A generation ago, many wondered how many years would pass before American dominance and, by extension, the clout of Western-led financial institutions like the IMF and World Bank faced a serious challenge. So far, no single rival has proved its staying power. For better and for worse, the IMF and World Bank remain core components of international politics and development. And that's what makes collective action among the BRICS-Brazil, Russia, India, China, and South Africa-so intriguing. The BRICS carry considerable weight as models for the next wave of developing countries-particularly following an American-made financial crisis and ongoing turmoil in the Europe.
It's no surprise then that plans announced last month to create a BRICS development bank have generated so much buzz. In particular, the ability of leading emerging market governments to finance big infrastructure construction projects across the developing world has interesting potential implications.
Yet, for many of the same reasons that the BRICS have so far struggled to institutionalize a working partnership in other areas, this bank will take longer to build than its architects think and will never realize the grand ambitions of its most forceful advocates.
It's no secret that Brazil, Russia, India, China, and South Africa are home to quite different political and economic systems and face different sorts of challenges. Less well understood is the diversity of their interests in creating a bank. Questions of seed money, oversight, purpose, and where the bank might be headquartered are certain to arouse controversy.
But the larger problem is that all the BRICS except China are grappling with sharper-than-expected economic slowdowns-and Brazil, India, South Africa, and Russia are all looking to spend their revenue on infrastructure projects at home to help bolster growth. For the moment, none of them can afford to invest substantial sums to build someone else's roads, bridges, and ports.
These governments face a choice. They can contribute to a BRICS bank funded in equal (modest) parts by each member and lacks the capital to accomplish much. Or they can lend their names to a much-better funded institution that is thoroughly dominated by China.
Yes, Brazil's government is interested in promoting a South-South development strategy, but the Dilma Rousseff administration is now focused mainly on reviving domestic growth following a significant slowdown last year. Its strategy rests in part on using state development bank BNDES to fund ambitious infrastructure projects inside Brazil. If the BRICS bank can be used to finance projects outside Brazil to which BNDES is already committed, it might be useful, but don't expect the Rousseff administration to offer significant new cash commitments toward these projects.
Russia's government, also faced with sluggish growth, will talk up the need for a counterweight to U.S.- and European-dominated institutions, but tepid pledges of support for the bank from Russia's finance minister and the recent tragicomedy in Cyprus make clear that Moscow is not ready to finance its bid for greater international prestige with substantial sums of cash.
Political officials in India, where national elections loom next year, are too preoccupied with a steady stream of domestic troubles to devote much capital to a BRICS development bank, and the government remains deeply ambivalent about its often troubled relations with fast-expanding China. That's in part why India's finance minister has said that the BRICS bank will complement, not challenge, existing international lending institutions.
Then there is South Africa, a country with a growing middle class but chronic high unemployment and an economy the size of China's sixth largest province. The ruling African National Congress sees obvious value in deepening trade and investment relations with China, but its greatest near-term contribution to a BRICS development bank will probably be limited mainly to providing its headquarters a home.
Finally, the bank faces obstacles even within China, the one country than can afford to give it heft. China already has a development bank. It's the most powerful financial institution in the country, one that answers only to the State Council, giving it the status almost of a government ministry. In fact, though the China Development Bank and the China Export-Import Bank may lack the perceived legitimacy of multinational institutions, they don't lack for borrowers. Together, they already lend more to developing countries and companies -- more than $100 billion per year -- than the IMF and World Bank do, extending China's strategic influence throughout Africa and Latin America, in particular.
Why share credit and benefit for these efforts with the other BRICS, especially when the rest have so much less to contribute? And why give others a say in where Chinese funds are invested?
All five of these governments have an interest in choreographed displays of unity and rhetorical challenges to U.S. power. But like so many other aspects of BRICS cooperation, there is less to this bank than meets the eye.
Willis Sparks is director in Eurasia Group's global macro practice.
ALEXANDER JOE/AFP/Getty Images
As the National People's Congress (NPC) -- China's rubber stamp parliament -- concluded on Sunday, China's historic leadership transition came to an end after more than two years of political intrigue and factional infighting. In the carefully choreographed tradition of previous transitions, the 3,000 parliamentary delegates convened in Beijing and elected the new government with an overwhelming majority. Xi Jinping was voted president with one opposing vote, just like Mao Zedong in 1949, and Li Keqiang became China's new premier, with three opposing votes.
But something was decidedly different this time around. It was a combination of the smog-filled skies, the reports of thousands of dead pigs floating in Shanghai's water source, and a growing public disenchantment with the Communist Party. Expectations for change were high, and tolerance for another orchestrated Communist gathering was low.
The signals coming from the NPC reflected a clear recognition from Xi and Li that something has to change. Over the past year, the party's domestic credibility has taken a serious beating: from the ouster of Chongqing Party Secretary Bo Xilai last March in a tale of murder and betrayal fit for a novel to foreign press accounts of unseemly wealth amassed by family members of Xi and outgoing premier Wen Jiabao to strikes earlier this year by journalists at liberal media outlets.
At the NPC, the leadership moved to address popular criticism. By dismantling two highly unpopular administrations -- the Railways Ministry and the family planning commission -- China's new leaders made the first real attempt to streamline the bureaucracy since reformer Premier Zhu Rongji in 1998. They vowed to improve food safety and fight environmental degradation, two issues of great public concern. The government also pledged to reduce the state's role in the economy and society.
Thus far, these moves amount to political symbolism rather than substantial change, but there is a lingering sense that this time is different. Since coming to power in November, Xi Jinping has consolidated his power base in the party and army more rapidly than his predecessor. He also has greater credibility and a more appealing public persona than the outgoing Hu Jintao, in part thanks to the aggressive promotion of the anti-corruption and frugality campaigns.
But while Xi Jinping is better placed than his predecessors to take on that broad agenda, the high expectations that come with that recognition are not always helpful. The new president will spend the year setting priorities and consolidating internal support for them even as pent-up internal and popular pressure on the young administration continues to build. Xi will have to move quickly. Beyond the signals, he will have to give substance to his reform agenda by the third plenum in the fall of 2013. The symbolism will not be lost on Chinese leaders, since it was Deng Xiaoping who also announced his transformative "reform and opening up" policy at the third plenum in 1978.
Only then will it be clearer if this time it really is different -- and if Xi's the one to bring about lasting and substantive change for a party and a country that needs it.
Michael Meidan is an analyst in Eurasia Group's Asia practice.
WANG ZHAO/AFP/Getty Images
Eurasia Group's weekly selection of essential reading for the political risk junkie -- presented in no particular order. As always, feel free to give us your feedback or selections by tweeting at us via @EurasiaGroup or @IanBremmer.
Craig Whitlock, Washington Post
Hindsight is 20-20. In light of recent events in Mali and Algeria, this is an interesting look back on a decade of U.S. counterterrorism efforts in Africa.
Lars-Olva Beier, Spiegel Online
With China slated to replace North America as the world's #1 film market by 2020, navigating the Chinese market is increasingly difficult -- and necessary.
Jonathan V. Last, Los Angeles Times
There are 38 million people living in America who were born somewhere else. How do global fertility rates shape U.S. immigration -- regardless of policy?
Ramy Inocencio, CNN
Posting a video of New York in flames? Not cool, North Korea. Using Michael Jackson's "We Are the World" as the background music? For shame. Lifting parts of the video from the latest Call of Duty video game? That's where YouTube draws the line.
To understand Kim Jong Un, it's important to put him in historical context. In the post-war era, North and South Korea's economies were roughly on par. Today, output per capita in South Korea is over 17 times that of the North.
Bill Simmons, Grantland
While it's not political per se, reporting on doping requires a great deal of diplomacy -- especially if you want to make the case that "innocent until proven guilty" does not always apply. This is one of the boldest, most honest pieces of sports journalism you'll ever read.
PASCAL GUYOT/AFP/Getty Images
Eurasia Group's weekly selection of essential reading for the political risk junkie -- presented in no particular order. As always, feel free to give us your feedback or selections @EurasiaGroup or @IanBremmer.
China has been all over the news this week, with the New York Times hacking episode dominating headlines. But recent stories related to China venture much further than cyberspace. This week's must-reads has a China theme.
1. "The resource race: China
dips toes in Arctic waters"
Christoph Seidler, Spiegel Online
This piece outlines China's new ventures to the Arctic -- and how China's diplomatic tactics are shifting.
2. "China's love affair with
cars chokes city air"
Louise Walt, Associated Press
Over the last decade, the automobile industry has skyrocketed in China. Last year, 13 million cars were sold. But what kind of environmental impact will such a rapid shift have?
3. "Making room"
In 2010, there were roughly 4,000 cities with populations of 100,000 or more. (China had about 400 of those). But between 2010 and 2050, the UN anticipates that the world's urban population will double. This piece reviews a new book by Shlomo Angel called Planet of Cities -- the book predicts how future urbanization will play out. Here's an interesting rule of thumb: usually, a country's biggest cities break down such that the largest city has twice the population of the second largest, three times that of the third largest...etc.
4. "Chinese labour pool
begins to drain"
Jamil Anderlini and Ed Crooks, Financial Times
China's working age population unexpectedly shrank last year -- a trend that wasn't meant to begin until later this decade. What do China's shifting demographics mean for the economy?
5. "Mexico: the new China"
Chris Anderson, The New York Times
Is cheaper always better? This piece highlights some of the advantages of using Mexican manufacturing from an American business perspective. Anderson argues that it allows for more product evolution, innovation, and customization -- and Chinese labor is getting less and less cheap.
Note: Today is the seventh in a series of posts that detail Eurasia Group's Top Risks for 2013
East Asia's geopolitical stability will continue to deteriorate this year. Countries such as the Philippines, Vietnam, and Japan will take tougher stances on territorial disputes with China and seek to involve Washington more closely in these issues. But China's new government will find it difficult to compromise and may even take more forceful positions given its need to consolidate internal support and channel growing nationalism. Meanwhile, the US will continue to enhance engagement with Asian partners -- particularly on the economic side -- which will raise skepticism in Beijing.
