Thursday, January 28, 2010

Europe and an inscrutable China

Charlemagne

Europe and an inscrutable China

The European Union gets more realistic about China—and China gets more realistic about the EU

Jan 21st 2010 | From The Economist print edition

Illustration by Peter Schrank

ONCE upon a time, or about two years ago, the European Union was full of optimism about China, and how it was becoming a “responsible stakeholder” in the world. Reports poured out of think-tanks with titles like “Can Europe and China shape the new world order?” Europe had a good chance of persuading China that its interests lay in co-operation over climate change, Africa or nuclear proliferation, it was said. And Europe was better placed than America: European co-operation was a model and, unlike America, Europe was not a strategic rival.

Head into ancient history, or to 2004, and such leaders as France’s Jacques Chirac were telling Chinese leaders they shared a “common vision of the world”, based on a “multipolar” system in which “international balance” would be achieved by closer ties between Europe, China and Russia. In case that jab in America’s eye was not clear enough, France and Germany led calls for the lifting of an EU arms embargo imposed on China after the Tiananmen Square protests in 1989. (European discussions on lifting the embargo were shelved in 2005, under heavy American pressure.) This was also the age of books with titles like “Why Europe will Run the 21st Century”. Europe was bullish about its exemplary wealth, social harmony, and “post-national” kindliness, and how such values would soon span the globe.

The mood is different now. Inside China, America and Europe several bubbles of optimism have burst at the same time. Charles Grant of the Centre for European Reform, a London based think-tank, says he and others who felt China was about to embrace multilateralism were guilty of “wishful thinking”. A closed-door gathering of Chinese, American and European officials and analysts, known as the Stockholm China Forum, this week heard how China has been unhelpful over climate change, Iran’s nuclear programme (China is counselling patience, not sanctions), its currency (kept artificially cheap despite American and EU protests) and its cyber-attacks on Western corporate and public computer networks. Such attacks, many coming from China, have reached damaging levels of intensity, and are now “high on the radar” of leaders, it was reported.

In 2009 China jailed more dissidents, sacked reformist editors and executed a British citizen for drug smuggling, brushing aside British government appeals that he was mentally ill. China has bullied Barack Obama over arms sales to Taiwan and meeting the Dalai Lama. In private meetings with European envoys, Chinese officials have unveiled a hubristic new argument for lifting the arms embargo: unless it goes, in years from now Europe “will not be able to buy its arms from China”.

In Brussels it is hard to overestimate the shock caused by the EU’s failure to achieve its goals at December’s climate-change summit in Copenhagen. In the EU hard problems are fixed like this: call a summit of leaders, set out public goals for action, declare a final deadline and then thrash out a compromise behind closed doors. Deals are done with a judicious blend of appeals to principle, arm-twisting and redistribution towards less wealthy nations. That model failed utterly in Copenhagen.

True, everyone has a different story about Copenhagen. Europeans are cross with America, India and others in a “low-ambition coalition”. But their strongest words are reserved for China, accused of a refusal to accept anything touching on its sovereignty and of secretly inciting small, poor allies to obstruct a deal. American officials say the summit came too soon. They complain that the Europeans thought they could bounce Mr Obama into binding emissions caps that Congress was not willing to approve. Senior Chinese analysts say that European threats of border tariffs on Chinese goods fuelled a sense that the rich world was out to “get China” and tax its growth.

American and European officials at least agree that Copenhagen was a disappointment. China’s government hailed the outcome as excellent. That does not sound like a responsible stakeholder talking. China was amazingly rude at Copenhagen, sending a deputy minister to shout at with Mr Obama, for instance. Such assertiveness punctures happy Euro-dreams of a multipolar world. It turns out that the only thing that alarms Europeans more than a swaggering American president is one who seems weak. And Copenhagen popped yet another bubble—the idea that leading by example can be used to coerce others. Europe’s strategy was to press others to match its own concessions on carbon emissions. But the EU barely existed at the talks.

E pluribus disunity?

American and Chinese illusions about European unity are also popping like soapsuds in the sun. The Lisbon treaty came into force in December. EU leaders appointed underwhelming figures to fill the top posts it created, and are now squabbling about how the new structures will work. Although it is early days, officials in Beijing and Washington now suspect that this is about as united as Europe is going to get.

Where now? The good news is that European and American views of China are converging. Arguments about engagement or containment now sound quaint, and fantasies involving China as Europe’s ally against American hegemony sound worse. China looks like a giant that has every right to rise, yet rejects many values that Europe and America share.

The bad news is that clashes with China loom over trade barriers and currency manipulation. Some in Europe and America are converging in the direction of protectionism. The coming year will pose some severe tests. It is in everyone’s interests to avoid a trade war. And European and American policymakers seem to understand what they share, and what China wants from the world, more clearly than before. But that is only a start.

