, these health threats," says William Becker, executive director of the State and Territorial Air Pollution Program Administrators, and the Association of Local Air Pollution Control Officials.

The plan, now in a 30-day public comment period, comes after years of discussion within the EPA and the industry. Following a few high-profile enforcement actions by the Clinton administration and rising citizen lawsuits, the industry sought a cooperative approach to regulation.

EPA officials say the new agreement is an efficient means of gaining the industry's participation. Traditional enforcement actions can take years of court battles and, even when successful, don't necessarily change industrywide behavior, says agency spokeswoman Cynthia Bergman. "If you can get everyone to come into compliance at the same time, more people benefit."

Critics say the program is too cooperative. Among their complaints: The industry has helped design the air monitoring program and will be funding and steering the review of data, compromising scientific independence. The plan calls for a nonprofit industry umbrella group, using the program's funds, to develop monitoring procedures and pay for scientific review.
"All along [EPA has] had the authority under the Clean Air Act to gather the kind of data they need to determine emissions levels," says Michele Merkel, a former EPA staff attorney who is now with the Environmental Integrity Project. "Four years ago we already knew that facilities of a certain size were exceeding health-based standards in the Clean Air Act."

Animal farms account for 73 percent of the ammonia released into the air.

Industry officials say they are ready to cooperate but reject the idea that factory farms present a serious environmental or human health threat. "In terms of human health impacts, there has not been anything scientifically proven that these hog barns would cause any ill to human beings," says Kara Flynn, spokeswoman for the National Pork Producers Council.

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For India's daughters, a dark birth day

from the February 09, 2005 edition - http://www.csmonitor.com/2005/0209/p11s01-wosc.html

Infanticide and sex-selective abortion yield a more skewed gender ratio.

By Uma Girish Contributor to The Christian Science Monitor

MADRAS, INDIA - The oleander plant yields a bright, pleasant flower, but also a milky sap that, if ingested, can be a deadly poison. It's one of the methods families use to kill newborn girls in the Salem District of Tamil Nadu, a part of India notorious for female infanticide.

Though the government has battled the practice for decades, India's gender imbalance has worsened in recent years. Any progress toward halting infanticide, it seems, has been offset by a rise in sex-selective abortions. Too many couples - aided by medical technology, unethical doctors, and weak enforcement of laws banning abortion on the basis of gender - are electing to end a pregnancy if the fetus is female.

The consequence of female infanticide and, more recently, abortion is India's awkwardly skewed gender ratio, among the most imbalanced in the world. The ratio among children up to the age of 6 was 962 girls per 1,000 boys in 1981, but 20 years later the inequity was actually worse: 927 girls per 1,000 boys.

Infanticide is illegal in India (though never prosecuted), and laws are also in place to stop sex- selective abortions. But in some places, national rules don't hold enough sway to overcome local religious and social customs - which remain biased in favor of sons over daughters.

"Factors like dowry, imbalance in the employment sector whereby the male is seen as breadwinner, and societal pressure to abort female fetuses conspire to increase the antigirl bias," says Ajay K. Tripathi of the Advanced Studies in Public Health Programme, of the Institute of Health Systems in Hyderabad. Government and the medical profession, he says, need to put more resources - and more political will - into strengthening and enforcing the laws.

A case in point is legislation - introduced last year but now stalled - that would prohibit all genetic-counseling facilities, clinics, and labs from divulging the sex of the fetus. The hope is that if parents don't know "it's a girl," fewer will resort to abortion. But the proposal, which would amend a 1994 law, is opposed by medical groups. They argue that technology used to monitor fetal health - such as ultrasound scans and amniocentesis - cannot be put under such intense scrutiny.

Others, though, see another reason for the opposition: Abortion is a lucrative business that many doctors do not want to see curtailed. "Abortions are a low-risk, high-profit business. As a specialist in fetal medicine, I can tell you that no pregnant woman would suffer if the ultrasound test were banned," says Puneet Bedi, a gynecologist at Apollo Hospitals in New Delhi. "Right now, it is used to save 1 out of 20,000 fetuses and kill 20 out of every 100 because [it reveals that the baby] is the wrong gender."

India stipulates that only a government hospital, registered facility, or medical practitioner with appropriate qualifications may perform an abortion. The reality, however, is that only about 15 percent of all abortions take place under such circumstances, according to the Indian Medical Association. About 11.2 million illegal abortions are performed each year off the record. Such abortions are often "female feticide," experts say.

In Salem district, for instance, signs posted in towns reinforce the societal message: "Pay 500 rupees and save 50,000 rupees later," a suggestion that aborting a female fetus now could save a fortune in wedding expenses in the future.

Salem district, a mostly rural part of Tamil Nadu, has a longstanding reputation as a deathtrap for baby girls. The Vellala Gounder community, the dominant caste there, owns most of the land and is intent on retaining property rights within the family. Sons represent lineage; daughters marry and relocate to their husbands' homes. As a result, local women, like Lakshmi, who gave birth to a girl early last year, may refuse to nurse their newborns. They leave it to midwives or mothers-in-law to administer the oleander sap, say anti-infanticide activists.

Nearly 60 percent of girls born in Salem District are killed within three days of birth, according to the local social welfare department. That doesn't count the growing number of abortions there to ensure a girl baby won't be carried to term.

Amid such stubborn statistics, activists are at work to counter the forces of tradition. A focus of their work: improving the standing and self-image of women themselves.

Community Services Guild (CSG), a nongovernmental organization, works with rural women in particular to discourage female feticide. One of CSG's interventions targets women who already have at least one girl. Now 20 years old, the program sends workers to visit these mothers, teaching them and their daughters skills that contribute income to their families (such as basket-weaving or selling produce) and reeducating them about the value of girls to society.
"Educating the new-generation girl - and empowering her with the skills necessary for economic independence - is the only long-term solution," says G. Prasad, CSG deputy director. Though CSG works in a patriarchal culture where female inferiority is ingrained, the group encourages women to become decisionmakers.

In pockets of India where female infanticide persists, the practice is rooted in a complex mix of economic, social, and cultural factors. Parents' preference for a boy derives from the widespread belief that a son lighting his parents' funeral pyre will ensure that their souls ascend to heaven; that he will be a provider in their later years (India has no form of social security); and that he will preserve the family inheritance.

Conversely, a daughter is considered an economic burden. Pressure to conform can be intense in rural areas, and some families borrow heavily to pay for the rituals prescribed for a girl - the ear-piercing ceremony, wedding jewelry, dowry, and presents for the groom's family on every Hindu festival.

The Tamil Nadu government has started several programs to protect girls - with mixed results. One urged families to hand over their baby girls to local officials, who saw that they were adopted by childless couples. Between May 2001 and January 2003, officials received 361 baby girls. An informal survey by CSG, however, found that many women would abort rather than have a baby and give her up for adoption.

Tamil Nadu's "Girl Protection" program may be more practical. Here, the government opens a bank account in a girl's name at her birth, depositing between 15,000 and 22,000 rupees during her childhood, depending on the number of girls in the family.

"The only way to wipe out this evil is by an attitudinal shift," says CSG's Mr. Prasad. "Educate a girl beyond eighth grade and encourage her to find her voice."

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Got a great cause? Here's how to build clout

from the February 14, 2005 edition - http://www.csmonitor.com/2005/0214/p13s01-wmgn.html

By G. Jeffrey MacDonald Correspondent of The Christian Science Monitor

As a community organizer in the South Bronx, Elena Conte doesn't exactly fit the profile of a Wall Street mover and shaker. To the contrary, she works daily with some of New York City's poorest denizens to rid her neighborhood of toxic air and the nonstop stench of burning sludge.
But thanks to a recent partnership with nearby Sisters of Mercy nuns, her neighborhood's concerns will soon get a prominent hearing at Synagro, which owns the company that turns malodorous New York sewage into fertilizer pellets. The secret? Clout, as in the kind that comes with having millions to invest, as the sisters' Mercy Investment Program does.

"We've never tried anything along these lines, but we understand in other cases it's been very effective to make the case from within" as a shareholder coalition, Ms. Conte says via telephone from her office. "We're willing to try anything that's legal to make this company be a good neighbor.... It stinks here."

By bending the ear of an institutional investor, Conte's Sustainable South Bronx group has tapped into one of the most effective ways for citizens groups to influence corporations. The invested assets of institutions, such as state pension funds and college endowments, exceed $3.2 trillion. That's more than the annual federal budget of the United States - and represents more than a 25 percent stake in the nation's public companies.

Of course, winning over the decisionmakers at institutional funds isn't easy. Obstacles can arise. Yet a growing number of activists are trying nonetheless - and reporting a measure of success.
"I think it's related to the political landscape," says Dan Rosan, a health-issues specialist at the Interfaith Center for Corporate Responsibility. "People who want to make positive change in the world see it's tougher and tougher to do that through public policy. Shareholder activism, when it's done properly, can be very effective" as an alternative mechanism.

The key, according to those who have had success, requires adapting one's tactics to the particular organization. A lifelong contributor to a state pension fund, for instance, is likely to have stronger standing to propose a policy than does someone who has never lived in the state (although outsiders, using different methods, can be persuasive, too).

Before graduating from Williams College in 2004, Mark Orlowski felt the entire college community should know where the school's $1.3 billion endowment was invested and how its managers were voting on issues that came before shareholders. As a tuition-paying stakeholder in the college, Mr. Orlowski gained a seat on the Williams College Advisory Committee on Shareholder Responsibility and helped establish a policy of posting investment information on the Web.

Many college endowment committees have welcomed greater input from students, alumni, and other key constituencies in recent years. Since 2000, about two dozen colleges and universities have either added or expanded a process for gathering constituent input, according to Orlowski, who has since cofounded the Responsible Endowments Coalition.

"When you look back, just about all of it was a result of student engagement and encouragement," Orlowski says.

In upstate New York, residents concerned about emissions from Eastman Kodak's manufacturing operations in Rochester, used shareholder resolutions to call on the company to reduce its air and water pollution. The residents - as taxpayers who help fund the salaries of state employees - shared their research with the New York State Comptroller's Office, which oversees the pension fund. Result: The Comptroller's Office signed on and helped propel a number of environmental improvements at Kodak, according to Mike Schade, western New York director of the residents group, the Citizens Environmental Coalition (CEC).

Eastman Kodak sees the situation differently, crediting its "steady improvements over 17 years" to expanded federal requirements, not shareholder activism. "We don't make our decisions on emissions reductions based on the filing or lack of filing a resolution," says company spokesman James Blamphin.

Nevertheless, the CEC is developing a strategy to court support from religious pension funds and endowments. Though the group would have no standing to speak of as a constituent, Mr. Schade hopes the cause of environmental justice might resonate with those charged with investing the faithful's savings.

"When faith-based organizations get involved, they're able to take a moral high ground that others can't," Schade says.

Cultivating partnerships with institutional heavyweights isn't always easy or quick. Just ask the Minnesota Senior Federation, which for a decade has been lobbying lawmakers and drug manufacturers in an attempt to lower prices of prescription drugs. After trying many approaches, the group eventually got a hearing with the Minnesota State Board of Investment, which last March resolved to call on drug manufacturers to lower domestic prices and stop what the seniors' group called an intentional effort to limit supply to Canadian pharmacies that sell to Americans.

A pharmaceutical industry spokesman would neither affirm nor deny the allegation. But that outcome wouldn't have happened had the federation not spent years collaborating with state lawmakers and groups of state employees whose pensions were at stake, says Peter Wyckoff, the federation's executive director.

"You need to be able to persist," Mr. Wyckoff adds. "You need to be able to speak to both sides of the aisle, to both free-marketers and traditional liberals" before the state board regards a petitioner as a credible voice.

But from one institution to the next, certain principles always seem to apply. Every board overseeing an institutional fund has a fiduciary responsibility to the fund's contributors. This means oversight boards meet periodically with their core constituencies, whether these are union members, college donors, retired ministers, or others. Bringing an issue to light through one of these constituencies can lay the groundwork for an investment policy governing where billions of dollars go or don't go.

Nevertheless, those boards often receive minimal input on the social or environmental effect of their investments. Wellesley College in Massachusetts, for instance, relies on a subcommittee of its board of trustees to study proxy issues. Yet no campus constituency has come forward with proposals for debate, says spokeswoman Arlie Corday.

A similar situation exists with the board of trustees for the Maryland State Retirement and Pension System. Board members in January began reviewing a set of proposed proxy voting guidelines for the first time. While state troopers care deeply about labor issues, they have never asked whether the companies they own through their pension funds use union labor, says Morris Krome, who reports to his fellow troopers on board activity.

"It hasn't gone to the level of becoming policy," Major Krome says. "The concern is, 'Are we getting our benefits ... and are you handling the money as you should.' "

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Skewering the lawyers

Tort reform

Feb 17th 2005 WASHINGTON, DC
From The Economist print edition

Congress deals a blow to class actions—but the basic tort system is unchanged

DICKIE SCRUGGS, a Mississippi trial lawyer who led the charge against Big Tobacco in the 1990s, helping 46 states win a $246 billion settlement, once described the features of a “magic jurisdiction” in America's tort system. Speaking at an asbestos conference in 2002, he said that such a place would have judges elected with “verdict money”, trial lawyers who were cosy with those judges, and huge numbers of voters “in on the deal”. In this trial lawyers' paradise, “cases aren't won in the courtroom,” Mr Scruggs assured his audience. “They're won on the back roads long before the case goes to trial.”

In the view of corporate America, many doctors and George Bush's Republican Party, there are too many magic jurisdictions in America. Places like Madison County, Illinois, have become famous for awarding large punitive damages and for cosy relationships between trial lawyers and judges. They thus become magnets for class-action lawsuits, which bundle hundreds—even hundreds of thousands—of small claims that would not justify the costs of a stand-alone case. These suits have surged in Madison County from just two in 1998 to 106 in 2003.

Trial lawyers and Democrats have long protested that Big Business is exaggerating the woes of America's tort system in order to tilt the system in favour of rich defendants. If so, this dastardly plan is certainly working. On February 10th, the Senate approved by 72 votes to 26 the Class Action Fairness Act, which is designed to push class-action suits away from places like Madison County to the fairer federal system. As The Economist went to press, it looked as if the House would pass the bill too, giving Mr Bush a chance to sign it into law when he returns from Europe.

One for the president

In political terms, this is a big victory for Mr Bush, who pushed class-action reform in his re-election campaign. He can also boast bipartisan support: 18 Democratic senators deserted the lawyers' lobby, which has given their party so much. Indeed, in general the lawyers were out-muscled by the US Chamber of Commerce, which cleverly focused its fire on the former Democratic minority leader, Tom Daschle, last November, forcing this blocker of tort reform out of his seat in South Dakota.

Mr Bush and his business allies are now keen to move on to the other two parts of his tort-reform plan: sorting out the asbestos-litigation mess and medical-liability reform. But what exactly will this week's new measure achieve? Opinion, inevitably, is split between lawyers, who think it goes too far, and reformers, who wish it had gone much further.

The bill hits trial lawyers in their pockets, by limiting their fees to a proportion of the amount of money the plaintiffs actually collect rather than the theoretical amount awarded to them, if the award is in coupons rather than cash. (In a big case, companies often compensate plaintiffs with coupons, which are either fiddly or too small to redeem.)

But the bill's main aim is to stop “forum-shopping”—looking for magic jurisdictions. It says that any big class action (one that has more than 100 plaintiffs and more than $5m at stake) must go to federal court. An important exception, won by Democrats, ensures that a class-action suit must be filed in a state court if the chief defendant and at least two-thirds of the plaintiffs come from that state.

Part of the debate about the effect of the new bill still revolves around how bad forum-shopping actually was. Democrats protest that “judicial-hellhole” states usually tidy up their act sooner or later: eight have recently passed laws making class actions harder to file. Republicans reply that barely has one hellhole been closed than another opens up elsewhere. The merry-go-round has moved from Alabama and Texas to Mississippi and now to southern Illinois and West Virginia.
Looking forward, both sides agree that it will be virtually impossible now to get a nationwide class-action suit off the ground. The bill, if passed, would bar such suits from being filed in state courts. Meanwhile, federal judges face all sorts of constraints before they can certify multi-state suits. Consumer-protection law, often the basis of class-action suits, varies too much from state to state, and is often vague.

Some exceptions exist: securities-law class actions, for instance, are dealt with at the federal level. But lawyers whinge that the federal courts are generally kinder (or less tough) on defendants than places like Madison County. And there is also a huge backlog in federal cases. Federal judges, who opposed the bill because they were overburdened, may well decide to give civil class actions a far lower priority than criminal cases or lazily dismiss them on technicalities.

All this explains why the new Senate Minority Leader, Harry Reid, claims that the bill “slams the courthouse door on a wide range of injured plaintiffs.” But wait a moment. The new law still leaves open the possibility for single-state class actions in state courts; the minimum requirement for in-state plaintiffs is quite low. George Priest of Yale Law School says that trial lawyers will simply duplicate their actions, filing simultaneous class actions in separate state courts if they are forbidden to bundle them together.

Less tough than it looks

Indeed, the claim that this is the toughest tort-reform package in a decade is no great boast. Since trial lawyers have kept all chance of reform locked in their vice-like grip, there is virtually nothing to compare it with. The new law may well restrict the number of class-action lawsuits, but it does nothing about the underlying principles of the tort system, especially the ability to sue for punitive damages (on top of the actual compensatory damages suffered for the victim) and the fact that those punitive damages, which tend to be the spectacular ones, are shared by the victims and their lawyers.

A more radical plan might simply have changed the system to remove the punitive incentive to sue—for instance, by paying all punitive damages to the state in the form of a fine for bad behaviour. In the absence of such fundamental change, a lot still depends on whether Mr Bush can push through his other two proposals.

In the case of asbestos, various lawsuits on behalf of victims have bankrupted more than 70 companies. The Republican solution is to establish a $140 billion industry-backed trust fund to settle all the claims in exchange for ending all litigation. Unfortunately, the consensus to do this is “eroding very fast”, says Michael Greve of the American Enterprise Institute. One problem is a brawl between insurers and manufacturers: each wants the other to pay more into the fund. Conservatives also worry that trial lawyers will get a cut.

With medical-liability cases, Mr Bush wants to cap awards for “pain and suffering”, which are given after patients have been reimbursed for lost earnings and medical expenses, at $250,000. That would bring some certainty to doctors, but it strikes many people as too low a limit for botched operations, so Mr Bush may have to compromise. Even if they get most of what they want, the Republicans will merely have curbed the more outrageous abuses; they will not have pushed through structural reform.

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

“Mr Dithers” and his distracting “fiscal cafeteria”

Canada

Feb 17th 2005 OTTAWA
From The Economist print edition

The prime minister will probably survive a sleaze inquiry. Will that allow the old Paul Martin to stand up?

