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.
The theme of this week's must-reads is the US domestic picture -- whether it's immigration, the federal deficit, gay marriage, or the 2016 presidential election.
The US domestic picture
Micah Cohen, FiveThirtyEight blog, New York Times
As soon as the 2012 presidential election wrapped up, some pollsters turned their attention to 2016. Too soon? Perhaps not.
Today there are just 140,000 green cards per year that are tied to employment and investment. That's the same quota as in 1990, even though the U.S. population has grown dramatically since. In 2011, just 6% of all green cards were handed out "for hard-nosed economic reasons."
Alexander Burns, Maggie Haberman, and John F. Harris, Politico
Will March 2013 be remembered as the month when the political calculus on the issue of gay marriage fundamentally shifted? What's the underlying cause of the shift? What does it mean for policy -- and for politicians -- going forward?
Garance Franke-Ruta, The Atlantic
According to the Congressional Budget Office, the U.S. is on track for the smallest federal budget deficit since 2009. But at 5.3 percent of GDP, the 2013 deficit would still be larger than in all but one year between 1947 and 2008. This article highlights three aspects of the U.S. financial picture that the American public routinely misunderstands.
A BRICS bonus
Anita Powell, Voice of America
Can a BRICS development bank work? Or are the interests and priorities of Brazil, Russia, India, China, and South Africa simply too divergent?
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
By Carlos Ramirez
At first glance, the Institutional Revolutionary Party (PRI) is the clear winner of Mexico's July 1 presidential election. But a closer look at the results reveals a more muddled picture. On the surface, the PRI certainly came out ahead: After 12 years in opposition, Mexico's once-hegemonic power reclaimed the presidency and engineered a strong congressional coalition. Also, when Enrique Pena Nieto is inaugurated on December 1, the party will have governors in place in 22 states and control of a majority of state legislatures. Meanwhile, the PRI's main rival, the currently ruling National Action Party (PAN), fielded a third-place presidential candidate, lost control of the key states of Jalisco and Morelos, and saw itself reduced to the third-largest party in the lower house of congress.
The PRI's pick-ups and the PAN's failure to retain the presidency were largely predicted in the weeks preceding the election. What came as a surprise was Pena Nieto's inability to reach the critical 42 percent threshold of total votes, which translated into a weaker performance for the PRI in the congressional races. The party failed to achieve working majorities in both chambers, and the outcome fell far short of the PRI's expectations-especially in the senate, whose members are elected every six years. So in a dramatic turn of events, Pena Nieto will assume the presidency but will have to depend on legislative support from the PAN to secure his agenda.
The electoral outcome has damaged the center-right PAN, but it does have this one lifeline. As a pivotal party in congress, it will be the only powerbroker with which the PRI will be able to negotiate structural reforms. This is the inverse result of the 2006 election, which may provide some consolation to PANistas who watched the policies of outgoing president Felipe Calderon repeatedly held up by the PRI over the past six years. This time, it is the PRI that will be tied to the PAN for the entirety of the Pena Nieto administration.
This ironic turn of events clearly was not part of the PRI's plan. Pena Nieto intended, after winning by a double-digit margin and capturing both chambers, to propose moving forward on many long-stalled reforms, to secure congressional approval with or without PAN support, and to avoid having to undermine the vested interests that make up his constituency. The goal was to demonstrate the PRI's effectiveness from the outset and achieve solid results. The Mexican public, in turn, would see 12 long years of obstructionism and stalled reforms quickly vanish. But that plan collapsed last weekend.
So why, exactly, is the outcome so bad for the PRI? From a business perspective, it seems reasonable that the PRI and the PAN would come together to enact needed reforms. According to Pena Nieto and his advisers, the PRI is pursuing the same reforms that the PAN tried (and failed) to pass during the Vicente Fox (2000-2006) and Calderon (2006-2012) administrations: fundamental changes in the areas of labor, fiscal policy, energy, and competition. The PAN has no deep-seated ideological opposition to any of these (unlike the other major party, the Democratic Revolution Party, or PRD). And it does not have strong ties to the groups with an interest in maintaining the status quo. Conventional wisdom, therefore, would say that Pena Nieto will find a way to get the PAN on board to pass the relevant legislation.
It is not that simple, however. If the PAN learns from its historic defeat, it will quickly come to terms with the fact that it now has a golden opportunity over the next six years to push for a much deeper transformation of Mexico's political and economic landscape. In particular, the PAN can offer support for the PRI's structural reforms in exchange for dismantling the vestiges of the old PRI-led corporatist coalition that survived Mexico's transition to democracy. (The PAN struggled against this coalition during its 12 years in the presidential residence.)
Accomplishing such a feat is a pretty straight-forward task, as there is no shortage of issues on which the PAN can seek concessions in exchange for supporting reforms. The list is large -- underscoring the many problems left untouched during the past dozen years-but certainly achievable. Here are some of the topics that could be up for negotiation:
There is no question that the PAN will support these structural improvements. After all, the party's only chance of returning to power relatively quickly is if Mexico breaks with its corporatist past and modernizes at a faster pace. The real question is whether Pena Nieto is serious about enacting real change-serious enough that he is willing to defy the rent-seeking coalition that backs him. If he is truly committed to advancing reforms (and is ready for the epic, vociferous resistance sure to emanate both from within his own party and from the PRD), then Pena Nieto might succeed in becoming the first president to usher in a historic transformation. In that scenario, the country will have undergone unprecedented economic reforms during his administration and will function in 2018 within a renovated institutional framework that empowers Mexicans to reach their real potential. If, however, Pena Nieto is not committed enough -- if he ends up preferring accommodation rather than transformation, and if the dead weight of the PRI's past prevails once again -- then Mexico will remain condemned to the same mediocre performance witnessed over the past decade.
The stakes for Pena Nieto are clear. Will Mexico's new president be transformational, or will he prefer to continue playing the role of a soap-opera actor? Like Mexico's famed telenovelas, the election had a surprise ending.
Carlos Ramirez is an analyst in Eurasia Group's Latin America practice.
By Alexander Kliment
Russian President Vladimir Putin's last minute decision to skip a G8 summit with President Barack Obama is a snub to Washington, but the Russian president's no-show may in fact increase the chances for a constructive relationship between the two countries.
Last week, just days after his inauguration, Putin let it be known that he would not attend the upcoming G8 summit at Camp David, where he and Obama were set for a one on one meeting.
The White House, in turn, said Obama wouldn't attend the 2012 Asia Pacific Economic Conference (APEC) summit this fall in Vladivostok, Russia -- though it was always hard to imagine Obama skipping the Democratic National Convention.
According to the Kremlin's official explanation, Putin can't leave Russia right now because approving the cabinet nominations submitted to him by Prime Minister Dmitry Medvedev is too sensitive a task for Putin to oversee by phone from Maryland. So Medvedev will send the list to Putin and head to the summit himself.
Putin's decision is a breach of G8 protocol, which expects that sitting heads of state will attend the group's summits. French President Francois Hollande, for example, will attend, just days after his 15 May inauguration. And by sending his number two to an organization in which Russia is already something of a second fiddle, Putin is raising questions about the wisdom of keeping Russia in the group at all.
Accordingly, many analysts have cast the move as a brazen rebuke to the U.S., which Putin alleges is behind the unprecedented street protests that have become a feature of Moscow life since last December.
It's true that the Kremlin's official explanation isn't wholly credible. Most cabinet decisions have likely been agreed upon already, Putin's re-election was never in doubt, and the G8 summit's date has been known for some time. That said, he reassumes the presidency amid rising popular opposition, which has sowed fresh doubts about his legitimacy. Keen to prevent infighting or, worse, insubordination among Russia's powerful elites, Putin could well be preoccupied with some last minute horse-trading at home.
The timing may, in fact, be no better in Washington than it is in Moscow.
Obama is entering a challenging re-election campaign in which he has already drawn fire from his Republican opponent Mitt Romney about the pursuit of a reset with Russia and his broader foreign policy track record. U.S.-Russia ties have deteriorated recently -- on account of disagreements over Syria, continuing friction over missile defense, and Putin's allegations of U.S. complicity in the protest movement -- meaning the U.S. president would be under pressure to take a hard line with Putin.
But that could risk an unpredictable flare-up with the notoriously sharp-tongued and pugnacious Putin. At the very least, it might complicate White House attempts to secure congressional support for granting Russia normal trade relations status so that U.S. companies can benefit from Russia's WTO accession.
In short, with both men facing heightened domestic concerns and pressures, Obama's meeting with Medvedev, who has warmer relations with Obama and who is seen chiefly as a messenger for Putin, carries much less political significance, but also much lower political risk. The practical result is that it leaves open the chance of greater flexibility between Washington and Moscow that could help maintain a pragmatic relationship in the medium term.
Alexander Kliment is an analyst with Eurasia Group's Eurasia practice.
JEWEL SAMAD/AFP/Getty Images
By Carlos Ramirez
Allegations that WalMart-Mexico's executives bribed local officials to speed up permitting for new stores highlight the issues of corruption in Mexico, but will have little impact. In the short term, the Mexican federal government has announced an investigation regarding the federal permits granted to the retailer. But that seems to be a political response to the growing criticism of inaction by the authorities rather than a serious case against the company. Because the allegations of wrongdoing relate to local-level permitting, any federal investigation will likely turn up little, if anything, of note. Furthermore, with the present federal administration entering its last few months, the investigation will probably fail to reach any meaningful result before its November 30 deadline.
In reality, federal officials are legally constrained from pursuing the allegations. They would first need a formal accusation by a third party before being able to launch any investigation regarding the alleged bribery. Furthermore, the division of powers under Mexico's constitution gives states and municipalities control over construction and most environmental permits, and national prosecutors have limited leeway to investigate local affairs other than when federal crimes are suspected.
