A generation ago, many wondered how many years would pass before American dominance and, by extension, the clout of Western-led financial institutions like the IMF and World Bank faced a serious challenge. So far, no single rival has proved its staying power. For better and for worse, the IMF and World Bank remain core components of international politics and development. And that's what makes collective action among the BRICS-Brazil, Russia, India, China, and South Africa-so intriguing. The BRICS carry considerable weight as models for the next wave of developing countries-particularly following an American-made financial crisis and ongoing turmoil in the Europe.
It's no surprise then that plans announced last month to create a BRICS development bank have generated so much buzz. In particular, the ability of leading emerging market governments to finance big infrastructure construction projects across the developing world has interesting potential implications.
Yet, for many of the same reasons that the BRICS have so far struggled to institutionalize a working partnership in other areas, this bank will take longer to build than its architects think and will never realize the grand ambitions of its most forceful advocates.
It's no secret that Brazil, Russia, India, China, and South Africa are home to quite different political and economic systems and face different sorts of challenges. Less well understood is the diversity of their interests in creating a bank. Questions of seed money, oversight, purpose, and where the bank might be headquartered are certain to arouse controversy.
But the larger problem is that all the BRICS except China are grappling with sharper-than-expected economic slowdowns-and Brazil, India, South Africa, and Russia are all looking to spend their revenue on infrastructure projects at home to help bolster growth. For the moment, none of them can afford to invest substantial sums to build someone else's roads, bridges, and ports.
These governments face a choice. They can contribute to a BRICS bank funded in equal (modest) parts by each member and lacks the capital to accomplish much. Or they can lend their names to a much-better funded institution that is thoroughly dominated by China.
Yes, Brazil's government is interested in promoting a South-South development strategy, but the Dilma Rousseff administration is now focused mainly on reviving domestic growth following a significant slowdown last year. Its strategy rests in part on using state development bank BNDES to fund ambitious infrastructure projects inside Brazil. If the BRICS bank can be used to finance projects outside Brazil to which BNDES is already committed, it might be useful, but don't expect the Rousseff administration to offer significant new cash commitments toward these projects.
Russia's government, also faced with sluggish growth, will talk up the need for a counterweight to U.S.- and European-dominated institutions, but tepid pledges of support for the bank from Russia's finance minister and the recent tragicomedy in Cyprus make clear that Moscow is not ready to finance its bid for greater international prestige with substantial sums of cash.
Political officials in India, where national elections loom next year, are too preoccupied with a steady stream of domestic troubles to devote much capital to a BRICS development bank, and the government remains deeply ambivalent about its often troubled relations with fast-expanding China. That's in part why India's finance minister has said that the BRICS bank will complement, not challenge, existing international lending institutions.
Then there is South Africa, a country with a growing middle class but chronic high unemployment and an economy the size of China's sixth largest province. The ruling African National Congress sees obvious value in deepening trade and investment relations with China, but its greatest near-term contribution to a BRICS development bank will probably be limited mainly to providing its headquarters a home.
Finally, the bank faces obstacles even within China, the one country than can afford to give it heft. China already has a development bank. It's the most powerful financial institution in the country, one that answers only to the State Council, giving it the status almost of a government ministry. In fact, though the China Development Bank and the China Export-Import Bank may lack the perceived legitimacy of multinational institutions, they don't lack for borrowers. Together, they already lend more to developing countries and companies -- more than $100 billion per year -- than the IMF and World Bank do, extending China's strategic influence throughout Africa and Latin America, in particular.
Why share credit and benefit for these efforts with the other BRICS, especially when the rest have so much less to contribute? And why give others a say in where Chinese funds are invested?
All five of these governments have an interest in choreographed displays of unity and rhetorical challenges to U.S. power. But like so many other aspects of BRICS cooperation, there is less to this bank than meets the eye.
Willis Sparks is director in Eurasia Group's global macro practice.
ALEXANDER JOE/AFP/Getty Images
As we wrote last August, some governments are watching political developments in Venezuela more closely -- and with more anxiety -- than others. For the past decade, that country's Petrocaribe program has helped 18 Central American and Caribbean leaders avoid the kinds of tough economic choices that sometimes drive angry citizens into the streets -- and helped Hugo Chávez extend his regional influence. Each of these countries has benefited from concessional financing schemes for their imports of Venezuelan crude oil, as well as Venezuelan support for infrastructure projects and social programs. Beneficiaries, especially Cuba, will be watching closely as Venezuelans go to the polls on April 14 to elect Chávez's successor.
They can expect good news and bad news.
The good news for them is that acting-President Nicolas Maduro, Chávez's hand-picked successor, is highly likely to win. Opposition leader Henrique Capriles Radonski is back for another run after losing to Chávez in October, but following a campaign that is likely to prove nasty, brutish, and short, Maduro will benefit from still-strong popular support for Chavismo, public sympathy for those close to Chávez, and fear that the opposition would reverse the late president's most popular policies. Maduro and his allies will also have the resources and political leverage to boost spending and mobilize supporters.
The bad news is that policy is unlikely to improve under a Maduro administration, and political conditions within the country could deteriorate over time as internal dissent becomes more difficult to manage and worsening economic conditions stoke social unrest. Maduro is likely to maintain Petrocaribe, but in the medium term, domestic fiscal constraints may well force him to reduce foreign aid, since among the spending commitments of state-run oil firm and government piggy bank PDVSA, help for foreign governments is the easiest area to cut. Maduro will have to care more about support at home than friends abroad.
Venezuela is currently giving away about one-third of its oil production at below-market prices, including as part of the Petrocaribe program. At today's prices, the volumes that go to Petrocaribe partners amount to more than $6 billion in lost revenue -- about 2 percent of Venezuela's total GDP.
The new president will probably prioritize aid to Cuba, since the Castro brothers are strategic allies and high-profile friends who likely played a role in vetting him for the presidency. Maintaining strong relations with the Castro regime is also a means for Maduro to protect his revolutionary credentials as he works to establish himself as Chávez's legitimate political heir.
But for other Petrocaribe countries, aid reduction will likely be substantial. The Dominican Republic and Nicaragua would likely face the toughest economic challenges, forcing policymakers to make sharp policy adjustments. Reduction or elimination of Petrocaribe financing would put the DR's Danilo Medina in an especially tight spot. Given the size of its economy and its access to international financial markets, the Dominican Republic is better placed than Cuba or Nicaragua to weather the storm, but Medina is already looking for new sources of state revenue.
Cuts to Petrocaribe would also be bad news for Daniel Ortega's government in Nicaragua. Some estimates have Venezuelan support -- in the form of direct loans to Ortega, energy projects, and oil -- at about $500-600 million a year. That's 7-8 percent of Nicaragua's GDP. Petrocaribe has allowed Ortega to subsidize electricity rates and public transportation, boost public sector wages, spend on infrastructure improvements, and enhance food security. A significant cut to Petrocaribe might even persuade Ortega to make new friends in Washington.
These are a few of the reasons why there will be so much international interest in Venezuela's election -- and in what comes next.
Risa Grais-Targow and Heather Berkman are analysts in Eurasia Group's Latin America practice.
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Note: Today is the first in a series of posts that detail Eurasia Group's Top Risks for 2013.
Since the onset of the financial crisis in 2008, investors and companies have focused mainly on risks in developed world markets. But as conditions in the U.S. and Europe continue to improve in 2013, the most worrisome risks will again come from emerging market countries. These countries are fundamentally less stable than their developed world counterparts, and some of their governments used a period of favorable commodities prices and the benefits from earlier reform to avoid the tough choices needed to reach the next stage of their political and economic development.