The tale of Mr Jackson

Schumpeter

The tale of Mr Jackson

The public sector has had its fill of management consultants

Jan 21st 2010 | From The Economist print edition

Illustration by Brett Ryder

MARGARET THATCHER regarded Beatrix Potter’s “Ginger and Pickles” as the only business book worth reading. The BBC recently elaborated on this insight in a series on “The Beatrix Potter Guide to Business”. “Jemima Puddleduck” is a treatise on enterprise. “Samuel Whiskers” is a parable about the importance of rolling audits. And “Mrs Tittlemouse”? It is a warning about the dangers of employing management consultants.

Mrs Tittlemouse is “a most terribly tidy particular little mouse”, forever cleaning her house and shooing away intruders. But one day Mr Jackson, a “fat-voiced” toad, arrives and makes himself at home, lounging in the rocking chair and putting his feet on the fender. He not only refuses to leave, he scours the house for tasty morsels, spreading chaos as he goes. It takes Mrs Tittlemouse a day to clear up after him when he finally leaves.

Management consultants have been hopping all over the public sector for years. The growing pressure to get “more for less” persuaded governments to turn to the private sector for inspiration. And the challenges of adopting information technology prompted them to turn to IT consulting giants such as IBM and Accenture. Britain’s New Labour government led the world in its infatuation with consultants. Tony Blair and Gordon Brown talked excitedly about “transforming” Whitehall and its fuddy-duddy ways. Consultants crawled over everything from the Cabinet Office to the health service. New Labour apparatchiks were much more likely to wax lyrical about Tom Peters and Michael Porter than Keir Hardie and Nye Bevan.

The result was a bonanza for the management-consulting industry. Money poured into the consultants’ pockets, especially during 2004-06. Over that period, spending on consultancy increased by a third. And a New Labour-consultancy complex formed at the heart of government. The Downing Street Policy Unit was full of former McKinsey consultants. Lord Birt, a former BBC boss, was much criticised for working simultaneously for Downing Street and McKinsey. Patricia Hewitt, a former head of research at Accenture (then called Andersen Consulting) was health secretary in 2005-07; David Blunkett got a consultancy job when he resigned as work and pensions secretary in disgrace.

Consultants are nothing if not ingenious in getting their feet on the fender. The Obama administration looked like a perfect mark when it came to Washington, DC, on a wave of hope and hype (Mr Obama even created the new job of “chief performance officer”). Monitor Group, based in Boston, has signed up Libya’s Colonel Qaddafi as a client. McKinsey actually scented an opportunity in the credit crunch: an article in the consultancy’s house magazine urged that governments needed to go in for “whole-government transformation” if they were to cope with the mess. But even the most ingenious consultants will be challenged in the coming years.

Yawning deficits will force governments worldwide to cut back on necessary expenditure, let alone unnecessary splurging. And there are many who argue that consultants represent unnecessary splurging. In Britain, consultancy fatigue is even more pronounced than New Labour fatigue. Successive parliamentary inquiries have revealed appalling examples of waste. From the NHS to the BBC, consultants are regarded as fork-tailed devils.

This counterblast against consultants is largely to the good. They have frequently left devastation in their wake and have treated the public sector as dumping grounds for airy-fairy ideas such as “transformation” that have been rejected by the private sector. They have built overly elaborate management structures that make it harder for people to do their jobs. And they have demotivated people who like to feel that they are working for the public good. The government has wasted huge amounts of money on botched IT projects designed by consultants. The worst example, a £12.7 billion project to improve the health service’s systems, has now been partially abandoned; but the Ministry of Defence is still struggling with a project that is currently £180m over budget.

Blame the paymaster, mostly

That said, it is worth adding two qualifications to the general chorus of condemnation. The first is that just because some consultants have given bad advice does not prove that they are incapable of giving good advice. Civil services are congenitally inward-looking organisations, led by people who are plucked from elite universities and shielded from the rest of the world in government palaces; it helps to expose them to innovations from the private sector. The private sector routinely introduces reductions in costs and improvements in performance that are almost unknown in the public sector. The IT debacles may be dispiriting. But few government departments possess the internal expertise to master new technology on their own.

The second is that the people who are ultimately responsible for the debacles are not the hired hands but their political masters. Gordon Brown and Tony Blair were suckers for flashy but insubstantial ideas about transformation. Lower-level politicians were lazy managers. In 2006 the National Audit Office provided a devastating list of ways in which the government had failed to make the best use of consultants—ranging from failing to appreciate what could be achieved with their own staff to refusing to learn from what the consultants were telling them.

But the biggest reason for the failure is that politicians have repeatedly used consultants to avoid dealing with the difficult questions by dressing up antiquated institutions in fashionable business garb. Back in 1995 Peter Drucker argued that if politicians were serious about “really reinventing government” they would go back to first principles and ask if large parts of government needed to be there in the first place. Tell Mr Jackson to follow Drucker’s advice and he might yet produce value for money.