A formal investigation at the state and/or municipal levels is even less likely. Since Mexico's transition to democracy, political power has shifted from the once all-powerful presidency toward the 32 state governors and the mayors of some of Mexico's biggest cities. The governors have strengthened their leverage over important decision-making within their jurisdiction through their control of local institutions. Increased budgetary and debt resources, with little related accountability and transparency (which increase the likelihood of corruption), have only reinforced the governors' political clout. Moreover, because the alleged corruption occurred five or six years ago, and reelection is banned in Mexico, politicians who served at that time will no longer be in office, which would further complicate a formal investigation.
Ultimately, both federal and local governments welcome companies that bring jobs and economic activity and that will likely to trump other considerations. WalMart-Mexico is currently Mexico's largest private sector employer with more than 210,000 employees. Local and federal authorities are unlikely to constrain WalMart-Mexico's growth, particularly when citizens cite jobs as among their principal concerns. In fact, federal and local authorities are likely to continue to regard the company as an important contributor to the economy.
In the short term the most likely immediate outcome for WalMart-Mexico is increased scrutiny of its operations by the media, competitors, and NGOs that oppose its presence in the country, but this is unlikely to hamper the company's ability to keep expanding in Mexico.
The episode does raise questions about whether Mexico's next president, to be chosen in July, will be able to tackle the lack of local-level transparency and accountability. Not only do governors face few checks, but the ban on reelection also means that politicians have few incentives to govern with any concern for their longer-term public reputation. If Enrique Pena Nieto from the Revolutionary Institutional Party (PRI) wins the July election, cooperation between federal and local authorities would improve in some areas. Calderon was frustrated with the lack of cooperation from the states on security, leading to tense relations, especially with PRI governors.
But the fact that the PRI controls most states and many municipalities means there are few incentives for a PRI president to seriously attempt to improve transparency. If elected, Pena Nieto is likely to prioritize the need to win support from governors for his own agenda, rather than pursue the complex political reforms needed to seriously tackle accountability and transparency issues at a local level.
Carlos Ramirez is an analyst with Eurasia Group's Latin America practice.
Daniel Aguilar/Getty Images
By Ayham Kamel
It may be tempting to view the plethora of recent gatherings -- the Arab League summit, the U.S.-Gulf Cooperation Council Strategic Cooperation Forum, and the Friends of Syria conference -- as evidence that the global community is getting more serious about addressing the violence in Syria. But the summits really just exposed the rifts among the relevant players that will prevent a viable and coordinated response. Syrian President Bashar al Assad, in turn, will profit from the lack of coherence; he will only nominally entertain Kofi Annan's peace plan as he maintains his grip on power, and the bloodshed will worsen.
International powers remain hesitant regarding any form of direct intervention. They considered initiatives calling for buffer or humanitarian zones, but ultimately no country seems prepared to act. Key powers appear to be pursuing their distinct policies, with only a hint of coordination.
Saudi Arabia and Qatar will provide extensive support -- including arms -- to the Syrian opposition, but are unlikely to supply the heavy arms that would lead to an immediate change in the balance of power. Heavy arms are more difficult to smuggle and training rebels would be much more challenging than during the Libyan conflict. Moreover, the escalation could provoke an un-calculated response from Assad's military. While their interests differ, the two powers see Assad's survival as a threat to their influence. Riyadh's purpose is to limit Iran's regional influence. Meanwhile, Doha has invested significant diplomatic and political capital in the struggle against Assad and any failure to deliver would represent a tangible setback to its prestige. Behind the armament policy is also a deep concern that if Assad regains control, Damascus and Tehran would aim to destabilize the al Saud and al Thani ruling families' grip on power.
Arming the rebels, who have had trouble obtaining ammunition sine the regime began its extensive military campaign in early February, will provide much needed psychological support and will help weaken Assad's forces. While the resolve of Syria's opposition will not abate, arms from the Gulf will neither arrive overnight nor will they immediately change the balance of military power, which is still heavily tilted in the regime's favor. An equally important element of the Gulf strategy is providing monetary incentives to officers in the Syrian army to incite defections. But Assad has built multiple safeguards to prevent defections, a tactic he inherited from his father.
The U.S. is willing to overlook, perhaps even support, GCC efforts to weaken Assad. But Washington is definitely not interested in playing an active role. It is concerned about Saudi Arabia's and Lebanon's support of Salafist rebels and al Qaeda leader Ayman al Zawahiri's call for jihad in Syria. While Sunni monarchies in the Gulf benefit from rising sectarianism in Syria, the U.S. interest in long-term regional stability could be compromised if the Sunni-Shia confrontations spread to Iraq and other countries. U.S. officials believe that a political settlement will be needed to prevent prolonged instability. Verbal support for the Annan process is a reflection of the desire to keep negotiations open, but U.S. officials are convinced that under current conditions the Annan plan will only enable Assad to retain power.
Assad will probably not implement key elements of the Annan peace plan, which calls for a halt of hostilities from all sides, and a negotiated settlement between the regime and the opposition. The regime views cooperation with the UN envoy as a way to secure the successes achieved by its military strategy and to gain some breathing space. While Annan is a shrewd diplomat, there are few reasons to think that success is in reach. Syria's opposition will probably not negotiate with Assad or agree to a settlement that keeps him in power. Meanwhile, there are no indications that the Lion of Damascus has reached a point where he would accept his own ouster.
Ayham Kamel is an analyst in Eurasia Group's Middle East and North Africa practice.
Mohammed Ameen-Pool/Getty Images
By Adam Siegel
Colombian president Juan Manuel Santos is likely to open the Sixth Summit of the Americas in Cartagena next month with a standard welcome for Barack Obama and the 33 other leaders of the Western Hemisphere, but maybe there's a more fitting greeting for the U.S. president: "This is an intervention." After decades of partnering with the U.S. to pursue an aggressive, often controversial 'war on drugs,' a number of Latin American leaders say they're ready to discuss major shifts in regional anti-drug policy. Some of them have begun talk of "decriminalization" -- and they want to do it at the Summit, where the United States will have no choice but to talk up the merits of the prohibition policies it has long favored.
The former presidents of Brazil, Colombia, and Mexico generated headlines in 2009 by jointly declaring that "the war on drugs has failed" and calling for decriminalization of marijuana, but the commentary was dismissed in some quarters as an easy argument to make for men no longer politically accountable as heads of state. Since then, however, several sitting Latin American leaders (on both the left and right) have called for candid debate of current drug policy. Among them: Mexico's Felipe Calderon, Costa Rica's Laura Chinchilla, Argentina's Cristina Kirchner, Guatemala's Otto Perez Molina, and Colombia's Santos -- who told Britain's The Observer last year that "A new approach should try and take away the violent profit that comes with drug trafficking... If that means legalizing, and the world thinks that's the solution, I will welcome it."
Santos' caveat -- "[if] the world thinks that's the solution" -- nods to the global reach of Latin America's drug trafficking organizations, underscoring the desire for a debate that includes producers and consumers (who are concentrated in the U.S. and Europe). This distinction is important; indeed, personal consumption of drugs like marijuana and cocaine is already technically decriminalized in Mexico, Costa Rica, and Colombia, while the total number of convictions for personal drug possession in Guatemala and Argentina combined was just 161 in 2009, according to the Inter-American Drug Abuse Control Commission. So when an ex-military general like Perez or a former defense minister like Santos talks about decriminalization, it's not because they care so much about personal liberties. Rather, they have one major goal in mind: choking off the resources that fuel drug cartels and the violence they practice.
As Perez explained recently in advance of a Central American conference on alternative drug strategy sponsored by his administration in Antigua, "drugs are expensive precisely because they are prohibited...traffickers will lose if they cease to be profitable." While no detailed proposal is yet on the table, his idea of decriminalization is clear: create a legal framework to make the production and transport of cocaine legal, at least throughout Central America -- a region through which approximately 80 percent of the cocaine heading to the United States stops. Bringing the business of this $37 billion industry out into the open, it is assumed, would reduce the imperative of traffickers to corrupt public officials and their need to use violence against both governments and rivals for access to the best trafficking routes.
Other leaders, from Vice President Joe Biden to Nicaraguan president Daniel Ortega, have rejected the decriminalization proposals out of hand. Nevertheless, the coordinator of Obama's trip to Colombia recently indicated that the U.S. was "ready to have a good dialogue between all countries to hear their views," though he reiterated that U.S. opposition to any legalization will not change. Of the suggestions offered at the Guatemala conference last weekend, some could be endorsed by the U.S. -- such as the creation of a regional Central American court for trying traffickers that would reduce local corruption and relieve pressure on national justice systems, while others -- mandating that the U.S. take "co-responsibility" and pay individual countries for every drug raid or plant eradicated -- don't stand a chance.
Obama's challenge at the Summit will be to offer policy alternatives to the status quo. Latin American leaders warn that Washington has asked them to take tough choices over the years, and they want to see the U.S. demonstrate the political courage to consider a few of their own. Latin Americans are far from united on decriminalization or any other single solution, but the gathering in Cartagena will make clear that they have become increasingly willing and able to propose new ideas they know that Washington won't like. If Guatemala's Perez Molina gets his way, we'll even see him start discussions on a formal drug transit corridor for moving cocaine between South America and the United States.
Wartime U.S. presidents talk often of the need to "listen to the generals on the ground." In coming years, beginning in Cartagena, Washington can expect its "frontline partners" in the war on drugs to offer up strategies and ideas that U.S. policymakers won't like. Some Latin American leaders may give Obama a break during an election year, but they aren't prepared to wait much longer.
