The Economist Articles for Oct. 1st Week : Oct. 4th(Interpretation), Oct. 5th(Discussion)

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America and Islamic State

Mission relaunched

The fight against Islamic State will help define America’s role in the world

Sep 27th 2014 | From the print edition

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FOR more than three years, Barack Obama has been trying to avoid getting into a fight in Syria. But this week, with great tracts of the Middle East under the jihadist’s knife, he at last faced up to the inevitable. On September 23rd America led air strikes in Syria against both the warriors of Islamic State (IS) and a little-known al-Qaeda cell, called the Khorasan group, which it claimed was about to attack the West. A president who has always seen his main mission as nation-building at home is now using military force in six countries—Syria, Iraq, Afghanistan, Pakistan, Yemen and Somalia.

The Syrian operation is an essential counterpart to America’s attacks against IS in Iraq. Preventing the group from carving out a caliphate means, at the very least, ensuring that neither of these two countries affords it a haven (see article). But more than the future of IS is at stake in the streets of Raqqa and Mosul. Mr Obama’s attempt to deal with the jihadists is also a test of America’s commitment to global security. It is a test that he has been failing until now.

In this section

• Mission relaunched
• Now for the English question
• A $2.5 trillion problem
• You’re boring. Get used to it
• Grand new canals

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Related topics

• Political policy
• International relations
• Iraq
• Middle East
• Syria

IS et al

The sense that America is locked in relative decline has been growing in recent years, as it has languished under the shadow of the financial crisis and two long, difficult wars. Why should a newly rich country like China take lectures about how to run its affairs from a president who struggles even to get his own budget through? America, meanwhile, seems swamped by the forces of disorder, either unable or unwilling to steady a world that is spinning out of control. IS embodies this frightening trend. It is, in the jargon, a non-state actor, and it thrives on chaos. With each new humiliation of the governments in Iraq and Syria, it has accumulated more wealth, territory and recruits.

Its rise has also reflected American policy. First, the poorly thought-out intervention of George W. Bush, typified by the rash “Mission Accomplished” banner that greeted him on the USS Abraham Lincoln in May 2003 after his invasion of Iraq. Then Mr Obama’s studious inaction. When Syrians rose up against the regime of Bashar Assad, the president stood back in the hope that things would sort themselves out—leaving Mr Assad free to commit atrocities against his own people. Even when Mr Assad crossed “the red line” of using chemical weapons, the superpower did not punish him. About 200,000 Syrians have died and 10m have been driven from their homes. Denied early American support, the moderate Syrian opposition has fragmented, leaving the field to the ruthless and well-organised IS.

Standing back has not worked well elsewhere in the world, either. Mr Obama has spoken about the limits to American power—exhorting other governments with a stake in today’s system to do their bit to keep the world safe. He wanted the United States to be seen less as a unilateral bully, more as the leader of world opinion. Yet when America stepped back, its allies stepped back, too. The countries that most eagerly came forward were its rivals, such as Russia and China.

IS has induced a change of heart among the American people. Before vicious extremists seized the city of Mosul and began to cut off Western heads on social media, Americans doubted the merit of further military action in the Middle East. When they realised that IS threatened them directly, they began to demand protection. Mr Obama therefore has a chance not just to strike a blow for order in the Middle East, but also to give the declinists pause.

From axis of evil to network of death

He has brute force on his side. The disastrous mismanagement of post-invasion Iraq has tended to eclipse the overwhelming potency of American firepower at the beginning. In six short weeks in the spring of 2003 America and its allies defeated the 375,000 troops of Saddam Hussein with the loss of only 138 American lives. Never in history has a single country had such military dominance. It has not suddenly evaporated.

The bigger question is whether Mr Obama can carry off delicate diplomacy. The lesson from Iraq and Afghanistan is that firepower alone will not prevail. Indeed, if America comes to be seen by Sunni Arabs as nothing more than a Shia air force, strikes will only bind IS to the local people.

If he is to win the argument in Iraq and Syria, Mr Obama needs coalitions and partnerships. For that he must get the diplomacy right. So far he has done well. He insisted on the replacement of Nuri al-Maliki, the Shia-chauvinist former prime minister of Iraq, with Haider al-Abadi, who is making efforts to bring Sunnis into government. He sent John Kerry, his secretary of state, to recruit regional Sunni powers such as Saudi Arabia and Jordan, to try to persuade Sunnis in Iraq and Syria that he is not taking sides against their branch of Islam. America has argued to the United Nations that its intervention—requested by Iraq but not Syria—is legal under Article 51 of the UN’s charter. Ban Ki-moon, the UN secretary-general, appears to have accepted that argument; so should Britain’s Parliament, which will vote on whether to help America.

There is much more for Mr Obama to do. The coalition-building is not complete. Turkey, a NATO member, is at last suggesting it favours action against IS, but it needs to be seen to help. Holding the alliance together will require patience, flexibility and a judicious mix of bullying and seduction. Mr Obama will have to put in many more long hours on the telephone with world leaders than he has done so far. And even if he succeeds in substantially destroying IS, new horrors may emerge from the ensuing vacuum if he does not help benign local forces to fill it.

Americans will grumble about the superpower’s lot. Of course, European allies can do more; of course, Asia’s emerging powers should support the world order. But it is also plainly in America’s interest to stay involved—and, when necessary, to show that it will put its might behind right, if only to deter the world’s tyrants and terrorists from further mischief. Although the mission to stop IS will be long and hard, it is one that no other nation could even contemplate. Mr Obama is right to relaunch it. Now he must see it through.

