Sweden is trying to turn people Swedish

Charlemagne
The world’s greatest welcomers of refugees must work out how to assimilate them

 

NASTEHO WEHELIYE sits on one side of a semi-segregated cafeteria (men-only to the right of the counter; mixed to the left) in Tensta, a migrant-heavy suburb of Stockholm. Like many Somalis, she is an enterprising soul. So it is hardly surprising to hear her lament the high taxes and hiring costs of the homeland she adopted as a young asylum-seeker 27 years ago. As she wrings her henna-stained hands at the thought of the regulations that have stymied her two attempts to open shops in the Swedish capital, the café owner parks himself at a neighbouring table in an ill-disguised effort to eavesdrop.

The biggest local problems are housing and unemployment, says Ms Weheliye. These challenges have acquired fresh urgency as Sweden confronts the massive task of integrating its latest wave of refugees. In 2015, 163,000 asylum-seekers, mostly Syrians, Afghans and Iraqis, reached the country. Relative to Sweden’s population of 10m, this was the largest influx ever recorded by the OECD, a club of mostly rich countries. Not all will stay; last year two-fifths of asylum claims were rejected. But the rest will need homes, schools and jobs.

Tensta shows why that will be hard. In recent decades waves of migrants and refugees have filled its high-rises after native Swedes upped sticks for better areas. Today Tensta is one of 53 parts of Sweden that the police deem “vulnerable” (ie, crime-ridden). Unemployment is substantially higher than the national rate of 6.6%. Development schemes have eased tensions, says Ditte Westin, a local official and former policewoman who has known the area for 20 years. But a quick tour of the neighbourhood, under the deafening sound of a police helicopter, reveals some of its scars, from open drug-dealing to a basketball court that, Ms Westin jokes, is used mainly by kids fooling around on motorbikes.

Just 6% of Swedes live in areas like Tensta, according to Tino Sanandaji, an economist, but 26% of residents with a non-Western immigrant background do. Their troubles are milder than those of some American inner cities or French banlieues, but hard to swallow for a society that prides itself on order. To avoid deepening segregation, ministers know they must act now, as the asylum system churns through the new claimants. A new law obliges all 290 of Sweden’s municipalities to accept refugees, but as they can go where they like once their claim is granted, clustering is hard to avoid. A housing shortage, particularly in Stockholm, aggravates the problem.

Finding work for refugees is another tough nut to crack. Fully 95% of new jobs in Sweden require at least a secondary education; one-third of recent refugees, most of them women, have less than nine years’ schooling. High wage settlements, agreed between unions and employers, make it hard for unproductive workers to find jobs. The employment gap between low-skilled migrants and natives, nearly 20 percentage points in 2012, is a persistent feature of the labour market. And the concentration of refugees among Sweden’s immigrants presents a challenge that will only have been sharpened by the recent influx.

Immigration also shoulders some of the blame for a decline in education standards (as measured by PISA scores) and a growth in inequality—admittedly to levels that remain the envy of less cohesive societies. Successful, high-trust countries like Sweden are vulnerable to this sort of difficulty: they may be happy to welcome outsiders, but can be harder to penetrate than looser, more informal places. It is hard to create an inclusive national identity under such circumstances. All seven of Ms Weheliye’s children were born in Sweden, she says, but few of them feel Swedish.

All this prompts a harsher criticism: that its wealth has allowed Sweden to prop up an ethnic underclass sequestered in invisible suburbs. Alert to the concern, business groups and some politicians argue for a disruption of Sweden’s wage-setting model to encourage a fresh wave of lower-paid service-sector jobs; flexible America, they note, is good at putting unskilled migrants to work. But sceptics fear this would entrench an ethnically stratified labour market. Better to focus on teaching refugees skills and Swedish, and hurry them into better-paid jobs, they say. The debate is likely to dominate next year’s election campaign.

Sverige, vart ska du?

Beyond the policies lies a more nebulous question: what sort of country does Sweden want to be? The old consensus has broken down, perhaps for good. A country that defined itself through the welcome it extended to outsiders is now consumed by the task of managing those who came. Border controls imposed in 2015 remain in place, and there is no appetite to return to the open-door policy of the past. “We want to help as many people as we can,” says Morgan Johansson, the migration minister. “But there are limits.” Such thoughts once approached heresy in Sweden.

One casualty is the cordon sanitaire around the Sweden Democrats, a rabble-rousing anti-immigrant party of the sort disrupting politics across Europe. In January the centre-right Moderate Party said it would work with the Sweden Democrats in certain circumstances. The move led to a sharp drop in the Moderates’ popularity, but it will be hard for mainstream parties to lock out the populists for ever. The Sweden Democrats nabbed 13% of the vote in 2014, forcing the Social Democrats to assemble a minority government, and polls now give them around 20%.

The situation is hardly hopeless. Swedish firms are desperate for workers, and the influx of young newcomers will help in a greying society. Tightened borders have bought the government precious time. And the troubles of areas like Tensta have been exaggerated by outsiders with an anti-immigrant agenda. The question is whether Sweden can work out how to extend the benefits of the successful society it has built to those it has invited to join. The aim is laudable, but just now the odds look long.

http://www.economist.com/news/europe/21722167-worlds-greatest-welcomers-refugees-must-work-out-how-assimilate-them-sweden-trying

 

 

Moon-landingMoon Jae-in wins South Korea’s presidential elections by a landslide

As remarkable is how well the country’s conservatives did

HE WAS imprisoned for months for protesting, then as a student, against the dictatorship of Park Chung-hee in the 1970s. After millions demonstrated for the removal of Park Geun-hye, General Park’s daughter, South Koreans voted on May 9th for that former student dissident, Moon Jae-in, to succeed her. Mr Moon has become South Korea’s first liberal president in almost a decade, elected in an unusual snap election triggered two months ago by Ms Park’s sacking. He won 41% of the vote in the single-round system with no minimum threshold: a remarkably strong mandate in a contest among 13 candidates, the most crowded race in South Korea’s electoral history. His 17 percentage-point lead on the runner-up, a conservative, is the highest ever.

Still, Mr Moon’s victory was no surprise: he had led the polls for four months; support for his Minjoo party during the two-month campaign for the presidency hit its highest on record. Ms Park’s trial on charges of abuse of power and the demanding or collecting of 59bn won ($52m) in bribes began last week. She is a bitter disappointment for many voters who had been charmed, in the election that brought her to power in 2012, by her reputation for integrity. Expectations are high for Mr Moon, during his single five-year term, to see through the “regime change” he promises. His promises to root out corruption that flows from close links between government and big business—“clearing out the evil”, he has called it—and to create a fairer society struck a chord in recent months. Mr Moon says he will set up a special department to get to the bottom of the presidential scandal.

Over 77% voted, the highest turnout in two decades. He has enormous appeal for South Korea’s disenchanted voters, especially the unemployed young: over half of those aged between 20 and 40 voted for him, according to exit polls. He has promised to reserve a third of over 800,000 new jobs he claims he can create, mainly in the public sector, for the young. He also wants to hike the minimum wage. In his acceptance speech on May 10th, Mr Moon pledged to build a country “where rules and logic apply”. Kim Hyung-jun, a young father who took his toddler to a polling station in central Seoul on May 9th, said that he was voting to create a better society for his daughter: one “where everyone begins at the same line”, not where “the rich and powerful have a head start”.