The most worrying concern during the early part of 2013 will be the Senkaku/Diaoyu islands, claimed by both China and Japan. Tensions surrounding the islands spiked in late 2012 following the Japanese central government's decision to purchase several of them from their private owners. The growing presence of Chinese ships and aircraft in surrounding waters is stoking nationalist sentiments in Japan and increasing the risk of a clash that could quickly escalate and ensnare the world's three biggest economies in an ugly dispute.
In 2013, regional governments will lean toward political considerations more than economic ones. In Japan, a new government led by the Liberal Democratic Party (LDP) Prime Minister Shinzo Abe will become more assertive on foreign policy issues. The LDP was able to capitalize on nationalist sentiments in its campaign, and Abe will carry through with some of his promises in 2013 by establishing a more assertive national security and foreign policy posture. Abe will also bolster the U.S.-Japan security alliance and likely commit Japan to joining the Trans-Pacific Partnership (TPP) negotiations. China will regard such moves as confrontational.
Meanwhile, Beijing's appetite for compromise will be limited. China's political transition will make it more difficult for Beijing to be flexible on foreign policy issues. The country's new leaders will need to consolidate internal support. Moreover, growing middle-class expectations and concern over the state's control of information are expected to encourage a more nationalistic foreign policy. If Beijing faces a foreign policy test, the incoming administration might feel the need to demonstrate its foreign policy mettle and avoid being seen as capitulating to outside interests.
Policies toward Asia from the U.S. will not change much: The rebalancing of its attention toward the region will continue, with more substance on the economic than on the strategic side. In particular Washington's trade negotiators will focus on negotiations for the TPP talks.
The South China Sea will be another hotspot. There has been relatively little tension there in recent months, but that calm is unlikely to continue. Vietnam and the Philippines, in particular, will maintain their aggressive postures toward China. Neither country has an interest in provoking a military conflict, but domestic politics make it difficult to back down without a perceived (even if minor) but unlikely concession from Beijing.
Later this week, we'll profile Risk #8: Iran
GOH CHAI HIN/AFP/GettyImages
Note: Today is the first in a series of posts that detail Eurasia Group's Top Risks for 2013.
Since the onset of the financial crisis in 2008, investors and companies have focused mainly on risks in developed world markets. But as conditions in the U.S. and Europe continue to improve in 2013, the most worrisome risks will again come from emerging market countries. These countries are fundamentally less stable than their developed world counterparts, and some of their governments used a period of favorable commodities prices and the benefits from earlier reform to avoid the tough choices needed to reach the next stage of their political and economic development.
Some of these emerging market nations face more difficult challenges than others, and much depends on the degree of political capital each leader will have in order to make unpopular but necessary changes. These countries can be divided into three broad categories according to the complexity and immediacy of the risks they face and the longer-term upside they offer.
The first category includes the best bets:
The second category of emerging market economies are at risk of considerable volatility.
Lastly, there are the underperformers, those countries where risks will overshadow returns.
On Friday, we'll profile Risk #2: China vs Information.
HOANG DINH NAM/AFP/Getty Images
Eurasia Group's weekly selection of essential reading for the political risk junkie-presented in no particular order. As always, feel free to give us your feedback or selections @EurasiaGroup or @IanBremmer.
Must-Reads1. "South Korea's Presidential Election: A Homecoming"
Banyan Asia blog, The Economist
On Wednesday, Park Geun-hye was named president of South Korea by a small margin, making her the first woman to hold the post in the nation's history. How will her presidency differ from Lee Myung-bak's? What are the implications for North-South relations?2. "The Importance of Shinzo Abe"
Sanjaya Baru, The Hindu
A much more momentous Asian election took place this past weekend, as Shinzo Abe and the LDP returned to power. Many are focusing on the possible conflicts that the election could provoke between China and Japan, but this piece asks: Are Japan and India the "natural partners in Asia?" In light of the conflict over the Senkaku/Diaoyu islands, it seems Japan is pursuing an ABC policy (Anybody But China). Why not India?3. "Pakistan: Mullahs and Militants Keep Polio Alive"
Sami Yousafzai, The Daily Beast
The eradication of polio has been tantalizingly within reach, as its presence has dwindled to just a handful of countries. But wiping the disease out of Pakistan comes with substantial risks. This piece focuses on the dangers to the anti-polio mission in the wake of Bin Laden's death and the role that vaccinations played in gathering intelligence for the operation.4. "Slavery's Global Comeback"
J.J. Gould, The Atlantic
Another atrocity that hasn't disappeared: human trafficking and forced labor. These are new terms for what Gould still dubs 'slavery.' Even by conservative estimates, there are more people enslaved today than at any point in history. This is an epidemic that needs global attention.5. "The Putin Show"
Brian Whitmore, Power Vertical Blog
If there were a foreign-policy edition of People magazine, Putin would fill the pages. Why all the hype for his most recent press conference? Consider analysis of his performance as our guilty pleasure political risk story.
Longer Reads6. "Utopia for Beginners: an amateur linguist loses control of the language he invented"
Joshua Foer, The New Yorker
This piece is not political per se, but the treatment of language as an art -- communicable and easily repurposed the world over -- has global as well as philosophical implications. Foer follows a man who spent 34 years inventing a language designed to more precisely mirror reality. The story of who ended up co-opting it -- for political purposes no less -- makes for a fascinating read.
Eurasia Group's weekly selection of essential reading for the political risk junkie-presented in no particular order. As always, feel free to give us your feedback or selections @EurasiaGroup or @IanBremmer.
1. "Al Qaeda 3.0:
Terrorism's Emergent New Power Bases"
Bruce Riedel, The Daily Beast
In a world where international governance is breaking down, leaders are focused more on domestic than on foreign policy challenges. This trend extends to al Qaeda, an organization transitioning from global to local goals.
2. "India's African ‘Safari'"
Sudha Ramachandran, The Diplomat
We hear a lot about the US and China's conflicting investment approaches in Africa, but there's precious little written on Africa's fourth largest trading partner: India. With trade increasing by a factor of 17 over the last decade, India-Africa relations are becoming much more interesting.
3. "How Crash Cover-Up
Altered China's Succession"
Jonathan Ansfield, New York Times
How will Beijing's leadership manage the challenges that come with an era of more open information? What will the rest of us learn about the Chinese leadership's taste in cars, clothes and once-hidden power politics?
4. "Merkel's mastery of
Michael Fry, The Scotsman
Is Angela Merkel the most talented politician in the world? Her domestic political tactics shed light on her policies with regard to the Eurozone and beyond.
5. "A free-trade agreement
David Ignatius, The Washington Post
Though still on the drawing board, the Trans-Pacific Partnership has far-reaching security and economic implications for North America and the Asia Pacific region. Progress on an Atlantic equivalent seems beyond the horizon. But is an ‘economic NATO' already in the planning stages?
6. "The mother of all
worst-case assumptions about Iran"
Stephen M. Walt, Foreign Policy
Would a nuclear Iran carry "shattering geopolitical significance?" This piece overstates its case at times, but it's a question that demands consideration.
The Weekly Bonus:
"Floating Housing (And
Golf Courses) For Post-Climate-Change Island Paradises"
Co.EXIST blog, Fast Company
In a G-Zero world, don't expect political leaders to tackle climate change. An ineffectual climate summit meeting in Doha this week makes that all the more obvious. If climate change continues unabated, the Maldives will end up underwater. The government knows it, hosting a cabinet meeting on the ocean floor in full scuba gear in 2009, and inquiring about land purchases abroad. But even the most daunting risks come with opportunities, however whimsical they may seem.
By Roberto Herrera-Lim
It's easy to disparage Vietnam, whose reputation as the poster child for the economic potential of frontier market countries has taken a beating in recent years. Inflation is a persistent threat, growth is slowing, and the country's banks and state-owned enterprises (SOEs) are struggling with a potentially destabilizing level of bad debts. And to top it all off, Vietnam's political leaders are fighting among themselves when the situation calls for firm action. As a result, foreign investors are left scratching their heads and wondering if Vietnam will be able to build the institutions and capabilities needed to move into the ranks of the emerging market nations.
Vietnam's institutions were not prepared for strong growth. That much is clear from the crisis that has played out over the past few years during which Vietnam's institutions and leaders mismanaged capital inflows, resulting in inflation, bad investment decisions, and near-rogue banks and SOEs. All this occurred on Prime Minister Nguyen Tan Dung's watch, and while he has survived at least two challenges to his leadership, he is weakened and chastened. As a result, consensus decision-making will play a greater role in coming years, while Dung's competitors (including President Truong Tan Sang) reduce his control over policymaking and tighten oversight. The near-term consequence of this dynamic will be a greater likelihood that factional competition will result in uneven policies and conflicting signals.
But don't count Vietnam out of the game yet. Historically, crises have been effective at forcing effective policy choices from the government (such as the 2001 ouster of the party's then general secretary Le Kha Phiu). The current situation is unlikely to result in Dung's exit, but it will spur a serious reexamination of economic policy, especially when it comes to better allocating investment. There is, after all, still a broad consensus among Vietnam's elites that previous reforms should remain in place and that long-term growth and sustained, equitable improvements in the quality of life are needed to ensure the survival of the communist party. The country's economy could also benefit from structural factors that are encouraging investors to consider manufacturing locations other than China.
It may be tempting for manufacturers to look to other countries in Asia, but they should not discount Vietnam's reemergence as a viable investment destination. The country's leaders may be squabbling, but they understand that failure to reform is a larger threat to their primacy than the uncertainty that comes with change.
Roberto Herrera Lim is a Director in Eurasia Group's Asia practice.
HOANG DINH NAM/AFP/Getty Images
Scott Seaman and Ross Schaap
The fight to increase Japan's consumption tax may yet spark significant party system realignment -- something the country needs in order to secure a government that can more effectively address Japan's fiscal challenges and increase economic competition, especially through trade. Any move toward such change is now tied to the next Lower House election, with its timing depending largely on the behavior of former prime minister Yukio Hatoyama.