China’s water crisis

Grand new canals

Vast new waterways will not solve China’s desperate water shortages

Sep 27th 2014 | From the print edition

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SOON the centrepiece of one of China’s most spectacular engineering projects will be completed, with the opening of sluicegates into a canal stretching over 1,200km (750 miles) from the Yangzi river north to the capital, Beijing. The new channel is only part of the world’s biggest water-diversion scheme. More than 300,000 people have been kicked out to make way for the channel and the expansion of a reservoir in central China that will feed it. But the government is in a hurry, and has paid their complaints little heed.

China’s leaders see the so-called South-North Water Diversion Project, which has already cost tens of billions of dollars, as crucial to solving a water problem that threatens the country’s development and stability (see article). Grain-growing areas around Beijing have about as much water per person as such arid countries as Niger and Eritrea. Overuse has caused thousands of rivers to disappear. The amount of water available is diminishing fast as the water table drops and rivers dry up; what little is left is often too polluted even for industrial use. The World Bank has said that China’s water crisis costs the country more than 2% of GDP, mostly because of damage to health. The new supply’s arrival in Beijing will thus come as a huge relief to officials. Indeed, so desperate is the lack of water that some have in the past suggested such drastic answers as moving the capital.

In this section

• Mission relaunched
• Now for the English question
• A $2.5 trillion problem
• You’re boring. Get used to it
• Grand new canals

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Related topics

• Beijing
• China
• Water

Yet China’s water problem will remain unsolved. The canal is the second leg of the diversion project; the first, which opened last year in eastern China, brings water from the south along the route of the old Grand Canal, built 1,400 years ago, to the northern plain. Neither will prove more than temporary palliatives as demand continues to soar and pollution remains widespread. China’s water crisis cannot be tackled by showy mega-projects. Misguided policy is as much to blame as a mismatch in supply between the water-rich south and the arid north. A new approach to water management, rather than more concrete, is needed.

Send them the bill

The solution is simple: China needs to price its water properly. Prices have risen a bit recently, but even in places where water is scarce it is ridiculously cheap, and as a result there is colossal waste. Beijing is ringed with water-hungry golf courses for the elite. Householders are scarcely aware that water has a value. Planners fail to take the cost of water into account, so provincial governments entice water-intensive firms to invest in desert areas and officials designate drought-prone regions as the sites of vast new cities. Raising the price of water in places where it is in short supply would discourage investment in such areas.

 

The Maoist obsession with food self-sufficiency compounds the problem. The arid northern plain, home to 200m people, produces water-hungry crops such as wheat and corn. Nearly 70% of water consumed in the area is used for agriculture. It is time for China to abandon autarkic thinking and import more food.

Last year the Communist Party pledged to let market forces play a decisive role in allocating resources such as water, land and electricity. If it did so in the case of water, it would reap many benefits. Development would become more environmentally friendly, China could devote its capital and remarkable engineering skills to projects more productive than shipping water around the country—and everybody would save a great deal of money.

Barack Obama and the economy

The woes of the average Joe

America is getting richer, but most voters can’t feel it

Sep 27th 2014 | WASHINGTON, DC | From the print edition

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BARACK OBAMA’S strenuous efforts to avoid being a war president have failed. But voters care more about the economy than the Middle East, and here Mr Obama has a good story to tell. The headline numbers are impressive: both output and employment have passed their pre-recession peaks and the unemployment rate, at 6.1%, has fallen far enough to inspire the Federal Reserve to debate, openly, when to raise interest rates. Though the latest jobs report was disappointing, private payrolls have grown by 10m in the past four and a half years, the longest uninterrupted streak in history.

Yet for all the upbeat economic news, Mr Obama has yet to reap any political reward. His approval rating, at 43%, is stubbornly low. Just 39% of voters approve of his handling of the economy, according to YouGov; 56% disapprove. Remarkably, they now trust Republicans more than Democrats to manage the economy.

In this section

• The woes of the average Joe
• Fried pickles and Ebola
• Republican knightmares
• Got to have a J.O.B.
• Fare Ladies
• The lessons of El Paso
• Correction

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Related topics

• Ronald Reagan
• Politics
• Government and politics
• Polls and approval ratings
• Democratic Party (United States)

Voters give Mr Obama little credit for America getting richer because, by and large, they haven’t felt it. Not only is the recovery subdued by historical standards, but widening inequality means that the median household (in the middle of the income range) is doing far worse than the mean (total income divided by the number of households).

Ken Hodges of Murfreesboro, Tennessee, thinks Mr Obama wasted money bailing out banks and carmakers, “but it hasn’t helped the working-class people at all.” Mr Hodges used to build guitars for a living but the business went downhill after the financial crisis, as did his investments. He now sells barbecue lunches out of a food truck in Nashville and, between the cost of meat, fuel and the thousands of dollars he spends on permits, reckons he makes 20% less than he did in 2007. “I’m slowly but surely going broke, though I’m working like a madman,” he says.

Inequality actually began to widen in the early 1980s. But, for two decades, overall growth was still healthy enough to lift the median household. During Ronald Reagan’s first six years in office, GDP grew 22% while the median income grew 6% (see chart 1). During Bill Clinton’s first six years, GDP grew 24%; median income, 11%. But growth began to slow in the 2000s, undermining both the mean and the median. In George Bush’s first six years GDP rose 16%, but median incomes fell 2%. Under Mr Obama it has been even worse: GDP is up 8% and median income is down 4%, according to the Census Bureau and Sentier Research, a private outfit.

Though median income performed almost as badly under Mr Bush as Mr Obama, there was an important difference. During the first part of the 2000s consumers could borrow easily, thanks to rising property prices. Between 2001 and 2007 the median household’s real net worth rose 19%, to $135,400. The collapse of the housing bubble sent it plunging. By 2013 it was $81,200, less than in 1989. In contrast, the mean net worth of American households has increased by 60% since 1989, to $534,600, thanks to the soaring fortunes of those at the top (see chart 2).