Mr Moon grew up poor. His parents are refugees from Hungnam, a North Korean port city evacuated in 1950 shortly after the start of the Korean war. The family was resettled in Geoje, where he was born (the southern island has produced another South Korean president in the democratic era, Kim Young-sam). Mr Moon began his political career as chief of staff to Roh Moo-hyun, a late liberal president in office from 2003 to 2008, with whom he had set up a law firm in the 1980s dealing with human-rights cases. Mr Moon then ran for the presidency himself in 2012, and was narrowly defeated by Ms Park in a two-way race. He often appeared at the million-strong protests that began against her in October.

The challenges he faces now as president are formidable. He comes to power at a time of unprecedented flux in North-East Asia: China, South Korea’s main economic partner, is tormenting it over the installation of an American anti-missile defence system known as THAAD, which went into operation last week. Confused policy towards the peninsula under Donald Trump has ratcheted up tension and risked undermining the alliance that has long helped protect South Korea against the existential threat posed by the North. Mr Trump abruptly threatened a fortnight ago to make the South pay the $1bn cost of THAAD. As the American president has declared an end to an era of “strategic patience” towards the North, Mr Moon has threatened, for his part, to review the deal finalised under Ms Park.

How to deal with a threatening North Korea became a major issue during the election campaign. Mr Moon calls for more engagement and dialogue with the North. But hawks’ fears that Mr Moon will reopen an old liberal era of “sunshine” that gave the North the benefit of the doubt along with lashings of aid are surely overdone. Since that era North Korea has exploded five underground nuclear devices and ramped up its belligerent threats. Scott Snyder of the Council on Foreign Relations, an American think-tank, says that resolutions passed by the UN Security Council have blocked economic deals that would have been allowed when Mr Moon worked under Roh. Nor do South Koreans want to be seen as bowing to pressure from China.

And then, even if Mr Moon were inclined to reverse policy towards North Korea, he would have to contend with the politics of the National Assembly. His Minjoo party does not hold a majority, and the next parliamentary elections do not take place until April 2020. Hong Joon-pyo, the presidential candidate who represented Ms Park’s former party (then Saenuri, now rebranded as Liberty Korea), had a remarkably strong showing in the election, of 24%. Ahn Cheol-soo, who ran under the banner of the People’s Party, a centrist group that split from Minjoo last year, supports THAAD and opposes Mr Moon’s plan to reopen the Kaesong industrial complex on the border with North Korea, a sunshine-era initiative that Ms Park shuttered.

Mr Moon will need to negotiate with him and others to govern. He has already been courting Mr Ahn’s party: both parties, he says, “come from the same roots”. Some suggest it could even decide to merge again with Minjoo, which would give the ruling party a 150-seat majority. On May 10th he appointed Lee Nak-yon, current governor of South Jeolla province, as his prime minister, promising to share more power and responsibility with his cabinet. That includes plans to introduce a system that reflects opinion-poll results in government appointments.

Support for Liberty Korea also suggests the new president will be governing a fractured nation. A “resentful pocket” of conservatives, says Shin Gi-wook of Stanford University, has coalesced around Mr Hong. He has referred to civic organisations, many of which led the protests against Ms Park, as “thieving bastards”, and pledged to carry out the first executions in two decades; his campaign slogan promised a South Korea free of “pro-North leftists”. This old-school conservatism continues to resonate, particularly in Gyeongsang—an eastern region that, as the Park family base, has long been a conservative stronghold—and with the elderly: half of those over 60 voted for Mr Hong.

Other rifts, too, will test Mr Moon’s promise, in his acceptance speech, to be a “president for all”. Shim Sang-jung, head of the Justice Party, received more votes than any other minor progressive candidate has in previous elections: she is the only candidate to support an anti-discrimination act to uphold the rights of minorities. According to exit polls, those in their 20s voted in greater numbers for Yoo Seung-min, a minor reformist conservative, than they did for Mr Hong. On his first day in office, Mr Moon says that he will be speaking to the heads of all four opposition parties before holding a meeting with his own.

http://www.economist.com/news/asia/21721868-remarkable-how-well-countrys-conservatives-did-moon-jae-wins-south-koreas-presidential

The world’s most valuable resource is no longer oil, but data

Regulating the internet giants

The data economy demands a new approach to antitrust rules
The Economist Print edition | Leaders May 6th 2017

 

A NEW commodity spawns a lucrative, fast-growing industry, prompting antitrust regulators to step in to restrain those who control its flow. A century ago, the resource in question was oil. Now similar concerns are being raised by the giants that deal in data, the oil of the digital era. These titans—Alphabet (Google’s parent company), Amazon, Apple, Facebook and Microsoft—look unstoppable. They are the five most valuable listed firms in the world. Their profits are surging: they collectively racked up over $25bn in net profit in the first quarter of 2017. Amazon captures half of all dollars spent online in America. Google and Facebook accounted for almost all the revenue growth in digital advertising in America last year.

Such dominance has prompted calls for the tech giants to be broken up, as Standard Oil was in the early 20th century. This newspaper has argued against such drastic action in the past. Size alone is not a crime. The giants’ success has benefited consumers. Few want to live without Google’s search engine, Amazon’s one-day delivery or Facebook’s newsfeed. Nor do these firms raise the alarm when standard antitrust tests are applied. Far from gouging consumers, many of their services are free (users pay, in effect, by handing over yet more data). Take account of offline rivals, and their market shares look less worrying. And the emergence of upstarts like Snapchat suggests that new entrants can still make waves.

But there is cause for concern. Internet companies’ control of data gives them enormous power. Old ways of thinking about competition, devised in the era of oil, look outdated in what has come to be called the “data economy” (see Briefing). A new approach is needed.

Quantity has a quality all its own

What has changed? Smartphones and the internet have made data abundant, ubiquitous and far more valuable. Whether you are going for a run, watching TV or even just sitting in traffic, virtually every activity creates a digital trace—more raw material for the data distilleries. As devices from watches to cars connect to the internet, the volume is increasing: some estimate that a self-driving car will generate 100 gigabytes per second. Meanwhile, artificial-intelligence (AI) techniques such as machine learning extract more value from data. Algorithms can predict when a customer is ready to buy, a jet-engine needs servicing or a person is at risk of a disease. Industrial giants such as GE and Siemens now sell themselves as data firms.

This abundance of data changes the nature of competition. Technology giants have always benefited from network effects: the more users Facebook signs up, the more attractive signing up becomes for others. With data there are extra network effects. By collecting more data, a firm has more scope to improve its products, which attracts more users, generating even more data, and so on. The more data Tesla gathers from its self-driving cars, the better it can make them at driving themselves—part of the reason the firm, which sold only 25,000 cars in the first quarter, is now worth more than GM, which sold 2.3m. Vast pools of data can thus act as protective moats.