Adam Siegel is a researcher in Eurasia Group's Latin America practice.
LUIS ROBAYO/AFP/Getty Images
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.
By Carlos Ramírez and Allyson Benton
The ruling National Action Party's (PAN) Josefina Vázquez Mota won the internal party presidential primary on 5 February, easily defeating former finance secretary Ernesto Cordero by about 15 percentage points. This is the first time that a mainstream political party in Mexico has selected a female candidate for president. Although surprising for some outside observers, the news was not unexpected for those watching PAN politics over the past year. A variety of opinion polls had consistently shown that Vázquez Mota's service as Secretary of Social Development, Secretary of Education, and most recently as PAN legislator and lower chamber party whip had raised her name recognition and popularity well above the other competitors.
Vázquez Mota's selection will raise hopes among some groups that Mexico will elect its first female president. However, the incumbent PAN faces several challenges from its main rival, the Institutional Revolutionary Party (PRI), and its candidate, the telegenic Enrique Peña Nieto. A recent poll by Consulta Mitofsky reflects the uphill battle she faces: Peña Nieto commands 40 percent support to Vázquez Mota's 24 percent, with the left-leaning Andrés Manuel López Obrador from the Democratic Revolution Party (PRD) only four points behind her; 17 percent of voters expressed no preference and 1 percent supported another small party. Although the PAN will see increased support after having finally named a candidate and the start of formal campaigning at the end of March, the party and its first ever female candidate face three critical challenges.
The PAN has held the presidency since 2000. Any incumbent party, especially a two-term one, needs a highly favorable economic environment to counteract the erosion of support that accompanies voters' increasing familiarity with the government in power. The PAN successfully navigated the 2008-2009 global financial and economic crisis and a deep domestic economic recession, but voters may find it difficult to reward a party that has overseen lackluster average yearly per capita GDP growth of 0.5 percent during the two terms. The modest growth expected over the next few months is unlikely to assuage voter concerns.
The deterioration of Mexico's security environment since President Felipe Calderon took office in December 2006 is another potential liability for the PAN. Mounting drug-trafficking-related violence continues to grab headlines, and there is an overwhelming sense that the country is losing the war against the drug traffickers. As a result, the election will be in good part a referendum on Calderon's security strategy, a pillar of which has been the use of armed forces instead of local law enforcement agencies. Although Calderon retains considerable support on this front, a majority of voters support a change in the security strategy, although they are undecided about what the new approach should be.
The PRI candidate meanwhile benefits from several advantages heading into the race. Peña Nieto has successfully staked out a centrist position that appeals to a broader constituency than just the traditional PRI faithful. The strategy appears to be assuaging voter concerns about the potential return to power of the formerly authoritarian party. The PRI also has a structural political advantage given its control of 20 governorships out of 32. Governors have emerged as powerful political figures in Mexico's evolving political landscape and they can marshal significant state-level resources to assist in campaigns.
Despite these challenges, Vázquez Mota is likely to be a competitive candidate this July. She has strong national-level name recognition and likely counts on solid support from the PAN's traditional constituents in the middle classes and the business community. Additionally, her status as the first female candidate from a mainstream party could help her attract independents (about one-third of the electorate) and first-time voters. Many swing voters might be reluctant to support the PRI -- despite Peña Nieto's best efforts at convincing voters that it has changed -- or the more radical left-leaning López Obrador. Vázquez Mota's likely strategy is to present herself as representing continuity with popular PAN polices, such as its free-market and pro-investment economic policies and its popular healthcare and housing initiatives -- but as also able to critique the current administration on other fronts, such as security policy, where she will offer improvements.
The PRI remains favored to win the race, but Vázquez Mota's selection has probably made it a much closer race than originally anticipated.
Carlos Ramirez and Allyson Benton are analysts in Eurasia Group's Latin America practice.
ALFREDO ESTRELLA/AFP/Getty Images
By Hani Sabra and Willis Sparks
Some of the outsiders inspired by last year's protests in Tahrir Square and the power of ordinary Egyptians to oust their long-time dictator expressed surprise when the country's transitional government began in December to target prominent NGOs as agents of foreign (read Western) governments. They shouldn't be. So far, the great lesson of Egypt's ongoing "transition" is that it remains awfully hard for old dogs to learn new tricks.
Egyptian authorities are now prosecuting more than 40 people for operating NGOs without licenses and for receiving "illegal foreign funding." Among the accused are 19 Americans, including the Washington-based International Republican Institute's Sam LaHood, son of U.S. Transportation Secretary Ray LaHood.
The case is but one example of how far Egypt's revolution has unraveled. A year ago, after Hosni Mubarak's exit, even those Egyptian activists least willing to trust the Supreme Council of the Armed Forces (SCAF) believed that the generals understood that the country could not continue as it had for six decades, that power had to be shared, and that democracy demands much more than the conduct of hastily arranged elections.
The activists, and the rest of the country, watched the generals leap aboard the "January 25 Revolution" bandwagon and salute the struggle's young martyrs. Protesters believed they had an unspoken understanding with SCAF that the military would retain some political influence -- and some of the commercial assets they had amassed over the years -- in exchange for a willingness to pass political power to a pluralist civilian government following a period of transition, to reform state institutions, and to respect the rights of citizens to organize.
In the months that followed, minds changed and understandings evaporated. When the military killed more than two dozen Egyptian Christian activists in October, the illusion was publicly shattered. Clashes between activists and security forces in November and December upped the stakes. As 2011 drew to a close, it became clear that SCAF generals, who first rose to prominence via the intensity of their loyalty to Hosni Mubarak, shared their former leader's authoritarian worldview.
Over the course of 2011, SCAF froze out the protest leaders and struck a separate deal with the Muslim Brotherhood, one that gives various Islamist parties a dominant position in crafting Egypt's domestic policy while leaving the army in charge of foreign policy and key segments of Egypt's economy. Islamist parties, including the Muslim Brotherhood, won about two-thirds of seats in recent parliamentary elections. The protesters, now marginalized, are becoming more confrontational.
The crackdown on NGOs reveals the understandings that are implicit in the Muslim Brotherhood-SCAF understanding. Credible allegations have emerged that Islamist groups have received foreign funding too, from Gulf Arab countries, but SCAF has taken virtually no action against them. It's the groups that lobby for human rights -- and who have criticized SCAF -- that have been targeted.
If these NGOs have indeed broken laws, they are Mubarak-era laws. SCAF has changed the rules on elections and the formation of political parties, but their unwillingness to tolerate civil society shows the limits of their willingness to change.
The generals' inflexibility bodes ill for Egypt's future. The Brotherhood, eager to finally enjoy a share of formal power, has become the army's enthusiastic partner. But neither group appears to recognize that elections alone will not guarantee stability. Their broader public popularity and the power of state television ensure that, especially outside of Egypt's largest cities, the military and Muslim Brotherhood represent the "silent majority."
But the vocal minority will keep pushing back, and the potential for violence is on the rise.
Hani Sabra is an analyst in Eurasia Group's Middle East practice. Willis Sparks is an analyst in the firm's Global Macro practice.
Jeff J Mitchell/Getty Images
By Ayham Kamel
Recent, though futile, efforts to resolve the crisis in Syria have demonstrated the absence of leadership from global powers such as the U.S. and likely set the stage for possible contagion. The unwillingness of the major powers to intervene in crises such as in Syria -- a marker of what Eurasia Group has called the G-Zero World -- has allowed regional players to step into the breach, notably Qatar via the Arab League. But the League's efforts have also exposed a regional power vacuum and tensions among Middle East nations that could potentially escalate into a proxy war in Syria.
The Arab League's late-January initiative called on President Bashar al-Assad to step down, leaving the vice president to negotiate with the opposition, but it reflects neither the complexity of the Syrian conflict nor the domestic power balance. For example, the opposition is still deeply divided and there is still considerable support for the regime among business interests and some minorities. The Syrian regime is likely to retain power throughout most of 2012, but the risk of collapse will rise considerably in the last quarter.
Other players have taken advantage of major powers' unwillingness to get involved in Syria. Qatar has been pushing for more hawkish Arab League policy on Syria, but the organization lacks the power to push through such initiatives. Turkey, Iran, and Saudi Arabia have also staked out a role. But, the lack of interest in producing a negotiated solution effectively means that the Syrian regime can disregard the Arab League on many issues.
Divisions in the League between Gulf Cooperation Council (GCC) states and other members also limit the group's ability to formulate and pursue effective policies. The 24 January decision by the GCC to withdraw monitors from Syria highlights this division. Both Egypt and Algeria, traditionally important players in the organization, are uncomfortable with what is increasingly seen as Qatari and Saudi dominance. In the near term, Egypt's leverage will likely decrease given its own political transition, but major stakeholders (such as the military and the Muslim Brotherhood) will eventually seek a more proactive foreign policy. Within the GCC, there is also a subtle, but important, tension between Qatar and Saudi Arabia. Saudi royals are wary of Qatari calls for direct military intervention as a tool for democratic reform in Syria or any other Arab countries, a precedent that could be later used against Riyadh.
Syria is a key part of the regional balance of power between moderate pro-U.S. states and the so called resistance camp lead by Iran. Seeking a broader realignment in the Middle East, regional powers are likely to increase their support of their local allies. Saudi Arabia, Turkey, and Qatar are actively encouraging the uprising driven by conservative Sunnis. Meanwhile, Iran is providing the Assad regime with intelligence, and technological equipment to suppress the uprising.