Efforts by the Fed to support the economy have bolstered stock and house prices, but the benefits have bypassed many households. Just 65% owned their own home in 2013, compared with 69% in 2007. Fewer owned shares or mutual funds outside retirement accounts. Even the impressive decline in unemployment has partly come about because many people have given up looking for work, and so are not counted as unemployed. In previous recoveries the labour-force-participation rate rose even as unemployment fell; this time, it has fallen (see chart 3).

Voters tend to blame the president for bad times and give him credit for good ones, regardless of the real cause. Thus presidential approval ratings depend a lot on median household income (see chart 1, again). Mr Obama is not on the ballot in November, but history suggests that voters will vent their frustrations on his party, as they did on Republicans in 2006, when George W. Bush’s approval rating was even worse than Mr Obama’s is now.

The economy and presidential popularity are not everything, of course. Ronald Reagan’s approval rating was over 60% in 1986, but Republicans still lost control of the Senate, thanks to the quirks of the electoral calendar. Senators serve six-year terms; every two years, a third of them stand for election. Many Republican novices won Senate races in Democratic states in the Reagan landslide of 1980; six years later, few could hold onto their seats.

Action chart: American unemployment and labour force participation

Mr Obama has the worst of both worlds. Not only are voters feeling glum; Democrats are also fighting to hold on to several Senate seats in Republican states, such as Arkansas (see article). It is not that voters love Republicans, says Jim Kessler of Third Way, a Democratic think-tank. Rather, this year could see “an anti-incumbent wave, and Democrats happen to have more beach-front property”.

Charlie Cook, an elections analyst, thinks the Senate could flip back and forth over the next four years, with neither party securing the 60 seats (out of 100) needed to pass big laws without help from the other side. Disgusted voters may be open to radical alternatives. Mr Hodges, the Tennessee food-truck operator, despises Democrats and most Republicans, but would vote for Ted Cruz, a Texan Tea Party populist, if he could. Mr Cook recently advised some bankers to hope that Democrats nominate Hillary Clinton for president in 2016, because the alternative is Elizabeth Warren, a banker-bashing Massachusetts senator. “The energy and passion of the Democratic Party is a heck of a lot further to the left than Hillary,” says Mr Cook.

On the stump, Mr Obama offers morsels of economic populism aimed at the Democratic base: a higher minimum wage, debt relief for students and a law that will make unequal pay for women even more illegal than it has been since 1963. Also, on September 22nd, the White House announced rules to stop companies from moving their headquarters abroad to avoid taxes. Such policies could marginally reduce inequality, but they do nothing to boost underlying growth.

A better bet would be free trade, tax reform, more money for infrastructure and training and an overhaul of entitlements such as disability insurance. Many of the jobless end up drawing disability benefits and never return to work, another reason labour-force participation has fallen.

Even if Congress were to co-operate, such policies would take years to bear fruit. But surveys by Global Strategy Group, a Democratic consultancy, found that voters prefer a candidate who promises higher growth to one who promises to reduce inequality. Alas, neither party has plausible plans for that.

Lexington

The lessons of El Paso

A Texan border city offers a case study in the perils of populism

Sep 27th 2014 | From the print edition

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IF IT is scary, it must be coming over the border with Mexico. That principle has long guided border-security populists. Beto O’Rourke, a Democratic congressman for El Paso, a Texan border city, recalls a 1981 headline from the El Paso Herald-Post, about border checks for a Libyan hit squad that was supposedly coming to America. The assassins were never found. “Whatever the threat of the day is, we tend to project it onto the border,” says Mr O’Rourke. Today, the rumour is that Islamic State (IS) terrorists are lurking in Ciudad Juárez, just across the Rio Grande from El Paso, and plotting to attack America. This tale is spread by internet conspiracy-mongers and politicians big enough to know better.

The Republican governor of Texas and a putative presidential contender, Rick Perry, accuses the Obama government of paying “lip service” to border security, creating a “very real possibility” that IS or other terror groups have already crossed from Mexico. Another Texan with national ambitions, Senator Ted Cruz, says that securing the Mexican border should come “first and foremost” in any plan to fight IS worldwide, citing reports of online chatter among suspected militants about the possibility of crossing that frontier.

In this section

• The woes of the average Joe
• Fried pickles and Ebola
• Republican knightmares
• Got to have a J.O.B.
• Fare Ladies
• The lessons of El Paso
• Correction

Reprints

Related topics

• Political policy
• Domestic policy
• Security policy
• Government and politics
• United States

In vain, Homeland Security officials say that they have no credible information pointing to such plots, and that arrivals on commercial flights are a bigger worry. Ahead of mid-term elections in November, Senate candidates as far afield as Georgia and New Hampshire are running doom-laden TV attack ads, linking the menace of radical Islam to demands for Mr Obama and Democrats to “secure the border”.

Lexington spent two days on the border this month, around the anniversary of September 11th, 2001. The fruits of fearmongering were visible to the naked eye. The bridges and inspection lanes linking El Paso and Ciudad Juárez, which are normally clogged with traffic, were largely deserted. Rumour-peddlers in El Paso insisted that the border had been placed on high alert. Puzzled officers knew of no such alert—though they knew all about public alarm. A burly border guard told of ordering his tearful son to school on September 11th, over the boy’s fears of terror attacks.

Bringing border traffic to a standstill is no small thing. El Paso and its Mexican twin are so close that (except during drug wars) Texans often stroll across the line to visit the dentist or a cheap pharmacy. Mexican daytrippers head north in their millions every year, buying cheap clothes and household goods in El Paso’s shops. Conspicuous in crisp white and blue uniforms, gaggles of Mexican children walk to American private schools each morning. Other bridges carry rumbling lorries and mournfully-hooting trains—laden with flat-screen TVs or car parts from Mexican maquiladoras, but also American-made machines and components heading south. Mexico is the second-largest market for American exports, supporting an estimated 6m gringo jobs.

