Poor Economics

Why would a man in Morocco who doesn’t have enough to eat buy a television?
Why is it so hard for children in poor areas to learn even when they attend school?
Why do the poorest people in the Indian state of Maharashtra spend 7 percent of their food budget on sugar?
Does having lots of children actually make you poorer?

For more than fifteen years Abhijit V. Banerjee and Esther Duflo have worked with the poor in dozens of countries spanning five continents, trying to understand the specific problems that come with poverty and to find proven solutions. Their book is radical in its rethinking of the economics of poverty, but also entirely practical in the suggestions it offers. Through a careful analysis of a very rich body of evidence, including the hundreds of randomized control trials that Banerjee and Duflo’s lab has pioneered, they show why the poor, despite having the same desires and abilities as anyone else, end up with entirely different lives.

Through their work, Banerjee and Duflo look at some of the most surprising facets of poverty: why the poor need to borrow in order to save, why they miss out on free life-saving immunizations but pay for drugs that they do not need, why they start many businesses but do not grow any of them, and many other puzzling facts about living with less than 99 cents per day.

POOR ECONOMICS argues that so much of anti-poverty policy has failed over the years because of an inadequate understanding of poverty. The battle against poverty can be won, but it will take patience, careful thinking and a willingness to learn from evidence. Banerjee and Duflo are practical visionaries whose meticulous workoffers transformative potential for poor people anywhere, and is a vital guide to policy makers, philanthropists, activists and anyone else who cares about building a world without poverty.

Brains & Beauty

A Book To Read...

Going to Extreme

By PAUL KRUGMAN

I admit it: I had fun watching right-wingers go wild as health reform finally became law. But a few days later, it doesn’t seem quite as entertaining — and not just because of the wave of vandalism and threats aimed at Democratic lawmakers. For if you care about America’s future, you can’t be happy as extremists take full control of one of our two great political parties.

To be sure, it was enjoyable watching Representative Devin Nunes, a Republican of California, warn that by passing health reform, Democrats “will finally lay the cornerstone of their socialist utopia on the backs of the American people.” Gosh, that sounds uncomfortable. And it’s been a hoot watching Mitt Romney squirm as he tries to distance himself from a plan that, as he knows full well, is nearly identical to the reform he himself pushed through as governor of Massachusetts. His best shot was declaring that enacting reform was an “unconscionable abuse of power,” a “historic usurpation of the legislative process” — presumably because the legislative process isn’t supposed to include things like “votes” in which the majority prevails.

A side observation: one Republican talking point has been that Democrats had no right to pass a bill facing overwhelming public disapproval. As it happens, the Constitution says nothing about opinion polls trumping the right and duty of elected officials to make decisions based on what they perceive as the merits. But in any case, the message from the polls is much more ambiguous than opponents of reform claim: While many Americans disapprove of Obamacare, a significant number do so because they feel that it doesn’t go far enough. And a Gallup poll taken after health reform’s enactment showed the public, by a modest but significant margin, seeming pleased that it passed.

But back to the main theme. What has been really striking has been the eliminationist rhetoric of the G.O.P., coming not from some radical fringe but from the party’s leaders. John Boehner, the House minority leader, declared that the passage of health reform was “Armageddon.” The Republican National Committee put out a fund-raising appeal that included a picture of Nancy Pelosi, the speaker of the House, surrounded by flames, while the committee’s chairman declared that it was time to put Ms. Pelosi on “the firing line.” And Sarah Palin put out a map literally putting Democratic lawmakers in the cross hairs of a rifle sight.

All of this goes far beyond politics as usual. Democrats had a lot of harsh things to say about former President George W. Bush — but you’ll search in vain for anything comparably menacing, anything that even hinted at an appeal to violence, from members of Congress, let alone senior party officials.

No, to find anything like what we’re seeing now you have to go back to the last time a Democrat was president. Like President Obama, Bill Clinton faced a G.O.P. that denied his legitimacy — Dick Armey, the second-ranking House Republican (and now a Tea Party leader) referred to him as “your president.” Threats were common: President Clinton, declared Senator Jesse Helms of North Carolina, “better watch out if he comes down here. He’d better have a bodyguard.” (Helms later expressed regrets over the remark — but only after a media firestorm.) And once they controlled Congress, Republicans tried to govern as if they held the White House, too, eventually shutting down the federal government in an attempt to bully Mr. Clinton into submission.

Mr. Obama seems to have sincerely believed that he would face a different reception. And he made a real try at bipartisanship, nearly losing his chance at health reform by frittering away months in a vain attempt to get a few Republicans on board. At this point, however, it’s clear that any Democratic president will face total opposition from a Republican Party that is completely dominated by right-wing extremists.

For today’s G.O.P. is, fully and finally, the party of Ronald Reagan — not Reagan the pragmatic politician, who could and did strike deals with Democrats, but Reagan the antigovernment fanatic, who warned that Medicare would destroy American freedom. It’s a party that sees modest efforts to improve Americans’ economic and health security not merely as unwise, but as monstrous. It’s a party in which paranoid fantasies about the other side — Obama is a socialist, Democrats have totalitarian ambitions — are mainstream. And, as a result, it’s a party that fundamentally doesn’t accept anyone else’s right to govern.

In the short run, Republican extremism may be good for Democrats, to the extent that it prompts a voter backlash. But in the long run, it’s a very bad thing for America. We need to have two reasonable, rational parties in this country. And right now we don’t.

Big Boys: Wal-Mart

It hardly shrieks of billion-dollar glamour. The US nerve centre of the world's largest retailer, Wal-Mart, consists of a collection of low-slung prefabricated buildings along a four-lane highway in north-western Arkansas. Wal-Mart's head office is hundreds of miles from the nearest big city. It isn't even handy for the state capital, Little Rock, which is three and half hours' drive away.

But hopeful merchants beat a path from all corners of the world to hawk their wares here, in a series of bare Perspex rooms along a "supplier corridor". Staff work in spartan cubicles and reminders of the retailer's low-cost culture are constant – in an employee lounge an honesty box invites payment for tea and coffee with a blunt message: "Drinks are not free."

It was nearby, in the main square of the modest town of Bentonville, that Wal-Mart's founder, Sam Walton, opened a discount store, Walton's Five and Dime, in 1951. That shop, now a museum, helped spawn a retail empire that spans 8,100 stores in 15 countries generating $401bn (£248bn) of revenue annually. With a market capitalisation of $210bn, Wal-Mart is worth as much as the gross domestic product of Nigeria.

Four of America's 10 richest individuals are from Wal-Mart's low-profile Walton family, which still owns a 40% controlling stake. The company's portfolio ranges from superstores in the US to neighbourhood markets in Brazil, bodegas in Mexico, the Asda supermarket chain in Britain and Japan's nationwide network of Seiyu shops. Wal-Mart gets many of its products from low-cost Chinese suppliers. The pressure group China Labour Watch estimates that if it were a country, Wal-Mart would rank as China's seventh largest trading partner, just ahead of the UK, spending more than $18bn annually on Chinese goods.

A Wal-Mart store in Beijing. Photo: Getty

Perhaps more than any other firm in America, Wal-Mart divides opinion. Unions loathe its relentless downward pressure on wages and its refusal to allow workers to organise. The company has been accused of unfair treatment of older, more expensive, employees. It is facing one of America's largest class-action lawsuits alleging wage discrimination against women and its hypermarkets are routinely blamed for squeezing small shops out of business.

"This is a company with a record of exploitation," says Jill Cashen, spokeswoman for a pan-union campaign group, Wake Up Wal-Mart. "They have not shared their wealth. When you spend your money at Wal-Mart, you're contributing to the wealth of one very rich family and not very many other people."

