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
Monday's ruling from India's Supreme Court that Novartis could not claim patent protection for an expensive leukemia drug throws a spotlight on India's limited intellectual property (IP) protections and may constrain much needed innovation both in the health industry and the broader economy.
The court's verdict upholds language in India's 2005 patent law that says new forms of a known drug must be significantly more effective in order to win a new patent. The court's move represents a win for India's booming generic pharmaceutical industry, but it may prove a pyrrhic victory as it threatens to fundamentally limit the government's ability to improve Indian healthcare over the long term. Foreign corporations with any IP concerns will now be more careful about operating in India. The ruling could also have the unintended consequence of keeping domestic makers of generic pharmaceuticals at the lower end of the value chain.
The verdict is in fact the latest move by Indian authorities targeting international pharmaceutical firms' IP protections in order to help lower Indian healthcare costs. But, despite the government's hostility toward their business model, research and development-focused pharmaceutical firms such as Novartis are unlikely to exit India entirely. They will, however, proceed slowly and cautiously with the drugs they introduce and the patents they file.
The government's approach will also further box Indian pharmaceutical firms into their role as producers of low-cost, low-margin generic drugs. Over the long term, many Indian companies plan to invest substantially in research capabilities in an effort to develop new treatments and move up the value chain. These firms could become victims of their own lobbying and legal successes. Indian pharmaceutical companies will find it difficult to make the transition to higher value products if their IP protections are limited.
More broadly, the verdict could constrain innovation in other areas of the economy as well. Any firm that depends on IP may find the Indian market either unprofitable or unwelcoming (or both). A clear medium-term risk is that foreign investment in Indian research centers will also probably decline, threatening India's long-term growth. The Indian government can ill-afford to stifle the virtuous cycle of innovation if the country's economy is to provide adequate jobs, healthcare, and social opportunities for a largely disadvantaged population of 1.2 billion.
Sasha Riser-Kositsky is a researcher with Eurasia Group's Asia practice.
PUNIT PARANJPE/AFP/Getty Images
The future of Myanmar's National League for Democracy (NLD) seemed preordained when the trammels of political repression were removed in 2012. The party would parlay the popularity of its leader Aung San Suu Kyi and coast to victory in the 2015 elections over a ruling party led by widely despised former generals. But democracy is messy, and even its most fervent adherents can slip once the real challenges of governance and politics surface.
The NLD has stumbled in the past few months and its trajectory is now less certain. The party faces a growing list of constituent demands and the ruling Union and Solidarity Development Party (USDP) has demonstrated a talent for political maneuvering that is improving its outlook.
The NLD's internal disorder is in part a natural consequence of having to shift its focus from opposing a hated military government to winning an election in a diverse country. Burma has 135 recognized ethnic groups, many of which live along the eastern, western, and northern borders. Some of them have never yielded to rule by an outside force, making the majority-ethnic Burman NLD's task of building an effective national party more difficult. But the party has also been accused of mishandling internal party elections, delaying the first party congress until the second week of March. Several hundred disgruntled members defected from the party in Pathein several months ago, and recently party members gathered in Mandalay to protest party election fraud. The aging party leaders are also rumored to be excluding party youth from the policymaking process, which could result in more defections that could bolster the NLD's competitors or provide the core of new parties ahead of the 2015 national elections.
Aung San Suu Kyi's new role has also forced her to make compromises that have alienated some would-be NLD supporters. She has exhibited greater pragmatism and less ideological conviction in her role as member of parliament than she did as an activist. Though her silence on the Rohingya humanitarian crisis is less problematic in Myanmar than it is among international donors, Aung San Suu Kyi has not won allies through her silence on the conflict in Kachin State. Her silence may cost the NLD dearly if it finds that it must rely on ethnic parties to form a ruling coalition after the 2015 elections, much as the NLD did in 1990 when it formed an alliance with ethnic coalition the United Nationalities League for Democracy.
Meanwhile, the USDP has improved its ability to govern, thanks in part to personnel changes that have promoted technocrats and its experience with the exercise of power. The USDP has been increasingly vocal about taking credit for the recent political liberalization, and as economic liberalization begins to improve the standard of living, the party's leaders will no doubt seek to burnish the USDP's reputation. From a policy perspective, this means that development will likely be steered toward areas that return the biggest, quickest, and most obvious improvements in living standards, which includes areas such as electrification, telecoms, and agriculture.
Finally, the USDP will use the familiar divide-and-rule tactic of the past, working to undermine their opponents by fostering personality-based rivalries and distrust across ethnic lines. The USDP and military have pursued an aggressive effort to broker ceasefire deals with 11 groups since November 2011, whom they will then encourage to register as political parties. If successful, this tactic will force the implicit acceptance of the 2008 Constitution by Myanmar's ethnic groups and will also present the NLD with new challenges in minority ethnic electoral districts. And if the NLD cannot improve its relationship with ethnically based parties -- either because of concerns about the selection of local party officials or because of its silence on the Kachin -- then it may find itself competing with them instead of building a coalition. That outcome would divide the opposition vote and cede the advantage to the USDP.
Similarly, in an effort to raise the stock of the breakaway NLD competitor, the National Democratic Force, President Thein Sein on Feb. 6 appointed one of its members of parliament as the first non-USDP cabinet minister. And if Thein Sein feels he can succeed, he may also encourage the pro-democracy group, 88 Generation Students (88 GS), to form a party. The organization's moral authority in Myanmar approaches that of Aung San Suu Kyi, and an 88 GS party would challenge NLD's pro-democracy bona fides.
The result is that the NLD is too weak to shape the reform agenda for the next three years, and perhaps longer. Aung San Suu Kyi is probably aware of this and as a result will be careful not to overreach and risk alienating international stakeholders. For the USDP's part, Thein Sein and his cabinet will continue with reforms that are intended in part to gradually legitimize both the military and the USDP while entrenching their privileged economic and political positions.
Christian Lewis is a researcher in Eurasia Group's Asia practice.
Ye Aung Thu/AFP/Getty Images
Note: Today is the ninth in a series of posts that detail Eurasia Group's Top Risks for 2013
With slow growth, persistent inflation, and large fiscal and current account deficits, India desperately needs to implement a range of economic reforms. But due to its own shortcomings and a constraining political environment, the ability of the Congress party-led United Progressive Alliance to tackle structural problems is limited -- and will wane further in the run-up to national elections.
Elections are due by May 2014, and the Congress party is scrambling to shore up its popularity in the wake of high-profile corruption scandals. Other coalition members and issue-based supporters, sensing weakness, will try their hardest to extract political concessions from the Congress while the opposition Bharatiya Janata Party (BJP) will likely remain relentlessly obstructionist in its quest to regain power.