Access to data also protects companies from rivals in another way. The case for being sanguine about competition in the tech industry rests on the potential for incumbents to be blindsided by a startup in a garage or an unexpected technological shift. But both are less likely in the data age. The giants’ surveillance systems span the entire economy: Google can see what people search for, Facebook what they share, Amazon what they buy. They own app stores and operating systems, and rent out computing power to startups. They have a “God’s eye view” of activities in their own markets and beyond. They can see when a new product or service gains traction, allowing them to copy it or simply buy the upstart before it becomes too great a threat. Many think Facebook’s $22bn purchase in 2014 of WhatsApp, a messaging app with fewer than 60 employees, falls into this category of “shoot-out acquisitions” that eliminate potential rivals. By providing barriers to entry and early-warning systems, data can stifle competition.

Who ya gonna call, trustbusters?

The nature of data makes the antitrust remedies of the past less useful. Breaking up a firm like Google into five Googlets would not stop network effects from reasserting themselves: in time, one of them would become dominant again. A radical rethink is required—and as the outlines of a new approach start to become apparent, two ideas stand out.

The first is that antitrust authorities need to move from the industrial era into the 21st century. When considering a merger, for example, they have traditionally used size to determine when to intervene. They now need to take into account the extent of firms’ data assets when assessing the impact of deals. The purchase price could also be a signal that an incumbent is buying a nascent threat. On these measures, Facebook’s willingness to pay so much for WhatsApp, which had no revenue to speak of, would have raised red flags. Trustbusters must also become more data-savvy in their analysis of market dynamics, for example by using simulations to hunt for algorithms colluding over prices or to determine how best to promote competition (see Free exchange).

The second principle is to loosen the grip that providers of online services have over data and give more control to those who supply them. More transparency would help: companies could be forced to reveal to consumers what information they hold and how much money they make from it. Governments could encourage the emergence of new services by opening up more of their own data vaults or managing crucial parts of the data economy as public infrastructure, as India does with its digital-identity system, Aadhaar. They could also mandate the sharing of certain kinds of data, with users’ consent—an approach Europe is taking in financial services by requiring banks to make customers’ data accessible to third parties.

Rebooting antitrust for the information age will not be easy. It will entail new risks: more data sharing, for instance, could threaten privacy. But if governments don’t want a data economy dominated by a few giants, they will need to act soon.

http://www.economist.com/news/leaders/21721656-data-economy-demands-new-approach-antitrust-rules-worlds-most-valuable-resource

 

Plastic-eating caterpillars could save the planet

Moth-eaten

An escape from a shopping bag triggers an idea

MOST scientific research follows a logical progression, with one experiment following up on the findings of another. Every now and then, however, serendipity plays a part. Such is the case with a paper just published in Current Biology, which reveals to the world a moth that is capable of chewing up plastic.

The experiment behind the paper was inspired when Federica Bertocchini, an amateur beekeeper who is also a biologist at Cantabria University, in Spain, was looking at some of the honeycombs in her hives and noticed caterpillars chewing holes through the beeswax and lapping up the honey. Such pests are not uncommon, so to be certain of what she was dealing with, she collected some of the caterpillars and took them home in a plastic shopping bag for subsequent examination. She assumed the larvae would be unable to escape from this bag, but she was wrong. When, a few hours later, she got around to looking at her captives she found the bag pierced by holes and the caterpillars roaming around her house.

After rounding them up, she identified them as the larvae of the greater wax moth, a well-known pest of bee hives. On considering their escape from their shopping-bag prison, though, she wondered whether they might be put to some sort of use as garbage-disposal agents.

Past attempts to employ living organisms to get rid of plastics have not gone well. Even the most promising species, a bacterium called Nocardia asteroides, takes more than six months to obliterate a film of plastic with a thickness of a mere half millimetre. Judging by the job they had done on her bag, Dr Bertocchini suspected that wax-moth caterpillars would perform much better than that.

To test her idea out, she teamed up with Paolo Bombelli and Christopher Howe, two biochemists at Cambridge University. Dr Bombelli and Dr Howe pointed out that, like beeswax, many plastics are held together by structures called methylene bridges (molecular units consisting of one carbon and two hydrogen atoms, with the carbon also linked to two other atoms). These bridges are impossible for most organisms to break, which is why plastics based on them are not normally biodegradable, but the team suspected wax-moths had cracked the problem.

One of the biggest constituents of rubbish dumps is polyethylene, which is composed entirely of methylene bridges linked to one another. So it was on polyethylene that the trio concentrated. When they put wax-moth caterpillars onto the sort of film it had taken Nocardia asteroides half a year to deal with, they found that holes appeared in it within 40 minutes.

On closer examination, Dr Bertocchini and her colleagues discovered that their caterpillars each ate an average of 2.2 holes, three millimetres across, every hour, in the plastic film. A follow-up test using standard shopping bags weighing just under three grams each found that an individual caterpillar took about 12 hours to consume a milligram of such a bag.

Whether releasing wax moths on the world’s surplus plastic really is a sensible approach to the problem is not yet clear. For one thing, it has yet to be established whether the caterpillars gain nutritional value from the plastics they eat, as well as being able to digest them. If they do not, their lives as garbage-disposal operatives are likely to be short—and, even if they do, they will undoubtedly need other nutrients to thrive and grow. Another question is the composition of their faeces. If the droppings produced by eating plastic turn out to be toxic, then there will be little point in pursuing the matter. Regardless of that, though, the discovery that wax-moth larvae can eat plastic is an intriguing one, for even if the moths themselves are not the answer to the problem of plastic waste, some other animal out there might be.

 

http://www.economist.com/news/science-and-technology/21721328-escape-shopping-bag-triggers-idea-plastic-eating-caterpillars-could

What America and China must do to head off a clash

Disorder under heaven: Avoiding the trap

The best hope is a balance of restraint, force and legitimacy

 

A MUCH-DISCUSSED recent study led by Graham Allison of Harvard university highlighted the dangers looming when a rising power challenges a ruling one, as when Athens challenged Sparta in ancient Greece. A rising power gains a growing sense of its entitlement and importance, often fed by past grievances and slights. This makes the established power feel insecure and all the more determined to defend the status quo. “When a rising power is threatening to displace a ruling power,” Mr Allison writes, “standard crises that would otherwise be contained, like the assassination of an archduke in 1914, can initiate a cascade of reactions that, in turn, produce outcomes none of the parties would otherwise have chosen.” This is the Thucydides Trap, named after the Athenian historian who first pointed to it. The Harvard study concluded that in 12 out of the 16 historical cases in the past 500 years that it examined, the outcome was war.

It may be a consolation that both Xi Jinping and Shinzo Abe have mentioned the Thucydides Trap as a cautionary comment on Chinese-American rivalry. But the leader of the status-quo power in Asia, Donald Trump, almost boasts about his ignorance of history. Besides, even when the protagonists are forewarned, there is still great scope for getting it wrong. It is a feature of the trap that defensive behaviour by one party—such as China’s building airstrips and the like on reefs in the South China Sea—is seen as aggression by the other.

