Note: Today is the first in a series of posts that detail Eurasia Group's Top Risks for 2013.
Since the onset of the financial crisis in 2008, investors and companies have focused mainly on risks in developed world markets. But as conditions in the U.S. and Europe continue to improve in 2013, the most worrisome risks will again come from emerging market countries. These countries are fundamentally less stable than their developed world counterparts, and some of their governments used a period of favorable commodities prices and the benefits from earlier reform to avoid the tough choices needed to reach the next stage of their political and economic development.
Some of these emerging market nations face more difficult challenges than others, and much depends on the degree of political capital each leader will have in order to make unpopular but necessary changes. These countries can be divided into three broad categories according to the complexity and immediacy of the risks they face and the longer-term upside they offer.
The first category includes the best bets:
The second category of emerging market economies are at risk of considerable volatility.
Lastly, there are the underperformers, those countries where risks will overshadow returns.
On Friday, we'll profile Risk #2: China vs Information.
HOANG DINH NAM/AFP/Getty Images
Eurasia Group's weekly selection of essential reading for the political risk junkie -- presented in no particular order. As always, feel free to give us your feedback or selections @EurasiaGroup or @IanBremmer.
1. "Freshmen From Kennedy to Double Amputee Join Polarized
Steve Walsh, Bloomberg
An interesting glimpse at some of the new personalities in the 113th Congress, a group of representatives that runs the gamut of conceivable paths to Washington -- and the new Congress breaks records, with 81 women in the House and 20 women in the Senate (both all-time highs).
How to reconcile the similar economic growth we've seen in Mali and Ghana with their starkly different development trajectories? There's no simple answer, but this piece is a good primer on many of the variables involved.
3. "The Art of Snore"
John Arquilla, Foreign Policy
On US defense spending, are there more than budget cuts to fear? Is there an innovation deficit? Arquilla outlines what he perceives as shortcomings in the current military spending approach -- as well as some interesting solutions.
4a."Myanmar Launches Airstrikes on Kachin Rebels"
Simon Roughneen, Christian Science Monitor
4b."Burma's Military Follows Own Course in War against Kachin
Jonathan Manthorpe, The Vancouver Sun
When Barack Obama and Hillary Clinton visited Myanmar in November, it was an historic occurrence -- the first-ever US presidential visit to the country, and a firm endorsement of the recent reforms that have taken place. But while national hero and opposition leader Aung San Suu Kyi warmly greeted the visitors, she also admonished that "we have to be very careful that we are not lured by a mirage of success." Fighting between the military and Kachin rebels in the north has clouded reform efforts. And, as Jonathan Manthorpe explains, Myanmar's relations with China -- and water security issues -- underpin much of the issue. These are two sources of conflict that are only trending upward throughout the region as a whole.
5. "Better Than Human"
Kevin Kelly, Wired
At Eurasia Group, we've devoted a lot of attention to the long-term labor force impact that the advent of robotics and 3D printing will have, particularly on emerging markets like China, where the country's greatest resource -- cheap labor -- could very well become one of its biggest obstacles as its citizens are displaced from manufacturing jobs following technological advances. Kelly looks on the bright side of a robotic future, outlining the opportunities for innovation and productivity that come with a mechanized work force. His vision is a bit rosy, but it's a useful counterweight to the much-discussed downside risks.
By Roberto Herrera-Lim
It's easy to disparage Vietnam, whose reputation as the poster child for the economic potential of frontier market countries has taken a beating in recent years. Inflation is a persistent threat, growth is slowing, and the country's banks and state-owned enterprises (SOEs) are struggling with a potentially destabilizing level of bad debts. And to top it all off, Vietnam's political leaders are fighting among themselves when the situation calls for firm action. As a result, foreign investors are left scratching their heads and wondering if Vietnam will be able to build the institutions and capabilities needed to move into the ranks of the emerging market nations.
Vietnam's institutions were not prepared for strong growth. That much is clear from the crisis that has played out over the past few years during which Vietnam's institutions and leaders mismanaged capital inflows, resulting in inflation, bad investment decisions, and near-rogue banks and SOEs. All this occurred on Prime Minister Nguyen Tan Dung's watch, and while he has survived at least two challenges to his leadership, he is weakened and chastened. As a result, consensus decision-making will play a greater role in coming years, while Dung's competitors (including President Truong Tan Sang) reduce his control over policymaking and tighten oversight. The near-term consequence of this dynamic will be a greater likelihood that factional competition will result in uneven policies and conflicting signals.
But don't count Vietnam out of the game yet. Historically, crises have been effective at forcing effective policy choices from the government (such as the 2001 ouster of the party's then general secretary Le Kha Phiu). The current situation is unlikely to result in Dung's exit, but it will spur a serious reexamination of economic policy, especially when it comes to better allocating investment. There is, after all, still a broad consensus among Vietnam's elites that previous reforms should remain in place and that long-term growth and sustained, equitable improvements in the quality of life are needed to ensure the survival of the communist party. The country's economy could also benefit from structural factors that are encouraging investors to consider manufacturing locations other than China.
It may be tempting for manufacturers to look to other countries in Asia, but they should not discount Vietnam's reemergence as a viable investment destination. The country's leaders may be squabbling, but they understand that failure to reform is a larger threat to their primacy than the uncertainty that comes with change.
Roberto Herrera Lim is a Director in Eurasia Group's Asia practice.
HOANG DINH NAM/AFP/Getty Images
By Shaun Levine
It is befitting that Indonesia has become the latest darling of the investment community, drawing private equity firms, retail and consumer giants, and the world's largest automakers to its shores. Even in a depressed global economy, the world's fourth most populated country continues to grow strongly, perhaps by as much as 6.2 percent in 2012. Indonesia is also blessed with natural resources, shipping its coal, nickel, copper, and gold to supply many of Asia's giants, including China and Japan, with the precious materials they need for their own economic engines.
Indonesia's stubborn affinity for subsidies, however, remains a major impediment to its longer-term growth. President Susilo Bambang Yudhoyono's government remains committed to unsustainable funding for subsidies, which will potentially consume up to 20 percent, or $30 billion, of the 2013 budget-nearly the amount spent on education. The largest portion of this spending, nearly $20 billion, will be allocated to fuel subsidies, which the government acknowledges largely benefit the country's more affluent households.
Indonesia's current high growth rates mask the problems that, if left untouched, will likely make the country an example of a booming emerging market economy that never quite reaches its potential. Without a realignment of spending priorities away from subsidies and toward vital infrastructure and education, investors are likely to take their dollars elsewhere.
Unfortunately, the political context is not conducive to a reduction in subsidies in the near term, despite external pressure from ratings agencies, the World Bank, and the IMF. Subsidies remain highly popular with a large portion of the voting population, and given this reality, Yudhoyono appears reluctant to press for reforms any time soon. Such a move would certainly dampen his party's electoral prospects: Recent polling suggests that if the 2014 parliamentary election were held today, Yudhoyono's PD would lose its top ranking, ceding substantial ground to rivals Golkar and PDI-P. Parliament also appears to reject subsidy reform, and political parties want to make sure it would be Yudhoyono's prerogative to reduce popular subsidies ahead of the 2014 elections.
But subsidy spending will shrink Indonesia's growth potential. Improving the country's decrepit infrastructure remains paramount: Even though parliament boosted Yudhoyono's planned infrastructure spending by $3 billion to $20 billion in 2013, that number is dwarfed by spending on subsidies, which offer no return on investment. Indonesia's backlogged and rickety ports, crumbling road and rail networks, and antiquated system of airports remain a large handicap for this country of 17,000 islands. Despite the size of its economy, Indonesia's level of spending on infrastructure, at nearly 2 percent of GDP, remains far below that of another favorite of investors-neighboring Vietnam (9 percent-10 percent).
At the moment, though, investors appear to be placated by government pledges to improve Indonesia's infrastructure. The country has reported record foreign direct investment thus far into 2012, perhaps a yearly total of more than $22 billion; investment officials proudly boast of having $75 billion more in the pipeline. New laws have been passed helping to ease the process of land acquisition, and spending continues to increase. But how long can Indonesia squeeze growth out of a flawed model before the darling of investors becomes the disappointment?
Shaun Levine is an analyst with Eurasia Group's Asia practice.