Since 2001 Congress has thrown tens of billions of dollars at the border. Different agencies were merged to create a behemoth, Customs and Border Protection (CBP), with Border Patrol agents (quasi-paramilitaries in green uniforms) guarding the frontier, and CBP officers (in dark blue) to man air, land and sea ports of entry, screening hundreds of millions of passengers and trade flows worth trillions of dollars. In Washington, DC, border debates always focus on illegal migration, notes Bill Owens, a congressman whose New York district abuts dangerous Canada. So “money gets thrown at the green uniforms”.

The number of patrol agents has doubled in a decade, to more than 21,000 (the same size as the active-duty Canadian army). Hundreds of miles of fencing have been built, buttressed by sensors, cameras, surveillance blimps, helicopters, drones and patrol planes. Apprehensions have neared record lows in recent years: the average agent catches less than one person a fortnight. Yet most people in Congress want still more agents in green.

For years investment in legal border crossings and blue uniforms badly lagged, even as passenger numbers and trade flows grew. In El Paso recently, a forum of business bosses, mayors, border congressmen and bigwigs from the Department of Commerce sounded the alarm about congestion and creaking infrastructure at border ports. Odd business practices already show how delays hurt trade. Some firms will rush lorries through the border half-empty, if they fear long queues. With several new car factories planned in Mexico, some sea ports, such as San Diego in California, are proposing to ship vehicles around snarled land crossings and highways in short hops.

You say border security, I say bottleneck

Dysfunction in Washington is spurring innovation. Mr O’Rourke, working with a few business-friendly Texas Republicans, helped pass a law allowing El Paso and a few other pilot cities and airports to pay overtime for CBP officers in peak periods. CBP commanders insist that they are trying to speed goods through, for instance with fast lanes for trusted shippers, while keeping to their primary post-2001 mission—hunting terrorists and weapons of mass destruction. Some border-district members of Congress and Commerce Department bosses have begun a Heartland Outreach Tour, telling Chambers of Commerce or factory workers in inland America how much their state exports to Mexico and Canada, hoping that they will press Congress to see the border as a place of opportunity. Some argue for donating queue-busting customs technology to Mexico.

Building a more rational border will take an alliance between pro-trade Democrats and pragmatic, non-nativist Republicans. That is a shrinking pool. More lawmakers like Mr O’Rourke, an internet entrepreneur by background, who clashes frequently with border populists in Congress, would help. Shouting about deadly foreigners is sexier than trying to cut the costs of cross-border supply chains. But the latter would make America richer.

Charlemagne

Let’s stick together

The European Union realises it is not designed to deal with the disintegration of members

Sep 27th 2014 | From the print edition

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THE demonstrations that led to the fall of the Berlin Wall came out of nowhere, says Günther Dauwen, and had consequences nobody could foresee. Observing the proceedings in Scotland last week, he wondered if something similar might be brewing. From a quiet fourth-floor office in Brussels Mr Dauwen runs the European Free Alliance (EFA), a rum assortment of 40 regional political groups, including the Scottish National Party (SNP), that seek greater autonomy, or, in some cases, independence, from existing countries. From the plains of Silesia to the beaches of Corsica, reckons Mr Dauwen, there is a growing clamour for power among Europe’s long-neglected regions. Scotland is a “beacon” for such places; that its independence referendum was achieved at all encouraged others to think “Yes, we can!”, even though the outcome was negative. In the run-up to the vote the EFA’s website nearly crashed under the weight of traffic.

Watching the streets of Edinburgh filling up with Saltire-waving Catalans, Flemings and South Tyroleans (not to mention Québécois, Kurds and Taiwanese) last week, a visitor might have been forgiven for assuming that something was stirring in Europe. Some commentators fretted about the prospect of “balkanisation” across the continent. Yet although parts of Europe may one day drift towards dissolution, and Catalonia is trying to hold a vote on its future, the Scottish effect was overdone. Pro-independence campaigners in Flanders or the Veneto will have taken heart from the Scottish campaign, but given the different constitutional arrangements of Belgium and Italy they will struggle to draw useful lessons from it. And it will take a lot more to rouse the good burghers of Bavaria or Frisia from their slumbers.

In this section

• Orban the Unstoppable
• Three illusions
• In the queue
• Je reviens
• A Somalia scenario?
• Significant variations
• Let’s stick together

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Related topics

• European politics
• World politics
• European Union politics
• Referendums
• Government and politics

Outside Britain, the biggest impact of a Scottish vote for secession would have been felt within the European Union. Ever since it adopted “Independence in Europe!” as a slogan in 1988, EU membership has been central to the SNP’s proposition. For small nations, the prospect of staying in a giant trading block with its own foreign policy and currency makes the idea of statehood less daunting. In contrast to what is perceived as an oppressive multinational state, it may offer space for identities to flourish. Asked in 2007 if his country wanted to establish a “Greater Albania”, an Albanian official referred to the EU symbol: “Yes we do. It has a blue flag and gold stars on it.”

All the trickier, then, that the EU has no explicit legal provision for dealing with breakaways. At times Alex Salmond, the SNP’s leader, appeared to suggest that Scotland’s accession to the EU could be achieved through a minor treaty revision. But most observers, including the European Commission, agree that an independent Scotland (or Catalonia, or Flanders) would have to reapply for membership after obtaining statehood. That could take years, so an interim solution would have to be found to avoid, for example, Germans in Edinburgh suddenly finding that they lose the right to work. As ever in the EU, politics trumps law, and paths can be smoothed if the will is there.

