Politics in Malaysia:The racial question

Harassment of pro-democracy activists in Malaysia reveals a worrying undercurrent of racism

Jul 14th 2012 | KUALA LUMPUR

THE house of Ambiga Sreenevasan in a leafy neighbourhood of Kuala Lumpur looks ordinary enough. Getting into it, though, betrays a different reality. A security guard greets visitors, who are then scrutinised by newly installed surveillance cameras. A bodyguard hovers somewhere inside the house.

The precautions are revealing. Ms Ambiga has become the target of what she describes as “relentless attacks”, including death threats. They have thrust a middle-class lawyer (she is a former president of the Malaysian Bar Council) into the centre of politics in the run-up to what could be a pivotal general election.

Ms Ambiga is co-leader of the Bersih movement, a coalition of NGOs campaigning for free and fair elections. To her supporters, Bersih, which means “clean” in Malay, is dedicated to strengthening democracy in Malaysia, where the system is heavily skewed in favour of the ruling United Malays National Organisation (UMNO). The party has been in power continuously since independence in 1957; it governs in a coalition known as the Barisan Nasional (BN) mainly with two minority parties, one ethnic Chinese and the other Indian, reflecting the racial composition of the country. To many within UMNO, Ms Ambiga is a grave threat, the more so because Najib Razak, the prime minister, has to go to the polls by the second quarter of next year, but appears to be reluctant to call the election. Though his personal support rating is high, the coalition is less popular.

A mass rally called by Bersih in the capital in April (protesters are pictured above) attracted tens of thousands of people, including many opposition leaders. The event ended in riots and violence. Ever since, UMNO and its underlings have been demonising the leaders of Bersih, which may have cheered some from the majority Malay population but could also backfire against the government.

When it started in May, the harassment of Ms Ambiga was almost farcical. A posse of traders turned up outside her door frying burgers to protest about their lost earnings on the day of the rally; silly stuff, though still offensive to a Hindu vegetarian. Sillier still, a group of ex-soldiers marched on her house and shook their buttocks at it, calling her a subversive.

Then things turned nasty. Several hundred men handed over a petition saying that she was anti-Islamic (in a Muslim-majority country) and should leave Malaysia. Ms Ambiga says that these protests were “either sanctioned or supported by the state”. Finally, on June 26th, a veteran UMNO politician, Mohamad Aziz, said in parliament: “Can we not consider Ambiga a traitor…and sentence her to hang”.

This has caused a storm. Quite apart from the overt threat, the MP lit the touchpaper of Malaysia’s highly flammable racial politics; this was a Malay MP insulting a prominent member of the Indian community. The country’s 2m Indians are normally a divided lot, but they quickly rallied behind Ms Ambiga. Even the leaders of the BN-aligned Malaysian Indian Congress party denounced the MP, ostensibly their political ally. Mr Mohamad issued a limited apology to Indians in general, but not to Ms Ambiga personally.

Ms Ambiga believes the attacks on her, all by Malay men, are racist. She points out that her Malay co-leader of Bersih, a famous writer called A. Samad Said, has never been targeted.

It is as yet unclear whether the souring climate could turn Malaysia’s Indians against the BN. They make up only 8% of the population. Traditionally they have mostly voted for the BN, but some may now change their minds, especially in urban areas where Ms Ambiga is respected. After the BN’s Indian vote fell at the last election in 2008, Mr Najib worked hard to court Indians. Now, that may have been to little avail.

Mr Najib may also be personally tarnished. He portrays himself as a liberally minded champion of multiracial politics, yet critics say he has done little to rein in the racist attacks. When under pressure, the “warlords” of UMNO who constitute its nationalist backbone have often drawn on racial politics, playing up to Malay voters the supposed threats that Chinese and Indians pose to their institutionalised privileges in jobs and education. Under Mr Najib people had hoped for something better. Ms Ambiga accuses him of being “wet” for failing to take a stronger stand. His belated rebuttal to Mr Mohamad merely urged MPs not to say things that might “hurt the feelings of other races”.

Meanwhile, Ms Ambiga and other Bersih co-leaders (not the Malay one) have been issued with a bewildering demand for compensation from the Kuala Lumpur city council for costs incurred during the April rally. This includes a claim for “damage to trees” ($5,246) and “food and drink” for staff. The government has also brought charges against Anwar Ibrahim, the leader of the opposition, and several of his colleagues for a variety of offences arising from their participation in the April rally. Their cases go to court in the next few months; if they are convicted, they could be banned from standing in the election.

Political analysts argue that such tactics are a sign of nervousness—though the BN is very unlikely to lose the election. Since May, surveys suggest his support among Chinese and Indian voters has fallen, though that of Malays has increased a bit. It is all likely to make for a more acrimonious election when one is at last called.

The Economist

Malaysia’s debts a potential time bomb, say economists

By Lee Wei Lian

July 18, 2012

 Malaysia’s debt levels may limit Najib’s ability to respond to financial crises. — File pic

KUALA LUMPUR, July 19 ― The government’s debt, which nearly doubled since 2007 to RM421 billion, pose a fiscal risk to the country if not managed carefully as it impairs Malaysia’s resilience to economic shocks, analysts and economists have said.