Monday, January 18, 2010

In God's name?

Malaysia's burning churches

In God's name?

Jan 14th 2010
From The Economist print edition

A combustible mixture of race, religion and politics


AP A scene of worship and crime

THE delicate political balance between Malaysia’s ethnic and religious groups has been rocked by a series of attacks against churches, blamed on Muslim fanatics. They began after the High Court ruled on December 31st that a Catholic weekly, the Herald, could use the term “Allah” in its Malay-language edition.

This overturned an existing ban and offended some Muslims, who claim that “Allah” is exclusive to Islam, even though the word means “God” in Malay, and is used by other faiths in, for example, Indonesia. The supposed fear is that Christians are plotting to convert Malays, who make up some 60% of the population and, under the constitution, must also be Muslims. So sensitive is the issue that on January 6th, after an appeal by the government and with the consent of the Catholic church, the High Court suspended its own ruling.

By then, tempers had flared. Several Islamic groups planned to stage protests against the ruling on January 8th. Hours earlier, arsonists descended on three churches in Kuala Lumpur. By January 14th nine churches, a convent and a Sikh temple across the country had been hit. The prime minister, Najib Razak, condemned the attacks, offered compensation, and stepped up security around churches. Prominent Muslims spoke out against the violence. In fact, many Muslims were unperturbed by the High Court ruling. The Islamic Party of Malaysia, or PAS, part of the main opposition coalition, argues that people of the “Abrahamic” faiths may indeed use the word “Allah”.

Some analysts saw the attacks as evidence less of a broader lurch towards extremism than of the fragility of Mr Najib’s own standing. Since an election in March 2008, when the ruling Barisan Nasional coalition suffered its worst-ever performance, competing groups have been jostling for influence. His United Malays National Organisation (UMNO), the main party in the coalition, is keen to be seen as the defender of Malay-Muslim identity. Opposition parties are meanwhile arraying themselves as beacons of moderation.

They accuse Mr Najib of pandering to UMNO’s far right. Last year the government dithered before prosecuting a group of Muslims who had offended Hindus by using a cow’s severed head to demonstrate against the building of a temple. And on January 7th Mr Najib said the government could do nothing to stop the planned demonstrations—though the government has had few qualms about squelching past protests. The extremists may have taken Mr Najib’s demurral as a green light.

That would not have been his intention. Burning churches, and the perceived danger of worsening violence, will unnerve foreign investors and tourists. They make Malaysia look far from the tolerant, prosperous country that most of its citizens think they belong to.

Crying for freedom

Democracy's decline

Crying for freedom

Jan 14th 2010 | BUDAPEST AND KABUL
From The Economist print edition

A disturbing decline in global liberty prompts some hard thinking about what is needed for democracy to prevail


AFP

MORE than at any time since the cold war, liberal democracy needs defending. That warning was issued recently by Arch Puddington, a veteran American campaigner for civil and political rights around the world.

This week the reasons for his concern became clearer. Freedom House, a lobby group based in Washington, DC (where Mr Puddington is research director), found in its latest annual assessment that liberty and human rights had retreated globally for the fourth consecutive year. It said this marked the longest period of decline in freedom since the organisation began its reports nearly 40 years ago.

Freedom House classifies countries as “free”, “partly free” or “not free” by a range of indicators that reflect its belief that political liberty and human rights are interlinked. As well as the fairness of their electoral systems, countries are assessed for things like the integrity of judges and the independence of trade unions. Among the latest findings are that authoritarian regimes are not just more numerous; they are more confident and influential.

In its report entitled “Freedom in the World 2010: Global Erosion of Freedom”, the American lobby group found that declines in liberty occurred last year in 40 countries (in Africa, Latin America, the Middle East and the ex-Soviet Union) while gains were recorded in 16. The number of electoral democracies went down by three, to 116, with Honduras, Madagascar, Mozambique and Niger dropping off the list while the Maldives were reinstated. This leaves the total at its lowest since 1995, although it is still comfortably above the 1990 figure of 69.

Taken as a whole, the findings suggest a huge turn for the worse since the bubbly mood of 20 years ago, when the collapse of Soviet communism, plus the fall of apartheid, convinced people that liberal democracy had prevailed for good. To thinkers like America’s Francis Fukuyama, this was the time when it became evident that political freedom, underpinned by economic freedom, marked the ultimate stage in human society’s development: the “end of history”, at least in a moral sense.

In the very early days after the Soviet collapse, Russia and some of its neighbours swarmed with Western advisers, disseminating not only the basics of market economics but also the mechanics of multi-party democracy. And for a short time, these pundits found willing listeners.