But for precisely that reason, would-be Scotlands might find the road to membership rougher than they predict. Had Scotland seceded, the terms of its accession to the EU and any interim arrangement would have set precedents for other potential breakaways. They would therefore have been subject to fierce wrangling. Spain would probably not have gone as far as to veto Scottish accession, but it would have had every incentive to make it as difficult as possible, as a warning to Catalans and Basques. In Scotland’s case, the obligation of new members to work towards membership of the euro and the Schengen passport-free zone, both of which it has no interest in joining, would have created plenty of trouble. The only guarantee would be that of a healthy pay cheque to constitutional lawyers.

Breaking up is hard to do

The EU has improvised its way through before. Independence campaigners like to cite the example of East Germany, swept by the gusts of politics into the then EEC after German reunification almost before fellow members had a chance to notice (although helped by an article in the West German constitution that foresaw reunification). Maps of the European Coal and Steel Community, a precursor to the EU, drawn up before 1962 often include Algeria as part of France. Danish-administered Greenland left the club in 1985 without triggering a constitutional crisis.

But there are running sores. Cyprus was admitted to the EU in 2004 with more than one-third of its territory under Turkish occupation. Some countries in eastern Europe with restive minorities worried about the consequences of a Scottish “yes”. Five EU members, including Spain, still refuse to recognise Kosovo as an independent country for fear of rousing secessionist sentiment at home. In Ukraine the self-proclaimed Donetsk People’s Republic expressed solidarity with Scots seeking independence, and the leader of Russia-annexed Crimea announced that he detected hypocrisy in the West’s treatment of Scotland’s referendum and that in his territory.

In the run-up to Scotland’s referendum EU officials strained to avoid taking a position on the consequences of a “yes” (while quietly preparing contingency plans in case of a sudden flight of capital). But they were immensely relieved by the outcome. There have been very few changes to the borders of west European countries since the second world war. The EU is designed to bring members together, not to manage their disintegration—or the process of “internal enlargement” that may have to follow. “After half a century of building Europe, we risk entering a period of deconstruction,” said François Hollande, the French president, as Scots went to the polls. That may be an exaggeration, but it captures the fears of many.

Samsung

Waiting in the wings

As succession looms at the Korean conglomerate, much has to change

Sep 27th 2014 | SEOUL | From the print edition

• 

“CHANGE everything except your wife and children.” Thus spoke Lee Kun-hee, the boss of Samsung, two decades ago at an emergency meeting with his senior managers. He wanted the conglomerate (whose name means “Three Stars”, implying that it would be huge and eternal) to stop churning out vast quantities of cheap products and focus on quality, to become one of the world’s leading firms.

Mr Lee (pictured, left) accomplished his mission, probably beyond his wildest dreams. Today the Samsung group, whose 74 companies have estimated annual revenues of more than 400 trillion won ($387 billion) and 369,000 employees, is into everything from washing-machines and holiday resorts to container ships and life insurance. But it is the group’s predominant electronics division that has made its patriarch particularly proud: Samsung has overtaken its Japanese rivals to become the world leader in this industry by revenues, outselling everyone in memory chips, flat-panel televisions and smartphones.

In this section

• Waiting in the wings
• Transition, not succession
• A hard rain
• Not so funny
• The default choice
• Priceless pills
• Balls in the air
• The look of a leader

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Related topics

• Mobile phones
• Smart-phones
• Consumer electronics
• Electronics
• Samsung

Now Samsung is again at a point in its 76-year history at which much has to change. This will be underlined if, as expected, Samsung Electronics issues a fresh profit warning shortly. The company is not facing existential threats. But the world around it is in flux, and Samsung has to adapt—from top to bottom.

Start at the top. In May Mr Lee, 72 years old, suffered a heart attack. He is still in hospital. Nobody expects him to return as he did in 2010, when he came back after avoiding prison for embezzlement and tax evasion. (He got off with a suspended sentence of three years and was later pardoned so he could remain a member of the International Olympic Committee.)

Mr Lee’s only son, Lee Jae-yong (pictured, right), looks certain to take control of Samsung’s main businesses, and his two daughters will run some smaller ones. The younger Mr Lee, now 46, joined Samsung Electronics in 2001 and ten years later had the title of vice-chairman. Other than a few bare biographical facts, little is known about him. “He is unproven as a manager,” says Chang Sea-jin, a business-school professor and author of “Sony vs Samsung”, a book about the two Asian tech giants. Despite Samsung’s best PR efforts, most Koreans still associate him with eSamsung, a disastrous internet venture.

Those who have met him call him approachable and unassuming—quite unlike his father, who is known for an imperial management style. When the elder Mr Lee visited factories, the red carpet was rolled out and employees were not allowed to look down on him from the windows. In 1995 he had thousands of faulty mobile phones and other devices burned and bulldozed in front of weeping employees.

His son’s more restrained personality may be just what Samsung Electronics, in particular, now needs. To thrive it must attract flighty technical talent and get along with partners. Sent to Silicon Valley to negotiate with Apple, a big customer for Samsung’s chips (and a rival in smartphones), young Mr Lee apparently managed to get along with the often prickly Steve Jobs. He was the only Samsung executive to be invited to Jobs’s memorial service.

The succession is unlikely to happen before another badly needed change is well under way: reforming the group’s Byzantine corporate structure. For example, the group’s holding company, which has just changed its name from Samsung Everland to Cheil Industries, owns 19.3% of Samsung Life, which owns 34.4% of Samsung Card, which owns 5% of Cheil. (See the illustration below for a simplified depiction.)

This corporate hairball has let the Lees exert control over the group with a stake of less than 2%. But for various reasons they are now likely to simplify it, explains Shaun Cochran, a longtime Samsung-watcher at CLSA, a broker. One is that the rules against such circular shareholding structures are being tightened. But the most immediate consideration is the imminent succession—and the resulting inheritance tax. The family will have to pay about six trillion won, according to some estimates, and needs to raise cash.