They say that while government debt ― currently at about 54 per cent of gross domestic product (GDP), and the second highest in Asia ― has not significantly impacted the country and its credit standing yet, the volatile nature of global markets may manifest such a risk at any time.

While the Najib administration has vowed not to let federal government obligations exceed 55 per cent of the country’s GDP, there is increasing worry that when government-backed loans or “contingent liabilities” are taken into account, the government’s total debt exposure rose to about 65 per cent of GDP last year ― above the comfort level for many analysts.

RAM Ratings chief economist Yeah Kim Leng said that while Malaysia’s debt levels are currently considered moderate, it should still be vigilant against the possibility of debt levels hitting the “tipping point” whereby it could be punished with higher borrowing costs.

“The threshold at which the market sentiment can turn against you is unknown,” said Yeah. “If market sentiment does turn against Malaysia, it could result in very high borrowing costs and capital pull-out.”

The reason we have not had a higher debt burden is because we have a piggy bank called Petronas. — Cheong Kee Cheok, senior research fellow at University of Malaya’s Economics and Administration Faculty.

He added that careful management of debt levels could inject greater resiliency into the economy, which was desirable given the increasing frequency of economic shocks that characterises the global economy today.

“It’s not just about economic growth but also the country’s ability to withstand shocks,” he said.

Figures from the Federal Treasury’s Economic Reports shows that the federal government’s domestic debt almost doubled in the space of less than five years ― from RM247 billion in 2007 to an estimated RM421 billion in 2011 ― far outpacing its revenues which only grew 31 per cent or from RM140 billion to  RM183 billion during the same period.

In contrast, 2001 to 2005 saw domestic debt level growing from RM121.4 billion to RM189 billion, or just 56 per cent.

Government-backed loans rose rapidly as well between 1985 to 2010 ― from RM11 billion to RM96 billion ― representing a growth of 8.7 per cent per annum.

Cheong Kee Cheok, a senior research fellow at University of Malaya’s Economics and Administration faculty, said that while Malaysia’s debt level of 55 per cent of GDP is “not an outright disaster” when compared to countries like Greece, he expects the level of debt to continue to rise.

“The rise in this debt level over the past few years is worrying though, and so far, I have not seen any effort to try to rein in spending given that revenue sources have not expanded,” he said. “The reason we have not had a higher debt burden is because we have a piggy bank called Petronas.”

Wan Saiful Wan Jan, chief executive of the Institute for Democracy and Economic Affairs (Ideas) said that politics played a role in why Malaysia is grappling with debt.

He said that while deficit spending was “completely wrong”, as long as governments could roll over their debt, there was little urgency to address the issue as politicians rarely look beyond the next election.

Wan Saiful blamed the government’s deficit on pork-barrel politics. — File pic

“Politicians will spend what they need to win elections,” he noted.

He added that his was not a criticism only of the Najib administration as he found Pakatan Rakyat’s many promises even “more reckless”.

“Pakatan Rakyat say that they can pay for spending by removing corruption but if you want to be responsible, you should plug the hole and pay the debts not plug the hole and spend the money,” he said.

The country’s fiscal track record has apparently already affected investor confidence, as evidenced by the weakness in the country’s currency and relatively high yields on government bonds.

Despite Malaysian government securities offering higher yields than either Singapore or the US, investors last week still flocked to the two perceived safe havens over places like Malaysia, sending the ringgit markedly lower in recent weeks.

Countries with strong credit ratings such as Switzerland can even afford to offer negative yields to investors due to their perceived comfort factor while weaker countries, such as Italy and Spain, have a harder time raising funds even when offering vastly superior yields due to the perceived higher risks involved.

While Malaysia is not yet in the category of Spain or Italy, it is notable that investors prefer to switch their money to US and Singapore assets rather than Malaysia’s in times of uncertainty despite the 10-year MGS (Malaysian Government Securities) offering a yield of about 3.4 per cent as compared to less than 1.5 per cent for both 10-year Singapore government bond and 10-year US Treasury bonds.

This generally means that investors harbour stronger doubts over Malaysia’s ability to pay back its debts, and outflow of funds led to the ringgit slumping to a 14-year low against the Singapore dollar and also saw the currency lose ground to the greenback.

With both its debt and budget deficit among the highest in Asia as a percentage of GDP, it would be difficult for the government to pare down debts without it either raising taxes or cutting spending, both options which are likely to make it unpopular with the public at large.

The saving grace for the government is that it can tap into the vast savings pool of Malaysians instead of going outside the country and the revenue it gains from oil and gas.

Hydrocarbon income, however, could be under threat this year as petroleum prices have weakened significantly due to the economic uncertainty.

Should another global economic crisis hit, it is unclear how much fiscal space the Najib administration has left to implement stimulus measures given its commitments to reduce its budget deficit and keep a lid on debt.