ADEK BERRY/AFP/Getty Images
By Shaun Levine
Joko Widodo's win in the September 21 Jakarta mayoral election was a momentous step forward for the forces of reform in Indonesia's increasingly stagnant political scene. The luster will soon wear off, however, unless Widodo can translate his victory into fixing the mess he has inherited: failing infrastructure, immovable traffic, water supply issues, and a rebellious regional government, just to name a few. If his time as mayor of the small town of Solo is any indication, Widodo may be up to the challenge. Widodo improved Solo's transportation networks and governance, and reduced the level of corruption endemic in Indonesian politics. However, in order to effect change in the big city of Jakarta, where he is now a de-facto national leader, Widodo will need to roll up the sleeves of his signature checkered shirts.
Widodo's victory could be an important turning point for Indonesia. The early head-first rush into democracy and reformism in 1998 has given way to the patronage politics so common during the days of Suharto. Bureaucratic reforms, the fight against corruption, and attempts to improve governance have largely come to a standstill -- which largely benefits the remnants of Suharto's New Order regime that cling to power and look set to compete with one another in the 2014 presidential election. President Susilo Bambang Yudhoyono's ten-year mandate is coming to an end, with the early promise of reform having been snuffed out by reactionary forces. Even with the backing of more than 60 percent of voters, change and reform have not been easy for Indonesia's first directly elected president.
Going forward, Indonesian voters will have to choose between elevating new reformers such as Widodo, who himself may become a presidential candidate in 2014, and the crop of leaders from the New Order who see 2014 as a must-win election; most may be too old to compete in 2019.
For these leaders, Widodo's win -- which appeared unlikely at the start of the campaign in the early summer -- should be seen as a wakeup call. The proven tactic of pandering to voters, and in some cases buying their votes, may not be the panacea it was in the past. Neither will efforts to translate a growing sense of confidence in Indonesia's future, based on its international standing and strong economic growth, into economic nationalism. Voters are well aware that the reform movement has largely stalled, and that current leaders want to chip away at democracy so that regional governors like Widodo are appointed and not elected.
But the real impetus is on Widodo and his like-minded counterparts, who have overcome the hurdle of reaching office but will now face the bureaucratic challenges, and temptations, of the reformers that came before them. Promises made on the campaign trail mean nothing when gridlock and animosity seek to undermine reform; compromise is a hallmark of democracy, but not when it benefits the few to the disadvantage of the many.
Against all odds, Widodo was able to show that honesty and a proven track record of reform could overcome overwhelming challenges in campaign financing and political party support. The win also demonstrates that Indonesian politics, which is mired in patronage and money, doesn't have to remain so. This is a democracy that will have its fits and starts, but will more than likely rise up to become a leader in the global community commensurate with its population and wealth.
The presidential election in 2014 is likely to be the last for the Suharto-era leaders, many of whom have witnessed Widodo's victory with envy and some of whom have even benefited from supporting his campaign. The chances of a dark-horse candidate such as Widodo winning in 2014 are still slim. But voters' choice in the Jakarta mayoral election has moved Indonesia a step closer to realizing its much-heralded democratic and economic potential.
Shaun Levine is an analyst in Eurasia Group's Asia practice.
By Michal Meidan and Carsten Nickel
There are many reasons why China's economy has begun to cool, but the dramatic slowdown within the European Union, China's largest trade partner, is among the most important. Fears for Europe's growth and stability weigh heavily in Beijing, and China's risk-averse leaders are willing to invest in Europe's recovery.
But Beijing won't risk throwing good money after bad with substantial bailouts for risky peripherals like Spain, Italy or Greece. That would play badly inside China, where public perception that government is bailing out wealthy Europeans during a slowdown at home wouldn't play well. Greek haircuts earlier this year left Chinese investors with huge losses, and to invest in the European Financial Stability Facility (Europe's current bailout fund) is to form closer ties with meddlesome bureaucrats in Brussels.
Instead, China is increasing its direct investment in Germany, still Europe's economic engine, and, by extension, in Berlin's ability to manage crises and restore the continent's growth. That's good news for German Chancellor Angela Merkel, who sees the strategic importance of improving relations with the world's other leading manufacturing-dependent surplus economy. China has become Germany's third-largest export market behind France and the United States, and with demand among Germany's neighbors unlikely to increase anytime soon, German manufacturers will grow increasingly dependent on China and its markets.
Economic ties between China and Germany began to tighten following the onset of the financial crisis in 2008 as demand generated by the Chinese stimulus plan became an important source of Germany's recovery. Closer ties with German automakers and producers of renewable energy help Chinese firms develop new technologies and climb the value chain.
is a downside for Germany. Expanded commercial ties will force Merkel's
government to contend with domestic concerns that China's labor practices fall
far short of acceptable standards and that German companies doing new business
in China will have their intellectual property stolen. But Chinese purchases of
German Bunds will help Merkel ease domestic fears that German support for
Eurozone weaklings will sap the country's strength. That's why Merkel's once
vocal criticism of China's human rights record has all but disappeared -- and why Berlin,
unlike European institutions in Brussels, has yet to demand equal access to Chinese
That's crucial for China. Beijing will continue to pay lip service to its ties with EU institutions, but growing ties between Beijing and Berlin will complicate Brussels' efforts to develop a common foreign and trade policy toward China, increasing Beijing's bargaining power with individual European partners.
Today, when China's leaders look toward Europe's core, they see a weakened France, a marginalized Britain, and a rising Germany. By betting on Berlin, China is hoping that Germany will use its increasingly decisive role in EU decision-making to provide China with market economy status, and the commercial advantages that come with it, and even to help lift Europe's arms embargo on Beijing. For its part, Germany is hoping ties with China can boost growth at a moment when it's badly needed.
For the moment, it's an increasingly profitable partnership.
Michal Meidan is an analyst in Eurasia Group's Asia practice. Carsten Nickel is an analyst in the firm's Europe practice.
Sean Gallup/Getty Images
By Samantha Grenville and John Watling
Australia's reputation for being a lucky country has certainly been polished to a high gloss over the past few years. Its buoyant economy contrasts mightily with the gloom and doom dominating the headlines in Europe and the U.S. But the country is abuzz with concerns about housing and whether or not the country is about to face the consequences of a busted bubble. The argument is vociferous but evenly matched, with partisans on both sides variously claiming imminent disaster or fevered imaginations. One thing seems certain though: the politicians are unlikely to intervene, even though in most such cases they would be falling over themselves to soothe the population's jagged nerves.
The arguments in favor of a bubble depend in large part on the meteoric rise in housing prices over the past decade and a half (by some estimates they were up about 150 percent between 2004 and the recent peak in 2010). Much of this increase was driven by higher household debt, which had many economists clucking in concern. Demand for housing has also been propped up by the soaring economy. China's gigantic appetite for the country's minerals and other primary resources has spurred strong growth in Australia's mining and allied sectors (including reports of unskilled mine workers earning six-figure salaries and attendant health and social issues), boosting the currency in the process. Other parts of the economy, such as tourism and domestic manufacturing have not been so lucky and are suffering because of the Australian dollar's surge. The recognition of the two-speed economy combined with elevated housing prices have spurred considerable popular fear among Australians that the country is on the brink.
Doomsday forecasters argue that the bursting of the housing bubble will cause the economy to implode, with the banks acting as the transmission mechanism. Collapsing home prices would destroy bank balance sheets, forcing the banks to raise capital in volatile markets, or to deleverage and withdraw credit from the real economy. That move would further depress home and other asset prices in a negative feedback loop.
So then why does Australia's government seem unwilling to intervene? Prime Minister Julia Gillard and Treasurer Wayne Swan have quietly deflected questions about housing with gentle bromides and urgings to the private sector to talk up the economy. They have likely made the wise decision, politically at least.
First, there may not be a housing bubble. Policymakers at Australia's Reserve Bank certainly seem to believe there is no danger. Reserve Bank assistant governor Guy Debelle speaking at a recent mortgage industry conference claimed he was more worried about the EU and that housing risk is not something that keeps him awake at night. Home prices have been declining steadily over the past year or so, and if that continues, household debt ratios may drop even further, freeing up the central bank to ease rates. In the meantime however, the Reserve Bank is clearly concerned that lowering rates would boost the wrong sort of confidence, encouraging still relatively indebted households to continue borrowing.