Some of these emerging market nations face more difficult challenges than others, and much depends on the degree of political capital each leader will have in order to make unpopular but necessary changes. These countries can be divided into three broad categories according to the complexity and immediacy of the risks they face and the longer-term upside they offer.
The first category includes the best bets:
The second category of emerging market economies are at risk of considerable volatility.
Lastly, there are the underperformers, those countries where risks will overshadow returns.
On Friday, we'll profile Risk #2: China vs Information.
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By Daniel Kerner and Risa Grais-Targow
The Bolivarian revolution in Venezuela is rapidly approaching its biggest test yet: The defiant Hugo Chavez, the man who has personified Venezuelan politics for 14 years, has publicly admitted that his days as president may be numbered. His movement has a slight edge in elections that are likely to be called within months, but much will depend on the president's ability to transfer his personal appeal to his chosen successor.
Throughout multiple treatments for what appears to be cancer, Chavez had refused to publicly acknowledge that he may be too weak to lead his country. But on December 8 he announced that he would need a fourth round of surgery in Cuba, and named Vice President Nicolas Maduro as his successor, setting in motion plans for a potentially rapid transition.
According to the Venezuelan constitution, new elections must be held within 30 days should the president be forced to step aside before inauguration day (January 10) or during his first four years in office. Maduro would likely face Miranda Governor Henrique Capriles Radonski, whom Chavez defeated by about 10 percentage points in the October 7 presidential election.
Anointing a successor is a clear admission by Chavez that he is unlikely to complete his six-year term, making an election inevitable. There are three main reasons the government will likely call for a vote as soon as possible.
The future of Chavismo depends on Chavez's ability to transform a movement that is largely based on a cult of personality to one that can survive without him in perpetuity. Chavez remains popular, despite the fact that a majority of the public thinks poorly of the government's ability to solve problems. Chavez therefore needs to aggressively make the case to the Venezuelan people that Maduro has the talent and vision to carry on the revolution. Chavez's ability to campaign for Maduro is uncertain, but it will only lessen with time.
Second, foreign exchange dynamics are untenable for much longer. The country has an unorthodox three-tiered exchange system, with two different official rates for businesses and individuals needing dollars, as well as a parallel (illegal) rate. Black-market rates indicate that the bolivar should be much weaker than it is in the official windows, and dollars are becoming increasingly scarce.
The government would likely prefer to hold fresh elections before a devaluation, which would propel already-high inflation and be politically costly for Maduro's candidacy. In the meantime, the government can rely on domestic and foreign debt issuance to meet fiscal and foreign exchange needs to buttress the political environment in Maduro's favor.
Finally, Chavismo wants to capitalize on an opposition that remains weak and divided following Capriles Radonski's defeat, by forcing it to compete before an official candidate selection process can take place. Capriles Radonski faces a gubernatorial election on 16 December, which he is likely to win. But if he does not, the opposition will have to scramble to coalesce around a new candidate in a short amount of time.
That said, the opposition is likely to take advantage of its best chance to win since Chavez came to power by uniting around a single candidate. It is far from certain that Chavez will be successful in transferring his personal appeal to Maduro, but Chavismo retains a slight edge in the coming election.
Regardless of who wins, Venezuela faces a very challenging 2013. Maduro would be forced to make difficult economic adjustments and manage divisions within Chavismo. An opposition president would have to make the same adjustments before setting out on a reform course, but would face even more obstruction from Chavismo stakeholders across the state apparatus.
Daniel Kerner is an analyst in Eurasia Group's Latin America practice. Risa Grais-Targow is an associate in the firm's Latin America practice.
By Daniel Kerner
Argentina is once again rattling the nerves of foreign investors. The country that has been struggling to move on after its 2001 default and checkered economic history has recently nationalized the country's largest private company, Repsol's YPF, without any signs of providing compensation. Additionally, there have been growing rumors and divergent signals that the government might "pesify" its debt obligations -- in other words, convert dollar-denominated debt into the less valuable local currency -- to contain the outflow of dollars.
Government officials have denied such rumors, knowing that debt is a very sensitive issue for its own voters. Indeed, the near-term probability of debt pesification seems low given that the government is, in part, imposing tough foreign exchange restrictions so that it has enough reserves to meet debt payments. That being said, the risk will probably increase over time. Economic dynamics will likely worsen in the next few months, and the government is likely to double down on interventionist measures even as economic distortions grow.
Argentina has experienced high rates of economic growth since 2003 (with the exception of 2009), but in a context of growing macroeconomic problems. Now, with economic growth faltering, and the central bank increasingly financing the treasury, Argentina seems to be headed toward a negative equilibrium of low growth and high inflation. But fear of following more orthodox policy prescriptions that, in the government's view, caused the last crisis (and Europe's recent troubles), may be generating the next economic crisis.
Financial investors clearly have a reason to be concerned. Argentina still has debt in default and has been tweaking official statistics in part to pay less debt. The paradox, however, is that the government is imposing trade and foreign exchange restrictions precisely to have enough dollars to meet its debt obligations. To some extent, this is because the effects and memory of the 2001 debt default are still alive. Fernandez de Kirchner's government is a product of the economic crisis, and during her presidency and that of her husband, the late Nestor Kirchner (2003-2005), the government was willing to take interventionist actions to service the debt for fear that financial troubles could cause them political troubles, even if these measures are now generating inflation and a sharp economic slowdown. In fact, the memory of the crisis can also be seen in the government's obsession with maximizing short-term growth and consumption, and in its reluctance to implement needed macroeconomic adjustments (especially if they are seen as orthodox measures).
At the center of the problems is rising inflation. Official inflation is at 9.9 percent, but the credibility of those figures has been questioned since 2007 (private estimates put inflation above 25 percent). Inflation first picked up following Argentina's 2002 devaluation and has been rising over the past few years due to expansionary fiscal and monetary policies. In contrast to most of its neighbors where independent central banks actively fight inflation, the government has been increasingly relying on the central bank to finance the treasury, and even reformed the bank's charter earlier this year to gain further support.
High inflation, and the government's reluctance to let the currency depreciate substantially, has led to a rapid increase in imports and capital flight ($21 billion in 2011), all of which have put pressure on the currency. Low investment in the energy sector, a result of low prices and interventionist policies, has led to ballooning energy imports (which increased by 113 percent in 2011). The government responded to the deterioration in the external accounts by restricting purchases of dollars, limiting imports substantially, and nationalizing the largest energy company, all measures that have aggravated the country's problems.
Argentina seems to be caught in economic limbo. It is aware that making its debt payments is of paramount importance, but is unwilling to adopt the economic policies that would make it easier to do so without causing more economic damage. Foreign investors are right to be experiencing flashbacks.
Daniel Kerner is an analyst in Eurasia Group's Latin America practice.
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By Joao Augusto de Castro Neves
When Brazilian President Dilma Rousseff travels to Washington next week, she won't be looking for a free trade deal or military assistance. Her country, the "B" that begins the "BRICS," primarily wants recognition -- specifically U.S. support for a permanent seat on a revamped U.N. Security Council. But this time around, Rousseff won't even be getting a state dinner.
Washington, due mainly to bureaucratic inertia, isn't ready to give Brazil the recognition it wants. Its reluctance may actually encourage other nations to behave in ways contrary to U.S. interests.
Years of macroeconomic stability, sustainable economic growth, and a cluster of successful social policies gave rise not only to a new and thriving Brazilian middle class, but also to Brazilian multinational companies, the so-called national champions. Externally, these changes translated into greater confidence -- inside and outside official circles -- and a wider scope of international ambitions.
Brazil is beginning to display the characteristics of a regional hegemon -- it has attracted more illegal immigrants from surrounding countries, and helped Colombia's government conduct rescue missions for hostages held by the FARC. And since 2004, Brazil has been leading the U.N. stabilization mission in Haiti. But Brazil's "holy grail" remains a seat at the Security Council table. And it won't get recognition (yet) from the most important member of the Permanent Five, whose support it very much covets.