Another issue is that the RM96 billion in government-backed debts is likely to grow even more in light of an expected raft of rail and road infrastructure projects, which some reports have estimated will cost as much as nearly RM100 billion over the next few years.

Even Malaysia’s National Higher Education Fund Corporation (PTPTN) is going down the route of government-backed debt, recently selling RM2.5 billion of federally-guaranteed Islamic debt as it looks for financing to provide more loans to a growing number of eligible students entering university.

The PTPTN scheme, however, has been a source of controversy as only 84 per cent of students are reported to be repaying their loans as at February this year.

For the moment, investors are still willing to buy Malaysian government bonds used to raise money for the country’s development.

The question is whether falling petroleum prices, stubborn fiscal deficits or rising contingent liabilities could one day shake their confidence.

The Malaysian Insider

Greece's crisis

The parable of the four-engined planes

Jul 18th 2012

AN OLD friend in the aviation business, with years of experience with Greek clients, told me a story that serves as a parable for how the country got into its current state. It concerns the sale of four Airbus long-haul planes after the national flag carrier, Olympic Airways, went bust. In 2007 an American valuation consultancy, Avitas, put a value of $45m on each of the A340-300 planes, which were then eight years old and still airworthy. Offers by outside firms to handle the sale were turned down. Instead a special state-owned firm with hundreds of employees was established, just to flog the four surplus planes.

In 2010 a small German airline called Cirrus offered $23m each for them. But the Greeks rejected this because of a rule that state assets could not be sold for less than 75% of their declared value. They then called for another expert valuation on the planes, which by then had been grounded for a year: the valuers marked them down to just $18m each.

By then, this tiny part of the secondhand airliner market was becoming flooded with this type of four-engined aircraft, which had been made uneconomic by high fuel prices. This, and the deteriorating state of the grounded planes, pushed their value steadily lower. By 2012, after three years sitting unused and un-serviced in the humid atmosphere of Athens, the only offer was from Apollo Aviation in Miami, which wanted the planes for scrap. The Greek trade unions kicked up a fuss about state assets being flogged cheaply abroad. But the deal was eventually sealed by the new government earlier this month, with the planes being sold for just $10m each.

So, a sale of surplus state assets that might have strengthened Greece's coffers by $180m in 2009 ends up raising just $40m, three years and two international bail-outs later. In part the most recent slump in value is because the buyer will have to spend up to $20m on repairs to make the planes fit enough to be ferried across the Atlantic with no passengers (which is cheaper than full restoration). At these prices it might have even been better to break them up for scrap in Athens: at least that would have provided a bit of work for jobless Greeks.

The Economist

Democracy in America

BACK in the salad days of Gen X, when Ethan, Winona and Janeane took to the silver screen to whinge about divorce, AIDS and McJobs, it was often heard that ours would be the first generation in American history to fare worse than our parents'. When this ominous forecast of generational decline first found my ears, I refused to believe it. My faith in America's free-enterprise system was boundless. That is, if America continued to exist at all! An early-90s collaborative hypertext fiction listserv to which I belonged envisioned our future on the borderless virtual frontier as a disembodied anarchy of infinite freedom and endless innovation in which the laws of conventional economics would be suspended. The American state would become a minor protective-services franchise, as envisioned in "Snow Crash", since income would become untraceable and untaxable, thanks to Peter Thiel. Also, for some reason or other, we would have access to unlimited quantities of LSD, and Terence McKenna and Robert Anton Wilson would stop by our temporary autonomous zone and regale us with tales of worlds beyond the world as a roaring bonfire of discarded Douglas Coupland novels licked the smudged night sky like the forked tongues of a million lizards. This did not come to pass.

Nevertheless, the Clinton-era boom and the rise of a rather less fantastic internet economy laid to rest fears of Gen X's waning fortunes, and my cohort went forth into a sunlit world of stock options, companionate marriages and Netflix marathons. But then, cruel fate, it finally came to pass that Ethan, Winona, Janeane and Ben were more or less vindicated. Reality does bite. We are suffering a great stagnation. Where once I saw pathetic hand-wringing, now I see a venerable American rite of passage. Every generation must contemplate the dread prospect of faring worse than the preceding. (Logically, a few generations hence, the kids will be eating locusts and killing in cold blood for 40-year-old cans of Fancy Feast, but look away, reader, before the abyss looks also into you.) What is your glitch, America? 

This unpleasant reverie comes to you courtesy of Matt Miller, who last week upheld this proud American tradition by reminding the under-35 set that:

As many as 100 million Americans live in households today that are earning less than their parents did at a similar age. And this is happening well before we feel the full impact of global economic integration with rising economies like India and China.

According to Mr Miller, college costs too much, college grads are crushed by their student loans, the public schools produce mediocrity instead of mobility, America's economically-vital infrastructure is falling down, and nothing much is being done about any of it. Why not? Old people!  

