The Economist - NOVEMBER 22ND-28TH 2014

12 Leaders

2 vert the Arak heavy-water reactor so that it produces less plutonium. Iran is also ready to turn the enrichment facility at Fordow, almost impregnable beneath a mountain near Qom, into an R&D site. The sticking point is Iran’s uranium-enrichment capacity, which, with the size of its stockpile of low-enriched uranium (LEU), determines how fast it can make the high-en- riched stu that goes into bombs.

The Russian option

America and its partners say that Iran’s needs for the Tehran Research Reactor and Arak, if it becomes a light-water reactor, can be metwith fewerthan 2,000 first-generation centrifuges— far fewer than the 10,200 now running and the 9,000 installed but not yet spinning. Fuel for the Bushehr nuclear power station can come from Russia. America wants constraints on Iran’s centrifuges to last for up to 20 years. Iran counters that it will not dismantle any of its centrifuges and that it needs more—to fuel Bushehr when a contract with Russia ends in 2021. Thatwould, itsays, take atleasta tenfold increase in itscapacity plus some new technology.

But there is room for compromise on the numbers. If Iran were to agree to send its LEU routinely to Russia to be made into fuel rods, which cannot easily be further enriched into bomb-fuel, its negotiating partners would agree to its keeping about half its operating centrifuges. The rest would be mothballed at a secure site monitored by nuclear inspectors. Iran’s research into newer, more e cient centrifuges, which could help it build a small secret enrichment plant (a big worry for Western spooks), would be rigorously monitored.

Japanese elections

Same race, same horse

The Economist November 22nd 2014

The world could give ground overthe length ofa deal. After, say, ten years, some constraints could relax in phases—though only if the International Atomic Energy Agency (IAEA) could certify that Iran was honouring the agreement. To that end, Iran would have to submit to a uniquely intrusive inspection regime. Lastly and crucially, Iran must demonstrate its faith in the deal by admitting its past work on weaponisation. The IAEA could treat such declarations in confidence—saying only that it had received a full accounting.

Some unilateral sanctions could be eased quite quickly because both the European Union and America could reimpose them were Iran to cheat. The UN sanctionsshould be the last to go because they would be the hardest to restore.

Such a compromise would fall well short ofthe maximalist demands of Iranian hardliners, including the supreme leader, Ayatollah Ali Khamenei, who continue to believe that Iran should have a nuclear-weapons option, if not the bomb itself. It would also provoke outrage among sceptical members of America’s Congress and Israel’s prime minister, Binyamin Netanyahu, who insist that Iran’s record of cheating means it should have no enrichment programme at all. But that is the nature ofcompromises; neither side will get all it seeks.

The West would probably accept the deal outlined above. For all its protests, Israel would be much safer from attackthan it is now; so indeed would the whole region. Iran has a choice. It could keep an option on nuclear weapons, but su er poverty; or it can rejoin the global economy and still have the prospect of the peaceful nuclear programme it says it has wanted all along. Which is it to be? 7

WHEN Shinzo Abe made the case, in late 2012, that he wasthe man to save the econ-

omy and revive Japan, voters handed him a landslide generalelection win. This week, just two yearson, the prime minister dissolved the Diet’s lowerhouse

and declared a snap election for December14th. “We cannot”, he thundered, “let this chance go.” Not surprisingly, many Japanese thinkthey are being asked to buy the same horse twice.

The political calculations are clear. Mr Abe’s popularity has tumbled from the gravity-defying levels he enjoyed until this autumn. Better to seek another four-year term now before fights next year over defence policy and restarting Japan’s closed nuclear plants—and before mutterings against Mr Abe grow inside his own Liberal Democratic Party (LDP). The opposition is in disarray, unable even to field enough candidates for the vote. Observers expect the ruling coalition to lose 30-40 seats but still keep a handsome majority (see page 35). Some of Mr Abe’s people hope that the LDP might actually add seats and govern without the help ofKomeito, its junior partner.

Yet there is no getting around it. Mr Abe is running on a promise to revive the economy because his attempts to do so the first time round have largely failed. Countless times he

claimed to be putting an end to years ofdeflation and reviving the economy. The Economist was among those who gave him the benefit of the doubt by endorsing “Abenomics”, a slickly presented campaign promoting radical monetary easing, more government spending and far-reaching structural reforms. Soon after he came to o ce, Mr Abe famously declared that “Japan is back”. As awful GDP figures released forthe third quarteron November17th underlined, he was half-right: Japan is indeed back—in recession. And many Japanese households feel squeezed because wages are not keeping pace with prices.