In reply, Wal-Mart's executives say the company is "saving people money so they can live better". They trumpet the availability of Wrangler jeans for $11.50, laptops for $298 and even an entire Thanksgiving turkey dinner for eight people at $20. Wal-Mart maintains that it is on the side of hard-working families who need to save every penny they can – and the company intends to spread this message globally.

Wal-Mart spent $4.1bn on international expansion in the year to January 2009, and intends to spend between $4.2bn and $4.4bn in the current fiscal year, excluding acquisitions. About a quarter of its sales are outside the US. But oddly, few of its foreign customers are aware that they are shopping at an American multinational.

Unhappy early experiences outside American shores have prompted an outbreak of new thinking at Wal-Mart. The company has embraced something of a "stealth" approach to growth. Its stores are emblazoned with an array of different names around the world – Maxibodega in Costa Rica, Todo Dia in Brazil, Despensa Familiar in Honduras and the awkward-sounding Best Price Modern Wholesale in India.

"We learned very early in the process that you simply can't take a superstore in the US, pull it out of the ground and plant it in another country and expect that to be a successful strategy," says Mitch Slape, Wal-Mart's head of international business development.

During earlier decades, the firm's approach to expansion was simple. It built US-style out-of-town discounting superstores around the world and expected shoppers to flock there for bargains. But this didn't always work. Travel patterns, family roles and shopping habits vary. Ventures into Germany and South Korea came to a sticky end with expensive exits in 2006.

Under the new approach, the "front end" of Wal-Mart's stores can look like enlarged family-run convenience stores. The contents, to some extent, are locally focused. Chinese stores offer live crustaceans, while south American outlets are heavy on spicy beans. But the "back end" is a duplicate of the US model.

"From the customer point of view, it might appear to be a certain brand," says Slape. "But everything that is 'back of house' – systems, processes, buying – we can leverage a lot of that globally."

Part of its pluralistic new approach comes from experience in Britain, where Wal-Mart bought Asda for £6.7bn a decade ago. The chain has been a moderate success, delivering consistent results, but Wal-Mart has been frustrated in its efforts to expand. Frustrated, Wal-Mart's former chief executive Lee Scott, who retired this year to make way for new incumbent Mike Duke, reportedly pondered a complete exit from the UK – but ultimately opted to stay put.

Insiders say that competing in Britain's feverishly competitive supermarket industry has taught Wal-Mart a good deal. Asda is now something of a centre for excellence for its global grocery sales. The head of global marketing for Wal-Mart is based at Asda's head office in Leeds. And, in an example of Wal-Mart's global distribution muscle, the Wall Street Journal recently reported that the best-selling wine in the whole of Japan is an own-label Asda Bordeaux.

Britain is Wal-Mart's fourth-largest overseas chain, with 368 Asda outlets, behind Mexico's 1,322 stores, Brazil's 373 sites and Japan's 371 shops. All are dwarfed by the 4,200-strong network of Wal-Marts in the US. Smaller territories include Canada with 313 stores, Cuba at 266 and a newly acquired 238-strong chain in Chile. Russia and India are next in line for focus and Wal-Mart won't be taking half measures – the company only bothers to enter a market if it thinks it can be one of the top few players.

"It's important for us to be in one of the top three positions," says Wan Ling Martello, chief financial officer of Wal-Mart's international operation. "We have to have scale – otherwise it doesn't quite make sense."

That scale gives Wal-Mart muscle – and it is this brawn that, in the eyes of critics, can give it an unpleasantly bullying demeanour. At the very centre of the company's business model is a constant effort to drive down costs to an absolute minimum. Every pound, penny and tenth of a penny per unit of stock turns into millions in a firm of Wal-Mart's size.

"With the scale the company has, the economies of scale it can command, it basically extracts every last nickel out of its suppliers," says Michael Bride, deputy overseas organising director at the United Food & Commercial Workers Union in Washington. "If you're a Chinese supplier and Wal-Mart is pressing you down, you probably can't go and negotiate your electricity rates or your rent down. But you can cut costs when it comes to labour."

An investigation of five factories supplying Wal-Mart by China Labour Watch found "illegal and degrading conditions" according to a report released in November by the New York-based human rights group. At one plant in Dongguan, which supplies candles and Christmas tree lights, it found that workers were required to work 24-hour overtime shifts during busy periods and painted a bleak picture of pay as low as 44 cents (27p) an hour, bathrooms without running water and unsanitary canteens. Although Wal-Mart uses independent auditors to check on ethics at its suppliers, the group found evidence of workers being obliged to sign false pay receipts.

Wal-Mart responded to the report by saying it had begun an immediate inquiry into the factories: "We take reports like this very seriously and we will take prompt remedial action if our investigations confirm any of the findings."

While imbued with an innate conservatism by its founding family, Wal-Mart moved in recent years to introduce higher environmental standards. As of 2007, it says it succeeded in cutting the amount of waste it sent to landfills by 55%. Wal-Mart also wants to be 100% driven by renewable power and recently said that it was purchasing sufficient wind energy in Texas to account for 15% of its electricity in the US.

Under a newly launched "sustainability index," Wal-Mart's suppliers must report to the company on their greenhouse gas emissions, waste reduction initiatives and ethical sourcing. The company is working towards a labelling system to inform customers of the sustainability of each and every product.

Matt Kistler, Wal-Mart's senior vice-president for sustainability, says saving on waste is a no-brainer: "At first it was a little bit of a reaction to the negative pressures as a company we'd been receiving. But very early on, from day two, there was a tremendous appetite not only from an environmental point of view but from a business point of view to do what we're doing."

Yet even these efforts, argue critics, are modest in the context of larger questions over the globalisation of Wal-Mart's business. Wake Up Wal-Mart campaigner, Jill Cashen, says: "It's one thing to bring in a product, ship it from the other side of the planet and stick a label on it telling customers it's sustainable. How much greener would it be if it was produced within 100 miles of where it was sold?"

In North America, Wal-Mart is unashamedly anti-union. When, in a rare case in 2005, workers at a Quebecois Wal-Mart store voted in favour of collective representation, Wal-Mart simply shut it down. The case went to Canada's supreme court, which last month accepted Wal-Mart's explanation that the location was unprofitable.

Overseas, Wal-Mart has proved more flexible – it has worked with unions in Argentina, Brazil and in China, in accordance with local laws. But there are still strong reservations in the public mind about the way Wal-Mart does business.

Back in Arkansas, the Walton family are taking a stab at posterity through the construction of an impressive $50m glass and wood art gallery, Crystal Bridges. Designed by an acclaimed Israeli architect, Moshe Safdie, the 100,000 sq ft (10,000 sq metre) complex is bankrolled by Sam Walton's daughter, Alice, and is intended to put Bentonville on the cultural map with a collection of American art from colonial times to the present.

But even on Wal-Mart's home turf, visitors are far from unanimous in their verdicts on the company. "It's a symbol of free enterprise – the success of the free enterprise system," says John Niccum, a pensioner visiting Sam Walton's original Five and Dime store, now a museum.

But Kay Heaton, an AT&T telecoms employee from Missouri, is dubious: "It's beating the heck out of the little man. It kills the little guy who offers an independent service, from an independent business."

Founding father

Samuel Moore Walton, the founder of Wal-Mart, was born on 29 March 1918 on a farm in Oklahoma. His father moved the family from town to town in the 1920s after quitting farming and becoming a mortgage broker. When the Great Depression hit in the 1930s, Walton took any job that was going to supplement the family income but eventually graduated from the University of Missouri in Columbia with a business degree. Three days after leaving college, in 1940, he joined JC Penney on the retailer's management trainee scheme, where he picked up some of the traits that were to characterise his business life, including his penchant for "managing from the floor". He was paid $75 a month.