Add it up, and what’s it all mean? Younger Americans don’t realize they’re coming of age in an era in which both parties have pre-committed virtually all public resources to seniors. They’ll inherit a government without the cash or flexibility to address emerging non-elderly needs—choices that should be every generation’s birthright. Want to help a poor child or fix a bridge? Sorry, kids, the till is empty.

Not fair! So what's to be done? Ice floes? Death panels? Mr Miller offers this instructive tale:

In 1995, when I was a (younger) generational equity worrywart, I asked then-Sen. Alan Simpson how to fix what was clearly coming. Simpson told me nothing would change until someone like me could walk into his office and say, “I’m from the American Association of Young People. We have 30 million members, and we’re watching you, Simpson. You [mess with] us and we’ll take you out.”

Simpson was right then. He’s still right now.

What?! That's it? The best last hope for America's 20-somethings is the "American Association of Young People"? That's not the most depressing thing I've ever heard, but it's close.

Mr Miller seems to me to overestimate the extent to which the prospects of rising generations depend on government spending. I would emphasise that American prospects generally depend on a return to healthy rates of economic growth, and that's not entirely or even primarily a matter of taxpayer-financed "investment" in America's human capital and physical infrastructure. That said, the economy certainly won't break out of its rut if an increasingly huge portion of GDP is consumed by health care and old-age pensions. So Mr Miller is right to suggest, as he does, that younger Americans will have little to look forward to unless it becomes politically possible to end Medicare and Social Security as we know them. But, again, how can this become possible?

The answer is... the answer is: I don't know. Oh wait: I do know. The answer is by refusing en masse, AAYP or not, to concede that a major overhaul of entitlements is somehow mean-spirited, and instead insisting that it is an utter necessity of collective prudence and generational equity. My generation and these "Millennial" youngsters both are going to have to stop being so sensitive about appearing stingy and insist that we get a fair shake, too. Listen to Winona, kids. If you ever manage to get a revolution going, don't disembowel it for a pair of running shoes, or for a pat on the head from the AARP.

Who Lost the Euro?

Illustration by Daniel Pudles

By Clive Crook

The arc of Europe’s postwar history is turning toward tragedy. It isn’t just that much of the Continent has fallen into a new Great Depression, or that in some countries things will get worse before they get better. It isn’t even that the whole mess was avoidable in the first place. It’s that the crisis is dividing Europe along the very lines the European project was intended to erase.

Decades of clichés about European “solidarity” and “the European idea” are being held up to ridicule. The notion that Greeks, Spaniards, Britons, Germans, and Italians are instinctive partners whose commonalities transcend their cultural differences and historical enmities—that “Europe” is a real community, not just a heavily worked-over blueprint in Brussels—turns out to be, let’s say, disputable. Ancient stereotypes are as livid as ever, framing conversations about the crisis right across the European Union. Germans are bossy and severe. Italians are idle. Greeks are corrupt. Brits are arrogant. The French are vain. So much for 60 years of European unification.

Until recently, Germany could claim to be expressing the consensus of rich northern Europe, but no longer. France has chosen the socialist Francois Hollande as president, ditching German Chancellor Angela Merkel’s erstwhile ally, Nicolas Sarkozy. The resolve of other northern governments to stand with Merkel in her demands for fiscal austerity in the south is weakening.

Meanwhile, resentments thought to be dead and gone have revived. Three generations after the end of World War II, newspapers in Greece publish caricatures of Merkel as a swastika-sporting Nazi. In Spain, Italy, and other countries suffering the stress of a German-directed drive to restore Europe’s public finances, anti-German sentiment is better disguised but no less widely held. Germany stands increasingly isolated in a union that was intended, not least by Germany’s own leaders, to bind and subdue the country within a larger whole.

Why did it all go wrong? Three main reasons: French grandiosity, German shame, and a universal law of bureaucratic self-aggrandizement. Together these formed a European Union that was poorly adapted to the stresses the project was sure to encounter. The EU was perhaps unlucky that the crisis came when it did—before national loyalties had diminished and an emerging European identity had begun to take their place. Yet the EU’s designers had some sense of the risk they were running. They gambled and lost.

The overriding goal for a Europe in ruins after 1945 was to create a secure zone of peace and prosperity. Reconciliation between France and Germany, formerly bitter enemies and sure to be the dominant economic entities in a new Europe, was vital. As a matter of the highest priority, the two countries formed a close alliance and began building a new, united Europe around it. They began modestly in 1951 with the European Coal and Steel Community, but they entertained bigger ambitions from the outset.

As early as 1957, the Treaty of Rome enshrined the notion of “ever closer union.” This became the organizing principle for Europe’s subsequent evolution. The path not taken was that of an enhanced free-trade area, a zone of economic cooperation among sovereign states, a kind of Nafta-plus. The architects of European integration had larger designs. If Europe was to compete and engage on equal terms with the U.S., it would need to aim higher. Ultimately, a United States of Europe was the goal.