Consequently, parliamentary gridlock will persist, with only minor administrative reforms politically feasible in 2013. P. Chimdambaram's return as finance minister in July 2012 has buoyed foreign investor confidence and market sentiment, but he needs to make deep, politically difficult spending cuts to improve India's chance of averting a sovereign credit downgrade to junk status.
And parliamentary elections are not likely to lead to an improved policymaking environment. Like the Congress party, the BJP is in the throes of a prolonged leadership transition and has been largely unable to capitalize on the decline in public support for Congress. This leadership vacuum has enhanced the influence of swing regional and state parties. Elections will likely result in a hung parliament and an even more unstable coalition that will be capable of approving only lowest-common-denominator policies.
Growth will improve in 2013 but India will likely miss its fiscal deficit targets of 5.3 percent of GDP for fiscal year 2012-2013, and 4.8 percent for fiscal year 2013-2014, without substantial subsidy cuts unprecedented in an election year budget.
Expectations for India's performance in 2013 are limited. While it can hope to accomplish just enough on fiscal policy and economic reforms to avoid a sovereign downgrade, India will make negligible progress on structural problems that have long vexed its economy.
On Wednesday, we'll profile Risk #10: South Africa.
Daniel Berehulak/Getty Images
Note: Today is the first in a series of posts that detail Eurasia Group's Top Risks for 2013.
Since the onset of the financial crisis in 2008, investors and companies have focused mainly on risks in developed world markets. But as conditions in the U.S. and Europe continue to improve in 2013, the most worrisome risks will again come from emerging market countries. These countries are fundamentally less stable than their developed world counterparts, and some of their governments used a period of favorable commodities prices and the benefits from earlier reform to avoid the tough choices needed to reach the next stage of their political and economic development.
Some of these emerging market nations face more difficult challenges than others, and much depends on the degree of political capital each leader will have in order to make unpopular but necessary changes. These countries can be divided into three broad categories according to the complexity and immediacy of the risks they face and the longer-term upside they offer.
The first category includes the best bets:
The second category of emerging market economies are at risk of considerable volatility.
Lastly, there are the underperformers, those countries where risks will overshadow returns.
On Friday, we'll profile Risk #2: China vs Information.
HOANG DINH NAM/AFP/Getty Images
By Anjalika Bardalai
On the face of it, India and the US have more differences than similarities: They diverge markedly in terms of income and a host of other qualitative and quantitative indicators. They seem like political opposites as well-one is a two-party presidential system, the other a parliamentary system comprising no fewer than 70 recognized parties (the newest was launched just this week). But Mitt Romney's defeat in the recent US presidential campaign has highlighted several weaknesses of the Republican Party that are mirrored in India's center-right national party, the Bharatiya Janata Party (BJP), which has been the main national opposition party since its spectacular loss in India's 2004 general election.
Most critically, both parties exhibit a split between a conventionally center-right, business-friendly faction and an overtly religious faction that tries to politicize social issues. In the US, the extremely conservative stance of a few Republicans on issues such as rape and abortion periodically overshadowed the presidential campaign and arguably alienated potential voters who favor the right's economic policies, but who found its social policies abhorrent. The BJP, too, exhibits a fault-line between one faction that is secular, pro-business, pro-economic reform, and (relatively) fiscally conservative, and another wing-the hardline "Hindu-nationalists."
The GOP's hardline stance and rhetoric on immigration reform in the US contributed to an extremely poor showing for the party among Hispanics, the fastest-growing minority group in the US. Similarly, the consequences for the BJP of the Hindutva influence are grave, and will become ever more so as rising incomes inevitably weaken the bonds of religious, ethnic- and caste-based identity in India. For one thing, the BJP's perceived pro-Hindu stance means that it will be all but impossible to make serious electoral inroads among the roughly 15% of India's population that is Muslim.
In addition, the BJP's position is a serious liability in terms of its ability to form alliances with India's myriad regional parties. In an increasingly fractured political system, this could be an utterly debilitating political handicap. As a debate raged this week about whether or not a symbolic parliamentary confidence vote would be held on a the government's recent move to liberalize FDI in the retail sector, the BJP was unable to persuade key parties that are stridently opposed to the reform that they should side with it in a vote against the government. As much as they may fear the recent liberalization, the other parties may fear what they have termed the "communal forces" represented by the BJP even more.
The broader consequences of the BJP's schizophrenic identity are no better. In the absence of a strong, coherent policy platform, the party has relied on sheer obstinacy and obstructionism, preventing the legislature from attending to important legislation (some would argue echoing the behavior of the Republicans in Congress for much of the recent past). The Indian government certainly cannot be absolved of responsibility for the current disastrous policymaking environment, but the main opposition party is behaving irresponsibly.
Finally, the division between the secular and religious right complicates the choice of party leadership. Some analysts argued that with public approval of Obama relatively low and, crucially, the US economy still relatively weak, the presidency was the Republicans' to lose if only the party had been able to muster a stronger candidate than Romney. In India, the BJP has yet to anoint a prime ministerial candidate for the next general election, which is due by May 2014. The man widely hailed as the front-runner is the chief minister of the state of Gujarat, Narendra Modi. Having presided since 2001 over one of India's fastest-growing and most industrialized states, he has developed a sterling reputation for economic management and as such is well-placed to campaign on the main issue of the day: economic revival.
Unfortunately for him, however, he is also one of the country's most divisive figures, with a shadow still hanging over him from communal riots in the state in 2002 in which around 1,000 people-75% of them Muslims-were killed. Even if he prevails in the BJP's internal leadership struggle, this potentially bodes ill for the party's electability in 2014. The BJP urgently needs to reflect on finding a leader who could bring to the table both economic management and political cohesion. Both the Indian BJP and the US GOP have similar lessons to learn from recent history as they attempt to stake out a brighter political future.
Anjalika Bardalai is an analyst in Eurasia Group's Asia practice.
SAM PANTHAKY/AFP/Getty Images
By David Sloan, Anjalika Bardalai, and Sasha Riser-Kositsky
India's low-key Prime Minister Manmohan Singh has revealed unexpected backbone, but his renewed vigor may come too late to for India to avoid a ratings downgrade or save his unpopular government. After years of limited and haphazard progress on structural changes to the economy, the prime minister, in conjunction with the new Minister of Finance P. Chidambaram, has successfully leveraged the looming threat of a sovereign downgrade to reassume control -- at least for now -- over India's economic policy-making. At the pair's urging, India's Cabinet Committee on Economic Affairs on September 14 approved 51 percent FDI in multi-brand retail, allowed foreign airlines to buy 49 percent stakes in Indian carriers, and raised the FDI cap in broadcasting services from 49 percent to 75 percent. Those long-awaited announcements came just one day after a cabinet committee also approved an unexpectedly large price increase for diesel.