Second, there may be no need to act even if there were a dramatic decline in housing prices. Australian banks are considerably stronger than they were before the 2008/09 crisis. The IMF recently stress-tested the major banks by hypothetically invoking an Ireland-style housing bubble and bust, and found that banks would be buffeted but remain solvent. In perhaps the strongest vote of confidence in the local economy, Germany's Bundesbank -- arguably one of the world's most conservative central banks-is considering buying Australian dollars, signaling the country's emergence as a true safe haven.
Gillard may also be disinclined to tackle the issue lest it add to her burdens. Authorities are already facing a tough battle over the incoming carbon tax, which opposition Liberal Party leader Tony Abbot has used as a cudgel against the incumbent Labor Party government. Any misstep on housing would have the unfortunate side effect of giving Abbot another target.
All of these considerations argue in favor of a gentle hand on the tiller and against dramatic action until it may be absolutely necessary.
Samantha Grenville is an associate with Eurasia Group's Comparative Analytics practice, John Watling is a senior editor with Eurasia Group.
Ian Waldie/Getty Images
By Willis Sparks
A few days ago, Google introduced a tool that warns its users inside China about the hundreds of sensitive words and phrases that can produce an error message or even freeze the site, at least for a moment. China Digital Times (CDT) has since compiled a list of the most interesting (sometimes surprising) search terms. Taken together, they offer a glimpse of the wide range of things that China's Internet monitors don't want Chinese citizens reading and talking about. Translations are provided by CDT.
All the terms you see below in bold are apparently considered sensitive subjects.
Why are Chinese authorities worried about truth, benevolence, and forbearance? Because these words are associated with the outlawed spiritual movement Falun Gong. Watch out for the phrase snow lion; it's a reference to the flag of Tibet. Not surprisingly, searches for Taiwan Political Talk, Xinjiang + independence, and the Tibetan government-in-exile produce similar reactions. References to dissidents like Chen Guangcheng and Ai Weiwei can get you bounced. So can entering the words Liu Xiaobo or the Nobel Peace Prize he won in 2010. In fact, you might want to avoid the word dissident.
Nor do China's Internet monitors want citizens thinking about Chinese people eating babies or baby soup. That goes double for pornography, Playboy, and boobs.
Other words and phrases are dangerously suggestive for different reasons. The expression blood house, which refers to forced evictions, is a problem. Perhaps that's because it can encourage curiosity about assembly, a student strike and a people's movement. As these kinds of events take on a life of their own, it can lead young people to explore the so-called three leaves -- leave the Party, leave the Youth League, leave the Young Pioneers -- the 21st century Chinese equivalent of turning on, tuning in, and dropping out. It can also lead students into the public square, trigger a rebellion, a coup d'état or even a revolution. These kinds of things can provoke martial law.
It has happened before, though you won't learn much about that simply by searching for Tiananmen, tankman, block tank, or by entering 89 + student movement, Beijing + something happened, or what happened to Beijing. Lately, these sorts of spontaneous insurrections have been popping up in places like Egypt and Tunisia, stoking fears in Beijing of Jasmine + revolution, a Beijing spring or a China spring.
Insurrections aside, mere political embarrassments ring alarms, as well. Searches for Governor Bo Xilai or Chongqing, the province he governed before scandal charges brought him down, make the list -- as does Heywood, the family name of the British businessman his wife is suspected of having murdered. Add Chen Jian, victim of an earthquake who gave a live interview before dying beneath the wreckage and Zengcheng, a city in Guangzhou with the misfortune to have hosted a riot among migrant workers last summer.
Then there is Twitter and Facebook. Expect problems if you hunt for Wikileaks + China. China Digital Times is on the list along with traditional foreign troublemakers like Voice of America and Radio Free Asia. Expect glitches if you investigate the country's great firewall, the web brigade of Internet censors who help hold it in place, and freegate, dynapass or ultrasurf, tools for those who want to climb over the wall.
It's a bit more surprising that searches for Mao, Deng Xiaoping and Jiang Zemin raise red flags. Even the names of today's leaders (Wen Jiabao and Hu Jintao) and tomorrow's (Xi Jinping and Li Keqiang) can create a disruption. Same for searches of the nine elders who operate behind the scenes in the Politburo Standing Committee. Simply entering Chinese Communist Party can create a problem, to say nothing of its less flattering nicknames the Common Disabled Party, Common Tragic Party, or the more colorful red bandits.
It's clear that Chinese authorities don't want citizens reading Mein Kampf. It's less clear why they appear to frown on the Coen Brother's film Burn After Reading. It's easier to understand sensitivity about the phrase best actor when you learn that's it a derisive nickname for Premier Wen Jiabao. But one mustn't get too curious about another of his popular nicknames: teletubbies.
Taken together, these and hundreds more words and phrases demonstrate just how hard it is to "manage" communications in a country of 1.4 billion people, more than half of whom have already found their way online.
Unfortunately for all concerned, this list of words and phrases is only getting longer.
Willis Sparks is an analyst in Eurasia Group's Global Macro practice.
China Photos/Getty Images
By Scott Seaman and Stephen Majors
Many Japan watchers -- and the market -- are hoping for a breakthrough in Prime Minister Yoshihiko Noda's efforts to secure passage of a consumption tax increase. The general expectation is that raising the tax from 5 percent to 8 percent in April 2014, and then again to 10 percent in October 2015, wouldn't just be a solid step forward in addressing Japan's ballooning public debt, which is projected to reach 239 percent of GDP by year's end. It would also demonstrate that Japan's political parties are able to work through their differences to tackle tough problems in a country that has had seven prime ministers in the past six years.
But this view wrongly focuses on a narrow, short-term outcome rather than on the broader political malaise such a victory could prolong -- which, in Japan's case, is the most salient factor for long-term reforms. The passage of the tax hike is not necessarily a good sign for the country's ability to tackle its many pressing problems unless it leads to snap elections and a major realignment of Japan's sclerotic party system. The best outcome would be the failure of the tax hike measure, followed by Noda's call for a snap election; or the passage of the hike based on Noda's agreement with the opposition Liberal Democratic Party (LDP) that he would call an election in return for their cooperation. Outside of these two scenarios, the party realignment that is necessary for Japan to make deep economic reforms and boost competitiveness is very unlikely to happen.
Without major party system realignment, political gridlock on most reforms would persist, undermining medium- to long-term prospects for deeper economic restructuring. A core problem of Japan's political system is that the ruling Democratic Party of Japan (DPJ) and the LDP are both characterized by deep internal schisms over greater openness to economic competition and trade, as well as on fiscal and social welfare reform. Such internal cleavages have blurred distinctions between these parties and made maintaining party discipline and cohesion almost impossible. In addition, a "twisted" Diet (Japan's parliament) in which the DPJ controls the lower house, but lacks a majority in the upper house, allows opposition parties to block legislation with ease. The policy gridlock that often results has contributed to a loss of public support for parties of every stripe and a general sense that Japan's politics is essentially dysfunctional.
Noda has set a deadline to bring legislation for the tax hike to a vote in the lower house of the Diet before the end of the current session on 21 June. Strong opposition outside -- and inside -- the DPJ keeps the odds of enacting legislation for the hike during the current Diet session low. Despite the challenges, Noda may still find a way through threats and horse-trading to pass the increase. Numerous members of the DPJ, LDP, and other parties feel electorally vulnerable and would prefer to avoid a near-term snap election, strengthening their desire to pursue inter- and intra-party compromises. If Noda's government passes the hike without a snap election, markets will likely view this positively based on the argument that any success reduces the risk of a rise in Japanese bond yields and provides a signal that Japan's prospects for better fiscal management have improved.
But focusing on the short-term market spike in such a scenario would risk overlooking the larger implications of successful passage of the hike. Beneath it would lay the perpetuation of a largely dysfunctional status quo. Party system breakdown would be traumatic, and any realignment that follows would be fraught with uncertainty. But if it sets the stage for reform-minded politicians from the DPJ, LDP, and other parties to coalesce into a single party with a majority in both houses of the Diet, the outlook for future reform efforts would be brighter.
Scott Seaman is an analyst in Eurasia Group's Asia practice. Stephen Majors is an editor with Eurasia Group.