When the US entered the Second World War in 1942, Walton joined the army intelligence corps and when fighting ended, he borrowed $20,000 from his father-in-law and used his own savings of $5,000 to buy a store in Newport, Arkansas. He quickly proved his business acumen by snapping up a women's lingerie distributor two years later, when rayon women's underwear was becoming all the rage.

Walton had to sell his Newport store after failing to renew the lease, but he did not let the setback slow him down. He snapped up another in Bentonville and renamed it Walton's Five and Dime. By the end of the Fifties he had more than a dozen stores across Arkansas, Missouri and Kansas. But the first to be branded Wal-Mart – a name created by Walton's assistant Bob Bogle – did not open until July 1962 in Rogers, Arkansas. It was an instant hit but the second, launched two years later, nearly ended in disaster. Opening in a heatwave, the store soon reeked of manure from donkeys been hired for children's rides.

The company officially incorporated as Walmart Stores in 1969 and the following year, Walton raised $5m by taking the company public on the New York Stock Exchange. The chain rapidly expanded in the 1970s and 1980s, opening its 1,000th store in 1987, and Walton lived to see it overtake Sears in 1991 to become the largest retailer in the US. He died in 1992 as the richest man in America, though he still drove a battered pick-up truck and made a habit of getting $5 haircuts.

Big Boys: China Mobile

Until just over a year ago, Gong ­Kangshun spent much of his life trekking over the mountains around his remote village in south-west China. It isn't easy to make a living in Xiuxi, a tiny settlement of 58 families deep in Aba county, Sichuan. Gong grows crops on a small plot and sells rare fungi found on the steep slopes nearby. Many young people, including his brother, leave to find work in the factories and shops of China's east.

But a single purchase has shortened his working hours and sent his income soaring – by helping him to find buyers for his fungi. It has even improved his relationships with family and friends. "I'd panic without my mobile phone," the 35-year-old admits.

Across China, tens of millions have similar tales to tell. Many had never enjoyed phone access until recently. Now, for as little as £20, they can buy a handset, slot in a pre-paid sim card, start calling – and change their lives.

Most, like Gong, can thank one firm: China Mobile. With more than 70% of the domestic market it has 518 million subscribers; more than any other mobile carrier on the planet.

It is the world's largest phone operator by market value and the largest Chinese company listed overseas. Its work on 4G technology and its interest in foreign acquisitions suggest its international profile may soon grow.

Already the company's influence is rippling out across the world, almost unnoticed. The rapid spread of mobiles facilitated by the company's high-speed network roll-out, is both a product of China's aggressive development and a contributor to it – accelerating the pace of life and business, shrinking distances.

Some activists are enthusiastic about the potential for mobiles and the internet to expand the flow of information in a country with heavy censorship. They point to cases where camera phones have captured and shared images of unrest or official abuse.

The authorities certainly seem to be aware of the potential – Chinese social networking sites are strictly controlled and overseas services such as YouTube are blocked. In restive Xinjiang text messaging was turned off after vicious ethnic violence. The authorities also use mobiles for everything from political education to monitoring individuals.

The social and political effects of new technology are rarely straightforward, but for most people, mobiles are simply a part of their life. Whether a highly-paid Shanghai ­executive, or an independent farmer-cum-trader such as Gong, no one can afford to be without a phone – or a signal. China Mobile's 500,000 base ­stations now cover 98% of the population. You can call home from city subway trains, distant fields, or the peak of Mount Everest.

"If you have a requirement, we will have coverage," pledged the firm's chairman and chief executive Wang Jianzhou, who has more than three decades of experience in the sector.

"When we started this business we thought very few people would use mobile phones – only the rich," he said. Now he is dissatisfied with a penetration rate of 57%. "I think every adult should have at least one mobile … they are an extension of human ears, eyes and mouths."

Before the network reached Xiuxi, in late 2008, Gong used the phone perhaps twice a month. Each time he would walk for an hour to the nearest landline to call traders interested in buying the valuable "caterpillar" and "sheep stomach" fungi used in Chinese medicine.

"Now, on a busy day, I might make 20 calls," he said. "I can contact buyers in Chengdu and Shanghai. I can do business sitting at home and buyers can reach me, too."

News from outside

His income has risen 50%, to 20,000 yuan (£1,820). And instead of walking seven hours a day to find the fungi collectors, he can call and ask them to deliver.

In his spare time, he chats to his younger brother, a chef in Zhejiang province who comes home at most once a year. Villagers hear a lot more news from the outside world these days – even Gong's 14-year-old son has his own phone. In 1997, there were just 10 million mobile users in China; by 2005, China Mobile had 240 million. Since then it has more than doubled.

The government pushes all carriers to serve the poorest. But since taking charge at China Mobile in 2004, Wang has shown sceptics that focusing on rural areas is a viable business strategy.

"Many analysts and investment bankers told me: never go to rural areas because they are low revenue. You will not make a profit," Wang said, in an interview at his spacious but low-key office in the company's headquarters on Beijing's Financial Street.

"I didn't believe that … with fixed lines, providing rural services is very, very difficult and expensive. [We have] low average revenue per user – but also low costs."

With a penetration rate of just 37%, there is plenty of room for growth among China's 700 million rural population. And there is plenty of demand. In Yangcun county, close to Beijing, Chen Fengmei anxiously scrolls through her latest text message: advice from officials on how the day's weather will affect her tomato crop. Another villager, Li Chunyu, checks the latest market prices for his pigs, no longer needing to trust middlemen or to give them a cut of his profits. "I never need to go anywhere. I can stay on the farm and find out everything," he said.

Some wonder whether China Mobile's success is down to business acumen or simply that the Chinese government owns a stake of more than 74%. Public investors hold the rest – the firm is listed in New York and Hong Kong, where it is technically domiciled.

"We are all wondering whether China Mobile really has the mojo, or whether whatever position it has is really a government favour," said David Wolf of corporate advisory firm Wolf Group Asia. "I think China Mobile would argue they have been victims of disfavour in recent years … the fact the company didn't simply implode suggests a lot of good inside the organisation."

In 2008, officials reorganised the telecoms sector, strengthening competition and awarding the firm the least mature of the 3G standards.

China Mobile had previously snapped up 83% to 88% of new subscribers, said Mark Natkin, managing director of Marbridge Consulting, a Beijing-based telecoms and IT specialist. As its rivals settled down, that share rose. But by October 2009, it had fallen to 56%.

"Now there are three players and the market is very, very competitive," Wang said.

"We think its normal that we have a reduced share of new subscribers. But the total market still has big potential." The costs of introducing 3G and the impact of the global downturn contributed to the firm's only fall in profits for a decade, in the second quarter of 2009. Although profits have rebounded, the slight year-on-year rise to 28.6bn yuan in the third quarter was less than analysts had predicted.

Last week also saw unwelcome news when China Mobile sacked its vice-chairman Zhang Chunjiang, citing alleged serious financial irregularities. He had earlier been sacked by the parent company, according to state media. China Mobile said his removal would have no material effect on the business; reports ­suggest the claims relate to Zhang's ­previous job.

The company's mid to long-term prospects depend on customers like pig farmer Li making more frequent and longer calls and using data services – as Wang tacitly acknowledges when he remarks that "we hope all mobile phones will become smart phones".