This also goes a long way towards explaining why Samsung denies any talk of a restructuring: the more it seems a sure thing, the higher the share price and thus the tax bill. Because of the complex ownership structures, some listed companies within the group trade at a discount. When news broke of the older Mr Lee’s heart attack, the shares of Samsung Electronics went up—mainly because a restructuring was seen as more likely.

Denials notwithstanding, the restructuring has clearly begun. Earlier this month Samsung Heavy Industries and Samsung Engineering announced plans to merge. This will be followed by the IPOs of Samsung SDS, a provider of IT services, perhaps as early as November, and of Cheil, which is expected early next year.

The flotation of Cheil is key, argues Mr Cochran. Unlike other group companies it is controlled directly by the Lee children and a family foundation. The listings will not only raise cash, but also make it easier to put values on the group’s cross-shareholdings. So it will be easier to unpick these without attracting lawsuits.

The sooner all this happens, the better: the restructuring is distracting executives from running their businesses. One, in particular, needs attention: smartphones. Not only has it been directly responsible for a big chunk of the profits at Samsung Electronics, and thus the group; it is also the biggest customer for other parts of the business, such as making chips and displays.

Samsung Electronics came from nowhere in the space of a few years, to grab one-third of the market for smartphones in 2012. It did so mainly by being among the first to bet on Android, Google’s popular mobile operating system, and by offering iPhone-like handsets at lower prices than Apple. Yet since then, problems have been piling up, and Samsung’s market share has now slipped to 25%, reckons IDC, a market-research firm. The Galaxy 5S, which Samsung introduced in January, was derided for its cheap plastic casing.

Low-cost makers from China, such as Xiaomi and Huawei, and new European brands such as Wiko and Archos, are attacking Samsung’s market from below. From above, Apple has regained share, and looks set to keep doing so after its recent launch of a “phablet”, a phone with a large screen—a category where Samsung still had an advantage. What is more, the smartphone market is maturing; indeed, in Britain it is already shrinking.

If fighting back were simply a question of making better hardware, Samsung would be safe. This is what it knows best, says Ben Wood of CCS Insight, another market researcher. Since it launched Galaxy Gear, a smart watch, a year ago, it has followed up with five further models. “Samsung is prototyping in public,” says Mr Wood. But smart watches also show why Samsung is in trouble. The Apple Watch, launched at the same time as the bigger iPhone, may look a lot like the Galaxy Gear, but it comes embedded in an ecosystem of software and services, such as a new touchless payment system and sophisticated health-monitoring apps.

Samsung will have a hard time matching such an ecosystem. It does not control Android, and an effort to establish its own mobile operating system, Tizen, seems to have been put on the back burner. Being structurally a hardware company, and one with a conformist Confucian culture, Samsung would surprise many if it suddenly came up with great apps and services.

So, the firm’s best chance is to stick with gadgets, and to try to create ones that consumers love so much that they fly off the shelves, argues Francisco Jeronimo of IDC. But it has to act fast. The fates of Nokia and BlackBerry (which made another attempt at a comeback on September 24th by launching a new smartphone, the Passport) show how quickly fortunes can reverse. And Apple sold 10m of its new iPhones, including an updated smaller model, in three days—a number that the Galaxy 5S only reached after 25 days.

In all, the younger Mr Lee has his work cut out for him. Samsung-watchers wonder if he has it in him, but when he takes over he may have to make a “change everything” speech of his own.

Schumpeter

The look of a leader

Getting to the top is as much to do with how you look as what you achieve

Sep 27th 2014 | From the print edition

• 

IN GORILLA society, power belongs to silverback males. These splendid creatures have numerous status markers besides their back hair: they are bigger than the rest of their band, strike space-filling postures, produce deeper sounds, thump their chests lustily and, in general, exude an air of physical fitness. Things are not that different in the corporate world. The typical chief executive is more than six feet tall, has a deep voice, a good posture, a touch of grey in his thick, lustrous hair and, for his age, a fit body. Bosses spread themselves out behind their large desks. They stand tall when talking to subordinates. Their conversation is laden with prestige pauses and declarative statements.

The big difference between gorillas and humans is, of course, that human society changes rapidly. The past few decades have seen a striking change in the distribution of power—between men and women, the West and the emerging world and geeks and non-geeks. Women run some of America’s largest firms, such as General Motors (Mary Barra) and IBM (Virginia Rometty). More than half of the world’s biggest 2,500 public companies have their headquarters outside the West. Geeks barely out of short trousers run some of the world’s most dynamic businesses. Peter Thiel, one of Silicon Valley’s leading investors, has introduced a blanket rule: never invest in a CEO who wears a suit.

In this section

• Waiting in the wings
• Transition, not succession
• A hard rain
• Not so funny
• The default choice
• Priceless pills
• Balls in the air
• The look of a leader

Reprints

Related topics

• United States
• Harvard Business School
• Peter Thiel

Yet it is remarkable, in this supposed age of diversity, how many bosses still conform to the stereotype. First, they are tall: in research for his 2005 book, “Blink”, Malcolm Gladwell found that 30% of CEOs of Fortune 500 companies are 6 feet 2 inches or taller, compared with 3.9% of the American population.

People who “sound right” also have a marked advantage in the race for the top. Quantified Communications, a Texas-based company, asked people to eval‎uate speeches delivered by 120 executives. They found that voice quality accounted for 23% of listeners’ eval‎uations and the content of the speech only accounted for 11%. Academics from the business schools of the University of California, San Diego and Duke University listened to 792 male CEOs giving presentations to investors and found that those with the deepest voices earned $187,000 a year more than the average.