The Syrian conflict has fanned Sunni-Shiia tensions and the risks of contagion in Lebanon, Jordan, and Iraq are considerable. In Iraq, Sunnis are emboldened by a resurgence of conservative movements across the Middle East. Lebanon could become more unstable as the Syrian conflict has divided political factions in an increasingly delicate struggle. Jordan's own communities could reconsider their allegiance to the Hashemite monarchy as communal divisions between Jordanians of Palestinian descent and tribal elites begin to increase. Potential Syrian or Iranian support to Kurdish separatist groups in Turkey is likely to become a problematic issue. Finally, covert action by either the Sunni axis (Saudi Arabia, Qatar, and the Arab League) or Shiias (Iran and Iraq) entails significant risks to regional stability and could spur a violent proxy war that would hurt the business environment and oil flows.
Ayham Kamel is an analyst in Eurasia Group's Middle East practice.
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Davos 2012 -- jam-packed, exciting. A bargain? Not quite. But did the rewards outweigh the costs for attendees? Given the extraordinary time commitment and expense folks go through to attend, is Davos worthwhile?
In my opinion -- definitely yes. Here's why.
1. Davos gives me the chance to meet with pre-vetted folks in fields I don't know particularly well...but need to. Anyone looking for insight on these subjects would otherwise have to invest too much time to figure out who the true experts are, and how to reach out to them. I know who I really rate in thinking about global politics, and when I have questions or want to bounce an idea off a few people, there's no problem. But what about subjects that aren't my forte? What about food scarcity? Or climate change? Urbanization? Microfinance? Gender inequality? If you're interested in pattern recognition, systems thinking, and getting out of your box, Davos is a virtually unparalleled opportunity. Anyone with a global element to their work can benefit immensely from this type of exposure.
2. Davos is not just about finding experts in fields that aren't your specialty. You're also with top folks in your own field, and the audience is global and experienced. So you need to bring your A-game. Last year, Niall Ferguson, Ken Rogoff and I squared off at dinner in front of 50 CEOs on global rebalancing. This year it was global security, and I spoke alongside Richard Haass, John Chipman and Yan Xuetong. The audience has heard the top voices before, and they're a decidedly skeptical bunch; there's not much scope for misstep. Needless to say, it's an exciting opportunity that Davos provides.
3. If you're in a global field, you can pack six weeks' worth of meetings into five days. Just the breadth of people in attendance from governments, corporations and NGOs across the world -- I'm not somebody who likes to live out of a suitcase and spend my life on an airplane. That means picking and choosing your trips. Davos allows me to consolidate, and skip those extra couple visits to the major financial and industrial capitals and instead spend an extra week on the ground in China, or a frontier market I've been meaning to visit.
Bottom line: this little snowy town is as alluring as the incredible people who make the trek to get out there. It's a real chicken-or-the-egg affair, where people go because...people go.
On to my Davos 2012 awards.
Boris Johnson. On Thursday, the mayor of London gave a fantastic address on behalf of the London 2012 Olympic Games. One of the highlights: Johnson quipped that London's murder rate is one-quarter of New York's. It was perhaps the most well received Davos speech I have ever attended.
Best new theme:
While it is not exactly new, state capitalism seemed to finally catch fire in the Davos debate this year. In light of developed economies' woes and emerging markets' resilience to the financial crisis, state capitalism is receiving a serious look (even though it is by no means a viable alternative to free market capitalism). At Davos, David Cameron addressed state capitalism directly, explaining how Western leaders need to actively combat it and stand up for what he has been calling ‘popular capitalism' in his recent speeches. And it didn't hurt that The Economist topic du jour was state capitalism going into last week too.
I have to admit it -- the Google party really did steal the show. The ‘green' dance floor that measured the watts exerted by those brave enough to dance was a highlight. Every year at Davos, Googlers really seem to make up for lost time spent in the library throughout their youth.
Senator Saxby Chambliss (R-Ga.). Chambliss is completely old school, and he understands the polls and the pols alike -- when I chatted with him, it was plain to see why he's so popular in Georgia. More on our meeting in my previous post.
Thank you, Azeri government. Awfully kind. See my earlier post.
Davos outperformer (country):
Brazil took the cake. They were taking the lead sponsorship for the first time at Davos and nailed it. Between World Cup and Olympics chatter on top of promising fundamentals when it comes to infrastructure build-up and stable governance, the Brazilians were the delegation to beat. Honorable mentions: Indonesia and Turkey. Both delegations had a strong technocratic presence in Davos and focused on attracting investment.
Davos outperformer (company):
McKinsey was the best represented company in Davos -- they are consistently the best attended, and Rik Kirkland had thought leaders streaming into the Seehof Hotel for intelligent conversations on key global issues in droves. It was so busy that there was even a camera set up in...a shower. (Gotta scrub those videos. Or perhaps Rik is moonlighting...)
Davos underperformer (country):
Russia. They did their best to dodge questions and kept the heavy hitters away. If Putin's too busy for debates, he's clearly too busy to attend Davos. Nouriel Roubini and I both used the conference to announce Russia shouldn't be a BRIC -- the response was very positive.
Davos underperformer (person):
Mick Jagger. Lots of folks were star struck, but he looked out of his element.
The best entrance probably belongs to Bill Gates, for its understated quality. He enters softly, softly, and suddenly he's there and his presence speaks for itself. He would probably be the last person in the conference to showboat, despite probably mattering more than anyone else there.
Steve Roach, definitely, as he escaped Davos protestors at an Open Davos event. More on that in an earlier piece of mine.
FABRICE COFFRINI/AFP/Getty Images
Last night, I had the privilege of moderating a World Economic Forum dinner panel entitled, "The Future of Democracy," asking the following broad question that left ample room for debate: "How are established and nascent democracies being reformed and shaped to meet the challenges of the 21st century?"
The topic and a great group of panelists -- including Professor Timothy Garton Ash (U.K.), Archbishop Thabo Cecil Makgoba (South Africa), Kenneth Roth (U.S.), Amira Yahyaoui (Tunisia), and Jean-Francois Copé (France) -- made it easy for me to facilitate a spirited discussion. It largely revolved around one important theme: determining to what extent anti-democratic tendencies are on the rise globally.
Europe was an area of particular interest, where this threat broke down into two main categories: the disintegration of democratic institutions under the watch of Viktor Orban in Hungary, and a more general anti-immigration far right populism throughout Europe. There was general consensus that the threats to democracy don't extend as far as consolidated democracies like France, but with austerity in the equation for the foreseeable future, the periphery is poised to see this threat grow. An interesting debate arose between the Economist senior editor, who didn't see any of this as significantly anti-democratic, and Timothy Garton Ash, who certainly did.
It's interesting to examine this in countries that are bastions of democratic values and juxtapose it with tendencies in authoritarian states. Take the perceived trend in the other direction in Russia, for example, as we see the middle class publicly speak out and air its grievances.
Davos generally has a Western bent, with an underlying mentality that its customs and ideals will win out. Even with this in mind, there was a lot of talk about avoiding hypocrisy and the importance for Europe and the United States to get their own houses in order democratically before they champion these values abroad. This criticism was especially pointed with regard to the U.S., as people highlighted issues of wealth disparity and corporate influence on politics as areas where democracy seems to be eroding.
There was not as much on the role of technology as I would have liked, nor on the treatment of populations as consumers rather than citizens. But I tried to incorporate these trends into a broader question that I asked the entire audience. Given the following three trends, I asked, is the global environment becoming more supportive of democracy?
1. Exponential technology boosting communication avenues and the greater immediacy and availability of information
2. Volatility and the economic disparity of wealth
3. Challenges to an outmoded western model of international governance
I didn't take a formal poll, but responses came back roughly as follows:
Where do I stand? I'm mixed, perhaps with a toe in the "less favorable" camp.
The first day at Davos took its toll on me. A civilized 8 a.m. start, but then it was full tilt until 10 p.m., bouncing from one event to another. And I turned in early, which won't be an option from here on out. After all, the can't-miss evening events come tonight and tomorrow.
I'm headed to Davos tomorrow for the annual meeting of the World Economic Forum, where the discussion is sure to be provocative -- and a bit more forward-looking than in recent years. Since the financial crisis first shook the global economy in 2008, these summits have focused mainly on the meltdown's market impact and its implications for policymakers. As aftershocks ripple across the eurozone, its troubles will remain a high priority topic. There just isn't much new to say about them -- though there will be much speculation on how short-term solutions play out. The forecast is for more muddle-through as Europe's leaders take halting, painful steps toward austerity and closer fiscal union.
But on a more macro level, we'll see plenty of willingness here to change the tune. I wouldn't quite call this the first recovery summit, but we're seeing signs of life in the U.S. economy, solid growth numbers in China, and we've put a cap on the security-driven 9/11 era with the killing of bin Laden, the crippling of al Qaeda, the end of the Iraq War, and a scheduled troop drawdown from Afghanistan.
So if global politics are no longer consumed with responses to 9/11 on the security side and the financial crisis on the economic front, this year's gathering will have room to address broader drivers of international governance and the global balance of power in years to come. Thus the Davos theme: "The Great Transformation: Shaping New Models." I look forward to getting plenty of perspective from my work as moderator for several upcoming discussion panels and to unpacking this idea piece by piece in posts to come.
To kick off, let's unveil the themes sure to be most hotly debated. The growing gap between rich and poor will play a huge role. The issue already stands to provide the U.S. 2012 elections with both text and subtext, and an Occupy Davos movement will soon echo through the summit press coverage. How this divide compares to other sources of global tension -- sectarian divides, nationalistic ones, and the demographics of age and immigration -- will make for charged debate. The future of democracy versus its various alternatives will also take center stage, along with juxtaposition of the relative merits of free market and state capitalist economic models. A discussion of the Arab Spring's impact on the state of democracy -- or perhaps just the stability of states in general -- is sure to surface.