Germany mainly wanted a broader union—to surround itself with friendly states even if the newcomers were at different stages of economic development than those at the European core. France sought a deeper political union, one that would subdue German economic power and give Paris more reach. Compromising, they chose to broaden and deepen at once. The European Economic Community expanded to take in new members. It developed a thin, yet feverishly proliferating, federal layer of government, complete with a parliament and executive. These two drives were in tension. Members of an ever-widening union had less in common than countries in the advanced-economy core, making political and economic integration ever harder.

The critical juncture was reached in talks for the Maastricht Treaty of 1992. This provided for European monetary union, the boldest step yet.

As expected, France was keen on the new single currency: This was deepening with a vengeance. Under then-existing arrangements, French monetary policy was in practice constrained by the choices of Germany’s mighty central bank. France had no vote on the Deutsche Bundesbank’s governing board, but its interests would be recognized by the European Central Bank. Back then, France saw monetary union as adding to, not subtracting from, its own monetary sovereignty.

More gloriously—and what is France for if not la gloire?—the single currency advanced the goal of a Europe fit to contend with the U.S. in global affairs. The dollar needed a rival. The euro would be it. A truly single European market, which the EU had resolved to build, needed to eliminate exchange-rate risk, and that required a single currency. What better way to incubate a European sense of identity than to create such a currency?

As before, Germany viewed deepening more skeptically. Polls told the government that, had Germany’s constitution permitted a referendum on dropping the esteemed deutsche mark, the country would have rejected the idea. But Chancellor Helmut Kohl gave greater weight to other considerations. After the fall of the Berlin Wall, the country’s enlargement to the east had stirred concern about resurgent German power. Kohl wanted to offer reassurance. This was not Deutschland über alles, you understand. There’s no going back to that shameful past—we’ll surrender the D-mark to prove it. Germany acquiesced in the annihilation of its currency out of meekness.
Yes, that’s ironic.

There was another factor, almost as laughable in hindsight. Starting in the 1970s, a view had gained ground around the world that central banking was above politics. The goal of monetary policy—price stability—is simple, according to this view, and the means purely technocratic. The old Keynesian idea that governments could trade a bit of inflation for a spurt of faster growth stood discredited. If such choices ever arose, central banking would be political; but they don’t, the thinking went, so monetary policy should be held above the fray.

That’s why Europe’s leaders weren’t too worried that the union’s democratic underpinnings, including its arrangements for fiscal policy, were so much weaker than those of a traditional, currency-issuing nation-state. Actually, they thought, this was a good thing. The EU’s governance deficit would make the ECB all the more independent. Left alone, it would be able to do its job better and without controversy.

Nice theory. One thing this crisis has proved is that central banking is a branch of politics. Under some extreme circumstances, such as those we’re in, monetary policy is just fiscal policy by other means—as when a central bank engages in “quantitative easing” and takes government debt onto its books, as the U.S. Federal Reserve has done. To underline its independence, the ECB was forbidden to do that, but out of necessity it’s lately found ways around the prohibition. Many economists are now calling for more quantitative easing in the euro zone.

In addition, with economies across the euro area diverging, the supposed simplicity of the stable-prices goal has evaporated. Price stability in Germany means depression in Greece. But the euro area can have only one monetary policy. Setting it involves choices that are as political as they come—yet no clear line of democratic accountability connects the ECB and the EU’s citizens or governments.
 
Some economists drew attention to the fragility of the euro system’s design from the start. Harvard’s Martin Feldstein presciently stressed that as economic performance differed from one country to the next, a single currency would pit winners against losers. Europe lacked both the political machinery and the democratic legitimacy to mediate these disputes.

The standoff between Germany and its allies in fiscal austerity on one side and Greece, Ireland, Spain, and the distressed peripheral economies on the other comes down to a fight about who bears what burden. German taxpayers are unwilling to further subsidize what they see as their reckless and feckless EU partners. In the end, if this reluctance brings the ceiling down, it may do Germany more harm than good. You can understand it nonetheless. And since Europe’s national solidarities look more entrenched than ever, you can also understand resentment in Greece and elsewhere at being dictated to by Berlin.

One way of describing Europe’s dysfunction is to say that economic integration, which sped up with the euro’s arrival, got too far out in front of political integration. While that’s true, you’d be wrong to conclude that political integration could have moved much faster. Successive treaties have foundered because of popular resistance to the transfer of decision-making power to the EU. Across Europe, politics is still resolutely national. To many Spaniards, Madrid, let alone Brussels, seems remote. The same goes for the citizens of most other EU member countries.

For that reason, adopting the single currency was always going to be a risk, but it didn’t need to be as risky as it proved. National governments understood what the economic demands of the euro would be, then spent more than a decade doing nothing about them. Successive Greek governments not only overborrowed but also cooked the books to hide the fact. Greece was an outlier only in the latter respect. Everywhere, complacency about the safety of sovereign debt was total. For years governments borrowed, and creditors lent, as though Greek (or Spanish or Italian) debt was as safe as Germany’s.