By Roberto Herrera-Lim
Economic reforms that are the most significant in Burma since the 1990s confirm that the country's recent awakening has repercussions that go farther and deeper than politics alone. The news that the local currency will be floated on April 1, coupled with the likely passage of a new investment law, signals that the reform agenda has strong support throughout the leadership, not just with the visible President Thein Sein. The floating of the kyat -- with its potential to upset entrenched corruption and deny state enterprises and well-connected businesses privileged access to foreign currency -- reveals that reformers are relatively secure in pushing through with this change despite the risks to powerful interests. By doing this, the government is also showing a willingness to deal with near-term popular risks such as inflation, which may increase as state enterprises are forced to price their goods and services at market rates. The kyat float sets the stage for unwinding distortions that have led to corruption, lack of transparency in official transactions, and ineffective monetary policy. It will also enable Burma to use development aid more efficiently; the EU has already promised an additional $200 million in aid over the next two years. Meanwhile, the new investment law will allow foreigners to set up businesses without the need for local partners, and may provide a five-year tax holiday.
None of this would have been possible if the leadership were fracturing. Burmese politics, for the most part, remains very opaque despite the changes of the past few months. This creates near-daily speculation regarding the positions of the different cliques and institutions on the trajectory and pace of reform; serious disagreement can give hardliners the upper hand. Every instance of disagreement or lack of coordination -- whether between parliament and Thein, or between the central government and local military commanders -- is micro-analyzed for signals of dissent and fracturing of the senior leadership. This is why the substantive steps forward on economic reforms provide such a clear signal of a sustained commitment to reform.
On April 1, the former pariah nation will also hold its first free elections since the 1990 vote won by the opposition (but which the military refused to recognize). By the numbers alone, the outcome shouldn't matter much in the parliamentary balance of power. Up for grabs are a measly 40 seats in the 440-seat house, six seats in the 224-seat senate, and two for regional chambers. Including those regional assemblies and the 25 percent of seats automatically allocated for the military, Burma's legislature totals 1,158 seats. But the vote will be an important marker for democratic reforms-an idea that no one was willing to connect to Burma even a year ago -- because it opens the next political chapter for opposition leader and democracy symbol Aung San Suu Kyi. Suu Kyi and her opposition allies in the National League for Democracy (NLD) are expected to win most, if not all, of the seats being contested. Suu Kyi has not given any signals about her future political role, whether as an opposition leader validating the process of political change or as a more integrated participant in Thein's push for reform.
Burma is not yet fully out of the woods -- there are still several ways in which the reform process can be derailed. But with the raft of economic reforms, this is starting to look more and more like the highly praised "doi moi" (renovation) of Vietnam. It might be a bit too early to call it that, but it is becoming more and more difficult to bet against it.
Roberto Herrera-Lim is a director in Eurasia Group's Asia practice.
Paula Bronstein/Getty Images
By Damien Ma
If you're following all things China, the two memes trending for the last week or so have been the pre-trip musings on Chinese Vice President Xi Jinping's American tour and the Jeremy Lin show. What connects the two? Well, basketball.
After spending barely two days in Washington, Xi will travel to L.A. to hobnob with local politicians and businesspeople. In his down time, he is supposed to take in a Lakers game. Incidentally, Lin and his Knicks defeated the Lakers last week, when the Harvard grad and overnight NBA sensation put up a career-high 38 points that dazzled even Kobe Bryant. That Lin, a Chinese-American, and Xi, the Chinese leader who will preside over the NBA's largest potential market, are cementing U.S.-China links on the court should make NBA Commissioner David Stern smile. After a rough start to the season and with Chinese fans seeking a post-Yao Ming player to champion, "Lin-sanity" may be just the spark needed to revive the flagging franchise on both sides of the Pacific.
For his part, Xi's appearance at a Lakers game is a feat of public diplomacy that will draw comparisons to Chinese patriarch Deng Xiaoping's memorable first visit to the U.S. On that trip, Deng donned a cowboy hat at a Texas rodeo and tried out a simulator in NASA's Houston headquarters. Whether Xi is deliberately attempting to mimic Deng's charm offensive is anyone's guess. But such an effort will not go unnoticed by the American public, which tends to favor leaders with a touch of the "common man." This may be just what Xi has in mind: to project an image of affability and ease.
To be sure, optics matter a great deal on these occasions, especially when a Chinese official is thrown into the unrelenting punditry of the American media. President Hu Jintao always seemed maladjusted in the freewheeling environment, appearing wooden and somewhat nervous during his public appearances with President Barack Obama last year. Xi, in his subtle way, may also be trying to draw a contrast between himself and China's current leadership, therefore. He will have to be careful not to outshine Hu before he is fully in command, however, or to appear too enthusiastic about American culture.
Either way, Xi's likely attendance at the Staples Center is a small step forward for soft power diplomacy that, if continued, should help to reduce mutual suspicions and overcome the perception that the Chinese political system is opaque. But it will still be a long time before China's top leaders are truly comfortable with the U.S. media and can speak off script. When a Chinese presidential aspirant is bold enough to make an appearance on Jon Stewart, well, then we'll be looking at truly different U.S.-China relations.
Damien Ma is an analyst in Eurasia Group's Asia practice.
Chris Chambers/Getty Images
By Scott Rosenstein
In November and December of 2011, two teams of researchers submitted papers to Science and Nature magazines, apparently revealing the mutations necessary to make H5N1 avian influenza (a.k.a. bird flu) easily transmissible among humans. In its current form, the virus is exceedingly difficult for people to catch. If a beefed-up version were to circulate outside a lab while maintaining its lethality, though, the ensuing pandemic would likely be devastating. The scientists' research launched a heated debate, and on Jan. 20, 39 scientists announced a 60-day moratorium on all avian flu transmission research. But in a world where rapid gains in technology and scientific knowledge have made virus manipulation available to an expanding cohort -- some with less-than-honorable intentions -- that probably won't be enough time for policymakers and scientists to strike a balance between security and pandemic preparedness.
As Laurie Garrett has detailed in Foreign Policy, security experts worry that the information in the pending papers, or even the existence of the mutated virus in a lab, poses a security threat that outweighs the possible benefits of identifying the pathogen strain early and developing vaccines and antivirals to beat it. Scientists, meanwhile, argue that censoring scientific inquiry sets a dangerous precedent, while doing little to diminish the capabilities of nefarious actors. One of the first questions to ask, therefore, is who might those actors be, and would bird flu really be their weapon of choice?
The most obvious candidate is al-Qaeda. The terrorist group is struggling to reassert itself after the death of Osama bin Laden and has expressed interest in staging a biological attack. Hillary Clinton, in her Dec. 7 speech in Geneva, singled out the group's recent call to arms for "brothers with degrees in microbiology or chemistry to develop a weapon of mass destruction." But bird flu may not be the best choice here. Flu spreads fast, circumnavigating the globe multiple times a year, and making it a less-than-ideal weapon if your target is a specific population or geography.
If you were hoping to target all of humanity, bird flu could be more attractive. And since doomsday agendas tend to be associated with misfits and loners, it's worth asking: Would an individual be able to unleash bird flu alone? The details of the studies remain shrouded, but there is reason to believe that developing a lethal virus might be possible for those with access to the necessary technology and a relatively basic background in genetic engineering. Perhaps not the most common educational path for would-be terrorists, but the situation is worrying nonetheless -- particularly as the necessary technology becomes more widespread and easier to use.
Increasingly accessible technology presents another concern, one that doesn't require a nefarious actor: a lab accident. Virus leaks certainly happen, as demonstrated by an Ebola incident in Russia and SARS in Singapore. Both sides of the debate agree that we need better global coordination on bioweapons and biosafety. But the 1972 U.N. Biological Weapons Convention is outdated and mostly unenforceable, and the basic definitions and protocols for biosafety around the world are far from standardized, creating gaps that could allow negligent or suspect activities to go unnoticed.
So now what? Per the suggestion of the National Science Advisory Board for Biosecurity, a U.S. agency tasked with issuing guidance on potentially dangerous experiments, both bird flu papers will likely be published soon, with significant methodological components redacted. This compromise has satisfied neither side, and in the meantime, the World Health Organization (WHO) is planning to hold a summit on the issue. But a two-month research moratorium and a WHO summit are unlikely to be sufficient. WHO is the most logical arena for the discussion and could help diffuse criticism that the U.S. is dominating the debate. But massive funding shortfalls at the organization and the security risks at play could stymie their efforts. So while the doomsday scenario remains a fat tail risk, improved international coordination will likely remain challenging, as a diverse set of actors navigate mostly uncharted political and scientific territory.