Today, the idea that politicians in ex-communist countries would take humble lessons from Western counterparts seems laughable. There is more evidence of authoritarians swapping tips. In October, for example, the pro-Kremlin United Russia party held its latest closed-door meeting with the Chinese Communist party. Despite big contrasts between the two countries—not many people in Russia think there is a Chinese model they could easily apply—the Russians were interested by the Chinese “experience in building a political system dominated by one political party,” according to one report of the meeting.

For freedom-watchers in the West, the worrying thing is that the cause of liberal democracy is not merely suffering political reverses, it is also in intellectual retreat. Semi-free countries, uncertain which direction to take, seem less convinced that the liberal path is the way of the future. And in the West, opinion-makers are quicker to acknowledge democracy’s drawbacks—and the apparent fact that contested elections do more harm than good when other preconditions for a well-functioning system are absent. It is a sign of the times that a British reporter, Humphrey Hawksley, has written a book with the title: “Democracy Kills: What’s So Good About the Vote?”.

A more nuanced argument, against the promotion of electoral democracy at the expense of other goals, has been made by other observers. Paul Collier, an Oxford professor, has asserted that democracy in the absence of other desirables, like the rule of law, can hobble a country’s progress. Mark Malloch-Brown, a former head of the UN Development Programme, is still a believer in democracy as a driver of economic advancement, but he thinks that in countries like Afghanistan, the West has focused too much on procedures—like multi-party elections—and is not open enough to the idea that other kinds of consensus might exist. At the University of California, Randall Peerenboom defends the “East Asian model”, according to which economic development naturally precedes democracy.

Whatever the eggheads may be saying, there are some obvious reasons why Western governments’ zeal to promote democracy, and the willingness of other countries to listen, have ebbed. In many quarters (including Western ones), the assault on Saddam Hussein’s Iraq, and its bloody aftermath, seemed to confirm people’s suspicion that promoting democracy as an American foreign-policy aim was ill-conceived or plain cynical.

In Afghanistan, the other country where an American-led coalition has been waging war in democracy’s name, the corruption and deviousness of the local political elite, and the flaws of last year’s election, have been an embarrassment. In the Middle East, America’s enthusiasm for promoting democracy took a dip after the Palestinian elections of 2006, which brought Hamas to office. The European Union’s “soft power” on its eastern rim has waned as enlargement fatigue has grown.

But perhaps the biggest reason why democracy’s magnetic power has waned is the rise of China—and the belief of its would-be imitators that they too can create a dynamic economy without easing their grip on political power. In the political rhetoric of many authoritarian governments, fascination with copying China’s trick can clearly be discerned.

For example, Syria’s ruling Baath party talks of a “socialist market economy” that will fuel growth while keeping stability. Communist Vietnam has emulated China’s economic reforms, but it was one of the states scolded by Freedom House this year for curbing liberty. Iran has called in Chinese legal experts and economists. There are limits to how much an Islamic republic and a communist state can have in common, but they seem to agree on what to avoid: Western-style freedom.

Even Cuba, while clinging to Marxist ideas, has shown an interest in China’s economic reforms. And from the viewpoint of many poor countries, especially in Africa, co-operating with China—both economically and politically—has many advantages: not least the fact that China refrains from delivering lectures on political and human freedom. The global economic downturn—and China’s ability to survive it—has clearly added to that country’s appeal. The power of China (and a consequent lessening of official concern over human rights) is palpable in Central Asia. But as dissidents in the region note, it is not just Chinese influence that makes life hard for them; it is also the dithering of Western governments which often temper their moral concerns with commercial ones.

The argument for open argument

Given that democracy is unlikely to advance, these days, through the military or economic preponderance of the West, its best hope lies in winning a genuinely open debate. In other words, wavering countries, and sceptical societies, must be convinced that political freedom works best.

So how does the case in defence of democracy stand up these days? As many a philosopher has noted, the strongest points to be made in favour of a free political contest are negative. Democracy may not yield perfect policies, but it ought to guard against all manner of ills, ranging from outright tyranny (towards which a “mild” authoritarian can always slide) to larceny at the public expense.

Transparency International, a corruption watchdog, says that all but two of the 30 least corrupt countries in the world are democracies (the exceptions are Singapore and Hong Kong, and they are considered semi-democratic). Autocracies tend to occupy much higher rankings on the corruption scale (China is somewhere in the middle) and it is easy to see why. Entrenched political elites, untroubled by free and fair elections, can get away more easily with stuffing their pockets. And strongmen often try to maintain their hold on power by relying on public funds to reward their supporters and to buy off their enemies, leading to a huge misallocation of resources.

Yet it is easy to find corrupt democracies—indeed, in a ramshackle place like Afghanistan elections sometimes seem to make things worse. Or take the biggest of the ex-Soviet republics. Russia is authoritarian and has a massive problem with corruption; Ukraine is more democratic—the forthcoming elections are a genuine contest for power, with uncertain results—but it too has quite a big corruption problem. Ukraine has no “Kremlin”, wielding authority over all-comers, but that does not make it clean or well-governed.