Hatoyama has returned to the limelight after Prime Minister Yoshihiko Noda managed to secure Lower House approval on June 26 of legislation that will increase the consumption tax. That process prompted a split of the ruling Democratic Party of Japan (DPJ) when Ichiro Ozawa and a group of his followers defected on the vote and formed a new party. Despite fears that Ozawa (nicknamed the "Destroyer" for his habit of creating and then wrecking political parties) would bring down Noda's government by leaving the DPJ with a large contingent of disaffected backbenchers, the DPJ has retained its Lower House majority. But the risk of a no-confidence motion has increased, and Hatoyama may yet snatch away Ozawa's moniker if he decides to defect as well.
Hatoyama is a DPJ stalwart, having helped found this party and lead it to victory in the 2009 general election. But as a backbencher he voted against the consumption tax hike and continues to criticize Noda's decision to pursue it. If Hatoyama were to defect along with 13 or more other Lower House members, Noda would not survive a no-confidence motion backed by a united opposition.
Despite stressing that he doesn't want to leave the DPJ, Hatoyama continues to speak out against Noda and has hinted that he may intensify efforts to challenge the party leadership if the Upper House fails to dilute the tax hike legislation (though he isn't clear about what he actually wants). Hatoyama will probably stay put when the Upper House passes the hike into law, likely in August without any major changes. If he defects and brings Noda's government down, Hatoyama could lose in the subsequent election. (The opposition Liberal Democratic Party is preparing to run a popular Olympic speed skater against him.)
If Hatoyama remains in place, Noda is likely to weather the current political storm and work to delay any snap election until after he secures reelection as the DPJ president in September. Such an outcome would slow any move toward restructuring of Japan's party system, which will likely advance fastest if elections occur that shake up representation in the Diet. There are other scenarios that could result in early elections, including other defections from the DPJ or an opposition refusal to help approve legislation to issue bonds to fund the budget, but they are less likely.
As a result, the odds are increasing that an election (and any resulting political party realignment) will not occur until mid-fall or later -- perhaps even next summer. A later election would allow Noda more time to position the DPJ and canvass potential allies and prepare the way for mergers or the formation of a formal coalition with reform-minded elements of the LDP and other parties. But if Hatoyama is appeased or cowed and the tax hike row dies down, pressure for an election will wane and Japan's gridlock would likely persist.
Ironically then, any hope for more rapid reforms in Japan would be best served at this point by Hatoyama jumping ship after the Upper House passes the tax hike, likely forcing Noda to call an election and potentially setting a broader realignment process in motion. For Hatoyama, replacing Ozawa as Japan's "Destroyer" by helping to dissolve the DPJ could end up being his most lasting contribution to Japanese politics.
Scott Seaman is an analyst with Eurasia Group's Asia practice; Ross Schaap is the director of the Eurasia Group's Comparative Analytics practice.
YOSHIKAZU TSUNO/AFP/Getty Images
By Scott Seaman, Shaun Levine, and Divya Reddy
Major resource-producing countries are shifting economic levers in their favor, taking advantage of consumer countries' thirst for commodities. Producer countries are increasingly restricting exports of raw commodities so they can be processed at home, creating jobs and moving domestic industry up the value chain. For countries that import natural resources, export restrictions can translate into higher costs that industries, labor forces, and consumers find difficult to swallow.
Moreover, when facing off against developing countries whose economies are growing quickly and becoming more sophisticated, developed countries may find that threats or offers of traditional development aid and tit-for-tat trade actions are less effective tools to apply pressure. This will be especially true as the gains from implementing new export restrictions expand, adjusting the cost-benefit calculation in favor of new restrictions even in the face of potential trade conflicts.
A case in point is the row between Indonesia and Japan over Indonesia's imposition in May of a 20 percent export duty on unprocessed mineral ores, as well as Indonesia's plans to implement a total ban on such exports in 2014. Unsurprisingly, these restrictions have made post-Fukushima Japan even more skittish about the security of its commodity supplies, and are fueling a lively exchange: Japan has made references to potential WTO action and allegedly threatened to ban Indonesian imports of photocopy paper, while Indonesia has indicated it could retaliate by restricting LNG exports to Japan.
While a trade war is not likely, these tensions highlight a growing trend that countries like Japan will inevitably face. Recent efforts by countries such as Brazil and India to limit iron ore exports to promote domestic steel production, and by a local government in the Democratic Republic of the Congo to force domestic copper processing, pose worrisome precedents from Japan's perspective.
Not only is there a risk that Japanese smelters will be squeezed out of the market by these changes, but associated job and revenue losses will pose challenges for the government. For example, Japanese firms and the government will face domestic backlash if they invest in smelting facilities abroad while cutting jobs at home, especially at a time when the economy is fragile and the "hollowing out" of industry there has become such a hot-button issue.
At the end of the day, Japan and other countries dependent on raw materials imports will have little recourse to counteract producer countries looking to take a greater share of the value-added processing market. That said, many of these producer countries (including Indonesia) will take time to build up their domestic smelting capacity and may not prove to be cost-competitive in areas such as labor and electricity supply.
So Japan may be able to buy some time and avoid the immediate economic and political consequences of a shifting resource landscape. But the overall trajectory probably won't reverse course. At some point down the road, Japan and other countries accustomed to having more leverage will have to make painful adjustments.
Scott Seaman and Shaun Levine are analysts in Eurasia Group’s Asia practice. Divya Reddy is an analyst in the firm’s Global Energy & Natural Resources practice.
By Nicholas Consonery and Willis Sparks
For China's top leaders, this is not a good time for confrontations with the neighbors. The country's once-a-decade leadership transition is expected to unfold this fall, and neither outgoing nor incoming officials want uncertainty or ugly international headlines to interfere with the official choreography.
Thus the worry that Asian governments like the Philippines and Vietnam, emboldened by a commitment from Washington to maintain a robust strategic presence in the region, are pushing more aggressively to assert territorial claims in the South China Sea. More worrisome still, China's leaders face patriotic pressures from within for a forceful response.
China and its neighbors could be working together on joint oil and gas exploration in these disputed waters. Proven and undiscovered oil reserves in the South China Sea are estimated to be as high as 213 billion barrels, according to a 2008 report from the U.S. Energy Information Administration. If accurate, that's larger than the proven oil reserves of all but Saudi Arabia and Venezuela. But territorial disputes continue to block efforts to prove these estimates, and the potential for open hostilities in the area is growing, threatening to disrupt trade flows and stoking regional tensions.
The most recent conflict is the impasse
between the Philippines and China over the Scarborough
Shoal, a small island 100 miles off the coast of the Philippines
claimed by both countries. In April, Philippine naval vessels discovered
Chinese fishing boats in a lagoon of the Scarborough Shoal, provoking a three-month
standoff in which Beijing used trade barriers to pressure Manila, which called
on Washington for help. Though the standoff seemed to have been resolved in
June, there are still Chinese fishing boats in the shoal.
Manila is pressing the issue both to stoke national pride at home, to justify greater defense spending, and to draw the U.S. deeper into territorial disputes. Vietnam has similar motivations, though Hanoi appears to have less appetite for tension than Manila at the moment. Neither Chinese neighbor wants to punch toe-to-toe with Beijing, and cooler heads are always likely to prevail. But confrontations at sea can spin beyond the control of state officials back on shore.
There is a similar problem in Beijing. When Chinese officials discuss how best to manage territorial claims in the South China Sea, there are lots of negotiators seated around the table. Local leaders, maritime police, customs and border officials, as well as representatives of national oil companies and the Chinese Navy each have their interests to assert. Any of these actors can play to increasingly hawkish public opinion to operate outside the limits set down by senior leaders.
That's why, though the leadership would like to put a lid on territorial tensions, China has been making so much South China Sea news in recent weeks. Two weeks ago, the state-owned China National Offshore Oil Company (CNOOC) opened nine blocks for exploration in waters also claimed by Vietnam. Not long after, a spokesperson for China's Defense Ministry announced that the navy was conducting combat-ready patrols in the area.
In months to come, China's top leaders will do their best to strike a delicate balance-to appease belligerent voices at home and within the government while reassuring outsiders that China is not becoming more aggressive. But each time one of the neighbors makes another provocative move, Beijing's balance becomes a bit harder to maintain.
Nicholas Consonery is an analyst in Eurasia Group's Asia practice. Willis Sparks is an analyst in the firm's Global Macro practice.
HOANG DINH NAM/AFP/Getty Images
By Damien Ma
Though the curious case of blind Chinese dissident Chen Guangcheng has badly embarrassed China's leaders, it has provided them one important benefit -- it has diverted attention from the far more dangerous story of Bo Xilai. Regardless of the outcome in either case, the Communist Party's image has been badly tarnished. For a Chinese government that seems bent on investing in soft power, these last few months have offered clear reminders that soft power cannot be bought. It must be earned.
For a Chinese government that prefers to keep its differences behind closed doors, the Bo Xilai episode is a nightmare, in part because the involvement of the U.S. and British governments in the case has brought an unusual degree of international media scrutiny. (One of Bo's deputies briefly took refuge in the U.S. embassy, and Bo's wife has been implicated in the murder of a British businessman.) China's familiar tools of propaganda have been overwhelmed by frenzied speculation about the case in the Western press and China's social media echo chamber -- yet another reminder that Beijing can no longer afford to ignore Sina Weibo, China's version of Twitter.
The party leadership has dismissed the Bo Xilai saga as a sideshow and Bo himself as an aberration within the country's otherwise upstanding roster of senior officials. But little of China's blogosphere appears to be buying it. Instead, Bo's story signals for many that China remains a corrupt and opaque place, that the unbridled capitalism practiced in China has mainly benefited politically-connected VIPs, and that greed has infected the leadership right to the top.