Scott Rosenstein is a director in Eurasia Group’s global health practice.
SUTANTA ADITYA/AFP/Getty Images
Today, we turn to risk #7 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:
China -- Regional tension: A string of U.S. foreign-policy successes in Asia -- and the damaging of China's brand in the region -- have emboldened China's neighbors. The risk in 2012 is that Vietnam or the Philippines may test just how far U.S. security assurances will take them, provoking China into a maritime dispute. China has its own set of challenges in 2012, raising the risks of miscalculation and escalation.
Q- Why are China's neighbors feeling more assertive?
A- The U.S. had a very good year in Asia in 2011, while China's reputation suffered from an overly aggressive regional posture in 2010. The U.S. made gains in Asia on both security ties and economic diplomacy; it persuaded Japan to enter the Trans-Pacific Partnership trade talks, secured the stationing of 2,500 U.S. Marines in Australia; and will send 24 F-16 fighter jets to Indonesia and new coastal combat ships to Singapore. China's neighbors welcome the U.S. presence, because they recognize the importance of economic ties with China but don't want to become overly dependent on Beijing either economically or politically.
Q- How might China's neighbors push their interests against Beijing?
A- The South China Sea is the most likely arena of confrontation. Some of China's neighbors, particularly Vietnam and the Philippines, are eager to pursue oil and gas interests in areas that Beijing considers Chinese territorial waters, and the risk is that they will miscalculate that a heightened U.S. security presence will give them backing to do so. They may encourage oil and gas exploration in disputed territory or take a more aggressive posture against Chinese fishing interests or other Chinese vessels in contested waters.
Q- Why will it be harder to predict China's response to provocation in 2012?
A- There will be a lot going on within China's borders in 2012. China is focused on a once-in-a-decade leadership transition and has not resolved internal debates over its role on the world stage. The leadership vacuum and jockeying for power during the transition means China's response to provocations will be unpredictable -- perhaps even aggressive. The 2008-2009 financial crisis and resulting souring of confidence in the Western economic model led some Chinese leaders to push for a more aggressive foreign policy, which Beijing adopted in Asia in 2010. Dai Bingguo, the Communist Party's highest ranking foreign-policy official, resisted this push with a reaffirmation that China wants peaceful development and is not interested in challenging U.S. primacy. But Dai is retiring from government this year, and his replacement is unlikely to wield comparable influence with China's increasingly diverse set of foreign-policy actors and interests -- even if he shares Dai's views.
Asia is fraught with volatility and uncertainty in 2012. Investors and corporations should pay attention-the risks of misperceptions and unforeseen tensions in Asia are on the rise.
Next up, the dramatic twists and turns along Egypt's road toward democracy.
Feng Li/Getty Images
Today, we turn to risk #5 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:
North Korea: Implosion or explosion? North Korea recently became the world's first nuclear-armed power without a clear leader, and competition and uncertainty within the ruling elite pose significant risks for East Asia in 2012. The secretive nature of the regime makes the likeliest threat -- belligerent military action or substantial domestic instability -- less predictable and much more worrisome.
Q- Is Kim Jong-Un really in charge in North Korea?
A- There's always been a clear limit on what outsiders know about how the North Korean elite makes decisions. That's still the case. But there are plenty of reasons to doubt that this political novice is fully in charge. He hasn't had much time to prepare for his new job. His grandfather Kim Il-sung brought his father, Kim Jong-Il, gradually into power over more than 20 years. Kim Jong-Il inherited the keys to the kingdom in 1994 at the age of 53. The preparation of 28-year-old Kim Jong-Un began only recently as it became apparent that Kim Jong-Il's health was failing.
For the moment, the regime appears stable. Kim Jong-Il's family and entourage -- the so-called guardians --look to have firm control of the ruling Korean Workers' Party and the Korean People's Army. The country's military continues to serve as guarantor of North Korea's baseline security. In the two years before his death, Kim Jong-Il positioned his brother-in-law and the regime's previous number two, Jang Sung-Taek, as regent for his son. Jang is believed to have strong personal ties with senior military officials, and he'll probably hold considerable power -- at least until Kim Jung-Un can earn the confidence of the country's ruling elite. If Kim can't consolidate power, the guardians may push for another leader to ensure the survival of the regime. But for the moment, it's probably some combination of Kim Jong-Un's status, Jang Sung-Taek's resourcefulness, and the military's authority that gives the regime whatever cohesion it now has.
Q- Why can't this arrangement last indefinitely?
A- The steady deterioration of North Korea's economy and infrastructure over several decades, particularly outside the capital, ensures that this new generation of leaders will have less political capital and a less sure popular mandate than their predecessors. Conflicts are likely to develop within the elite as rivals and factions compete behind the scenes for power and personal survival. There is evidence that, once he knew he was ill, Kim Jong-Il tried to sideline as many as possible of his son's potential rivals. In fact, there were a suspicious number of fatal automobile accidents involving senior officials over the past two years -- all the more striking given how little traffic there is in the country. Some officials still in power probably wonder how long they can remain in favor and could move to protect themselves. It's also unclear what role Kim Kyung-Hee, Kim Jong-Il's sister and Jang Sung-Taek's wife, might play in coming months.
Q- It seems clear that there's a threat of aggressive action from North Korea, since they've stirred up trouble many times before. There's also always the risk that the government will collapse. That could create a refugee crisis and a scramble for control of the country's nuclear weapons that draws in outside powers. But beyond 2012, what's the long-term risk for North Korea and its neighbors?
A- The DPRK has defied predictions of collapse for decades, mainly because China and South Korea have always been willing to bail the country out to avoid another war on the peninsula and to prevent North Koreans from starving. Yes, there is the risk that North Korea might use its nuclear capability. Even if it doesn't, its conventional arms are powerful enough to launch a horrendous attack on the South. This is also the scenario most likely to put U.S. and Chinese forces at odds with another and in the same arena.
But the longer-term problem is that, despite the efforts of outsiders to keep things going, North Korea will one day buckle beneath the weight of its contradictions, and an international debate will begin about who will pay to clean up the mess. Studies conducted over the years suggest that the reunification of North and South Korea will prove more complicated and far more expensive than the reunion of East and West Germany. Who will pay for it? Imagine the stresses on South Korea and its economy as 20 million North Koreans come in from the cold. Today this is hypothetical, but one day it will be a very real problem.
One of the most important lessons of last year's Arab world turmoil is that brittle authoritarian regimes can remain in place for a very long time with changes ongoing beneath the ice that outsiders don't see until cracks emerge. Anyone could have predicted that the governments of Tunisia, Egypt, Libya, Yemen, Bahrain and Syria were vulnerable, but no one could have seen that the desperate act of one Tunisian vegetable vendor broadcast across the Arab world would trigger a wave of revolutions.
Given North Korea's isolation and the regime's secrecy, the fall of North Korea might come even more abruptly.
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 Roberto Herrera-Lim
Secretary of State Hillary Clinton's visit to Myanmar this week was a public relations coup for that regime and for Western advocates of engagement. The New York Times featured a photo of Clinton smiling with freed opposition leader Aung San Suu Kyi, both clad in white. But while the visit and Myanmar's incremental reforms have ignited hopes that relations between that nation and the West could thaw considerably in the near term, some skepticism is appropriate regarding how quickly things will change. The regime will continue balancing reform with control, suggesting that progress will be slow and gradual. That will not stop the U.S. from offering diplomatic and administrative concessions to the new Burmese government, but in the absence of major reforms in the near term, Washington will be too consumed by other issues to take up what would be a contentious congressional debate on sanctions.
Myanmar's reform process began sometime in 2007 or 2008, possibly in the wake of the 2007 Saffron Revolution of Buddhist monks. Barack Obama's presidential win in late 2008 secured buy-in for that process within the military junta; the expectation was that the Obama administration would be more open to dialogue and engagement than previous U.S. administrations had been. Since then, President Thein Sein's government has begun implementing some of the country's most serious political reforms in a decade. It has allowed more open discussion of political and economic reform, suspended construction of a Chinese-funded dam due to the population's concerns about its environmental side effects, and -- most prominently -- freed Suu Kyi.