Li's 20 to 30 calls a day bring in little income for China Mobile; perhaps 2,000 yuan (£180) a year. Even that is double the average. "I know you can use mobiles for other things besides calls and texts, but I don't know how," he confided. "Sometimes I look at their screens and feel a little dizzy."

The good news for China Mobile is that his children and their friends are using their phones to browse the web, play games and watch videos. But customers may be tempted to turn away from the firm as they trade up. The company is heavily promoting its 3G service, launched last January and in November, almost 3 million people used the network, which serves 70% of cities.

iPhone

Yet China Unicom, which launched its 3G network in October, is catching up fast, with a million users in its first month. China Mobile must fight off strengthened competition with the domestically-developed TD-SCDMA (time division synchronous code division multiple access) standard.

Some wondered if the firm missed a trick when it failed to reach a deal for the iPhone, now available through China Unicom. Wang says it is still negotiating with Apple and highlights a deal for a TD-SCDMA BlackBerry as "very big progress". Yet he is noticeably unenthusiastic about 3G.

"It's a very difficult job to operate ­TD-SCDMA because no other operator has used it before. But China Mobile has big experience in rolling out and maintaining networks," he said.

"It's difficult but we think we can reach our target. And TD-SCDMA does have advantages – easy migration to LTE."

TD-LTE (long term evolution) is a 4G standard offering super-fast downloads, which China Mobile will trial at the World Expo in Shanghai this year.

Wang foresees 4G products on the market within three years and says overseas operators are already interested. "It's expected to be a much stronger competitor," Natkin confirmed.

"TD has always been playing catch-up. In the 4G arena China is actually at – if not ahead of – the starting line."

China Mobile hopes to extend its reach in other ways. In 2007 it bought Pakistan's Paktel, now renamed ChinaMobile Pakistan and branded as Zong.

Wang describes the telecoms market there as "very competitive" and "difficult". But he sees the purchase as a first step in international expansion and his eyes gleam at the prospect of snapping up other overseas carriers.

The chief executive, who spoke fluent English throughout the interview, has fostered relationships with his peers abroad and watches them closely.

"We are trying to find other opportunities for acquisitions, but it's not easy. We are waiting for ­opportunities whether in ­developed or developing countries," he said.

Big Boys: Gazprom

The next cold war may well take place in a room that looks oddly like a scene from the last one. Along one wall of a spartan control centre in Moscow, a large map of Europe is projected on computer screens. Visitors have to pass through five rings of security to reach this spot, but the few outsiders who make it through are proudly shown a display of raw power. From underground facilities deep inside Siberia, a series of trajectories are plotted on the computer screens – aiming west toward Europe's largest conurbations. An engineer explains how easy it would be to turn out the lights in a foreign city with the click of a button on his desk.

Fortunately, this is not missile command but the control room of Gazprom, the world's largest gas producer and a flagship of Russian capitalism. The plotted lines show the route of major pipelines – coloured green because they are full of natural gas flowing at more than 30km an hour. Yet the threat of plunging neighbouring states into nuclear winter remains a real one. This time last year, actions taken in this room threw much of Europe into panic. A dispute between Gazprom and Ukraine over unpaid gas bills culminated in a decision to turn off transit pipelines that also feed much of central and eastern Europe – shutting down heating and electricity generation for millions during one of the worst cold snaps for years.

Now, with the continent again in the deep freeze and running low on gas, the power of Russian energy companies is once more in the spotlight. Russia has already sparred with Belarus over oil supplies this winter in a dispute that also threatened to disrupt energy exports to Europe. Gazprom and the Ukrainian government are hoping to avoid a repeat of their 2009 pipeline brinkmanship for now, but critics claim Moscow is never far away from using its energy might to exert political influence over its neighbours.

Even Britain received a taste of how fragile Europe's gas supply infrastructure can be last week when a drop in pipeline pressure from Norway forced authorities to suspend supply to certain designated industrial users to protect homes and offices. Our reliance on imported gas is set to rise rapidly as UK reserves near depletion in less than eight years at current extraction rates.

Increasingly, one company dominates not just existing European supply but, more importantly, its future sources. Gazprom has so much natural gas under the tundra of Siberia that its energy resources are equivalent to all the oil and gas fields owned by western energy companies put together. At 33.1tn cubic metres, its gas reserves are 55 times greater than Britain's North Sea alone. In fact, only the Saudis, with their huge desert oilfields, can match Gazprom's total energy reserves. Even then, oil exports from Russia recently overtook those of Saudi Arabia.

The geopolitics of energy are well rehearsed but relatively little is known about key corporate players such as Gazprom, which rarely grants access to foreign media. Today's Guardian interview is the first in a five-part series published this week, which looks at some of the key international companies likely to shape world affairs over the coming decade. Some, like Gazprom or the mining giant BHP Billiton, control the dwindling raw materials most likely to prove strategic flashpoints.

Tomorrow we turn to China Mobile, straddling the two most powerful global trends: the rise of China and digital communications, while General Electric and Wal-Mart are examples of how powerful multinational corporations have survived the financial crisis to retain their global influence.

Not all are in good shape. 2009 was a torrid time for businesses everywhere. Gazprom has had a particularly bad year as its reputation for reliability plummeted after the Ukrainian shutdown and the recession caused Europeans to consume far less gas.

But as energy prices bounce back fast (oil, which acts as a benchmark for gas, has jumped swiftly to $80 a barrel again) Moscow is recovering the swagger of a city swimming in easy money.

A few miles south of its glitzy ­boutiques, the headquarters of Russia's largest company is more forbidding: a chilly blue neo-Stalinist skyscraper known as "The Candle" houses a bureaucracy that serves as a constant reminder of Gazprom's Soviet past. Still 50.1% owned by the Russian state, its managers are nonetheless at pains to stress its independence from government foreign policy. "We don't do politics," insists Vladimir Mikheev, an executive from the export arm who complains of the west's "Gazpromophobia".

But his boss, Gazprom's official public representative, Sergei Kupriyanov, is blunt about why the state keeps such an iron grip: "Most of the territory of the Russian Federation lies in rather uncomfortable climatic conditions – much of the year it is freezing, which means any rupture of the gas supplies will immediately lead to catastrophe."

Russia knows about energy's strategic importance better than most. Its citizens rely on heavily subsidised gas from Gazprom's monopoly and months of sub-zero temperatures make energy security a matter of life and death.

As last year's clash with Ukraine showed, it also makes for an unusually powerful form of economic weapon. Opinion remains divided over who was really to blame for shutdown, but the show of strength appears to have worked: five years after Ukraine's so-called Orange revolution, both candidates standing for election in next weekend's presidential election are now broadly pro-Moscow.

Gazprom is more than just strategically useful, contributing 20% of ­Russia's total state budget in taxes, and Kupriyanov stresses its benefits to other shareholders too: "We also have private investors who are expecting returns and that means we have to be transparent".

Unfortunately, market rules do not always apply as evenly to foreign investors in Russia, who remain scarred by a series of assets confiscations and forced disposals. Only the vast riches at stake keep overseas money flowing to invest in vital new projects such as the Yamal development scheme in Siberia or Nord Stream pipeline to Germany. Chief executives from two western energy firms who agreed to speak off the record about Gazprom conceded that they faced little choice but to continue dealing with Russia despite misgivings about the reliability of its contract law.

Gazprom's emphasis on "shareholder transparency" does little to clear up questions about its ownership either. Rumours persist that senior government figures have sizeable indirect holdings. "We haven't seen any traces," says Kupriyanov when asked whether Vladimir Putin has a personal economic interest in the company.