What about the argument that economic development, at least in its early stages, is best pursued under a benign despot? Lee Kuan Yew, an ex-prime minister of Singapore, once asserted that democracy leads to “disorderly conduct”, disrupting material progress. But there is no evidence that autocracies, on average, grow faster than democracies. For every economically successful East Asian (former) autocracy like Taiwan or South Korea, there is an Egypt or a Cameroon (or indeed a North Korea or a Myanmar) which is both harsh and sluggish.

The link between political systems and growth is hard to establish. Yet there is some evidence that, on average, democracies do better. A study by Morton Halperin, Joseph Siegle and Michael Weinstein for the Council of Foreign Relations (CFR), using World Bank data between 1960 and 2001, found that the average annual economic growth rate was 2.3% for democracies and 1.6% for autocracies. Other studies, though, are less clear.

Believers in democracy as an engine of progress often make the point that a climate of freedom is most needed in a knowledge-based economy, where independent thinking and innovation are vital. It is surely no accident that every economy in the top 25 of the Global Innovation Index is a democracy, except semi-democratic Singapore and Hong Kong.

China, which comes 27th in this table, is often cited as a vast exception to this rule. Chinese brainpower has made big strides in fields like computing, green technology and space flight. The determination of China’s authorities to impose their own terms on the information revolution was highlighted this week when Google, the search engine, said it might pull out of China after a cyber-attack that targeted human-rights activists. Since entering the Chinese market in 2006, Google had agreed to the censorship of some search results, at the authorities’ insistence.

Admirers of China’s iron hand may conclude that it can manage well without the likes of Google, which was being trounced in the local market by Baidu, a Chinese rival. But in the medium term, the mentality that insists on hobbling search engines will surely act as a break on creative endeavour. And no country should imagine that by becoming as autocratic as China, it will automatically become as dynamic as China is.

What about the argument that autocracy creates a modicum of stability without which growth is impossible? In fact, it is not evident that authoritarian countries are more stable than democracies. Quite the contrary. Although democratic politicians spend a lot of time vacillating, arguing and being loud and disagreeable, this can reinforce stability in the medium term; it allows the interests and viewpoints of more people to be heard before action is taken. On the State Fragility Index, which is produced annually by George Mason University and studies variables such as “political effectiveness” and security, democracies tend to do much better than autocracies. Tito’s Yugoslavia was stable, as was Saddam Hussein’s Iraq—but once the straitjacket that held their systems together came off, the result was a release of pent-up pressure, and a golden opportunity for demagogues bent on mayhem.

At the very least, a culture of compromise—coupled with greater accountability and limits on state power—means that democracies are better able to avoid catastrophic mistakes, or criminal cruelty. Bloody nightmares that cost tens of millions of lives, like China’s Great Leap Forward or the Soviet Union’s forced collectivisation programme, were made possible by the concentration of power in a small group of people who faced no restraint.

Panos Worth fighting for?

Liberal democratic governments can make all manner of blunders, but they are less likely to commit mass murder. Amartya Sen, a Nobel prize-winning economist, has famously argued that no country with a free press and fair elections has ever had a large famine. And research by those three CFR scholars found that poor autocracies were at least twice as likely as democracies to suffer an economic disaster (defined as a decline of 10% or more in GDP in a year). With no noisy legislatures or robust courts to hold things up, autocracies may be faster and bolder. They are also more accident-prone.

For all its frustrations, open and accountable government tends in the long run to produce better policies. This is because no group of mandarins, no matter how enlightened or well-meaning, can claim to be sure what is best for a complex society. Autocracies tend to be too heavy at the top: although decisions may be more easily taken, the ethos of autocracies—their secrecy and paranoia—makes it harder for alternative views to emerge. Above all, elections make the transfer of power legitimate and smooth. Tyrannies may look stable under one strongman; but they can slide into instability, even bloody chaos, if a transition goes awry. Free elections also mean that policy mistakes, even bad ones, are more quickly corrected. Fresh ideas can be brought in and politicians thrown out before they grow too arrogant.

But if something has been learnt from the recent backlash against democratic enthusiasm, it is that ballot boxes alone are nothing like enough. Unless solid laws protect individual and minority rights, and government power is limited by clear checks, such as tough courts, an electoral contest can simply lead to a “tyranny of the majority”, as Alexis de Tocqueville, a French philosopher, called it. That point has particular force in countries where some variety of political Islam seems likely to prevail in any open contest. In such places, minorities include dissident Muslims who often prefer to remain under the relative safety offered by a despot.