AS PRIME-MINISTERIAL occasions go, being questioned for more than four hours at a judicial inquiry—broadcast on live television—hardly ranks among the most agreeable. Indeed no serving Canadian prime minister had suffered such an indignity for 130 years. In the event, Paul Martin acquitted himself rather well when he appeared as a witness before an inquiry into sleaze on February 11th. But 15 months after succeeding his fellow-Liberal, Jean Chrétien, Mr Martin, a successful finance minister for almost a decade until 2002, cannot quite shake off the impression that Canada's top job is too big for him.

As finance minister, Mr Martin acquired a reputation as a tough and decisive deficit-cutter who transformed the public finances and oversaw the renaissance of the Canadian economy. But as prime minister, his faltering leadership has earned him the sobriquet of “Mr Dithers”. At an election last June intended to give him a personal mandate, the Liberals scraped back, reduced to a parliamentary minority. Both before and since, Mr Martin's main concern seems to have been to court popularity by parading a generous social conscience.

Yet before the cameras last week, a steelier Paul Martin resurfaced. He had himself ordered the inquiry—into the siphoning of funds from a C$250m ($200m) federal sponsorship programme set up by Mr Chrétien to promote Canadian unity in French-speaking Quebec. At the time, perhaps the inquiry seemed a clever idea, an attempt both to embrace clean government and embarrass Mr Chrétien, who had become his bitter rival.

It has turned into a millstone, which has burdened Canadian politics for a year. Judge John Gomery has probed the inner workings of government to find out who—bureaucrats or politicians—oversaw contracts to Liberal-friendly public-relations firms who are said to have skimmed up to C$100m in unwarranted commissions. So far his finds have hardly been earth-shattering: an extravagant C$59,000 for 480 neckties with a Canadian flag ordered by the prime minister's office, for example.

In his own testimony to the inquiry, Mr Chrétien defended the purpose of the scheme—to discourage Quebec from seceding, as it almost did in a referendum in 1995—and hinted that Mr Martin knew more about the details. But the prime minister pleaded his own lofty reasons of state for ignorance. He was immersed in steering the economy and leading the G20, a club of finance ministers, he said. Yes, several of his budgets included a C$50m Canadian “unity reserve” for the prime minister's office which he had never queried. It was up to the Treasury Board, Canada's civil-service department, to monitor this. He said that he did not know the sponsorship program even existed until reading press reports of its mismanagement.

He has probably done enough to distance himself personally from the scandal. But the affair has already damaged his government. Opposition parties made Liberal sleaze the main issue in last year's election. To shift attention, Mr Martin made some lavish spending promises.

Top of the list was a pledge to “fix for a generation” Canada's beloved but creaking Medicare system. The provincial premiers, who run the system, subsequently extracted from Mr Martin a larger cheque than he had originally offered: $41 billion over ten years, as well as a special deal for Quebec. He failed to win any commitments to reform the system in return.

Mr Martin is ceding revenues to the provinces too. On February 14th, he flew to the Maritime provinces to sign a special deal under which Nova Scotia and Newfoundland will keep all their revenues from offshore oil and gas but not lose federal handouts from the equalisation fund (an arrangement under which richer provinces hand over some of their revenues to poorer ones). In doing so, Mr Martin was honouring an unwise election pledge. More federal money is unlikely to revive the Maritimes' economy, which has been slowly dying for decades. But the deal has unleashed a stampede of demands from other provinces, led by Ontario, a Liberal stronghold and the largest of the three net contributors to the equalisation fund.

Last week, a ministerial conference on child care—another of Mr Martin's pledges—again suggested that Quebec should have special arrangements. Mr Martin is setting up a “fiscal cafeteria” for the provinces to choose their own takeaways, quipped Hugh Mackenzie, a Toronto economic consultant. At the same time, the federal government has seemed slow and hesitant in pushing ahead with its own agenda. Mr Martin has travelled abroad almost frenziedly, but a long-promised foreign-policy review has yet to appear.

For now, the prime minister can afford all this largesse. The economy is growing steadily. The federal government has a large fiscal surplus. Yet in allowing his authority to be undermined, Mr Martin may be storing up trouble. This week, the opposition united to defeat a bill to split the Foreign Affairs and International Trade Department into two. A bill to make same-sex marriage legal across the country may barely squeak through in the face of fierce Conservative opposition.

All this means that the budget, on February 23rd, will have unusual political importance. It should allow Mr Martin to set some priorities, rather than responding to those of others. It may include a shake-up of foreign aid, and money for a new rapid-response army brigade. The opposition is unlikely to force a fresh election by rejecting the budget. But if Mr Martin is to win that election when it comes, perhaps next spring, he will have to show more of his decisive leadership of old.

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

All aboard?

India and Pakistan

Feb 17th 2005 LAHORE
From The Economist print edition

It is only a bus, but it gives a tired-looking peace process a burst of life

AT LAST, what looks like a breakthrough in the long quest for peace by India and Pakistan. On February 16th in Islamabad, India's foreign minister, Natwar Singh, and his Pakistani counterpart, Khurshid Kasuri, agreed to “impart momentum” to an ineffably tedious “composite dialogue” started a year ago. But this time there was some substance to the waffle. Most significantly, they agreed to open, from April 7th, a bus route between Srinagar, the capital of Indian-held Kashmir, and Muzaffarabad, the capital of Pakistan-held Kashmir.

The agreement is important in two ways. First, it offers Kashmiris, the real victims of the two nations' squabble over their homeland, something many have longed for. The road linking the two Kashmiri capitals was closed after the first of three wars over Kashmir in 1947-48. Kashmiri families were divided, homes destroyed and centuries-old trade routes blocked. When the reopening of bus links was mooted in late 2003, road signs were swiftly erected in Srinagar, pointing to Muzaffarabad. It was a moment of hope.

Second, the removal of the obstacles delaying this agreement shows a rare flexibility from both sides. Pakistan has always been suspicious of the idea of the bus, fearing that travel between the two Kashmirs would legitimise the existing “line of control” that divides them, turning it into a permanent border. Wanting precisely that, India had insisted on those using the bus carrying national passports, thereby conceding its sovereignty over at least part of Kashmir. Now it has agreed that, once identities have been verified, in some unspecified way, passports will not be needed.

Optimists believe that the opening of the roads linking the two halves of Kashmir could be the bond that keeps the peace. It ought to restore dignity to the shattered lives of Kashmiris on both sides and give them a real stake in peace rather than in insurgency and jihad. Kashmiris on either side of the divide will be able to embrace each other in only three hours.

More generally, the reopening of transport links means the restoration of age-old trading routes in the subcontinent. It takes nearly eight hours by road from Amritsar in Indian Punjab to Jammu, the closest point in Indian Kashmir. But it would take half as long if a traveller could transit Pakistan. The hinterland of Lahore, capital of Pakistani Punjab, used to stretch from Delhi to Srinagar. It might do so once more.

The foreign ministers reached other, less contentious, agreements as well. The two countries will open rail links further south, between Pakistan's Sindh and India's Rajasthan states. They also decided on a joint push for oil and gas pipelines through Pakistan to India: from Turkmenistan, through Afghanistan; and from Iran and Qatar. India is short of energy and Pakistan stands to benefit from hundreds of millions of dollars in transit fees.

All of this suggests that the peace process launched by India's former prime minister, Atal Behari Vajpayee, in April 2003, is back on track. Ever since his party lost an election last May, there have been fears that the momentum had been lost. Indian foreign policy under the new government, led by the Congress party, had seemed to be back in the hands of crusty diplomats, schooled in Pakistan-bashing. But the patience of Pakistan's president, Pervez Musharraf, has been vindicated. At last he has something to show for the olive branches he has thrown at India, notably a ceasefire along the line of control in November 2003, and an effort to rein in the Pakistan-based militants stoking the insurgency in Indian-controlled Kashmir.

They could yet upset this process through a spectacular act of terror in Kashmir or in India. Hardline separatists in Indian Kashmir have been swift to reject the bus deal as a sop that avoids the real issue of the territory's status. They will not stop fighting yet. The Indian army, too, may find it hard. It has this month promised to adopt a friendlier approach in Kashmir, and, after a brutal war that has claimed perhaps 60,000 lives, to try to win hearts and minds. But India may not be able to stomach close political links between Kashmiri separatists in Srinagar and their brethren in Muzaffarabad.

There are also bound to be security-related snags over the pipeline projects. It will take some time before Afghanistan is stable enough to carry the pipeline from Turkmenistan. And Pakistan's army is gearing up in Baluchistan to combat a nationalist insurgency that is threatening existing pipelines. Disagreements over another crucial resource—water—could also sour relation between the two rivals.

Or the two countries could simply succumb to the weight of history and start squabbling again. But this week's breakthrough implies two very hopeful things: that the national-security establishments in both are now ready to recognise the pivotal role of economics in bilateral relations. And second, that resolution of the Kashmir dispute is no longer a precondition to better relations. Rather, it is seen as a potential consequence.

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

Iraq’s Shias go from exclusion to dominance

Feb 17th 2005
From The Economist print edition

An alliance loyal to Iraq’s top Shia Muslim cleric, Grand Ayatollah Ali al-Sistani, has won the largest number of seats in Iraq’s parliamentary elections. But it will need to form a coalition with other groups to govern the country—the broader the better, to avert a civil war

IRAQ’S Shia Muslims have had a long time to repent their boycott of the country’s first multi-party elections, held in 1924, four years after Iraq was carved out of the collapsed Ottoman Empire. For the following 80 years they were excluded from power, despite greatly outnumbering all other groups, and suffered repression under successive governments mainly drawn from the Sunni Arab minority. This time, the Shias, especially their most influential cleric, Grand Ayatollah Ali al-Sistani, were determined not to repeat their historic mistake. In the parliamentary elections in late January—the country’s first genuine ones in half a century—droves of Shia voters defied the insurgents’ death threats and followed Mr Sistani’s fatwa instructing them to cast their ballots. The final results, announced on Thursday February 17th, showed that the United Iraqi Alliance, a Shia-led group of parties that claimed the endorsement of Mr Sistani and other Shia mullahs (and thus was nicknamed the “clerics’ list”), came well ahead of all rivals. However, with 140 seats, it will have only a slender majority in the new, 275-seat parliament and will thus have to seek a broader coalition.

What may turn out to be an extensive period of haggling is under way, with the leaders of the clerics’ list and the other various groups that won seats seeking to trade powerful jobs in the new government for support in the parliament. The Shias, who are around three-fifths of Iraq’s population of about 27m, have gone from being excluded from power to being over-represented in the parliament. This is because many of the Sunni Arabs, who dominated the country until the toppling of Saddam Hussein, despite being only about a fifth of the population, either boycotted the elections or were prevented from voting by the insurgency, which is raging most fiercely in Sunni-majority areas. The electoral commission said that, nationwide, around 58% of the 15m registered voters turned out. However, in Sunni-dominated provinces, the turnout was markedly lower: though in Salahadin it reached 29%, in Anbar province it was a pitiful 2%.

Iraq’s Kurds—a further fifth of the population, mostly of the Sunni faith but distinct ethnically from the Arabs—also turned out in force to vote. The grand alliance formed between the main Kurdish parties won the second-largest share of the vote. The Kurds, like the Shias, also now go from excluded to over-represented. They have their eyes on the largely ceremonial job of Iraqi president, currently held by Ghazi al-Yawar, a Sunni. Mr Yawar’s Iraqiyun List is the main Sunni group in the new parliament, though with just five seats. A secular group led by Adnan Pachachi, a Sunni tribal leader, did poorly and did not get a single seat.

The Iraqi List, a Shia-led but more secular alliance headed by Iyad Allawi, the interim prime minister, trailed behind the Kurds in third place. Thus Mr Allawi is now likely to lose his job, though he will try to persuade the other parties that, given his close links with senior military officers and his fairly good relations with Sunni leaders, he is best placed to hold the country together. This may not wash with the parties belonging to the clerics’ list, who are pushing several of their own candidates for prime minister. Of these, the front-runner seems to be Ibrahim al-Jaafari, the leader of the Dawa party.

Under Iraq’s interim constitution, the new assembly has to choose a president and two vice-presidents by a two-thirds majority (ie, 184 of the 275 seats), who between them choose a prime minister and cabinet, who must then win the support of a simple majority in the parliament. All this may not happen until late March. Between them, the clerics’ list and the Kurdish Alliance would have a two-thirds majority, though the parties and individuals who came together to form each electoral alliance will not necessarily stick together in the current horse-trading.

Once it has approved the new government, one of the parliament’s main jobs will be to draw up a new constitution. If all goes well, this will be put to voters in a referendum possibly in October. If two-thirds of voters in each of three provinces reject the constitution, it will have to be rewritten—thus giving the Sunnis and Kurds the power of veto, despite the Shias’ dominance of the parliament. Thus it is vital that the main Sunni groups which boycotted the elections be persuaded to take part in drawing up the constitution. Though the Sunnis will have precious few seats, one of their number may be made the speaker of the new parliament, an important role that should help guarantee them some influence in drafting the constitution. Once it has been approved in a referendum, there will be another general election, perhaps in December, in which, if all goes well, there may be wider Sunni participation.

America and its allies would probably prefer to see Mr Allawi continue in power. But even if Mr Jaafari or someone like him emerges as Iraq’s new leader, it will not be such a disappointing outcome for the coalition that brought Iraq an election through military might. Though Mr Jaafari is an Islamist, he appears to understand the need to include all the country’s main groups in decision-making. The chances are that the new government will not be a close ally of America—indeed, to establish its credibility, both among Iraqis and among the wider Arab and Muslim world, it would be wise for it to show a degree of independence. But it seems unlikely to be openly hostile to America or the West in general. There is a fair chance it will be broadly democratic and inclusive, setting a positive example to the whole region, as America has been hoping.

Once the haggling ends and a government is chosen, there are still many bitter battles to be fought—with luck, political battles rather than the military sort. What will be the role of Islam, and of the senior clerics, in framing the country’s laws? How much autonomy will the Kurds and indeed other groups be allowed? How will the country’s oil revenues be shared between the federal government and the provinces? And should some sort of timetable or limit be set for the withdrawal of foreign troops? While Iraq’s newly elected parliamentarians dispute such matters, the insurgents—who are far from beaten yet—will continue to do their utmost to stamp out the shoots of Iraqi democracy before they have a chance to take root.

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

Safety first

Pharmaceuticals

Feb 17th 2005
From The Economist print edition

Pain relief for America's drug regulator

THE past few months have not been easy for America's Food and Drug Administration (FDA).The worldwide withdrawal of Vioxx, a blockbuster anti-inflammatory drug, by Merck, its manufacturer, has left the FDA open to attack for doing too little, too late given mounting evidence that the product raises the risk of heart attacks. David Graham, one of its own officials, publicly accused the agency of being more interested in getting new drugs to market than scrutinising their safety after the fact. “The FDA has let the American people down and, sadly, betrayed a public trust,” he told Congress in November. The FDA—which this week has been holding a marathon advisory committee meeting on the risks and benefits of Vioxx and other COX-2 inhibitors—faces further scrutiny as various congressional committees take up the issue of drug safety.

Slowly, the Bush administration is responding to the criticism. On February 15th, Michael Leavitt, the new secretary of health and human services, announced the establishment of an “independent” Drug Safety Oversight Board within the FDA. This will routinely review emerging evidence about the safety of drugs that are already on the market, and make recommendations based on this information. It will also introduce new ways of communicating information about drug safety to the public. The board will bring together officials from the FDA's existing divisions in charge of new drug approvals and drug safety, plus some outside experts.

This is less than some politicians and public-health activists want: an entirely separate, and thus (they argue) truly independent, office of drug safety, well-funded and beyond the reach of the FDA's drug-approval branch (which they regard as too eager, and potentially tempted to downplay any evidence that its own approval decisions were mistaken). Others disagree. Pushing the FDA to weigh safety more heavily than benefit may already be a move too far, says Henry Miller, a former FDA official now at the Hoover Institution, a think-tank. Any slowdown in the approval of more innovative, but riskier, new medicines could, on balance, do Americans more harm than good, he claims.

The FDA this week also got (probably) a new head, albeit a familiar one: Lester Crawford, a former deputy commissioner and acting head of the agency since last year, has been nominated as the next permanent commissioner. He is likely to get the green light in Senate confirmation hearings. And he should be good news for the drug industry, says Rami Armon of Lehman Brothers, an investment bank. The industry wants a safe pair of hands to implement gradual reform of the FDA, not radical remodelling. But some observers fear that Mr Crawford, a veterinary expert, lacks the right experience or personality to handle negotiations with the big drug firms. “The FDA needs a firebrand, not a smouldering hulk,” says Mr Miller.

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

Germany and Japan—shrinking giants

Feb 16th 2005
From The Economist Global Agenda

Exports have traditionally rescued the mighty Japanese and German economies from downturns. But new figures show both countries’ economies shrank in the last quarter, despite strong world trade. What has gone wrong?

THE world’s second and third biggest economies both got a little smaller last quarter. Japan’s gross domestic product contracted at an annual rate of 0.5% in the final quarter of 2004, according to figures released on Wednesday February 16th. The numbers from Germany the day before were grimmer still. Its economy shrank at an annualised rate of 0.9% in the same period. Both economies started 2004 well, but failed to live up to the expectations they fleetingly raised.

Japan’s figures bemuse as well as disappoint. As the yen value of Japan’s output fluctuates, the statisticians must sort out how much is down to changes in prices rather than quantities. For much of last year, prices seemed to be falling sharply and quantities rising. But the cabinet office introduced a new way of counting GDP in November, which showed less deflation, but less output as well. Since November, however, the cabinet office has reworked its recalculations several times.

On Wednesday, it said it now reckoned that the economy contracted by 0.8% in the second quarter and 1.1% in the third, meaning that Japan spent three-quarters of last year in recession. Richard Jerram, an economist at Macquarie Bank, laments that estimates of Japan’s GDP are “such a rapidly moving target” it is hard to make much sense of them. Japan’s official statistics, it seems, offer lies, damned lies and revised lies.

What does seem clear, however, is that Japan is in the grip of a protracted “inventory cycle”. Makers of goods, unlike service providers, can stockpile their products, ready for future sale. When sales fall, however, manufacturers seek to clear their groaning shelves by cutting production by more than the fall in sales. Japan’s manufacturers, after adding to their inventories at a healthy pace in the first quarter of last year, spent the remaining nine months waiting for their shelves to clear.

Sales may be about to pick up again, however. Orders for machinery from abroad were at record levels in December, and consumer confidence rose last month. Economists nevertheless remain divided about whether this fragile and fretful recovery will be sufficient to drag Japan out of its structural slump.