In the Harvard study, when war was avoided it was thanks only to “huge, painful adjustments in attitudes and actions on the part not just of the challenger but also the challenged”. At the heart of this must be efforts to establish durable patterns of co-operation. For America and China, two areas are likely to be key: trade and North Korea.

Trade and the problems of access to China’s vast market cause the West understandable frustration. Two decades ago foreign businesses were cheerleaders for China to become part of the world economy (it eventually joined the World Trade Organisation in 2001). Today the mood among foreign businesses in China has turned to disenchantment.

Tariffs on China’s imports of goods are low, but in an economy dominated by state giants, outsiders are shut out of too many sectors, including government procurement. In industries which the Chinese government considers sensitive, the obstacles are written or unwritten rules. In other areas, such as cloud computing, Western companies fear to tread, because they are worried about the safety of proprietary technology or data. China’s latest initiative, “Made in China 2025”, is a blueprint for creating national champions in advanced manufacturing, promising government subsidies and investment in ten “strategic” industries. Other countries have similar plans. The difference is that foreign companies are not so shut out of them.

These are legitimate grievances, but the best hope of dealing with them is for America to pursue them vigorously within the multilateral system. If the United States were to go outside the framework of the WTO, or even shut access to its own markets, it would risk immense harm both to the bilateral relationship and to the global trading order.

“The pace of North Korea’s missile and nuclear development appears to be quickening

North Korea raises even bigger challenges. The pace of its missile and nuclear development appears to be quickening. Last year Kim Jong Un’s regime launched a missile from a submarine, a first. In early March it test-fired a cluster of rockets in preparation, it said, for attacking American bases in Japan. Later that month, in another first, it conducted a comprehensive test of a first-stage rocket for an intercontinental ballistic missile. A sixth nuclear test is thought to be in the works.

China, like America, wants North Korea to abandon its nuclear programme. At the UN it has signed up to an American-led sanctions regime against the North. It has a tangled history with its small, snarling neighbour. Officially the two countries are still allies, but China is furious about the North’s truculence. Still, it displays an astonishing inability to see things from anyone else’s point of view. In particular, it has thundered against South Korea’s plans to install an American anti-missile system, Terminal High Altitude Area Defence (THAAD), designed to shoot down attacking North Korean missiles, claiming that the system’s radar will allow America to look deep into its own defences. It has organised consumer boycotts of South Korean goods and entertainment to punish its neighbour. That sends an unnerving message to the region: that its relatively petty issues trump real concerns over the North Korean threat.

A better approach would be to share concerns over North Korea and work together on contingency plans. That requires wisdom and patience. The same goes for the broader relationship between China and America, which in Henry Kissinger’s words requires “a subtle balance of restraint, force and legitimacy”. A balance of power defined primarily in military terms will, he insists, “shade into confrontation”. If the Thucydides Trap is to be avoided, the search for partnership has to begin. The meeting between Mr Trump and Mr Xi at Mar-a-Lago earlier this month was a start. But it will come to nothing unless co-operation is put at the heart of relations between the two countries.

Something to build on

A rich basis for such co-operation is already in place (see chart), and perhaps widely underappreciated. Almost half of all foreign buyers of American property are Chinese, as are one-third of the nearly 1m foreign students in America. China can trace one-third of its GDP to foreign investment, much of it American. And Starbucks opens a new branch in China every 15 hours. A large part of the world wants America’s president both to understand and care about such things.

Yet China’s likely trajectory in the coming years will make co-operation harder, not easier. Mr Xi’s rule is proving more authoritarian than that of his predecessors, resources continue to be poured into military spending, and a slowdown in China’s debt-fuelled economy may render politics more brittle and make an ugly jingoism a tempting diversion.

Many Americans will question why their country should cede ground. It would certainly be wrong to retreat in the face of threats of force. In other areas, however, if China seems willing to shoulder responsibilities, America should respond. For instance, rather than allow China to nurture resentment at being shut out of running Western-led institutions such as the IMF and the World Bank, why not offer to incorporate China’s new Asian Infrastructure Investment Bank into the global institutional order?

That is where the wisdom comes in. China must show it too, by acknowledging that Asia wants the American presence to continue, and that its own security and prosperity also depend on it. Above all, both America and China need to remember that the alternative to co-operation is confrontation.

This article appeared in the Special report section of the print edition under the headline “Avoiding the trap”
http://www.economist.com/news/special-report/21720715-best-hope-balance-restraint-force-and-legitimacy-what-america-and-china-must

Exploitation and short-sightedness in Africa’s slums

The great urban racket

Making slums less exploitative may be Africa’s biggest challenge

 

STANDING on a muddy patch of grass in Mathare, a district in the eastern part of Nairobi, Kevin surveys his handiwork. From an electricity pylon, a thick bundle of crudely twisted wire hangs down into a tin-roofed shack. From there it spreads to a dozen more. Single wires run perilously at eye level over open sewers, powering bare light-bulbs, kettles and blaring speakers. In exchange for a connection, Kevin and six of his friends collect 200 shillings per month each (about $2) from about a hundred shacks in his corner of the slum. To protect the business, the gang pays off police officers and intimidates the competition. The connections, Kevin insists, are cheaper than official ones, and safer too. The rotting body of a fried rat near one of the lines suggests otherwise.

So goes the provision of public services in Nairobi’s poorest districts. These warrens of shacks and crudely built apartment blocks are home to 40% of the city’s population, according to one recent World Bank survey (others put the figure even higher). As the city’s population has exploded—from a third of a million at independence in 1963 to over 4m now—so too have the slums. Across Africa, they are the primary way by which hundreds of thousands of people have escaped even greater poverty in the countryside. By 2030, half of Africa’s population will live in cities, up from a third in 2010. According to the UN, two-thirds of that growth will take place in slums. Between 1990 and 2014, the continent’s slum population more than doubled, to some 200m people. Finding ways to improve slums will be one of the most pressing problems of the 21st century for African governments.

There for a reason

Slums grow because they provide something poor people need: affordable housing near to work, schools and public transport. Perversely, for such a poor continent, African cities tend to be sprawling and car-dependent. From Lusaka to Lagos, suburban housing estates and shopping malls, seemingly transplanted from Houston or Atlanta, are springing up at the edge of cities. But the vast majority of Africans cannot afford cars. In Nairobi slums are among the very few places close to jobs where it is possible to go shopping, watch a film and get a street-side meal, all without having to get into a vehicle.

The need to be near jobs helps explain why slums often sit next to staggering wealth. In Nairobi Mathare is wedged between Eastleigh, a bustling Somali commercial hub, and Muthaiga, a luxurious country club popular with white Kenyans. Alexandra in Johannesburg, a township of tin shacks, is at the edge of Sandton, the city’s poshest office district. In Lagos, a megacity where two-thirds of people live in slums, Makoko, a collection of shacks built on stilts in the lagoon, sits under the city’s Third Mainland Bridge, across from which new office buildings rent for vast sums.