Another caveat is that democracy has never endured in countries with mainly non-market economies. The existence of an overweening state machine that meddles in everything can tempt leaders to use it against their political foes. Total control of the economy also sucks the air away from what Istvan Bibo, a Hungarian political thinker, called “the little circles of freedom”—the free associations and independent power centres that a free economy allows. Free-market economies help create a middle class that is less susceptible to state pressure and political patronage.

Perhaps most important, democracy needs leaders with an inclination and ability to compromise: what Walter Bagehot, a 19th-century editor of The Economist, called a “disposition rather to give up something than to take the uttermost farthing”. Without a propensity for tolerating and managing differences, rival groups can easily reduce democracy to a ruthless struggle for power that ultimately wears down liberal institutions.

Democracy, this suggests, is more likely to succeed in countries with a shared feeling of belonging together, without strong cultural or ethnic fissures that can easily turn political conflict into the armed sort. Better positioned are “people so fundamentally at one that they can safely afford to bicker,” as Lord Balfour, a 19th-century British politician, said. Such was not the case in Yugoslavia in the 1990s or in Lebanon in the 1970s.

Even where all the right conditions are in place, democracy will not prevail unless its proponents show success at governing. No constitution can, in itself, guarantee good governance. The success of any political system ultimately depends on whether it can provide basic things like security, wealth and justice. And in countries where experiments in democracy are in full swing, daily reality is more complex than either zealous democracy-promoters or authoritarian sceptics will allow.

In Kabul a 26-year-old handyman called Jamshed speaks for many compatriots when he lists the pros and cons of the new Western-imposed order. Compared with life under the Taliban, he appreciates the new “freedom to listen to music, to go out with your wife, to study or do whatever you want.” But he cannot help remembering that “under the Taliban, you could leave your shop to pray and nobody would steal anything…now the government is corrupt, they take all your money.”

Jamshed has never read John Stuart Mill or Ayn Rand. But whether he is ruled by theocrats or Western-backed election winners, he knows what he doesn’t like.

Flowers for a funeral

Google and China

Flowers for a funeral

Jan 13th 2010 | BEIJING
From Economist.com

Censorship and hacker attacks provide the epitaph for Google in China


AP

“WE’RE in this for the long haul,” wrote a Google executive four years ago when the company launched a self-censored version of its search engine for the China market. Now Google says it might have to pull out of the country because of alleged attacks by hackers in China on its e-mail service and a tightening of China’s restrictions on free speech on the internet. Its change of heart, as the company rightly points out, could have “far-reaching consequences”.

Google’s “new approach to China”, as the company’s chief legal officer, David Drummond, called it on January 12th on the company’s official blog, will certainly infuriate China’s government. The authorities are sensitive to foreign complaints about internet controls in China. In November, during a visit by President Barack Obama, his obliquely worded criticism of Chinese online censorship was itself censored from official reports. If it does close down in China, Google would be the first big-brand foreign company to do so citing freedom of speech in many years.

Mr Drummond’s blog-posting also contained unusually direct finger-pointing by a foreign multinational at China as a source of hacker attacks. It said that in mid-December Google detected a “highly sophisticated and targeted attack” on its corporate computer systems “originating from China”. It found that at least 20 other large companies from various industries had also been attacked. A primary goal, of the hacking of Google, it said, appeared to be to gain access to the e-mail of Chinese human-rights activists who use Google’s “Gmail” service. The hackers succeeded in partially penetrating two such accounts.

“Third parties” had also, wrote Mr Drummond, “routinely” gained access to the Gmail accounts of dozens of other human-rights advocates in America, Europe and China itself. Unlike the mid-December attack, these breaches appeared to involve “phishing” scams or “malware” on users’ computers rather than direct attacks on Google’s systems. All this, he said, along with attempts over the past year to impose further limits on free speech on the web, had led Google to “review the feasibility” of its Chinese business.

The company has decided to stop censoring the results of its China-based search engine, Google.cn. Mr Drummond said this might result in having to shut down Google.cn and Google’s offices in China. In the face of much criticism from Western human-rights advocates, Google justified its decision to set up Google.cn in 2006 by pointing out that China often blocked its uncensored engine, Google.com. Better to offer a censored service (with warnings to users that results were filtered), the company argued, than nothing at all. China would certainly not allow an uncensored search engine to be based on its territory.

Google’s decision at the time was presumably driven in part by the lure of China’s rapidly expanding internet market. In part because of intermittent blocking of Google.com, and the slowness of access to the company’s foreign-based servers, Baidu, a Beijing-based company listed on America’s NASDAQ exchange, dwarfed Google’s share of the search-engine business in China. The launch of Google.cn did little to dent Baidu’s domination.

Nor has Google’s acquiescence in self-censorship of its searches made China any less wary of its other, uncensored, services. Google’s video-sharing site, YouTube, has been blocked since March, because of footage of Chinese police beating Tibetan monks. Its photo-album site, Picasa Web Albums, suffered the same fate soon after. Access to Google’s blog service, Blogger, has long been intermittent. It is currently unavailable in Beijing.