According to many foreign policy specialists in Washington, Brazil does not deserve a place in the top echelons of the U.N. because it is not a nuclear power and is unwilling to share the burden of leadership. Another line of reasoning highlights the fact that the U.S. does not endorse Brazil's bid -- as it did with India -- because South America is not a very relevant region in the U.S. strategic chessboard. The remaining argument point to the fact that a potential endorsement could hurt U.S. interests with other key allies in the region, specifically Mexico and Colombia.
Even if some of these considerations may hold elements of truth, at the end of the day they hamper the deepening of relations between the two largest democracies and economies in the Western hemisphere. Brazil could do a better job explaining to the U.S. -- and the world -- how it would behave as a permanent member of the Security Council; but the U.S. could also rethink some of its arguments against Brazil.
The fact that Brazil is not a nuclear power and that South America is not a relevant strategic hotspot should count in favor of Brazil's aspirations, not against. If the region is relatively calm, it is because of the collective effort of Brazil and Argentina to end their economic and military rivalry in the 1980s. As a matter of fact, the rapprochement also defused the nuclear component of the rivalry, something that India and Pakistan were not able to do. The U.S. decision to endorse India's bid and ignore Brazil's sends a perverse message. It awards a country that snubbed every major nonproliferation regime while punishing a country that willingly adhered to these very same regimes.
Although the repercussion of the endorsement of Brazil's bid over U.S. interests with key allies in the region is likely to be negative, its importance is widely overplayed. Even nuclear Pakistan's outright resistance did not factor in U.S. geopolitical calculus when it endorsed India's bid. In addition, for some time now, the U.S.-Latin American agenda is in fact a collage of increasingly specific bilateral relations. Any dissatisfaction, therefore, could be dealt with bilaterally without any relevant repercussion on the regional agenda.
Next week's visit by Rousseff is likely to pass without the words that Brazil wants to hear from President Barack Obama. Those words will eventually come from Obama or a future U.S. president, but their absence in the short term will keep relations between the Western Hemisphere's two most important democracies from reaching their productive potential.
Joao Augusto de Castro Neves is an analyst in Eurasia Group's Latin America practice.
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Today, we turn to the last 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:
Venezuela -- A lose-lose election. No matter who wins the October 7 presidential election, Venezuela's political and economic conditions are likely to worsen. President Hugo Chavez would maintain the same distorting economic policies, and the economy would struggle to overcome the effects of a large pre-election increase in spending and debt issuance. An opposition win would likely lead to an eventual improvement in economic policy, but the transition could produce instability as Chavez supporters, who would still control most of the state apparatus, try to counteract reform.
Q- Can Chavez win another election? What will affect the outcome?
A- Chavez has the edge because of his relatively persistent popularity despite a growing dissatisfaction with the status quo. The president's popularity (his approval ratings are currently around 50 percent) comes despite high inflation (estimated at nearly 28 percent in 2011), low growth, good shortages, and an electricity crisis. To alleviate these negatives, Chavez will likely engage in a massive campaign spending spree, fueled by high oil prices. His government will also issue a large amount of debt to provide dollar-denominated assets to curry favor and counteract dollar shortages. The major wild card is Chavez's health. He announced in July that he was diagnosed with cancer, but little is known about the severity of his illness. Should his health deteriorate significantly, Chavez's reelection chances will diminish, as the public's faith in his ability to lead drops.
Q- Who is the opposition?
A- The Coalition for Democratic Unity (MUD) will select its presidential candidate when it holds primary elections on February 12. Miranda Governor Henrique Capriles Radonski, a young and popular governor from one of Venezuela's most important states, is the favorite. The opposition hopes to capitalize on the growing dissatisfaction with Chavez and to continue the momentum from the 2010 legislative elections, when a unified opposition list of candidates won 54 percent of the popular vote against the president's United Venezuelan Socialist Party (PSUV). The MUD would promote more orthodox macroeconomic policies, likely leading to lower inflation and more fiscal stability in the long run. The opposition would also adopt oil-related policies that are more attractive to foreign investment.
Q- What are the different risks arising out of the election outcome?
A- A Chavez win would mean a continuation of the same economic policies that have produced widespread market distortions and a strained relationship with foreign oil companies. It will be even harder for the country to recover from the large uptick in spending and debt Chavez is likely to push to improve his election chances. Given Chavez's wide-ranging power within the government, however, it would be easier for a Chavez government than a more fragmented opposition to make some economic adjustments, such as devaluing the currency or tweaking the foreign exchange system.
An opposition win, while positive for long-run growth, could paradoxically lead to more instability in the short-run. The government would be opposed at every turn by Chavez allies, contributing to policy paralysis. The most stable outcome would probably occur if the opposition wins, and Chavez's health makes it difficult for him to continue leading his movement behind the scenes. The most unstable environment would likely arise from a rapid deterioration in Chavez's health, causing him to abandon the presidential race and creating a power vacuum that would roil both the governing party and the opposition.
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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.
By Carlos Ramirez
The death of Mexico's Interior Secretary Francisco Blake in a helicopter crash on Nov. 11 initially sparked fears of foul play, perhaps by drug traffickers. The early evidence, however, points to a tragic accident caused by bad weather and all but rules out any sabotage or criminal intent. As a result, the policy ramifications of his death will be limited.
The government immediately called for an exhaustive inquiry into the accident and has been forthcoming with evidence. The Ministry of Communication, formally in charge of the investigations, provided enough information in the days following the crash to dispel speculation that foul play was involved. According to analysis, the best explanation so far is that heavy fog in the area contributed to pilot error that resulted in the helicopter crashing on a hillside. There is no evidence of mechanical failure or signs of sabotage.
The similarity to an earlier incident likely prompted the government's relative openness. The accident occurred three years after the death of the former interior secretary Juan Camilo Mourino in a plane crash in Mexico City. Mourino's death also initially generated suspicions of sabotage by drug traffickers and that speculation likely underpinned the government's response this time around.
Like Mourino, Blake was a close associate of President Felipe Calderon. He joined the administration in 2010 as Calderon's fourth interior secretary. Blake and Calderon grew close when both served in the lower chamber of congress between 2000 and 2003. Although he was a surprise choice to head the Interior Secretariat, he impressed with a low-key but effective approach to negotiating with the opposition.
The policy implications of Blake's death, however, will be limited. The Interior Secretariat plays an important role in government affairs ranging from congressional negotiations to elections, but it is more a facilitator than policymaker. Also, all major initiatives-such as labor reform-are on hold until the next president takes office (there is only one full congressional session before the July 2012 presidential election). The secretariat has also ceded much of its earlier oversight of security policy to other agencies. And while Blake was an effective mediator between different institutions involved in day-to-day security policy, his death will not disrupt policies designed and implemented by the Public Security Secretariat, the Secretariats of Defense and Navy, and the Attorney General's Department.
Carlos Ramirez is an analyst in Eurasia Group's Latin America practice.
FRANCISCO VEGA/AFP/Getty Images
By Daniel Kerner
It's been a busy few weeks in Latin America, with citizens scurrying to the polls in Guatemala, Nicaragua, and Argentina. In Guatemala and Nicaragua, the elections left some uncertainty. Will former army general Otto Perez Molina's tough rhetoric translate into meaningful change in Guatemala, especially where crime and taxation are concerned? And with rampant electoral fraud alleged in Nicaragua, will the United States and the European Union recognize incumbent Daniel Ortega's nearly 32-point win? There are fewer questions in Argentina, where Cristina Fernandez de Kirchner's reelection promises more of the same-and possibly even more of it, if she tries to tweak the constitution to give herself a shot at a third term.