The decision prompted a quick revolt by the second-largest party in the ruling United Progressive Alliance (UPA) coalition. Mamata Banerjee, the firebrand leader of the West Bengal-based Trinamool Congress (TMC), announced on September 18 that the TMC was withdrawing from the government after Singh ignored her demands to roll back both the diesel price hike and FDI liberalization.
But the TMC's departure will not stop those measures from going ahead. The TMC's move leaves the UPA even further from a simple majority in the Lok Sabha, but the government says it still has enough support from other regional parties to survive any possible confidence vote, at least in the near-term. The UPA's ability to maintain the outside support of a number of regional parties -- especially the Samajwadi Party (SP), which holds power in India's largest state, Uttar Pradesh, and has 22 members of parliament in the Lok Sabha -- is crucial to the coalition's future. Although the SP has previously turned down ministerial positions and is likely to do so again in the now-inevitable cabinet shuffle, New Delhi will offer the state government significant financial incentives as an inducement. Still, the SP, along with the TMC a huge winner in recent state elections, expects that early national polls would significantly expand its parliamentary representation.
As such, while the government is likely to survive for now, the TMC's exit underscores the fragility of the Congress-led UPA coalition and increases the chances for early national elections. If the SP and the main opposition Bharatiya Janata Party can resolve their internal leadership squabbles, they might support any TMC initiative to force early national elections. Otherwise, the UPA government is likely to limp along until the end of its five year term in mid-2014.
Despite the political firestorm, the government is unwilling to risk the reputational damage of backtracking again on FDI liberalization, as it did last December after initially approving FDI in multi-brand retail. But the prospects for further reforms have diminished as a result of the political turmoil. Any liberalization of FDI rules in pensions and insurance that would require legislative action is out of consideration, while implementation of the Direct Taxes Code and the Goods and Services Tax, which would require a constitutional amendment, is extremely unlikely. And while the government will move ahead with fiscal consolidation later this month, the window for new and deeper changes closes as national elections approach. Following the election, the prospects for reform are even bleaker as an even more divided, dysfunctional coalition government is likely to assume power.
David Sloan is head of Eurasia Group's Asia practice, Anjalika Bardalai is an analyst in the Asia practice, and Sasha Riser-Kositsky is a researcher in the Asia practice.
Today, The Call presents our top risks for 2012. Click HERE for Eurasia Group's complete report.
1. The End of the 9/11 Era -- It was a truism of globalization: economics drives markets, and national security drives geopolitics. No longer. Following the 2008 financial crisis, the killing of Osama bin Laden, the withdrawal of U.S. troops from Iraq, and an end date for the war in Afghanistan, politics and economics will overlap almost entirely in 2012. Political officials around the world will worry mainly over economic risks -- the eurozone crisis, the strength of U.S. recovery, and China's evolving role in the global economy in 2012. Market players, in turn, are anxious mainly about political decisions, especially those that will be made in Europe, America, and China this year, as shortsighted leadership from virtually all the major geopolitical players generates policy stalemate and uncertainty.
2. G-Zero and the Middle East -- The inability/unwillingness of major powers to bolster the region's balance of force will generate greater turbulence across North Africa and the Middle East as unresolved religious, sectarian, and ethnic tensions threaten more unrest. The lack of a viable regional security framework, continuing protests, autocracies at risk, and enormous challenges facing newly democratic regimes will add to the potential turmoil. As this dynamic plays out in Syria, Egypt, Iraq, Libya, Yemen and Bahrain, regional heavyweights -- Saudi Arabia, Iran, and Turkey -- will generate friction as they vie for proxy influence.
3. Eurozone: the rollercoaster ride rolls on -- In Europe, it's not the breakup of the Eurozone we need to fear in 2012 but the "reactive incrementalism" that could spin beyond the control of political officials. The uncertainty and volatility we saw in 2011 has only just begun.
4. United States: right after elections -- Once the votes are counted in November, lawmakers will take up the $5 trillion worth of tax and savings decisions that must be taken in the final nine weeks of the year. Investors face uncertainty about their taxes and government contracts as well as about the broader impact of lawmakers' choices on economic growth.
5. North Korea: implosion or explosion -- The world's most opaque nuclear-armed state enters a year of uncertainty as the battle for power and influence within the regime gathers force.
6 - Pakistan: turmoil, spillover -- The end of the 9/11 era threatens neglect of other hotspots, and none is more combustible than Pakistan, a terrorism-plagued, nuclear-armed power burdened with an unpopular civilian government, a meddlesome military, politically motivated judges and an increasingly dangerous security environment. The expected withdrawal of thousands of U.S. troops from Afghanistan this year will fuel regional competition for new influence.
7. China: trouble in the neighborhood -- The Obama administration's recent emphasis on Asia will embolden China's neighbors to take more assertive positions with Beijing. Rising nationalism in China, its ongoing political transition, and the leadership's unwillingness -- perhaps inability -- to resolve internal debates about the country's role in the world suggest Beijing is especially likely to meet provocation with provocation in months to come with both naval and economic muscle.
8. Egypt: a transition in trouble -- Egypt faces the risk of political disintegration this year as anger builds between military and civilian political forces, both Islamist and secular. Egypt's base-line stability, its economic recovery, and its broader regional influence will suffer.
9. South Africa: populism ascendant -- The struggle for leadership of the ruling African National Congress will slow the pace of both policy and economic growth at a time when the eurozone crisis already weighs heavily on South Africa's trade and currency.
10. Venezuela: a no-win election -- The country's big political story this year is October's presidential election, which incumbent Hugo Chavez, if healthy enough for a vigorous campaign, is likely to narrowly win. But the outlook for economic and political stability is bad no matter the election result. Should Chavez die or abandon the race, the deep fissures between the Chavista movement and the opposition could stoke violence.
In addition, Eurasia Group identifies four red herrings, the big stories we don't believe will happen in 2012.
Fallout from the 2012 political transitions -- In 2012, we'll see political transitions in the U.S., China, Russia, and France, countries that together represent nearly half of global GDP and four-fifths of the UN Security Council. But there's surprisingly little at stake in the outcomes for geopolitics and the global economy.
This is probably the single most overrated risk of 2012. The political will to
maintain the eurozone remains strong among all the major political parties in
the core Eurozone states, almost across the board in the European periphery
and, just as importantly, among eurocrats in the ever-growing European
bureaucracy. And there's no effective political mechanism for a Eurozone
China's hard landing -- There are signs of overheated growth in China, but the state has the tools and resources to manage short-term trouble, and it will pull out every stop to prevent a serious slowdown, especially during a major political transition.
Mayan apocalypse -- Just isn't happening. And if it does, well, sorry.
Over the next three weeks, we'll be posting more ideas and information on each of these risks.