Google’s frustrations are widely shared. In the build-up to the Beijing Olympics in August 2008, China lifted longstanding blocks on several websites, as it tried to present a more open image to foreign visitors. Since then, controls have been stepped up to unprecedented levels. Internet access in the western region of Xinjiang has been all but cut off since ethnic riots erupted there in July.

The unrest also prompted a shutdown of foreign social-networking sites such as Twitter and Facebook. The role of such sites in protests in Iran, after its stolen elections in June, had already alarmed the government. Its fear of dissent around the 60th anniversary in October of the founding of communist China prompted even greater vigilance against sensitive debate online. But there has been no sign of relaxation since then. In recent weeks the authorities have tightened restrictions on the registration of websites under the .cn domain name (only businesses may apply). A crackdown on internet pornography has led to closer scrutiny by internet service providers of non-porn websites.

In December Yeeyan, a site with translations of articles from foreign newspapers including the Guardian and the New York Times, was closed for several days. It was allowed to reopen after putting tighter controls in place on the publication of politically sensitive pieces. Ecocn, a site offering translations of articles from this newspaper, was also briefly shut down as officials trawled for pornography, but resurfaced unscathed. The volunteers who run this informal operation make translations of sensitive articles available only to users they trust.

The anti-porn drive turned up the heat on Google too. Last year Google.cn was among several search engines in China accused by the authorities of providing links to pornographic sites. The state-controlled press gave particular prominence to Google’s alleged transgressions, which the company promised to investigate. The Chinese media have also published frequent criticisms in recent months of Google’s alleged violations of Chinese copyrights in its Google Books venture.

In Silicon Valley, its home, Google’s change of tack in China was widely applauded. But some were asking whether it was “more about business than thwarting evil” to quote TechCrunch, a widely read website. Besides pointing to Google’s failure to eat into Baidu’s market share, cynics noted that, whereas, according to Mr Drummond, Google’s revenues in China are “truly immaterial”, its costs are not. It employs about 700 people in China, some of them royally paid engineers, who may now may have to look for other jobs. Hacker attacks and censorship, critics say, are convenient excuses for something Google wanted to do anyway, without appearing to be retreating commercially. Google strongly rejects this interpretation.

In China, however, the government is clearly fearful that the company’s public stand against censorship will be celebrated by many Chinese internet-users. Chinese news accounts of the company’s decision failed to mention the reason for Google’s actions. Chinese web portals buried the story. Many internet-users in China have become adept at finding ways of circumventing China’s blocks on overseas websites, including the installation of “virtual private network” software. Numerous tributes to Google that rapidly appeared on Chinese internet discussion forums, and flowers laid outside Google’s office in Beijing, showed that the attempts at censorship had failed. Few, however, believe the company’s announcement will dissuade China from keeping on trying.

Carrots dressed as sticks

Designing rewards

Carrots dressed as sticks

Jan 14th 2010
From The Economist print edition

An experiment on economic incentives


PEOPLE are contrary creatures. A man may say he would not pay more than $5 for a coffee mug. But if he is told that the mug is his, and asked immediately afterwards how much he would be willing to sell it for, he typically holds out for more. Possession, it appears, lends things an added allure.

This makes little sense in the world of standard economic theory, where the value of something depends on what it is. But it can be explained by behavioural models in which the value people attach to objects is affected by what they already have, and people abhor losses more than they like equivalent gains.

In a new paper Tanjim Hossain of the University of Toronto and John List of the University of Chicago explore a real-world use of these insights. The economists worked with the managers of a Chinese electronics factory, who were interested in exploring ways to make their employee-bonus scheme more effective. Most might have recommended changes to the amounts of money on offer. But Mr Hossain and Mr List chose instead to concentrate on the wording of the letter informing workers of the details of the bonus scheme.

At the beginning of the week, some groups of workers were told that they would receive a bonus of 80 yuan ($12) at the end of the week if they met a given production target. Other groups were told that they had “provisionally” been awarded the same bonus, also due at the end of the week, but that they would “lose” it if their productivity fell short of the same threshold.

Objectively these are two ways of describing the same scheme. But under a theory of loss aversion, the second way of presenting the bonus should work better. Workers would think of the provisional bonus as theirs, and work harder to prevent it from being taken away.

This is just what the economists found. The fear of loss was a better motivator than the prospect of gain (which worked too, but less well). And the difference persisted over time: the results were not simply a consequence of workers’ misunderstanding of the system. Economists have always been advocates of using carrots and sticks. But they may not have emphasised appearances enough. Carrots, this research suggests, may work better if they can somehow be made to look like sticks.