To Gazprom's foreign shareholders, close links with the Kremlin are a mixed blessing: protecting their asset but holding back true reform. "The government is only interested in two things: political power and cheap domestic gas," says one Moscow-based fund manager. "There is no incentive to make the business more efficient and profitable so they just take more for themselves."

For the economy as a whole, energy may be too much of a good thing. Roland Nash, head of research at Moscow investment bank Renaissance Capital, warns that over-reliance on booming energy prices may hold back Russia's otherwise strong prospects.: "The economic crisis was just the wrong length of time: long enough to undermine small companies and the emerging middle class but too short to force government into reform. Russia needs to diversify away from oil and gas."

For now though, Gazprom is in the vanguard of Russia's new energy imperialism. British consumers too may see more of "the big G". Gazprom Marketing and Trading, its overseas arm, sells gas to commercial clients such as Chelsea football club and has a target of expanding its UK market share from 2% to 10%. Kupriyanov also reveals ambitions to sell to residential customers one day. "Yes, definitely," he says. "The British market offers ample opportunities of developing downstream operations – we appreciate the fact that it's a liberalised market and all of the infrastructure is in place."

Last time Gazprom made moves on the residential market – by exploring a takeover of Centrica – it prompted intense political suspicion and even the threat of a UK government veto. Now it hopes its softly-softly approach with commercial customers will ease fears. "You all thought there would be bear scratches on the gas pipes but the headlines cried wolf," says Kupriyanov. "Our entry to the UK market was exemplary."

A bigger factor in containing Europe's "Gazpromophobia" is likely to be whether the company cuts off any more pipelines. Will there be another crisis this winter? "We have good reason to believe crisis can be averted but it is never easy to give a 100% guarantee," concludes the man from Gazprom.

Krugman On Samuelson

There have been hedgehogs; there have been foxes; and then there was Paul Samuelson.

I’m referring, of course, to Isaiah Berlin’s famous distinction among thinkers – foxes who know many things, and hedgehogs who know one big thing. What distinguished Paul Samuelson as an economic thinker, making him like nobody else, past or present, was the fact that he knew – and taught us – many big things. No economist has ever had so many seminal ideas.

With a little help from Google Scholar, I’ve compiled a list of some of Samuelson’s big ideas. I say “some” because I’m sure it’s not complete. But anyway, here are eight – eight! – seminal insights, each of which gave rise to a vast and continuing research literature:

1. Revealed preference: There was a revolution in consumer theory in the 1930s, as economists realized that there was much more to consumer choice than diminishing marginal utility. But it was Samuelson who taught us how much can be inferred from the simple proposition that what people choose must be something they prefer to something else they could have afforded but don’t choose.

2. Welfare economics: What does it mean to say that one economic outcome is better than another? This was a blurry concept before Samuelson came in, with much confusion about how to think about income distribution. Samuelson taught us how to use the concept of redistribution by an ethical observer to make sense of the concept of social welfare – and thereby also taught us the limits of that concept in the real world, where there is no such observer and redistribution usually doesn’t happen.

3. Gains from trade: What does it mean to say that international trade is beneficial? What are the limits of that proposition? The starting point is Samuelson’s analysis of the gains from trade, which drew on both revealed preference and his welfare analysis. And everything since, from the distortions analysis of Bhagwati and Johnson, to the generalized comparative advantage concepts of Deardorff, has been based on that insight.

4. Public goods: Why must some goods and services be provided by the government? What makes some, but only some, goods suitable for private markets? It all goes back to Samuelson’s 1954 “Pure theory of public expenditure”.

5. Factor-proportions trade theory: Every time we talk about resources and comparative advantage, every time we worry about the effect of trade on income distribution, we’re harking back to Samuelson’s work in the 1940s and 1950s: he took the vague, confusing ideas of Ohlin and Heckscher, and turned them into a sharp-edged model that defined most trade theory for a generation, and remains a key part of the modern synthesis.

6. Exchange rates and the balance of payments: A bit of personal storytelling: Most people who work in international trade tend to lose the thread when the discussion turns to exchange rates and the balance of payments; as I’ve sometimes put it, the real trade people regard international macro as voodoo, while the international macro people regard real trade as boring and irrelevant (and when I’m in a sour mood, I suggest that both are right). But I was saved from all that when I read Dornbusch, Fischer and Samuelson 1977 on Ricardian trade, which among other things showed how trade and macro, exchange rates and the balance of payments, the possibility of gains from trade but also the possibility of unemployment, all fit together.

What I learned later was that Samuelson grasped these issues much earlier, although the neatness of the DFS formulation surely helped get them across. Here’s what he wrote in his 1964 paper “Theoretical notes on trade problems”: “With employment less than full and Net National Product suboptimal, all the debunked mercantilist arguments turn out to be valid.” And he went on to mention the appendix to the latest edition of his Economics, “pointing out the genuine problems for free-trade apologetics raised by overvaluation”. The solution, of course, was to end the overvaluation rather than restrict trade; Samuelson understood that good macroeconomic policies are a prerequisite for good microeconomic policies. More on that in a minute.

7. Overlapping generations: Samuelson’s 1958 overlapping-generations model of borrowing and lending is the ur-framework for thinking about everything from Social Security to household debt. It’s hard to imagine macro without it.

8. Random-walk finance: Samuelson’s demonstration that forward-looking investors imply randomly fluctuation prices is the starting point for much of modern finance.

As I said, I’m sure there’s more. But notice that any one of these ideas, all by itself, would have been considered enough to make Samuelson a great economist. Nobody, but nobody, has done this much.

So how did he do it? By being smarter than anyone else, of course. But there were also, I’d suggest, two aspects of Samuelson’s intellectual makeup that empowered his intellectual quest.

The first was his playfulness. Read Samuelson’s work, and what you get is the sense of a man who, rather than sitting down to write Very Serious Papers, was having fun with ideas. Sometimes the playfulness boiled over into inspired silliness. Look at footnote #9 in his overlapping-generations paper, where he writes: “Surely, no sentence beginning with the word ‘surely’ can validly contain a question mark at its end? However, one paradox is enough for one article …” It seems clear to me that Samuelson’s playfulness liberated his imagination, and fueled his creativity.

And yet Samuelson was at the same time always grounded in reality. No ivory-tower academic he: he remained deeply interested in events and policy, he played the markets, he never let his theories override his sense of the way things actually were.

Which brings me, finally, to Samuelson’s great contribution to economic policymaking: the Keynesian synthesis. Samuelson was, intellectually, a Depression baby: he came of intellectual age in an environment of mass unemployment. His textbook brought Keynesian thinking to a broad audience. And he never forgot that markets can malfunction terribly. How, then, could economic theory on the virtues of markets be of any real-world use?

Samuelson’s answer was that good macro policies come first. Monetary and fiscal policy had to be employed to assure more or less full employment (and as I’ve pointed out elsewhere, Samuelson appreciated the limits of monetary policy in a way that seems incredibly prescient today). Exchange rates had to be adjusted to assure competitiveness. Only then could the virtues of markets come into play.

It was a lesson that too many economists forgot, as they immersed themselves in the lovely math of perfect markets. But Samuelson’s realism – his understanding that markets are great things, but need to be supported by government activism — has never seemed more relevant than it does now.

So let us praise Paul Anthony Samuelson, the incomparable economist. There has never been, and will never be, anyone to match him.

by Paul Krugman

Paul Samuelson (RIP)

Paul Samuelson, who died yesterday, aged 94, was probably the most influential American economist of the 20th century. Certainly, no thinker did more to turn economics from a scattered selection of ideas into a social science.