Physical fitness seems to matter too: a study published this month, by Peter Limbach of the Karlsruhe Institute of Technology and Florian Sonnenburg of the University of Cologne, found that companies in America’s S&P 1500 index whose CEOs had finished a marathon were worth 5% more on average than those whose bosses had not.

Good posture makes people act like leaders as well as look like them: Amy Cuddy of Harvard Business School notes that the very act of standing tall, with your feet planted solidly and somewhat apart, your chest out and your shoulders back, boosts the supply of testosterone to the blood and lowers the supply of cortisol, a steroid associated with stress. (Unfortunately, this also increases the chance that you will make a risky bet.) 

Besides relying on all these supposedly positive indicators of fitness to lead, those who choose bosses also rely on some negative stereotypes. Overweight people—women especially—are judged incapable of controlling themselves, let alone others. Those who “uptalk”—habitually ending their statements on a high note as if asking a question—rule themselves out on the grounds that they sound tentative and juvenile.

The rise of the giant emerging-market multinationals has yet to make much difference to all this stereotyping. Such firms’ bosses often suffer from the corporate equivalent of a colonial cringe. They wear Western business suits. They litter their conversations with Western management-speak. And they pack their children off to Harvard Business School, where they will learn how to look and sound like Western-style managers. High-tech companies merrily abandon Mr Thiel’s rule once they reach a certain size and recruit a besuited outsider as CEO. Female leaders have reacted in different ways. Some have defined themselves by wearing power suits and working long hours. Others have celebrated motherhood: in her book, “Lean In”, Sheryl Sandberg, Facebook’s chief operating officer, writes about delousing her children aboard a corporate jet.

Posing for power

Can anything be done about this predisposition for promoting people of a certain type? Ideally, those selecting a new boss would conscientiously set aside all the stereotypes, and judge candidates purely on their merits. However, given a plethora of candidates, all with perfect CVs, selection committees continue to look for the “X” factor and find, strangely enough, that it resides in people who look remarkably like themselves. Another solution is to introduce quotas for CEOs and board members. But the risk is that this ends in tokenism rather than a genuine equalising of opportunity. So, some management experts suggest we just accept that stereotypes and prejudices cannot be wished away, and simply help those born outside the magic genetic circle project a sense of power and self-confidence.

Ms Cuddy gave a talk on “power poses” to the 2012 TED Global conference which has since become TED’s second most downloaded talk. In her recent book, “Executive Presence”, Sylvia Anne Hewlett of the Centre for Talent Innovation in New York urges young women to lower the register of their voices, as Margaret Thatcher did, eliminate uptalking and other vocal tics, and look people in the eye when giving presentations. She advises every would-be manager to work out regularly and look as fit as possible. This may sound like a bit of a cop-out. But the evidence is strong that candidates for top jobs can still be undermined by superficial things like posture and tone of voice. More than a century ago, Oscar Wilde quipped: “It is only shallow people who do not judge by appearances.” Unfortunately those who choose leaders still seem to think this way.

Buttonwood

Scrambled signals

Did financial journalists fail to spot the crisis?

Sep 27th 2014 | From the print edition

• 

“YOU cannot hope to bribe or twist, thank God, the British journalist. But seeing what the man will do, unbribed, there’s no occasion to.” Those lines from Humbert Wolfe come to mind when contemplating a new book of essays* that asks whether financial journalists were to blame for abetting, or not spotting, the financial crisis of 2007-08.

The picture that emerges is mixed. Did journalists spot that house prices were inflated? Yes, a study found that the Spanish press used the term “real estate bubble” 2,500 times between 2003 and 2008. Did journalists report on the worrying growth of subprime instruments like collateralised debt obligations? Yes, at least in the specialist press. Did they spot that banks were expanding their lending very rapidly? Yes, an oft-cited quote from Chuck Prince of Citigroup about the bank having to keep dancing as long as the music played comes from an interview with the Financial Times. Did anybody tie the whole thing together to predict a seizure in banking and the deep recession that followed? No. But regulators and economists did not foresee that either.

In this section

• No respite
• Scrambled signals
• Rickety rails
• Reform à la Modi
• Bad carma
• Consorting with terrorists
• A tempting target
• Goldilocks nationalism

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Related topics

• Arts, entertainment and media
• Media
• Journalism

Nevertheless, the crisis did illustrate how the message can be scrambled. There is a trade-off between access and independence. Back in the 1980s the biggest names in British financial journalism (City editors, as they were called) were very grand figures, often lunching at the Savoy or the Ritz with the titans of industry. Public-relations firms indulged in the “Friday night drop”, whereby they would place favourable stories about their clients in the Sunday papers. Scoops were the currency of the day and hostile coverage would cause such scoops to stop.

Things are not as bad as that today, largely because regulators have enforced the need to release financial news to all investors simultaneously; there are fewer scoops. But journalists are nevertheless aware that they may lose access to sources if their coverage is too critical.

A related problem is that of asymmetry of information. When writing about the complex structured products at the heart of the credit boom, journalists had two main sources: the bankers who devised them and the credit-rating agencies who analysed them. Neither was wholly independent. Academic papers did start to emerge about the riskiness of this lending in early 2007, but by that stage there were already signs of a bursting bubble. Nor was it possible for journalists to know who owned the most risky tranches of such products; that information was not public. When regulators announced that the financial system had become less risky because securitisation had diversified the ownership of mortgage debt, it was hard for newspapers to prove them wrong.

Another issue is that newspapers tend to report on what has recently happened, not what might happen. After 40 days of sunshine, journalists will be writing about water shortages and forest fires, not about the risk of floods. In a booming economy, the bulk of articles will be explaining why things are going well. This can, of course, lead to a feedback loop in which positive stories boost investor confidence, spawning more positive stories. Readers do not always welcome contrarian views: those commentators who decried the excesses of the dotcom bubble were often told they “just didn’t get it”.