It has, after all, been more than a decade since Japan first succumbed to debt-deflation, with falling prices raising the real burden of accumulated borrowing. Japan’s banks and companies have worked off some of these debts since then. The gross interest-bearing debts of Japan’s corporations fell from 146% of GDP in the 1993 fiscal year, to 84% in 2003. Debt held by banks has also fallen. But, as Andrew Smithers, an independent analyst, points out, Japan’s debt burden has been shifted, not lifted—from the shoulders of firms and banks on to the backs of taxpayers. The government’s (gross) debt burden grew from 72% of GDP in 1993 to 162% in the 2003 fiscal year.

Inflation, should it ever return, would erode the burden of those debts. But some in Japan’s policymaking circles are not willing to wait that long. In December, the government announced that in January 2006 it would halve an income-tax rebate, which can be worth ¥290,000 per person. Last month, the finance minister threatened to raise the consumption tax, a move widely blamed for snuffing out Japan’s last promising recovery, in 1997. Such contractionary policies sit uneasily beside such bad economic numbers. Either the politicians are myopic, or the figures are so unreliable they are being ignored.

In Germany, like Japan, recovery usually starts abroad. The order books of the two countries’ giant manufacturers, from Siemens to Sony, quickly fill as the world economy revives. The stimulating effects of foreign sales then multiply throughout the domestic economy. And last year was a vintage one for world trade. In 2004 Germany carried off the prize for the world’s leading exporter (of goods, if not of services) for the second year in a row; and Japan’s manufacturers hitched a ride on China’s prodigious investment boom. But towards the end of the year both economies departed from the usual script of an export-led recovery.

In Japan’s case, what was surprising and encouraging about its strong start to 2004 had been how little it owed to international trade. Most first-half growth came in fact from domestic consumption and investment. But in the second half, investment growth slowed, while consumer spending actually fell. Meanwhile, unaccustomedly, Japan’s imports grew rather faster than its exports: in the final quarter, imports grew 3.1% (quarter-on-quarter) while exports increased by only 1.3%. This meant that a greater share of Japanese demand was filled by foreign producers, thereby affecting Japanese firms’ contribution to GDP.

If Japan had a consumption boomlet that fizzled out in 2004, Germany never had one in the first place. According to Goldman Sachs, an investment bank, Germany’s “silent corporate revolution” may partly explain the failure of domestic demand to respond to the country’s strong export performance. The much noisier overhaul of Germany’s welfare system, pursued by Gerhard Schröder, the chancellor, may also have been a factor. German firms have squeezed extra hours out of their workers, but for no extra pay. In June, for example, Siemens lengthened the working week from 35 hours to 40 in two plants, without raising wages. Wage moderation has also prevailed in Germany’s public sector.

Workers, therefore, have had no extra money to spend: retail sales fell in December, for the third month in four. The shops, in turn, had no reason to hire. Thus the sales assistants they might have employed remained on Germany’s jobless rolls, which topped 5m in December, where they linger, waiting for Mr Schröder to cut their benefits.

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

Building the American dream…or nightmare?

Feb 18th 2005
From The Economist Global Agenda

The Fed's chairman, Alan Greenspan, has urged Congress to do something to rein in America's two monster mortgage-finance agencies, Fannie Mae and Freddie Mac, before they put the country's financial system at risk

FANNIE MAE and Freddie Mac, the twin titans of America’s mortgage markets, think of themselves as big, friendly giants. They stand behind the mortgages of around three-quarters of America’s households—they “make home possible,” as Freddie Mac likes to put it. Their circle of friends does not, however, extend to the Federal Reserve and its chairman, Alan Greenspan. On Thursday February 17th, he told Congress that by letting these two agencies grow unchecked, “We are placing the total financial system of the future at a substantial risk.” Very big but not so friendly, these giants could soon loom over America’s financial skyline like Godzilla and King Kong.

Fannie Mae—originally the Federal National Mortgage Association, it now calls itself by its chummy Wall Street nickname—traces its origins to the credit crunch of the Great Depression, and government efforts to help families borrow to buy a home. Fannie Mae, and its smaller cousin, Freddie Mac (the Federal Home Loan Mortgage Corporation), do not lend to budding homebuyers directly. Instead, they buy up the mortgages that other lenders offer, helping local banks and thrifts to distance themselves from the risks involved. Some of these mortgages are then bundled up and sold on: the agencies serve simply as middlemen. But a growing proportion are kept on the agencies’ balance sheets. Between 1997 and 2003, their combined holdings more than trebled, to over $1.5 trillion (see chart). The middlemen have got fatter and fatter.

Why are they so financially retentive? To provide liquidity and stability to the American mortgage market, a Freddie Mac spokesperson told Reuters news agency. To make money, Mr Greenspan told Congress. Though the two agencies are owned by private shareholders, they are widely perceived to enjoy an implicit guarantee from the federal government. This lets the agencies borrow cheaply to buy mortgages, squeezing out any unsubsidised rival which has to stand on its own feet. Whatever the official position, since the two agencies are now so big, the federal government will in fact be forced to bail them out if things ever do go wrong.

How might things run awry? As an asset, mortgages pose three risks: the interest rate can fall, the mortgage can be repaid early, or the homebuyer can default. To cushion themselves against these risks, the two agencies hold a reserve of capital. But in Fannie Mae’s case, this cushion was judged too threadbare by the agency’s main regulator, the Office of Federal Housing Enterprise Oversight (OFHEO). It ordered Fannie Mae to raise its capital cushion by 30%. The two agencies thus stopped adding to their piles of mortgages at quite such a furious rate last year. But once this moment of crisis passes, Mr Greenspan says, the portfolios will grow again.

On Thursday, Mr Greenspan urged Congress to step in and cut the two agencies down to size. If “immediate divestiture” of their mortgage holdings would be too abrupt, their portfolios should nonetheless be slimmed down over several years. His words wiped more than 2% off Fannie Mae’s share price, and 3% off Freddie Mac’s.

The chairman’s words have hurt the two agencies before. Last year, the Fed chairman suggested homebuyers should take out flexible-rate mortgages, rather than fixed-rate. This is questionable advice for homebuyers, but it is unquestionably bad for Fannie Mae and Freddie Mac. Borrowers, who are averse to risk and often overexposed to mortgage debt, pay a premium for the security of a constant stream of interest payments, a premium Fannie Mae and Freddie Mac are happy to pocket.

The implicit guarantee the agencies exploit accounts for half of their stockmarket value, according to Wayne Passmore, an economist at the Fed. But only a small fraction of this subsidy is passed on to homebuyers in the form of cheaper mortgages. The rest is pocketed by the agencies’ shareholders. This is, said Mr Greenspan last year, an “opaque and circuitous” way to subsidise homeownership.

Does homeownership deserve a subsidy at all? Politicians argue that homeowners are better citizens, more committed to their communities. That is partly true: in America, the transaction costs of selling a house can claim up to 10% of the value of the home, leaving people reluctant to pick up and move. But is immobility necessarily a good thing? When jobs move people should follow them. But homeowners, rooted in their neighbourhoods, are also rooted to the spot. They cling to the side of a sinking neighbourhood, long after the jobs have jumped overboard. As Andrew Oswald, an economist at the University of Warwick, in England, points out, West Virginia has one of the highest homeownership rates in the Union; it also tends to have one of the highest rates of unemployment.

Fannie Mae likes to say that “Our business is the American dream”. Homeownership is undoubtedly popular with Americans and their politicians. But if the Fed chairman is right, these two dream-builders should be keeping financial regulators awake at night.

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

A new spymaster—and a powerful one

Feb 17th 2005
From The Economist Global Agenda

President Bush has chosen John Negroponte, currently ambassador to Iraq, as America’s first director of national intelligence. The choice of Mr Negroponte indicates that the newly created job will have real power

JOHN NEGROPONTE is tough. There can be no doubt that the man George Bush has chosen as America's first director of national intelligence is a survivor and a fighter. Mr Negroponte, whose nomination was announced by Mr Bush on Thursday February 17th, has been accused of abetting torture and murder in Central America during the 1980s. He was ambassador to the United Nations during the run-up to the Iraq war and is currently America’s ambassador to a violence-torn Iraq. To many he is a tarnished figure—but his critics have been able only to watch him rise through the ranks from one hard job to another.

He will need to draw on all his experience of fighting—both the diplomatic and the literal sort—for his hardest job yet. Legislation passed in December created the post. America’s 15 intelligence agencies were seen as competing rather than co-operating, and the special commission that investigated the September 11th 2001 attacks determined that better coordination might have been able to forestall the tragedy. Congress, under pressure from the commission and the September 11th victims’ families, duly created the powerful post of the DNI.

This did not happen without controversy, however. In Washington, power is often measured by control of money and personnel. But many fought the creation of a DNI with these powers. Most notable among them were Donald Rumsfeld, the defence secretary, and his department, which consumes around 80% of the intelligence community’s $40 billion budget. Mr Rumsfeld’s congressional allies managed to squeeze a provision into the intelligence-reform law requiring that the new director’s job not “abrogate” the statutory responsibilities of the defence secretary. This seemed to indicate that the new DNI would be a figurehead, a nominal co-ordinator without the crucial power to allocate money between intelligence agencies.

The selection of Mr Negroponte, and Mr Bush’s comments at his nomination, seem to indicate otherwise. Though the DNI will not sit in the cabinet or be physically located in the White House, Mr Bush made it clear that Mr Negroponte would have his ear. He will replace the CIA’s boss, currently Porter Goss, as the president’s primary daily intelligence briefer.

Moreover, Mr Bush reiterated that Mr Negroponte would have the authority to allocate money to all the intelligence agencies and direct how it was spent. When asked directly what would happen if Mr Negroponte comes into conflict with Mr Rumsfeld, Mr Bush sought to downplay the notion that the two would necessarily disagree, whatever press reports might indicate. But when pressed, Mr Bush said directly, “Ultimately, John will make the decisions on the budget,” thus seeming finally to settle the ambiguity.

However, Mr Bush also stated that the military chain of command would remain intact. This could refer to the tasking of satellites, many of which are controlled by military intelligence. If Mr Negroponte and Mr Rumsfeld do not agree on where they should go, the question may be referred to the National Security Council and perhaps ultimately decided by the president.

A controversial past

Mr Negroponte served in America’s foreign service from 1960 to 1997, with assignments in Europe, Asia and Latin America. His most prominent posting was as ambassador to Honduras from 1981 to 1985. While there, he was a key figure in the Reagan Administration’s war against the leftist Sandinist government in neighbouring Nicaragua. Honduras is where the American-backed, anti-Sandinist rebels, the Contras, were trained. Human-rights groups say that the Contras used their base in Honduras to torture prisoners and that this was done with Mr Negroponte’s knowledge. The remains of 185 corpses were discovered there in 2001. In addition, Mr Negroponte is said to have abetted the creation of Battalion 316, a death-squad used by Honduras’s right-wing government (and trained by the CIA) to crush dissidents in Honduras. Mr Negroponte has repeatedly denied such accusations.

Mr Negroponte went on to work at the State Department in Washington, and then as ambassador to Mexico and the Philippines. In 2001 he was Mr Bush’s surprising pick to be America’s ambassador to the UN. In his confirmation hearings some congressmen complained that he was an inappropriate choice, saying he had misled Congress during his tenure in Central America. But he was nonetheless confirmed, and served until mid-2004. Though he was America’s UN envoy during the run-up to the Iraq war, he was largely off of the stage at that time, due partly to a successful fight with prostate cancer. It was Colin Powell, then Secretary of State, who made the case to the UN for Iraq’s alleged possession of weapons of mass destruction, not Mr Negroponte.

He remained relatively quiet in his next job as the first American ambassador to post-Saddam Iraq, in sharp contrast to Paul Bremer, who had been America’s proconsul before the handover of sovereignty in June last year. When pressed on what America’s vision for Iraq was, Mr Negroponte has repeatedly said that he is merely a diplomat, and that the choice of policies is up to the sovereign Iraqi authorities.

Now he will be not a diplomat, but a powerful adviser and boss. But boss of what, exactly? The intelligence-reform law gives him the power of advice and veto over the heads of the various intelligence agencies’ chiefs. At the highest levels, he will be respected and possibly even feared as a formidable player in the national-security apparatus. But he will personally command no battalions, control no field agents. Will this mean that he is too close to the president and too disconnected from the spies and analysts who do the actual intelligence work? Many believe that intelligence was politicised in the run-up to the Iraq war, with the “correct” answers handed from the top down, not from the ground-troops up. How well Mr Negroponte spans the gap between listening to the myriad agencies and deciding what to tell the president will be crucial to his success.

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

Cinderella markets

Buttonwood

Feb 15th 2005
From The Economist Global Agenda

If ever there was a time to shun glamour and look for inner beauty, this is it

WHEN Buttonwood went through outstandingly plain phases as a youthette, her mother—now, alas, of sainted memory—used to raise the quotient of references to Inner Beauty and its superiority to the flashy outward stuff. How those memories come back these days, with fund managers touting as never before the fragrant charms of fast-growing foreign markets. As April nears and those last bits of tax-favoured retirement income look for a home, investors are listening. Last week’s net inflows into emerging-market equity funds were the largest one-week numbers in over a decade. So far this year, investors have put $4.64 billion into non-American equity funds and pulled $1.58 billion out of American equity funds. The figures come from Emerging Portfolio Fund Research, a firm in Cambridge, Massachusetts.

The attractions are obvious. Though there are certainly lemons among them, developing economies as a group are likely to grow twice as fast as developed ones this year, the IMF reckons. Their shares are far cheaper, trading on trailing price/earnings ratios about a third lower than in developed countries and at a larger-still discount if predicted future earnings are factored in instead. So emerging-market shares, which were hot in the 1990s but cooled off later in the decade, have been making a comeback.

Investors think they are betting that these countries will continue to outpace the developed world in economic growth. But they are also—unconsciously—making a lot of other bets: among them, that corporate profits will grow in line with the countries’ economies; and that shareholders in existing companies will have a corresponding share of these profits.

But does past economic growth in fact imply greater future stockmarket returns? Not on your nellie, say Elroy Dimson, Paul Marsh and Mike Staunton from London Business School (LBS), in an annual study of global investment returns sponsored by ABN AMRO, a Dutch bank, that was published last week. Though this finding is not entirely new, the LBS team brings to the analysis an unrivalled set of data going back 105 years for 17 developed countries and substantial periods for another 36 countries.

They identified three elements in the total return on shares—dividend yield (price divided by previous dividend), dividend growth and changes to the price/dividend multiple. They found that, over the long haul, economies with slower GDP per capita growth produced better real returns on shares than faster-growing ones, and vice versa. The star performer over more than a century, by the way, was Australia, followed by Sweden, South Africa, America, Canada and Britain.

Messrs Dimson, Marsh and Staunton then tested this finding in a different way, using a share-trading rule based explicitly on economic growth. They classified all their countries into quintiles according to how quickly GDP had grown in each over the previous five years. Equal sums were invested in each quintile, and dividends were reinvested. The countries were re-ranked each year, the quintiles were re-based and fresh investments were made. At the end of 2004, the total return from buying shares in slowest growing countries was 12% a year, compared with a 6% return on shares in the fastest-growing countries.

What might account for this perverse relationship between economic growth and stockmarket performance? The easiest thing to say is that by the time a country comes to be recognised by the global investment community as “fast-growing”, its share prices have probably been bid up too high for newcomers to make much money out of it. Another explanation is that insiders cream off profits before they hit the bottom line. Also, growth may be fuelled by thousands of small entrepreneurial companies that never come to market and thus do not recompense shareholders in existing firms.

More broadly, economies tend to grow when they get bigger inputs of labour, capital and technology. The benefits of growth may be felt by those who supply the labour (local workers), the capital (including local savers and investors) and the technology (eg, Cisco Systems)—or by none of the above, such as consumers. Shareholders will probably get a look-in, but there is nothing to say how big.

Jay Ritter, who teaches finance at the University of Florida, takes the argument further. In a paper that will be published soon in the Pacific-Basin Finance Journal, he maintains that not only is past economic growth no guarantee of future stockmarket returns, but even future economic growth (could we but know it) is no guarantee of contemporaneous stockmarket returns except in the most transitory way. A rough-and-ready empirical example of that truth, looking only at share prices: in 2004, and for the second year running, China was the worst performing stockmarket tracked by The Economist, falling 15% despite the country’s rapid growth. Mr Ritter reckons that current earnings yields are the best guide—but earnings need to be massaged over ten years or so to remove the distorting effects of specific moments of the business cycle.

So is the moral of the story to forget high-flying Thailand? Not quite. Emerging markets may not produce the outsized returns investors expect but they are still a good way to diversity portfolios. As the developed world’s markets become more highly correlated, emerging markets, refreshingly, continue to go their own way. The point is not to expect Thailand to produce greater-than-average returns on its shares—and to keep a sharp eye out for transaction costs, which are often higher in emerging markets.

If this argument about economic growth and stockmarket returns feels faintly familiar, it’s because it is. Here we have, on a bigger scale, a favourite debate of stockmarket strategists over whether growth stocks or value stocks give the bigger return. Are investors better off buying a stock with a high price/earnings ratio because they think its prospects for growth justify a higher multiple? Or do they get better returns from buying a cheaper, higher-yielding share? In the short term, either investment style can produce consistently good returns: growth stocks predominated in the 1990s, value stocks have done better in the past five years and there are those who think the tide is about to turn back now. In the long run, however, according to the LBS team and many others, value stocks—like Cinderella countries with unglamorous growth rates—are more likely to provide higher returns.

There is something so counter-intuitive about this line of reasoning that Buttonwood doubts investors will be able to resist the lure of fast women, fast cars and fast economies—any more than she really believed her mother about the superiority of Inner Beauty. But just in case reason lurks out there somewhere among the irrational exuberance, the accompanying table groups countries, as the LBS team did, according to how quickly they have grown in the past five years. On “value investing” criteria, the countries in the lowest-growth category are no worse a bet—even perhaps a better bet—than the countries under highest growth. Anyone for Denmark?

Send comments on this article to Buttonwood (Please state whether you are happy for your comments to be published)

Read more Buttonwood columns at www.economist.com/buttonwood

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

Hariri’s killing shatters Lebanon’s calm

Feb 16th 2005
From The Economist Global Agenda

A car-bombing in Beirut has murdered Rafik Hariri, who had quit as Lebanon’s prime minister last October, calling on Syria to take its troops out of his country. Was it Syrian revenge, internal Lebanese score-settling or an effort to destabilise the wider region?