By Seema Desai
In early December, India's Minister of Finance Pranab Mukherjee confirmed to parliament that the government would halt current efforts to open up FDI for foreign companies such as Wal-Mart in multi-brand retail. The government is likely to revisit the subject in 2012, perhaps with a reduced FDI limit, but the decision does not signal that the government's limited ability to push economic reforms has eroded any further, or that its survival is in doubt. No major political party, within the ruling coalition or the opposition, is prepared to bring down the government and force a snap election. The current Congress government will continue in power, though there is a possibility that Prime Minister Manmohan Singh may be replaced midway through 2012. Though unlikely, if Singh suddenly resigns in protest against his eroding authority and the cabinet is replaced, it is difficult to visualize the party pushing ahead with any controversial reform.
The same constituency that brought retail reform to near-completion after years of consultation with stakeholders will likely revive the push in 2012. The measure's backers include Minister of Commerce Anand Sharma, senior cabinet members, and various sections of industry. The Congress Party built its case for in support of FDI in multi-brand retail over the past five years but rushed the final announcement, angering party and coalition members.
The bungled announcement has, however, put a fresh political dynamic into play within the Congress Party and its alliance members. The party's senior leadership is not against the retail FDI policy, but the government is also acutely aware of the political dangers posed by the faltering Indian economy. The party will have to address dissenters' concerns and work extra hard to secure support from coalition members. Neither the Dravida Munnetra Kazhagam nor the Trinamool Congress is willing to exit the coalition or face fresh elections, but they felt slighted by not being informed properly about the Nov. 24 policy announcement.
Despite the overblown media commentary, this policy reversal does not materially change the progress of internal economic reforms. Next year, the government is likely to secure legislative approval for some reform legislation, including mining, land acquisition, and direct tax bills. The retail FDI fiasco has not altered the outlook for these internal reform measures, and the political dynamics and probability of these reforms being enacted are unaltered.
There have been structural obstacles for reform since mid-2009, including a lack of real drive from the Congress party leadership. In addition, the likely internal leadership transition and the risks it poses to reformist policymaking will accelerate and grow over 2012. The exceptionally antagonistic relationship between the two main national parties, the Bharatiya Janata Party and Congress, has also made reform even more difficult over the past five years. This dynamic will continue to cast a shadow over reforms in the future unless relations improve.
Still, there continues to be movement on policy announcements that are not contentious (such as infrastructure policy), do not require parliamentary approval (the National Manufacturing Policy), or have been making their way slowly through the system over the past decade (the Goods and Services Tax).
Seema Desai is an analyst with Eurasia Group's Asia practice.
SAJJAD HUSSAIN/AFP/Getty Images
By Ian Bremmer and David Gordon
A wave of money flooding into emerging markets has lifted many boats. But when the tide goes out, certain countries -- and the investors betting on them -- may be left high and dry.
There are very different risk profiles among emerging markets, and even beyond the increasingly turbulent Middle East, not all are going to perform well this year. The risks facing these countries include negative economic policies (fiscal imbalances in some, premature austerity in others) as well as more purely political risks (including contentious elections and political violence). As these problems play out in 2011, they will contribute to poor investment outcomes, ranging from adverse regulatory changes to asset bubbles to weak stock market performance.
The most notable underperformers are Argentina, Hungary, Peru, South Africa, Sri Lanka, and Thailand.
In Argentina, investors appear overly optimistic that policy will improve -- either as a result of President Cristina Kirchner losing her re-election bid or a change in direction if she wins. In fact, she is likely to win, but policy is unlikely to change, leading to higher inflation and more populism.
In Hungary, markets have recently turned south, but still do not seem to be pricing in the scope of the potential impending crisis as the Fidesz government attacks asset holders across a range of classes. Hungary may once again have to turn to the IMF, but Prime Minister Viktor Orban has walked himself into a political corner with his vitriolic anti-IMF rhetoric.
Investors in Peru underestimate the potential for populist candidate Ollanta Humala to make a serious run at the presidency. He's a decided underdog to be sure, but it's too early to write him off. Even if the more market-friendly Alejandro Toledo wins, we're likely to see more resource nationalism -- and mild capital controls if the Peruvian sol continues to appreciate.
Despite its aspirations, South Africa won't improve its investment climate in 2011. Growing political pressure on President Jacob Zuma ahead of municipal elections in April-May and the ruling party leadership contest in 2012 will increase the risk of government inertia and erratic policy-making and reinforce the African National Congress (ANC)'s "single party rule" mentality."
Many people have become overconfident that the end of Sri Lanka's civil war will usher in a period of political stability. But President Mahinda Rajapakse, insecure in his position, is centralizing power while failing to address the country's structural challenges. That's a recipe for resurgent political and ethnic tension, and it will dampen growth prospects.
Finally, 2011 promises to be a year of political tension in Thailand, especially given the king's failing health. Allies of former Prime Minister Thaksin Shinawatra remain popular in much of the country, raising the risks of a violent, flawed election or a military intervention. There's real potential for serious and sustained unrest involving Thailand's incumbent elites and the pro-Thaksin "red-shirt" movement.
Ian Bremmer is president of Eurasia Group. David Gordon is the firm's head of research.
By Ian Bremmer and David Gordon
Pakistan is experiencing a near perfect storm of political, economic, and social crises, and the Pakistan People's Party-led government is not equipped to manage the fallout. A full-on military coup like the one that brought Pervez Musharraf to power in 1999 is unlikely in 2011, but the government's ineptitude and a worsening security situation across the country could fuel still more unrest, encouraging the army to play a more direct and active role in the country's politics. President Asif Ali Zardari will fight any bid by the army to remove members of his inner circle from power, and even if the military were to install a technocratic administration, it would struggle to reverse the effects of years of weak governance.
Zardari and Prime Minister Yusuf Raza Gilani face challenges on multiple fronts. Gilani is focused on rebuilding the ruling coalition and fighting a Supreme Court and media set on undermining Zardari and other senior PPP members. This political battle will continue to distract the government from addressing pressing problems, like the need for structural reforms to slow the expansion of a fiscal deficit that leaves the government little room to invest in much-needed development projects. It's hard to get accurate statistics on inflation and unemployment, but both are high enough to arouse widespread public anger. Food prices are a particular source of anxiety. Severe flooding has created emergency conditions. The government will continue to struggle to hold together a fractious parliamentary coalition.