Was Abenomics, then, all voodoo? Not entirely. Without the Bank of Japan’s massive quantitative easing, who knows how far the economy might have sunk? The first round of easing in 2013 did nudge inflation expectations upwards. Its second round in late October was also right, because the economy had stopped in its tracks, while core inflation, which had been moving up to the central bank’s target of2%, had slipped.

As for fiscal policy, the problem was too little loosening. With hindsight, the government made a mistake in going ahead in April with a long-planned rise in the consumption (value-added) tax, from 5% to 8%. It knocked the stu ng out of the economy. MrAbe wasrightto declare thisweekthat he will postpone the next planned rise, from October 2015 until April 2017 (though he wasdisingenuousin claimingthathe needed a fresh electoral mandate to do so). In a stagnant economy put-1

14 Leaders

2 ting fiscal consolidation before recovery can prove disastrous. Monetary and fiscal policy will remain loose after Mr Abe is re-elected. Yet Abenomics may now pull less ofa punch. Per-

haps its chief intention, in the words of one adviser, was as a “psychology-management exercise” to boost the stockmarket and shake Japanese households and businesses out of their deflationary gloom. That e ect cannot be repeated again and again. The BankofJapan can act yet more boldly, but it will become harder to shockand awe.

That leaves structural reform, the third dimension to the plan to raise Japan’s long-run rate of growth. Here, spin raced much further ahead of substance. The government announced fine-sounding proposals to improve a rigid employmentsystem, open marketsand even allowin more foreigners. A few of them have borne fruit: corporate governance is being overhauled to allow in more independent directors, more women are at work and agriculture is freer. But overall there

China’s monetary policy

The People’s Blank of China

The Economist November 22nd 2014

has been no sense ofurgency or priorities.

Mr Abe’s advisers say that a second term will be di erent: he will unblocktrade talks with America over farm protection; he will reform labour; he will change the taxsystem to spurjob creation and stimulate spending. He may also get a little help from the economy. Year-end bonusesatbigcompaniesare likely to be generous, thanks to profits from a weak yen. And inventories and labour markets are surprisingly tight. In Nagoya, for instance, wages for bar workers have doubled in the past year as construction firms have snapped up casual labour.

Time to upset people

In the long run, however, Japan can grow faster only if it has a leader who is prepared to make changes that upset old ways of doing things. Mr Abe has radical ideas, but he is too averse to spending his political capital to implement them. Great leaders have to take risks. 7

ALAN GREENSPAN was a masterofabstruse language as chairman of the Federal Re-

serve. “Ifyou understood what I said, I musthave misspoken,” he once joked. At least Mr Greenspan spoke. In China the central bank has made a habit of si-

lence. Policy announcements are rare and, if they are o ered, come at unpredictable hours, often over the weekend. Sudden shifts in the value of the yuan always bear the central bank’s fingerprints, but are infrequently explained. The motto for the People’s Bank of China (PBOC) should be: “If you know what we did, we must have done it wrong”.

This taciturn tendency has long bemused people trying to understand the direction ofChina’s monetary policy (see page 65). But recently it has reached new and dangerous extremes. Since June the central bank is widely reported to have injected as much as 1.8 trillion yuan ($294 billion) to prop up the slowing economy through a mix oftargeted liquidity facilities. That is a lot of money, equivalent to more than three months of quantitative easing at the peak of the Fed’s bond-buying programme. Butonlyin earlyNovember, halfa yearafter rumours started, did the central bank provide some confirmation of its actions, and even then it was only partial.

Worse, the PBOCdeliberatelychoosesconvoluted means to loosen monetary conditions—in essence providing cheaper medium-term money to some banks, not others. And it is using this as a first line of defence. Elsewhere, central banks cut interest rates close to zero before turning to unconventional policies. In China the benchmark one-year lending rates sit at 6%. It would be better if China loosened monetary policy the traditional way—by cutting interest rates.

The central bankis, to be fair, in a tough spot. It has been the boldest of China’s regulators in trying to curb soaring debts in the shadow bankingsystem. It worries that a rate cut would be seen as a U-turn, signalling a retreat from its quest to rein in

borrowing excesses. Hence its preference for covert easing. This is the wrong choice, for two reasons. First, the central

bank’s meddlesome approach to providing liquidity risks underminingits own reformist agenda. Instead ofletting the market allocate resources, the central bank is choosing which banks should be the beneficiaries of easing, and how they should direct their lending. It has, for instance, specified that a big chunk of its cash injections must go to the construction of public housing. That may be a laudable goal for the government, but not the central bank.