But only guarded optimism is warranted. First, the reforms being implemented are calculated moves, rather than signs of any wholesale embrace of democracy. The government -- which includes proxies of the former junta -- is unlikely to adopt reform for reform's sake, but instead as a means of soothing internal tensions and reducing external threats to the military. As such, the carefully planned changes can be read as a way for the government to maintain control and protect the aging, retired members of the former junta.
Second, Myanmar has a history of stalling or reversing reforms. In 2004, political infighting led to the ousting of the relatively reformist prime minister Khin Nyunt and stalled the "roadmap to democracy" with which Myanmar had hoped to establish credibility with Washington. (This setback followed the 2003 attack on Aung San Suu Kyi's convoy by armed groups suspected of acting on behalf of hardline military factions.) And several times -- in 1992, 2004, and 2005 -- former junta leader Than Shwe released political prisoners but followed up with nothing else. Similarly halting reform won't be enough for Washington, which will likely insist on major moves such as the release of most political prisoners, an end to the persecution of minorities, and free and fair elections in 2015 before lifting sanctions. While this may happen, it will take some time.
In the meantime, incremental reforms could keep improving the West's informal engagement, which might in turn reinforce the regime's good behavior. Suu Kyi, who was the most visible sign of the country's slide into authoritarian rule, will be a critical determinant of this diplomatic trajectory. Indeed, there will be no more important signals for Washington than those coming from her about the pace of Burmese reform and whether or not the time is right to lift sanctions.
Roberto Herrera-Lim is a director in Eurasia Group's Asia practice.
Paula Bronstein/Getty Images
By Roberto Herrera-Lim
With the threat of flooding still the main day-to-day concern in Bangkok, the political effects of the crisis remain muted. But the government of Prime Minister Yingluck Shinawatra will come under intense pressure as the waters recede over the next few weeks to implement programs that compensate farmers and worst-hit residents for their losses, help small businesses get back on their feet and improve flood defenses around Bangkok and the main industrial zones. The shape and details of the recovery plan will be discussed and deliberated over the next few weeks, but the cost will be significant.
Crisis management will remain focused for the next week on managing the flow of water from the north to the Gulf of Thailand and controlling flooding in the capital and the threatened industrial estates. About a fifth of Bangkok is already under water. Water levels may still rise with the tide and industrial zones are still under threat at Bangchun and Lat Krabang, but the flood waters have started to flow into the Gulf of Thailand. Estimates as to when firms in the industrial estates hardest hit by the crisis can restart production (even partially) vary from four weeks to a couple of months.
Attention will quickly turn to the government's plans to help individuals and businesses hurt by the flooding, as well as efforts to prevent a repetition next year. The government received substantial criticism for its handling of the flooding, particularly the lack of information, a sense that local politics determined which areas would be protected or sacrificed, and weak coordination between local and central government agencies. The government's efforts have improved, but the real test will be the recovery effort. The opposition will try to capitalize on the situation, but it is not exactly blameless. There is some evidence that the Irrigation Department's reluctance to release water from two major dams when heavy rains started in March (the opposition Democrats were still control) may have increased the amount of water that needed to be released in August, when the flooding threat rose substantially
Still, the government needs to show that it is responding and failure will boost dissatisfaction with the prime minister and result in a more distracted government, which could further hurt the government's response to the economic fallout from the crisis. That may ultimately increase the domestic clamor for an early (and potentially destabilizing) return by the former prime minister, Yingluck's brother Thaksin Shinawatra. Yingluck's government likely recognizes this risk, which will probably prompt a strong rehabilitation effort and substantially higher spending in the first half of next year.
There has been much talk of an 800-billion baht ($27 billion) "New Thailand" project to help the economy and build new infrastructure to manage future flooding threats. But given the budget process, the government is unlikely to any program in place within the next six months, which is the critical window for the government to show that it has dealt with the crisis.
The near-term focus is instead likely to be a patchwork of programs. Predicting the actual size of these programs as well as how much they could add to the deficit is difficult. The cabinet has agreed to raise the 2012 budget deficit to 400 billion baht ($12.3 billion) from 350 billion baht ($10.7 billion) to assure some funding for relief programs). Most numbers regarding the damage and the needed measures to reduce future threats are early, impromptu estimates; businesses, individuals and farmers will register for benefits only once the crisis ends. So far, the near-term measures in place remain unchanged from a few weeks ago and include about $1,000 in aid for each flood-affected household (estimated to number around 3 million), and government guarantees for 325 billion baht ($10 billion) in low-interest loans for small and medium sizes businesses, industrial estate operators, individuals, and corporations.
Roberto Herrera-Lim is a director with Eurasia Group's Asia practice.
Paula Bronstein /Getty Images
By Bob Herrera-Lim
The strong win by Pheu Thai (PT) Party representing the allies of former prime minister Thaksin Shinawatra at the July 3 parliamentary elections will allow the country to avoid any serious near-term instability. The incoming PT-led coalition government will have about 300 seats out of 500, which makes it much harder for anti-Thaksin groups to reduce the new government's majority, either through disqualifications or defections, and engineer a legal takeover as they did in 2008.
In the meantime, the military and the crown will pragmatically avoid any outright provocation or direct confrontation, a strategy the PT will also pursue. Army chief Prayuth Chan-ocha is strongly anti-Thaksin, but he cannot move without justification, such as a popular or political movement similar to large anti-Thaksin rallies in 2006. Prayuth will likely negotiate some near-term deal that avoids a major shuffle of military commanders and secures Thaksin's agreement not return to the country without proper legal proceedings.
The monarchy will be similarly constrained. The king appears disinterested in current politics, so it is the queen and Privy Council President Prem Tinsulanonda who will guide the monarchy's strategy. They too can only be effective if there is some "popular" movement that has effectively mobilized against the government. In the past, the Yellow Shirts (organized and financed by media mogul Sondhi Limthongkul) provided this momentum. But Sondhi's relationship with the military and the Bangkok elites has eroded significantly since 2008 when the Yellow Shirts blockaded the airport and precipitated a political crisis.
There has been some speculation that the PT's political agenda could provoke the military or the monarchy, but this risk remains relatively low. All signals indicate that the PT is aware of how any early and public attempt to secure Thaksin's return, or ban party dissolution could lead to an early and distracting political battle. Prime Minister-elect Yingluck Shinawatra was quick to emphasize national unity and deemphasize an immediate return by her brother. Laying the legal groundwork for his return, managing the political dynamics around it, and negotiating with the other elite factions will likely be done over the next few months behind the scenes. Constitutional change will also be pursued carefully to avoid triggering a similar fight.
Whether this temporary peace will lead to longer-term stability remains uncertain. The anti-Thaksin factions among the elites may now recognize that elections will sometimes deliver results they disagree with, but which they must respect. But they may instead maintain their belief that the popular vote is unreliable, that the electorate is susceptible to promises of economic largesse and populist rhetoric, and that when necessary the results must be overturned. The future of Thai democracy will be decided by the outcome of that decision.
Bob Herrera-Lim is a director with Eurasia Group's Asia practice.
Athit Perawongmetha/Getty Images
By Roberto Herrera-Lim
Thailand will return to the headlines soon in what will likely be a heated election campaign ahead of the July parliamentary vote. The Democrat Party-led coalition government of Prime Minister Abhisit Vejjajiva is in a race against the opposition For Thais (PT) party and the more well-known Red Shirt movement identified with former Prime Minister Thaksin Shinawatra. Despite speculation about an opposition victory triggering a possible military coup, the ruling coalition has a good chance of holding its ground. Its local party machinery appears stronger than that of the exiled Thaksin, and February constitutional amendments have tipped the party-list race in its favor.
A Democrat Party victory would return some stability to Thailand, at least for the near term, as it would resolve the legitimacy issue that has brought the Red Shirts out into the streets on several occasions over the past few years. The Democrats have been historically inept at maintaining power. But, absent another shock (an economic crisis or the death of the king), they are likely to win and hold on to power for the next few years. And challenges to their subsequent control will come from mainstream politics rather than the streets.
Two factors could make a Democrat win less likely: increased voter dissatisfaction with the economy and the opposition's ability to recast the elections as a referendum on Thaksin. Economically, the Democrats are most vulnerable on inflation, but they are mindful of this challenge. The government will also cut oil taxes (a gift to Thai farmers) and the Thai central bank is among the most hawkish on inflation in the region. Thaksin will meanwhile do his best to cast the elections as a personal referendum in the hope that voters will vote based on their affinity and loyalty to him, rather than on local issues.