The government has no political control in the unstable Federally Administered Tribal Areas and Khyber Pakhtunkhwa (the new name for the Northwest Frontier Province). Nothing new there, but the bigger worry is that instability is spreading to the heart of the country and the provinces of Punjab and Sindh. Both have been relatively isolated from the turbulence of the tribal areas, but militants have been increasingly encouraged by the Pakistani government's weakness and the success of allies across the border in Afghanistan. The governor of Punjab, Salman Taseer, was assassinated in Islamabad just three weeks ago. Social upheaval is generating a surge in crime (including kidnappings, extortions, and robberies), protests, and other forms of unrest in Pakistan's large cities --especially Karachi. Further social and ethnic turmoil in the heart of the country might push the military to argue that urban unrest and terrorism are undermining national unity -- and that political change has become an urgent necessity.
These risks have clear implications for U.S. troops across the border. Following a sharp spike in the number of U.S. boots on the ground in Afghanistan, U.S. gains, though limited, are real. But they aren't sustainable without a much more stable Pakistan that can limit the militants' room for maneuver. That will require a political sea change in Karachi, and that's not in the cards for 2011.
On Wednesday, we'll examine Top Risk no. 9: Mexico, where the government's battle against drug cartels continues.
Ian Bremmer is president of Eurasia Group. David Gordon is the firm's head of research.
ASIF HASSAN/AFP/Getty Images
By Eurasia Group's Asia practice
Next in our series of regional outlooks is Asia, where most economies not named Japan are enjoying quicker and stronger recoveries than in other regions. Asian states have also gained new weight within the G-20 and the Bretton Woods institutions. But traditional strategic rivalries persist, and China's growing economic clout and North Korean belligerence are likely to generate most of the headlines in 2011.
Across the region, Chinese demand is a central driver of other countries' economic growth, and for many Asian countries, China is the top trade partner. In the coming year, China will boost its role at the center of a growing web of economic and financial connections that are gradually, but inexorably, integrating East Asia. Beijing will also strengthen its economic ties across South Asia, notably in Pakistan, Sri Lanka, Bangladesh, and even India, with a focus on investment in infrastructure. China-centric free trade agreements have proliferated. Beijing has also adopted its own standards in some areas of information and communications technology and will try to have them adopted internationally. China will continue to try to reshape the region's trade and investment architecture, largely on a pan-Asian basis and without the United States.
But Beijing's long-term strategic intentions inspire deep anxiety, and its foreign and defense policies have rattled its neighbors. Beijing will suffer consequences in 2011, as India, South Korea, Japan, Indonesia, Vietnam, Malaysia, Australia, and others strengthen their defense ties to the United States. Joint exercises, drills at sea, and weapons sales will periodically raise tensions. So too will trade conflicts, as debates over China's industrial policies at home and investments abroad mix commercial worries with national security fears.
Traditional geopolitical risks in Asia, including China-Japan and India-Pakistan frictions, should be manageable in 2011, but North Korea remains a wildcard. Pyongyang continues to make succession arrangements for an ailing Kim Jong-il, and the regime has used military action in the past to bolster its domestic legitimacy.
Further North Korean provocations are highly likely. We could see a third nuclear test in 2011, but additional conventional attacks would rattle markets with greater force. Significant military escalation is unlikely, however, unless Pyongyang strikes U.S. assets -- like ships participating in joint exercises -- or launches conventional strikes at peninsular South Korea. The former would prompt U.S. retaliation. The latter could lead to counterstrikes on peninsular North Korea, though an innately conservative Seoul will try to modulate its response to avoid an escalation of violence.
This post was written by analysts in Eurasia Group's Asia practice.
By Roberto Herrera-Lim
Western governments recently cheered Aung San Suu Kyi's release, but don't expect any major changes to their Myanmar (formerly known as Burma) policies in the near term. By contrast, Asian countries will probably increase their level of engagement, no matter what the country's politics, because they want access to its natural resources. So what does this all mean for Myanmar's relations with the East and West?
Divining the intentions of Myanmar's generals is never easy, especially their calculations around the release of the country's most famous dissident. It could be an act of economic desperation, the result of a power play between the old guard and relatively more moderate factions within the military, or simply the regime's efforts to achieve some form of normalization. Regardless of the motives, however, the effects are clear: While the West remains distrustful of recent moves, other Asian countries will increase their dealings and investments with Pyinmana, giving these governments greater leverage with the generals who effectively run the country (albeit in civilian clothes). In other words, there will a widening gap between how the West and Asia deals with the Burmese regime, for the next year at least.
The current U.S. administration, whose priorities in Asia lie elsewhere, will not expend much political capital on the country. Influential pro-democracy constituencies in Washington can easily find arguments for continued sanctions and against engaging with the country's nominally "civilian" leadership. While the country held its first general election in 20 years on Nov. 7, it was not free, fair, nor credible. Furthermore, most Myanmar watchers are mindful of May 2003 when, barely a year after Suu Kyi's first release from detention, an armed group apparently recruited by the regime's front, the Union Solidarity and Development Association (USDA), attacked her convoy, killing about 100 people. Senior generals seen as responsible for the attack are now in the new parliament as part of the government-sponsored majority belonging to the Union Solidarity and Development Party (USDP), the successor of the USDA. ??
Meanwhile, many countries in Asia (including China, India, and Thailand) will continue to pursue policies toward Myanmar based on their economic interests and a sense that the country is an arena for strategic competition with rivals. China is already Myanmar's de-facto regional patron. Other countries are now pursuing postures more similar to Beijing's than to Washington's, which, in turn, eases the environment in Asia for further Chinese pursuit of Burmese resources such as natural gas. This year, for instance, CNPC started construction for its oil and gas pipeline projects from Arakan (Rakhine) state off the Andaman Sea to the southern Chinese province of Yunnan. The gas pipeline will draw its supply from the Shwe fields off the Arakan coast in the Bay of Bengal and transport it to Kunming and Nanning in China. The oil pipeline, meanwhile, will transport oil offloaded by tankers from the Middle East at Ramree (Maday) Island in Kyaukphyu to Ruili in China's Yunnan province; it will be able to carry roughly 10 percent of China's imports from the Gulf. For Thailand, meanwhile, Myanmar supplies about a fourth of Thai gas needs, and the amount is expected to increase by 2013, based on new agreements by Thai state energy company PTT.
The next few months will be critical for Myanmar's political and economic trajectory. In the days after her release, Suu Kyi was understandably vague about her plans. She did, however, emphasize "national reconciliation" and flirted with the line that Western sanctions might need to be rethought. Increasingly, Suu Kyi will likely test the limits of the government's tolerance and willingness to pursue political reform. But she'll have to be careful, as the generals will probably be assessing whether their experiment of releasing Suu Kyi succeeds -- and they'll recalibrate as necessary. If they sense that increased instability is the likely outcome of her freedom, the leadership will likely revert to old practices, including increasing the military's role in maintaining order and possibly finding an excuse to again arrest Suu Kyi. On the other hand, if Myanmar's leaders believe their gamble has paid off -- and that the economic and diplomatic gains from her release outweigh the risks to their control over the country -- the pro-democracy movement could be given some breathing room. In this case, if the regime can claim it has fulfilled former prime minister Khin Nyunt's seven-step roadmap (announced in 2003), then a more significant, though slow, thawing of ties with the West becomes more likely. This process will, of course, take time. But if the momentum generated by Suu Kyi's release is sustained, some change might become a more realistic expectation within a couple of years.