And, yes, Europe's travails will cling to the top of the charts, though the eurozone itself will survive 2012 in one piece. I strongly suspect we'll see positive signs from the meetings here, probably in the form of some announcement of (incremental) support for the periphery and a modest upswing in optimism that the Greeks make it through their next funding deadline on March 20. We can expect a lot more market volatility. We're not headed for a cure, but nor are we headed over a cliff. That alone will give us plenty to discuss.
Then we'll leave Davos as we arrived -- with a new set of urgent questions that defy simple answers.
BTW, I can't forget to thank Newt Gingrich for stirring the political pot with that win in South Carolina. I fully expect shrewd questions about this from befuddled foreign friends. I only hope I can provide some semi-satisfying answers.
Ian Bremmer is president of Eurasia Group and author of End of the Free Market: Who Wins the War Between States and Corporations?
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Today, we turn to risk #4 in our series of posts on Eurasia Group's Top Risks for 2012 and answer the most common questions we've gotten about it.
Here's a summary:
The United States- Right after elections. Congress won't accomplish much as members face re-election and the presidential horserace develops over the first ten months of the year. But once the votes are counted, a couple of multi-trillion-dollar decisions with substantial long-term importance must be made quickly.
Q- You say that the lame duck session will be especially important this year. Why are the stakes so high?
A- Decisions have to be made by the end of 2012 on the future of the Bush tax cuts and on whether to waive the automatic spending cuts triggered by the failure of the congressional super-committee to agree on a long-term deficit reduction deal. Together, these issues will involve more than $5 trillion over the next decade, an amount large enough to have lasting influence on the trajectory of the U.S. economy. Even if there were more clarity on who will win the presidential election and on the post-election congressional balance of power, it would still be difficult to predict whether (and exactly how) the two parties can resolve these looming questions. In the meantime, companies and investors will have to cope with a lot of uncertainty in 2012 -- particularly about their own taxes and government contracts. This uncertainty will also weigh on economic growth this year.
Q- Isn't it possible that Democrats and Republicans will fail to agree on anything and that nothing will happen?
A- It's always possible that the leadership of the two parties and the White House will fail to reach a deal. But in this case, the failure to decide is a decision, because higher taxes would automatically go into effect and $1.2 trillion in cuts to government spending will move forward. Should lawmakers fail to agree on a solution by January 1, the next Congress could move in 2013 to retroactively reverse the impact. But the next class of legislators may prove no more amenable to compromise than the current one. Even if they succeed, these adjustments and readjustments would prove highly disruptive.
Q- How will the election results play into this risk?
A- If either party takes a big hit at the polls, its leaders will have clear incentives to reach a deal on tax and spending policies before their numbers decline in the new Congress. The other side would then have most of the bargaining leverage. But if the elections produce a continuation of divided government, the two parties would be much more likely to deadlock. The realistic best-case scenario is not so great either: Both sides could agree before the end of the year on yet another temporary fix, such as a partial or full extension of the tax cuts, combined with a delay on automatic spending cuts, and punt a solution to 2013. That outcome would be less disruptive than an expiration and a retroactive fix, but it would extend the uncertainty that companies and investors dread into next year.
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Today, we turn to risk #2 in our series of posts on Eurasia Group's Top Risks for 2012 and answer the most common questions we've gotten about it.
Here's a summary:
G-Zero and the Middle East - The inability/unwillingness of major powers to bolster the region's balance of force will create new turbulence across North Africa and the Middle East in 2012 as unresolved political, sectarian, and ethnic tensions threaten more unrest. Continuing protests, autocracies under pressure, new democratic regimes fighting to establish stability, and the lack of a viable regional security framework will add to the potential turmoil. As this dynamic plays out in Syria, Egypt, Iraq, Libya, Yemen and Bahrain, neighborhood heavyweights -- Saudi Arabia, Iran, and Turkey -- will vie for influence and generate friction.
Q- What does 2012 have in store for the Arab Spring?
A- Last year's Arab world uprisings will have lasting impact on North Africa and the Middle East. Protesters in Egypt and Tunisia proved they could force an autocrat from power. Demonstrators in Syria and Yemen have pushed their governments to the brink. Muammar al Qaddafi, in power since the Beatles were cutting albums, is dead. Saudi Arabia had to send troops across the King Fahd Causeway to prevent insurrection in Bahrain.
But let's not overstate the lasting impact of last year's upheaval. In Egypt, Mubarak is gone but his support structure lives on, and the country's next president won't be the Egyptian equivalent of Vaclav Havel. The military remains firmly in charge and will share power with the Muslim Brotherhood. The protesters who made themselves famous in Tahrir Square last year will be the odd man out as Egypt looks to form its next government.
In Syria, Bashar Assad's presidency may not survive the year, but for the moment he remains in power. Military defections are a serious worry, but so far they've been limited. Sanctions hurt, but the business elites in Damascus and Aleppo haven't yet begun siding with the opposition and calling for his ouster.
In Libya, oil production is ramping back up, though not as quickly as the new government claims, but powerful militias show no signs of renouncing their individual ambitions and joining the new Libyan army.
Bahrain continues as a majority Shia state ruled by a Sunni monarch. Monarchs in Jordan and Morocco remain firmly in place.
The governments of Saudi Arabia and Iran face no existential internal threats. The Saudis appear poised for a smooth process of succession when King Abdullah dies, and though Iranian President Ahmadinejad remains on shaky ground, Supreme Leader Ayatollah Ali Khamenei faces no direct near-term challenges.
That said, there is plenty of ongoing turmoil in some of these countries -- especially in Egypt, Syria, and Libya -- and Americans and Europeans don't believe they can afford direct intervention. U.S. troops are leaving Iraq, and there is no other outside power or alliance of powers capable of maintaining the region's delicate balance of power. That leaves local heavyweights -- especially Turkey, Saudi Arabia and Iran -- to compete for influence. None of them wants to get too involved in the complicated problems of its neighbors, but as the stakes rise in these less stable countries, they also face the risk of doing too little to bolster stability and to counter-balance their local rivals.
In short, the Middle East is top risk #2 this year because the absence of outside powers and the rivalries of local players could further destabilize a region that has already had its share of uncertainty and local violence.
Q- Syria remains in the headlines and there seems to be more violence in Iraq these days. What can we expect in these two countries?
A- In Syria, the risk is that prolonged stalemate will force the neighbors to intervene and bring things to a head. So far, the Arab League, led by Qatar, is most directly involved. As outside pressure on Assad increases, Iran may feel it has to bolster his government, one of the Islamic Republic's few reliable friends. The Saudis may decide that bringing the turmoil to a close means using their leverage to force Assad out, empowering Syria's Sunnis in the process. Turkish Prime Minister Erdogan's government may join them to put an end to the violence that has pushed many Syrians across the border into Turkey. Assad's fate may not be resolved quickly or easily, however, and Syria's troubles may extend well into 2012.
In Iraq, sectarian rivalry is filling the vacuum left behind by departing U.S. troops. Until recently the most exciting investment story in the Middle East, Iraq's stability is again in question. Nouri al-Maliki's government is no longer intent on accommodating Sunni Arab powerbrokers to keep the peace. In response, Sunnis who once opposed Kurdish demands for greater autonomy are now pushing to create a semi-autonomous bloc of their own in the Sunni-majority western provinces of the country. Here again, Iran, Saudi Arabia, and Turkey may calculate that they can't afford to hang back and let their rivals build new influence inside this country.
Q- What about Israel?
A- On the one hand, Israel will become more isolated. The Obama administration wants to reduce its risk exposure in the Middle East -- at least to the extent possible given the region's lasting importance for the United States -- and to focus more of its attention and resources on East Asia. In addition, Israel recognizes the surge of populism across the Arab world, and relations have become much more complicated with Egypt, Jordan, and Turkey. Add Iran's determination to continue development of its nuclear program and Israel will be on edge throughout this year. The risk has increased in recent weeks that Israel will face more violence in 2012 -- both within Israel and perhaps with Lebanon.
That said, whatever the differences between President Obama and Prime Minister Benjamin Netanyahu, U.S.-Israeli relations remain central to the domestic political health of both governments. Israel is not going it alone. And an Israeli military strike on Iran remains unlikely for two reasons. First, sanctions weaken Iran, even if only by forcing Tehran to sell oil to Asian states that will pay well below market prices for it. Second, sabotage, including via cyberattacks, appears to have slowed Iran's momentum in centrifuge development. This is a much less expensive and less dangerous approach than the conduct of bombing raids on Iranian territory.
Next up, another year of uncertainty for the eurozone.
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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.
On Monday night, Larry Summers and I teamed up to argue with Paul Krugman and David Rosenberg at the Munk Debates in Toronto. The event is hosted twice a year by the Aurea Foundation, a charitable organization, which provides this platform for people with provocative opinions to debate some of the most interesting questions of the day in a venue open to the public. Our topic: "Be it resolved North America faces a Japan-style era of high unemployment and slow growth."
A vote taken before the debate revealed that most of the crowd agreed with Krugman and Rosenberg on the pessimistic side of the question. Before the debate began, 56 percent voted in agreement with the proposition. 26 percent disagreed, and the rest were undecided. The vote immediately following the debate suggested that Larry and I had managed to swing all the undecideds and a few of those who had voted in favor. We narrowed the final margin to just 55-45 in favor of the proposition.
Here's Krugman's brief version of events. (He neglects to include the votes -- naughty Krugman!)
So what actually happened? Here's the full presentation (click "Watch the Debate" on the right).