And though the drama surrounding Chen Guangcheng has given the public something new to speculate about, in some ways, the story reinforces the cynicism that Bo Xilai has exposed. Chen and Bo -- a powerless and once illiterate legal activist and a powerful political scion who long stood above the law -- seem polar opposites. But they have something important in common; both were left without a place to hide when the leadership decided they should be punished.
Few within the country believe that Bo or his wife will have their day in court, reinforcing public fear that average citizens have no real protection within a system manipulated for the benefit of the party. That Chen, like Bo Xilai's deputy, first sought sanctuary in the U.S. embassy underscores a point not lost on the Chinese public: The United States, not China's own government, offers protection of last resort in times of political turmoil.
These stories are engendering a growing trust deficit between the government and the informed public -- the very elites that the party counts as its crucial constituency. A perception of systemic "rot from within" and the lack of legitimacy it implies undermine the regime's monopoly hold on domestic political power.
Despite Premier Wen Jiabao's constant talk of political reform, the last decade of the Hu Jintao/Wen Jiabao administration saw an economy that raced ahead and a political system that changed very little. But to repair this latest damage to its "brand," the party may feel it has to produce some real change. Some within the leadership are already using this opportunity to push for political liberalization. In his closing arguments as premier, an increasingly legacy-conscious Wen Jiabao is making a final pitch for real political reform. But Wen is a lame duck.
Over the course of the next few months, China will introduce a new generation of top leaders. Any political changes they might produce are unlikely to fundamentally recast Chinese politics or to appear soon. But they may soon find that delivering go-go growth is no longer enough. They may find that, particularly in the online public square provided by social media, a growing segment of China's people will expect a new degree of accountability -- and a new kind of change.
Damien Ma is an analyst in Eurasia Group's Asia practice.
Lintao Zhang/Getty Images
By Jiakun Jack Zhang
In an attempt to reorient its economy toward consumption and allow its masses to share more of its record growth, China is quietly undertaking the largest social welfare project in human history.
Decades of rapid economic growth have created vast inequalities, and populism is consequently on the rise. China's 99 percent feel left out of their country's rapid development and are increasingly lodging their complaints online. A recent study of Chinese internet trends in 2011 reveals a shift away from nationalism toward issues of public welfare. The government is paying greater attention to social media and taking notice of this trend. In 2011, mentions of Weibo (Chinese twitter) in The People's Daily (the Party mouthpiece newspaper) increased by an astonishing 83,900 percent.
In its battle to retain political legitimacy, the Chinese Communist Party has announced that it will sacrifice growth for development quality. It realizes that raising the GDP growth bar is no longer adequate and has launched its own version of the New Deal by introducing ambitious reforms and hiking spending on affordable housing, social security, healthcare, and education. If China's leaders bungle this massive undertaking, it will spell trouble for the country's state capitalist system.
If they get it right, the next five years, covered by the 12th Five Year Plan (FYP), could prove to be the most transformative in modern Chinese history. As Beijing attempts to extend the social safety net to cover all of its 1.3 billion people, it could reshape China's economic landscape by furthering urbanization, bolstering domestic consumption, creating a better-educated workforce, and improving social stability. There are two simultaneous goals: preserve the legitimacy of the political system and contribute to the country's economic re-balancing.
For a nominally communist country, China's lack of a social safety net is somewhat ironic. When Beijing dismantled the country's communes and privatized state-owned enterprises in the 1980s and 1990s, China's ‘iron rice bowl' welfare system collapsed. The national savings rate rose during the 2000s as Chinese households struggled to pay for increasingly expensive housing, healthcare, and education while putting away enough for retirement. Ordinary citizens had little choice but to deposit their savings into state-owned banks, earning negative real returns. The savings glut fueled the country's export- and investment-driven model, but household consumption lagged.
This model seemed to work until the global financial crisis shook Beijing out of its complacency. After several abortive attempts at reform over the past decade, China's leaders finally seem committed to mending the country's broken social safety net. The government plans to construct seven million affordable housing units in 2012 alone-the project is estimated to cost 1.3 trillion yuan ($198 billion) and aims to make 20 percent of the housing market "affordable" by 2015. Last year it implemented regulations that will provide basic pension and insurance coverage for all citizens and ramp up spending by 21.9 percent to 575 billion yuan ($91 billion). A new set of health care reform goals were set in the 12th FYP: universal health care, drug pricing reform, and public hospital reform. The 2012 appropriation for healthcare is 203 billion yuan ($32 billion), an increase of 16.4 percent from 2011. Education spending is slated to expand by 16.4 percent to 378 billion yuan ($60 billion). For more details, refer to the Ministry of Finance Budget Report for 2012.
Yet pushing through reforms will prove a significant challenge for China's fifth generation of leaders. The window for reform is rapidly closing and implementation will be hindered by entrenched interests and bureaucratic inefficiencies at the local level. China's economic growth is slowing and its demographic advantage is fading. The government acknowledges that while its revenues are projected to shrink, its expenditures will expand in order to finance these new entitlement projects. The Communist Party risks losing political legitimacy and will confront growing social unrest if these efforts stall or fail. Political reforms may be the only way to create a civil service capable of administering these programs effectively (and without corruption). Having recognized that headline-grabbing GDP growth isn't enough, China's political system will have little to fall back on if it can't make this New Deal work.
Jiakun Jack Zhang is a researcher in Eurasia Group’s Asia practice.
PETER PARKS/AFP/Getty Images
By Michal Meidan
A growing economic juggernaut and rising political power, China has many reasons to look to the Middle East: to import oil, extend its diplomatic influence, diversify its trade ties, and undermine U.S. hegemony. In that context, it seems hardly surprising that Beijing (alongside Moscow) vetoed a recent U.N. Security Council resolution on Syria and set aside its commercial dispute with Iran to conclude an oil import deal -- undermining U.S. and European sanctions on Tehran.
But Beijing's Middle East strategy is hardly the coherent, well-thought-out doctrine that some believe. Instead, it's the product of a number of (sometimes competing) domestic interests that must be coordinated each time a crisis unfolds. Worryingly for Beijing, as China's commercial ties to the Middle East increase, it will inexorably become more involved in the region's politics. In the process, the risk of antagonizing an important commodity supplier, getting on the wrong side of Washington, or fueling unwanted domestic debates will become more costly and more complicated.
Some argue, simplistically, that when China blocks pressure on Iran to protect its commercial relations with that country, it pays no price for it. The reality is not nearly that simple.
First, Beijing's decisions on Iran and Syria have clearly irked Washington. Secretary of State Hillary Clinton dubbed the Syria veto "despicable." Moreover, ongoing oil trading between China and Iran has already led Washington to slap sanctions on a Chinese trader. In a year of presidential elections in the U.S. and political turnover in China, when both sides are trying to keep tensions at bay, Middle East politics will burden an already complicated relationship with an unwelcome irritant.
But Beijing has more than the United States to worry about. Take China's ties with Saudi Arabia, which provides China with almost one fifth of its oil. Beijing's reluctance to support Western-led sanctions on Iran isn't going down well in Riyadh either. Nor has China's decision to veto the U.N. Security Council's Syria resolution, a choice that Beijing claims was intended to prevent the situation on the ground from escalating further.
Finally, several diplomatic principles -- non-interference in a third country's sovereignty, support for non-proliferation, China's rise as a responsible stakeholder -- are increasingly being called into question by other governments. The decision to veto the U.N. Security Council resolution on Syria may have been motivated by diplomatic principles of non-interference in a country's sovereignty and by Beijing's desire to prevent the situation from getting worse, but it has plainly damaged popular perceptions of China elsewhere in the region, and Premier Wen Jiabao's criticism of the Iranian nuclear program rings hollow to Western ears.
When thinking about its foreign policy goals, does Beijing really want to provide the security framework for the Middle East? These are difficult debates that Chinese leaders must have, but they will certainly want to postpone them until after Beijing's leadership transition is complete next year.
In short, the more deeply Beijing becomes involved in the Middle East, the more complicated its foreign relations and internal policy-making processes become -- and the more China has to lose. The choice between alienating an oil supplier, challenging an important trade partner and a global political power or opening up its diplomatic principles for debate is one that Beijing would like to avoid. But as its global reach extends, so will the trade-offs it has to make.
By Jennifer Lee
The new, young regime in North Korea surprised more than a few observers when it agreed last week to a moratorium on its nuclear activities in return for 240,000 tons of U.S. food aid so soon after Kim Jong Un assumed leadership. Instead of the legitimacy-building provocations expected from the young Kim (who is in his late 20s), the world got a measured concession from a totalitarian regime that demonstrated a degree of consensus and decision-making ability. In some ways, it was the story of the young son continuing his father Kim Jong Il's efforts to improve relations with the U.S. prior to his death.
There is general optimism surrounding the agreement, which stalls North Korea's uranium enrichment program, and nuclear and long-range missile tests, and allows the International Atomic Energy Agency to inspect the Yongbyon nuclear facility. Last week's step forward, however, does not necessarily presage a more substantive shift in North Korea's posture. The agreement allows North Korea to possibly address its immediate concerns (economic sanctions) and affect domestic politics in South Korea, without ceding its ability to provoke or flip the switch (again) on its nuclear program.
While it is easy to think that the U.S. food aid "carrot" must have been the main reason behind North Korea agreeing to this deal, it is unlikely the case. North Korea is not known for being particularly concerned about the hunger of its people (allegedly more than one million people died during the famine in the 90s, and food security has been dismal for the past few decades); and the totalitarian nature of the regime means that its leaders are not very concerned about their approval ratings.
North Korea is more concerned about the economic condition of the state and the long-term implications of sanctions (North Korea's version of the statement mentions that it would want to discuss the lifting of sanctions and provision of light water reactors if the Six Party Talks resume). The current move is probably a gambit to see if it can resume the Six Party Talks and have sanctions lifted without giving up the nuclear program. The deal is also likely an effort by Pyongyang to slight the Lee Myung-bak administration in Seoul, which it views with hostility, in the hope of increasing the chances of the liberal parties in South Korea's presidential election in December.