Driven to distraction

Schumpeter

Driven to distraction

Jan 14th 2010
From The Economist print edition

Two and a half cheers for sticks and carrots


Illustration by Brett Ryder

THIS is bonus season in the financial world. That means, of course, that it is bonus-bashing season everywhere else. The righteously outraged have no shortage of arguments on their side, from the mind-boggling size of the bonuses to the fact that the banks were recently rescued with public money. But if they want to mix a bit of theory with their spleen they now have a book to help them: Daniel Pink’s “Drive: The Surprising Truth About What Motivates Us”. It seems that bankers are not just slaves to greed. They are also slaves to a discredited management theory: the idea that the best way to motivate people is to use performance-related rewards.

Mr Pink’s argument is hardly new. Eminent management theorists have been dismissing payment-by-results as simplistic and mechanical ever since Frederick Taylor tried to turn it into the cornerstone of scientific management in the early 20th century. But Mr Pink’s book is nevertheless well-timed. The widespread fury about bonuses is sparking a wider debate about the way bankers and other lavishly remunerated people are paid. “Drive” is a decent summary of the anti-Taylorist school of thinking. And Mr Pink, once Al Gore’s chief speechwriter and now a prolific management writer, is a highly motivated self-publicist.

Mr Pink argues that the rich world is in the middle of a management revolution, from “motivation 2.0” to “motivation 3.0” (1.0 in this schema was prehistoric times, when people were motivated mainly by the fear of being eaten by wild animals). In the age of routine production it made sense for organisations to rely on sticks and carrots or “extrinsic motivators”, as he calls them. But today, with routine jobs being outsourced or automated, it makes more sense to rely on “intrinsic rewards”, or the pleasure we gain from doing a job well. Look at the success of collaborative marvels such as Wikipedia, Firefox or Linux, which were created by volunteers. Or look at the rise of social entrepreneurs or the movement to promote “low-profit” limited-liability firms.

Mr Pink argues that carrots and sticks are not only outdated, but can also be counterproductive—motivation killers and creativity dampeners. Paying people to give blood actually reduces the number who are willing to do so. Providing managers with financial rewards can encourage them to game the system or, even worse, to engage in reckless behaviour.

So how should firms motivate people? Mr Pink argues that the answer is to give them more control over their own lives and thus allow them to draw on their deep inner wells of diligence and drive. Software companies such as Atlassian and—of course—Google are giving workers time to pursue their own projects. Even low-tech firms such as Whole Foods and Best Buy are giving people more control over how and with whom they work.

How convincing is all this? Mr Pink insists that all he is doing is bringing the light of science to bear on management: “There’s been a mismatch between what science knows and what business does.” But this argument depends on a highly selective reading of the academic literature. Four reviews of research on the subject from the 1980s onwards have all come to the same conclusion: that pay-for-performance can increase productivity dramatically. A study of an American glass-installation company, for example, found that shifting from salaries to individual incentives increased productivity by 44%. More recent research on workers at a Chinese electronics factory also confirms that performance-related pay (especially the threat of losing income) is an excellent motivator (see article).

Linking pay to performance does not just increase motivation. It also helps to recruit and retain the most talented. The world’s brightest students are overwhelmingly attracted to organisations that make extensive use of performance-related rewards such as partnerships and share options. Firms are adept at using these rewards to encourage long-term loyalty: people work in the salt mines for years in the hope of becoming partners or senior managers. Companies that eschew extrinsic rewards risk lumbering themselves with sluggish dullards.

Self-determined to do better

What about Mr Pink’s other worries, about creativity and “self-determination”? It is certainly true that creative people value the intrinsic things in life. But an enthusiasm for intrinsic rewards can go hand in hand with a taste for extrinsic gain. American universities attract star professors from all around the world by the simple expedient of paying them lots of money. Successful writers employ agents to get the highest possible advances (Mr Pink himself probably hopes to make some money from his book). Creative centres such as Hollywood and Silicon Valley are also hotbeds of payment-by-results. It is true that some of the world’s best companies are putting more emphasis on “purpose”. But it is quite possible to mix this with pay-for-performance; indeed, companies that Mr Pink lauds, such as Google and Whole Foods, are highly skilled at using sticks and carrots.

All this suggests that Mr Pink has it backwards: far from abandoning sticks and carrots organisations are making ever more use of them. Companies are keener than ever on holding bosses’ feet to the fire by linking their pay to performance through stock options and the like and on firing them if they fail. But they are also trying to widen pay differentials further down the organisation: about 90% of American firms use merit pay, for example.

There is no doubt that sticks and carrots can be badly used. They can encourage risky behaviour, as they have in the banking system, or persuade policemen to focus on minor traffic infractions rather than violent criminals, as they have in Britain. But properly managed they can be immensely powerful tools for boosting productivity and attracting the right people. For all the battering he has taken over the past hundred years, Frederick Taylor still has the edge over his critics.