These were our arguments:
1 - Contrary to popular belief, there is governance going on in the United States. There's partisan acrimony, there's political polarization, and nobody likes Congress. But the first two years of the Obama administration yielded passage of more policy than at any point since the mid-1960's, if not the early 1930s. Sure, the demands of partisan pettiness will ensure that Congress again flirts with disaster (as in the debates over the debt limit, government shutdown, and now the super-committee). But this is theatrics. Much has been and will be accomplished. Compare this with the debates ongoing in 17 eurozone parliaments or the paralysis we've seen in Japan from a Democratic Party of Japan-led government that is governing for the first time in its existence. Or in China, where the political elite knows it has to finally take on deeply entrenched interests within state-owned companies and their enormous bureaucracies in order to reform a system still far too dependent on exports to America, Europe, and Japan.
2 - America has enormous advantages. Compare US demographics with Europe, Japan, or China. Yes, the boomers are retiring, but the US workforce will expand in coming decades as others begin to shrink. (China's will shrink sharply.) Compare opportunities for women and their impact on the ability of the country to grow its way out of difficulty. Consider America's natural resource base-not just in energy, but in food. (In a world where billions are joining the middle class and consuming more calories, America's status as the world's leading agricultural exporter is important). America continues to foster innovation and entrepreneurship. The United States leads the way in the marriage of traditional and new media, and in development of unconventional oil and gas. That's why the Next Big Thing, whatever it turns out to be, will probably come from an American company.
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 Risa Grais-Targow
Cuba. Oil. Two words that tend to get U.S. politicians hot under the collar, though usually not in the same sentence. That could change as the 2012 campaign season heats up in the U.S. and as Cuba's plans for offshore oil exploration materialize. The Chinese-built, Italian-owned Scarabeo 9 rig is scheduled to enter Cuban waters in August or September, and a consortium of international oil companies is set to begin drilling soon after. The struggling island nation, which currently depends on generous oil deals from its friend and neighbor Venezuela, has high hopes that its potential offshore resources might rev up its sagging economy. (Cuba claims that it has 20 billion barrels of "probable" oil in the continental shelf just off Havana, while the U.S. Geological Survey thinks that number is closer to 5 billion barrels.) But as the rig makes its steady way from Singapore, officials in Washington are getting anxious. Many lawmakers doubt that Cuba has the regulatory capacity or expertise to drill safely, particularly without the U.S.-manufactured equipment that the more than 50-year-old embargo has kept out of Cuban hands. And with BP's spill in the Gulf of Mexico still fresh in the U.S. public's mind, politicians are flagging the possibility of a Macondo-like spill 50 miles off the Florida coast.
The specter of such a disaster has already prompted several legislative efforts to punish foreign firms that drill in Cuba -- or at least those who chose not to comply with U.S. safety standards. Since January, Congressional hardliners from Florida have introduced three bills proposing to deny contracts to such firms or visas to their employees. The bills are designed to appeal to anti-Castro constituencies in the run-up to the elections, but widespread haggling over the issue is set to increase as Cuba's drilling plans progress, and the issue could become a talking point for presidential candidates in battleground states. For its part, Cuba will keep scrambling to convince the international community that it will uphold international safety standards. But those PR efforts will do little to cool the heated debate brewing on the Hill.
That said, none of the bills is likely to move anytime soon, given another powerful constituency: oil. Pro-drilling legislators in the House will be wary of punishing foreign oil companies (some of which have U.S. operations). The issue will also be overshadowed by pre-election priorities such as job creation. In the absence of Congressional action, the administration will likely take an ad-hoc approach. It might twist companies' arms behind closed doors, as it recently tried to do with Spain's Repsol, to get them to abandon their plans altogether. Or, if that doesn't work, it might simply push for guaranteed safety compliance. Measures that involve engaging directly with Cuban officials are unlikely, leaving room for less controversial alternatives such as allowing companies that specialize in emergency response to contract with Cuba and creating some kind of exception to the embargo that allows Cuba to use certain U.S.-manufactured equipment to prevent or minimize spills.
Risa Grais-Targow is a member of Eurasia Group's Latin America practice.
ADALBERTO ROQUE/AFP/Getty Images
By Heather Berkman and Sean West
U.S. Trade Representative Ron Kirk told the House Ways and Means Committee on Feb. 9 that the Obama administration is serious about progress on the South Korea, Panama, and Colombia free trade agreements. He wouldn't commit to a timeline, but we think Congress will pass all three deals this year -- though not without a round of serious political deal making.
Obama campaigned on the need to extract additional concessions from South Korea, Colombia and Panama before any of these deals, all of which were negotiated and signed by President George W. Bush, deserved ratification. For example, automakers and the United Auto Workers complained that the South Korea deal opened the U.S. auto market to Korean imports without securing reciprocal liberalization.
The United States took two years to tell South Korea exactly what it wanted changed, but the two sides have finally negotiated a side deal in which the Koreans made additional concessions. With the new agreement providing political cover, Obama now officially endorses the deal and will send it to Capitol Hill for ratification soon.
The path forward for the Panama and Colombia FTAs is a bit murkier. The Panama deal -- which, frankly, will have negligible economic impact on either country -- was first held up because Pedro Miguel Gonzalez, who later became leader of the Panamanian National Assembly, was indicted by a U.S. grand jury on charges he shot and killed a U.S. serviceman in 1992. When Gonzalez left government in 2009, U.S. trade skeptics shifted their criticism to Panama's alleged role as a tax haven, forcing the Ricardo Martinelli administration to reluctantly sign a Tax Information Exchange Agreement with the Treasury Department.
The Colombia deal faces a more difficult battle. U.S. labor unions loudly oppose the pact because so many Colombian trade unionists and labor leaders have been murdered by paramilitary organizations. The number of murders has fallen in recent years, and though Colombia probably still has the highest murder rate of union members in the western hemisphere, it probably also has the highest rate of murders of priests, schoolchildren, and bus drivers. In short, despite significant government progress in cracking down on armed groups and reducing the homicide rate, Colombia remains an intensely violent place -- for labor leaders and many others. There's no way to solve that problem in the context of a trade negotiation.
By pushing these trade deals forward, the Obama administration is making a political bet. The White House knows the left has a long list of gripes with the president, and that pushing hard on trade deals will add fuel to the fire. But presidents benefit from the economic boosts provided by trade -- and Obama views the deals as a way to reach out to the independent and moderate voters he'll need in 2012.
Aware that Washington can't expect much more from these countries, the Obama administration will court reluctant Democratic lawmakers by extracting relatively minor concessions -- like a pledge from the Panamanian government to ratify a tax treaty or from the Colombian government to put more of those who kill union leaders on trial.
What will Democratic lawmakers want in return? They may well call on the White House to work much harder to enforce existing agreements before moving forward with new ones. That means moving forward with antidumping and countervailing duty cases against China -- both at the World Trade Organization and through domestic remedy.
With so little expected from a divided Congress, the White House will trumpet these deals as important accomplishments. But it will have been the U.S. political context that changed -- not the content of the deals.
Heather Berkman is an analyst in Eurasia Group's Latin America practice. Sean West is a U.S. political risk analyst with the firm.
NICHOLAS KAMM/AFP/Getty Images
By Ian Bremmer and David Gordon
An increasingly ferocious and costly battle with drug cartels will continue to occupy much of the Mexican government's time and resources in 2011. There's a serious risk of more dramatic episodes of violence -- including of higher-profile assassination attempts on government officials, security forces, and business figures.
Since taking office in Dec. 2006, President Felipe Calderon has presided over a startling rise in drug-related murders. The government is gaining ground in the fight against organized crime as the military and federal police generate important arrests, cartel members are killed, and drugs, cash, and arms are seized. The cartels are on the defensive, the government shows no signs of letting up, and coordination between Mexico and the United States on drug and security-related issues has improved dramatically.
But there are negative results, as well. Fragmentation of the leadership of the cartels has only increased the likelihood of deadly conflict within and among these organizations. Surviving traffickers try to ward off municipal and state cooperation with federal security efforts, increasing the likelihood of assassination of local officials. And with steady demand for narcotics in the United States and demand on the rise in Mexico, surviving and new trafficking groups will compete to fill any voids in the drug supply chain left by other groups.
More broadly, the political consensus in Mexico in support of the Calderon administration's tough approach to drug violence is weakening. The security issues were a plus for the president and his National Action Party (PAN) during his first two years in office, but that's no longer the case. This provides the opposition Institutional Revolutionary Party (PRI), which controls a majority of state and municipal governments, with incentives to push back against the federal government's efforts to consolidate weak, inefficient, and compromised municipal police forces.
In 2011, four patterns are likely to surface. First, violence will remain high. Second, the security threat to public officials, especially at the local level, will increase. Random acts against domestic and foreign businesses and even U.S. government assets, while a lesser concern, will also present risks. Third, the violence will remain largely concentrated along Mexico's northern border and in west coast states. Finally, ongoing Mexican and U.S. efforts against the cartels, especially in the border region, will make transportation to the United States increasingly difficult. As a result, traffickers will seek to develop local distribution networks. This will keep violence high in large, wealthier cities like Guadalajara and Mexico City, and increase cartel activity in tourist destinations like Acapulco and Cancun.
In the medium to long term, the Mexican government's counter-narcotics strategy -- mixing police and military operations with institutional reforms -- will yield more progress. But in the meantime, we're likely to see a lot more violence in 2011. The downside impact on Mexico's economy, particularly on the tourism sector, will continue.
On Friday, we'll discuss our final Top Risk for this year -- the risk that a wave of money flooding into emerging markets will include bad bets on a half dozen countries where investor confidence may well be misplaced.
Ian Bremmer is president of Eurasia Group. David Gordon is the firm's head of research.