Despite Argentina's staggeringly high inflation (around 25 percent, according to private estimates), worsening fiscal position (spending is up 35 percent so far this year), declining trade surplus (imports have grown 37 percent year-to-date, while exports have gained only 28 percent), and steady capital flight (around $3 billion a month for the past few months), Fernandez de Kirchner swept the Oct. 23 elections. Macroeconomic imbalances notwithstanding, GDP continues to expand, unemployment is low, and wages have kept up with inflation. And this, together with expansive social policies, has improved voters' well-being. Now backed by nearly 54 percent of the vote, as well as comfortable majorities in both the lower house and the senate, Fernandez de Kirchner has little incentive to steer economic policy in a more orthodox direction-including, say, less expansionary fiscal and monetary policies to contain inflation or easing restrictions on foreign trade-especially as Argentine authorities watch the US and Europe struggle under just such a framework.
The government's moves since the elections support this more-of-the-same outlook. Three days after Fernandez de Kirchner's win, her administration decreed that it would force energy and mining companies to repatriate all of their export revenue (previously, they'd been allowed to keep 70 percent and 100 percent of it abroad). This about-face was likely an attempt to reduce downward pressure on the currency, a result of the deteriorating trade balance and rising demand for dollars. The government also limited access to foreign currency to stem capital flight. The central bank has already spent more than $4 billion of its reserves trying to prop the peso up, and while the administration is loath to let the currency fall, it's likely to keep proffering ad hoc fixes like forcing companies to repatriate revenue or imposing foreign exchange controls rather than making any serious adjustments. Likewise, while the government announced earlier this month that it would reduce subsidies to the energy and transportation sectors, thereby curtailing spending, the proposed $140 million reduction is miniscule compared with the roughly $17 billion that the government spends on subsidies. And most of that $17 billion will probably come in the form of higher taxes rather than higher energy prices (which would stimulate investment). So no game changer there.
As a result, Argentina's economic distortions are unlikely to improve much, and could worsen if the world economy languishes further. Fernandez de Kirchner will have to be careful, though. Her popularity depends in part on the country's economic conditions, and her chance of securing a third term depends on her popularity. She'll need support from two-thirds of both chambers to make the necessary constitutional adjustment -- a challenge, but not an impossibility. It remains to be seen whether she'll test the waters this year.
Daniel Kerner is an analyst in Eurasia Group's Latin America practice.
DANIEL GARCIA/AFP/Getty Images
By Christopher Garman
Over the past decade, Brazil has undergone a quiet socioeconomic revolution. From 2003 to 2009 nearly 30 million Brazilians entered the middle class, which now accounts for more than half of the population. These new entrants are now clamoring for improved quality of life, not just access to steady jobs and wages. The change in aspirations is remaking Brazilian politics, a process which can be seen in President Dilma Rousseff's recent overhaul of the Ministry of Transportation following allegations of corruption.
Rousseff's comprehensive housecleaning of the Transportation Ministry followed the early July publication of corruption allegations in the weekly newsmagazine Veja. It sent a strong signal to congressional allies that she wants to improve government efficiency and will be less tolerant of corruption. Rousseff dismissed 18 people, most of them political appointees, including ex-transportation minister Alfredo Nascimento, from the Party of the Republic, or PR (an ally in the lower house), and senior ministry officials from the ruling Workers' Party. The president also announced other ministries could follow and signaled that no political appointees would be spared if corruption were found.
Rousseff's stance could be explained by her own technocratic profile. She is pragmatic and wants results, particularly in the run-up to the 2014 World Cup and 2016 Olympics. The cost of turning a blind eye to corruption among those running agencies and ministries is growing. But the rise of the middle class is a more important structural factor.
As recently as 2005, jobs and wages were the top demands of voters. But greater economic prosperity has brought greater aspirations. The new middle class unsurprisingly wants better health care, better education for their kids, and better neighborhoods to live in. Polling conducted by Ipsos Public Affairs, for example, demonstrates a significant increase in concern over these three issues from 2005 through 2010 and a proportionate drop in concern over wages and income. According to Ipsos Public Affairs, quality-of-life issues were ranked as primary concerns by roughly a quarter of middle class voters in 2005, while economic issues were the primary concern of close to 50 percent. But by 2010 middle-class concern with economic issues had fallen to 36 percent, behind quality-of-life issues, which rose to 38 percent. These demands will shape the types of candidates that will be successful in future elections and act as powerful incentives for elected officials.
Two conclusions emerge from this appraisal. First, Rousseff is unlikely to back down. While Rousseff may be forced to make strategic concessions to congressional allies on occasion (don't expect the president to quickly conduct similar overhauls in other ministries), the focus on better governance is here to stay.
Second, Rousseff's relations with congress will likely become more difficult. Voter demands may change quickly, but the intricacies of Brazil's political system (specifically coalition management in a multiparty presidential system) will evolve more slowly. For example, Rousseff's decision to strip the Brazilian Democratic Movement Party (PMDB) of key ministries early in her term contributed to her difficulties during the scandal implicating her chief of staff. If her public-approval ratings decline, the PMDB and the PR may be inclined to show their displeasure with open dissent -- likely with support of populist spending measures. And in a context in which the government is struggling to keep inflation at bay, more spending by congress is that last thing Rousseff needs.
Christopher Garman is Eurasia Group's Latin America practice head.
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By Christopher Garman and Jefferson Finch
At first glance it would appear that Brazilian President Dilma Rousseff has successfully weathered her administration's first political crisis: a scandal that led to the resignation of her chief of staff, Antonio Palocci (his second departure from a Workers' Party government due to accusations of shady dealings). Indeed, it'd be easy to think that it might be smooth sailing for the rest of the year. The president substituted Palocci with Gleisi Hoffman, a senator whom she knows well and who is loyal to her; the market's trepidation about inflation appears to be receding for the moment; and the latest unemployment data, released yesterday, reveal that seasonally adjusted unemployment has reached an all-time low of 5.9 percent. What's more, a public opinion survey conducted by Datafolha in June found that Brazilians' impression of the Rousseff administration had improved a little since March, with 49 percent of respondents saying her government was "good" or "great," compared with 47 percent before.
But Rousseff's political future might not be as rosy. If you dig a little deeper, a different, more challenging picture emerges. The same Datafolha poll found that the share of respondents who think inflation will stay high jumped from 41 percent in March to 51 percent in June. Likewise, the portion of respondents who think their purchasing power will increase dropped from 43 to 33 percent. Meanwhile, the National Confederation of Industry found that 71 percent of the people they spoke to expect inflation to increase over the next year, the highest percent in roughly a decade.
To make matters worse, consumer confidence is starting to drop. Datafolha discovered that 17 percent of respondents think the economy will worsen, almost double the number (9 percent) who felt that way in March. These shifts in popular sentiment may not be dramatic enough to change the political calculus of Rousseff's advisors, some who think her popularity might even rise later this year. But they do hint that the economic foundation of Rousseff's popularity is splintering. As Brazilians feel their purchasing power sapped, the rosy halo around Rousseff will likely start to fade. That said, the president's downhill slide will probably be gradual. After all, we're talking about higher inflation, not runaway inflation, and slower growth (just under 4 percent for 2011), not recession.
Christopher Garman is head of Eurasia Group's Latin America practice. Jefferson Finch is an associate in the practice.
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By Erasto Almeida
At a moment when voter anger has elected leaders in the United States and Europe running for cover, a healthy number of Brazilian voters would like to see more of the same from their government. President Luiz Inácio Lula da Silva has presided over several years of relatively strong growth, major economic improvements for a significant portion of the population, and rising self-confidence across his country. The 2014 World Cup, the 2016 Olympics, a more obvious presence on the international diplomatic stage, and the discovery of an enormous amount of off-shore oil have fueled the perception that this is Brazil's moment. Dilma Rousseff, Lula's former chief of staff, has pledged to build on that record.