But even if the Democrats win, Thailand's structurally weak political system maintains the risk of ongoing volatility and unrest. Thailand is nominally a democracy, but the competition for real power takes place between several key players: the monarchy, the Bangkok business community, the military, republicans and, more recently, the Red Shirts. The Red Shirts have a legitimate grievance about the Bangkok-centric politics that have largely deprived the groups they represent (the north-eastern rural poor) a voice in national policymaking. Meanwhile, the four other players compete in a shifting web of alliances, depending on their agendas and perceived weaknesses. If Thailand is to avoid further periodic eruptions of unrest, it will need to build up its democratic institutions. However, none of the major players are currently willing to accept the loss of power that would entail.
Roberto Herrera-Lim is a director with Eurasia Group's Asia practice.
PORNCHAI KITTIWONGSAKUL/AFP/Getty Images
By Roberto Herrera-Lim
Protestors depose an authoritarian leader. Crowds revel in the streets. Optimism is high. What we just saw in Egypt happened in the Philippines in 1986, when strongman Ferdinand Marcos was ushered out, and in Indonesia in 1998, after the ouster of former president Suharto. But years after shaking off their autocrats, both countries remain stifled by vested interests and corruption, and progress will continue to be glacial.
Last week, around the same time that the Internet activist Wael Ghonim was reinvigorating Egypt's protesters, a former Philippine defense secretary apparently shot himself, fatally, in the chest. The retired general was embroiled in a scandal involving kickbacks and alleged golden parachutes. Such turbulence is nothing new for the Philippines. Since 1986 the country has produced at least half a dozen coup attempts. Claims of election fraud and shady deal-making have been common and destabilizing.
In Indonesia, President Susilo Bambang Yudhoyono's reform efforts are stymied by fierce battles with Suharto-era politicians such as Aburizal Bakrie, one of the country's richest men and the leader of the opposition Golkar party. Yudhoyono lost his credible finance minister, Sri Mulyani Indrawati, after Golkar wrongly accused her of complicity in a supposedly mishandled bank bailout.
Both countries are better off than they were under despots. There is more freedom, and economic growth has enlarged their middle classes. But the sense of lost opportunity is palpable. The revolts that shook the Filipino and Indonesian political systems sidestepped and maybe even reinvigorated powerful economic and bureaucratic interests. After Marcos was forced out, new president Corazon Aquino simply gave the businesses that Marcos had seized back to her allies. And anyone attending the country's first senate session in 1987 might have done a double-take: The old but now wrinkled pre-Marcos oligarchy had returned. In Indonesia, the dynamics were essentially the same, although of the more recent Golkar vintage.
Growth and reform have come painfully slowly as a result. Investors complain of all types of corruption, from petty payoffs to interference in major deals, and citizens sometimes question whether the fight was worth it. In 2003, I met with Jose Almonte, a retired Filipino general who had participated in the revolt against Marcos and staunchly believed that the country should have a more level playing field. I asked him what unfinished reforms kept the country unstable, the military politicized, and economic growth uneven. He replied, "Too many to count."
Many Filipinos are frustrated with their country's incomplete transformation, but maybe there is hope. Computerized elections in 2010 significantly reduced questions about legitimacy. While President Benigno Aquino III is unlikely to target vested interests directly, his aim of improving regulation and tackling corruption could ultimately lead to stronger democratic institutions. In Indonesia, meanwhile, the battle between Yudhoyono and Golkar will intensify before the 2014 elections, limiting the scope for substantive policymaking. The real promise is after the elections, if Golkar's power diminishes and Yudhoyono's anti-corruption and reform programs take root. Then the last vestiges of Suharto's reign might finally take their bow.
Roberto Herrera-Lim is a Director in the Eurasia Group's Asia practice.
JOEL NITO/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 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.
Almost as soon as the midterm elections ended, President Barack Obama set off on a 10-day Asia swing. He's found friendly footing abroad so far: a receptive India looking for a general counterweight to China and a rapturous day in Indonesia, where Obama spent several formative years as a child. Next came a G20 summit hosted by South Korea, a strengthening U.S. ally, and then he'll hit Yokohama for an APEC summit and to commemorate the fiftieth anniversary of the U.S.-Japan alliance. But this happy-go-lucky itinerary doesn't even hint at an overarching foreign policy. Which got me thinking, is Obama ever going to come up with one?
Plenty of commercial and defense deals were delivered during the India visit, which shows how that relationship is improving. There were high hopes for a breakthrough in Seoul on the U.S.-Korea trade agreement, though that now seems unlikely (at least for now). The Japan visit should include broad agreement on Tokyo moving ahead (along with the United States) with a trans-Pacific partnership (TPP). But these are all small things.
What's the big picture?
I was thinking about this while listening to Undersecretary of State Bob Hormats around-the-world speech at the World Affairs Council in Washington last week. I couldn't help but compare it with a similar speech from Secretary of State Hillary Clinton a couple months before. They both talked about the necessity of focusing on issues of bilateral cooperation with China, on Japan as the lynchpin of U.S. policy in the region, on the necessity of promoting free trade, the determination to stay focused on fighting terrorism, and to continue to support democracies around the world. There was talk about not neglecting traditional U.S. allies in Europe. And then, at the end, both emphasized the need to maintain strong commitments with America's key allies in the Western hemisphere, Canada, and Mexico.
I also thought about a speech I had heard from then Secretary of State Colin Powell in 2005. How different were the speeches? How much had the basic precepts of U.S. foreign policy changed over the course of the last two administrations, and during the past five years? To be charitable, I'd say 2 percent. Maybe. Primarily, the difference is that Asia is now taking up a little more attention, Europe getting slightly shorter shrift. Yet in that same period of time, the world has clearly changed more than 2 percent.
I'd say the world has hit a decisive inflection point, even more profound than after the collapse of the Soviet Union. The fall of the wall produced a new global security balance, to be sure -- the United States emerged as the sole hegemon. But in terms of the global economic and policy order, the world basically moved from the G7 to the G7+1. And to be blunt, the +1 sped up the process of globalization, but it did not reflect a new world order. Once the financial crisis hit, by contrast, the G7+1 became the G20. And that, however unworkable, is indeed a completely new ordering principle. It means different types of countries and governments vying for influence, power, and preference on key issues of global governance-from trade to currency to the politics of austerity, on climate, and on conventional and cyber security.
Yet there's a stark disconnect between our drastically changed world and US foreign policymaking. Over the past few decades, foreign policy has been the preserve of presidents, successful or not (think about the Carter, Reagan, Clinton, and Bush "doctrines"). But two years and a Nobel Peace Prize into the Obama administration, there's no sign of an Obama doctrine. This U.S. president has handled foreign policy primarily by managing conflict as it arises (stepping in directly when absolutely required), and otherwise making small, incremental policy gains on fronts with momentum. Obama has shaped America's foreign policy apparatus accordingly, with a strong and relatively autonomous Secretary of State in Clinton, a series of senior, competent special envoys in the State Department to handle intractable, longstanding foreign concerns, and loyal but comparatively weak, non-strategic national security advisers (namely, Jim Jones and now Tom Donilon, who primarily serve to coordinate policy communication and untangle disputes, not to leverage the National Security Council as a mechanism for executive policymaking.
The biggest new idea that the Obama White House flirted with, albeit briefly, was the prospect of a G2 -- a notion that the new world order could be jointly managed by the United States and China. But that concept was essentially stillborn as the first efforts to realize it came to an embarrassing naught at the Copenhagen climate summit last December. Since then, U.S-.China relations have steadily deteriorated on most fronts. For the world at large, that means a growing disconnect on global architecture -- think Gondwanaland, inexorably splitting into continents while the old government still embraces a single state. But faster.
Ian Bremmer is president of Eurasia Group and author of The End of the Free Market: Who Wins the War Between States and Corporations?
JIM WATSON/AFP/Getty Images
By Roberto Herrera-Lim
Cast as "China-lite," Asia's next major export tiger, Vietnam plays the part with gusto. Its bureaucrats look north to learn China's way of growth. And at first glance Vietnam seems perfect for the role -- affordable labor and plenty of both public and private investment (foreign and domestic) in everything from office buildings and new industrial zones to oil refineries and deepwater ports.