That bad behavior was compounded by the failure to align financial regulation with monetary union. The single currency fostered deep financial integration across the EU—that’s one of the reasons why leaving the single currency is so difficult. But progress toward a consistent EU-wide system of financial regulation—such as uniform banking rules or a single deposit insurance scheme—has been slow.

Labor markets also remain more national than continental, leaving workers and businesses at the mercy of the EU’s imperfectly synchronized business cycles. Migration is permitted in theory but can be difficult in practice because pension arrangements and labor certifications aren’t easily portable. Anyway, how many Frenchmen want to live in Britain? Or vice versa?

Until the crisis intervened, labor market craziness as notorious as Spain’s—where a dual system of permanent and disposable workers has driven the unemployment rate to 25 percent—was left unattended. Powerful unions and broken wage-setting systems allowed labor costs to get out of hand and created a widening competitiveness gap between Germany and southern Europe. This is the main underlying cause of the peripheral countries’ current plight.

The EU’s executive arm, the European Commission, is much to blame for this neglect. For years it focused on enlarging and complicating its areas of competence, but it failed to prioritize the issues that would make or break the currency union. Its pathological zeal to standardize the regulation of products and services fueled resistance to more rule from Brussels—resistance the commission then deflected by spraying regional development funds hither and yon. Its intrusiveness contrived to be both threatening and absurd. The commission thrived on tasks that neither made the euro system safer nor prepared the EU for the economic stresses of the crash.

The result is the fateful choice that confronts Europe in the coming days and weeks. Already a breakup of the euro system has gone from being “unthinkable” to a contingency for which officials are planning. The immediate question is whether Greece will exit. Europe’s leaders would hope to stop the rot there. But if Grexit happens, attention will turn instantly to which country goes next. To stop the system from unraveling with who knows what consequences, the EU may have to take the strides toward deeper union that Germany has been resisting since this crisis exploded: joint guarantees of sovereign debt and unlimited intervention by the ECB.

That’s fiscal union. It commits the EU to potentially enormous transfers among its members and makes them explicit. Can there be fiscal union of that sort without political union? And do Europe’s divided nations—the bossy Germans, idle Italians, arrogant Brits, and vain French—actually want to be one country? In Maastricht in 1992, the Treaty on European Union arranged things so those questions would one day have to be answered. Sooner than anyone bargained for, and before Europe was anything like ready, that day has come.

The Creative Economy

THE 21ST CENTURY CORPORATION

Which companies will thrive in the coming years? Those that value ideas above all else

Adam Smith, the arch-capitalist, didn't like corporations. He wrote in 1776 in The Wealth of Nations that they breed ''negligence and profusion'' and ''scarce ever fail to do more harm than good.'' In his day, governments handed out corporate charters rarely and grudgingly. But a century later, as the required scale of enterprise grew, corporations came to the fore. They built railroads, steel mills, refineries, and other businesses of unprecedented size. In so doing, they played an indispensable role in what University of California at Berkeley economist J. Bradford DeLong calls the ''central fact'' in 20th century economic history: the greatest increase in material wealth ever.

Now the Industrial Economy is giving way to the Creative Economy, and corporations are at another crossroads. Attributes that made them ideal for the 20th century could cripple them in the 21st. So they will have to change, dramatically. The Darwinian struggle of daily business will be won by the people--and the organizations-- that adapt most successfully to the new world that is unfolding.

This Special Double Issue is an attempt to peer into the future to describe the look and feel of 21st century corporations. We draw on the insights of CEOs, venture capitalists, academics, consultants, and, of course, the cubicle dwellers who do the work. We look at management via the Web, the workplace of the future, the battle for talent, the ecosystem in which corporations will exist, job titles of the future, and much more. Our aim is to provide readers with insights that could help their own companies thrive in the decades ahead.

VIRTUAL VALUE. Let's start with the most important force of all: the growing power of ideas. In Adam Smith's time, most people worked on farms. Later, industry was ascendant. But the advanced economies have gotten so efficient at producing food and physical goods that most of the workforce has been freed up to provide services or to produce abstract goods: data, software, news, entertainment, advertising, and the like. You can see it in the statistics. The share of U.S. capital spending devoted to information technology has more than tripled since 1960, to 35% from 10% (chart). Fields such as biotechnology are booming. The U.S. Patent & Trademark Office hands out 70% more patents--about 170,000 last year--than it did just a decade ago.

People are cranking out computer programs and inventions, while lightly staffed factories churn out the sofas, the breakfast cereals, the cell phones. The physical content of the gross domestic product seems to be vanishing like Lewis Carroll's Cheshire cat. Although the U.S. is still often called an industrial economy, the Bureau of Labor Statistics projects that by 2005, the percentage of workers employed in industry will fall below 20%, the lowest level since 1850. And the long lull in productivity growth seems behind us. If productivity increases 3% a year--below its recent rate--the average output per hour of work will double in 25 years. That will translate directly into higher living standards.