LONG-SUFFERING Beirutis had got used to the calm. The country, torn by civil war from 1975 to 1990, has since become one of the Middle East’s quieter spots. The calm was shattered on Monday February 14th, however, as an enormous car bomb killed Rafik Hariri, the country’s prime minister until recently, as his motorcade passed through the capital’s luxury-hotel district. At least 14 others were killed in the blast, and around 135 injured. The assassination of Mr Hariri, one of the architects of Lebanon’s post-war reconstruction, and the scenes of carnage, with corpses and burning cars strewn across the streets, brought back horrific memories of the civil war—and fears of foreign military intervention that could make Lebanon a battleground once more.

Who killed Mr Hariri and why? And will the bombing mean the end of Lebanon’s calm? The answer to the first question is opaque, but whoever murdered Mr Hariri it does not appear—yet—that the attack will mean wider instability in the country. In the immediate aftermath of the attack, most speculation has centred around Syria. It keeps around 14,000 troops in Lebanon and pulls the strings in its smaller neighbour’s politics. Syria helped put an end to Lebanon’s seemingly endless war. But a growing chorus of voices—including Mr Hariri’s as of recently—have been calling on the Syrians to leave. Having served as prime minister for 10 of the past 14 years, Mr Hariri resigned last October, after falling out with Lebanon’s pro-Syrian president, Emile Lahoud, and joined the opposition.

Some detect the work of an intelligence service—if not Syria’s, some other foreign power’s—in the method of the attack. Certainly, the size and sophistication of the bomb suggest it was the work of a well-organised and experienced group, or a government. The blast was big enough to leave a huge crater and shatter windows hundreds of metres away. Moreover, if it was remotely triggered, it was sophisticated enough to defeat jamming mechanisms, which the billionaire Mr Hariri’s convoy always used while travelling. Mr Hariri, who made his fortune in construction in Saudi Arabia, knew he had many enemies and took what countermeasures he could. However if the attack was a suicide bombing—as the Lebanese interior ministry suggested on Tuesday that it was—then no countermeasures might have prevented it from succeeding.

It would be unusual for an intelligence service to commit a suicide attack. And Syria’s president, Bashar Assad, was quick to join the chorus of international condemnation, calling the assassination “a terrible criminal act”. But innocent or not, Syria did have a possible motive for wanting Mr Hariri off the political scene. The former prime minister was set to make a comeback in Lebanon’s elections, due in May. If so, this would have been a political defeat for Syria and its allies in Lebanon, encouraging the opposition and possibly threatening Syria’s control of Lebanon itself. Many Lebanese are convinced that their interfering neighbour was behind the killing. Mr Hariri's funeral, on Wednesday, turned into an outpouring of anti-Syrian fury. At least 150,000 joined the funeral procession, with chants of “Syria out, Syria out!”

Shock and anger

But would the Syrians be rash enough to risk the international condemnation—or worse—that would follow if they were found to be behind the assassination? Already, the United Nations Security Council has passed Resolution 1559, demanding that Syria take its troops out of Lebanon. On Tuesday the Council ordered the UN's secretary-general, Kofi Annan, to investigate Mr Hariri's murder. A “shocked and angered” President George Bush has recalled America's ambassador to Syria and is pressing other Security Council members to take action against whoever was behind the assassination.

So far, Mr Bush has stopped short of directly accusing Syria. Nevertheless, America is likely to turn up the pressure on what it considers a destabilising rogue state in the Middle East. Some believe that increased regional tension, rather than internal Lebanese score-settling of whatever kind, was the goal of the attack. Silvan Shalom, Israel’s foreign minister, said the bombing “proves that there are organisations and countries, such as Syria and Lebanon, striving to undermine the stability in the region and prevent democratisation in the Arab world.”

Though it seems unlikely as yet, there are reasons to fear that Israel might be drawn into any renewed conflict in Lebanon: it still suffers, and retaliates against, sporadic attacks by Syrian-backed Hizbullah militants based in southern Lebanon; and only last year, Israel’s warplanes bombed what it said was a Palestinian militants’ training camp, just a few miles south of Beirut. Lebanon hosts a chunk of the Palestinian refugee population, and for nearly 20 years its southern reaches were occupied by the Israelis, who invaded in 1982 to clean out the Palestinian Liberation Organisation, which had used it to stage attacks.

Could the attack merely have been the work of a new and deadly militant group? A previously unheard-of organisation, calling itself Victory and Jihad in Syria and Lebanon, sent a videotape to al-Jazeera, a Qatar-based broadcaster, saying that it had killed Mr Hariri because of his ties with Saudi Arabia. But this claim may well turn out to be false, and the group may not even exist.

Lacking further hard evidence of the bombing itself, experts and the police can only speculate who might be responsible. Lebanon’s politics are complex, factional and too-often violent, despite the country’s relative calm until now. The population is divided between Sunni and Shia Muslims, Maronite Christians and Druze (followers of a heterodox offshoot of Islam). These groups are further divided into clans and, in some cases, crime families.

Since 1990, the country has stayed relatively peaceful under a power-sharing formula—not too dissimilar to that which it is hoped will develop in Iraq—in which the president would be a Christian, the prime minister a Sunni and the speaker of parliament a Shia. But the peace is fragile, and has become much more so with Mr Hariri’s death. Lebanon, as well as the wider Middle East, is sure to be a tenser place as the culprits are sought.

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

GM pays to walk away

Feb 14th 2005
From The Economist Global Agenda

General Motors has paid Fiat €1.55 billion to get out of an option that would have forced it to acquire the Italian carmaker outright. This solves a small problem for GM but leaves Fiat with little time to tackle its big troubles

THE second-hand car market is relatively transparent. Buyers and sellers have readily available means to put a value on a used set of wheels. On Sunday February 13th a little light was shed on how much it would cost not to buy a second-hand carmaker, in poor condition and with one not-so-careful owner. General Motors and Fiat announced that they had undone a deal that would have forced the American car giant to acquire the 90% of the Italian firm that it did not own. GM will pay Fiat €1.55 billion ($2 billion) to cancel a “put” option that the firms had agreed as part of a tie-up that was concluded in happier times for both car companies. GM can afford this and sees it as worth paying to be rid of a car company that is losing money and market share, and is running out of road.

In 2000, GM bought 20% of Fiat Auto, the car making arm of the Fiat industrial conglomerate, for $2.4 billion. In return, Fiat took a 6% stake in the American car giant. At the time GM, the world’s biggest car company, feared being left behind in the merger wave that was sweeping the car industry. Since the DaimlerChrysler merger in 1998, the industry had consolidated rapidly. To become a global force, GM felt it needed the expertise of foreign companies to satisfy the differing tastes of the world’s car buyers and to share development costs. GM’s greatest rival, Ford, was building a global network. In Europe it eventually acquired Jaguar, Volvo and Land Rover. Renault had teamed up with Nissan. DaimlerChrysler would go on to forge alliances with Hyundai of South Korea and Mitsubishi of Japan.

GM, fearing that DaimlerChrysler would buy Fiat, resolved to add the Italian firm to its European stable, which already included Opel, Vauxhall and Saab. After the deal went through, Fiat’s then boss, Gianni Agnelli, said that he had turned down an offer of $11 billion for the whole firm in an effort to keep the reins.

Fiat was keen to sell because its decline was accelerating. Fiat Auto accounted for some 40% of Fiat Group’s sales but its losses were draining money from the more successful parts of the business. At one time Fiat had accounted for 5% of Italy’s GDP and, by the mid-1980s, it was challenging Volkswagen as the biggest European-owned carmaker. But it had made little impact beyond Europe. Mr Agnelli’s desire to keep control (and stay Italian) led to his firm missing out as other carmakers merged.

The deal with GM was the best Fiat could do in the latter stages of the consolidation bonanza. Both firms were keen to make savings through joint purchasing and by sharing engines and transmissions. But Fiat had other problems besides high production costs. It had skimped on research-and-development spending to save cash, leaving it with a stale product line-up. A reputation for poor quality deterred some buyers. Most of its sales successes were in small cars, for which margins are usually thin.

Since GM took a stake the problems have mounted. Greater foreign competition in Italy, Fiat’s biggest market, arrived as government schemes to help Fiat faded away. Fiat’s high costs and the lack of success of the Palio (Fiat’s “world car”) and the Stilo, a a bigger and supposedly more profitable model, proved a drag, sucking money from Fiat’s successful truck and tractor business. In 2002 Fiat was forced to seek refinancing in the form of €3 billion in convertible loans from banks. The souring relationship with its American partner was exemplified by GM’s refusal to contribute. Fiat also sold its stake in GM and its financing arm to raise cash. This diluted GM’s holding in Fiat to 10%, which according to GM invalidated the put option.

GM has also had its share of troubles since its link-up with Fiat. In January 2000 its shares were worth over $80 and it made a profit of $5 billion that year. Its shares now trade at around $37 and although it made $3.6 billion in 2004, $2.9 billion came from its finance arm. The world’s carmakers have the capacity to produce about 80m cars and other light vehicles a year. Yet production is running at barely 60m, in an industry where utilisation rates need to top 80% to ensure decent profits. GM’s bonds are at a record low, hovering just above junk status and it has been saddled with mounting “legacy” costs from its employee health-care and pension plans. European and Asian producers dominate America’s luxury-car market and the increasingly bold and innovative South Koreans are attacking the market for cheaper cars.

Nevertheless, GM can afford to pay Fiat to ditch the deal, from its cash reserves of some $23 billion. Taking on Fiat and its hefty debts would surely have damaged GM’s precarious credit rating. And GM needs less European capacity, not more—it recently announced a restructuring programme that will cut 12,000 jobs at Opel in Europe. Its tie-up with Daewoo gives it a better position to take advantage of the growing markets of India and China.

The future for Fiat is much less certain. The car company is burning through cash at the rate of €1 billion a year. In 2000, the year of the GM deal, it sold 2.4m cars and vans; in 2003 it sold just 1.7m; and figures for 2004, which are released at the end of February, could show a further decline. The cash from GM will buy Fiat some time to engineer a revival—or better manage its decline. Italy’s government, the first port of call for ailing national businesses, has said that it will not bail-out Fiat. It may not be able to resist political pressure to do so in the event of a crisis, though European competition law may stand in its way. In fact, Fiat is a firm with few obvious attractions. The big car companies have all the partners they need. Fiat cites Peugeot Citroën as a role model but its troubles are worse than those its French counterpart was suffering before its turnaround. A possibility is that Fiat might find salvation from Asia. A big Chinese car firm is in takeover talks with Britain’s MG Rover. Perhaps another might consider Fiat as an ideal European partner. If not, its prospects look very bleak.

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

Shaken, not stirred

SCIENCE & TECHNOLOGY

Data storage

Feb 10th 2005
From The Economist print edition

The answer to slow data retrieval may be to shake the system up

COMPUTER processors may be getting faster and faster but the time it takes to retrieve data from a computer's hard disk is still a bottleneck. That rate depends on the speed at which the disk is spinning, which in turn determines how quickly a given bit of data arrives under the reading head that is responsible for detecting it and transmitting it to the rest of the machine.

Modern hard disks spin at between 5,400 and 15,000 revolutions per minute (rpm). If they went much faster than that, the forces generated would cause them to shatter. For years, this has seemed an insuperable problem, and the industry has been waiting for solid-state memory, which has no moving parts, to become cheap enough to do the job instead. But Dataslide, a firm based in Sussex, Britain, believes it has a revolutionary solution to the retrieval problem that does not require waiting for solid-state mass memory—or, rather, it has a non-revolutionary one.

Dataslide proposes to abandon rotation in favour of vibration. Charles Barnes, the head of Dataslide and inventor of the vibrating drive, has produced a prototype drive containing a rectangular plate coated with magnetic-storage material similar to that used in disk drives. A second plate above it carries an array of heads that have been lithographed on to its surface using the technique employed to make the pixels of liquid-crystal display screens. The plates themselves are made of titanium silicate glass, an extremely strong material, and covered with low-friction diamond coatings which act as a lubricant. That is because, instead of spinning under the heads, the lower plate vibrates from side to side under them 600 times a second.

The upshot is that every spot on the lower plate passes under a reading head every 833 nanoseconds (a nanosecond is a billionth of a second). The average time required to read a given bit of data is therefore 417 nanoseconds—or about ten times faster than a disk spinning at 15,000rpm. And that, Mr Barnes hopes, is only the start. He believes that with currently available materials and technology it should be possible to increase the frequency of vibration to 100,000 times a second, equivalent to a disk rotating at 12m rpm.

For the moment, the company's goals are more modest—within 18 months it hopes to build a drive with 64 heads storing up to 72 gigabytes. Mr Barnes believes it will eventually be possible to make drives with over 1m heads. These would be capable of storing vast amounts of data and handling them at rates of up to 300 gigabytes a second—hundreds of times faster than the rates that are currently attainable.

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

Ernst Mayr

OBITUARY

Obituary

Feb 10th 2005
From The Economist print edition

Ernst Mayr, evolutionary biologist, died on February 3rd, aged 100

CHARLES DARWIN'S most famous book is called “On the Origin of Species by Means of Natural Selection”. That is not, however, what it is actually about. Natural selection is there in abundance. Darwin shows how small, heritable variations that improve survival and reproduction will accumulate over the millennia. He also shows that groups of similar species have descended from common ancestors. But on the origin of those species—exactly how one ancestral species divides into many—the book is largely silent.

Darwin did not know the answer to this question, and nor did anyone else until Ernst Mayr, a biologist working at the American Museum of Natural History in New York, enlightened them.

First, in 1942, he published “Systematics and the Origin of Species”. This got to the heart of the problem by defining what a species actually is—not a group of individuals that look alike, but a group that can breed among themselves but not with others. That now-routine observation cleared the way to ask how such “reproductive isolation” comes about. Mr Mayr's answer was that bits of large interbreeding populations sometimes get isolated from the main (climate change may break up a range, for example). Natural selection will then do its work on the isolated sub-populations. To the extent that these sub-groups throw up different genetic mutations for selection to work on, and are subjected to different selective pressures, they will evolve in different directions. Eventually, they will become new species.

No doubt, many biologists reacted to this idea in the way that Thomas Henry Huxley reacted to Darwin's when he first heard it: “How extremely stupid not to have thought of that.” But it was Mr Mayr who did the thinking, and thus solved what Darwin and his contemporaries referred to as “the species problem”—in other words, why life on Earth is so diverse. By doing so, he joined a select group of biologists who, in the mid-20th century, rescued Darwin's idea from obfuscation and misunderstanding. Huxley was known as “Darwin's bulldog” for his sturdy public defence of his reclusive friend's ideas. These biologists—Mr Mayr, Theodosius Dobzhansky and George Gaylord Simpson in particular—deserve, perhaps, to be known as Darwin's retrievers.

The neoDars

It was not that biologists had given up on evolution by the 1940s—quite the contrary. But they had got very confused about its mechanism. Darwin himself started the confusion in later editions of “On the Origin”, by retreating from natural selection as the sole mechanism of evolution, and even tinkering with the idea of the inheritance of acquired characteristics.

The geneticists of the early 20th century did not help. They rediscovered the laws of inheritance first developed 40 years earlier by Gregor Mendel, an unsung Moravian monk. They also discovered the idea of genetic mutation. But instead of linking these things to natural selection, they came up with the idea of “saltation”—in other words, sudden mutational shifts from one well-adapted species to another. Nor, the geneticists complained, had there been enough time for natural selection to do its work, given what they had discovered about the rate at which mutations occur, and the fact that most mutations are deleterious. It was all a bit of a mess.

Darwin's retrievers cut through this muddle. Dobzhansky integrated genetics into what became known as the neoDarwinian synthesis with his work on fruit flies. Simpson provided the palaeontology with a classic study of the evolution of horses. Mr Mayr's contribution was to tackle the question of speciation head-on and solve it. (The question of time was disposed of by physicists, who gave radioactive dating to the world, and thus showed it is billions of years old, and also donated nuclear fusion, which has kept the sun shining for those billions of years.)

Mr Mayr's advantage over the laboratory-bound biologists who had hijacked and diluted Darwin's legacy was that, like Darwin, he was a naturalist—and a good one. He identified 26 new species of bird, more than anyone else now alive, and 38 species of orchid. He was born in Bavaria and studied medicine, but found he preferred birdwatching. He arrived in America by a circuitous route that took in New Guinea, the Solomon Islands and Tring, a small town in southern England where Lord Rothschild, a rich naturalist, had established a private museum. He moved to New York when his patron had to sell his collection of bird specimens to the American Museum in order to pay off a blackmailer. Mr Mayr, who helped to broker the deal, relocated with the collection.

Mr Mayr did well in America, ending up in the Alexander Agassiz chair of zoology at Harvard, showered with honours, and proving the fitness of his own genes by living for more than a century. It is an irony, though, that his adopted country is the one place in the developed world where the neoDarwinian explanations that he and his colleagues created are not the commonplace of the schoolbooks, and where many people prefer to cling to the campfire tales of Genesis, rather than face the awesome thesis that Mr Mayr helped to elucidate.

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

Unhappy returns

BRITAIN

Equities

Feb 10th 2005
From The Economist print edition

Investors have done badly under Labour

SHARE prices have had a good run in the past few months. The FTSE 100 index has risen from around 4,300 half a year ago to break through the 5,000 barrier in trading on February 9th. That's the highest equities have been since mid-2002.

Unfortunately for investors, share prices will have to climb a lot higher before the FTSE 100 returns to its all-time peak of 6,930. The last time the stockmarket reached that level was at the end of 1999.

The bursting of the high-tech bubble is the main reason why the stockmarket has done so badly in the past five years. The IT, telecoms and electronics sectors have done spectacularly badly since early 2000, point out economists at the London Business School (LBS) in their yearly analysis of long-run global investment returns for ABN Amro, a bank.

Yet what is remarkable about the performance of the stockmarket is that equities have done so much worse in Britain than in other countries since Labour came to power in 1997. Since the start of that year, the real value of equities has shrunk by 0.1% a year (see chart). By contrast, it has grown at an annual rate of 5.1% in France, 4.2% in America and 1.6% in Germany.

The picture looks somewhat better for total returns, which include reinvested dividends. In real terms, total returns in Britain have been 3.0% a year. That's only a little less than Germany's 3.4%. The gap with America, where returns were 5.7% a year, also narrows. This is because British companies generally pay quite generous dividends. However, the French stockmarket still puts Britain's in the shade with total real returns of 8.6% a year.

Many investors will know whom to blame. Last year, John Littlewood presented a charge-sheet against the Labour government in a publication by the Centre for Policy Studies, a right-of-centre think-tank. He said that the stockmarket had been weakened by Gordon Brown's tax raid on pension funds. The chancellor's public spending spree was diverting resources from the wealth-creating private sector. And the Labour government was strangling companies with more and more costly regulations, which were eating into their profits.