Paul Samuelson

What makes economies grow? When and why do companies choose to invest? Does international trade cost jobs? There weren't many big questions in economics that Samuelson didn't lend his brain to. He once boasted: "My finger has been in every pie." When they started a Nobel Prize for economics in 1969, they gave the second award to him.

As his friend Paul Krugman has commented:

"[M]ost economists would love to have written even one seminal paper - a paper that fundamentally changes the way people think about some issue. Samuelson wrote dozens: from international trade to finance to growth theory to speculation to well, just about everything, underlying much of what we know is a key Samuelson paper that set the agenda for generations of scholars."

Samuelson did much to bring maths into the subject - in The Foundations of Economic Analysis he showed his fellow economists how equations could help them predict how households and businesses would behave. Critics now would say the mathematical turn took the subject away from the real world - eventually giving economists too much faith in abstract models, like the complex equations for estimating risk which have lately got the financial markets into so much trouble.

But if there's a link between Samuelson and our current troubles - and frankly I think it's a bit mean to draw one - it's a link that goes to the core of all of modern economics. For, whatever economics is today, for good and bad, it is, in no small part thanks to him.

His most famous student was a recently elected John F Kennedy, to whom he gave his first economics class on a beach near the Kennedy compound in New England in 1960.

With his seminal textbook - Economics - Samuelson brought the ideas of John Maynard Keynes to generations of students around the world.

As I discussed in my recent Analysis programme, ( The Economist's New Clothes ), some of Keynes insights - especially about the nature of uncertainty - got lost in Samuelson's effort to incorporate Keynes into the mainstream. But had it not been for Samuelson, Keynes might not have found his way into the standard textbooks at all.

Samuelson was lucky to have come to the subject when he did - when modern economics was just beginning. It would be all but impossible for one individual to leave such a mark today. "I don't care who writes a nation's laws - or crafts its advanced treatises" - he once said. "if I can write its economics textbooks".

by Stephanie Flanders

Black Swan

Taleb says rich should not pay more tax to help the poor

A US academic billed as David Cameron's new intellectual guru takes a Darwinian approach to economics and says it is wrong for the rich to pay higher taxes to help the less well-off.

Nassim Nicholas Taleb, a professor of risk engineering at New York University, attacked Barack Obama for increasing his tax bill as part of a series of anti-recessionary measures.

The remarks by Taleb, the conservative author of the book Black Swan, were made during an appearance with Cameron at the Royal Society for the Encouragement of Arts, Manufactures and Commerce (RSA) on Tuesday.

Labour attacked Cameron, who says Taleb's work confirms his own prejudices, because the "eccentric" academic says economic crashes are a good thing.

In some of his most provocative remarks at his appearance with Cameron, the Lebanese-American academic criticised Obama for increasing his taxes as he harked back to Darwin's theory of evolution.

"I happen to do OK. I am paying more taxes," Taleb said. "How can you have evolution if those who do the right thing have to finance those who did the wrong thing? If you are making money in 2009 – that means you have a robust business in the cycle – you are paying more taxes. If you are losing money in 2009 you get a bigger tax break. It is the opposite of everything I believe in."

Taleb has become a conservative folk hero following the success of his book, which examines the phenomena of "Black Swans" or "low-probability, high-impact events" that can have a major impact on the world.

Cameron praised Taleb and said his book had confirmed his own prejudices. "I very much enjoyed Black Swan. I am trying to come to terms with Black Swan thinking and what it might mean for politics … The danger with reading somebody's book is that it just confirms some of your prejudices and that is why you like it," the Tory leader said.

But Taleb has beliefs which are outside the political mainstream in Britain. These include:

• Economic crashes are a good thing. "I like crashes. I just like the world to be robust with them. The world is not robust. In 2000 Silicon Valley was very robust."

• Debt is nearly always dangerous. "Christianity early on did not like debt. Islam banned debt. It is not without reason. The Romans had problems with debt. A lot of wars were caused by debt. So debt was not necessarily a good thing. You say in moderation. But we don't know what moderation is."

• Climate change may not be man-made. "I'm a hyper-conservative ecologically. I don't want to mess with Mother Nature, OK. Even I don't believe that carbon thing is necessarily anthropogenic [man made], right. I just don't want to mess with Mother Nature. I don't understand Mother Nature. It is much more intelligent than us. It has been around for longer than anything else." Cameron made clear he disagrees with Taleb on this.

Taleb yesterday criticised the British press for the reporting of his remarks, saying they may have become "lost in translation". His views on economic crashes had been distorted, he said. "I said that free markets generate fads, crashes, massive movements. Attempts to control the cycle proved futile – what we need is citizens to become robust to them, to be immune to their impact. My point is that we cannot predict Black Swans, but we know their impact and can be prepared for them. Again taken backwards: 'Taleb loves crashes'. This is incompetent journalism in its most insidious form."

Climate experts and bank risk managers have both failed us

I'm not a denier. We just do not know the consequences of our actions

I am honoured to see my conversation with David Cameron at the RSA covered in your paper (Cameron's guru says rich should not pay more tax to help the poor, 20 August). However, your reporting was in complete reverse to my positions on three subjects.

First, you say I believe that "Climate change may not be man-made"; and Lucy Mangan describes me as a "climate-change denier" (This week, 22 August). In fact, ecologically I am hyper-conservative (meaning super-Green), and I am one of the authors of the King of Sweden's recent Bönhamn declaration on attitudes to climate change. My position on the climate is to avoid releasing pollutants into the atmosphere, regardless of current expert opinion. Climate experts, like banking risk managers, have failed us in the past in foreseeing long-term damage. This is an extension of my general belief: "Do not disturb a complex system." We do not know the consequences of our actions (this idea also makes me anti-war), and I have explicitly stated the need to leave the planet the way we got it.

Second, I was portrayed as someone who "loves crashes". By coincidence I spoke at the same venue, the RSA, two and a half years earlier – well before the current crash – as part of my crusade against the risk of financial collapse. I find it depressing that the British public could have saved a trillion pounds and hundreds of thousands of jobs had these hidden systemic risks been addressed.

My position is that a robust system needs to produce frequent crashes, with citizens immune to them, rather than infrequent total collapses which we cannot cope with. By constraining cycles and assuming "no more boom and bust" (as your current government did) you end up with a very large bust – and I am sure that I do not need more events like the recent crisis to prove the point.

Thirdly, I was quoted as saying "How can you have evolution if those who do the right thing have to finance those who did the wrong thing?" But this is not the same as saying "[the] rich should not pay more tax to help the poor", as your headline stated. I spent 13 years fighting bankers' bonuses (when no one else did) and am currently crusading for past payments to be clawed back. I have also shown how regular taxpayers have been financing millionaire bankers' bonuses: "socialism for the losses, capitalism for the profits". We are still financing those who got us here, with tax hikes on those who do the right thing, and larger tax breaks for those who blew us up. Companies who made mistakes and weakened the system are being subsidised by the countercyclical ones who make it more robust.

Nowhere do your articles discuss my central idea, that the risks that were in the system two years ago are still with us now, and that unless we lower debt to "definancialise" the economy (instead of increasing deficits through stimulus) we face more risks of blow-ups. With the same distortion of views one could easily make Karl Marx an apologist of capitalism and Adam Smith a promoter of communism.

The Elite in the Mountain

The knives are out for Davos Man. But the alternative is much more alarming

by Timothy Garton Ash

The biggest danger is not a surfeit of the globalism embodied by this forum, but the strengthening of economic nationalism

Davos Man, "the most highly evolved mammal on the planet", should say sorry for the economic mess he's got us into, according to a trenchant little piece in the Times by the Conservative MP and journalist, Michael Gove. Scanning the list of participants in this year's annual meeting of the World Economic Forum, I notice the name of the Conservative party leader, David Cameron. If memory serves, Cameron was a Davos Man last year too. So clearly Gove is calling on his party leader to say sorry.