Africa’s slums are full of enterprising people. But they are also deeply dysfunctional places, where much of the population lives in a Hobbesian world of exploitation. It is not just electricity that is provided by violent cartels; so is water, rubbish collection and security. The state scarcely enters: in most slums, health care and education are provided privately or by charities, if at all. Diseases such as cholera and HIV are rife. There is often little in the way of a legal system to protect property rights. Instead, well-connected landlords make fortunes renting tiny patches of land to people who have nowhere else to go.

And slums are violent. In Nairobi the cartels fight vicious turf wars with each other. Some, like the Mungiki, a Kikuyu mafia, are organised on ethnic lines. In Lagos slums like Makoko are run by local chiefs called “baales”, who dress like mob bosses and expect tributes from residents. Cops are unwilling to go in, except occasionally to extract bribes or to shoot a suspect. Politicians do enter: an abundance of unemployed young men are easy recruits to gangs raised to intimidate opponents.

Perversely, slums are also expensive. In Mathare options range from a shared space in a wooden shack on top of an open sewer with no water or electricity for 700 shillings per month ($7) to a relatively clean room in a compound with a light bulb and a shared outside toilet, for 3,000. That may seem cheap, but slum landlords are doing much the same as Western consumer businesses do in Africa: packaging their product up in tiny enough bites for the poor to afford it. And just as a hundred tiny sachets of washing powder cost more than a single large box, so too with land. According to Jacqueline Klopp, a researcher at Columbia University, per square foot of land rented, Nairobi’s slum residents could well pay higher rents than some of the city’s wealthy expatriate workers.

Why can’t slums be cleared? African governments often see slums as an eyesore and would like to do just that. In Nigeria the Lagos state government has become notorious for waking up slum-dwellers on the most valuable patches of land with bulldozers. When the government wants the land, people are simply kicked off and expected to find new homes. In Kigali, Rwanda’s spotlessly clean capital, taxi drivers point out patches of neat grass where slums have been torn up. Less authoritarian governments, such as Kenya’s, have tried to “upgrade” slums in situ by building newer, better housing.

Yet when slums are demolished, other ones become more crowded. And new housing is often too expensive or isolated from services for slum residents to benefit. In Kibera, another Nairobi slum where the government has built smart apartments nearby, they are lived in by middle-class newcomers. Those few residents who were upgraded preferred to sublet their new homes.

According to Sumila Gulyani, a World Bank researcher, slums tend to improve when their residents have an incentive and the money to invest. If people either own their property, or rent for long periods, they spend more on improvements and take care of their surroundings. Over time, that can produce better areas. The problem with many African slums, she says, is that people rarely live in one place for more than a few years. While they are there, the money they make is extracted from them by landlords and cartels, who have little incentive to invest. In many cases, improvements—such as proper piped water—brought in by well-meaning outsiders are vandalised by the cartels.

If government treated slums as real city districts they might improve. In Mathare there is some reason to be hopeful. Though shacks still predominate, some taller buildings have been going up, with more space. In his shack, Crispin Adero, a 20-year-old construction worker, has plastered the walls with posters of Manchester City football players. Music plays from a television connection to a satellite tuner. A ladder leads to an upstairs room, which Mr Adero shares with his wife. He built it himself, having made a deal with his landlord to share the costs. Life, says Mr Adero, “is OK.” But not everyone has such luck. And outside, sewage still runs in the street.

This article appeared in the Middle East and Africa section of the print edition under the headline “The great urban racket”
http://www.economist.com/news/middle-east-and-africa/21721141-making-slums-less-exploitative-may-be-africas-biggest-challenge-exploitation-and

The Trump presidency is in a hole

The White House
And that is bad for America—and the world

 

DONALD TRUMP won the White House on the promise that government is easy. Unlike his Democratic opponent, whose career had been devoted to politics, Mr Trump stood as a businessman who could Get Things Done. Enough voters decided that boasting, mocking, lying and grabbing women were secondary. Some Trump fans even saw them as the credentials of an authentic, swamp-draining saviour.

After 70 days in office, however, Mr Trump is stuck in the sand. A health-care bill promised as one of his “first acts” suffered a humiliating collapse in the—Republican-controlled—Congress (see Lexington). His repeated attempts to draft curbs on travel to America from some Muslim countries are being blocked by the courts. And suspicions that his campaign collaborated with Russia have cost him his national security adviser and look likely to dog his administration (see article). Voters are not impressed. No other president so early in his first term has suffered such low approval ratings.

It is tempting to feel relief that the Trump presidency is a mess. For those who doubt much of his agenda and worry about his lack of respect for institutions, perhaps the best hope is that he accomplishes little. That logic is beguiling, but wrong. After years of gridlock, Washington has work to do. The forthcoming summit with Xi Jinping, China’s president, shows how America is still the indispensable nation. A weak president can be dangerous—picture a trade war, a crisis in the Baltics or conflict on the Korean peninsula.

The business of government

Mr Trump is hardly the first tycoon to discover that business and politics work by different rules. If you fall out over a property deal, you can always find another sucker. In politics you cannot walk away so easily. Even if Mr Trump now despises the Republican factions that dared defy him over health care, Congress is the only place he can go to pass legislation.

The nature of political power is different, too. As owner and CEO of his business, Mr Trump had absolute control. The constitution sets out to block would-be autocrats. Where Mr Trump has acted appropriately—as with his nomination of a principled, conservative jurist to fill a Supreme Court vacancy—he deserves to prevail. But when the courts question the legality of his travel order they are only doing their job. Likewise, the Republican failure to muster a majority over health-care reflects not just divisions between the party’s moderates and hardliners, but also the defects of a bill that, by the end, would have led to worse protection, or none, for tens of millions of Americans without saving taxpayers much money.

Far from taking Washington by storm, America’s CEO is out of his depth. The art of political compromise is new to him. He blurs his own interests and the interests of the nation. The scrutiny of office grates. He chafes under the limitations of being the most powerful man in the world. You have only to follow his incontinent stream of tweets to grasp Mr Trump’s paranoia and vanity: the press lies about him; the election result fraudulently omitted millions of votes for him; the intelligence services are disloyal; his predecessor tapped his phones. It’s neither pretty nor presidential.

That the main victim of these slurs has so far been the tweeter-in-chief himself is testament to the strength of American democracy. But institutions can erode, and the cocuntry is wretchedly divided (see article). Unless Mr Trump changes course, the harm risks spreading. The next test will be the budget. If the Republican Party cannot pass a stop-gap measure, the government will start to shut down on April 29th. Recent jitters in the markets are a sign that investors are counting on Mr Trump and his party to pass legislation.

More than anything, they are looking for tax reform and an infrastructure plan. There is vast scope to make fiscal policy more efficient and fairer (see article). American firms face high tax rates and have a disincentive to repatriate profits. Personal taxes are a labyrinth of privileges and loopholes, most of which benefit the well-off. Likewise, the country’s cramped airports and potholed highways are a drain on productivity. Sure enough, Mr Trump has let it be known that he now wants to tackle tax. And, in a bid to win support from Democrats, he may deal with infrastructure at the same time.