One final criticism is that journalists get captured by those they cover, subconsciously absorbing their world view. Many financiers would disagree: Buttonwood once spent an uncomfortable hour on stage, along with colleagues from rival papers, being berated by hedge fund types about negative coverage of their industry. Familiarity with the financial markets tends to breed, if not contempt, then a healthy degree of scepticism.

But if journalism consists of talking to people and then writing down what they say, it is hardly surprising that most press coverage reflects the consensus. As a historical essay by Richard Roberts shows, the press welcomed Britain’s return to the gold standard in 1925 and then applauded its exit in 1931. The Archduke Franz Ferdinand’s assassination in June 1914 was treated with indifference by the financial press and the markets.

When the First World War started, the financial press helped to cover up news of a run on the Bank of England. One brave street vendor dared to tell the truth, shouting “Run on the bank”. He was immediately arrested. Not quite shooting the messenger, but close enough.

Free exchange

Goldilocks nationalism

The size and homogeneity of a country’s population has a big bearing on its economic policies

Sep 27th 2014 | From the print edition

• 

WHEN Scotland turned down independence, it was bucking a trend. Since 1946 the number of sovereign states has soared, from 76 to 197. The steady shrinking of the world’s political units raises the question of what the ideal size would be from an economic perspective. Separatists from Catalonia to the southern Philippines should be aware that a country’s population, economists believe, has a big impact on all sorts of policies, from the level of government spending to its openness to trade.

Separatists eyeing the exit have many motivations, but economics typically plays a big role in the choice to stay or go. In their book “The Size of Nations”, Alberto Alesina and Enrico Spolaore lay out the costs and benefits of going it alone.* Scale has its advantages: bigger countries are easier to defend from foreign aggressors, for instance. When barriers to trade are high, a bigger domestic market allows for more internal specialisation. A 19th-century British prime minister is reported to have complained to a French ambassador, “If you were not such persistent protectionists, you would not find us so keen to annex territories!” America’s size allowed it to develop new and highly productive forms of industry in the late 1800s, which Europe’s smaller countries could not match until tariffs fell in the 20th century.

In this section

• No respite
• Scrambled signals
• Rickety rails
• Reform à la Modi
• Bad carma
• Consorting with terrorists
• A tempting target
• Goldilocks nationalism

Reprints

Yet the bigger a country grows the more multitudes it contains. Larger populations are not always more diverse than smaller ones—Japan is both much larger and more homogenous than Belgium—but in larger countries there are generally more politically distinct subgroups. As the voting public becomes more heterogenous, the scope for intractable disputes over government policies grows.

Messrs Alesina and Spolaore reckon falling barriers to trade have reduced the cost of being a small state and boosted interest in separatism. Ironically, the European Union has made breaking up especially attractive. Catalan nationalists, for instance, assume that if Catalonia parted ways with Spain, which it currently subsidises by paying more in taxes than it receives in government spending, it would nonetheless remain within the single market. That makes independence a much easier sell.

Becoming independent, however, might impose different costs. Economists generally reckon that smaller states devote a larger share of output to government, for two key reasons. The first is that there are economies of scale in the provision of some public services. In larger economies the cost of financial regulators and courts can be spread over more taxpayers. An independent Scotland would have needed to replicate much of Britain’s bureaucracy, but with a population one-thirteenth the size. Research by Romain Wacziarg of the University of California, Los Angeles, and Mr Alesina shows that government spending on things like parks and general administration declines as a share of GDP as countries grow larger.

The economies of scale associated with social spending are not that big, but smaller economies tend to be more generous where such programmes are concerned. That appears to be a direct result of the greater homogeneity within smaller countries. In a paper published in 2001 Mr Alesina, Edward Glaeser of Harvard University and Bruce Sacerdote of Dartmouth College examined the generosity of welfare states in America and Europe. Differences in income inequality or social mobility could not account for the finer mesh of Europe’s safety nets, they reckoned. Instead they suggest that racial animus is to blame. White Americans, who account for a disproportionate share of rich ones, are less keen on redistribution, the argument runs, since blacks account for a disproportionate share of the poor.

More recently Mr Wacziarg, Klaus Desmet of Southern Methodist University and Ignacio Ortuño-Ortín of University Carlos III in Spain studied the relationship between ethno-linguistic diversity and several economic variables. In general, they reckon, less diverse economies engage in more redistribution and greater provision of public goods such as education and infrastructure. In highly homogenous Denmark, government spending runs to nearly 60% of GDP. More diverse America allocates just 39% of GDP to government; in polyglot Singapore the figure is just 14% (see chart).

Better together

Borders, no matter how porous, also choke off trade. Despite sharing a free-trade area, a language (for the most part), an international dialling code and much else besides, America and Canada trade roughly a tenth as much as American states do with one another. Given the costs of national division, decentralisation is sometimes preferable to outright independence, argues Mr Spolaore in a paper published in 2008.

Within such tie-ups, transfers of government revenue between regions can become a sore point. Mr Spolaore reckons it is the nature of the redistribution, as much as the scale, that matters. Pay-offs used to mollify a region with different policy preferences can actually leave everyone better off. Much as it may grate with some English politicians, it could be worth the rest of Britain’s while to bribe Scotland to put up with Westminster’s taste for small government, as long as the bribe is smaller than the benefits the union with Scotland brings.

In contrast, redistribution resulting from pronounced differences in income between regions is often destabilising, as one side chafes at its relative poverty and the other at its tax bills. That is not always the case: handouts from the former West to the former East no doubt helped make German reunification a success. Where flows from rich to poor also cut across cultural lines, as in Spain, trouble is more likely to result. The bigger the transfers, the more likely the country is to fall apart. Enforced solidarity, in other words, undermines the voluntary sort.