There is something both predictable and ridiculous about the blame game being played, with politicians blaming bankers, bankers blaming regulators, regulators blaming politicians, and so on. If, as Barack Obama famously remarked to Joe the Plumber, we need to spread the wealth around a bit more, we also need to spread the blame around a bit more - and more discriminatingly.

Those of us who are not financial experts are only beginning to understand what went wrong in what George Soros has described as a super-boom followed by a super-bust. (If you want a crash course - the term is doubly apt - I recommend a special report on finance in the latest Economist and a recent lecture by the head of Britain's Financial Services Authority, Adair Turner, available on the FSA website.) On the evidence we have so far, the following could plausibly be asked to interrogate themselves on their share of the responsibility. With the exception of the first and last categories, the words "some of the" should be inserted before each heading. My list is, of course, merely indicative.

Crooks. Bernie Madoff was (it appears, subject to the finding of the courts) a crook, a fraudster and a confidence trickster. His like will always be with us. The relevant question is how he was able to get away with it for so long and on such a scale.

Bankers. Some highly respected and law-abiding bankers took huge gambles and made horrible miscalculations at our expense, themselves walking off with multimillion bonuses while leaving shareholders and taxpayers to pick up the tab. Others did not.

Regulators. There's a lot of failure to go around in this category. "Is that a typo?" one official at the US Securities and Exchange Commission was said to have asked, when faced with the $50bn estimate for Madoff's losses. "Isn't that number meant to be $50m?"

Politicians. It's all very well for politicians to rail against "Wall Street" and the "banksters", but this happened on George Bush's and Gordon Brown's watch. "The cheerleaders of finance," writes the Economist's Edward Carr in his report, "were unwilling to admit that houses were too expensive and risk too cheap." Yes, but so were the cheerleaders of British and American politics.

Economists. Here's a guild from which we might usefully hear a little more self-criticism - especially from the quantitative economists whose mathematical models helped to lead investment bankers astray. In what sense can economics still claim to be a science if its predictive capacity is so low? Imagine Newtonian physics when apples start going upwards.

Journalists. Yes, a few warned, as did a few exceptional economists like Nouriel Roubini; but it's only now that your average reader of the business pages is in a position to understand how risky his or her investments were. Did business journalism fail us?

We, the people. Some of us, anyway: piling up household debt, especially in Britain and America, on the back of inflated house prices that gave the illusion of security; not asking sufficiently probing questions about where our pension funds were invested.

The system. Blanket charges against some denatured, depersonalised "system" usually betray incoherence wrapped in indignation. But there is a sense here of a global financial system that had become so large, complex and untransparent that it was beyond the capacity of even the largest actor in the markets to understand, let alone control. And one in which apparently rational decisions by most individual participants produced a result collectively damaging for all.

The first conclusion that I draw is about knowledge and transparency. What many of these categories have in common is that those involved, whether bankers, regulators, politicians, journalists or ordinary pension fund-holders, did not see and understand enough about what was really going on. There were too many black boxes and unopened Russian dolls - such as those repeatedly repackaged "collateralised debt obligations". Even Soros, the legendary master investor, is said to have been wary of derivatives because he didn't "really understand how they work". Now you may say: "Well, if Soros couldn't understand, how on earth do you expect me to?" But you can also turn that round the other way and say: "Follow the Soros rule - don't invest in anything you don't understand." If enough individual and institutional investors made that paradigm shift, this would have the beauty of using market mechanisms to discipline markets. Offer more transparency or you don't get my money. This is not a substitute for better regulation by national governments and international institutions, but would be a formidable complement to it.

My second conclusion brings us back to Davos Man, a term of art coined by the late Samuel Huntington to describe a member of a new global elite, liberated from national loyalties and contemptuous of national boundaries - a kind of ruthless cosmopolitan. Davos Man was always what social scientists call an "ideal type". In practice, Davos is a meeting place of diverse business, political and media elites. Many of the multinational companies, banks and media concerns represented here do have global business plans and strategies, yet even they often remain rooted in a national business or media culture. CNN is global but also very American; BBC World is global but also quite British, Nestlé is global and thoroughly Swiss.

As for the political leaders who come to Davos, most of them are still firmly based in national politics. Up here, on the magic mountain, they present their national views and interests to an international audience in the most cosmopolitan terms - as the Chinese premier Wen Jiabao and the Russian premier Vladimir Putin did yesterday. But they always remain acutely conscious of how their words will play through national media to national publics back home.

The biggest danger to the world's economic system is not a surfeit of Davos-type internationalism; it's the strengthening of economic nationalism. Davos has always been a small part of a larger effort not to supplant international competition but to place it within a stronger framework of international co-operation.

Now we are at a crossroads. One road leads back to economic nationalism, protectionism and beggar-thy-neighbour policies. Another leads forward to more international co-operation, including more regulation and transparency. Without a conscious effort, the dynamics of both democratic and undemocratic politics, which remain national, will lead us down the former road. Inside Davos Man, there is his predecessor and possible successor always struggling to get out. If you don't like what you've seen of Davos Man, wait till you see Nationalist Man get to work.

There Is Hope

Despite the persistence of Africa’s natural and man-made horrors, the latest trend is cheeringly positive

UNTIL the past few weeks of global turmoil, Africa’s doughty band of boosters were feeling they at last had something to smile about. After four decades of political and economic stagnation that kept most of their 800m-odd people in poverty and gloom, the continent’s 48 sub-Saharan countries have been growing for the past five years at a perky overall rate of 5% or so. If they maintain this pace or even bump it up a bit, Africa still has a chance of taking off. Now, with commodity prices likely to fall, world markets sure to shrivel and Western aid set to plateau or even dip, Africa, though more isolated from the global economy than other parts of the world, is bound to suffer from its ill breeze. But maybe not as badly. Once described by this newspaper, perhaps with undue harshness, as “the hopeless continent”, it could yet confound its legion of gloomsters and show that its oft-heralded renaissance is not just another false dawn prompted by the passing windfall of booming commodity prices, but the start of something solid and sustainable. Despite its manifold and persistent problems of lousy governments and erratic climates (see article), Africa has a chance of rising.

A long way to go

Pessimists have plenty of evidence to call on. There have been spurts of growth before, especially when commodity prices have risen sharply. But when those prices have fallen, growth has fizzled. Africa’s few recent successes tend to be set against a previous history of disaster. Ghana, for instance, is often cited as one of the most hopeful cases, but at independence in 1957 it was nearly as well off as South Korea; now, despite its recent bounce, it is still some 30 times poorer in wealth per person. The lively growth in several other hopeful spots—for instance, Mozambique, Rwanda and Uganda—must likewise be set against the horrors of their quite recent past. In fact, the sole country in Africa with a record of consistently strong political and economic progress is Botswana.

Many basic indices remain grim. Africans’ lifespan is still declining, owing largely to the scourge of AIDS, 60% of whose worldwide victims are African. A recent World Bank paper was guarded as to whether the African surge would last. Most of the quicker growth, it notes, is due to soaring revenues enjoyed by just eight sub-Saharan African countries blessed with oil. A third of Africa’s countries—by far the highest proportion in any continent—are trapped in civil wars or cycles of violent unrest. The two biggest in area, Sudan and Congo, are ravaged by strife and misgovernment. Zimbabwe, once a jewel of southern Africa, is still a nightmare, despite a recent agreement to forge a government of national unity. The World Bank paper bemoans Africa’s standards of governance.