Yet Mr Brown could quite legitimately retort that Britain's economy has done well with him in charge. Inflation has been tame, unemployment has fallen and the economy has relentlessly kept on growing. Germany may have outperformed Britain as far as stockmarkets are concerned, but Britain has been doing much better than Germany on the economic front.

But does a strong economy necessarily imply a strong stockmarket? It is natural to suppose that the two go hand in hand, since a buoyant economy should push up profits and dividends. Yet as Elroy Dimson, one of the authors of the LBS study, points out, the historical evidence does not back up the supposed link between growth and stockmarkets. If anything, strong stockmarkets tend to predict strong growth: investors get there first.

If this is the case, there is an uncomfortable corollary. Britain's poor stockmarket performance over the past few years may be signalling that the economy's long run of good performance will not last. In the general election campaign, Labour is making much of its record in managing the economy. Fortunately for the Labour government, any economic reckoning will occur safely after a spring election.

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

Priceless

FINANCE & ECONOMICS

Euronext and the LSE

Feb 10th 2005
From The Economist print edition

An approach to the London Stock Exchange is missing one detail

AT LAST, the London Stock Exchange (LSE) has the competing proposals for its hand in writing. On February 9th Euronext, operator of several continental exchanges, published details of its case for bringing the LSE into its fold. Euronext promised that trading would get cheaper and said that a takeover would yield €203m ($260m) annually, through lower costs and higher revenue. However, unlike Frankfurt-based Deutsche Börse, which opened the battle for the LSE, Euronext put forward no price tag. Deutsche Börse's £1.35 billion ($2.4 billion) offer, made in December and repeated late last month, was roundly rejected.

The LSE's board made no comment on the new proposal, citing (understandably) the absence of a price. That detail aside, in many respects Euronext's intentions look similar to Deutsche Börse's. Both say that the LSE's customers will enjoy a 10% cut in trading costs. Neither Jean-François Théodore, boss of Euronext, nor Werner Seifert of Deutsche Börse seems willing to move the headquarters of a combined exchange to London. But both brim with assurances that regulation of the LSE will be unchanged, since Britain's Financial Services Authority (FSA) is doing such a fine job. Euronext, which sees itself being dually listed in London and Paris, says it would adopt a single-tier board for the combined exchange; Deutsche Börse is bound to a two-tier model by German law.

The bids differ strikingly, however, in their calculations of the benefits of a merger: €203m a year before tax, says Euronext; a mere €100m, reckon the Germans. But they are banking on the same sorts of improvements: cost savings from merging trading systems, better distribution networks and so on. Quite why Euronext should be able to promise so much more is hard to see—although it will be able to capitalise on its foothold in London, having bought Liffe, the London derivatives market, three years ago. Euronext puts restructuring costs at €184m, nearly twice Deutsche Börse's estimate.

Ultimately the battle may turn not just on numbers, but on corporate governance and regulation. Last week the FSA warned that while it was “indifferent to the nationality” of a combined exchange, long-term regulatory arrangements deserved more thought. Even if the LSE stays under the watch of the FSA for some years after being bought, future electronic improvements could mean that LSE traders end up sending orders to a market elsewhere, under another regulator. Moving a combined exchange's headquarters to London would assuage such concerns.

If Deutsche Börse's experience is any guide, Euronext may encounter some skittishness from shareholders, who will want to know how much they would pay for the LSE. At least one Deutsche Börse shareholder is demanding a meeting to vote on whether a takeover bid is even sensible. Euronext is required by Dutch law to hold such a meeting. Though listed in Paris, it is registered in Amsterdam.

As talks continue all round, the LSE is meanwhile doing nicely on its own. The same day as receiving Euronext's proposal, the London exchange announced that January 2005 had been its busiest month ever, with trading on its main platform up by 17% from a year earlier. That will make its two admirers even keener.

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

A deal of trouble

FINANCE & ECONOMICS

Riggs National and PNC

Feb 10th 2005 NEW YORK
From The Economist print edition

The fall of an august institution

FOR almost 170 years, Riggs National has been the bank of choice for the great and good of Washington, DC, and the world. The “bank of presidents” managed the accounts of 21 first families, including those of Abraham Lincoln and Dwight Eisenhower, financed the Mexican War and the purchase of Alaska, and handled most of the accounts of the diplomats that breezed through America's capital.

But along with the great and good Riggs also banked for the shady and sordid. In late January, the bank pleaded guilty to money-laundering offences concerning the accounts of various foreigners, including Augusto Pinochet, the former dictator of Chile. On February 7th, the proposed acquisition of Riggs by PNC Financial, a Pennsylvania bank that was to be Riggs's knight in shining armour, fell apart—only to be saved three days later.

Last July PNC agreed to pay $779m to buy Riggs as part of its strategy of expanding its bank network across the east coast. But fearful of Riggs's legal problems, PNC took precautions. It negotiated the right to walk away from the transaction should Riggs suffer a “material regulatory impairment” before the deal's close. After Riggs's guilty plea last month, PNC began sidling away. It slashed its original offer by 20% and demanded that Riggs settle or put aside reserves for private lawsuits outstanding against it, including one on behalf of the victims of the terrorist attacks of September 11th 2001.

Riggs's board of directors unanimously rejected the offer—and sued, to force PNC to honour the original deal or, failing this, to pay Riggs for the “resulting damage” caused by the failure of the acquisition. But on February 10th Riggs suddenly agreed to be bought by PNC for $654m.

Recent events have scarcely made Riggs a more attractive target. Other potential buyers would have been likely to think twice before acquiring a bank faced with mounting legal fees and continuing investigations. Riggs is still working with regulators to revamp its money-laundering controls. In its latest financial report, Riggs estimated that it spent $20m in the fourth quarter of last year dealing with investigations and lawsuits and strengthening its internal systems.

Then there are fines. Riggs suffered a $25m civil penalty from the Treasury Department last May. The price of last month's admission of guilt was a $16m fine, which may be increased.

Beyond this is the worry that Riggs's sullied reputation could affect its core operations. The bank's main attraction is its branches: 51 of them in and around Washington, one of the wealthiest areas in America. But most of its branches are in urban areas, not the faster-growing suburbs.

Riggs's books look poor, too. It lost $100m in 2004, $60m of it in the fourth quarter. Its deposits slid from $4.3 billion at the end of 2003 to $3.0 billion in December last year. Much of this reduction is likely to have been the result of the shedding of its embassy businesses, but some of it might have been the consequence of customers switching to banks with cleaner reputations. Worse, on February 8th Moody's, a credit-rating agency, downgraded Riggs's debt, which could lead to a higher cost of borrowing. It has been a long fall for the bank of presidents.

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

From rivalry to mergers

BUSINESS

Anglo-Dutch companies

Feb 10th 2005
From The Economist print edition

A brief history of the Anglo-Dutch business model

FOUR centuries ago, within 15 months of each other, the English and the Dutch set up rival East India companies. In 1826 a British foreign minister sent his country's ambassador in The Hague a (coded) message: “In matters of commerce the fault of the Dutch is offering too little and asking too much.” But business is business: why compete when you can combine? The two East India companies soon found it easier to trade in separate bits of Asia.

A century ago, the countries' rival oil companies agreed, as their joint history now puts it, that they “would do better working together”, and in 1907 created Royal Dutch/Shell. In the 1920s, Margarine Unie, a Dutch-led quasi-cartel, saw Lever Brothers extending from soap into food. In 1930 the pair became Unilever.

Much later came three other big Anglo-Dutch mergers. In 1993, Elsevier, a Dutch publisher, merged with Reed, a one-time paper firm that had spread into publishing. In 1999 British Steel and Hoogovens united as Corus, and Britain's Reckitt & Colman merged with a Dutch household-products rival, Benckiser.

Reckitt Benckiser has been a success. Avoiding errors made by the others, the two firms were swiftly and fully integrated into one; this week it reported record profits. But elsewhere “national” stresses have sharpened business ones. Royal Dutch/Shell was a merger of operations only: the group is still 60% owned by its Dutch parent, 40% by its distinct British one. Only last October, under fire for its oil-reserve accounting, did the two decide to become one, Royal Dutch Shell PLC, listed in London but headquartered in The Hague. Reed Elsevier is still owned 50-50; up to 1999 it was also two warring boards and headquarters, until a new Dutch ex-Unilever chairman brought in a British boss and a unified management structure.

Corus set off in 1999 proclaiming unity, but with a carefully balanced Anglo-Dutch board and joint chief executives. It soon lost them, and $1.5 billion in its first 15 months. A new sole—and British—chief executive did not end the clashes, as Dutch profits were eaten by losses in Britain. In early 2003, the supervisory board (the new CEO plus three Dutchmen) that has a say in Corus's Dutch operations rejected the sale of some profitable aluminium plants there. Corus was at war with itself, a war ended only by the arrival of a new chief executive—from France.

Unilever avoided most such problems. Although it has two parents, Unilever NV and Unilever PLC, chaired by Antony Burgmans in Rotterdam and Patrick Cescau in London, the same people sit on both boards; each chairman is vice-chairman to the other (awkwardly, both are “co-chairman” of the group). But now Mr Burgmans will be non-executive chairman. Mr Cescau will be chief executive. He has one advantage: like his counterpart at Corus, he's neither British nor Dutch but French.

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

Heading for court

FINANCE & ECONOMICS

Executive Life

Feb 10th 2005
From The Economist print edition

Does the French government really want the embarrassment of a trial?

BRINKMANSHIP has played its part in the scandal over Executive Life, a bust Californian insurance company whose business and junk-bond portfolio were bought illegally in 1991 by Crédit Lyonnais, a bank then owned by the French state. Here we go again. Barring a last-minute settlement, the trial of a civil case brought by California's insurance commissioner, alleging fraud and seeking $3 billion on behalf of policyholders, will start on February 15th, six years after he filed the suit.

According to an American lawyer close to the case (there are dozens), neither Crédit Lyonnais, since privatised and taken over by Crédit Agricole, nor the Consortium de Réalisation (CDR), a state-owned body that has indemnified the bank against any losses arising from the case, has made an offer to settle out of court for more than the $350m that the CDR set aside for potential damages in this civil action as part of a settlement in 2003 of a parallel criminal case, brought by America's Department of Justice (DOJ). The commissioner is seeking at least $1 billion more.

A settlement might have been expected. In a hearing last November, Howard Matz, the judge handling the case, evidently not relishing a four-month jury trial, urged the French to settle. “I think the fraud can be proven...it isn't just going to be the plaintiffs win and here's the number. There are going to be all kinds of findings...if I were counsel to entities in France, I would want to make sure my clients understood,” the judge opined.

One defendant for whom a civil trial might be embarrassing is François Pinault, one of France's wealthiest businessmen and a close friend of Jacques Chirac, the country's president. Mr Pinault, who assisted the DOJ in compiling its criminal case against Crédit Lyonnais, testified to the grand jury empanelled to indict the bank. If his testimony were to be unsealed for use in the civil case, as lawyers have requested, the extent of his co-operation would become clear.

Judge Matz also had some strong words for the commissioner and his lawyers: they would “have to deal with utterly inconsistent testimony that will undermine their credibility”. He added: “Conjuring up some amount for damages...isn't going to be easy.” As Executive Life's business and junk-bond portfolio were sold to the highest bidder, the judge was sceptical that the commissioner would be able to prove that policyholders had suffered financially.

The commissioner may do better with his other claim. Arguing that those who commit fraud should not gain from it, he is after all the profit—around $2 billion before interest, he calculates—that Crédit Lyonnais and Artémis, one of Mr Pinault's holding companies, made from Executive Life. (In the 1990s, Artémis bought the insurance business and some of the junk bonds from Crédit Lyonnais.)

If he were to lose on this score, Mr Pinault would face a bill of up to $1 billion (before interest) as well as a finding that he had taken part in a huge fraud. That might test the validity of an indemnity that Artémis has from the state-owned CDR—and, if the indemnity is valid, the patience of French taxpayers. Through Crédit Lyonnais, they in effect put up the money that allowed Mr Pinault to profit from Executive Life. They might balk at picking up the bill for his defeat in court as well.

So far Mr Pinault has apparently not offered a settlement of the civil action much beyond the $185m that Artémis paid to settle the criminal case. If he wants to count on his indemnity from the CDR, he cannot put more money on the table without the CDR's say-so.
The criminal case was settled at the last minute. Common sense suggests something similar ought to happen to the civil action too. Perhaps the CDR has not yet plucked up the courage to explain the predicament to its political masters.

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

NEW YORK BRIEFING February 2005

News this month

Rock and a hard place

On February 4th, a judge ruled that the state's ban on gay marriage is unconstitutional, and that city clerks should be able to hand out licenses to same-sex couples. The ruling prompted Michael Bloomberg, New York's Republican mayor, to pledge his support for gay marriage, but then to say that the city would appeal the court's decision. City lawyers have recommended the appeal, arguing that an iron-clad ruling from the state's highest court would ensure the validity of same-sex marriage licenses. Otherwise New York City may simply fall in line with San Francisco and New Paltz, a small town in upstate New York, where thousands of gay marriages were ultimately overturned.

Mr Bloomberg's attempt at caution has won him no admirers. Tom Duane, a Democratic state senator, called him a coward, while his fellow republicans trotted out their long-held claim that the mayor is a Democrat in disguise. Some observers say Mr Bloomberg is just trying to have it both ways, before his election in November, since a wave of same-sex marriages would have hurt him in his party's primary. But a position unsympathetic to gay marriage would damage Mr Bloomberg's standing among the city's Democrats and gay voters, who are prominent in New York.

Spring sale

The budget recently proposed by George Pataki, New York's governor, calls for selling or leasing some of the state's roads, airports and bridges. Though Mr Pataki has long advocated privatisation—arguing that the state's transport facilities “are worth billions”—the move would require a change in state law. State officials seem confident that this will come, and have already met with Macquarie Securities, an Australian investment bank, and LCOR, a Pennsylvania developer, to build and manage a replacement for the Tappan Zee Bridge.

Privatisation of public works is becoming more common across the country. Last month, Texas announced that a private company will pay $6 billion to build 316 miles of highway and lease it for 50 years. The Chicago Skyway, a 7.8-mile toll bridge, was leased out for 99 years for $1.83 billion, and the Dulles Greenway in Virginia was built with $338m in private funding. New Jersey is considering leasing or selling the New Jersey Turnpike and two other toll roads to help mend its budget. Critics of the trend argue that profits earned by private firms will raise costs for taxpayers. But sagging budgets have left states like New York looking for a bailout that does not require higher taxes.

Olympian endeavours

In February, the Evaluation Commission of the International Olympic Committee (IOC) will tour each of the five cities bidding for the 2012 Summer Olympics—New York, London, Paris, Madrid and Moscow. In anticipation of the visit (New York is the third stop on the tour), the city has launched an ad campaign promoting the Games: the five-ringed Olympic logo is plastered across 13,000 taxis, 4,000 subway cars and over 7,000 buses across the five boroughs. The IOC will make its decision on July 6th. Paris is widely seen as the front-runner, with London in second place.

Mr Bloomberg hopes New Yorkers will rally in support of a controversial stadium on the city's west side, which would be used for the opening and closing ceremonies. The stadium would be a permanent home for the Jets, one of the city's two professional football teams (they now play just over the river in New Jersey), which has agreed to foot most of the construction bill. The Metropolitan Transportation Authority (MTA), which owns the stadium site, is in negotiations with the Jets for development rights. But the two sides are some $200m apart, and are squabbling over how to share broadcast revenue. Meanwhile, the MTA has received a $600m bid from Cablevision, an ardent opponent of the stadium, which wants to build shops and apartments on the site. Without the stadium, the city's Olympic bid looks less promising.

Justice

While waiting in line to get into a courthouse in January, one New Yorker turns to another and tells a classic lawyer joke: “How do you tell when a lawyer is lying? His lips are moving.” But an attorney standing near the men got offended, and reported them to a court officer. Both men were promptly arrested and charged with disorderly conduct, a misdemeanour that carries a maximum penalty of 15 days in jail.

But Harvey Kash and Carl Lanzisera, the unlucky jokesters, also happen to be co-founders of Americans for Legal Reform, an activist group that presses for greater public access to courtrooms. In this case, they got the last laugh: on February 8th, a grand jury voted to dismiss all charges. Mr Kash emerged from the courthouse proclaiming: “The First Amendment is alive and well,” and vowing, “to keep telling those lawyer jokes 150%”.

“C” stands for?

As New York's commuters crawled out from under the snow dumped by a blizzard that hit in late January, they were met with terrible news: two of the city's busiest subway lines were disastrously crippled by a fire. The C-line was suspended altogether, and the A-line was cut to a third of its previous frequency, putting each train 18 minutes apart. Transport officials first said it would take a ridiculous three to five years to fix the damage. But somehow, following a public outcry, they restored service by early February. Some 580,000 people ride the lines every weekday.

The damage—the subway's worst since September 11th—was caused by a fire in the tunnel leading to the Chambers Street station. Initial reports blamed the fire on a homeless man who was trying to keep warm (police do not remove homeless from the subway when temperatures drop), but police officials are still investigating. The fire destroyed a signal room full of crucial switches, relays and circuits, which can be repaired by only two firms in the world, one in Pittsburgh and the other in Paris.

Catch if you can

February 2005

Christo and Jeanne-Claude's The Gates in Central Park

February 12th-27th 2005

New York is in a tizzy over the Christo and Jeanne-Claude's latest environmental artwork. For two weeks, Manhattan's Central Park will be lined with 7,500 saffron-coloured vinyl gates (a hue remarkably similar to Jeanne-Claude's hair), each 16 feet high and hung with fabric panels. These vivid arches create a majestic passageway, criss-crossing the park's 23 miles of pedestrian walkways. Killjoys who tsk-tsk the city for endorsing such a project should note that the artists have paid for this $20m artwork themselves, using money earned from Christo's drawings and collages.

The Gates are expected to attract quite a few tourists. Those frustrated with the project's short shelf-life (after 26 years in the making) should note that brevity is part of the point. As Jeanne-Claude once said in an interview: “The fact that the work does not remain creates an urgency to see it. For instance, if someone were to tell you, ‘Oh, look on the right, there is a rainbow.’ You will never answer, ‘I will look at it tomorrow’.”

See the artists' official website.

SAO PAULO BRIEFING February 2005

News this month

Unreformed

The reputation of São Paulo’s State Foundation for the Well-Being of Minors, as reform schools are euphemistically known, was never good. Overcrowding, riots and break-outs are common. But January was a particularly bad month. One 18-year-old youth died following a riot in one institution, and 42 staff members at the Vila Maria unit—including the former director—were indicted for torturing their wards. This provoked more riots, hostage taking by the inmates and the threat of a strike by co-workers.