Roberto Herrera-Lim is a director in Eurasia Group's Asia practice.
By Maria Kuusisto
While Barack Obama's travels are focusing international media attention on India this week, rival Pakistan is on the brink of major political change. Increased violence, this summer's flooding, and the aftermath of the global recession has left most Pakistanis feeling increasingly insecure, and President Asif Ali Zardari's government has done little to ameliorate these anxieties.
Now it seems that just two years after the fall of former president (and general) Pervez Musharraf, the military may once more intervene. Only don't expect a coup like the one that brought Musharraf to power in 1999. Despite a long history of meddling in Pakistan's politics, the army is likely to stay behind the scenes this time and force the government to improve governance or face significant reshuffling.
The evidence pointing to intervention is unusually strong at the moment. Pakistan is beset by problems-political, economic, social, and security-related. Zardari's ruling Pakistan Peoples Party (PPP) is distracted by its battle with a hostile supreme court and largely disinterested in governing. The government has been unwilling and unable to introduce urgently needed financial reforms, which are necessary to bring the country's runaway fiscal deficit under control. Zardari has also failed to increase revenue collection by introducing a value-added tax. Instead, Islamabad has been resorting to a variety of quick-fixes, such as borrowing from the state bank, to finance its growing spending commitments. These moves are undermining the economy, hindering recovery, and fuelling inflation.
Meanwhile, social tensions-always a threat in this fractious, multiethnic country-are running high. People feel abandoned by the government: They're struggling to support themselves economically and afford basic food stables and services. These frustrations are manifesting themselves in protests, violence, crime, and terrorism. The law-and-order situation is particularly volatile in Karachi, the largest city and commercial capital. More than 1,200 people have been killed in the city's recurring waves of politically motivated clashes between rival groups and targeted killings this year. Hence, more and more of the public feels that the PPP's lassitude is leading to anarchy and undermining Pakistan's national interests.
The country's elites are looking for someone -- anyone -- to get them out of their current fix. Neither the PPP nor the opposition Pakistan Muslim League-Nawaz (PML-N) are up to the job of challenging and replacing Zardari. The president is highly skillful in intimidating his enemies and incentivizing his allies within the PPP, making it hard to form a united front inside the party against him. Moreover, the PML-N is more comfortable in being an opposition force and remains reluctant to take over the responsibility of running the country. That leaves the army as the only viable challenger. Pakistan's elites have begun calling on the military to intervene for the sake of national interest, before it's too late.
In the old days, everyone in Pakistan knew what this meant: a coup and a military government. After all, a military government has run Pakistan for more than half of its history. This time, however, Chief of Army Staff Ashfaq Pervez Kayani knows that stepping in directly would damage the military's domestic and international reputation, which he has carefully rebuilt since Musharraf's resignation in 2008, and could trigger a backlash. More importantly, Kayani knows that the military can't afford to jeopardize the aid it gets from Washington -- money (to the tune of $7.5 billion over five years in civilian assistance and $2 billion in military assistance) that the United States has linked to Pakistan's ongoing democratic process. The military's resources are already strained by its counterterrorism operations and flood relief efforts and it desperately needs those dollars from Washington.
Yet Kayani also knows he can't just sit and watch Pakistan's deepening crisis from the sidelines. He's under increasing pressure from others in the military and the country's influential elites -- who comprise his political power base -- to do something. In Pakistan, it is often said, only half-jokingly, that the country doesn't have a military, the military has a country. Now, the army's leadership is becoming worried that it may not have a country for long if it lets the political, economic, and security situation further deteriorate. As a result, expect Kayani to begin putting pressure on the PPP to improve governance, but from behind the scenes. The general, unlike his predecessor, will carefully evaluate the political mood (both domestically and internationally) and follow constitutional processes in challenging the current political set-up.
So change is coming to Pakistan, and the military may soon be sitting in the director's seat. But expect less drama than in its past performances; most of the action will stay behind the scenes for now.Maria Kuusisto is an analyst in Eurasia Group's Asia practice.
By Maria Kuusisto
Even before the heavy rain began to fall, Pakistan was suffering through more than its share of political, economic, and security worries. The Pakistan Peoples Party (PPP) government and President Asif Ali Zardari face fast-falling approval ratings, and multiple political and legal challenges that distract them from governing the country more effectively and creating a working, civilian-led counterterrorism strategy to target safe havens that militants have established in tribal areas along the country's border with Afghanistan, particularly in North Waziristan. That has helped the various Taliban and al Qaeda-linked terrorist groups, which now coordinate their work more closely, to launch a bombing campaign in Pakistan's largest cities, killing thousands of Pakistanis in recent years in response to US and Pakistani military strikes.
The political distractions have also made it more difficult for the government to tackle the country's considerable economic troubles, which include the need to stabilize a deepening fiscal crisis, stimulate a stagnant economy, expand the tax base, cut subsidies, and tackle high inflation. The recent flooding, which covers about 20 percent of the country, has made matters much worse.
Over the past three years, Pakistan has experienced a major economic slowdown. Local manufacturers have been hit hard by reduced demand for Pakistani goods in many countries, higher operating costs, and frequent work slowdowns thanks to a worsening electricity shortage and a volatile security situation in many areas. That's an especially large problem, because manufacturing accounts for about 25 percent of Pakistan's GDP, 60 percent of the country's exports, and nearly half of Pakistan's jobs.
The flooding was just the latest bit of extraordinarily bad news. State officials hoped that this year's expected bumper crop for cotton, the country's second biggest crop (after wheat), would stimulate textile production, the largest sub-section of Pakistan's manufacturing sector. The flooding will probably cost Pakistan at least 2 million bales of cotton this year of the 14 million that was expected. Faced with shortages, the textile sector will be forced to pay dearly for imported cotton, which will then make Pakistani textiles more expensive -- and, therefore, less competitive.
These problems risk large-scale layoffs in the textile sector, a development that would deepen the country's economic troubles, further undermining the government's credibility. The inevitable ripple effects through the rest of Pakistan's economy can only make it easier for Taliban and other militant groups to expand their influence in the country's poorest provinces and to recruit in larger numbers.
The Pakistani government is not about to collapse. Though the country's major opposition parties and military will compete with the government to claim credit for aid to flood victims, they would rather let Zardari and his ministers take full blame for the hard times to come than to claim power for themselves. And they certainly have an interest in protecting the country's baseline security and stability.