By Emily Hoch and Scott Rosenstein
In the shadow of Haiti's ongoing turmoil, infectious
disease tracker ProMed published a report
on Jan. 21 that polio
had may have been detected in Port de Paix and Port au Prince. Information remains scant. But if this report is only the tip of the
iceberg, this mostly forgotten scourge could regain a foothold in Haiti. This
is bad news for Haiti, the region, and a global polio eradication effort that
in the last few years has come tantalizingly close to success.
Polio is highly contagious and can become entrenched in communities, like Haiti, with weak water and sanitation systems. There is no cure, and few supportive therapies exist. Most cases do not cause significant illness but approximately 1 percent of all cases result in some form of paralysis and approximately 10 percent of these cases result in death.
Oral polio vaccine (OPV) is included in Haiti's routine child immunization program, but coverage remains poor at only 52 percent, well below the percentage necessary to provide herd immunity. Before the earthquake, 25 percent of children were malnourished (a significant risk factor for polio infection) and 40 percent did not have access to basic health services. Add to this equation mass displacement and nonexistent infrastructure and the prognosis becomes even more worrying.
The Americas were certified polio free in 1994. Since then, the only verified outbreak in the region was 21 cases in Haiti and the Dominican Republic in 2000-01. Surveillance in Haiti is difficult in the best of times and while there were no cases reported since 2001 some have speculated that failure to completely eliminate polio during this outbreak may have left the door open for its return.
Unless the Haitian Ministry of Public Health and the international community can act quickly and contain this outbreak, there is a considerable risk of it traveling to neighboring countries. Relations with the Dominican Republic, strained by decades of border disputes and the post-earthquake inflow of Haitian refugees, could worsen if polio, like cholera, makes its way into their country (on Friday the Dominican Republic reported its first cholera death). The Dominican Republic's polio immunization rate is considerably higher but still leaves them at the lower end of recommended levels. The United States has not had a polio case since 1993 and the vaccine coverage rate for 2009 was 93 percent, suggesting sufficient levels of herd immunity exist to prevent a significant outbreak. But coverage rates vary widely and growing vaccine skepticism in some communities has left large populations of children exposed to vaccine preventable diseases, making it impossible to rule out a limited return to the United States if there is a large uptick in cases within the Americas.
As we saw with H1N1 (swine flu) in Mexico, countries struggling to contain disease outbreaks in their own countries are quick to lay blame elsewhere. Regional spread of polio, if it occurs, will almost certainly see the majority of this blame placed on Haiti's shoulders. Travel restrictions and significant diplomatic disputes remain a very low likelihood scenario, but further demonization of Haitian communities can be expected if this outbreak is not contained.
After smallpox was eradicated in 1977, WHO pledged in 1988 that polio would be the next disease to be eliminated. 30 years later, endemic polio transmission is occurring in only four countries (Afghanistan, India, Pakistan, and Nigeria). However, politics and funding shortfalls threaten to thwart these efforts. A 2003 drive to eliminate polio in Nigeria collapsed after a combination of rumor, mistrust and poor communication convinced local leaders to boycott polio immunization, and subsequently led to outbreaks throughout Africa and as far away as Indonesia, which had been polio free for ten years. Vaccination drives in Afghanistan and Pakistan have been hampered by conflict, natural disasters, mobile populations, and religious refusals. Additionally, the Global Polio Eradication Initiative (GPEI) is perpetually struggling to meet its funding needs.
Details of this possible outbreak in Haiti will likely emerge in coming days and weeks. If cases persist, it will once again raise questions regarding the short-term trajectory of the polio eradication campaign, and it will be another in a laundry list of reconstruction challenges for this troubled Caribbean nation.
Emily Hoch and Scott Rosenstein are analysts in Eurasia Group's Global Health practice.
*This post has been edited since its initial publication to reflect that reports of polio in Haiti are currently suspected and unconfirmed.
THONY BELIZAIRE/AFP/Getty Images
By Ian Bremmer and David Gordon
Many investors wrongly assume that congressional gridlock will present few risks in 2011 and may even provide the predictability that investors look for. But a divided government can throw up unnecessary roadblocks to necessary policy changes. It can also push the White House to rely more heavily on executive powers, which are harder to predict and influence, to get things done. At a time of sluggish economic recovery and still high unemployment numbers, congressional gridlock is especially damaging.
U.S. gridlock poses three major risks this year:
First is the risk that there will be no movement on policies that investors and business leaders want to see. The most important of these is housing finance reform. Democrats and Republicans are not far apart on potential solutions, but the tough issues of winding down Fannie Mae and Freddie Mac and deciding what to do on affordable housing limits prospects for success. Failure to resolve the issue would prolong a key driver of the weak recovery, as would failure to take substantive action on the recommendations of President Obama's bipartisan deficit commission.
Second, in 2011, headline risk will be driven by both parties promoting priorities for which there is no path forward. The Republicans want to substantially revise the Dodd-Frank financial regulation bill, but they don't have the power to do it, even if they threaten to hold up funding for the Securities and Exchange Commission and the Commodity Futures Trading Commission. President Obama will resuscitate immigration reform despite the fact that the legislation will not pass the Republican-controlled House.
Third is the risk that a road-blocked White House takes heavier-handed administrative actions that are hard to predict or influence. As President Obama finds little room to legislate next year, he is likely to turn to the things he can accomplish on his own. Understanding how the president can use his powers will be critical to getting 2011 forecasts right.
On Monday, we'll take a closer look at Top Risk no. 8: Pakistan, which faces a near perfect storm of political, economic, and social crises.
Ian Bremmer is president of Eurasia Group. David Gordon is the firm's head of research.
NICHOLAS KAMM/AFP/Getty Images
By Heather Berkman
In September, we noted that Cuba was likely on the verge of major economic reforms, given a struggling economy and Raul Castro's announcement of state-worker layoffs, agricultural reforms, and the granting of licenses for some types of self-employment. Since then, Cuba's president has laid the groundwork for an upcoming April 2011 meeting of the Cuban Communist Party, where the Cuban congress is likely to approve guidelines for economic reforms that the government published in early November. The 32 page, 291-point "guidelines for socio-economic policy" clearly aims to tackle some of Cuba's major challenges: a heavy reliance on food and energy imports; an inefficient export sector; a bloated state payroll; crumbling transportation and vital infrastructure; and a rampant black market that the government now sees as a potential source of tax revenues via the legalization of informal jobs.
Given their government's on-again-off-again approach to reform in the past, many Cubans are skeptical that the government will follow through. Is Cuba really ready for plans to create wholesale markets, delegate more responsibility to local governments, and diversify exports? These changes will be tough to undertake in a country where the population has for decades depended on the state for jobs, healthcare, food rations, and education.
Whatever its tolerance for setbacks, Cuba certainly appears eager to attract investment in key sectors, and that will present its foreign allies and other international investors with a huge opportunity to influence the path the country takes. Foreign governments and businesses will have more leeway to invest in infrastructure, construction, electricity generation and transmission, oil and gas exploration and production, and transportation. These countries may also offer input that could shape the Cuban government's future policy decisions. The road ahead for Castro and his cronies will be fraught with difficulties, but Cuba's allies will be along for the ride.
Countries like China, Brazil, and Venezuela already have investments in the works to help upgrade Cuba's port infrastructure, oil refining capacity, and electricity generation. Oil companies from Norway, Spain, Russia, and Canada are focused on boosting oil exploration and production in the Gulf of Mexico off Cuba's coast. With an eye on the Cuban government's commitment to revitalizing its domestic agriculture sector, South African officials hope to export agricultural machinery and supplies to the island -- and have forgiven $137 million in debt to restore the two countries' relationship. Just last week, France reestablished bilateral cooperation with Cuba following a seven-year freeze.
The United States will be left out of the game. As Cuba reaches out to its allies and interested foreign investors for help -- and makes efforts to deal with its foreign debts, promote industrial production, and revamp its energy matrix -- its government, once cornered by the U.S. economic embargo, is making it abundantly clear that an economic opening can and will be made without U.S. help or influence. The Cubans can't get Texas-based oil drilling technology, but China's ready to help build a rig. U.S. agriculture exports are tied up in legislative and regulatory knots, but Vietnam's happy to export rice to the island until Cuba's domestic production recoups.
The incoming chair of the House Foreign Affairs Committee, Ileana Ros-Lehtinen (R-FL) wants to isolate Cuba and cut funding for the State Department and assistance to foreign governments. Castro and his advisors don't care. They're working around Washington -- and creating opportunities for the governments, companies and investors that are ready to seize them.
Heather Berkman is an analyst in Eurasia Group's Latin America practice.
By Heather Berkman
Last week, Jeffrey Goldberg posted a column at The Atlantic that sparked an international uproar over whether Fidel Castro had admitted that Cuba's economic system is failing. Goldberg published a series of interviews he conducted with Fidel during a recent trip to Cuba. In response to Goldberg's question on whether "the Cuban model was still something worth exporting," Fidel reportedly replied that "the Cuban model doesn't even work for us anymore."
The quote unleashed the expected frenzy of analysis of what Fidel meant -- and Castro himself attempted to backtrack, later claiming that Goldberg had "misinterpreted" his statement.
Whether Fidel has recognized that the socialist model on Fantasy Island has failed, it is clear -- judging from younger brother Raul's economic policy decisions of the past year -- that the government recognizes that the current system doesn't work. Put Fidel's commentaries aside and look at the numbers, if you believe them.