The turn of the millennium is a turn from hamburgers to software. Software is an idea; hamburger is a cow. There will still be hamburger makers in the 21st century, of course, but the power, prestige, and money will flow to the companies with indispensable intellectual property. You can see it already. At the end of last year, Microsoft Corp. (MSFT), with just 31,000 employees, had a market capitalization of $600 billion. McDonald's Corp. (MCD), with 10 times as many employees, had one-tenth the market cap. Or take Yahoo! Inc. (YHOO)--a virtual place in a virtual medium, the Internet. Although far below its peak price, Yahoo trades at more than 40 times book value. If USX Corp.'s U.S. Steel Group (X) traded at the same multiple to book as Yahoo, its market capitalization would be nearly $90 billion, instead of less than $2 billion.

In an economy based on ideas rather than physical capital, the potential for breakaway successes like Yahoo is far greater. That's because ideas, like germs, are infectious. They can spread to a huge population seemingly overnight. And once the idea--say, a computer program--has been developed, the cost of making copies is close to zero and the potential profits enormous.

With the possibility of gargantuan returns, it's no wonder that idea-based corporations have easy access to capital. The pool of investable money has been swollen by the rising tide of wealth around the world, coupled with a new culture of investing. U.S. companies received nearly $50 billion in venture capital last year, 25 times as much as in 1990. The amount of money raised in U.S. initial public offerings last year, nearly $70 billion, was 15 times the amount in 1990. Both records are certain to be broken this year.

The sheer abundance of capital could be bad for the capitalists themselves, including ordinary investors in the stock market. That's because the commodity they supply--money--is no longer scarce. What's scarce are the good ideas. Thus, shareholders are likely to lose some power in the 21st century, while entrepreneurs and idea-generating employees gain it. Huge bonuses and option grants to key employees are early evidence of the trend. Raghuram Rajan, an economist at the University of Chicago's Graduate School of Business, says it may be time to rethink the conventional wisdom that shareholders are entitled to all the profits of a corporation. Charles Handy, the British author of The Age of Unreason, even suggests that some corporations might become more like voluntary associations, run for the benefit of their working ''members.''

''FIGHTING ISSUE.'' The rising importance of ideas creates all kinds of difficulties for corporations. Books, music, and software are devilishly difficult to create--and diabolically easy to copy. China, for instance, is a counterfeiting machine. And now so is the Internet, thanks to services that enable people to download music, movies, and software for free. The legal battle over the biggest of the music piracy havens, Napster Inc., is a sign of things to come.

Theft of intellectual property is lethal to innovation. Yet overly strict enforcement of intellectual-property protections can dampen innovation as well by letting the property owners get lazy. Chuck D, the lead rapper for Public Enemy and a supporter of Napster, complains that record companies often buy rights to songs and then let them languish. To keep the Creative Economy growing, governments will have to strike a delicate balance: enforce patents, copyrights, trademarks, and noncompete clauses to preserve incentives to create, but not so much that it suppresses competition. ''Intellectual property is going to be the big fighting issue'' of the coming decades, predicts Lester C. Thurow, a Massachusetts Institute of Technology economist.

In the Creative Economy, the most important intellectual property isn't software or music or movies. It's the stuff inside employees' heads. When assets were physical things like coal mines, shareholders truly owned them. But when the vital assets are people, there can be no true ownership. The best that corporations can do is to create an environment that makes the best people want to stay.

Of course, not everyone will benefit equally from the shift to an information-based economy. High school grads' median weekly earnings are 43% less than those of college grads, far worse than the 28% gap in 1979. And education is likely to become even more essential to prosperity in the future. The five fastest-growing occupations in the U.S. are all computer-related, according to projections of the Bureau of Labor Statistics. Corporations faced with a shortage of skilled help are likely to respond through a combination of training, exporting work offshore, and looking for ways to ''de-skill'' certain jobs. Fast-food cashiers, for instance, punch buttons for food items rather than keying in prices.

A NEW MIX. A chronic shortage of skilled help will be accompanied by a change in the mix of people in the workforce. The long-term trend toward earlier retirement has recently been reversed, with more older people looking to stay at work or return. Overall, a record 67% of the adult population is employed or looking for work, mainly because female participation in the labor force has jumped to 60% from about 50% two decades ago. And the ethnic mix of the workforce is changing, partly because the great American jobs machine is sucking in immigrants. The Census Bureau projects that by 2050, 53% of the U.S. population will be non-Hispanic whites, down from 74% in 1995.

The corporations that thrive will be the ones that embrace the new demographic trends instead of fighting them. That will mean even more women and minorities in the workforce--and in the boardrooms as well. Ted Childs, who runs IBM's (IBM) global diversity program, claims there are 350,000 unfilled jobs in the U.S. information-technology industry. ''I believe we're in a war for talent,'' he says, ticking off various IBM projects to develop talent among women, blacks, Asians, homosexuals, and other groups. ''None of this is charitable.''