The U.S. and South Korea both have presidential elections this year. The agreement is likely North Korea's way of buying time for a year or so until the South Korean administration changes, while trying to extract concessions from an Obama administration that does not want any more conflicts on its hands during an election year. This is also a moratorium that is to last only while "productive dialogue continues." Everything North Korea has promised is reversible if it decides to back out. And it certainly has set a precedent for doing so. Furthermore, this moratorium applies only to the Yongbyun nuclear facilities; it is widely believed that there are several other nuclear development sites throughout North Korea that will be out of reach under this agreement.
It should not be forgotten that North Korea's nuclear capability has been extolled within North Korea as Kim Jong Il's most important legacy. It is undoubtedly seen as the single most powerful card that North Korea has, and with the recent leadership transition to a young new leader, there is little chance that the country will completely forgo this leverage, especially after the NATO operation in Libya that removed Muammar Qaddafi.
There is still a possibility that this could turn into something positive and lasting for U/S.-North Korea relations or North Korea's future behavior. Last week's agreement demonstrates that the totalitarian regime in North Korea was able to take a rational step for its self-interest. But it does not demonstrate that North Korea is contemplating giving up its nuclear weapons, or that it is on the verge of changing its behavior.
Jennifer Lee is an associate in Eurasia Group's Asia practice.
Today, The Call presents our top risks for 2012. Click HERE for Eurasia Group's complete report.
1. The End of the 9/11 Era -- It was a truism of globalization: economics drives markets, and national security drives geopolitics. No longer. Following the 2008 financial crisis, the killing of Osama bin Laden, the withdrawal of U.S. troops from Iraq, and an end date for the war in Afghanistan, politics and economics will overlap almost entirely in 2012. Political officials around the world will worry mainly over economic risks -- the eurozone crisis, the strength of U.S. recovery, and China's evolving role in the global economy in 2012. Market players, in turn, are anxious mainly about political decisions, especially those that will be made in Europe, America, and China this year, as shortsighted leadership from virtually all the major geopolitical players generates policy stalemate and uncertainty.
2. G-Zero and the Middle East -- The inability/unwillingness of major powers to bolster the region's balance of force will generate greater turbulence across North Africa and the Middle East as unresolved religious, sectarian, and ethnic tensions threaten more unrest. The lack of a viable regional security framework, continuing protests, autocracies at risk, and enormous challenges facing newly democratic regimes will add to the potential turmoil. As this dynamic plays out in Syria, Egypt, Iraq, Libya, Yemen and Bahrain, regional heavyweights -- Saudi Arabia, Iran, and Turkey -- will generate friction as they vie for proxy influence.
3. Eurozone: the rollercoaster ride rolls on -- In Europe, it's not the breakup of the Eurozone we need to fear in 2012 but the "reactive incrementalism" that could spin beyond the control of political officials. The uncertainty and volatility we saw in 2011 has only just begun.
4. United States: right after elections -- Once the votes are counted in November, lawmakers will take up the $5 trillion worth of tax and savings decisions that must be taken in the final nine weeks of the year. Investors face uncertainty about their taxes and government contracts as well as about the broader impact of lawmakers' choices on economic growth.
5. North Korea: implosion or explosion -- The world's most opaque nuclear-armed state enters a year of uncertainty as the battle for power and influence within the regime gathers force.
6 - Pakistan: turmoil, spillover -- The end of the 9/11 era threatens neglect of other hotspots, and none is more combustible than Pakistan, a terrorism-plagued, nuclear-armed power burdened with an unpopular civilian government, a meddlesome military, politically motivated judges and an increasingly dangerous security environment. The expected withdrawal of thousands of U.S. troops from Afghanistan this year will fuel regional competition for new influence.
7. China: trouble in the neighborhood -- The Obama administration's recent emphasis on Asia will embolden China's neighbors to take more assertive positions with Beijing. Rising nationalism in China, its ongoing political transition, and the leadership's unwillingness -- perhaps inability -- to resolve internal debates about the country's role in the world suggest Beijing is especially likely to meet provocation with provocation in months to come with both naval and economic muscle.
8. Egypt: a transition in trouble -- Egypt faces the risk of political disintegration this year as anger builds between military and civilian political forces, both Islamist and secular. Egypt's base-line stability, its economic recovery, and its broader regional influence will suffer.
9. South Africa: populism ascendant -- The struggle for leadership of the ruling African National Congress will slow the pace of both policy and economic growth at a time when the eurozone crisis already weighs heavily on South Africa's trade and currency.
10. Venezuela: a no-win election -- The country's big political story this year is October's presidential election, which incumbent Hugo Chavez, if healthy enough for a vigorous campaign, is likely to narrowly win. But the outlook for economic and political stability is bad no matter the election result. Should Chavez die or abandon the race, the deep fissures between the Chavista movement and the opposition could stoke violence.
In addition, Eurasia Group identifies four red herrings, the big stories we don't believe will happen in 2012.
Fallout from the 2012 political transitions -- In 2012, we'll see political transitions in the U.S., China, Russia, and France, countries that together represent nearly half of global GDP and four-fifths of the UN Security Council. But there's surprisingly little at stake in the outcomes for geopolitics and the global economy.
This is probably the single most overrated risk of 2012. The political will to
maintain the eurozone remains strong among all the major political parties in
the core Eurozone states, almost across the board in the European periphery
and, just as importantly, among eurocrats in the ever-growing European
bureaucracy. And there's no effective political mechanism for a Eurozone
China's hard landing -- There are signs of overheated growth in China, but the state has the tools and resources to manage short-term trouble, and it will pull out every stop to prevent a serious slowdown, especially during a major political transition.
Mayan apocalypse -- Just isn't happening. And if it does, well, sorry.
Over the next three weeks, we'll be posting more ideas and information on each of these risks.
By Willis Sparks
Western officials (and more than a few Western celebrities) have criticized China in recent years for its protection of Sudan's government. They've charged Omar al-Bashir's regime in Khartoum with support for ethnically motivated militia attacks on civilians in the country's Darfur region -- and China's government with complicity. Bashir, the world's only fugitive head of state, was indicted by the International Criminal Court in 2008 for Darfur-related crimes against humanity. Beijing uses its veto power to block international efforts to supply UN peacekeepers for Darfur, critics say, to protect its oil interests in the country.
It's ironic then that China's energy needs are now helping forestall a broader (and perhaps bloodier) confrontation in Sudan.
Last July, Sudan became two countries. The mostly Muslim North and mainly Christian South finalized a relatively amicable break-up as South Sudan became an internationally recognized independent state. But like most divorces, this one did not produce a clean break, because the two countries share custody of the country's oil wealth.
Before the separation, Sudan produced about 500,000 barrels of crude oil per day. South Sudan now sits atop 75 percent of that total, but the pipelines that transport the oil and the ports that move it to market lie in the North. Since July, the northern government in Khartoum has faced a series of political and economic crises, and its foreign reserves have dwindled to dangerously low levels. Bashir's government needs some way to draw more cash from the oil it has lost.
Not surprisingly, North and South have yet to agree on how to share oil revenue, and each side has used its leverage to pressure the other. An opening of negotiations offered little promise of progress: Khartoum demanded a transit fee of $36 per barrel. The southern government in Juba offered less than a dollar.
On Nov. 8, President Salva Kiir of South Sudan dramatically upped the stakes in the dispute by ordering the expulsion from the south of Sudapet, the North's national oil company and a financial lifeline for its government. Khartoum countered with an announcement that oil exports from South Sudan would be suspended.
China quickly jumped in.
This oil is especially important to the China National Petroleum Corporation (CNPC), which has equity production in Sudan of about 200,000 bpd, 15 percent of its total overseas output. Despite its growing involvement in oil exploration and production abroad, CNPC is still a newcomer to this game, with fewer options than its international peers.
And CNPC is important for China's government, because the company is a guarantor of China's energy security. Most of the crude that CNPC draws from Sudan is not shipped home to China but is sold on international markets. Yet Beijing has emphasized the importance of holding oil assets overseas, providing fuel that can be directed to China if events threaten a sharp drop in supply.
The country's thirst for energy -- and management of the political vulnerabilities it creates -- remain a top priority for Beijing. Sudan represents less than 5 percent of China's crude oil imports, but add an extended export shutdown in Sudan to the current range of worries and headaches across oil-producing North Africa and the Middle East, and you could have significant upward pressure on global oil prices at a time when the Chinese leadership is already worried over price inflation and the risk of unexpected foreign economic shocks.
This is an especially anxious time for Beijing's economic policymakers. Volatility in Europe and the slow recovery in the United States -- China's largest trading partners -- fuel fears of a sharper-than-expected slowdown inside China. It's also a delicate moment for the country's politics as a leadership transition begins in earnest in 2012. That's why China moved quickly to pressure the North to renounce its threatened blockade.
To save face, Khartoum announced it would allow the oil to pass but would seize about a quarter of the profits as compensation. Low-level violence will continue, and we can expect to see more of the increasingly common attacks on oil fields along the two countries' poorly demarcated border. There will be more turmoil in restive oil-producing regions in the North. But thanks to aggressive Chinese mediation, the oil continues to flow, and Chinese diplomats are now trying to broker a long-term deal on transit fees.
Don't expect China to dive more deeply into conflict resolution in other countries. On foreign policy, China's leadership is risk-averse even in the most confident of times, and the looming transition to a new president, premier, and party elite over the next two years will make officials even more cautious. Only when political and commercial interests clearly coincide, as they do in Sudan, will Beijing move quickly to intervene in the politics of other countries.
In this case, however, Chinese intervention helped avoid a dangerous foreign conflict -- at least so far -- even if Western critics are cynical about its motives.
Willis Sparks in an analyst in Eurasia Group's Global Macro practice.