Perhaps even more worrying, in the past year or so, three of Africa’s leading countries have had heavy setbacks. Nigeria’s election was the shoddiest since the country’s return to civilian rule in 1999; Kenya, east Africa’s hub, succumbed to ethnic mayhem after a disputed poll; and South Africa, easily the sub-Saharan continent’s leading power in every way, producing one-third of its entire GDP, has entered an ugly phase of politics, authoritarian if not yet undemocratic, just when it should be setting an example of tolerant pluralism to the rest of Africa. The recent violence against black foreigners is a reminder that the bottom third of South Africans still face gnawing poverty.

All the same, the boosters’ case is stronger than before. Political freedom, however patchy, is commoner than it was a generation ago. Two-thirds of African countries now limit presidential terms; at least 14 leaders (with a few bad exceptions) have felt obliged to step down as a result. Multi-party systems, however fraught, are more usual; the notion of political accountability and choice is more widely accepted. The media, partly because of the internet, are livelier. The latest index of African governance funded by Mo Ibrahim, a Sudanese-born telecoms mogul, suggests a general improvement.

The presumption of state control under the rubric of “African socialism” (an illusory third way) has been junked. Most local leaders accept that Africa must join the global economy to prosper, however shaky it looks right now. The mobile-phone revolution has hugely helped Africans, especially poor peasants and traders. Banking systems are modernising and mortgages more readily offered to an emerging middle class. Businessmen around the world have been investing more, especially in Africa’s better-governed countries. Even those that lack natural wealth have grown a bit faster. The spectacular advent of China into Africa’s market is, on balance, a bonus.

Another report, co-sponsored by the World Bank, gently dissents from the certitudes of the “Washington consensus” that pure free marketry could cure all, and that Africa must just open up to trade, tighten its fiscal strings and sell off the state. One size in varied Africa does not fit all. The rich world could, for instance, offer time-limited trade preferences.

Feel each stone as you cross the river

Other devices could help too. America’s Africa Growth and Opportunity Act of 2000 has spurred African exports by dropping American tariffs. Another promising new mechanism is the Extractive Industries Transparency Initiative, a voluntary code that a score of African countries have adopted, with governments and foreign firms accounting openly for their dealings—in contrast to mineral-rich Congo, whose government ludicrously claimed in 2006 to have received only $86,000 in mineral earnings. The creation of national savings funds in commodity-flush countries is another good idea. On the farming front, issuing individual land titles, no easy task in a continent where much land is still communally held, is another. Pragmatism often beats dogma.

So Africa has a rare chance to break out of its poverty trap. It would be hard even if governments were honest and efficient. Sadly, most are still not. Amid all the grim drawbacks of climate, disease, illiteracy and ethnic division, bad and corrupt government is still by far the biggest. But the news overall is cheerier. And the rich world, troubled as it is, must never give up in its effort to help the poor one to stand on its own feet.

(from The Economist)

Turn Left for Growth

by Joseph E. Stiglitz

Both the left and the right say they stand for economic growth. So should voters trying to decide between the two simply look at it as a matter of choosing alternative management teams?

If only matters were so easy! Part of the problem concerns the role of luck. America’s economy was blessed in the 1990s with low energy prices, a high pace of innovation, and a China increasingly offering high-quality goods at decreasing prices, all of which combined to produce low inflation and rapid growth.

President Clinton and then-Chairman of the US Federal Reserve Alan Greenspan deserve little credit for this – though, to be sure, bad policies could have messed things up. By contrast, the problems faced today – high energy and food prices and a crumbling financial system – have, to a large extent, been brought about by bad policies.

There are, indeed, big differences in growth strategies, which make different outcomes highly likely. The first difference concerns how growth itself is conceived. Growth is not just a matter of increasing GDP. It must be sustainable: growth based on environmental degradation, a debt-financed consumption binge, or the exploitation of scarce natural resources, without reinvesting the proceeds, is not sustainable.

Growth also must be inclusive; at least a majority of citizens must benefit. Trickle-down economics does not work: an increase in GDP can actually leave most citizens worse off. America’s recent growth was neither economically sustainable nor inclusive. Most Americans are worse off today than they were seven years ago.

But there need not be a trade-off between inequality and growth. Governments can enhance growth by increasing inclusiveness. A country’s most valuable resource is its people. So it is essential to ensure that everyone can live up to their potential, which requires educational opportunities for all.

A modern economy also requires risk-taking. Individuals are more willing to take risks if there is a good safety net. If not, citizens may demand protection from foreign competition. Social protection is more efficient than protectionism.

Failures to promote social solidarity can have other costs, not the least of which are the social and private expenditures required to protect property and incarcerate criminals. It is estimated that within a few years, America will have more people working in the security business than in education. A year in prison can cost more than a year at Harvard. The cost of incarcerating two million Americans – one of the highest per capita rates in the world – should be viewed as a subtraction from GDP, yet it is added on.

A second major difference between left and right concerns the role of the state in promoting development. The left understands that the government’s role in providing infrastructure and education, developing technology, and even acting as an entrepreneur is vital. Government laid the foundations of the Internet and the modern biotechnology revolutions. In the nineteenth century, research at America’s government-supported universities provided the basis for the agricultural revolution. Government then brought these advances to millions of American farmers. Small business loans have been pivotal in creating not only new businesses, but whole new industries.

The final difference may seem odd: the left now understands markets, and the role that they can and should play in the economy. The right, especially in America, does not. The New Right, typified by the Bush-Cheney administration, is really old corporatism in a new guise.

These are not libertarians. They believe in a strong state with robust executive powers, but one used in defense of established interests, with little attention to market principles. The list of examples is long, but it includes subsidies to large corporate farms, tariffs to protect the steel industry, and, most recently, the mega-bail-outs of Bear Stearns, Fannie Mae, and Freddie Mac. But the inconsistency between rhetoric and reality is long-standing: protectionism expanded under Reagan, including through the imposition of so-called voluntary export restraints on Japanese cars.

By contrast, the new left is trying to make markets work. Unfettered markets do not operate well on their own – a conclusion reinforced by the current financial debacle. Defenders of markets sometimes admit that they do fail, even disastrously, but they claim that markets are “self-correcting.” During the Great Depression, similar arguments were heard: government need not do anything, because markets would restore the economy to full employment in the long run . But, as John Maynard Keynes famously put it, in the long run we are all dead.

Markets are not self-correcting in the relevant time frame. No government can sit idly by as a country goes into recession or depression, even when caused by the excessive greed of bankers or misjudgment of risks by security markets and rating agencies. But if governments are going to pay the economy’s hospital bills, they must act to make it less likely that hospitalization will be needed. The right’s deregulation mantra was simply wrong, and we are now paying the price. And the price tag – in terms of lost output – will be high, perhaps more than $1.5 trillion in the United States alone.

The right often traces its intellectual parentage to Adam Smith, but while Smith recognized the power of markets, he also recognized their limits. Even in his era, businesses found that they could increase profits more easily by conspiring to raise prices than by producing innovative products more efficiently. There is a need for strong anti-trust laws.

It is easy to host a party. For the moment, everyone can feel good. Promoting sustainable growth is much harder. Today, in contrast to the right, the left has a coherent agenda, one that offers not only higher growth, but also social justice. For voters, the choice should be easy.

Joseph E. Stiglitz, Professor at Columbia University, received the 2001 Nobel Prize in economics. He is the co-author, with Linda Bilmes, of The Three Trillion Dollar War: The True Costs of the Iraq Conflict.

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