Yet the politics of tax reform are as treacherous as the politics of health care, and not only because they will generate ferocious lobbying. Most Republican plans are shockingly regressive, despite Mr Trump’s blue-collar base. To win even a modest reform, Mr Trump and his team will have to show a mastery of detail and coalition-building that has so far eluded them. If Mr Trump’s popularity falls further, the job of winning over fractious Republicans will only become harder.

Were he frustrated in Congress, the president would surely fall back on areas where he has a free hand. He has already made full-throated use of executive orders and promises to harness the bureaucracy to force through his agenda. In theory he could deregulate parts of the economy, such as finance, where the hand of government is sometimes too heavy. Yet his executive orders so far have been crudely theatrical—as with this week’s repeal of Barack Obama’s environmental rules, which will not lead to the renaissance of mining jobs that he has disingenuously promised coal country (see article). It is the same with trade. Mr Trump could work through the World Trade Organisation to open markets. More probably, the economic nationalists on his team will have the upper hand. If so, America will take a bilateral approach, trade protection will grow and foreign policy will become more confrontational.

The character question

The Americans who voted for Mr Trump either overlooked his bombast, or they saw in him a tycoon with the self-belief to transform Washington. Although this presidency is still young, that already seems an error of judgment. His policies, from health-care reform to immigration, have been poor—they do not even pass the narrow test that they benefit Trump voters. Most worrying for America and the world is how fast the businessman in the Oval Office is proving unfit for the job.

http://www.economist.com/news/leaders/21719794-and-bad-americaand-world-trump-presidency-hole

Brand Britain post-Brexit

The national brand needs attention, says LBS marketing professor Nader Tavassoli

London Business School Review 20 Mar 2017 Nader Tavassoli

Brexit Britain

Maybe the Brexiteers didn’t expect to win the referendum in June 2016. To quote from the confusingly-titled iconic Brit film, The Italian Job, maybe they “only meant to blow the bloody doors off”. Possibly they didn’t intend to shatter the whole edifice: they fled the scene so fast it’s hard to know. No matter. In uncertainty, as everybody knows, there is opportunity. And for Brand Britain to grasp this opportunity, it cannot afford the British habits of self-deprecation and ambivalence. Brands need to know what they’re about. And behave accordingly.
I don’t know how Britain will emerge from Brexit – who does – but I do know that it could help to look at it from a brand-building perspective. I have a 3Bs framework for this: aligning business, brand and behaviour. Maybe if Britain learns from corporate experience, it can avoid becoming a nation of Bregretters.

Seize the moment

With the world watching, attempts to shape Britain’s brand will have a disproportionate impact, amplified internationally by the press and social media. That opportunity won’t last for ever. The British government can help people reconnect with their identity, reframe the values that define the culture, and position Britain’s role in Europe and the wider world for a new era. Political leaders should not get caught up in short-term posturing on the terms of Brexit – or its £60 billion price tag. This behaviour will reflect on Brand Britain. Rather than think of it as a cost, it should be seen as an investment. The European Union (EU) is not the only one listening and Brand Britain is a far greater prize at stake. Ultimately, brands are about identity and emotions. And, without empathy, Brexit may well have the same chilling effect of the separation of the British Isles from continental Europe following the last glacial period.
So let’s look at corporate brands for inspiration on how it could and should be done.

A branded house or a house of brands?

What is the national brand in question anyway? Brexit is an abbreviation for “British exit” where “British” refers to the people of the United Kingdom, which includes Great Britain – comprising England, Scotland and Wales – and Northern Ireland. As such, the UK is not a branded house like London Business School (LBS). Rather, it is a house of brands such as Unilever that owns power brands such as Dove, Axe (or Lynx), Lipton and Knorr, to name just a few. Unilever is also the world’s leading ice-cream maker, with brands such as Magnum, Carte D’Or, and Solero that are part of the Heartbrand, and Ben & Jerry’s that is not. Unilever’s Global Chief Marketing Officer, Keith Weed’s views on the repositioning of their brand can be usefully applied and can be heard in an interview I carried out with him here.
The brand architecture is complex, but purposeful. Brands such as Carte D’Or and Solero have a different functional positioning – sharing and refreshment, respectively – but are united under the Heartbrand’s umbrella positioning of “euphoric fun”. This aims to turn Carte D’Or’s sharing into a much more active “bonding” and Solero’s refreshment into an emotional “uplift”. Furthermore, Unilever’s corporate brand has the purpose of “adding vitality to life”, which for example, drives product development into lower-sugar ice creams.
Britishness too is a layered identity. Think of the UK as Unilever, Great Britain as the Heartbrand – with England as Magnum, Scotland as Carte D’Or, and Wales as Solero – and Northern Ireland as Ben & Jerry’s. And, of course, each comes in different flavours, just like London, the Lake District and Cumbria are all English yet different. Britishness is layered on much older identities of being English, Irish, Scottish and Welsh, which continue to resist a homogenised British identity. People differ in the degree to which they consider themselves as English versus British, for example, with some rejecting either aspect entirely. And it gets even more complicated when considering the EU: Remainers might add a dollop of Europeanness to their identity, which surely is a concept entirely foreign to the identity of most Brexiteers.

Business: British brand DNA

These complex concepts must be defined when it comes to establishing the ‘B’ for “business” in my 3B branding framework, whether for a company or a nation. William Hesketh Lever, founder of Lever Brothers, defined the purpose for Sunlight Soap in Victorian England in the 1890s: “to make cleanliness commonplace; to lessen work for women; to foster health and contribute to personal attractiveness, that life may be more enjoyable and rewarding for the people who use our products”. These ideas still guide Unilever’s business, brands and behaviours today.
But what is the identity-defining purpose of a nation? A nation is a body of people of a particular territory, united by common heritage, history, culture, or language. And to (re)define the British brand, one must deep dive into its DNA, values, culture, key moments in history and the iconic people that continued to shape it.
The British national identity finds its roots at least as far back as Magna Carta in1215, still an important symbol of liberty today. Britishness has political and moral foundations, such as tolerance, meritocracy and freedom of expression. It is an identity formally established with creation of the unified Kingdom of Great Britain in 1707, when England and Scotland agreed “a hostile merger”. What was the purpose of this union? What led to its expansion to include Wales and Ireland later on? Or the demerger of the Republic of Ireland in 1922?
Purpose and identity are closely linked, and the notion of Britishness was strengthened during the Napoleonic wars, when it was one defined primarily by virtue of not being French or Catholic. A more pragmatic purpose was the growth and wealth creation of the British Empire, one that cemented the union. Money is also part of the Brexit equation, but the Remainers missed a vital ingredient by ignoring the role that identity played during the vote. And the government is in danger of playing a short game by focusing on the uncertain economics of Brexit without understanding the vital long-term implications of a strong British identity. The Brexiteers certainly knew how to play up historic identity battles with the Continent and the otherness of immigrants to fuel patriotism. Identity is a powerful card being played around the world, and the UK government ignore it at their own peril – not just with respect to the UK’s role in the world, but the union itself.
To redefine Brand Britain, it is worth looking at what accompanied the Empire’s planting of the Union Jack across the globe: tea, tubs, sanitation, obscure sports and churches, as well as a love-hate relationship to Britishness. In making its mark in the world, the UK has needed a range of soft skills: persuasiveness, diplomacy, creativity, ingenuity. These are skills that Brexit Britain should consider rediscovering and using to their maximum potential.
Mass immigration to the UK from the Commonwealth after the British Nationality Act 1948, and from all over the world since, has created an eclectic and vibrant expression and experience of cultural life exemplified in London. More than 250 languages are spoken in the capital, which has the largest non-white population of any European city. The UK’s membership in the European Economic Community in 1973 and European Union since 1993 has left indelible traces of Europeanness on the British identity.
Akin to how corporate brand identities are established, it’s instructive to look at who the British celebrate as the best examples of themselves. In November 2002, a BBC poll of more than a million people identified their greatest Britons of all time. Winston Churchill topped the chart, with engineer Isambard Kingdom Brunel in second place and Princess Diana in third. The list included artists, writers, royalty, scientists, explorers, military giants and, of course, a Beatle.
As the list illustrates, Britain has long been a hotbed of innovation, with major contributions to global culture, literature and the arts. Brits contributed to world-changing inventions in global communications (electronic telegraph, telephone, worldwide web), the media (photography, television), industry (cement, stainless steel, spinning frame, steam engine, electric motor), and even the humble toothbrush. Its education system at all levels is envied and has been copied around the world. One should also explore what people think when they see a product is “Made in Britain” and how perceptions differ from the same product labelled as “Made in Germany” or as “Made in China”.
But a brand is not simply a laundry list of all possible ingredients that make up its DNA. As the British film producer and director Alfred Hitchcock has observed: “If you confuse the audience, they cannot emote.” And, in the end, this is an emotional and not just intellectual exercise. The genes of the DNA ingredients need to be boiled down and fit together as a coherent whole.