ASHRAF SHAZLY/AFP/Getty Images
By Shaun D. Levine
The unexpected and surprising late-October promotion of Indonesia's Tourism Minister Jero Wacik to energy minister confirms that President Susilo Bambang Yudhoyono is more interested in electoral results than he is in securing changes to the regulatory environment. The decision also highlights the president's infatuation with loyalty and exposes his penchant for weaving complex webs of vested interests that further knot these groups into Indonesia's economic and political fabric. Wacik's selection provides an excellent look into Indonesian politics and its ongoing democratic transition.
Wacik's selection is related to two factors: it is a reward for loyalty and helps Yudhoyono access the network of vested interests that dominate Indonesia's political and economic environment. With the Energy Ministry facing a host of technical and political issues, Yudhoyono could have picked an experienced technocrat with some independence from vested interests. But rewarding loyalty won out-as it often does in Indonesia. After joining Yudhoyono's Democrat Party (PD) in 2003 Wacik established his credibility by effectively winning Bali for Yudhoyono in the 2004 campaign. His reward was the appointment to tourism minister in 2004. Wacik then repeated the win in the 2009 election. His continued loyalty and close relationship with Yudhoyono's wife Ani Yudhoyono has now earned him one of Indonesia's most important ministerial portfolios.
One of Wacik's greatest challenges will be his lack of industry knowledge. It is a common problem for members of Indonesia's cabinet, and can result in vested interests securing the advantage given their persistence and political clout. Wacik has admitted he will have to take some guidance from the industry and that could lead to increased cronyism.
Wacik may also be subject to pressure from his contacts. Early in his career, Wacik worked at Astra International, which was owned and controlled by one of the founders of Adaro Coal, Edwin Soeradjaja. Additionally, Wacik is a former classmate of Aburizal Bakrie, who heads the Suharto-era Golkar party and controls Indonesia's largest coal mining group. These relationships complicate a government decision to purchase shares in a large mining company, pitting political parties and business interests against the government.
Yudhoyono knows these risks, but views Wacik's business connections as critical for the PD. Wacik's relationship with Adaro Coal and that company's influence on policies will lead to increased financial support for the PD in the 2014 electoral cycle. The relationship with Bakrie could also soothe political tensions between Golkar and the PD, where Golkar occasionally acts more like the opposition than part of Yudhoyono's coalition.
Time may prove to be the ultimate limiting factor for Wacik. The new cabinet's tenure officially runs from the end of 2011 to 2014; but election noise will pick up in 2013, which, given Wacik's likely political role during the campaign, gives him only slightly more than a year to run the ministry. As one of Yudhoyono's valued fund raisers, it is likely that Wacik will be distracted or have to resign as the campaigning and fundraising work for 2014 heats up by early 2013. Wacik's ties to Bali would also likely see him spending more time there rather than pursuing ministry work.
Shaun D. Levine is an analyst with Eurasia Group's Asia practice
ADEK BERRY/AFP/Getty Images
By Michal Meidan
The Senate bill that aims to punish China for holding down the value of its currency and that is now in the hands of the House will not trigger a trade war between China and the United States (as feverish speculation has suggested). That said, as both Beijing and Washington head toward political transitions in 2012, politicians will have to take tough stances on sensitive issues to please domestic audiences-while trying to keep bilateral relations stable. Maintaining its footing between these sometimes opposing demands will become increasingly challenging for Beijing as its campaign season revs up.
China's leaders aren't formally campaigning the way U.S. presidential candidates do, but jockeying for the country's top political positions is underway. Current leaders, as well as the younger crop they hope to promote, are therefore vulnerable to criticism from hardliners within the government, as well as from an increasingly nationalistic public. China's expanding economic clout, combined with a sense that American primacy has reached its end, is fuelling calls for more assertive responses to perceived provocations from Washington. In the run up to the Senate vote, Beijing therefore made every effort to lobby U.S. lawmakers to reject the bill. And once the bill had passed, Chinese politicians were compelled to express their displeasure vociferously. Government spokespeople slammed the bill as a protectionist move that could hinder the global economic recovery, while the state-run media denounced Washington's attempts to use the yuan as "a scapegoat for the U.S. politicians' incompetence."
Now that Beijing's rhetorical dues to its people are paid, though, it is unlikely to rock the boat further. By retaliating with currency devaluation or a trade war, Beijing could embolden lawmakers in Washington to push the bill forward. Instead, Beijing reckons that as things stand there's only a slim chance that the bill will become law. Even if the bill moves forward, China's leaders will likely wait for President Barack Obama to either water it down or veto it altogether. That is, Beijing will give the White House a chance to uphold the tacit bilateral agreement to keep cool.
Such conciliatory logic prevailed around the $5.9 billion arms sale to Taiwan that the United States announced last month. The Obama administration agreed to refurbish the F-16 jets it sold to Taiwan in 1992, but did not sell the island the latest model of the fighter plane, as some in both Washington and Taipei had hoped. China's response was low-key: Beijing called off a few military-to-military dialogues but did not sever ties (as it did after the previous announcement, in January 2010), despite strong calls at home to be more assertive. As long as Washington keeps its side of the bargain, Beijing can get away with such moderation.
But appeasing nationalistic voices while keeping bilateral ties on an even keel will be increasingly difficult for Beijing in the coming year, as contentious issues are likely to emerge. Presidential elections in Taipei in January could rattle nerves in both Beijing and Washington, as might flare-ups in the South China Sea. Particularly as the two countries grapple with an uncertain global economic outlook and try to coordinate their approach to the Middle East, any or all of these issues could make the campaign season acrimonious.
Michal Meidan is an analyst in Eurasia Group's Asia practice.
LAURENT FIEVET/AFP/Getty Images
By Damien Ma
Few things capture as much attention as the Chinese economy these days. But the politics behind who will run that economy, now the world's second-largest, are just as intriguing. For the last decade, the world has grown accustomed to the avuncular familiarity of Premier Wen Jiabao. He was the economic czar -- within a collective leadership -- who steered China through an era of unprecedented growth and oversaw a gigantic rescue package in the darkest hours of the financial crisis. But as "Grandpa Wen" relinquishes the reins next year, the question of who will take his place remains unsettled. Unlike Xi Jinping, whose lock on the presidency and party chairmanship seems certain, the candidate who was once considered a shoe-in for premier, Li Keqiang, no longer looks so invincible. Instead, the stock of a reform-minded contender seems to be rising.
That contender is Vice Premier Wang Qishan, a face most familiar to those in Washington as the leading figure on the Chinese side of the Strategic and Economic Dialogue. Back home, Wang is known as a competent manager with a wealth of experience in the financial sector, having served in the central bank and headed the China Construction Bank. He has also earned a reputation as something of a "crisis defuser" -- both dealing with the SARS outbreak as Beijing mayor and playing an important role in shaping China's response to the economic crisis. Wang's engagement with top US officials also earns him credibility as something of a statesman. As for his aspirations, one wonders what lay behind his decision to give an extended interview to the US media, a rarity for top Chinese officials (see: Wen Jiabao and Fareed Zakaria). Was he advertising his capabilities to Beijing by holding court with Tim Geithner on a serious show like Charlie Rose?
On the flip side, did the heir apparent fall from grace? Not exactly. Li arguably still has the best shot of becoming premier, given that he's President Hu Jintao's close ally and protégé. But questions are surfacing about his managerial capabilities and experience, given the challenging economic transition that Beijing hopes to engineer. Such doubts are not entirely Li's fault. He was dealt some of the toughest portfolios in the Politburo -- namely, food safety and social housing. But it will be up to Li to prove his opponents (who argue that his achievements are few) wrong.
Several other seats at the apex of Chinese political power remain unsettled, meaning that the internal jostling and gamesmanship will continue and could spill into the public arena more than the opaque mandarins would like. (Exhibit A: the swirling rumors that Jiang Zemin had died). This will be a time for extra caution, as Beijing turns inward to manage the nation's sensitive domestic politics. For those of us on the outside, perhaps it's time not just to learn names like Bachmann and Pawlenty, but also to begin getting the Chinese-language intonations right on Li (third tone) and Wang (second tone).
Damien Ma is an analyst in Eurasia Group's Asia practice.
Guang Niu/Getty Images
By Nick Consonery
The U.S. and Chinese governments have just wrapped up the third annual Strategic and Economic Dialogue (S&ED) talks, which were a vital opportunity to "tune up" one of the world's most important relationships. With the Chinese delegation now back in Beijing, the United States at least will bill the latest round as a success.
Washington secured a commitment from Beijing that it would follow through on an earlier promise to open up its massive government procurement market. Beijing also gave ground on a few other market-access issues, including in its domestic financial services market. These developments are significant for some companies in some sectors. But despite this progress, the current longer-term outlook for the U.S.-China relationship is muddled at best, and fractious at worst.
There a several areas of concern. The massive trade imbalance that haunts the relationship will not be resolved any time soon, especially given low expectations for meaningful economic change in China over the next few years. Another worry is that commercial relations-which helped smooth over several periods of high tension in the past two decades-will become more fraught, as business competition surges.
In this context, the S&ED talks-while important-are insufficient to ensure that relations stay on a positive trajectory. Sub-national contacts between the two sides must also be expanded more aggressively, in tandem with the S&ED.
Fortunately, both national governments recognize this and are working to bolster sub-national contacts. The leading efforts are the U.S.-China EcoPartnership program (which was expanded during the S&ED), and the newly formed U.S.-China Governor's Forum, which will have its first annual meeting in Salt Lake City, Utah in July this year. Individual U.S. states are also expanding dialogues and connections with China. South Carolina's Department of Commerce, for example, has a permanent representative office in Shanghai. And just this week Virginia opened its own trade office in Shanghai.
Of course, sub-national contact between the United States and China is not exactly new. As a U.S. government fact sheet, agreed on during Chinese President Hu Jintao's January visit to Washington, points out, eight governors led trade visits to China in 2010, and equivalent Chinese politicians made 100 visits to the United States in the same year.
Admittedly, these moves are driven largely by commercial interests. In particular, U.S. states are angling to get their share of a hoped-for flood of Chinese investment into the United States. But this grass-roots contact will also improve the U.S.-China relationship in a way that no high-level bilateral dialogue could hope to accomplish.