Newspapers showed pictures of teenagers with injuries, including blows to the head, and cited an official report that found 84 lesions on 111 youths examined by doctors. Some of the abused said they were doused in freezing water first so that they would not bruise. Six days before the indictment, 202 residents tried to escape from Vila Maria, many of whom were supposed to testify; 116 were eventually recaptured. Prosecutors alleged that the school's staff had encouraged the students to flee, to prevent them from testifying, but those questioned denied this. In all, 21 staff were suspended for allowing the breakout to happen.

Deadly rains

Heavier-than-usual summer rains struck the city with force, leaving 15 people dead and many more injured. Mudslides caused by the rain dislodged shacks in the slums of São Bernardo do Campo, a city in the greater São Paulo region, killing eight children and one adult. Meanwhile, a bridge on the road linking São Paulo with southern Brazil collapsed, killing one person and injuring three others. More bridges suffered cracks, forcing closures and diversions that at one point backed up traffic for more than 111 kilometres around São Paulo.

The death toll need not have been so high. In 1997, a bridge inspection programme was suspended, resulting in fewer maintenance checks. And the São Bernardo government has known since 1999 that certain hillsides could collapse after heavy rains, but had not been able to relocate all the slum dwellers.

Campaign brain

Marta Suplicy, the ex-mayor of São Paulo who lost her re-election bid in November, plans to form a new institute to study public policy. The as-yet-unnamed group is widely seen as a way to help her bid for the 2006 Worker’s Party (PT) nomination for governor. The centre will be staffed by her new husband and advisor, Luís Favre, with a handful of ex-City Hall secretaries who lost their jobs when Mrs Suplicy was ousted. Though no one has announced their candidacy yet, Mrs Suplicy's expected rivals for the nomination include Aloizio Mercadante, a well-known senator, and João Paulo Cunha, the president of the federal house of deputies.

We have a winner

Just like the flashier party that occurs a few days later Rio de Janeiro, the centrepiece of the São Paulo Carnival was the competition among samba schools. Império da Casa Verde beat X-9 Paulistana by one-and-a-half points to win for its take on the theme “Brazil: If God is with us, who will be against us?” This was only Casa Verde's third time in the competition, which sees 16 schools parading over two nights in the Sambadrome. Judges score the teams for their songs, dancing, gigantic allegorical floats and costumes. Some 3,000 people marched in the event.

Doing well is serious stuff. Before the results were announced two groups—both off-shoots of football clubs—agreed not to listen to the marks together, to avoid a brawl. Mancha Verde, the samba school for Palmeiras fans, came in 12th, and Gaviões da Fiel, the school for Corinthian fans (which had a humiliating showing last year), topped the second division to win a slot in next year’s premier league parade. On February 11th, the top-ranked schools do it all again in the winner's parade. But by then the country is presumably a bit tired—Rio De Janeiro's Carnival wrapped up on February 8th.

Catch if you can

February 2005

Vulnerability of Being: Photos by Claudia Andujar

Until March 20th 2005

Claudia Andujar, a Swiss-born Hungarian whose family was ravaged by the Holocaust, came to Brazil in the mid-1950s. Here she was drawn to the Yanomani Indians, a threatened Amazonian tribe, which she chronicled and worked with for the next half-century. Of Andujar’s 15,000 photographs, 80 are displayed here, including pictures taken throughout Brazil.

The black and white portraits are stark, almost confrontational. As the title suggests, they show the vulnerability of Brazil's poor, in both the urban and Amazon jungle. There are disturbing images of a dead indigenous road worker, caused by development in the Amazon. The landscapes are abstract, using extreme close-ups and blurred edges to turn specific subjects, such as the Rio Negro, into water that might be anywhere. The only self-portrait is of Andujar’s shadow, caught off-balance, a visual representation of her own vulnerability.

Pinacoteca do Estado, Praça de Luz 2. Open: Tues-Sun 10am-6pm. Tel: +55 (11) 3229-9844.

ZURICH BRIEFING February 2005

News this month

Running the asylum

Although Switzerland has banned asylum-seekers from working during their first three months in the country, Zurich—home to 17% of the country's total—will not follow suit. The canton began a pilot programme in 2003 that lets immigrants work for a small “motivational” payment that does not exceed Sfr400 ($337) per month. Controversially, the canton recently voted to continue the programme.

Monika Stocker, head of the city's social-affairs department, says that the general fate of the country's asylum-seekers has worsened since Christoph Blocher, head of the right-wing Swiss People's Party, took charge of the federal justice ministry in the last year. A study has found that the work asylum-seekers do in Zurich is worth about Sfr1.5m to the cantonal authority, but observers doubt this will affect the ban elsewhere in the country.

Global solidarity

From January 26th to 30th, about 2,250 bigwigs—politicians, business leaders, journalists, NGO representatives and a few celebrities—met at the World Economic Forum (WEF) in Davos, Switzerland to discuss improving the world. This year, the forum concentrated more on social problems, including poverty, climate change, social security and AIDS, especially in the developing world.

With temperatures hovering around 20ºF below zero, protection duties fell to 5,000 bundled-up Swiss soldiers, who patrolled on land and in the air. The forum itself went off without a hitch: some 80 opponents demonstrated peacefully in Davos, with larger and more violent clashes in Basel. No demonstrations took place in Zurich. Perhaps the biggest stir this year came when Eason Jordan, the chief news executive of CNN, claimed that the American military was deliberately targeting journalists in Iraq. He back-pedalled when pressed for evidence.

Art furore

Thomas Hirschhorn, a Swiss artist, is aiming to press a few political buttons. In his multimedia installation “Swiss-Swiss Democracy”, which was exhibited through January at the Centre Culturel Suisse in Paris, he said he wanted to protest against “the absurdity of direct democracy” and the election of Christoph Blocher, a controversial right-wing leader, to Switzerland's federal council. The show included several provocative paintings and a mock play nominally about William Tell, a Swiss national icon, which featured a woman vomiting into a ballot box and an actor on all fours raising his leg in mock urination onto a portrait of Mr Blocher.

What really irked politicians, though, was that this exhibition was funded by Pro Helvetia, a government-funded cultural-development body. In retaliation, the Swiss parliament lopped Sfr1m from its annual budget. Pro Helvetia has made much of its political independence, but several politicians chastised it for dragging Switzerland's most prized values through the mud. Parliament will soon discuss alternative ways to promote Swiss culture and the arts.

Worth their salt

Switzerland's unusually cold winter has created a run on salt, an easy way to melt snow. At the beginning of the season, the canton of Zurich had 13,440 tons of salt in store. By the end of January, more than half had been used up—fluctuating temperatures required several road re-saltings. In late January, 246 city employees with 160 vehicles were salting and clearing 1,000km of pavement and 750km of road. More salt has been ordered, but at prices 25% higher than they were over the summer.

A dithering host

In January, Zurich agreed to host three games during the 2008 European football championships, which will be played across Switzerland and Austria. The city will have the same number of matches as Basel, Bern and Geneva. For some time, officials were undecided about where in Zurich the games would be played—the city could choose between the Letzigrund and Hardturm stadiums, neither of which is completely finished. The local government finally agreed to fund an upgrade to the Letzigrund stadium, while the Hardturm project remains mired in legal questions.

Catch if you can

February 2005

Hindu Zurich

Through February 26th 2005

Just under one-sixth of the world's populace—most of India and the Indian diaspora, along with significant chunks of Sri Lanka, Pakistan, Bangladesh and Afghanistan—is Hindu. There are roughly 30,000 Hindus in Switzerland, with more than 20% in Zurich. But in this buttoned-down, Teutonic canton, Hinduism remains something of a mystery, a polytheistic network of faiths more often mentioned than understood. Besides examining the religion, this show explores the faith as it exists in Switzerland. Colourful photographs depict the Hindu way of life, and numerous interviews with Swiss Hindus shed light on personal experiences of practicing in Switzerland. There are also three short films of a Hindu wedding, a temple ceremony and a family ritual.

Stadthaus, Stadthausquai 17, 8001 Zurich. Tel: +41 (0)1 216-31-11. Open: Mon-Fri, 9am-6pm; Sat 9am-12pm. For more information, visit the exhibition's website (in German).

WASHINGTON, DC BRIEFING February 2005

News this month

Setting priorities

Local military facilities should be flush under the new proposed budget, which George Bush unveiled in February. In 2006, defence spending is scheduled to rise by 5% and homeland security spending by 3% while other programmes are to be cut by 1%. The president touted his new budget as the “most disciplined proposal since Ronald Reagan.” It includes cuts to 150 federal programmes.

Fiscal responsibility is in order, given the swollen budget deficit (and the president's desire to maintain and extend the tax cuts). Local programmes will feel the burn. The new budget cuts the $5m Congress spent last year to help DC school libraries, and it swipes $19m from efforts to clean the Chesapeake Bay. But the local military will enjoy an extra $165m for new Maryland facilities, and $7m towards a new forensic and anti-bioterrorism laboratory.

Perhaps a renaissance

The federal government is considering handing over some of its many DC-area land holdings to the city. As part of the president's new budget, the federal government will eschew cash subsidies to the city in favour of letting the district government control new local sites. This is good news for local officials, who have long complained that the city's tax base is crippled by federal ownership of city property (federal lands cannot be taxed). A city spokesman told the Washington Post that the resulting tax windfall could mean tens of millions of dollars in new tax revenue over a decade. Some say this could spark urban renewal.

The government owns parks, waterfront property and a host of other facilities in the area. The federal Office of Management and Budget would review these, looking for properties that could be redeveloped by the district. But one site which city officials have pined for, the 182-acre St Elizabeth's Hospital facility, has been earmarked for a new Coast Guard headquarters.

A little extra

Drivers on the Dulles Toll Road may see tolls raised as much as 25 cents under a new measure to help finance an expansion of the DC Metro. It would be the first toll increase for the road, which stretches west of Washington from inside the beltway past Dulles International Airport to Leesburg, Virginia. More than 200,000 vehicles each day use the road, which leads along the “Dulles corridor” of high-tech firms that have recently sprung up alongside it.

The toll increase would raise a portion of the approximately $3.5 billion needed for the Dulles rail project, which would extend the Metro’s orange line 23 miles west by 2015, adding stops at Dulles and suburbs such as Herndon and Loudon County, in Virginia. The federal government would pay half the costs.

Getting better

The National Zoo, run by the Smithsonian, improved its animal care in 2004 but still needs work, according to a year-long study sponsored by the National Academy of Sciences. Deaths of several animals—including a lion after an operation, two red pandas that ate rat poison and two zebras that starved to death—had prompted Congress in 2003 to ask for review of the zoo's practises. An interim report released in February 2004 found deficiencies in animal care and management. Record keeping was also seriously flawed, making it sometimes impossible to track the animal care or pest control.

The final report, issued in January, noted improvements to record-keeping and in preventative care, where a six-month backlog was eliminated. The problems that remain include an undertrained staff and a management scheme that lacks clear roles and accountability. In February, the zoo showed off a new litter of cheetahs, the first ever to be born there.

Won't happen again

In January, the city settled a lawsuit filed by seven people who were jailed during protests against the International Monetary Fund and the World Bank in 2002. The city will pay a total of $425,000 to five protestors and two bystanders who were rounded up with roughly 400 others in Pershing Park, a small patch near the White House.

DC has hosted countless demonstrations, but local authorities have taken sterner measures against them in recent years. In the 2002 incident, protesters were charged with failing to obey the police, and held for as long as 36 hours. But later investigations showed that no order to disband had been given, so there was nothing to obey. The settlement mandates that in future a police commander must tell protesters to disband before they can be arrested. In addition, Charles Ramsey, DC's police chief, must send a personal letter of apology to all seven plaintiffs.

Mas profits?

For years, WHFS was the Washington area’s alternative-rock radio station. But last month it ceased broadcasts and re-imagined itself as a Latin pop and Spanish-language station, under the name “El Zol”. The new tagline is “siempre de fiesta”—always partying. Found at 99.1 FM since the 1960s, the station had hosted “alternative music”—an outmoded rubric for rock and pop slightly removed from mainstream acts. But it lagged in ratings behind DC101 (at 101.1 FM), the region’s main rock station.

Spanish-language radio, meanwhile, is the fastest-growing format in the nation. WHFS is owned by Infinity Broadcasting, while DC101 is owned by its rival, Clear Channel Communications. The two media giants are scrambling hard for market share. Another less-noted switch took place on the AM band, where WWRC (at 1260) ditched sports-talk in favour of liberal talk radio. Now the station is part of the Air America network, a fledgling left-wing talk-radio station featuring Al Franken, a humorist, and Janeane Garofalo, an actress.

Catch if you can

February 2005

Rembrandt: Late Religious Portraits

Until May 1st 2005

The brooding quality of Rembrandt's portraits is double-edged, depending on whether his subject is secular or sacred. The melancholy air of his plebes and royals elevates them; their enlightenment makes them seem not entirely of this world. But moodiness in his religious portraits tends to make his subjects more accessible: even Christ seems somehow familiar.

This show brings together 17 pictures and two dozen of his religious etchings. In the portraits, apostles, saints, monks, the Virgin and Christ are each captured during some decisive moment. Some of the best insinuate you into their heavy thoughts. One shows Paul, busily scratching out a new letter to the Corinthians. Another portrait of him is actually a self-portrait of the artist, with a familiar look of mild disapproval and dissatisfaction.

The National Gallery, on the National Mall, West building. Entry: Free. Open: Mon-Sat 10am-5pm, Sun 11am-6pm. For more information, visit the museum’s website.

MILAN BRIEFING February 2005

News this month

Hard to fight

Controversy swirled when Clementina Forleo, a Milan judge, acquitted three north African men of terrorism charges on January 24th. Politicians of all stripes spoke out against the ruling, with several newspapers lining up behind them. Gianfranco Fini, the deputy premier and foreign minister, described feeling “anger and incredulity” over what he denounced as a “distortion of the reality before the entire world.” Milan prosecutors have begun an appeal.

In court, phone transcripts allegedly found the men planning to recruit suicide bombers to send to Iraq, and talking of funding the insurgency there. Ms Forleo said these were “guerrilla” activities, but not necessarily terrorism. She sentenced Bouyahia Maher and Ali Ben Sassi to three months in jail, and Mohammed Daki, who has been linked to the September 11th attacks, to 22 months for trading forged documents. He was released for having already served the term. Two others, Dirissi Noureddine and Kamel Hamraoui, were referred to another jurisdiction on related charges. Italy has arrested dozens of people on international-terrorism charges since December 2001 (when the crime was defined), but few have been convicted. The law makes prosecution difficult, partly because secret-service intelligence is not admissible evidence.

Wit's end

Commuters complain that trains are dilapidated, dirty and overcrowded, often arriving late if at all. Service to some secondary stations has also been cut. Fed up with years of poor service, some of the angrier commuters resorted to protest in January, blocking train-tracks on lines running to Milan. In February, consumer groups and unions backed a disobedience campaign that involves refusing to buy tickets or to show them when asked. Bruno Ferrante, the Milan prefect, said that such exasperation was understandable, but stressed that blocking trains is against the law.

Lights out

Milan's 250,000 smokers seem reconciled with a new nation-wide ban on smoking in public spaces, which went into effect on January 10th. They now dutifully tramp outside to shiver as they puff. Italy now joins Norway and Ireland in imposing no-smoking measures for all bars, restaurants and offices. Smoking is now allowed only in private homes, special ventilated smoking rooms and outside. The fine for illicit smoking is €275—double if committed near a pregnant woman or a child. Restaurant and bar managers also face fines if they do not enforce the law. Milan's hospital San Paolo has unveiled plans for a new service to help smokers kick the habit.

Meanwhile, some of Italy’s roughly 13m smokers are fuming. A new association, Io Fumo (I Smoke), is seeking a referendum to appeal the law, which it decries as a threat to civil liberties. Some bar and restaurant owners say the new law may hurt business, but this has not materialised in other cities, such as New York, which have enacted similar bans.

Trying to clean up

Hoping to ease air pollution, Milan imposed traffic limits in January and February. For 12 hours on a series of Thursdays, driving privileges alternated between cars with odd- and even-numbered license plates. The city also imposed a number of car-free Sundays, freeing some locals to bike or roller-blade on normally clogged and noisy streets.

Dario Fo, a Milan playwright and a Nobel laureate for literature, together with his wife, the actress Franca Rame, set up an anti-smog committee aiming to force local authorities into action. Domenico Zampaglione, the city politician responsible for environmental issues, conceded that Milan lies within one of the world's five-most polluted industrial regions, but argued that this is inevitable given the area's population density and nearby manufacturing activity.

Too hip for squares

In February, the city of Milan banned a billboard depicting a nearly all-female version of the Last Supper, after a local advertising watchdog argued that it was potentially offensive. The ad campaign by Marithé and François Girbaud, a French fashion house, features female models in a chic take on Leonardo Da Vinci’s 15th-century fresco. A lone, bare-chested male model sits provocatively on the lap of one of the women.

The fashion house said that it had been inspired by Dan Brown’s successful thriller, “The Da Vinci Code”, and had meant no offence. The ad campaign, which was designed to be a tribute to women and their role in society, had run for weeks in Paris and New York without controversy. But Milan, which houses the original Da Vinci fresco, is less resistant to the Vatican's influence. The Istituto di Autodisciplina Pubblicitaria, which evaluates advertisements for impropriety, has argued that exploiting theological symbols for commercial ends inevitably chafes “at least part of the population”.

Catch if you can

February 2005

René Burri

Until April 6th 2005

René Burri, a Swiss photographer, is the man behind the image of Che Guevera that is plastered on posters and T-shirts all over the world. Born in Zurich in 1933, Mr Burri is admired for his portraits of famous artists, such as Picasso (pictured), Giacometti and Le Corbusier, as well as his documentary work for Magnum. This big retrospective of his work includes some 200 photos, taken in the second half of the 20th century. It includes many vintage prints from Mr Burri’s personal archives.

Palazzo dell’Arengario, Piazza Duomo. Open: Tues-Sun 9.30am-10pm. Closed Monday. Tickets: €6.

TOKYO BRIEFING February 2005

News this month

Second-class citizens

Foreign residents can work as civil servants in Japan, but they shouldn’t expect promotions: the nation’s top court ruled that foreigners can be barred from managerial posts in the government. The ruling was a defeat for Chong Hyang Gyun, a South Korean citizen and long-time resident of Japan, who was employed as a nurse by the Tokyo Metropolitan Government. Ms Chong sued the city in 1994 after she was barred from a test to become a manager because she is not a Japanese citizen.

The Tokyo High Court (just below the Supreme Court) previously ruled that blocking Ms Chong from the exam violated a constitutional guarantee of equality for all, regardless of race or ethnicity. That decision cheered many of Japan's foreign residents, particularly the large community of expatriate Koreans that have lived here since the second world war. But the city appealed on the basis that only Japanese citizens should be allowed to exercise civil authority.