British or English

Brand: who is it for?

But to create a compelling brand, the DNA is not enough. One has to consider the voice of the target audiences, whose attitudes and behaviours the brand should ultimately affect. It is an exercise at small scale with the Red Arrows as part of our MBA programme’s London Business Experience immersion. The Red Arrows know who they are, but in order to be a force for stimulating UK economic growth – their new remit of their air shows when travelling the world – they need to understand the goals of their different audience members, and then marry these insights up with what their DNA has to offer. To do so, you have to look for a universal insight that unites, rather than differentiates these audiences. Unilever has many audiences ranging from their own employees to regulators, communities, investors, customers and consumers. But they all can relate to their corporate purpose.
The second ‘B’ for brand therefore marries the DNA with target stakeholder insights: from businesses, immigrants, tourists, students, governments, not to mention its own citizens. For whom, in the long-term, should the brand be crafted? What are their goals? In what ways can Britain and Britishness authentically relate to these? While the brand message can be articulated in different ways to different stakeholders, the brand idea must have a consistent and coherent voice. External stakeholders too have different goals: Brexit affects them in different ways. The remaining 27 EU members will certainly feel different about Brexit than non-EU countries, who see new opportunities in a more independent UK.
Starting internally may well be the way to go: finding common ground for a nation divided. London stands apart from most of England, and Northern Ireland and Scotland voted to remain. It is therefore important to not get seduced by the notion of trying to forge a new Britishness around the identity of the Brexiteers. Exit polls and regional voting patterns suggest that they were, on average, older and less educated than the Remainers. Also, as the polling organisation YouGov showed, the brands preferred by voters differed substantially, even when correcting for demographic factors. Those who voted to leave were most loyal to traditional and warm brands like HP Sauce, Sky News, PG Tips and Richmond Sausages; whereas those voting Remain favoured more progressive and innovative brands like the BBC, Spotify, Virgin Trains and Twitter. This is no value judgement but a call to look at what unites rather than what divides them.

Behaviour: what are the moments that matter?

Whatever brand idea is created at the overlap of the DNA and audience insight, this is only the design of the brand strategy – one that needs a plan to be successfully executed. This is where the third ‘B’ for behaviour comes in, and it presents probably the biggest challenge – for business or nation alike. This is not about the big campaign. This is about the thousands of behaviours that add up. Take Southwest airlines. They are not just cheap, but their brand promise to weary travellers is that it will be a cheerful experience. And their people exhibit true missionary zeal, with constant smiles and creative in-flight announcements. This is not the 4 Ps of marketing – product, price, place and promotion – but the Southwest’s 3 Ps of “people, personal and personalities” that are at the heart of its branding efforts. All of its people processes are dedicated to attracting, selecting, developing and rewarding the hardworking “Fun-LUVing Attitude” that is one of its core values. All this so that its people can deliver fun moments-that-matter.
And Southwest is an example not too far-fetched for Brand Britain to learn from. Think of all the touchpoints that a migrant, foreign student, tourist or business traveller has. From acquiring a visa (something millions more will likely have to do post-Brexit) to arriving at an airport such as Heathrow, there are thousands of experiences that will shape people’s perceptions of this nation. When Glasgow wanted to improve its image, city leaders worked with taxi drivers. These moments all matter. And there are usually humans behind them.
What’s crucial, of course, is that leaders themselves behave in line with the identity: this is where Britain needs to take stock quickly, or else lose this opportunity. Because your people are more likely to follow your example than your carefully-crafted words. Similarly, in Brexit Britain, though the Brexiteers insisted they did not want to keep out migrants who worked and paid tax, their message is interpreted bluntly by many who hear it. But building a strong brand is not just about avoiding missteps or misperceptions. It is about behaving positively in brand consistent ways, and the government is in desperate need of a brand playbook at this critical time.
Nader Tavassoli is Professor of Marketing at London Business School, where he founded the Walpole Luxury Management Programme, as well as non-executive chairman of The Brand Inside.

 

https://www.london.edu/faculty-and-research/lbsr/brand-britain-post-brexit?utm_campaign=703921_MC_LBSR_Emails_FY17_March_Themed_Prospects&utm_medium=email&utm_source=DotMailer&utm_content=Article%205&dm_i=2SVQ,F35D,108A4V,1JS2V,1#.WNMkwMDfqBY

America’s shale firms don’t give a frack about financial returns

Exploration and production companies are poised to go on another investment spree

 
INSIDE the boardrooms and bars of Houston, the spiritual capital of America’s energy industry, the swagger is back. The oil price may only be at $48, or half the level it was three years ago. But shale fracking—the business of getting oil and gas out of rocks by blasting them with water and sand—is booming once again after the crash of 2014-16. Exploration and production (E&P) companies are about to go on an investment spree. Demand is soaring for the industry’s raw materials: sand, other people’s money, roughnecks and ice-cold beer.

Shale’s second coming is testament to Texan grit. But the industry’s never-say-die spirit may explain why it has done next to nothing about its dire finances. The business has burned up cash for 34 of the last 40 quarters, according to figures on the top 60 listed E&P firms collected by Bloomberg, a data provider. With the exception of airlines, Chinese state enterprises and Silicon Valley unicorns—private firms valued at more than $1bn—shale firms are on an unparalleled money-losing streak. About $11bn was torched in the latest quarter, as capital expenditures exceeded cashflows. The cash-burn rate may well rise again this year.