Yet, the devastating floods ensure that a tough year for a struggling country will become tougher still -- and could fuel a level of unrest not seen since independence.
Maria Kuusisto is an analyst in Eurasia Group's Asia practice.
ADEK BERRY/AFP/Getty Images
By Maria Kuusisto
On 7 December, the Supreme Court of Pakistan started hearing a case that challenges the legitimacy of the National Reconciliation Ordinance (NRO), granting immunity to President Asif Ali Zardari and thousands of other politicians and bureaucrats against corruption cases dating back to the 1990s. Zardari has little option but to relinquish some of his powers if he wants to survive. While this may buy the president some time, tension is likely to continue, risking a major political shake-up.
The opposition Pakistan Muslim League - Nawaz (PML-N) and the military
desperately want to push President Zardari into a ceremonial role. They see
Zardari as putting Pakistan's national interests (as well as the military's
institutional interests) at risk and are pressing him to give up his powers
under the constitution, thereby empowering Prime Minister Yusuf Raza Gilani.
Zardari's most significant power is his right to sack an elected government and
appoint the military leadership. In return for giving up his key powers, the
PML-N and the military say they will not support efforts to remove Zardari.
If Zardari refuses to give up his key powers, he is likely to face intensified pressure and potential removal. The Supreme Court, led by Chief Justice Iftikhar Muhammad Chaudhry, is likely to strike down the NRO case, using it as an opportunity to settle a long-standing political score with Zardari. This development could lead to the re-opening of corruption and criminal cases against him, some of which are suspected of having some real merit. If he's convicted, the opposition could bring an impeachment motion against him in the national assembly, where Zardari enjoys a narrow, often case-by-case majority.
Until recently, Zardari has refused to see the writing on the wall, thinking that he can manage the political pressures against him through a combination of political and judicial manipulation. However, on Nov. 29, Zardari handed over control of the National Command Authority (NCA), which is the agency in charge of the deployment and development of Pakistan's nuclear weapons, to Gilani. This could signal that Zardari is finally starting to realize he has few options but to give up his key powers. But he needs to act quickly, as the opposition and the military are growing impatient.
Even if Zardari eventually gives up some of his powers, political tension will remain in Pakistan. The president is likely to try to dominate government. While Prime Minister Gilani is trying to take a more independent role, he remains a weak leader. He does not enjoy strong support within the PPP, which sees him as a political nobody and little more than Zardari's hand-picked choice. This makes Gilani highly dependent on Zardari's support. If Gilani refuses to fall in line, Zardari could sack him and replace him with someone else.
For the time being, the PML-N and the military want to work with the PPP government. The PML-N feels that an early fall of the PPP government would only invite the military to re-intervene in politics and undermine its longer-term political aims. Moreover, it feels that it needs more time to prepare the ground for national elections and it does not want to take charge of the government now when the country is facing multiple crises. Meanwhile, the military feels fears that a fall of the PPP government would strengthen PML-N's position.
While both Zardari and the PPP government may survive in the short term, pressure is likely to build up against them. Since the Feb. 2008 national elections, the popularity of Zardari and the PPP has taken a nosedive. They have become involved in a series of political scandals, which have undermined their credibility and distracted them from effective governance. Moreover, they have failed to meet their key pre-election promises of clean governance, pro-democratic reforms, and pro-people policies, and are perceived to be taking dictates from Washington. This weakened popularity is creating differences with the PPP's coalition partners and emboldening the opposition, which could lead to another crisis.
Maria Kuusisto is an analyst at Eurasia Group.
Chris Hondros/Getty Images
By Ian Bremmer
For the first time in several years, shifting security dynamics could push India and Pakistan toward confrontation.
The good news is that Pakistan's military has had success lately with attacks on local militants in the tribal areas along the border with Afghanistan. The bad news is that the militants have demonstrated an ability to retaliate in other parts of the country, most recently with a deadly assault on the heavily fortified army headquarters in Rawalpindi in October. The worst news is that they may try to launch new attacks across the border in India.
Pakistan's militants know they face less pressure whenever Pakistan's military and security forces feel directly threatened by India. Following last fall's Mumbai terror attacks, allegedly planned inside Pakistan, Pakistan's military, fearing an Indian reprisal, went on high alert. The breathing room the extremists won and the support they gained from others with an anti-Indian agenda may well have helped them develop new links with like-minded groups in the region -- possibly even with radicals at the margins of India's own Muslim community.
Since the Mumbai attacks, the Indian government has worked to simplify the processes of intelligence -- sharing among security agencies and police and to increase ground -- level coordination in Delhi and Mumbai with U.S. and British counterterrorist organizations. But it's a work in progress, and India's cities remain vulnerable.
India's Congress Party leadership wants to keep simmering tensions with Pakistan from reaching a boil. But to minimize the damage from opposition charges of weakness following the Mumbai attacks, India's government demanded that Pakistan take decisive action to disrupt cross-border terrorist operations. The Pakistanis have done very little in response. Another major attack would all but force the Indian government to take a much more hostile approach to Pakistan's government, allowing Pakistan's military leadership to set aside attacks on local militants and turn their attention to an enemy they feel less reluctant to antagonize.
Ian Bremmer is president of Eurasia Group.
SAM PANTHAKY/AFP/Getty Images
by Ian Bremmer
In Afghanistan, even the good news isn't so good. The country managed to hold a presidential election in August, but there aren't many people inside or outside the country who considered it free and fair. It looks increasingly like Hamid Karzai will win without a second round, but his legitimacy will remain under a very large, very dark cloud. He'll face open revolt from Tajiks in the north, who overwhelmingly opposed his candidacy. And as evidenced by the significant recent expansion of terrorist bombings in Afghanistan's major cities and the assassination last week of the country's second-ranking intelligence officer, it will even become harder to secure Kabul. No one should have much confidence that a second round would do much to restore Karzai's credibility.
In addition, military operations against the Taliban inside Pakistan achieved some actual success this summer, but that has probably pushed some militants across the border into Afghanistan to harass coalition forces there. U.S. casualties have increased, though that's not surprising given the more aggressive operations of larger numbers of US troops. But last week's U.S. bombing on a Taliban target, which killed dozens of civilians, is just the latest in a series of setbacks for coalition military operations.
More worrisome: It's becoming increasingly clear that Afghanistan won't be able to stand on its own anytime soon. U.S. military officials report that the training of Afghan soldiers is well behind schedule. For the next two or three years, with coalition forces at their present levels, Afghan troops won't be nearly strong enough to maintain even the current level of security, let alone make any meaningful contribution to an aggressive counterinsurgency effort.