The Cuban economy is an unsustainable mess. Raul, who took over from Fidel in early 2008, is in the unenviable position of dismantling more than 50 years of policies that obliterated the private sector and shaped generations of people who rely on the Cuban state for employment, income, and social services. With accumulating debts to foreign creditors, about half of an initial $1 billion in foreign suppliers' accounts still frozen in local banks, a devastated agriculture industry (Cuba imports more than 60 percent of its food), a sluggish tourism recovery, a distortionary currency regime, and crumbling infrastructure, Raul has little choice but to continue the piecemeal reform approach his government has slowly but surely undertaken over the past year.
The Cuban government will dismiss any suggestion that it's moving in a liberal direction, but the numbers don't lie. The government, which employs more than 85 percent of the labor force, will lay off a million workers -- including half a million over the next six months -- to try to reduce the state-run payroll and encourage workers to find other jobs. The government plans to issue licenses for more workers to run small service-providing businesses like restaurants, construction companies, and repair shops. Last year, the government began granting licenses to barbershops and taxis to give them more authority over pricing of services. Agriculture reforms have included provisions to allow farmers to directly purchase supplies and equipment and sell produce directly to consumers instead of working through a state-run farm produce contracting system. With an eye on the tourism industry, Raul recently signed a measure that increases the length of time that foreign investors can lease state-owned lands, from 50 to 99 years.
The Castro government isn't about to completely dismantle the state-run economy, and policy decisions will be taken slowly to ensure that the state retains its iron grip on Cuban political and social life. And there's no guarantee that Raul won't reverse field if the changes provoke serious unrest. Further, the ongoing U.S. economic embargo and the pending headache of resolving about $U.S. 6.8 billion in U.S. property claims will continue to limit the island's growth and investment opportunities.
But as it becomes more obvious that the current system must change and as public anger grows over the average citizen's poor quality of life, the Cuban government is already looking for new ways to loosen its grip.
Heather Berkman is an analyst in Eurasia Group's Latin America practice.
Most of the press following the recent G-20 summit in Toronto focused on President Obama's inability to persuade Europeans that the global recovery is too fragile for a slowdown in stimulus spending. But the real story was his administration's pledge to move forward on a long-delayed free trade agreement with South Korea.
The Korea-US free trade agreement (KORUS) was completed in 2007, but congressional Democrats, under pressure from labor unions, have refused to vote on ratification. They charge that, among other problems, the deal would allow South Korea to continue blocking entry to American automobiles and beef. Obama said he wants renegotiations to be completed before he visits Seoul for the next G-20 gathering in November and that he intends to submit the deal to Congress for a vote after the mid-term elections. This is Obama's first explicit public commitment to push on a specific trade deal with a clear timeline for passage.
America's 9.5 percent unemployment rate and a very challenging election season might make this a surprising time to try to move forward. But political and security developments in East Asia help explain the timing. China's recent announcement that it will allow some upward movement in the value of its currency has not appeased critics in Congress, and U.S.-China trade frictions will continue. More importantly, the crisis created when North Korea sank a South Korean naval vessel has sharply increased tensions in the region. These developments provide good reason for the United States and South Korea to move closer together. In Toronto, Obama went so far as to describe South Korea as "the lynchpin" of American policy in Asia -- a comment that raised a few eyebrows in Tokyo.
The South Koreans passed this deal long ago and have refused to reopen it to address congressional complaints. But anxiety over what's happening in North Korea will make it easier for South Korean President Lee Myung-bak to argue for compromise and better relations with the United States. The Obama administration assumption is that passage will become easier after the midterms have passed as enough pro-trade Democrats join Republicans to close the deal.
Forward movement on KORUS could add momentum behind other free trade proposals. House Majority Leader Steny Hoyer (D-MD) has argued that trade agreements with Panama and Colombia should move forward at the same time. The move also creates a possible opening for a U.S.-Japan trade agreement framework, something the president will consider more favorably now that new Japanese Prime Minister Naoto Kan is working to improve ties with Washington damaged during the turbulent tenure of Yukio Hatoyama.
The Doha round is going nowhere, but combine the latest moves with a reinvigorated U.S. push for Russia to join the World Trade Organization, and the Obama administration might finally have itself a trade agenda.
SAUL LOEB/AFP/Getty Images
By Allyson Benton
The drive-by murders of a U.S. consulate employee, her husband, and the Mexican husband of another employee in the Mexican border town of Ciudad Juarez this weekend have pushed Mexico's drug violence back into the American media spotlight. Even before these shootings, a spike in deadly violence linked to the Mexican government's campaign against drug cartels has provoked charges that President Felipe Calderon has started a war his government can't win.
The problem is a serious one for Mexico's security, its politics, and its people. But it's important to put this violence in perspective.
Rates of violent crime are on the rise in Mexico, but they remain lower than in the not-so-distant past -- and lower than today's violence in other Latin American countries of comparable size and wealth.
First, Mexico's murder rate has fallen sharply from a decade ago. The National Public Security System reports that in 2008, the most recent year with available data, 12 people per 100,000 were the victims of murder. In 1997, the number was 17. In the late 1980s, the murder rate hovered near 20, according to the National Statistics and Geographic Institute.
Second, drug-related murders are focused almost entirely in the northern and western states where cartel activity is concentrated. Murder rates among citizens not involved in the drug trade continue to decline.
Finally, here's a bit of regional perspective. Mexico's 2008 murder rate of 12 per 100,000 is less than half the most recent (2006) reported rates for Brazil (25). Colombia's murder rate has fallen dramatically thanks to President Alvaro Uribe's investment in security, but in 2009 the rate was still at 35. In Venezuela in 2008, the murder rate reached 58, a number that appears to be rising. Only Argentina, with 5.3 murders per 100,000 people in 2007, suffers from less deadly violence among the wealthier Latin American countries. The FBI puts the US murder rate at 5.4.
Foreign investors and business people also fear the risk of kidnapping in Mexico. Here again, the numbers put the problem in context. Kidnappings in Mexico have fallen from 1.1 per 100,000 people in 1997 to 0.8 in 2008 -- though the number may be increasing again. As for the regional comparison, though reliable data is hard to come by given that some victims choose not to report it, kidnapping rates in Venezuela have increased dramatically in recent years to an estimated 2.4 per 100,000 people. Colombia's rate has declined dramatically in recent years, from a high of 8.9 in 2000 to just 0.5 in 2009.
Violent crime, particularly involving the drug trade, is a serious problem for Mexico and the country's people. But context is crucial for issues so easily sensationalized.
Allyson Benton is a Latin America analyst at Eurasia Group.
Jesus Alcazar/AFP/Getty Images
Thus far, the Obama administration isn't making much of a showing. Undersecretary of State Bob Hormats did a strong job on yesterday's U.S.-China panel. But there's little coordination and not much of a message. If Secretary of State Clinton is too busy, why not send Vice President Biden? Combined with perfunctory foreign policy mention in the State of the Union, I'd suspect it's a feeling that anything but domestic issues isn't going to play well politically. That's not the strategy I'd be going with.
So for the American delegation, it's the U.S. private sector that's leading the charge here. And the omnipresent Barney Frank -- who yesterday told a private industry group to stop listening to what congress says, and look at actual policies ... do they have anything to complain about? Heads nod reasonably sagely.
Meanwhile, criticism of imminent political explosion grows as the nights wear on. Rogue economist/historian/documentarian Niall Ferguson, distinctly unshaven (proffered excuse--he forgot his razor on his flight from Delhi), wagered me $100 that the United States would have a new Secretary of Treasury by June 1st this year. Wager accepted. Howard Lutnick of Cantor Fitzgerald said he'd go $100 for Sept. 1. The bankers are always pushing it.
Ian Bremmer will be blogging from Davos this week sending reports and commentary from inside the World Economic Forum.
ERIC FEFERBERG / AFP / Getty Images
By Ian Bremmer and David Gordon
Now for the red
herrings, the places and problems where
we think there is less risk than meets the eye.
In Iraq, elections in March will spark violence as foreign militants try to undermine the transition to Iraqi national sovereignty. A U.S. troop withdrawal beginning right after the elections will invite more violence. We could see a Sunni election boycott. But compared to what we've seen before, and what might have happened, the overall story is remarkably positive. For the markets, Iraq is suddenly an opportunity. The institutions are becoming legitimate (even with the unresolved Kurdish issue), the army is starting to work, and most importantly, political leaders from all communities are beginning to recognize the value of Iraq's tremendous natural resource base from which all can benefit if they make the compromises to maintain stability in the country. For all their basic governance problems, there's very little chance of Iraq actually becoming a failed state at this point -- a meaningful risk even a year ago. It's not a place we're ready to vacation in, but we're bullish on Iraq.
Iraq is also moving in a positive geopolitical direction. Ties with Turkey have grown particularly quickly -- not just in the Kurdish region in the north, but in Baghdad. That's one of the few positive stories for Ankara this year. Arab states in the region are still hesitant to build ties with Iraq as they wait for clarity on its next government. Maliki hasn't been a popular figure with neighboring gulf Arabs, but they recognize that Iraq's economic consolidation won't wait for another four years, and they'll start making political overtures to Baghdad if Maliki's mandate is extended. And if the Iraqi prime minister isn't returned (which is certainly plausible), we'll see a stream of head of state visits to place relations with a new leader on a more solid footing. So whatever the electoral outcome in March, we're likely to see Iraq on a faster path to integration with regional political and economic infrastructure next year. Meanwhile, Iran's role in Iraq has quietly receded. Iran's controversial presidential election and subsequent state violence did nothing to improve Tehran's influence among Iraq's Shia population, where Iraqi nationalism has been steadily growing.
The headlines for Iraq next year will undoubtedly be the timing/delays/pace of the US troop withdrawal. But the real story is going to be a moderate government, growing geopolitical influence, and the most exciting new investment opportunities the region has seen in a decade.
AHMAD AL-RUBAYE/AFP/Getty Images