That's why this will likely be one of the world's very few status-quo elections over the next year. Rousseff, who has now advanced to a second-round run-off on Oct. 31 against former Sao Paulo governor Jose Serra, will also benefit from the dynamics of a head-to-head matchup. With just two candidates in the race, the Rousseff campaign will have an easier job making the case that the election offers a stark choice between a more uncertain and less prosperous past, represented by Serra and his record as a minister in the Fernando Henrique Cardoso administration (1994-2002), and a promising present and future represented by President Lula and Rousseff.
Polls suggest the race has tightened since the Oct. 3 first round, but the gap between Serra of the opposition PSDB and Rousseff has narrowed less than it seems, and she remains the clear favorite to become Brazil's next president.
Most polls since the first round show Rousseff's current lead at 5-7 percentage points, a significantly smaller lead than that forecast in second-round simulations held before the first round of voting. This has led some observers to argue that the race has tightened. But the apparently narrower margin probably has more to do with the pollsters' failure weeks ago to accurately forecast that some voters would skip the first round than any real shift in voter preferences over the past three weeks. Though voting is mandatory in Brazil, 18 percent of those eligible didn't turn up for the first round. Many of the absentees are lower income, less educated voters who are most likely to support Rousseff and the Workers Party. That helps explain why just before the first round, virtually every pollster projected that Rousseff had enough support to win without a run-off. She finished the first round with 46.9 percent of the votes. Correcting for this distortion, her lead probably hasn't changed much -- and a poll published just last night shows Rousseff's lead widening a bit.
The election is not a done deal. A bolt from the blue, probably in the form of new corruption allegations that touch Rousseff personally, could still flip the outcome. A corruption scandal involving her inner circle has already slowed her momentum in the run-up for the first round. Rousseff could also move off message and opt for a strategy of attacking Serra, making the opposition candidate's task easier. She seemed headed in that direction during a televised debate last week, but she appears to have gotten the message and returned to her core argument of comparing Lula's administration's with his predecessor's.
To win, Serra will have to draw about 90 percent of the voters who chose third-place finisher Marina Silva in the first round -- she and her party have refused to endorse either Rousseff or Serra -- or steal a few of Rousseff's voters for good measure.
That's very unlikely to happen.
Erasto Almeida is an analyst in Eurasia Group's Latin America practice.
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Late last week, Ecuadorean President Rafael Correa, having tried to pass a new public servant law that would have significantly cut police wages, found himself roughed up, tear-gassed, and barricaded inside a Quito hospital by rebellious cops for several hours before loyal officers finally shot their way inside and freed him. It was all the result of Correa's attempt to roll back spending in one of South America's most challenged economies, in a context where he has precious few financing options (having defaulted on his country's debt in 2008, Correa's finding it a little hard to get loans these days).
Because Ecuador's military and its top police commanders remained loyal, the coup quickly fizzled and the plotters were soon jailed. Order, for the time being, has been restored. But last week's unpleasantness in the Andes reflects a broader story with potentially more worrisome implications: how the extended economic downturn is dramatically exacerbating popular discontent with regimes where political instability had already been percolating -- and how, in some cases, that discontent can quickly and without warning spiral out of control.
This isn't much of a concern for the world's key emerging markets -- think China, India, Turkey, or Brazil -- since they've all performed well over the past year. Nor is it an issue for most of the underperforming developed states, since even the worst of these laggards have enough built-in social and political stability to weather the slow, painful recovery to come (think Japan). Even Greece, basket case that it is, should be able to soldier on, thanks to all the funding and outside support it has received from Europe and multilateral bodies such as the IMF.
But the dangers are out there. In Latin America, the worst fat tail risks -- that is, countries where serious unrest is still a relatively low probability but would be massively destabilizing if it erupted -- are in Cuba and Venezuela. That's because both countries are in disastrous economic shape, and are going to need to make some serious, painful cuts to stay afloat; yet in both countries, the regimes face major problems with popular legitimacy, which will make these cuts hard to sell to regular folks. Further afield, Ukraine, with its economic woes, deeply divided population, and perpetually dysfunctional political culture, also deserves to be added to the mix. (Indeed, the new president, Viktor Yanukovych, probably knows this, which is why he's recently tacked his foreign policy toward Europe, in order to connect to the broader electorate.) And while the developed states are generally well insulated, it's probably worth keeping half an eye on Spain -- which faces one of Europe's worst economic situations but must contest national and regional elections in the next twelve months. Portugal is also worth watching. This isn't to suggest that Iberia is about to erupt in flames. But if protests do occur and the Spanish and Portuguese take to the streets in real numbers, the narrow political consensus around the belt-tightening necessary to get through the economic crisis could crumble.
As for literal collapse, that's a real risk in a few places. Exhibit one is Pakistan, where this summer's massive floods worsened an already shaky political situation. The one saving grace so far has been that the military has little interest in intervening, since that would force the generals to assuming responsibility for governing the troubled country themselves. That said, don't rule out the chance of some sort of a sudden power transition. And then there's North Korea, which is trying to negotiate a leadership succession (from a coddled dipsomaniac to an overweight, untested 28-year-old, no less under disastrous economic circumstances; never an easy move).
The overall prognosis? Stay tuned. Place brittle regimes under great stress, and the one thing you're almost guaranteed to get is a larger number than usual of "unexpected" regime changes.
Ian Bremmer is president of Eurasia Group and author of The End of the Free Market: Who Wins the War Between States and Corporations?
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On February 23, representatives of 32 nations in the Western hemisphere gathered in Playa del Carmen on Mexico's Yucatan Peninsula to discuss formation of a new political forum. The new organization doesn't yet have a name, but for simplicity, let's call it the Council of Latin American and Caribbean states (CLAC?). Some covering the event seized on the fact that the new forum will exclude the United States and Canada. Is this bad news for North Americans hoping for regional stability and a market-friendly Latin America? Not really.
We've learned some important things about Latin America in recent weeks. We learned that one of the most market-friendly countries in the region, Chile, is a resilient place. Despite an earthquake 500 times stronger than the one that devastated Haiti on January 12, there will be a peaceful transfer of executive power on March 11 from a president of one party to the president-elect of another. And despite the kind of breakdown in public order you'll find in any country following a catastrophe of this scale, Chile has the economic and political resources it will need to rebuild.
Profits from copper sales, which are unlikely to be affected much by the quake, provide Chile with about $16 billion in savings. Its government can also tap financial markets to finance an increase in state spending on disaster relief. The country is also blessed with some of the most efficiently run governing institutions in Latin America.
This is the definition of stability: the capacity to withstand a serious shock to the system with its institutional integrity intact. New president Sebastian Pinera faces a tremendous challenge in months to come, but he'll have the advantages that political legitimacy can provide.
We've also seen a show of institutional strength in Colombia, where a constitutional court has finally rejected a bid by President Alvaro Uribe to alter the constitution and do away with presidential term limits. The vote was seven to two. Uribe can claim much credit for seven years of growth fueled by a surge in foreign direct investment and a dramatically improved security environment within the country. But his exit will help restore faith in Colombia's democracy and rule of law, and it opens the way for a talented field of candidates who agree on the need to encourage foreign investment.
There are hopeful signs for foreign investment even in Venezuela, where President Hugo Chavez recently wooed multinational oil companies with a bid round, the first real test of foreign investor interest in Venezuela's oil industry since Chavez became president in 1999. His government's willingness to lower the tax burden on foreign oil companies (and the obvious attraction of the Orinoco Belt's huge reserves) drew offers from both multinationals and state-owned oil companies.