The 21st century may see the emergence of a kind of ''welfare capitalism,'' in which corporations try to recruit and retain employees by providing services that in another era were provided by government agencies or families: assistance with child care and elder care, valet services, and so on. Their employees will handle more personal matters at work, and more work matters at home: The man in the gray flannel suit is becoming the man in the gray flannel shirt. Even floor plans are going New Age at places like SEI Investments Co. in Oaks, Pa. Computer linkups drop from the ceiling, and employees move from place to place as their assignments change.

While some freelance workers will jump from job to job like hired guns, companies like IBM and Sun Microsystems Inc. (SUNW) want to have a core of careerists to provide continuity. ''Enduring relations with employees become an enormous asset, because those employees are what connects the company to its partners,'' says James N. Baron, a professor at Stanford University's Graduate School of Business.

And just as companies want to hang onto a core of permanent employees, they'll want to retain some key business functions in-house as well. Forget the vision of the entirely ''virtual'' corporation in which nearly everything is outsourced. Clayton M. Christensen, author of The Innovator's Dilemma, points out in an essay written for this issue (page 180) that outsourcing won't work for cutting-edge products whose specifications are in flux.

Still, corporations in the 21st century will evolve new forms of close interaction. Silicon Valley is the exemplar of a new kind of interdependence: Skilled engineers jump between companies as easily as switching desks, and as they do, they spread ideas. ''In some ways, Silicon Valley performs as a large decentralized corporation,'' Philip Evans and Thomas S. Wurster of Boston Consulting Group Inc. write in their new book, Blown to Bits.

THE REAL ASSET: IDEAS. In the same way that the economy is losing weight--software instead of steel--corporations are getting lighter, too. They're able to generate lots of revenue and profit off a small base of assets and employees. Despite the merger wave of the 1990s, the most valuable companies in America aren't bigger by employment than the most valuable companies of a decade earlier. Comparing the 100 U.S. companies by market cap in 1989 with the corresponding group in 1999, the number of employees fell 3%, while the collective market cap rose 500%, according to data supplied by The McGraw-Hill Companies' Standard & Poor's.

Some of these trimmed-down businesses may emerge as more powerful than any corporations ever have been. In the industrial past, there were natural limits to the power of a strategically placed corporation. A corporation was restricted in how many businesses, or customers, or suppliers it could draw into its sphere of influence because there were natural limits on how many could be granted access to its crucial asset--say, a railroad terminal.

But in the Creative Economy, the power to exert influence is nearly unlimited because there's no ceiling on how many people can be made to depend on idea-based assets, notes the University of Chicago's Rajan. An example: America Online Inc.'s instant-messaging system. Companies will exercise power by sharing--or withholding--crucial intellectual property.

Global corporations will try to take advantage of their transnational status to operate beyond the control of national governments. They can play governments off one another through their decisions about where to locate factories or research labs. And many use unrealistic transfer prices to shift income from high-tax jurisdictions to low-tax ones. Last year, a General Accounting Office study reported that from 1989 to 1995, an outright majority of corporations, both U.S.- and foreign-controlled, paid zero U.S. income taxes.

For all the talk of a brave new world, nation-states aren't going away in the 21st century. So it's a good bet that there will be repeated clashes between corporations and the countries--and people--that play host to them. In response to the globalization of business, governments may coordinate their efforts to regulate corporations on issues ranging from taxation to pollution.

Of course, corporations have always been easy to hate. In 1612, British jurist Sir Edward Coke complained that they ''have no soul.'' In the 1960s, Martin Luther King Jr. warned of the alienation produced by ''gargantuan industry and government, woven into an intricate computerized mechanism.'' The past year's outcries against globalization spell trouble for transnationals ranging from Coca-Cola Co. (KO) to Exxon Mobil Corp. (XON), and there's no sign they're diminishing.

Still, corporations have a way of flourishing under changing circumstances. While some will go down with the dinosaurs, the corporate form itself has a good deal of flexibility. Many corporations have already begun to adjust to the new realities of the Creative Economy--by allowing power to tilt from the sources of capital toward the sources of ideas, by embedding themselves in fertile corporate ecosystems, and by adopting codes of social responsibility to win the trust of a wary public. Legally, a corporation is a person--a person who is potentially immortal. Let's see how these ageless characters handle the next 100 years.

By PETER COY 

Business Week

Where the jobs are

May 29th 2012, 

 by The Economist online

Despite high unemployment companies say they find it hard to hire people

UNEMPLOYMENT has reached record levels in many countries. Yet more than a third of employers around the world are still having trouble filling vacancies, according to a ManpowerGroup survey of nearly 40,000 employers in 41 countries. Workers in skilled trades (electricians, plumbers, bricklayers and so on) are in shortest supply, followed by engineers and sales people. Talent shortages are most acute in Asia, particularly in Japan where an ageing population is exacerbating the problem. Only in France has the proportion of employers struggling to find appropriate talent increased significantly since last year (from 20% to 29%). In Italy, by contrast, it has halved from 29% to 14%. Overall, employers are less concerned about the impact of skills shortages than they were in 2011. This may be because companies are becoming more comfortable conducting business in an uncertain environment where talent shortages persist.

 ersist.