Afghanistan, more locals than ever
want the US
out, whatever the cost. There's also dwindling support for the war in the United
States, as the American media increasingly turns its
attention from an economy beginning to improve toward the growing death toll in
Within the Obama foreign-policy team, there looks to be a growing divergence of opinion on what to do next. There appears to be an internal consensus that the current strategy isn't working. But senior officials appear more divided on whether to "go long" or "go home." In the go long group, those who want more troops and more resources because "failure isn't an option," we see Secretary Clinton, envoy Richard Holbrooke, most of the generals on the ground, and most Republicans in Congress. In the go home camp, those who want to pull troops out before things get much worse, are Vice President Biden, most of Obama's political team, and a growing number of senior Democrats. Even Defense Secretary Robert Gates appears to have grown much more skeptical.
In short, Afghanistan is becoming Obama's first lasting foreign-policy crisis. A major terrorist attack somewhere in the world carried out by militants trained in Afghanistan could shift international public opinion toward greater engagement. Short of that, U.S. public opposition to the war will likely grow steadily over the coming year, bringing the issue to a head just in time for U.S. midterm elections and driving a wedge between members of the president's own party.
MANPREET ROMANA/AFP/Getty Images
By Eurasia Group analysts Seema Desai and Maria Kuusisto
While no one’s launching a full revival of the India-Pakistan peace process yet, conversations are beginning to take place in the wings. On June 15, Indian Prime Minister Manmohan Singh and Pakistani President Asif Ali Zardari met for the first time since the November 2008 Mumbai terrorist attacks. Largely because of U.S. diplomatic pressure, they agreed to this brief discussion and public appearance on the sidelines of a Shanghai Cooperation Organization (SCO) summit in Russia.
Although the meeting demonstrates that Delhi and Islamabad may be willing to resume some sort of dialogue, both Singh and Zardari remain constrained by the hard-line sentiments of their domestic constituencies. India wants clear signs that Pakistan is cracking down on extremist elements within its borders. Meanwhile, the Pakistani government is under pressure from the military, which remains suspicious of India. And Pakistan's recent release of a prominent militant from house arrest has undermined prospects of cooperation.
From the U.S. perspective, the Obama administration sees easing India-Pakistan tension as an essential part of its regional stabilization strategy. It would enable the Pakistani military to focus on fighting the Taliban along the Afghan border and defuse covert and overt support for the Taliban and other extremists. In early June, the United States launched a diplomatic push, sending U.S. Special Representative Richard Holbrooke and Under-secretary of State William Burns to South Asia; Secretary of State Hilary Clinton will visit India and Pakistan in July.
India and Pakistan are sensitive to U.S. pressure: Islamabad needs U.S. financial assistance, and Delhi is keen to deepen the George W. Bush–era engagement. As a result, Delhi and Islamabad both made positive comments on the peace process around the Holbrooke-Burns visits, but they remain deeply sensitive to domestic forces, which will ultimately prevent deep engagement right now. And neither government wants to be seen as giving in to U.S. pressure, making a return to the results-oriented, pre-Mumbai composite dialogue highly unlikely.
Arif Ali/AFP/Getty Images
By Ian Bremmer
In the Pakistani city of Lahore on Tuesday, a dozen gunmen attacked a bus carrying members of Sri Lanka's cricket team, killing six policemen and a driver and injuring several of the athletes. Press accounts of the assault suggest a level of coordination similar to that used by the Pakistan-based militants who killed 173 people at several sites in Mumbai in September. Across Pakistan, suicide bombers killed two people in 2005, six in 2006, 56 in 2007, and 61 in 2008. Suicide attackers killed more people in Pakistan last year than in either Iraq or Afghanistan.
There are two important reasons why the threat of global terrorism is growing. The first is long-term and structural. The second is more directly tied to the global financial crisis. Both have everything to do with what's happening in Pakistan.
First, a report released in December from the U.S. Commission on the Prevention of Weapons of Mass Destruction, Proliferation, and Terrorism hints at both sets of problems. The report notes an increasing supply of nuclear technology and material around the world and warns that "without greater urgency and decisive action by the world community, it is more likely than not that a weapon of mass destruction will be used in a terrorist attack somewhere in the world by the end of 2013."
Destructive (and potentially destructive) technologies are now more accessible than at any time in history for small groups and even individuals. This will dramatically increase the baseline threat of disruptive violence from non-state actors over time. It's not just biological and nuclear material. GPS tracking devices help pirates operating off Somalia's coast venture further from shore and undertake increasingly ambitious attacks on private and commercial vessels.
Second, it's unlikely that we'll see the "greater urgency and decisive action by the world community" called for in the report. For the moment, political leaders around the world are too busy wrestling with the effects of the global financial crisis on their domestic economies (and their political standing) to coordinate action against such a diffuse threat.
But there's another reason why the financial crisis heightens the risk of global terrorism. Militants thrive in places where no one is fully in charge. The global recession threatens to create more such places.
No matter how cohesive and determined a terrorist organization, it needs a supportive environment in which to flourish. That means a location that provides a steady stream of funds and recruits and the support (or at least acceptance) of the local population. Much of the counter-terrorist success we've seen in Iraq's al Anbar province over the past two years is a direct result of an increased willingness of local Iraqis to help the Iraqi army and US troops oust the militants operating there. In part, that's because the area's tribal leaders have their own incentives (including payment in cash and weaponry) for cooperating with occupation forces. But it's also because foreign militants have alienated the locals.
The security deterioration of the past year in Pakistan and Afghanistan reflects exactly the opposite phenomenon. In the region along both sides of their shared border, local tribal leaders have yet to express much interest in helping Pakistani and NATO soldiers target local or foreign militants. For those with the power to either protect or betray the senior al-Qaeda leaders believed to be hiding in the region, NATO and Pakistani authorities have yet to find either sweet enough carrots or sharp enough sticks to shift allegiances.
The slowdown threatens to slow the progress of a number of developing countries. Most states don't provide ground as fertile for militancy as places like Afghanistan, Somalia, and Yemen. But as more people lose their jobs, their homes, and opportunities for prosperity -- in emerging market countries or even within minority communities inside developed states -- it becomes easier for local militants to find volunteers.
This is why the growing risk of attack from suicide bombers and well-trained gunmen in Pakistan creates risks that extend beyond South Asia. This is a country that is home to lawless regions where local and international militants thrive, nuclear weapons and material, a history of nuclear smuggling, a cash-starved government, and a deteriorating economy. Pakistan is far from the only country in which terrorism threatens to spill across borders. But there's a reason why the security threats flowing back and forth across the Afghan-Pakistani border rank so highly on Eurasia Group's list of top political risks for 2009 -- and why they remain near the top of the Obama administration's security agenda.
The Call, from Ian Bremmer, uses cutting-edge political science to predict the political future -- and how it will shape the global economy.