In fact, separating words from deeds helps explain why Americans and Canadians shouldn't worry too much about the work of that new regional forum. It can't replace the Washington-based Organization of American States, whatever Chavez says to the contrary, because while Brazil and Mexico can use the new club to bring their regional political clout into line with the market power of their emerging economies, the region will depend for growth on access to North American consumers for years to come.
Latin American governments are growing stronger, and that's good news for North America.
Ian Bremmer is president of Eurasia Group and author of The End of the Free Market: Who Wins the War Between States and Corporations? (Portfolio, May 2010)
RODRIGO ARANGUA/AFP/Getty Images
By Daniel Kerner and Willis Sparks
Remember when Britain and Argentina went to war over a handful of hard-scrabble islands with little to recommend them but two thousand windblown people and a few million penguins? In 1833, Britain seized and begun occupying what it called the Falklands, a set of islands just 350 miles off Argentina's coast and about 8,000 miles from London. Argentines, who refer to them as Islas Malvinas, have demanded their return ever since.
In April 1982, General Leopoldo Galtieri's military government announced that Argentina had finally claimed ownership of the islands. Prime Minister Margaret Thatcher insisted that they still belonged to Britain. To rally the Argentine people to a military junta blamed for large-scale human right abuses and a floundering domestic economy-and convinced that Thatcher would let the islands go rather than fight for them, Galtieri ordered an amphibious invasion. The British navy arrived and quickly forced an Argentine surrender.
The war lasted 74 days and killed 255 British and 649 Argentine troops -- along with three local residents. The Argentine government was soon forced from power, and Thatcher rode a surge of patriotic pride to a landslide re-election the following year.
Though Argentina withdrew, it has never surrendered its legal claim on the islands; ownership is enshrined in the country's constitution. The Falklands have experienced an economic boom in recent years, thanks to the revenue generated by increased exports of squid. But for most people outside Argentina and Britain, the war represents little more than a curious footnote of naval history.
Until last weekend.
On Sunday, a British-based oil company, Desire Petroleum, began drilling for oil in the northern basin of the islands. The news has provoked sharply rising tensions between a lame duck government in Britain, where the 1982 war remains a point of pride, and a struggling government in Argentina, where hard feelings over the conflict remain alive and well. Both governments face critical elections -- Britain later this year and Argentina in 2011.
Faced with few real options, the Argentine government tried to pre-empt the British exploration with a decree on February 16 that all ships moving to and from the islands that use Argentine ports or pass through Argentine waters must have a permit. Cristina Fernandez de Kirchner's government is now tightening the diplomatic screws on Britain, mainly by working to win broad support for its position from across Latin America. Other British oil companies are expected to explore the area soon.
Exploration will continue for the next few months. Local officials in the Falklands government claim there could be as many as 60 billion barrels in reserves beneath the basin, but some experts are skeptical. It's not yet clear that oil deposits near the islands contain enough accessible oil to make further investment worthwhile. Tensions will likely subside in coming weeks, and no one envisions a sequel to a war that killed nearly 1000 people. The Argentine government has said publicly that armed conflict is not an option, and the Argentina public is highly unlikely to support one.
But what if local officials are right about size of the oil reserves? What if there is much more oil there than some experts think? If two governments fighting for their political lives at home will go to war over islands famous only for their penguins, what might they do to secure billions of barrels of oil?
Daniel Kerner is a Latin America analyst at Eurasia Group, and Willis Sparks is an analyst in the firm's Global Macro practice.
JUAN MABROMATA/AFP/Getty Images
By Ian Bremmer
The story of Nestor Kirchner has taken yet another unexpected turn. Though he remained widely popular, then-president Kirchner decided in 2007 not to seek re-election as Argentina's chief executive, mainly because he feared that term limits would make him a lame duck and cost him control of his party. To extend his influence, he threw support behind his wife, Cristina Fernández de Kirchner, who won the election to succeed him.
Since then, things haven't gone well for either of them. Mrs. Kirchner has seen her popularity steadily ebb to less than 30 percent. To revive her (and his own) political fortunes, Mr. Kirchner decided to run for the lower house of congress this summer to represent Buenos Aires province, by far the country's largest. The former president came in second, and his wife's government lost its majority in both houses of congress. Political obituaries followed, and the Kirchner preference for nationalization, generous social spending, wealth redistribution, and manipulation of economic data now appears on the way out.
But Nestor Kirchner doesn't accept defeat easily. In the months since his embarrassment at the polls, he has worked to fight his way back toward relevance. Though finishing second, he still qualified for a seat under Argentina's system of proportional representation, and Kirchner formally assumed his post last week. With Argentina's economy likely to recover, financial relief on the horizon, and a fragmented opposition, the Cristina Fernandez de Kirchner administration will probably muddle through to the next presidential election in 2011.
Now Nestor Kirchner appears to be flirting with another run for the presidency. His wife's government succeeded in driving through comprehensive electoral reform last week meant to help his cause -- by strengthening established political parties and leaving smaller parties out of the running. Though Argentina is not Venezuela and no Argentine president can hope to exercise the political dominance that Hugo Chávez enjoys in Caracas, the government also managed to pass a law in October that gives government greater influence over the country's broadcast media.
But Nestor Kirchner's chances of winning in 2011 are slim. Rising inflation will continue to stoke political and social tension, and he and his wife will shoulder much of the blame. Ironically, the Kirchners' own electoral reform plan could lead to further embarrassment at the polls. The new plan also establishes that all registered voters must cast ballots in party primaries. Independent voters can vote in any primary they choose, leading to the unanticipated problem that the same voters who punished him at the polls last summer could strangle his presidential candidacy even before it reaches the general election.
Vice President Julio Cobos now looks to be the candidate best positioned to take advantage of a growing appetite for change -- and an end to the Kirchner dynasty and the political turmoil it so often generates. Dissident Peronist candidate and former president Eduardo Duhalde has signaled a willingness to challenge Kirchner in the primary and could also become a competitive candidate.
That's good news for Argentina, which may finally begin to get its fiscal house in order and begin to attract much-needed foreign investment again following the next election.
Ian Bremmer is president of Eurasia Group.
JUAN MABROMATA/AFP/Getty Images
By Ian Bremmer
Brazil's emergence as an investor-friendly, free market democracy has been one of the world's most encouraging stories of the past several years. As Venezuela's Hugo Chavez perfects his Castro impersonation, Ecuador and Bolivia follow Chavez's example, and Argentina's economy flounders, Brazil's President Luiz Inacio Lula da Silva has maintained responsible macroeconomic policies -- while redistributing wealth to narrow the still-considerable gap between the country's rich and poor. But as he begins his final year in office, a huge off-shore oil find has emboldened his government to deepen state control of the energy sector, clouding the investment picture.
Lula now looks likely to win a legislative battle over the future of Brazil's
oil sector. State-owned oil company Petrobras will then hold exclusive rights
to operate all new exploration and production in off-shore fields that are
believed to contain one of the world's largest deposits of crude oil discovered
in recent years. Brazil's government will then control all activity in the
new fields, making the big decisions on project operation and management. Over
time, Petrobras will become a much larger but less profitable and less efficiently
No surprise then that multinational oil companies resolutely oppose this plan. Despite the tremendous potential in the offshore fields, many of them may simply opt not to work with Petrobras under the terms the Brazilian government has proposed. That's why there's a real risk that Brazil will have to turn to Chinese and other state-owned energy companies for the resources they'll need to bring this oil to market. That will be bad news for those who import oil because, though Petrobras has the technical expertise for the job, the company is already approaching overstretch on development of existing projects. The fact that Petrobras can do the job doesn't mean it should. Partnership with oil multinationals with much more experience managing projects to recover maximum quantities of deep sea oil deposits would bring more oil to consumers -- and do it more quickly and efficiently.