Second, the failure to explain what it is doing diminishes the central bank’s e ectiveness. The point of easing is not just to pump money into the economy, but also to instil confidence in companies and consumers. By spelling out what they are doing and why, central bankers help steer markets and reduce uncertainty. The recent slide in China’s growth shows that the PBOC is struggling to hit its mark. Short-term money rates have declined, but real bank-lending rates have risen.

The case forcutting and talking

These shortcomingshurtChina’seconomy. Theyare also a global concern. Even as it slows, China still generates over a quarter of the world’s growth. Its financial system, sealed o behind capital controls for decades, is increasingly open. As of this week, anyone with a Hong Kong brokerage account can invest on the Shanghai stock exchange. And the yuan is being used more widely; central banks from France to Nigeria now hold the Chinese currency in their foreign-exchange reserves.

As a central bankofglobal consequence, the PBOC needs to adopt the best practices of its peers. That means loosening monetary conditions transparently and harnessing the power of communication. It should combine a cut in interest rates with a clear explanation of why it is cutting (to ward o the threat of deflation) and a promise to greet any rush to greater leverage with much stricter credit rules. Other big central banks have turned such “forward guidance” into a powerful policy tool. The PBOC should too. 7

16 Letters

Crowded Britain

SIR – The finding in an academic study by Christian Dustmann and Tommaso Frattini that immigrants to Britain from elsewhere in Europe make a net fiscal contribution does not justify high levels ofimmigration (“What have immigrants ever done for us?”, November 8th). Their study does not cover the significant non-fiscal costs ofthe resulting population growth.

Each added resident brings forward the need for increased capital spending on services.

Britain’s high-speed train projects are always justified by already overcrowded network capacity. Because ofbudgetary constraints hospital beds and school places are in short supply and becoming ever harder to find. The supply of some assets, such as beaches and beauty spots, cannot be increased, so they become crowded. More development to house more people brings large financial costs through the environmental damage that the loss ofcountryside will bring. None ofthis is covered in the report. Less net immigration would have meant these problems would now be smaller; net emigration could have helped cure them at low cost.

The study by Messrs Dustmann and Frattini is about the quality ofimmigrants. But it is the quantity ofimmigrants that is the bigger problem. We already have too much ofthis good thing.

GEORGE ELLINGHAM

London

Tackling Ebola

SIR – The rejection by some of e ective experimental treatments for Ebola lacks foresight (“Unchained malady”, November15th). The sacrifice ofa few lives may be a necessary evil for the development ofa drug to save thousands, which we have the ability to do right now at the early stage ofEbola’s spread. Any delay, be it months, weeks, or even a few days, could cause thousands ofdeaths.

Throughout history we

have sent soldiers to sacrifice their lives in battle for a greater good, but in this case we recoil at the thought. With conscription a man has as much control over his participation in war as victims ofEbola have over their catching the disease. How can we sacrifice fellow citizens for a greater good in war, but find disgust when doing the same with these patients? We should not be so quickto reject this notion ofsacrifice, for the result could make a monumental di erence.

BRIEN COMEY

Gambier, Ohio

SIR – To your list ofdiseases in Africa that have killed more people than Ebola you might add tuberculosis, which according to the World Health Organisation, killed over 10,000 in Guinea, Sierra Leone and Liberia in 2013, about twice the number ofdeaths currently reported from Ebola. Tuberculosis also killed 460 people in Britain that year.

PROFESSOR PETER DAVIES

Secretary

TB Alert

Liverpool Heart and Chest

Hospital

Planting pot

SIR – Like others you write about the legalisation ofthe growing cannabis “industry” (“Marijuana milestone”, November 8th). But the last thing this industry needs is to become like Big Tobacco. Cannabis is not an easy plant to cultivate. It requires a lot of attention and this is reflected in the price. Because sales and investment between states in America is banned it remains a local industry that maintains a high quality. There are dozens ofexamples ofmass-produced cannabis products that are bland, tasteless reflections of what was once crafted or cultivated with care.

W.J. TATE IV

Ewing, New Jersey

SIR – The United States has almost twice the rate ofmarijuana use as the Netherlands, where the drug has been legally available for decades. The criminalisation ofpeople who

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