Something to sneeze at

The amount of pollen in the air around Tokyo is expected to be ten to 15 times higher than last year, and perhaps even the highest on record. Horrible news for hay fever victims, but a potential bit of lucre for retailers, drug makers and others, who are covering shelves with a range of sniffle-fighting new products. Big Japanese retailers such as Takashimaya and Odakyu set up displays selling masks, eye drops and allergy medicines weeks earlier than usual. Kirin and Suntory, both beverage makers, have introduced teas, yogurt drinks and other concoctions claiming to alleviate allergies.

The surge in pollen is due to last summer's unusually warm weather. Although sales of allergy treatments should rise, the Dai-Ichi Life Research Institute predicts the overall effect on the economy to be negative, since those with the sniffles spend less time eating out and having fun.

Shrine controversy

Yotaro Kobayashi, the high-flying Chairman of Fuji Xerox, got some threatening packages after he criticised Japan's prime minister, Junichiro Koizumi, for visiting a shrine honouring the Japanese war dead. A package sent to Mr Kobayashi contained a bullet, and Molotov cocktails (which failed to fully ignite) were found outside his home. Yasukuni, the controversial shrine that Mr Koizumi visited, was once a famous backdrop for war propaganda and emperor-worship. The dead commemorated there include convicted war criminals from the second world war.

The prime minister's visits to Yasukuni have earned him criticism from a number of Japan's neighbours, which are still bitter about the country's long history of waging war on them. China in particular has said the visits show a lack of remorse from Japan, and has called for them to stop. Mr Kobayashi has been a target of right-wing groups since late last year, after he said the visits were fraying relations between Japan and China, which have been fragile lately.

Many to blame

Six executives are facing charges of criminal negligence after a six-year-old boy was crushed to death last March in a revolving door at Roppongi Hills, one of the city's glittering new skyscraper complexes. Police are charging three executives from the Mori Building Company, which runs the Roppongi Hills complex, and three from Sanwa Tajima, which made the door.

The police decided to go forward in January after finding out that six other accidents had occurred at the same place. They allege that Mori executives did not act on all of the safety recommendations their companies devised. One of the accidents was nearly identical to last year's fatality: a six-year-old girl had her head caught in the door, but was freed with minor injuries. Hisanobu Kubo, who worked for Sanwa Tajima, allegedly failed to report a blind spot in the censors that stopped the door, fearing unattractive safety measures and slow sales. The case seems to have spurred many to act: one survey found that 30% of building managers have removed or plan to remove their revolving doors, and 30% more have stopped using them.

New digs

Construction workers are putting the final touches on a new prime minister’s residence in central Tokyo, which should be ready in March. It is in what used to be the prime minister’s office building, an historic four-story structure near the Diet building. Nearly all of the interior has been remodelled, including living quarters for the prime minister and a guest house for visiting dignitaries.

The original 1929 structure was the site of a military coup in 1936. It is also where Tsuyoshi Inukai, the prime minister at the time, was assassinated in 1932. The refurbished structure is connected by passageways to a new office building completed three years ago, and Junichiro Koizumi has asked that it feature the latest eco-friendly technologies. It is a considerable improvement on his former official residence, which he moved out of in 2002, in which the roof was leaking and rats and cockroaches reportedly kept him company.

Catch if you can

February 2005

Archilab

December 21st-March 13th 2005

Subtitled “New Experiments in Architecture, Art and The City, 1950-2005”, this interesting show brings together more than 220 projects by nearly 90 architects from around the world. It is organised by the Mori Art Museum (MAM) with the FRAC Centre (Orleans, France). This is in the first show devoted to architecture at MAM, a new gallery for contemporary art, fashion, design and architecture established by Minoru Mori, a property developer, in 2003. Take advantage of the museum's long opening hours (until midnight Fri-Sun) to catch a glimpse of some of the most striking building projects of the 20th century.

Mori Art Museum, Roppongi Hills Mori Tower (53F), 6-10-1 Roppongi, Minato-Ku, Tokyo. Tel. 03-5777-8600 (Hello Dial). Roppongi station (Hibiya and Toei Oedo subway lines). More details are available on the museum's website.

Pat Toomey

from the February 10, 2005 edition - http://www.csmonitor.com/2005/0210/p20s04-usmb.html

By David T. Cook

Former Republican congressman from Pennsylvania Pat Toomey, the new president of the Club for Growth, was Wednesday's guest. Here are excerpts from his remarks:

On whether President Bush's new budget lives up to the club's call for limited government and lower taxes:

"By Washington standards, it is pretty extraordinary to propose an actual dollar reduction in any significant category of government spending. And the president has done that with ... all nonsecurity discretionary spending. I'd like to see it more dramatic than seven-tenths of a percent."

On criticism that Bush is a big-government conservative:

"In his first term, there were certainly examples of expanding government beyond what most limited-government conservatives want to see. I am hopeful the second administration will be better than the first in that respect."

On the long-term political impact of personal Social Security accounts:

"The ownership society does have profound implications, and they include political implications. If it succeeds in undermining the liberal economic policy that most Democrats hold, that's fine with me."

On the club's ad campaign against liberal Republicans in Congress:

"I just don't accept the idea that we have to take whole categories of incumbents off the table and say we can't do any better.... We are not a Republican institution, we are a pro-growth organization."

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Environmentalists push for a 'greener' iPod

from the February 09, 2005 edition - http://www.csmonitor.com/2005/0209/p11s02-stct.html

By Samar Farah Contributor to The Christian Science Monitor

First, Apple made iPod. Wondrously white and smooth and with a navigational Click Wheel so touch sensitive, it granted music lovers a sense of magical powers untold.

Then environmentalists broke the spell. The iPod, they told attendees at the Macworld Conference & Expo last month, was not magic but a piece of hardware with a very mortal heart: a battery that lasts only two to three years and is difficult to replace.

Why pick on the tiny iPod when landfills around the country are filling up with 16-inch monitors and ancient CPUs? Because of the sheer numbers of the devices being sold, and Apple's reputation as a forward-thinking company.

In the last part of 2004, Apple sold 4.5 million portable music players. Given the iPod's battery life, all of these could become e-waste by 2007.

The rising problem of how to dispose of outmoded electronic gadgets has caught the attention of the US Congress. Last week, legislation was introduced in the House that would charge consumers a fee on the purchase of computers and TVs to fund a nationwide recycling program. So far, American consumers have been largely uninterested in pushing companies to make their products more recyclable.

Environmentalists say the real push may come from Europe: New European Union laws ban hazardous materials in all consumer electronics and require companies to take full responsibility for recycling them. Soon, US companies will be forced to comply, or risk losing a large and powerful market.

At the same time, US universities, government agencies, and other large purchasers of consumer electronics have started applying pressure to manufacturers to produce more environmentally friendly wares. So the expectation is that companies will come up with product designs and models to satisfy new requirements.

"This is a very exciting period," says Joanna Underwood, president of Inform, which researches corporate environmental practices. "It is a time of intense creativity by corporations. The ones that are most creative will be the winners tomorrow."

On the horizon, for example, is a cellphone cover by Motorola, which is biodegradable and leaves in its place a sunflower seed. The design is still under research, but a cellphone that begets a sunflower puts the notion of electronic wizardry in new perspective. If successful, it would represent the paradigm shift that environmentalists hope for. Ideally, they say, companies would think about not just how to dispose of an MP3 player, or how to build lead-free monitors, but about a product's entire life cycle.

The European laws are expected to provide the incentive. One recent directive by the European Union shifts responsibility for recycling electronics and electrical equipment manufactured or sold in Europe from consumers to producers. European companies need to have facilities in place to handle this task by August. Even more important for US manufacturers is an EU law that will ban the use of toxins such as lead and mercury by July 2006.

"The European market is driving everything, there's no doubt about it," says Jack Geibig, acting director of the Center for Clean Products and Clean Technologies at the University of Tennessee.

Does this mean we'll be seeing iPods that decompose and sprout trees? Apple wouldn't comment on whether the company has plans to change its products or environmental practices.

Still, environmental advocates are optimistic. Walt Rosenberg, a vice president at Hewlett Packard, says that pressure from large buyers has been steadily mounting. "At the corporate-account level, [the pressure] is very real and very critical," he says.

But Mr. Rosenberg also says that this new attitude in the public sector will rub off on the consumer market. HP receives thousands of consumer inquiries each year relating to environmental concerns, he says. In response, last fall HP teamed up with Office Depot and offered consumers free electronic recycling.

Martin Charter of the Centre for Sustainable Design in Surrey, England, says that environmentalists have been too hard on Apple. Many of its products already have environmentally friendly features like easy disassembly for smooth recycling.

But Sheila Davis of the Clean Computer Campaign in San Jose, Calif., is holding out for something more impressive from Apple. "I hope next year at the Mac convention that one distinguishing point will be a product that [is totally recyclable]," she says.

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Clash over policies on energy, pollution

from the February 10, 2005 edition - http://www.csmonitor.com/2005/0210/p02s01-uspo.html

Pivotal environmental battles of second Bush term may hinge on quest for more energy, and for cleaner skies.

By Brad Knickerbocker Staff writer of The Christian Science Monitor

The tension between the desire to find more energy sources and the need to deal with the pollution they produce is creating a political dust-up that may define George Bush's environmental policy during his second presidential term.

Buoyed by his reelection and a larger Republican majority in Congress, Mr. Bush is pushing for more oil, gas, and coal development on public lands - including the controversial coastal plain of the Arctic National Wildlife Refuge (ANWR) in Alaska. This is the foundation of his energy policy.

At the same time, the administration wants to change landmark air-quality laws by easing some of the regulatory burden on coal-burning power plants and other energy producers while relying on the marketplace to provide incentives for reducing pollution.

Mr. Bush's recent State of the Union address, hearings that began in Congress last week, and the 2006 budget blueprint the White House sent to lawmakers Monday all point in this direction.

But despite the power of the GOP in Washington these days, administration plans here are no slam-dunk. Prominent Republicans are among those skeptical of oil drilling in ANWR, and some have joined the ranks of lawmakers already concerned about the climate change caused by human energy consumption. Some traditionally conservative red-staters along the Rocky Mountain front - ranchers, for example - are speaking out against more oil and gas drilling there.

While fossil fuels get the most attention in the Bush energy plan, it also includes increased spending on renewable energy sources, more government help to develop hydrogen fuel-cell technology, and federal support for the first new nuclear power plant in the United States in three decades.

Meanwhile, Bush's "Clear Skies" proposal would reduce the sulfur dioxide, nitrogen oxide, and mercury emitted by coal-burning power plants and other industries - 70 percent by 2018, supporters claim. "These cuts in pollution will provide substantial health benefits, prolonging the lives of thousands of Americans annually, and improving the conditions of life for hundreds of thousands of people with asthma, other respiratory illnesses, and heart disease," James Connaughton, chairman of the White House Council on Environment Quality told senators last week.

But Clear Skies does not address a more controversial substance - carbon dioxide, the main greenhouse gas most experts say is changing earth's climate. What's more, critics say, the administration plan offers fewer protections than would the Clean Air Act of 1970 and its subsequent amendments and it would take longer to reach the pollution-reduction goals.

"The bill weakens - and in many cases eliminates altogether - major air quality safeguards," warns John Walke of the Natural Resources Defense Council.

As with anything this complicated, the devil is in the details of the administration's Clear Skies proposal.

"While the act provides greater certainty than the existing patchwork of case-by-case legal authorities, the act also sets significant and challenging emissions control levels," says Scott Segal, director of the Electric Reliability Coordinating Council, a group of power-generating companies. "Implementing Clear Skies will be a heavy lift for power producers."

In the view of many observers, administration plans for energy development and pollution reduction are closely connected.

For the four years of his first term, Bush tried - and failed - to get comprehensive energy legislation passed in Congress, although it came very close last year. Several things are different this time: the US is at war in a part of the world rich in oil resources; the country is becoming increasingly dependent on foreign oil; and energy is a key issue for several new members of Congress, such as Sen. Ken Salazar (D) of Colorado.

In some ways, the energy-environment train may be leaving the station ahead of the administration and Congress. According to a recent study by the Pew Center on Global Climate Change, most states have taken steps to reduce the greenhouse gases (principally carbon dioxide) causing global warming and 18 states now require that electric utilities generate a portion of their electricity from renewable sources.

In addition, reports Pew, "There is a new and important trend towards multistate regional initiatives that address climate change." For example, nine Northeastern and Mid-Atlantic states are developing a cap-and-trade system for carbon dioxide emissions from power plants. The 18 states represented by the Western Governors' Association are investigating strategies to increase efficiency and renewable energy sources in their electricity systems.

Back in Washington, the shifting politics of energy and environmental policymaking are evident. Sen. Chuck Hagel (R) of Nebraska, who fought to keep the US from joining the international Kyoto Protocol on climate change, now talks about the need to reduce the causes of global warming. Several other GOP senators are said to be leaning toward joining the small band of Republicans already on record as favoring federal caps on greenhouse gases.

Both House and Senate are working on energy and clean air proposals. Those may be approved fairly soon. But then comes the more difficult part: reconciling the work of the two chambers. Says energy lobbyist Frank Maisano, "The conference committee is where it really matters."

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Jet pollution: drawing a line in the sky

from the February 10, 2005 edition - http://www.csmonitor.com/2005/0210/p14s02-sten.html

Although cars generate more greenhouse gases, airliner exhaust has an exaggerated effect, scientists say. Is it time to take action?

By Mark Clayton Staff writer of The Christian Science Monitor

Gazing into a clear blue Wisconsin sky, David Travis was amazed by what he did not see: not one fluffy airliner contrail. Not that day or in the two days that followed the 9/11 terror attacks, when commercial airliners in the United States were grounded.

For Dr. Travis, a climatologist at the University of Wisconsin at Whitewater, that tragedy had a tiny silver lining. A sky without jet contrails became a once-in-a-lifetime opportunity to see if the skinny, man-made clouds really did affect climate, as he had long suspected.

Little is known about the global climate effects of airliner exhaust. Although jets create far less greenhouse gas than power plants or automobiles, they have an outsize impact because of where they spew it - the delicate upper troposphere and lower stratosphere, five to seven miles up from Earth's surface. And an expected boom in airline travel in coming years is likely to swamp any efficiency gains from the next generation of airliners, such as the just unveiled Airbus A380.

The result: growing scientific concern that jets may be turning the skies into a hazier, heat-trapping place.

"Airliners are special because even though their total emissions are relatively small, compared to other sources, they're putting their emissions directly into the upper troposphere," says Joyce Penner, a University of Michigan professor of atmospheric science and lead author of a landmark report on aviation and the atmosphere. "It's a special location."

When injected together into the icy atmosphere, the mix of exhaust gases - including water vapor, unburned hydrocarbons, particulates, sulfates, nitrogen oxides (NOX), and carbon dioxide - produces clouds and has two to three times the warming effect of carbon dioxide alone, Massachusetts Institute of Technology researchers reported last year.

That finding meshes with what Travis found. Comparing ground temperature readings during the 9/11 flight ban with those after and before it, Travis found that those seemingly inconsequential wisps fanning out miles above the earth were like a blanket, reducing temperature fluctuations nationwide.

Travis's findings heightened scientists earlier suspicions that the cirrus clouds formed from contrails did much more than just suppress temperatures - perhaps playing a bigger role in global climate change than many had suspected. A key 1999 international report had cited airliner exhaust as responsible for 3.5 percent of the climate warming shift.

By 2050, carbon-dioxide emissions from airliners are expected to grow two to 10 times the 1992 level, thanks to increasing air traffic, according to the Intergovernmental Panel on Climate Change report co-authored byDr. Penner. By then, aircraft emissions will have risen to 5 percent of the cause of global warming, IPCC says.

New research suggests the problem could be even bigger. "Contrails can be called a cause of warming and definitely need to be considered in climate-change models," says Patrick Minnis, an atmospheric scientist at Langley Research Center in Hampton, Va., part of the National Aeronautics and Space Administration.

Hot under the contrail

Contrails not only can reduce temperature variations, but also increase surface temperatures - enough to account for the entire warming trend in the US between 1975 and 1994, according to a study Dr. Minnis published last year. Still, he notes, additional research is needed. Just because contrails "could account for all the warming, it's not absolutely certain they did," he says.

Other scientists say neither contrails nor airliner exhaust poses much of a warming threat.
"If you're worried about the planet warming up, airplanes are not the first place to look to reduce the impact," says Andrew Gettleman, an atmospheric scientist at the National Center for Atmospheric Research in Boulder, Colo. "It's a fairly small piece of the puzzle.... More than 95 percent of global warming is caused by other things, like power plants."

Much of the concern over contrails' potential impact on climate is coming from the European Community, which, ironically, unveiled the world's largest airliner last month. The four-engine Airbus A380 - far larger than a Boeing 747 - carries up to 840 passengers. Not to be outdone, Boeing is ramping up production of its twin-engine 7E7 Dreamliner, the first carbon-composite airliner that will be lighter and burn far less fuel per passenger mile than older airliners.

Improving fuel efficiency is one of the big environmental success stories in aviation. Better engines, aerodynamics, and other factors have improved airliner fuel efficiency 60 percent in the past 35 years, says Ian Waitz, a professor of aeronautics at the Massachusetts Institute of Technology and an authority on airliner emissions impact on the atmosphere.

Although the A380 and 7E7 will sport even more fuel-efficient engines, they will add to an already burgeoning global fleet of some 12,000 airliners. Airbus hopes to sell more than 700 of its megaliners; and Boeing, more than 2,500 of its Dreamliners.

"Even with a 40 to 50 percent improvement in fuel efficiency, you're faced with a 3 to 20 factor increase in the amount of travel, so we are going to have to have big increases in emissions with that kind of growth," says David Greene, a coauthor of the IPCC report and scientist at the Center for Transportation Analysis at Oak Ridge National Laboratory in Tennessee. Because it will take decades to turn over the global fleet, pollution will moderate only very slowly, he says.
Future contrail scenarios depend much on how much fuel is burned - and at what altitude. One possible solution, noted by researchers in England, would be to fly at lower, warmer altitudes.

Contrails require moist yet very cold air to form - prevalent over some regions, such as the American Midwest, or Northern and Western Europe. By flying 6,000 feet lower, aircraft would produce fewer contrails, a team of scientists from Manchester Metropolitan University reported in 2003.

But flying lower in denser air would cut fuel efficiency. Burning more fuel would increase carbon dioxide output, possibly neutralizing benefits, other point out.Problem with efficiency
Even today's more efficient engines have a downside. The ever higher pressures and internal fuel-combustion temperatures that such engines require tend to increase NOX emissions - a major ingredient in smog. Special combustion-chamber designs and technology can reduce NOX formation. And such "low-NOX" exhaust options have been available for one of today's most popular engines - yet few are purchased because of the extra cost, experts say.