But when Hanoi decided in August to devalue Vietnam's currency, it demonstrated that following China's path to prosperity just isn't that easy. Investors are now taking a step back to watch carefully as Vietnam wrestles with inflation, large trade and balance of payment deficits, and a frothy urban real estate market. They also worry over longer-term problems like official corruption, bureaucratic confusion, shortages of skilled workers, and large gaps in infrastructure investment.
Maybe China is the wrong model. Beijing is wrestling with some of these same problems and makes plenty of mistakes along the way, but China's enormous economy and its access to capital provide advantages that little Vietnam -- and maybe a lot of other small frontier economies -- can't match. China's size and advantages of scale have so far helped Beijing absorb many a self-inflicted blow over the past two decades.
By Roberto Herrera-Lim
The on-the-ground situation in Thailand is changing quickly at the moment, and unrest could persist for quite some time. Red shirts are building forts out of spears and rubber tires in the middle of Bangkok's commercial district. Anti-Thaksin yellow shirts are threatening to take back the streets. Multicolored shirts are demanding that the government take a tougher stand on the red shirts. But one thing's for sure: The key elites that have -- for better or worse -- dominated Thailand's political landscape appear to be as incoherent and uncoordinated as they have been in decades in dealing with the polarization in the streets. That's why, regardless of the near-term outcome of the current crisis, the prospects for long-term stability are weak.
The so-called red shirts, anti-government demonstrators who support former Prime Minister Thaksin Shinawatra, now in exile, have occupied parts of Bangkok for the past 25 days. Clashes between protesters and security forces have so far killed at least 26 people and injured more than 1,000. Their numbers have dropped in recent days, though some red shirts in the countryside have reportedly removed their colors to pass undetected through military checkpoints as they enter the capital looking for a fight. The protesters have demanded early elections; the government has refused. In short, the government is close to a point of no return.
King Bhumibol Adulyadej offered the clearest signal yet on Monday that Thailand stands perilously close to serious bloodshed. With his first public comment on the unrest that has plagued his country for the past month, the ailing 82-year old monarch appeared briefly on national television to call on a group of the country's judges to "do the right thing" in maintaining law and order. The monarchy has been deliberately vague in the past, to fulfill its perceived role of guiding the country while maintaining an apolitical stance. Unfortunately, the long-awaited message from the king did not directly address the protests themselves, a sign perhaps that the monarch, hospitalized for the past seven months, fears he no longer has the clout to back the red shirts down.
Meanwhile, the military leadership, while still nominally on the side of the government, has hemmed and hawed on how to best deal with the protesters on the streets, maybe a sign of some hesitation on the part of army commander Anupong Paochinda to take responsibility for what will likely be a bloody crackdown so near his September retirement. It also reflects some doubt on the part of senior commanders on whether the lower ranks will hold in the worst case scenarios; talk of watermelon soldiers ("green on the outside, red on the inside") is rife. For this reason, Anupong may be trying to hold off some of his more conservative deputies, who believe that Thaksin, and by extension the red shirts, should be removed from any political equation.
Prime Minister Abhisit Vejjajiva, British-born and Oxford-educated, has raised alarms of "terrorist behavior" by the red shirt protesters, and wielded the royalist flag by claiming that the current crisis involves a "plot to overthrow the monarchy." Normally, the test for a leader hit by a crisis that, on its face, has the support of significant segments of the population, would test his mandate through elections, rather than revert to bogeymen.
And finally Bangkok may no longer be the elite's stronghold. Some local residents have taken to the streets, many under cover of darkness, to give aid and comfort to the red shirts.
Ominously, the government's warnings are based on assumptions that the old relationships will work, and that the key players can deliver the government from the red shirts, either by outlasting them or beating them back. Maybe the government's strategy will work. If the king's call for calm can help restore order, as it did during anti-establishment protests in 1973 and 1992, serious bloodshed can be avoided. Or the red shirts, many of them poor, will fade away as their resources wane. His government might then survive another few months, but the divisions will remain, and the center of power will continue to fray. In this case, the red shirts will simply return to fight another day, and the next protest, the next round of volatility, will only be a matter of time.
Roberto Herrera-Lim is an Asia analyst at Eurasia Group.
Paula Bronstein/Getty Images
By Bob Hererra-Lim
Since mid-March, opposition protesters-known as the "red shirts" -- have been occupying parts of Bangkok. These anti-government demonstrations are clearly the largest and best organized ones since the 2006 "yellow shirt" rallies that led to the ouster of former Prime Minister Thaksin Shinawatra, and the Thai media has been regularly warning of possible violence. In fact, there has already been bloodshed on the streets, albeit voluntarily.
The near-term threat, however, is exaggerated. Despite their numbers, the opposition protesters will probably not be able to force out the government of Prime Minister Abhisit Vejjajiva. The key elites in Bangkok -- the monarchy, the military, and the business community -- remain solidly aligned with Abhisit's coalition government and against the return of Thaksin or the granting of major political concessions to his allies in the opposition For Thais (PT) party. For their part, the protesters say they are unwilling to accept anything short of the dissolution of parliament and a return to an earlier constitution. There have been a few grenade attacks, but these are isolated incidents, rather than a sign of a serious and destabilizing split within the military. At the end of the day, with both sides unwilling to give in, the protesters will likely march back to their homes when their enthusiasm and funding fade.
While the status quo is likely to satisfy significant segments of Thailand's elite, it could lead to a dangerous complacency. For much of its history, Thailand's political landscape has been shaped (and re-shaped) by the competition for power among the country's political and economic elites, marked most radically by the 1932 overthrow of the monarchy. Since then, this competition has sporadically manifested in bouts of volatility, as the key players disregard democratic processes and institutions while attempting to reshape the rules -- namely the constitution -- and the bureaucracy in their favor.
The rise (and fall) of Thaksin has thrown a new ingredient into the mix, one unseen in previous episodes of instability: an outsider tapping into a popular, disaffected power base. Thaksin had the personal wealth to rival even Bangkok's established elites. In addition, the former prime minster delivered on a populist agenda that specifically helped the disaffected, marginalized rural communities who now form the bulk of the protest movement. But while the red-shirts' march has been tinged with some of Thaksin's agenda, their reasons and aspirations for rallying in Bangkok run much deeper; rallyists often rail against what they claim to be double standards that favor established Bangkok interests.
As a result, Thailand is now moving into unchartered territory. The traditional elite competition for control will be influenced or even shaped by the rise of a new popular movement anchored on grievances against a system that has marginalized large segments of the population politically, economically, and socially. While traditional alliances should be able to contain these forces in the near term, they will not be able to do so indefinitely. King Bhumibol Adulyadej, the country's revered monarch and the cornerstone of stability today, is sick. He has been in the hospital since September, though the details of his condition remain a guarded secret. There is a clear sense that the alliance between the monarchy, the military, and the Bangkok elites is holding together only out of respect for the ailing king and the influence of key generals in his privy council, primarily retired general Prem Tinsulanonda. The risk is that the king's death, after an extended transition, will lead to another fight for power, as competing elites attempt to fill the vacuum should his successor fritter away the monarchy's goodwill. Graft onto this the disgruntlement that has built up among the lower-income classes, and a potentially more serious confrontation, the likes of which Thailand has never seen, is possible. This would threaten not only the established order, but the stability that has become the basis for much of the investor interest in the country the past few decades.
For these reasons, the key political players in Thailand must attempt a political compromise today, while the situation is still manageable and while key power brokers are able to maintain control. Unlike previous compromises, however, this one will have to be forged at both the political and popular level, to be credible and to deliver long term stability. An attempt must be made to not only defuse the tension between Thaksin and his opponents, but to build a whole system that addresses the disenchantment that originally created Thaksin's base. These changes will run the gamut from simple constitutional fixes that remove contentious provisions in the constitution (eg, those that allow dissolution of political parties for the flimsiest of reasons) to serious system-wide reforms in the bureaucracy and the judiciary that reduce the sense of economic and political disenfranchisement among the poor. And finally, they must talk honestly and openly of topics that are the subject only of whispered conversations in Bangkok. This will be more radical than any reform tried in Thailand since 1932, but the risks of not trying are much greater.
Bob Herrera-Lim is a director in Eurasia Group's Asia practice.
PORNCHAI KITTIWONGSAKUL/AFP/Getty Images
The Call, from Ian Bremmer, uses cutting-edge political science to predict the political future -- and how it will shape the global economy.