There is still a real risk, however, that politics could get in the way of the relationship-as Dan Rosen and Thilo Hanemann point out in their recent report on China's global investments. That may make it harder for states to capitalize on Chinese commercial interests, and reduce the benefits those investments would carry, such as new job growth. In the end, a more robust network of sub-national personal and business relationships between the United States and China will go a long way towards averting that outcome.
Nick Consonery is an Asia Analyst at Eurasia Group.
MANDEL NGAN/AFP/Getty Images
By Michal Meidan
Most Chinese are growing old before getting rich. The country's census results, published last week, show that of the country's 1.4 billion people, the number of those over the age of 60 ballooned by more than the population of Spain in a decade. Thanks to China's one-child policy, children under the age of 14 make up less than one-sixth of the population. This leaves the country's modestly paid working class to support two parents and four grandparents each, and taking care of one's elders can be dauntingly expensive for the average worker. The small upper class, meanwhile, is splurging on mansions. For a regime that bases its political legitimacy on economic wellbeing, a GINI coefficient nearing 0.5 (which puts China's income inequality on par with that of countries such as Sri Lanka) is a ticking time bomb.
Despite the nail-biting in Beijing about the potential consequences of inequality, the income gap is set to persist, partly because wealth is concentrated in the hands of the political elite. Many of China's new millionaires are the offspring of top officials, and other moguls have emerged from the ranks of state-owned firms. Since the beginning of the global financial crisis, the state has only tightened its grip on economic power. Private entrepreneurship is shackled, and the road to riches is closed to many. Young college graduates often earn just a fraction more than migrant workers do and have little hope of buying property, let alone the Ferraris they see in the streets of Shanghai.
So how should Beijing respond to its people's expectations and to the frustration that inevitably arises when dreams go unrealized? China's top leadership has yet to reconcile Maoist notions of equality with Deng Xiaoping's notion that "getting rich is glorious." In the meantime, Beijing will shift its emphasis from growth to development and do its best to make households richer. It is spending more heavily on welfare schemes and social safety nets and is mandating wage hikes across the country -- all of which will give workers a little more pocket money and ease the burden of supporting relatives. Officials have also begun introducing curious measures to prevent the less fortunate from realizing their increasingly less fortunate circumstances, including banning "lavishness" in advertising and restricting the size of tombstones.
This will keep resentment at bay in the near term, but social tensions are bound to rise as China muddles through its ideological crisis. To prevent them from bubbling over, Beijing will have to forge some sort of compromise: both expanding the Chinese Dream to include more people and broadening the sources of its own legitimacy.
Michal Meidan is an analyst in Eurasia Group's Asia practice.
PETER PARKS/AFP/Getty Images
By Damien Ma
In the midst of strident declarations that the global nuclear renaissance is over, it is worth pointing out that in China at least, the rebirth of nuclear power is for all intents and purposes a done deal, especially now that Japan's nuclear crisis seems to have turned a corner. Many thought Beijing's immediate announcement of a safety review and a freeze on new approvals meant the industry was effectively on life support. But that's not true. Nuclear power features prominently in the 12th Five-Year Plan (FYP) as an essential base-load alternative to coal. And because there are no easy substitutes, nuclear power is a key part of achieving China's clean energy goals.
The recently ratified 12th FYP contains binding targets to have non-fossil fuels account for 11.4 percent of China's primary energy mix and for a carbon intensity reduction of 17 percent by 2015. Those goals are likely to be reached only by meaningfully expanding nuclear power because renewables alone (including hydro) are unlikely to be sufficient in offsetting coal and meeting the plan's objective. Nuclear capacity is expected to quadruple from the current 10.8GW to around 40GW by 2015. The State Council has reportedly already approved 34 plants totaling 36.9GW, with work on 25 of those projects (totaling 27.7GW) having already started. Even if the new regulatory review delays construction of the remaining nine projects on the drawing board, China's nuclear power capacity would eventually still be just shy of 40GW.
The review process will have some effect though. Yet-to-be approved projects may be shelved. Existing projects and those yet to break ground could temporarily see delays or receive more scrutiny to determine whether they need to be retrofitted. But decommissioning reactors seems unlikely. China's fleet of reactors is relatively young, compare to the 40-year-old ones in Fukushima. Siting future plants in interior China, such as in Chongqing and Hunan, may also be reconsidered because of their proximity to notable quake zones. It is also worth noting that though China stated in 2010 that it is aiming for 70GW-86GW of installed capacity by 2020 (with some proposing total capacity as high as 100GW), that figure could ultimately err on the conservative side once Beijing reassesses its energy needs for the 13th FYP. But even at 70GW, China would be one of the largest nuclear markets in the world.
The support for nuclear energy reflects the political strength of its champions in the Chinese government. Top energy officials, such as former National Energy Administration (NEA) head Zhang Guobao and current NEA chief Liu Tienan, have publicly stated in recent days that China needs to develop its nuclear industry, with safety as a prerequisite. Other officials from the environment ministry, which has a hand in managing the nuclear sector, have also argued that China needs nuclear power to ensure energy security amid growing demand. Indeed, energy security and clean development have been invoked as compelling arguments. The head of the China National Nuclear Corp., one of the country's two nuclear giants, recently pointed to data indicating that China's existing nuclear capacity reduced annual emissions (67 million tons less of CO2 and 250,000 tons less of SO2) compared to equivalent coal-fired capacity.
Yet the effusive support elides legitimate concerns about whether China can produce a sufficient number of properly trained operators and managers that can keep up with the expansion of plants. (The Chinese obviously would prefer technicians like those handling the Fukushima crisis.) And the Japanese crisis has lent ammunition to some critics of the pace and scope of China's nuclear pursuit, with some likening it to a "great leap forward." The episode could perhaps inspire a more open debate about China's nuclear trajectory. It is also possible that bottom-up populism, particularly in a more "progressive" province such as Guangdong, could fight local governments over future plant sites. But ultimately, a sudden reversal of the civilian nuclear program that began in earnest 20 years ago seems unlikely.
Damien Ma is an analyst in Eurasia Group's Asia practice.
2009 Getty Images
By Ian Bremmer
With all the upheaval in the energy-rich Middle East, it's easy to forget that North Korea remains the world's single biggest security threat. And as he's proven many times over the years, Kim Jong-Il doesn't like to be ignored.
After a quiet couple of months, North Korea appears to be preparing for the next round of trouble. Recent talks with the South broke down almost immediately. A row over refugees has begun, with North Korea demanding the return of 31 people who crossed into South Korean waters in a fishing boat and South Korea insisting that four of them have asked for asylum.
In addition, published reports suggest North Korea could be preparing a third nuclear test.
Pyongyang is threatening missile strikes against the South Korean mainland if balloons carrying propaganda leaflets continue to cross the border. There's nothing new about threats
from the north, but the sinking of a South Korean naval corvette and the
shelling of a South Korean island last year provide an unusually hostile
North Korea has plenty to feel vulnerable about. The toughest winter in decades has damaged this year's rice crop, and North Korean officials are reportedly asking for food aid even as they threaten to drown South Korea in a lake of fire. And the hastily-coordinated transition to Kim Jong Il's all-but-unknown 27-year-old third son continues.
Don't forget the North Koreans. They have a way of reminding us they're still there.
Ian Bremmer is president of Eurasia Group and author of The End of the Free Market: Who Wins the War Between States and Corporations?
I hosted a dinner last night along with a couple of Harvard folks -- economic historian Niall Ferguson and economist Ken Rogoff. It seems Ferguson and I have been facing off a lot recently -- him doing the run-up to today's changing geoeconomic environment (starting from about the 14th century) and me looking ahead. This time, Ken was there to keep us honest on facts and figures.
Niall's pretty much a Davos fixture, with a studied but effortless presentation style and pretty extraordinary range when it comes to European/Eurasian/Asian historical trends. He also tends to get a haircut right before the summit, and so looked disarmingly boyish. (I guess that puts me in the middle, since Rogoff has a rather more adult do.)
The talk moved swiftly to whether Asia (and China in particular) has the ability to structurally eat the west's lunch. Niall thinks so -- and points to six "killer apps" that the west has dominated for a couple of centuries that now the east has picked up (things like innovation and competition). I'm skeptical on the innovation side, but generally they're strong drivers.
My primary rejoinder was to what extent China has also imported some killer apps from the west that are going to prove, well, problematic, for their model. The first, and the less controversial, is growth. When they get to around $10,000 per capita (from just under half that at present), growth's going to slow substantially. The economy has to be restructured, and largely into the hands of consumers ... out of the hands of the state. An extremely difficult thing for a consensus-driven state capitalist system to do.
But there's a second, more controversial "killer app": representative government. Not in the sense that Beijing is moving towards western-style democracy. But rather that over time, the Chinese government has indeed become much more responsive (and has had to become much more responsive) to the demands of the domestic constituency. That's a trend that's likely to prove extremely difficult to slow down. It's also one that likely makes the Chinese government more short term...and less strategic. One of the biggest advantages China has had (in addition to extraordinary amounts of productive cheap labor) is the ability to direct resources strategically in a way that the west, with their continual electoral cycles and need to placate constituents, really can't. When does that start seriously changing in China? Quite possibly at the worst possible time...when there's a slowdown.
Anyway, at the end of the presentation, we did a snap poll of the roughly 75 attendees at the dinner: how many thought emerging market growth was, on balance, a good or a bad thing for the developed world? A plurality actually voted "bad." (I'd say 40/45 percent, 25 percent good, and the rest thoughtfully abstaining). Food for thought.
FABRICE COFFRINI/AFP/Getty Images
By Ian Bremmer and David Gordon
Following the sinking of a South Korean naval vessel and the shelling of a South Korean island in 2010, more North Korean provocations are almost certain in 2011. The likeliest steps include a third nuclear test, a long-range missile test, conventional attacks, or terrorism. With the United States and China often at cross purposes on this problem, this low-likelihood, high-impact risk in definitely one to keep an eye on.