Meanwhile, the prospect of rapidly rising production is rattling global energy markets. In particular it worries OPEC, a cartel of producers led by Saudi Arabia that aims to restrain output and keep prices stable and fairly high. Khalid al-Falih, Saudi’s energy minister, warned of “irrational exuberance” on March 7th during an energy-industry conference in Houston.

When oil prices halved in just 16 weeks starting in late 2014, panic hit Texas, followed—for a while—by grim austerity. The number of drilling rigs in America dropped by 68% from peak to trough. Companies slashed investment. Over 100 firms went bankrupt, defaulting on at least $70bn of debt. Shale’s retrenchment helped to stabilise the global oil price. Production in the lower 48 states (ie, excluding Alaska and Hawaii), and excluding federal waters in the Gulf of Mexico, has dropped by 15% over the past 21 months, equivalent to 1m bpd, or 1% of global output.

The partial recovery in the oil price, which at one point fell as low as $26, is only one factor behind renewed enthusiasm for shale. Houston’s optimists also argue that the full geological potential of Texas’s Permian basin has only just become apparent. Some experts think it could in time produce more barrels each day than Saudi Arabia does. That has offset gloom about falling production from other shale basins, such as the Bakken formation in western North Dakota. The industry has also lifted productivity. Drilling is faster, more selective and more accurate, and leakage rates are lower. Wells are being designed to penetrate multiple layers of oil that are stacked on top of each other.

But the fact that the industry makes huge accounting losses has not changed. It has burned up cash whether the oil price was at $100, as in 2014, or at about $50, as it was during the past three months. The biggest 60 firms in aggregate have used up $9bn per quarter on average for the past five years. As a result the industry has barely improved its finances despite raising $70bn of equity since 2014. Much of the new money got swallowed up by losses, so total debt remains high, at just over $200bn.

Oil bosses like to show off their newest wells in the Permian basin, which, they say, can now make internal rates of return of more than 50% over their working lives. But most firms have mediocre wells too, as well as corporate overheads, so their overall efficiency improvement has not been great. For the ten largest listed E&P firms, aggregate cash operating costs per barrel fell by $13 between 2014 and 2016; not enough to offset a $50 drop in the oil price. Because shale-energy fields run out far faster than traditional ones, firms must reinvest heavily to keep production flat.

It is instructive to compare shale with another natural-resources business that has had to cope with a collapse in commodity prices. In 2016 the mining industry’s biggest companies ground out profits, produced cashflow after capital investments and made a decent return on capital. Yet despite this unflattering contrast, capital investment by American E&P companies will probably soar over the next year, by perhaps 50% or more.

There are two theories for why this is happening. One is that the way in which executives are paid, together with lenders’ incentives, means that Houston is always vulnerable to investment mania. Not one of the ten biggest E&P firms, for example, puts significant emphasis in its pay scheme on how much return on capital it produces. Low interest rates make it easy for shale firms to borrow, and fee-hungry banks cheer on the spectacle. But the only way that the mania will end well is if oil prices rise sharply, bailing out the industry, or if E&P firms are bought by bigger energy firms. That is possible, but companies such as Exxon and Shell are too seasoned to pay a lot for small, unprofitable firms.

Houston, we still have a problem
The second explanation is oil executives’ belief in increased output from the Permian, and higher productivity. Most E&P firms reckon they can expand production at an annual rate of 10-20% over the next few years. But to justify their market values, and make an adequate return on their cumulative capital invested, listed E&P firms would over time need to make about $60bn of free cashflow each year. Assuming that both energy prices and capital spending stay flat, that would require them roughly to double production from current levels.

The trouble is that this is a circular argument. If achieved across the whole shale industry it would mean that output would be twice as high as it is now, leading to a 5% increase in global supply, which might in turn lower the oil price. There is something heroic—and baffling—about America’s shale firms. They are the marginal producer in a cyclical industry, and that is usually an unpleasant place to be. The oil bulls of Houston have yet to prove that they can pump oil and create value at the same time.

 

https://www.economist.com/news/business-and-finance/21719436-exploration-and-production-companies-are-poised-go-another-investment-spree-americas

In praise of quinoa

Food for thought

The spread of exotic grains is evidence that globalisation works
The Economist From the print edition Leaders Mar 9th 2017

PEOPLE are funny about food. Throughout history they have mocked others for eating strange things. In 1755 Samuel Johnson’s dictionary defined oats as “a grain, which in England is generally given to horses, but in Scotland supports the people”. Nineteenth-century Japanese nationalists dismissed Western culture as bata kusai, or “stinking of butter”. Unkind people today deride Brits as “limeys”, Mexicans as “beaners” and French people as “frogs”. And food-related insults often have a political tinge. George Orwell complained that socialism was unpopular because it attracted “every fruit-juice drinker, nudist, sandal-wearer [and] sex-maniac…in England”. In many countries today, politicians who wish to imply that their rivals have lost touch with ordinary voters sneer that they are latte-drinkers, muesli-munchers or partial to quinoa.

This South American grain gets a particularly bad rap. To its fans, it is a superfood. To its detractors, it is like the erotic sci-fi murals found in Saddam Hussein’s palaces—pretentious and tasteless. An advertisement for Big Macs once riffed on this prejudice. “Foodies and gastronauts kindly avert your eyes. You can’t get juiciness like this from soy or quinoa,” it said, adding that “while [a Big Mac] is massive, its ego is not.” Even those who love quinoa sometimes fret that scarfing it may not be ethical. What if rising hipster demand pushes the price up, forcing Andeans to eat less of their beloved grain? Or what if the price falls, making Andean farmers poorer? A headline from Mother Jones, a left-wing magazine, perfectly captured the confusion of well-meaning Western foodies: “Quinoa: good, evil or just really complicated?”

This newspaper takes no view as to whether quinoa tastes nice. But its spread is a symptom of a happy trend. More and more people are chomping unfamiliar grains (see article). Rich Westerners are eating less wheat and more of the cereals that people in poor countries traditionally grow, such as millet, sorghum, teff and yes, quinoa. Middle-class Asians are eating more wheat, in the form of noodles or bread, instead of rice. West Africans are eating 25% more rice per head than in 2006; millet consumption has fallen by the same share.

All this is to be celebrated, for it is a symptom of rising prosperity and expanding choice. The spread of better farming techniques has raised yields, helping humanity feed itself despite a rising population. Rapid urbanisation means that fewer people grow their own grain, and more have the cash to try new varieties. Globalisation has allowed food and farming techniques to cross borders, meaning that people on every continent can experience new flavours and textures. Migration and tourism have broadened people’s culinary horizons: Chinese visitors to France return home craving baguettes; Americans who live near Ethiopian immigrants learn to love injera (a soft teff flatbread that doubles as an edible plate).

http://www.economist.com/news/leaders/21718516-spread-exotic-grains-evidence-globalisation-works-praise-quinoa