Brazil's opposition isn't happy with Lula's plan either, but his popularity (near 80 percent) has kept the opposition quiet. Even Sao Paolo Governor Jose Serra, the candidate most likely to defeat Lula's preferred successor (Chief of Staff Dilma Rousseff) next October is keeping most of his reservations to himself. Lawmakers who would normally oppose a government-managed plan are eager to remain in Lula's good graces as elections approach.
Multinational oil companies are moving cautiously, as well. They've aired their criticisms through Brazil's Petroleum Industry Association, but have avoided direct involvement in Brazil's election dynamic.
Without determined opposition, the legislation will probably pass. If Serra wins next fall's presidential election, he will probably try to reverse the legislation. But that would be a long process. If Dilma wins, international oil companies can only hope for an eventual victory in court on the reform plan's constitutionality. Either way, Brazil's energy sector will be much less investor friendly for the next several years.
Ian Bremmer is president of Eurasia Group.
ANTONIO SCORZA/AFP/Getty Images
By Ian Bremmer
Sometimes there's less to a story than meets the eye. Take Venezuelan President Hugo Chávez's announcement last week that he would freeze diplomatic and commercial relations with Colombia. There's nothing new about tensions between these two governments, but markets responded badly to what sounded like a drastic step. This story is much ado about almost nothing.
Chávez is angry that Colombia has invited a few hundred additional US troops into the country, granting them access to three Colombian military bases. (There are currently about 300 American soldiers in the country. Colombia's government insists it will not amend an existing bilateral agreement that caps the total of US troops at no more than 800.) Colombian President Alvaro Uribe insists the troops are there to help target narcotics trafficking, but Chávez has warned his people of an impending Yanqui invasion. Meanwhile, Uribe accuses the Venezuelan government of selling military materiel to FARC guerillas inside Colombia.
There's nothing new about any of this tension. Trade between Venezuela and Colombia briefly shut down in 2005 after Colombia captured a FARC spokesman in Caracas. It happened again in 2008 after a Colombian bombing raid killed FARC's second in command inside neighboring Ecuador, a Venezuelan ally. In both cases, trade between Colombia and Venezuela briefly halted but was quickly restored.
That will happen again this time, because the two governments need the commerce more than they need the conflict. About 14 percent of Venezuela's imports come from Colombia. Venezuela needs these products, particularly processed food, because the tight price controls Chávez has ordered and his ongoing threats to nationalize companies and entire industries have depressed production levels inside his country. Closing the door to inexpensive and easily accessible Colombian imports would worsen already significant shortages and put extra pressure on inflation and fiscal accounts.
The dependence works both ways. About 18 percent of Colombia's exports go to Venezuela. President Uribe has fewer political vulnerabilities than Chávez, and with an election next year, some fear he might take a tougher than usual line -- rallying core supporters, riding out protests from the export sector, and boosting his chances of securing a third presidential term.
But Uribe will probably abandon hopes for a third term, since he's unlikely to win support from lawmakers to launch the referendum he would need to remove constitutional term limits. Uribe already faces criticism that he hasn't done enough to refloat the country's floundering economy. It makes little sense for him to make economic matters worse, just as he's moving into retirement.
It's one thing for Chávez and Uribe to stir up nationalist fury in a bid to change the subject from tough economic times. It's quite another to launch a mutually damaging trade war that can only make matters worse.
JUAN BARRETO/AFP/Getty Images
by Eurasia Group analyst Erasto Almeida
Brazil has navigated the global financial crisis relatively well, and is well positioned to resume economic growth in 2010 and beyond. Responsible macroeconomic policies are probably here to stay, even when a new president takes office in January 2011. New vast oil discoveries will further reduce the country's vulnerability to external shocks and offer a number of new investment opportunities. So what's at stake for the markets in the 2010 elections? It will be important to watch the role of the state and national champions in key sectors such as oil, power, and mining.
No matter who wins the presidential election, it is highly unlikely that Brazil will return to the kind of irresponsible macroeconomic policies it had in the past. The country's largest leftist party, the ruling Worker's Party (PT), has not only embraced responsible macroeconomic policies but, very importantly, benefited politically from its decision, as shown by President Luiz Inacio Lula da Silva's reelection in 2006 and 80 percent approval ratings.
Lula's chosen candidate to succeed him, Chief of Staff Dilma Rousseff, is unlikely to change course. Jose Serra, the governor of Sao Paulo from the opposition Brazilian Social Democracy Party (PSDB), who will probably be her main adversary, is even more market friendly. Rousseff and Serra might differ on how to calibrate policies, but neither one will significantly alter the status quo. The 2010 electoral cycle may contribute to some fiscal slippage and generate noise on monetary policy with the likely departure of central bank governor Henrique Meirelles, who wants to run for office. Yet even if a less predictable candidate emerges and wins the election, a shift away from voters' preferences for low inflation is unlikely. Brazil remains overall a sound long-term bet for investors.
With macroeconomic stability here to stay, what differentiates the two main candidates is their view on industrial policy and the state's role in key sectors of the economy. Rousseff has a much more state-centered view than Serra, perhaps even more than Lula. Her view is already present in the current government, where she is the key policy decision-maker, but it would probably become more salient in a new PT administration. Investment from state-controlled energy company Petrobras, for instance, has been a key component of the government's counter-cyclical policy. More recently, the government seems to have decided to propose that Petrobras be the sole operator of the new deep-sea oil province. There may be similar moves, if on a smaller scale, in the power sector, for example, with a greater role for state-owned utility Eletrobras. Brazil's National Development Banks (BNDES) will play an increasingly important role in providing financing for companies and projects. Rousseff wants greater private investment as well, but as Brazil's economy and state revenues grow, she will have more room to push for industrial policies and national champions. If Jose Serra and the PSDB win, however, the state and national champions would have much less involvement.
The big question that remains open, of course, is who will the election. While the presidential race is expected to be tight and it's still early to make concrete predictions, the odds seem to be in Rousseff's favor. Although she is behind Serra in current polls, has never run for office, and lacks Lula's charisma, she signifies continuity -- which is likely to be the popular trend. Brazilians are happy with the economy and recent improvements in their lives. Studies show a steady expansion of the lower-middle class, which grew from 42 percent of the population to 52 percent in the past seven years. This progress helps explain Lula's record high approval ratings, which will also be Rousseff's main asset. If she wins, she won't put economic stability at risk, but Brazil will most likely see the state take a heavier hand.
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By Eurasia Group analyst Daniel Kerner
Argentina has seen better days.
Following a dramatic political and economic crisis in late 2001 and the largest sovereign default in recent economic history, Argentina enjoyed a remarkable economic recovery over the next several years. Under President Nestor Kirchner (2003-2007), a favorable international environment helped boost the country's economy at a record pace, enabling him to consolidate power and to become one of the most popular and successful presidents in Argentine history. His popularity (approval ratings of close to 70 percent for most of his mandate) allowed him to transfer political power to his wife, Cristina Fernandez de Kirchner, who was elected president by a comfortable margin in October 2007.
But the trouble began even before Nestor Kirchner stepped aside. Despite his political success, his government's reluctance to address rising inflation, unpaid external debt and energy shortages began to raise doubts over the sustainability of Argentina's growth. Inflation began to climb in 2005. The government responded with expansionary fiscal and monetary policies, manipulated inflation statistics, and heavy and sustained pressure on the private sector to keep prices low. Hopes that the Fernandez de Kirchner administration would more openly address these problems were quickly dashed.