The North's belligerence and its willingness to inflict casualties to make its point is almost certainly the result of a faster-than-expected leadership transition in Pyongyang. That's the only variable that could explain the sudden dramatic change in behavior of the past several months. The aggressiveness could be coming from external concerns -- that Kim Jong-Il's third son, Kim Jong-un, will be vulnerable to international "testing" if Pyongyang doesn't first prove his mettle. Or it could be internal -- if Kim Jong-Il fears the military isn't sold on his son's accession, especially in the event that the father dies suddenly. The latter scenario is much more troubling in terms of North Korea's willingness to provoke military conflict on the peninsula, but there's no way of knowing which of the two is the more likely. Beijing's view is that it's unwise to take any steps that would roil the North Koreans while a change of regime is in the offing. And change inside North Korea certainly appears to be underway.
Meanwhile, the South Korean political landscape is among the most polarized in Asia, and the hard liners are -- at least for the coming year --pulling the strings. President Lee Myung-bak has no desire to provoke war, but he's also politically disposed to take measures that Pyongyang will view as overtly hostile, steps like creation of a reunification tax that plans for an eventual North Korean collapse and more military exercises inside what North Korea considers to be contested territory. And some within the South Korean military may want to prove that their country is not the North's punching bag.
A response to North Korean escalation will likely be designed to avoid any appearance of escalation, unless Pyongyang directly targets peninsular South Korea or U.S. forces. The North threatened both in a recent statement.
The biggest risk here will materialize only if the North Korean transition begins to fail and regime collapse looms imminent. In this case, the United States and China would find themselves with sharply different priorities, as the U.S. military looks to ensure security of the North's nuclear arsenal while the Chinese look to prevent a flood of sick and starving North Korean refugees into China. There's been no military-to-military discussion, let alone coordination, for scenario planning between the United States and Chinese leadership. That's not the best recipe for crisis management.
On Wednesday, we'll move toward a more macro theme: capital controls, which takes its place at no. 6 on our list of 2011's top risks.
Ian Bremmer is president of Eurasia Group. David Gordon is the firm's head of research.
JUNG YEON-JE/AFP/Getty Images
By Ian Bremmer and David Gordon
Amid a sluggish global recovery, China's return to go-go growth will generate plenty of resentment in 2011 -- and not just in Washington. Though China has become the world's second-largest economy, its leadership insists it must continue to manage the country's development at a measured pace. For some of China's biggest trading partners, that argument is beginning to ring hollow.
To rebalance the global economy, policymakers in both the developed and developing world have called on China to reduce its enormous trade surpluses by reducing the country's dependence for growth on exports and increasing Chinese consumer demand, both for foreign and domestically made products. Chinese policymakers would like to do exactly that. The Western financial crisis briefly created turmoil in China, not because Chinese banks were exposed to contagion from Western banks, but because reduced demand for Chinese products in Europe, the United States, and Japan hit local manufacturers hard and forced millions of Chinese from their jobs. Beijing scrambled to create new jobs, primarily by targeting massive state stimulus spending at infrastructure projects that required lots of manual labor. For the Chinese leadership, generating much greater domestic demand would make China less vulnerable to hard times elsewhere.
But China's plans for rebalancing will take a generation to accomplish, and a lot of its trade partners would like to see the change come much faster than that. In the near term, Beijing will offer only small adjustments to accommodate them because the leadership must negotiate demands from various interest groups within the leadership and because this transition will put many more workers on the street than the slowdown did, and the Chinese leadership knows it must manage that challenge carefully to avoid a dramatic surge in civil unrest.
Unsatisfied, outsiders will grouse that China's rate of export growth remains twice its rate of economic growth. In 2010, relations between the United States and China became much more contentious. In 2011, China will likely face increased pressure from Europe, Japan, and probably from emerging markets like India and Brazil. Further, China's security-driven assertiveness in East Asia will continue to provoke tensions with many of its Asian neighbors even as trade relations deepen.
In the past, China has taken the edge off international pressure by adjusting the pace of its reform efforts modestly just before major multinational gatherings -- for example, by depegging the renminbi from the U.S. dollar in advance of the June 2010 Toronto G-20 summit. But there aren't many "steam-releasing" events on the calendar in 2011. President Hu Jintao visits Washington later this month, but the North Korea crisis will occupy much of that conversation, decreasing the likelihood that China will see much value in any major moves on rebalancing.
The next G-20 meeting, this one in Cannes, won't be held until November. French President Nicolas Sarkozy has grand ambitions for this event, but frustration with China will build over the next 10 months and so too will the risks of market-moving international reactions to China's incremental, deliberate, consensus-driven policymaking process. At Cannes, tensions may come to a head as more countries than ever prove ready to confront Beijing on issues from industrial policy to intellectual property rights protections to currency valuation.
On Monday, we'll examine the threat from North Korea, which hits our list of this year's top risks at No. 5.
Ian Bremmer is president of Eurasia Group. David Gordon is the firm's head of research.
FREDERIC J. BROWN/AFP/Getty Images
By Eurasia Group's Asia practice
Next in our series of regional outlooks is Asia, where most economies not named Japan are enjoying quicker and stronger recoveries than in other regions. Asian states have also gained new weight within the G-20 and the Bretton Woods institutions. But traditional strategic rivalries persist, and China's growing economic clout and North Korean belligerence are likely to generate most of the headlines in 2011.
Across the region, Chinese demand is a central driver of other countries' economic growth, and for many Asian countries, China is the top trade partner. In the coming year, China will boost its role at the center of a growing web of economic and financial connections that are gradually, but inexorably, integrating East Asia. Beijing will also strengthen its economic ties across South Asia, notably in Pakistan, Sri Lanka, Bangladesh, and even India, with a focus on investment in infrastructure. China-centric free trade agreements have proliferated. Beijing has also adopted its own standards in some areas of information and communications technology and will try to have them adopted internationally. China will continue to try to reshape the region's trade and investment architecture, largely on a pan-Asian basis and without the United States.
But Beijing's long-term strategic intentions inspire deep anxiety, and its foreign and defense policies have rattled its neighbors. Beijing will suffer consequences in 2011, as India, South Korea, Japan, Indonesia, Vietnam, Malaysia, Australia, and others strengthen their defense ties to the United States. Joint exercises, drills at sea, and weapons sales will periodically raise tensions. So too will trade conflicts, as debates over China's industrial policies at home and investments abroad mix commercial worries with national security fears.
Traditional geopolitical risks in Asia, including China-Japan and India-Pakistan frictions, should be manageable in 2011, but North Korea remains a wildcard. Pyongyang continues to make succession arrangements for an ailing Kim Jong-il, and the regime has used military action in the past to bolster its domestic legitimacy.
Further North Korean provocations are highly likely. We could see a third nuclear test in 2011, but additional conventional attacks would rattle markets with greater force. Significant military escalation is unlikely, however, unless Pyongyang strikes U.S. assets -- like ships participating in joint exercises -- or launches conventional strikes at peninsular South Korea. The former would prompt U.S. retaliation. The latter could lead to counterstrikes on peninsular North Korea, though an innately conservative Seoul will try to modulate its response to avoid an escalation of violence.
This post was written by analysts in Eurasia Group's Asia practice.
This week's U.S.-South Korean trade agreement fills Japan's political leaders with envy. The latest reports of North Korean belligerence fill them with dread. Suspicions that a record-breaking Chinese high-speed train was built with Japanese technology fill them with anger.
It's not easy finding good news in Japan. Following two decades of economic inertia, dynamic growth feels like ancient history. At nearly 200 percent of GDP, Japan's gross government debt has reached dangerous levels. The population is aging, and a third of Japanese young adults don't have jobs. China's shadow is lengthening across East Asia. Americans once worried that Japan was buying the U.S. economy. Today they fear the U.S. will repeat Japan's mistakes.
Yet, Japan's beleaguered leaders have three important advantages.
First, the Democratic Party of Japan (DPJ)-led government and the country's business elite are finally realizing that they have to work together. The DPJ won control of government in 2009 after a half century in the wilderness during the nearly uninterrupted rule of the Liberal Democratic Party (LDP). The DPJ's longstanding ties with trade unions and its leaders' anti-business rhetoric have badly damaged the party's credibility with Japan's industrial elite.
But the LDP won't be staging a comeback in the near future. To accomplish much of anything, the DPJ government needs the business elite to succeed. The business community, in turn, needs much better relations with the government. The two sides seem now to recognize that they have no choice but to build stronger, more durable ties. That's a foundation for better days ahead.
Second, China's rise -- and a growing appetite in Beijing for confrontation with Tokyo -- has accomplished something that U.S. and Japanese diplomats haven't. It has put the U.S.-Japanese relationship back on track. Once Washington and Tokyo stop bickering over placement of U.S. military bases, they can make progress on more serious security issues.
None of these issues could be more important than a renewed push for progress on the Trans-Pacific Partnership (TPP), a multilateral free trade pact that might one day integrate many of the Pacific Rim's largest economies. Washington is already negotiating to join. Japan's government has finally begun to show interest. In part that's because, with the DPJ in power, Japanese farmers won't have a veto over the pact as they did with the LDP in charge. It's also because China's expansion has Japan (and others in the region) looking to balance Beijing's growing weight by strengthening its ties with the United States.
Most importantly, Japan's leaders can count their blessings that angry large-scale demonstrations aren't common in Japan. Despite 20 years of economic malaise, Japanese leaders don't face the kind of public outrage we've seen this year in Europe. There's no Japanese tea party. Japanese students aren't as in to property damage as their South Korean counterparts. And unlike China, rising unemployment poses no threat to the survival of Japan's government.
And if its luck really begins to turn, perhaps Japan can get its economy back on track ... just in time to host the World Cup in 2034.
Ian Bremmer is president of Eurasia Group and author of The End of the Free Market: Who Wins the War Between States and Corporations?
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The Call, from Ian Bremmer, uses cutting-edge political science to predict the political future -- and how it will shape the global economy.