Unless low-NOX engines become more popular, NOX could grow more than fourfold over 1992 levels by 2050, IPCC forecasts.

Even so, the NOX issue is small potatoes, says Professor Waitz in an e-mail. "We should be concerned about all potentially important environmental impacts, but we must also recognize that aviation is a relatively small contributor."

For others, however, contrails pose a threat of growing gradually into a murky blanket that reduces earth's temperature swings and dims the sun - a scenario that would hurt crops and even maple-sap harvests by helping harmful insects survive.

"The jet-contrail problem is not really a pollution problem - it's a cloud problem," notes Dr. Travis back in chilly Wisconsin. "We're disrupting the natural radiation and energy balance of the planet ... trapping outgoing radiation and blocking incoming sunshine. And that makes the world a cloudier, warmer, less enjoyable place."

Timeline: commercial jet travel

1952: British Overseas Aircraft Corporation (BOAC) inaugurates the first commercial jet service with a flight from London to Johannesburg, South Africa. The De Havilland Comet 1 could cruise at 480 miles per hour, 2-1/2 times as fast as the propeller-driven DC-3. Repeated crashes force BOAC to suspend flights within two years.

1956: The Soviet Union's Aeroflot begins the first regularly scheduled and sustained passenger jet service with flights of its Tupolev Tu-104 between Moscow to Irkutsk.

1958: Pan American flies the first Boeing 707 from New York to London with 111 passengers, the largest number ever to board a single regularly scheduled flight. The fare: $272 (or $1,778 today).

1970: The jumbo jet era begins as Boeing's 747, capable of carrying more than 400 passengers, enters commercial service with a Pan Am flight from New York to London.

2005: Airbus unveils a super-jumbo - a double-decker A380, able to carry 555 people - while Boeing pushes ahead with its smaller and more efficient 7E7, due in 2007.

2008: Passenger air traffic is forecast to grow some 20 percent from today's levels. China and Poland should see a rise of more than 50 percent.

Sources: US Centennial of Flight Commission; Aeroflot; Finfacts.com; International Air Transport Association

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Small science may clean a big problem

from the February 10, 2005 edition - http://www.csmonitor.com/2005/0210/p14s01-sten.html

By John K. Borchardt Correspondent of The Christian Science Monitor

They're scattered all around the United States, more than 1,200 of them, waiting for cleanup. Some are old military bases or abandoned factories. Others are gas stations with leaky underground tanks. And they're only the beginning of a long, arduous task.

Over the next 30 years, the US may have to clean up as many as 350,000 Superfund sites at a cost of up to $250 billion, according to the US Environmental Protection Agency.
How will taxpayers pay for that?

One solution is to find cheaper cleanup technologies. One of the most promising innovations right now involves microscopic iron particles. At least four teams of researchers are using these "nanoparticles" to attack some of the most vexing underground pollutants, including chromium-6, the groundwater pollutant made famous in the movie "Erin Brockovich."

If these nanotechnologies prove successful, they could reduce cleanup costs at selected Superfund sites by 75 percent, researchers suggest, perhaps saving billions of dollars.

"Using iron nanoparticles is one of the hottest new technologies to emerge in recent years," says Paul Tratnyek, an environmental chemist at Oregon Health & Science University and one of several researchers working on the technology.

Iron's contaminant-removal power arises from the fact that it rusts. "When it does so in the presence of groundwater contaminants, it can convert them into less toxic or nontoxic materials," says Dr. Wei-xian Zhang, an engineering professor at Lehigh University in Bethlehem, Pa.

The nanoparticles are particularly useful because of their size - a single human hair is 500 to 5,000 times as wide. At that scale, they can move through microscopic flow channels in soil and rock, reaching and destroying groundwater pollutants that larger particles cannot.

"Developing new technologies capable of locating and effectively treating areas contaminated with subsurface pollutants is difficult," says Greg Lowry, an engineering professor at Carnegie Mellon University in Pittsburgh. "This is because it is often difficult to locate the exact site of contamination because records are poor for many old waste sites and the primary contamination sources, such as storage tanks, were removed many years ago.

"Some of these contaminants move deep underground, and predicting their movement is difficult. So there are few reliable technologies to treat these sites," Dr. Lowry adds.

Cleaning up a cleanser

Working with researchers at Pacific Northwest National Laboratory and the University of Minnesota, Dr. Tratnyek has found that iron nanoparticles can effectively destroy carbon tetrachloride, a toxic organic chemical once widely used in dry cleaning and in degreasers. Its widespread production and use have contaminated soil and groundwater at many sites.

But the ultra-small size of iron nanoparticles alone is not enough to neutralize carbon tetrachloride; the chemistry is crucial. For example, when Tratnyek's team compared two leading types of particles, only one converted carbon tetrachloride to a mixture of relatively harmless product consisting of iron oxide with a magnetite shell high in sulfur. "This type of nanoparticle is now commercially available," says Tratnyek. (The other type of particle, coated with oxidized boron, created chloroform, a toxic and persistent contaminant.)

The power of palladium

Other researchers are using nanoparticles containing palladium to convert toxic organic chemicals into harmless products. The palladium enables the iron to react with organic contaminants much faster than other types of iron nanoparticles, says Dr. Zhang.

When air-conditioner manufacturer Trane tested these nanoparticles at its Trenton, N.J., plant in 2001, they reduced the toxic organic solvent trichloroethylene, or TCE, in nearby well water by about 96 percent after 12 hours. More recently, field tests have been performed at several sites including a GlaxoSmithKline pharmaceutical facility in North Carolina.

TCE, widely used to remove grease from metal parts, is found in some 60 percent of Superfund sites, according to Lowry. His research team has designed a different iron nanoparticle that also can reach underground pockets of TCE. It uses reactive iron, which quickly breaks down solvents such as TCE into harmless byproducts. This reactive iron is coated with two layers of polymers. The outer "water-loving" one allows the nanoparticles to travel through an aquifer. When it reaches TCE, an inner "water-hating" polymer layer enables the nanoparticles to contact the water-insoluble TCE.

Tackling chromium

To remove chromium-6 - the "Brockovich" contaminant - from groundwater and industrial wastewater, two researchers are assembling an iron nanoparticle inside ferritin, an animal blood protein. When removed from the ferritin, this nanoparticle can convert toxic metals into a form that makes them much easier to remove from water, according to chemist Daniel Strongin and co-workers at Temple University in Philadelphia and Montana State University at Bozeman. For example, they use the iron nanoparticles plus visible light or sunlight to convert chromium-6 to insoluble chromium-3 (trivalent chromium), which can then be filtered out.

Using iron nanoparticles to clean groundwater can provide significant savings. For example, a $20 million cleanup project might cost $5 million using nanoparticles, a savings of 75 percent, says Zhang. Iron nanoparticle prices have dropped from $15 to $23 per pound in 1995 to $9 to $11 per pound today, thereby reducing their site treatment costs.

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China enforcing green laws, suddenly

from the February 10, 2005 edition - http://www.csmonitor.com/2005/0210/p01s02-woap.html

Beijing has targeted 22 major energy projects to assess their environmental impact.

By Robert Marquand Staff writer of The Christian Science Monitor

BEIJING - As many as 22 major dams and power stations under construction in China, including a key power facility at the controversial Three Gorges Dam, have slowed or stopped work pending an environmental review.

In the first instance of its kind, top Chinese leaders appear to be throwing their clout behind laws requiring environmental-impact statements for large energy-related projects.

Even if the projects, which total more than $14 billion and span 13 provinces, soon go back online, Beijing's public support of the State Environmental Protection Agency (SEPA), long considered a mere showpiece, seems an official nod to growing numbers of Chinese who support tougher policies to protect nature.

Energy-hungry China has embarked in recent years on a breakneck program of investment in power plants, adding to an already overheating economy. By enforcing policies requiring companies to account for environmental impact, the power sector may cool down a bit - one reason to allow SEPA to fine construction companies and demand they follow the law, according to an unusually frank South Metropolitan Daily editorial.

In the past decade, China's roaring double-digit growth, industrial output, and booming new-car sales have caused some of the worst air and water pollution in Asia.

So far, watchdogs like SEPA, despite being an arm of government, have not been given latitude to enforce any clean air and water laws.

Yet on Jan. 18, in a bit of savvy bureaucratic maneuvering, SEPA suddenly charged 30 construction projects with illegality, since they failed to submit impact statements.
Since then, most of the dams and hydroelectric projects have reportedly suspended work, according to the English-language China Daily.

The construction firm building the Three Gorges Dam project, after several days of balking, bent to an edict from the State Council. It stopped work on a 4,500-megawatt underground power facility, and a $5 billion dam called Xiluodu on the Yangtze River.

Analysts attribute a new attitude about the environment to deepening relations between figures like Chinese Premier Wen Jiabao and young stars at SEPA, like its deputy director Pan Yue.

"I think this is a significant moment; it signifies a new consciousness about the environment," says Elizabeth Economy of the Council on Foreign Relations in New York. "Pan Yue is spearheading that move among elites, and SEPA clearly has the ear of [Premier] Wen Jiabao."

The environment is a popular grass-roots issue in China, one of the few issues the central government allows some public discussion about. Every top college in China has an active student environmental group. The government of President Hu Jintao, moreover, which has a "people first" platform, knows the environment has a special hold on the imagination of a broad range of Chinese - partly because many of the children of high-ranking are involved in nongovernmental environmental lobby groups.

Few analysts say Beijing is about to allow large-scale public works projects, a source of employment and energy, to be vetoed by a small agency.

Yet analysts agree the high profile push by SEPA is a signal - to reform-minded elites, a generation of younger educated Chinese, and policymakers in other countries where the environment gets top billing - that the environment will weigh more heavily in planning and decisionmaking.

"There are about 70 environmental groups doing things at the local level," says Nick Young of China Development Brief In Beijing, which follows voluntary groups in China. "These aren't just clubs, but are active - and effective. The environment is a sector where there are real are imaginative possibilities in China."

Moreover, the environmental lobby in China has been given space to air its views in the state-run media, and in smaller private newspapers - questioning whether enough public resources are being devoted to stopping pollution and protecting wildlife, for example.

The current bold move by SEPA took place at a time when scholars, writers, and "public intellectuals" have been further discouraged to express themselves freely. The SEPA initiative was given great official state media attention on Jan. 18, the day after former premier and Tiananmen legend Zhao Ziyang died after living under house arrest for 15 years. For two weeks after Zhao's death, authorities and police effectively shut down discussion about Zhao, even on the Internet.

"I think a lot of the clout that we've seen with SEPA and with the growing environmental movement in China is due to the media here," Mr. Young says.

"The public is surprised and has praised this bold move," editorializes Metropolitan News. "Not only are ordinary people not satisfied, but leaders are not satisfied [with the lack of reform in anti-pollution measures]."

Sources in Beijing say many leaders are genuinely worried about scientific studies and new analyses showing long-term harm from continuing the pace of unregulated toxic emissions and waste. Not long ago, Beijing announced that high standards for auto emissions.

In testimony before the US Congress in September, Ms. Economy targeted water as the most pressing issue: "More than three-quarters of the water flowing through China's urban areas is considered unsuitable for drinking or fishing," she stated. "Much of China's pollution stems from industrial waste water from paper and pulp mills, printing and dyeing factories, chemical plants and other small, unregulated township and village enterprises."

In the post-Jan. 18 blast of coverage in Chinese media about illegal power plants, much of the style and content of the rhetoric appears similar to that used to condemn official corruption. China Youth Daily, for example, a state-run newspaper, did stories pointing to the most "embarrassing" projects that were suspended.

The paper cited a chromium factory in Huanzhong County in Northwest Qinghai Province that was dumping horrific levels of toxins into nearby rivers. The factory was ordered to close last May. But new building facilities and operations quickly started up again in July.

"The person who approved the July project was the director of the local environmental protection bureau," the paper reported.

In December, the State Council of China restated the laws governing impact statements, and officials from SEPA conducted a set of swift studies in the field - then made up the list.
SEPA officials stated that those projects out of compliance, including a $5 billion hydro-power station in Sichuan Province, will pay fines of up to $24,000.

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Congress crosses partisan divides on some issues

from the February 07, 2005 edition - http://www.csmonitor.com/2005/0207/p02s02-uspo.html
Agreement on moving class-action suits to federal courts indicates bridge building between parties, for now.

By Gail Russell Chaddock Staff writer of The Christian Science Monitor

WASHINGTON - For all the talk of epic battles to come on judicial nominations and Social Security, you might think that nothing is going to happen in the 109th Congress but gnashing of teeth.

Yet, while top issues are highly partisan, there are a number of bipartisan bills on a fast track in the 109th Congress - a sign that Republicans and a critical mass of Democrats are finding common ground - and GOP leaders aim to move them to a vote as rapidly as possible.

Surprisingly, the venue for this early bipartisanship is the Senate Judiciary Committee, expected to be the stage for bitter fights over Supreme Court nominations later in this Congress.

The mood was conciliatory and even cordial, as Sen. Arlen Specter (R) of Pennsylvania gaveled in the committee last week to launch the committee's legislative agenda. The new chairman aims to build as many bridges with Democrats as possible before nomination battles shut down prospects for bipartisan work.

Exhibit A is a long-stalled bill to move many class-action lawsuits into federal courts. First introduced in the 105th Congress - and reintroduced in every Congress since - it cleared the Senate Judiciary Committee last week on a bipartisan 13-to-5 vote and begins debate on the floor of the Senate Monday.

A top priority of the US business community, the bill is the first and least controversial of a series of measures proposed by the Bush administration to overhaul US Courts. Others include consumer bankruptcy, asbestos litigation, and medical malpractice.

Supporters say the bill, which would shift many class-action lawsuits into federal courts, is needed to protect US business from "frivolous" lawsuits and trial lawyers who shop cases to the most favorable state venues.

Opponents, including all leading consumer groups, say that the bill will lock consumers out of the courts and let companies endanger the public.

"The class-action bill is one of the rare bills that cuts across party lines. A minority of Democrats realize that some change is necessary," says Marshall Wittmann, a former Republican activist now with the Democratic Leadership Council.

It also marks a shift in strategy from the 108th Congress, where the GOP-controlled House would muscle through legislation on party-line votes, then watch them die in the Senate, where the rules favor the opposition. On the class-action bill, House GOP leaders have agreed to take up the Senate's bill, if it passes without amendment.

At the same time, many Democrats who have opposed the bill in the past are saving their fire for a vote they can win. While top Democrats such as minority leader Harry Reid oppose the bill, the party is not aiming to derail it. "The class-action debate demonstrates pragmatic leadership.... We don't have the votes to stop it," says Jim Manley, a spokesman for the Senate Democratic leadership.

Consumer groups who counted Senate votes over the weekend said they no longer have the votes to block the bill outright in a 55-to-45 vote (with one independent) Senate, but that they may be able to complicate its passage with amendments.

"It is unlikely that we can stop this unfair bill. But we believe we can get the votes to lessen the damage," says a spokesman for Public Citizen. A new Public Citizen report finds that at most two county court systems of 3,141 in the United States are "magnet jurisdictions" for lawsuits, and that at least 11 states have made significant changes in their class-action system that help businesses that are sued.

In often-spirited exchanges, Democrats on the Judiciary Committee vied as much with each other as with Republicans on this bill. "It is interesting to me that the main cosponsors way back then were Senators Kohl and Grassley, nonlawyers, and myself as a nonlawyer. The lawyers, I think perhaps look at this a little differently," said Sen. Dianne Feinstein (D) of California, a sponsor of the class-action bill.

"This is a bad idea whose time apparently has come," countered Sen. Joseph Biden (D) of Delaware.

After class action, the Judiciary panel expects to take up consumer bankruptcy legislation, which has also repeatedly derailed in previous Congresses. Senator Specter had hoped to move the bill to the floor for a vote by Feb. 14, but in response to Democratic concerns agreed to a hearing.

"We ought to stop and really reflect on ... whether the credit-card industry has some moral obligation here as part of this conversation," said Sen. Richard Durbin (D) of Illinois, the deputy Democratic leader.

Other issues expected to move through the judiciary panel include a deal on asbestos litigation and, later, medical malpractice reform.

Common ground goes beyond legal reforms. Senate Republicans say they are holding off moving an energy bill to the floor until at least April to boost emerging Democratic support. In addition, bipartisan coalitions are building on new legislation to support faith-based groups, to relax federal limits on stem-cell research, and to make repeal of the estate tax permanent.

"The polarization in Congress is not that Democrats and Republicans don't want to talk to each other, it's that their supporting constituencies are so hostile to each other," says Ross Baker, a political scientist at Rutgers University in New Jersey. "[One some issues] the interest group alignments are not as starkly rigid as they used to be."

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Bush hones his pitch on retirement

from the February 07, 2005 edition - http://www.csmonitor.com/2005/0207/p01s01-uspo.html

The president pushes hard, as public remains wary of private Social Security accounts.

By Linda Feldmann Staff writer of The Christian Science Monitor

OMAHA, NEB. - Roger and Peggy Carrell and her elderly mother lined up at 4:30 Friday morning to get a good seat at the Qwest Center for President Bush's Social Security roadshow. When they got inside, well in advance of the 8:30 start time, the Mutual of Omaha choir and a troupe of swing dancers revved up the crowd, which grew to more than 10,000 people.

There's no doubt the city of Omaha - including the anti-Bush protesters outside the arena - was excited about a rare presidential visit. But it's also clear that Mr. Bush still faces an uphill climb in selling a plan for partial privatization of Social Security, even after a five-state blitz before sympathetic audiences.

"Some people think he's trying to take away Social Security from everyone," says Mr. Carrell, who owns a surveying company. "The information he gave out is what everyone needs to look at. But I don't know how you do that, because you're getting all these negative people."

The Omaha event had a similar structure to the others: There were the visuals - a big chart showing how the number of workers supporting each beneficiary has shrunk since 1950 from 16 to 3.3. Another graphic showed how in 2018, incoming payroll taxes will no longer cover all the promised Social Security benefits and by 2042, the system will be insolvent.

Bush energetically strode across the stage, microphone in hand, and made his pitch - a more conversational version of his State of the Union appeal to revamp the retirement system. Then he settled into a chair alongside a preselected panel - one expert and four "regular folks" who represented different demographic groups, including a42-year-old employee of Omaha Steaks with a wife and three kids and a 57-year-old divorced secretary with three grown children. One is mentally challenged.

In this chat-show portion of the event, Bush asks every panel member to tell his or her story, which includes, of course, a conclusion that allowing younger workers to put some of their Social Security withholding into a personal retirement account, invested conservatively in stocks and bonds, is the way to go.

The inheritability of such accounts is another appealing feature. To