But it was last year's four-month conflict with the farming sector over export taxes that delivered the heaviest blow to the Kirchners' popularity. The conflict began after the government sharply raised taxes on soybean exports and refused to reduce them despite massive protests. The taxes were repealed only after the senate voted against the government's proposal. The government's decision to shore up its fiscal position by nationalizing local pension funds further undermined confidence in both the government and in Argentina's economic prospects.
But it was last weekend's election results that finally closed the door on the Kirchner era in Argentine politics. Months ago, the Kirchners knew they had a fight on their hands. Afraid a bad economy would only get worse, the government surprised many observers by pushing forward the date of mid-term elections from October to June. Aware that even the earlier elections would leave them at a disadvantage in key electoral districts, the Kirchners upped the stakes. Nestor Kirchner himself announced that he would seek a lower house seat representing the province of Buenos Aires.
He lost. And the government lost its majority in both houses of congress. In fact, government candidates fell in most of the country's largest electoral districts, including the Capital, Buenos Aires, Cordoba, Entre Rios, Mendoza and Santa Fe.
The Kirchners were hoping to maintain what was left of their grip on the Peronist Party and to dominate the political agenda heading into the next presidential election in 2011. Instead, the sun rose Monday morning on a new set of opposition leaders, like Vice President Julio Cobos, Senator Carlos Reutemann, and Buenos Aires mayor Mauricio Macri, who are well positioned to challenge for the presidency in two years. The country's most powerful politician, Nestor Kirchner, resigned Monday as leader of the Peronist Party. Though two years remain in her presidency, Cristina Fernandez de Kirchner has become a lame duck.
The key economic policy question is whether the Kirchners, who have refused to negotiate or compromise with rivals both inside and outside the Peronist Party can navigate the newly treacherous political waters.
If so, they'll have to fundamentally shift the way they've done business for the past six years. That's why it probably won't happen -- and why Argentina's political and economic forecast will remain mostly cloudy until a new president is elected in 2011.
CLAUDIO SANTANA/AFP/Getty Images
By Ian Bremmer
The first five "fat tails" are detailed in the entry below. Here are the second five. Again, each of these scenarios remains unlikely. But in each case, the impact of the global economic meltdown on a particular state's real economy has dramatically increased the likelihood of a fat tail occurring -- from 2 percent or 3 percent six months ago to 10 percent to 20 percent over the next several months, a serious enough concern to warrant focused attention.
6. Turkey's secularists lash out
Reinvigorated by their solid performance in recent local elections and still seething over last year's failed bid to close the ruling justice and development party (AKP), Turkey's opposition secularists in the military, media, and business elite are emboldened to try again, launching a public campaign to build opposition to the ruling party across the country. A sharper-than-expected economic contraction provides them with a new political opportunity to take on the AKP in the courts.
Weakened by the AKP's own poor election showing, Prime Minister Recep Tayyip Erdogan struggles to manage the nationalist and radical Islamist elements within his party. Convinced that his political survival depends more on party unity than on building consensus across the political class, Erdogan overplays his hand by trying once again to amend the constitution. The high court orders closure of the AKP and bans Erdogan from office. Turkey then finds itself in an institutional crisis that brings policymaking -- and the country's bid to join the European Union -- to a grinding halt in the middle of a recession. Foreign investors abandon ship, moving capital into less risky markets.
7. Argentina opens up
Fat tails can offer opportunities as well as risks. That's the case in Argentina. There the global recession could unravel the country's economy. The government's inability to manage the fallout would push its poll numbers sharply lower, persuading advisors to President Cristina Fernandez de Kirchner to advance the date of legislative elections from October to June to allow her allies a chance to face voters before the opposition gets organized and the economy deteriorates further. The president's husband, former president Néstor Kirchner, would head the government's legislative list.
Against the backdrop of spiraling social discontent, President Kirchner's Peronist party loses its lower house majority, and Néstor Kirchner would finish behind dissident members of his own party in Buenos Aires. The president resigns, and Vice President Julio Cobos becomes president. Kirchner's departure opens new policy possibilities. The Cobos government reduces state interference in domestic markets, removes restrictions on the farming sector, and improves the transparency (and therefore the credibility) of the national statistics institute. He signs an agreement with the IMF and promises to resolve the country's outstanding debt problems, quelling fears of default. This leads to a serious improvement in market sentiment.
8. The emirates disintegrate
The weakness of existing federal institutions has pulled back the curtain on a serious problem -- Emirati leaders haven't been able to respond in a coordinated way to the financial crisis. Abu Dhabi has jumped in to recapitalize the other emirates, but its strong moves to extend political control could push angry royals in Dubai, Ras al Khaymah and Sharjah, to look for future opportunities to reassert their independence.
Under this scenario, once the financial crisis passes, the smaller emirates try to kickstart their economic programs, provoking a federal veto. Sheikh Mohammed bin Rashid al Maktoum of Dubai tries to reestablish his economic autonomy by launching new infrastructure projects without the approval of Abu Dhabi's al Nahayan family. Abu Dhabi then blocks Dubai's negotiations with international partners, damaging Dubai's credibility and humiliating its royal family. Sharjah tries to restart talks on gas imports from Iran and Ras al Khaymah considers the same option. The Abu Dhabi-dominated federal government opposes the process. The smaller states then create a new federation or simply become independent states, and the UAE federation ceases to exist. The weak institutionalization of federalism and the UAE's increasingly personalized politics make this scenario not quite as unlikely as it seems.
9. Japan's policy paralysis
Japan's Liberal Democratic Party (LDP) will likely lose control of the lower house of parliament, the chamber which selects the prime minister, in an election that must be called by September 10. The opposition Democratic Party of Japan (DPJ) will likely win a majority of seats outright and form a new cabinet or a large plurality and forge a coalition with independents and LDP defectors.
But the more worrisome scenario involves the DPJ failing to win a majority of lower house seats, creating a chain reaction of party schisms that paralyze the coalition building process. The LDP loss aggravates already bitter internal rivalries, splintering the party that has ruled Japan almost continuously for more than 50 years. Internal battles over policy also plague the DPJ. If more conservative DPJ members form alliances with former LDP members, the DPJ could fall apart as well, further complicating the coalition-building process at a moment of economic uncertainty.
Japan is then ruled (as it was during the mid 1990s) by a fragile and fractious multiparty coalition that can't advance reforms needed for response to the economic crisis, deregulation, and foreign-policy priorities like reinvigorated relations with Washington, undermining Japan's value as an economic and security partner. This scenario provokes anxiety over the future strength of the Japanese economy and its security alliance with the United States. It then takes several years for the country's leading political parties to redevelop along ideologically coherent lines.
10. Poland runs off the rails
In Poland, the Civic Platform (PO)-led ruling coalition has successfully promoted a moderate, pro-market, pro-western agenda and has become one of Eastern Europe's most stable and capable governments. But under this fat tail scenario, the global economic outlook pushes Poland into a severe recession. Following an anti-market, anti-foreigner, and thinly veiled anti-banking/anti-Semitic electoral campaign, the populist/nationalist Law and Justice party (PIS) takes power in 2011, and the country turns inward. The new government blames capitalism (as well as the west in general and PO in particular) for all of Poland's ills. Its policy agenda is economically statist and culturally intolerant and nationalist.
The PIS-led government asserts control over a broad range of state and quasi-state companies in sectors like energy, mining, and banking/insurance. Officials appoint boards of directors for these companies based less on competence than on political loyalty. Poland withdraws its commitment to join the eurozone. The government scores domestic political points via attacks on both the EU and Russia -- with negative strategic and economic consequences. PIS launches corruption "witch hunts" against former communists, PO party loyalists, and foreigners, destabilizing Poland's economy and generating capital flight.
Click Here for The 10 crises you aren't expecting but should be (Part 1)
The Call, from Ian Bremmer, uses cutting-edge political science to predict the political future -- and how it will shape the global economy.